The Money Problem – Source and Solution (Guest Post)

I have had some feedback on economic and monetary ideas I have touched on in several of my posts. Here is an interesting one – with thanks to David McGregor http://sovereignlife.com/blog/:

Money and it’s creation is an interesting subject – and the fact is, the idea of "Social Credit" is on the rise yet again - as if economic hardship/depression is the ideal fertile ground for questioning the financial status quo.

And so it should be questioned.

We do indeed have a private banking system which has managed to create a monopoly on the creation of money. And they have done this by partnering with governments in an unholy alliance. 

In the "old" days Kings and governments had to live within their means. If the king wanted to go to war, he had to raise an army and pay them. And to do that he needed plenty of gold (or silver). No money, no war.

As democratic governance arose, there also arose the desire to have more money than could reasonably be taxed off the hapless citizens. That's when banks - and their nefarious fractional reserve banking - came to the rescue.

They in effect said, you can have as much money as you like - we'll lend it to you.

Ever since we have had spendthrift governments winning elections by bribing the electorate with "goodies' that could not be afforded, except by going into debt to the banks. Witness the mess Europe and most western countries are in today.

The "evil" inherent in modern banking is not that the banks are private, but that they have a monopoly on the actual creation of money out of thin air, which they lend at interest to all comers.

Giving the government this same licence, to "print money out of thin air" would not solve our problems one whit, but would in fact enable a government to go on a spending binge and ultimately generating a hyper-inflation of some sort. I hate to think what sort of control they could accomplish by having their dirty hands on the "printing presses".

The only remedy for our existing dilemma is to abolish the fraudulent fractional reserve system of money creation - which is the reason all banks are perpetually insolvent. A bank run is simply proof of the obvious - that the bank never has all the funds deposited with it.

In essence, fractional reserve banking means this: say I deposit $1,000 in the bank. The bank can now lend up to 90% of that. So Joe Blogs takes out a $900 loan. The bank now has two liabilities - my $1000 and Joe's $900. We are both entitled to take out our money - - but the bank only has the original $1000, while having $1,900 in circulation. This is the crux of the problem - not interest as such.

So how to get away from this clearly fraudulent system?

Money must be something that cannot be created. This is why gold and silver were always money - money that people freely chose via the free market.

Banks can only ever lend out what they have actually taken on deposit. So only funds on contractual term deposit can be lent out - so there is only one claimant to the funds at any one time.

Fiat money, as we know it, can work - provided people have faith in it. But having faith in paper money which is constantly subject to both bank and government manipulation is a recipe for disaster.

That is why I have a great interest in the monetary experiment known as Bitcoin - http://bitcoin.org

Here you have a privately issued fiat currency which cannot be manipulated. It has no central control. No company. No government. No counterfeiting. No inflation.

In fact, bitcoin is by nature deflationary - as only 21 million BTC can ever be in circulation. This means that as production rises, prices must fall - which is the natural order of things. 

A naturally deflating money encourages people to save (no interest required) because the value of their money is rising over time vis-à-vis spending power. These savings form the basis of capital formation, giving rise to investment and progress.

There is a growing market for bitcoins, and it is truly a subversive technology - one which has the potential to replace money as we know it, if/when it can reach a break-out of users and usage.

A monetary crisis in the banking sector, or full-blown hyperinflation could provide a trigger.

You can see one of the most popular bitcoin exchange markets here: http://www.mtgox.com

I purchased $2,000 worth of BTC around a year ago, at the price of $5 per BTC. It's currently $10.85 as I write this.

It's interesting to note how bitcoins are tracking inflation, in a similar way to gold - because neither BTC nor gold can be created out of thin air, and are not subject to human intervention or manipulation.

What's more, bitcoin represents true financial privacy - encrypted and outside the system. 

As we speak there are Bitcoin apps being launched on the Apple store, enabling people to pay for things and pay each other with the tap of a finger.

I find this technology to be a potential harbinger of things to come, and as an "experiment" it holds great promise in my opinion - to finally turn the money system around so it actually does what it's supposed to do - instead of being the means of our enslavement.