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money in the current system - how your money buys less and less

To understand money, we need first to understand how our economies work and how money makes it all go around.”

In the beginning, life for the average human, focused on acquiring food and water. To do this efficiently, we have been programmed to work cooperatively in groups, first in small families, then tribes and finally cities, states and great conurbations (how’s that for a new word? It means ‘an extended urban area’). All our efforts depend on cooperation by trading useful items between each other and then between groups and finally nations. This is the basis of our world today; it’s all about trade.

In early times a system of barter was used enabling an exchange of goods to provide for the necessary variety of foods and materials to make for a more secure and pleasant lifestyle; this is known as trading, and has been man’s major occupation since time began. Inter-tribal battles and wars were common because it is easier to steal goods from others than do the work necessary to “grow one’s own”. Soon it became clear that ‘might was right’ and the strong and healthy began to rise above the others and accumulate a greater proportion of the pool of vital resources. These leaders dictated and controlled the terms and conditions of trading which eventually became encapsulated in the Laws of the Land mostly to the advantage of the leaders and their compatriots, the “Powers That Be” in that particular world time and space.

                          Don't trade me!

                          Don't trade me!

 

Along with barter-trading came the need to find a convenient means of exchange; instead of trading a sheep for vegetables, for example, the traders could use an ‘intermediate’ unit of exchange which would be commonly accepted by all concerned. This became what we now know as money, which served merely as a means of exchange in the first place but later became a method of storing wealth.

 

So what is wealth? 

 

As we progress in our journey many more questions like this will arise and the answers will gradually emerge as the jigsaw picture begins to form.

In the early stages various local materials were used for money by general acceptance of the parties to a trade. For example, salt was used in areas where it could be mined, shells were common in pacific islands and in rain forests beans and other rare items were incorporated into local exchange systems. Finally, because of its many superior attributes, gold (and silver) eventually became the main source of both storage of wealth and a monetary unit for exchanging goods.

As time passed and trade expanded to encompass many countries, methods of trade began to develop specialities. There were merchants who specialized in various goods which could be exported around the world. A problem arose from the need to ensure that payment for goods would be made on time following delivery after some months of shipping across borders and overseas. This required the creation of an intermediate body which would take on the risk of extending credit to the purchaser during the passage of the shipment until the goods arrived safely in port.


From early days a system of money changers had arisen whereby owners (often merchants) of gold, now a recognized medium of exchange and wealth, were able to deposit their gold in secure vaults owned by the money changers; these are known as deposits, just as you and I would make a deposit into our bank, except now paper and computer digits have replaced gold for daily use. In exchange, the money changers wrote out a slip of paper, a receipt to the merchant, detailing the amount of deposited gold and its value after charging interest and fees. It was not long before merchants began paying for their goods using these receipts by endorsing them payable to the seller in settlement of their debts; they became a form of currency and from this the idea the bank note became established and in common use.

It didn’t take long for the money changers to figure out that they were holding much more gold than was likely to be claimed by the owners at any one time.

To increase their profits they started issuing more notes than they had gold on hand knowing that it would be unlikely for all their customers to want their gold back all at the same time. This worked well and of course relied on the trust of the merchants that their ‘money’ was always available in the vault, on demand, should they want it. These are known as ‘on-demand deposits’.

At the same time merchants who wanted to buy goods from overseas (imports) needed to issue a notice to their suppliers that they would be paid once the goods arrived. Of course the seller would not necessarily have faith in the merchant-importer that he would be good for settlement of the bill. The merchant therefore went to his money changer asking him to issue his own notice to the seller promising to pay for the goods once the merchant had accepted them in good condition on arrival at the port. Of course the seller, knowing that the money changer had plenty of gold on hand, would be comfortable about taking his promise to pay. In other words the shipper had security of knowing that he would definitely be paid. This is the method of credit that we use today and thus Commercial Banks arose which now became the main intermediaries involved in all this trading and payment of exports and imports; the documents used today are known as Letters of Credit. Without this system of trust and faith in principle, with all the attendant mercantile laws which evolved to govern it, our food and goods which you see in the supermarkets and stores could never happen.

Thus the banking system has enabled our modern world to provide all the abundance that we see around us! Who would have thought it? So we owe the banks a great deal of thanks for what they have delivered so far. However, the next question must be: what has gone wrong? Why are the banks now taking much of our money (deposits) without notice? The answer lies in how the banking systems have evolved, especially during the last fifty years. Technology has made such massive progress that the banks have taken advantage of instant, ‘global’ trading and settlement; the system has become highly complex and totally divorced from the world of basic trading in goods and services of the past.

It is clear that if we are to learn more about how our money is being used by the banks we need to know a lot more about banking systems in the modern world which is the subject of lesson 2 ‘Banks’.

Your bank manager will have spent many years learning his profession which includes not only finance but also economics, accountancy, statistics and law as well as the skills of written and verbal communication, personnel management and many other allied subjects. This course therefore seeks only to describe the most important aspects of these subjects which affect all of us generally. Sadly our education system fails miserably to make sure students have at least a working knowledge of modern-day money management and particularly debt management systems.

The financial world evolved since before the 1950s from a cash-based society to one of credit – the “live-now-pay-later” economy – which developed in the 1960s with its attendant credit card systems and extension of credit to all and sundry without consideration of the need to repay the loans with interest. Loans of money extended to credit-worthy people became necessary many centuries ago because of our agricultural society’s need to grow crops over time and deliver the produce later at the end of the season. The farmer needed to buy seed and use equipment and labor in order to produce crops therefore he had to borrow money in advance before he could sell his crops and recover his costs plus profit. Thus the farmer was ‘investing’ his capital and labor into the land in order to earn a living but at some risk. His ‘return on investment (ROI)’ is his profit but this must come after he has paid all his costs and interest on any loan or advance of money.

 

You will notice that four key terms have entered our story: Capital, Labor, Land (the three are known as ‘Factors of Production’) and of course an important one is interest.

 

Capital may be thought of as money but may also be machinery, plant and equipment. This is the basis of our ‘capitalist society’ where capital is applied to land, raw materials and labor in order to produce finished goods. But of course we ask who has access to all the money? Yes – the banks!   Therefore our capitalist society relies on the banks to issue loans in order for production to take place – without it everything stops! And we know that this operation relies on trust without which the banks will not function.

 

Now we know who controls everything from the base of the pyramid, we can look more closely at how the banks operate and make their profits out of their customers’ use of labor and land during the production process.

 

                               3 Well Dressed Bankers

                               3 Well Dressed Bankers

However, the banks have a problem. It is easy to lend to merchants because the loans are backed by the merchant’s goods which are to be delivered having already been shipped and documentation (Commercial Paper) having been lodged with the bank. No risk then for the bank because they will only send the money to the overseas seller when the goods arrive in good condition at the port. This is known as security or collateral. The banks who engage in this sort of finance are first and foremost known as ‘commercial banks’. They have been active in various countries since before the 13th century when Italian banks operated by families of merchants set up shop as financiers, for example the Medici family in Italy and later the Rothschild and Rockefellers et al of whom you may have heard. Nevertheless the farmer is a different case because he has not yet even planted his seeds which of course he has to buy first. This means that the bank is being asked to advance a loan over several months to the farmer without being certain that he will actually deliver and repay the loan. The bank will ask for some form of security to back the loan in case the farmer fails to repay because his crops might fail or a whole range of other risks come into play. In this regard, just as the merchants importing their goods might suffer loss due to storms or pirates, so the farmer could lose his crops through no fault of his own due to weather, fire or war. Thus the need to offer insurance arose at the same time as the finance was agreed. But now the farmer has a problem because he may be a tenant farmer with no land of his own to use as security for a loan. This is where a market comes into the story and is described in detail in the Markets Lesson.

Markets again have been in existence for almost as long as mankind has been trading. Most of us have been to a market at some time or another where goods are exchanged and deals done to the benefit of both parties. These rely on ‘one-to-one’ relationships where one party negotiates with another for a ‘win-win’ strategy and both parties are satisfied with the deal. Negotiating skill is important in these types of markets and we all do it in our individual ways according to our culture and upbringing. But what if there is a need to involve many parties to deal together each wanting to find the best price and strike a deal?   It becomes unmanageable in a local market situation although it can occur; for example, when casual agricultural laborers came together to competitively bid the price of their labor to the farmer-landowner for seasonal work.


As the need for more people to be engaged in exchange arose, specialized meeting places emerged like the Corn Exchanges where growers were able to meet merchants and make deals at on-the-spot prices to sell their corn to the highest bidder. It was not long before the traders began agreeing to buy the future corn off the field long before it was harvested offering prices taking into account the likely future spot price and to allow for the fact that they were buying in advance (the farmer was getting his money early). This is the principle of commodity futures markets which have become common place around the world involving all kinds of raw materials and produce including money and discussed in detail in Lesson 7.

 

There is also a price for money: it is called interest and this is what is paid for the use of money in the form of credit and described in Lesson 2 about banks.

 

Now the farmer has some options; he could go to the local corn exchange and ‘forward sell’ his crop to millers or flour merchants or he could agree to take a bank loan, a much more risky prospect, and pay interest on the loan at the going rate. There are several other ways today offering access to money which is needed to start and continue production in whatever form it takes because markets are now mostly electronic and interconnected worldwide. Clearly the banks had every incentive to get involved in these markets by making their profits from interest and fees earned in facilitating the deals using the money (represented by gold) which merchants had deposited in their vaults. Until the 1930s gold was used as a standard reference for money issued as bank notes and credit by the banks; this was known as the ‘gold standard’. As the demand for credit to fund expanding trade increased it became clear that the growing economies were being suffering from the limitations of the supply of gold which has a fixed supply (some 2,500 tons are mined each year).

Although paper money in the form of bank notes is in common use, they ‘promise to pay the bearer’ a sum (which used to be in the form of gold), banks had to keep a ‘reserve’ of gold to support the amount of currency (bank notes) in circulation. This restricted the money supply (the amount of currency in circulation at any one time) because the supply of gold was limited. Only the banks were permitted to issue new bank notes and this was tightly controlled by the government working in conjunction with the central bank.

 

After World War 2 the major trading nations’ banks got together at Bretton Woods to agree on a flexible financial system which would accommodate the expanding economies around the world. America was and still is the major trading nation in the world accounting for around 25% of the global economy and the US dollar (USD) became an accepted international standard to which every other currency in the world is referenced. It had become the world’s reserve currency, supplanting the British pound, used in colonial days, because of the immense size of the US economy which no other nation could match. The USA agreed to back the USD with its vast gold reserves held in Fort Knox and to replace paper USD with gold at an agreed, fixed price when any nation asked for its trade to be settled in this way. This assumed that trading partners would have faith in the dollar and would not actually require settlement or exchange of their USD for gold. This became known as the “Bretton Woods” agreement of 1945.

Conflicts arose between countries during the 1960s as it became clear that a system referencing to the gold standard limited the expansion of trade between nations and culminated in 1971; the French particularly having asked the USA for their trade balances to be paid in gold. There had been a steady drain of gold reserves from the USA over this period, so much so that President Nixon unilaterally repudiated the Bretton Woods agreement by refusing to pay in gold, and caused the USD to be valued by reference to all other currencies; this is known as fiat currency using floating exchange rates; the term derives from the Latin fiat: “let it be done”; “it shall be”) because it is backed with nothing more than the faith and credit of the United States of America and was declared legal currency by the government. All currencies today are fiat currencies as nations around the world gradually adopted the American system driven by the USD as the world’s reserve currency which is used in over 60% of all global financial transactions; especially in exchange for oil.


The use of the USD was compounded during the 1973 oil crisis when America agreed with Saudi Arabia that all their oil exports to be paid in USD in return for military and economic support. This required all nations to obtain and hold USD to pay for their oil and allowed America to act as the issuer of a common world currency. This has given America a significant advantage because they can print into existence as many USD as they wish without risking devaluing their dollar against other currencies; up to a limit of course, that limit being the degree of confidence given the USD by all its users so long as not too many dollars are issued into circulation.
The concept of a fiat currency is not easy to describe. Perhaps it would help to review an historical example and look briefly at the “History of Monetary and Credit Theory (From John Law to the Present Day),” written by the late French economist and Bank of France official Charles Rist (1938):

 

The next paragraph is pure torture… so feel free to skip it if you’re easily irritated!

 

“But let us tackle the essential argument, the argument in which [John] Law is a real forerunner, the crushing argument which, since his time, has been used by all the currency cranks and by all plundering states. What is money but a simple exchange voucher conferring the right to a certain quantity of goods? And if that is its function, what is the point of using a costly metal? Here we reach the cardinal point of Law’s theory. Money is only a voucher for buying goods. It is a formula which has provided the starting point for all currency cranks, an apparently self-evident axiom on which have been based all systems which deny the citizen the right to a means of storing value. Money is made only to purchase with. Money is not the durable and indestructible good, of stable value and unlimited acceptability, with the help of which man has been able to put by the product of his labor, the instrument for saving by means of which a bridge is built between the present and the future and without which all provisions for the future would become impossible. No!”“But apart from that, [Law] misunderstood the real character of metallic money, and it is this that makes him so representative of all the currency cranks. He ignored the function of money as a means of storing value in a world where men are so anxious to preserve the product of their labor and their saving from price fluctuations and vicissitudes of all kinds. It is that which ruined [Law’s] System. That metallic money is not an ideal instrument of circulation, and that it can be conveniently replaced in this respect by all sorts of circulating credits has been known from the earliest times. But nobody has yet shown that circulating credits can replace the precious metals in their function as a store of value. None of the monetary systems yet known to us, even the most advanced, has dispensed with the precious metals, that ultimate ratio of trade.” and the famous quote from John Law: “Money is not the value for which goods are exchanged, but the value by which they are exchanged: The use of Money is to buy goods, and silver while money is of no other use.”From Wikipedia: “John Law (1671 – 1729) was an economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade. He was appointed Controller General of Finances of France under King Louis XV. In 1716 Law established the Banque Générale in France, a private bank, but three-quarters of the capital consisted of government bills and government-accepted notes, effectively making it the first central bank of the nation. He was responsible for the Mississippi Bubble and a chaotic economic collapse in France”.

 

Bet you didn't make it through!

 

Law was a gambler and a brilliant at mental arithmetic. He was known to win card games by calculating the odds in his head, not unlike high-powered bankers today and so well described in Michael Lewis’s book: Liar’s Poker. Law originated economic ideas such as “The Scarcity Theory of Value” and the “Real bills doctrine“. Law’s views held that money creation (printing) will stimulate the economy, that paper money is preferable to metallic money (gold) which should be banned, and that corporate shares are a superior form of money since they pay dividends.

 

Law exaggerated the wealth of Louisiana, USA with an effective marketing scheme, which led to wild speculation in the shares of the Mississippi Company he founded in 1719. The scheme was to have the success of the Mississippi Company combine investor fervor and the wealth of its Louisiana prospects into a sustainable joint-trading company. The popularity of company shares were such that they sparked a need for more paper bank notes, and when shares generated profits the investors were paid out in paper bank notes. In 1720, the bank and company were united and Law was appointed Controller General of Finances to attract capital. Law’s pioneering note-issuing bank was successful until the French government was forced to admit that the number of paper notes being issued by the Banque Royale were not equal to the amount of metal coinage it held. The “bubble” burst at the end of 1720, when opponents of the financier attempted en masse to convert their notes into gold and silver, forcing the bank to stop payment on its paper notes. By the end of 1720, Law was dismissed from his positions by Philippe d’Orléans, regent of France for Louis XV. Law then fled France for Venice.


There are parallels between the unfolding experiment in contemporary managed electronic “money” with credit issuance and John Law’s disastrous experimental introduction of paper money in eighteenth century France. Similar to Law, present day central bankers see “money” simply as a medium – an expedient – for spurring spending throughout the real economy as well as in securities and asset markets. Central banks, described in Lesson 4, are now in the process of creating trillions of additional “money” out of thin air in order to inflate prices and encourage economic activity by merely adding electronic zeros to their government accounting records. In any rational economy this would be ‘counterfeiting,’ or to be blunt ‘fraud’, but it does seem to be acceptable in our current financial regime.

It is a real challenge to explain the flaws in our current inflationary, central bank doctrine. When inflation is not a problem why not just create some additional “money”? Central bankers think they can always reverse course and withdraw this excess money if necessary. Markets are at or near record highs for 2016, but the myriad risks associated with currency devaluation, monetary degradation, miss-priced finance, inappropriate incentives, resource misallocation, asset bubbles, inequitable wealth distribution and economic maladjustment don’t resonate all that well. Even the recent social upheaval in Greece, Ireland, Portugal, Spain and Cyprus are viewed by central bankers as domestic problems and not the consequence of misapplied global financial models.

Perhaps some coffee if you’re feeling like this?

Perhaps some coffee if you’re feeling like this?

Anyhow… Charles Rist titled his first Lesson, “Confusion between Credit and Money in the Political Economy in the Eighteenth Century.” In our 21st Century of runaway electronic money-based finance, the distinction between ‘money’ and ‘credit’ has been completely blurred. Indeed there is an important difference: Credit is much more about confidence, while money in its true form of gold and silver, has real value and is a store of wealth guarding against inflation caused by fiat currency systems. Credit, exemplified between 2006 and 2008, can be robust, whimsical, fleeting and frighteningly fragile. ‘Money’, perceived as a trusted fungible store of nominal value (‘fungible’ meaning able to replace or be replaced by another identical item. ‘Nominal’ meaning existing in name only), is the rock foundation for the entire financial system. As such, ‘money’ enjoys almost insatiable demand. And this attribute has ensured repeated episodes of gross over-issuance of paper notes that has plagued mankind for centuries. These days ‘money’ is the privileged and exclusive domain of government debt and central banks.

When his “Mississippi Bubble” scheme was faltering in 1720, John Law moved to devalue competing ‘hard’ currencies like gold. He was desperate to keep investors, and in particular the manic crowd of speculators in his monetary instruments in order to stave off collapse. All the central banks today have been working desperately to keep investors and speculators fully engaged in global debt, equities and risk markets. With near zero interest-rates and trillions of USD, ‘money’ is being methodically devalued around the world. Devaluation is forcing savers out of ‘money’ and into risk markets like the stock market, apparently believing that market price increases will spur wealth-creation, risk-taking and economic activity; they might be wrong.

The central bankers seem oblivious to the fact that they are on a perilous course that risks not only a crisis of confidence in ‘money,’ but also in global risk markets. The history of monetary fiascos is replete with ‘out-of-control’ inflations. Once money printing escalates, there is a strong connection for one year of elevated money printing to create even more printing the following year. This dynamic has been in play for decades now and, after having studied the theory of these types of dynamics, it is almost surreal to witness them, now, in real time.


It is clear that money is an essential part of the banking system and is used also as a unit of account in all commercial transactions. To see how the jigsaw pieces of money and banking fit together we need to review the banking systems and central banking arrangements in the following lessons. However, before moving on, perhaps a note about gold and silver (known as: precious metals or PM) will clarify the differences between real money that is gold and illusory money otherwise known as fiat currency.

When $1.00 buys you more, it’s usually because of ‘deflation’. If $1.00 buys you less, it’s most often because of ‘inflation’. What US Presidents were against monetary inflation?

The gold standard was used during the 19th and 20th centuries (until 1971) to keep the price of a nation’s currency constant by the government’s promise to buy and sell gold at a fixed price in terms of the base fiat currency, e.g. USD , British Pound (GBP) et al. Under this system the total amount of bank notes and coins in circulation plus bank reserves are backed by the amount of gold held in central vaults. This limited the growth rate of the economy and is now not used. In its place central banks control the issue of currency and commercial banks control the issue of credit in the form of loans and other financial advances based on the amount of money deposits they hold. However this does not mean that gold is no longer important. As we shall see it is very much at the center of the global financial systems and is still considered to be ‘real money’ by many people who wish to hold their wealth in ‘bullion’ as a guard against future inflation. So what is so special about gold bullion, also known as ‘physical gold’?

Gold has a limited supply (about 2,500 tons per year) and most of the gold ever mined, estimated to be 160,000 tons, is still in existence somewhere because it never deteriorates, it is always nice and shiny and exactly the same as the day it was mined. Because of its limited and relatively fixed supply the price varies depending on the demand for it at any one time. Gold has always been in demand, forever in the open market, and the price of the physical metal measured in USD has tended to rise as paper currencies like the USD lose their value over time (inflation). Since 1900 the USD has lost 96% of its value (purchasing power) measured against the price of gold.

Because the USD is used to buy/sell all kinds of commodities the price of these goods varies depending on how many USD are in circulation at any one time. Since the Federal Reserve – the ‘Fed’, the central bank of USA – has the sole privilege of issuing USD (printing) there is no limit to the amount of USD they can issue but if more USD are issued than the market requires the value goes down – more USD are needed to buy the same amount of goods (dollar depreciation).

One of the Fed’s main tasks is to control the supply of USD as world economies expand (economic growth). The spot price (price today) of gold in USD always reflects the true state of the amount of USD being issued; as more USD are put into circulation the dollar price of gold increases and left to normal market forces will always reflect the true rate of depreciation of the dollar. While the USA spends less than the amount it earns the Fed can keep a balance of USD in the world economy and trade continues as usual in cycles, expanding and contracting naturally, as time passes (known as the ‘business cycle’).

A problem arises when the US government begins to spend more than it earns because: where can it get more USD? It’s no problem they say, just ask the Fed to print more.

Rarely noticed at first, suddenly the price of gold begins to rise which is what happened in the 1970s when the dollar became unhitched from gold. If gold is allowed to rise in price unheeded the world will notice that they are being paid less and less in real terms for their goods and begin to avoid the USD and trade in their own currencies. This would cause the USA’s standard of living to fall quickly as they would have to pay more USD for imports in foreign currencies potentially resulting in a depression. Before 15th August 1971 the USD could be exchanged for a fixed amount of gold at a fixed price by agreement between all countries when settling their international trade debts. Two years later the financial markets began buying and selling contracts to purchase/sell gold at a future date – this created the ‘paper market’ for gold.

Thus a trader could purchase a paper contract that promised to deliver an amount of gold at a fixed date in the future, often 3-6 months forward. The price of the gold in the contract would generally be more than the present or ‘spot’ price because there are storage and transport fees, interest payments and other costs associated with handling any commodity. But gold is different from any other commodity in that it has been accepted over millennia as a form of secure exchange for goods (money) as well as a store of wealth.

 

Now there are two separate markets for gold with different prices: the spot price for physical delivery of bullion immediately (the physical market) and the prices for future delivery contracts (the paper market).

 

The clever bankers however understood what was happening and made a plan to keep the spot price of gold below its natural market price by manipulating the paper market and this is how it works. The Fed and their agents, JP Morgan, Goldman Sachs and several other major banks issue contracts to sell gold in the future at prices lower than the normal forward price. This has the effect of ‘flooding’ the world markets with what appears to be lots of gold for sale; but of course it is only paper contracts. Nevertheless traders will buy the contracts because they appear to be a bargain and thus the dollar spot price of gold falls by an amount depending on how many tons and at what price the contracts are written. The Fed and their agents have total control over the paper market price and are able to keep the USD appearing as a valid medium of exchange on world markets.

The Fed however are not all powerful and cannot alter the actual physical amount of gold in existence, so when these contracts become due for settlement they are not able to deliver the physical gold bullion; there is just not enough to go around. All they can do is pay the traders in cash instead of delivering physical gold and this is acceptable under normal contract terms and conditions. However, the cunning bankers beforehand have already agreed contracts to buy gold at a lower price, when the market prices for gold had fallen, thus at delivery time they can sell these contracts and are able to pay the traders off and still keep some profit for themselves.

 

In all this, no actual physical gold has moved – it’s all done on paper!

 

Nevertheless these bankers cannot control the demand for physical gold but only temporarily suppress the paper price. If demand for physical gold exceeds supply the bullion dealers will ask a premium to the ‘paper spot price’ and the two markets for gold diverge. This effect broadcasts how much the USD is being depreciated through excess money printing and is precisely what the Fed needs to avoid!


The 20th century was, broadly speaking, a period of almost constant monetary decay. Most nineteenth century economists, politicians and bankers would have correctly stated that global capitalism, being an international market economy facilitating the free exchange of goods and services across political borders, allows extensive human cooperation through trade and requires an international, apolitical and solid form of money to support it; such money is gold. It is the basis of any capitalist economy and it imposes strict discipline on all market participants. Crucially, this includes governments and banks.
Governments have to operate pretty much like private businesses. They have to balance their books and like you and I they need to live within the means provided. For governments this is mainly through taxation and if they borrow money in the marketplace their lenders are at full risk of default because no government can print real money (gold) to repay loans or even meet interest payments on those loans. As we have seen, it is only the central banks that are authorized to issue paper money but they work in conjunction with the government to fund their over-spending as most governments do these days and is euphemistically called: Public Sector Borrowing Requirement (PSBR); otherwise known as ‘government deficits’ or ‘over-spending’.

Over the course of the twentieth century from 1914 to 1971 – the monetary system was completely changed as a consequence of a number of entirely political maneuvers, all of them undermining the quality of money. Today, hard, international and apolitical money (gold) has everywhere been replaced with entirely elastic, national and politicized paper money; money that central banks issue under a territorial monopoly at no cost and with no meaningful constraints on issuance which the central bankers use to ‘manage’ the ‘national’ economy (itself increasingly an out-of-date-concept). This money is used to fund the state and grow the domestic banks which, under the protection of ‘lender-of-last-and-first-resort’ central banks, now issue unprecedented amounts of paper money.

The global monetary map resembles a patchwork of local, “nationalistic” paper monies, each of which is a political tool, often openly manipulated in an attempt to benefit the local export industry at the expense of foreign competitors or to ‘stimulate’ the ethereal economic concept of ‘aggregate demand’. Not surprisingly the global economy is drowning in debt – both public sector and private. It suffers from a bloated financial sector, international trade tensions and stumbling from one crisis to another each one worse than its predecessor.


Bizarrely, but not entirely surprisingly, politicians, bankers and modern ‘enlightened’ economists now tell us that this unhinged financial system is to our benefit and to ‘just have faith in us’. The present monetary system is in fact a hindrance to free international trade, properly functioning markets and human cooperation across borders but it might already be on its last legs. Yet a powerful but entirely misguided consensus seems to have convinced public opinion that paper money would be beneficial if only the money supply is managed astutely by clever bankers and central planners. A monetary system based on a constantly expanding supply of money is unstable and ultimately unsustainable. The reason why gold has kept its value for thousands of years is that it has a limited supply among its many other attributes. It is said that the price in gold of a toga in Roman times is no different from the amount of gold needed today to buy the same article!


As discussed in this lesson, money is not as real as we would have expected. its creation is totally under the control of bankers operating under cover of our modern global financial systems; banking is explored in the next lesson.