Modern Economics: Why Crypto Will Replace Fiat
In the 1930s, Henry Ford (founder of Ford Automotive) remarked that it was a good thing the general populace didn't know how banking and money really worked, for if they did, "There'd be a revolution before tomorrow morning".
However, in mid-March 2014, something unimaginable happened. The Bank of England, alongside three economists from the Bank's Monetary Analysis Directorate released a paper outlining current banking practice, titled 'Money Creation in the Modern Economy'. This paper is unprecedented in that it explicitly stated that most common assumptions about the functioning of the banking system are incorrect. Further, the authors support outright that the positions of populist anti-banking movements such as Occupy Wall Street have been correct all along.
Let me ask you some questions to ponder in light of this:
How is money created?
Who benefits from its creation?
What ultimate purpose does the fiat monetary system serve?
I challenge you to answer these questions to yourself, and then review your answers by the time you have finished reading this article. We will be reviewing the modern financial system, using the United Kingdom and the Great British Pound as a case study.
For centuries, the mechanics of the monetary system have remained hidden from the prying eyes of the general population. Despite this, its impact, both on a national and international level is perhaps unsurpassed. It is the monetary system that provides the foundations of international dominance and national control, and has an unprecedented impact on the quality of life of everyday citizens.
In recent years, as these very foundations are being shaken by endless escalating international crisis, the need for open and honest dialogue on the future of the monetary system has never been greater. Financial analyst Alessio Rastani highlighted the problem in a 2011 televised interview:
This economic system is like a cancer. If you just wait and wait, thinking this is going to go away, just like a cancer it is going to grow, and its going to be too late. What I would say to everybody is, get prepared. This is not a time for wishful thinking that the government is going to sort things out. The governments don't rule the world; Goldman Sachs rules the world.
Notes and coins
In 2010, the total monetary supply of the United Kingdom was 2.15 trillion Great British Pounds. Out of this total, only 2.6% was physical cash, amounting to 53.5 billion.
The rest, 2.1 trillion, or 97.4% of the total money supply was commercial bank money, which we will look at a bit later. The 2.6% of physical cash is minted by the government through the Central Bank in a process called seigniorage.
Seigniorage: Profit made by a government by issuing currency. The difference between the face value of notes and coins, and their production costs.
To elaborate on this process, when the Bank of England prints itself a ten pound note, it costs it about 3 pence to physically print that note. The Bank of England then sells it to a commercial bank at face value - £10. The profit, or the difference between printing the note and actually selling it for £10, goes directly to the Treasury. This effectively means all the profit ends up with the Treasury, which reduces how much taxes British citizens have to pay. Over the last 10 years, seigniorage has raised about £22 billion.
Commercial bank money
The reality is that most money today is not paper, nor is it metal coins. It's digital. Money is nothing more than numbers in a computer system. It's your Visa debit card. It's your electronic ATM card.
It's all a big database, and digital money is what we are now using to make payments. This digital fiat currency is what we actually use to run the economy. I would wager a lot of people in the UK probably think that the government or the central bank is in control of most money in circulation and also issues new money into circulation, but that's not the case. It is in fact private banks that create the vast majority of new money and also decide how it is allocated.
There was a poll done by the Cobden Centre where they asked people how they thought banks actually operated:
30% of the public thinks that when you put your money into the bank, it just stays there and it's safe. You can easily understand why this is a common assumption, because every child has a piggy bank to which you keep adding. When you need the money on a rainy day you smash it, take that money out and spend it. Essentially, this subset of the population views banks as somewhere safe to keep your money so that it's there for whenever you need it.
60% of people assume that when you deposit money in a bank, that money is then being moved across to somebody who wants to borrow it. For example, you have a pensioner who keeps saving money her entire life, and her life savings have been lent to a young couple who wants to buy a house. In fact, banks don't actually work like that either.
The remaining 10% of people fall into a range of subcategories that do not fit either of the two broader categories above.
So how does a bank really work? In the words of Professor Richard Werner:
'Lending' is basically an accounting trick. Banks create money. They don't lend it. When a bank gives out what is called a loan, it basically pretends that you have deposited the money. It has to invent the liability. This is how the money supply is created.
The official terminology for this accounting entry is commercial bank money. When banks issue loans to the public, they create new commercial bank money. When a customer repays a loan, commercial bank money is destroyed. The banks keep the interest as profit.
About 97 to 98% of money that's created is created as this bank "debt money", due to banks issuing money into circulation as loans. This is a very poorly understood fact. It is not a conspiracy theory. It is literally the way the Bank of England describes the process. For every pound anyone owns, someone, somewhere is paying a bank interest on 97 pence.
The amount of money banks are creating out of nothing is just incredible, to the tune of 1.2 trillion GPB in the last 10 years. That money is being distributed according to the priorities of the banking sector, not the priorities of society. From 1980 to today, the international banking sector itself grew from USD$2.5 trillion to USD$40 trillion by assets. To put that in perspective, in 1980 global bank assets were worth 20 times the then global economy. According to the UN, today they are worth an estimated 93 times the current global economy.
The banking system has such a huge impact on the world, but only because it supplies our money supply. We have to protect them. We have to subsidise them. We have to allow them to continue because the disaster of a bank collapse affects us all in a huge way. Anyone who says that we shouldn't have bailed out the banks doesn't quite understand the nature of our monetary system. Allowing a bank to fail is like eliminating a huge chunk of the money that we take for granted. However, bailing out the banks is also perpetuating a system which is never going to work.
Whatever we do, we are always going to have this cycle until we separate how money is created and the activities of banking. Then the banks could do as they wish. They'd be a normal business like everyone else.
Does this sound like a system we have heard of before? Cryptocurrency
Cryptocurrency can return the financial sector to a level of stability not seen for hundreds of years. It is a well-knows fact that the single most significant marker of a civilisation on the brink of collapse is the debasement of its currency. This happened to the Greeks, to the Romans, even the Aztecs, and we are seeing it today in our own economy. Luckily, we have been fortunate enough to have a replacement on the back-burner.
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