Appendix I: Myths in Monetary Theory

This is a chapter from the book, Money; A Mirror Image Of The Economy. Visit that link for more information about the book.

Under required reserves in modern fractional reserve banking mandated by law, private banks cannot, and do not, create money. What has really happened is that private bankers have control of America’s socially-owned Federal Reserve where they create massive sums of money to protect and expand their ethereal world of high finance. Remove those corrupt bankers, eliminate the monopolies which consume that money, then create money for productive purposes, and you have an efficient economy. There still remains the myth of paying off debts destroying money, the myth of the need for 100% reserves, and the myth of debts being money.

Logic proves that paying off debts does not destroy money as stated by both the Federal Reserve and money theorists. If you take in cash to pay off a $10,000 loan, the bank is not going to burn that money. They are going to put it in their vault right alongside their other cash. If you pay by check, those funds are debited from one reserve account and credited to that bank’s reserves. It is not destroyed.

What they mean to say is, unless that money is loaned back out, the money in use has been reduced. Yes, when loans are paid off and that money is not loaned back out the money in use is reduced and if all loans were paid off there would be no deposits beyond the initial primary-created money. That money has been destroyed is only appearances, all that initially created money is still there available for loans. All that is missing is the borrowing of that money and its circulation which creates what is known as “the money supply.” As money use shrinks the economy slows, values collapse, debts become unpayable, and then, through value loss and bankruptcies, money is destroyed.

By keeping her banks running even when they were technically bankrupt, Japan has demonstrated how to avoid the destruction of money as just described. A minimum level of Japan’s primary-created money has been destroyed and those bankrupt banks, maintaining their loan policies, have kept most money loaned out, much of it to America. That which is not circulating is, except for that under mattresses, sitting there, available, in reserve accounts.

The misunderstandings of 100% reserves: Early 100% reserve theorists suggested that the government print currency and use it to buy up treasuries and other debt instruments of banks. That money was to be stored in their vaults. Each dollar on deposit was to be guaranteed by a dollar in currency in those vaults. Later variations of 100% reserves had the banks borrowing enough currency from the Treasury to match all deposits.

There are severe contradictions here. 1) When banking first starts there would be no debt instruments to buy up. 2) The government earning interest on those debt instruments instead of the banks would be a massive drain on banks which would have to be paid for by higher interest rates. This would effectively be a tax paid by every citizen. 3) Deposit money, electronic money, exceeds currency in circulation by many hundreds of times. Paying interest on that sterile money, no matter at how low a rate, would be economic nonsense.

Eliminate those monopolies, have society operate those banks, pay equally for equally-productive labor, share the remaining productive jobs, and each dollar earned and-or deposited will represent true value (use value) within the economy. There will be no inflations due to too much money chasing too few goods nor deflations due to too little money, there will be no runs on banks, and there will be no need for reserves beyond that mandated by the Federal Reserve for a balanced economy.

The 100% reserves would be already in place by values, now purely use values, purchased matching the value of money paid. Even if there was a run on a bank, which there would not be, all checks or debit-credit card usage against deposits would be honored and the citizenry would soon learn their money was safe. As their responsibility is to keep the money supply in balance and they can do so by creating or destroying money, speeding up or slowing down the circulation of money through decreasing or increasing mandated reserves, a socially-owned banking system automatically has 100% reserves. Private banks do not have those automatic reserves. They cannot create it on demand.

The myth of debt money: Money is just what we have described it, circulating primary-created money. A debt is just that a debt incurred when circulating money is loaned out. Money flows through the economy in the process of producing, distributing, and purchasing. Though it may be sold to a different owner, a debt just sits there waiting to be paid off and the equities pledged backs those loaned reserve accounts.

On the other hand, the meaning of debt money as money created by the Federal Reserve-Treasury to provide loans to buy and sell monopoly values, as described throughout this treatise, is valid. Eliminating monopolization through applying the full and equal rights principles of Henry George, by society initially creating money for infrastructure and essential services, later covering those expenses through resource rents and socially-owned banking profits, and controlling the money supply through raising or lowering mandated reserves eliminates that form of debt money.

Though we have outlined an efficient economy that would operate on roughly 60%, possibly 70%, less borrowed money, debt is nonetheless an essential feature of a modern economy. Mandated reserves, managed by a Federal Reserve-Treasury authorized to create money for economic infrastructure and essential social services, is pure gold to an economy.

Unless it is a gift or inheritance, nobody starts life with adequate finance capital; it must either be earned or borrowed. Earning takes a long time whereas borrowing takes minutes. As soon as that finance capital is borrowed gifted people can put their talents to work producing with the efficiency addressed throughout this book. This is why rights to finance capital—for federated regions of the world, for countries, for regions within countries, for states, for communities, and for individual entrepreneurs—are so important. Yes, an efficient economy requires debts to keep products and services flowing but those debts are not money per se. They are just what we think they are, loaned money.a

Footnotes

  1. To be specific, that loaned money can be either created money or savings (stored labor) but, in an efficient economy, none will have been appropriated. Back to text
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This is a chapter from the book, Money; A Mirror Image Of The Economy. Visit that link for more information about the book.