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A film explaining the monetary system, from The Cobden Centre The good folk at The Cobden Centre have put together a very good documentary to explain how the fiat money system works, and has some suggestions as to what to do about it. At the instigation of the Sage of Kettering, (full disclosure, his cousin made it), here it is.
I have watched it and it is very good. Ex Nihilo: The Truth about Money. My only quibble is that it repeatedly refers to banks creating money out of thin air, but there is some substance to ‘thin air’, which, after all, can sustain respiration and hold up aircraft.
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Yes, I have watched and it is worth taking the time to watch it.
One suggestion I made though is that it isn’t money that is created, rather it is currency.
Money is Gold and Silver while the stuff that banks create is currency. And all currencies eventually degrade to nothingness. Money lasts.
If you agree with the idea that money is ‘created out of thin air’ then you should also realise that a matching debt is also ‘created out of thin air’ at the same time. Which is why Governments cannot just ‘print money’ without consequences.
Exactly correct.
John in Cheshire wrote:
‘Money is Gold and Silver . . . ‘
Sorry, but saying things like that in front of me is like showing a Dobermann a ham sammich – and I know what that looks like.
Money is not any specific material or item, whether it be gold, or silver, or cowrie shells, or salt, or even intaglio-printed pieces of paper. Money is a medium of exchange and an expression of trust between the giver and the taker, and can take virtually-any form – and has.
Gold and silver are just metals, which have, at some times and in some places, performed rather well as money, due to their (relative) scarcity and difficulty of extraction. But to suggest that they are somehow intrinsically ‘real’ money, as opposed to anything else, is pure fantasy – a fantasy that is often used to persuade the gullible to spend their substance on obtaining them in preference to any other medium of exchange. Gold and (to a lesser extent) silver, as well as other precious metals, are far-too-volatile to form a stable and reliable means of exchange, or as a reliable store of value.
Having secured my hobby-horse securely at the rail, I shall now dismount.
llater,
llamas
So, what is everyone here doing to protect their nest egg? Real estate? Gold? Ammunition?
Agreed. Money is whatever people accept to be money. Currently at least, vastly more people are willing to exchange their goods and services in return to dollars or koruna or francs than they are for bits of metal. Depending on the current state of debasement, said willingness varies.
(From the film)
When I write a cheque (remember those?) I create money out of thin air. But I then go to the bank and deposit enough money to cover the cheque which, in effect, destroys the money I just created. When banks make loans they do the same thing, they have to balance their books at the close of business each day.
If banks could create money out of thin air there would never be a run on a bank, would there? A bank would never be unable to pay out its depositors.
llamas:
Maybe I’ve always had a skewed view of this. When we denominate the price of gold in dollars, I’ve always viewed any volatility in that price as a reflection of the volatility of the currency more than the volatility in the value of the gold itself.
The big criticism of the film is that banks do not create legal money – they create Credit. However, bank credit “broad money” (lending that is NOT from Real Savings – as credit expansion is NOT “savings as real as any other form” – as J.M. Keynes falsely claimed) is treated as money and whenever the Credit Money bubble starts to crash down to the Monetary Base, governments step in with their “suspension of cash payments” and their bailouts (open or hidden bailouts).
The Economist magazine supported such legalised crime from the start – even in the 19th century (although on a very small scale compared to today).
In the United States in 1933 privately owned monetary gold (and later silver) was stolen by the government, and the gold clauses in all private and public contracts were violated. This criminality was upheld (5 to 4) by the Supreme Court in 1935 – although the link between the Dollar and physical reality was not formally ended till President Nixon’s “temporary” closing of the “gold window” in 1971 (cheating foreign governments as American citizens were cheated decades before).
Defenders of Mr Putin keep declaring that he will introduce a gold currency (they have been claiming this for years) – but he never does, as it would make his military misadventures much harder to finance.
There are no “Good Guys” in the modern world – just rival gangs of criminals (banks, other corporations, and governments all joined-at-the-hip). Their currencies as corrupt as everything else they do – from their Covid “vaccines” (their Corporate injections were not very effective and were certainly not safe), to their “Net Zero” policies (for some reason CO2 produced by China is fine – only CO2 produced in the West is harmful), to their “Diversity, Equity and Inclusion” which turns out to mean Uniformity, Injustice and Exclusion.
People who think that Mr Putin is an honest alternative to all this might as well say that Al Capone was an honest alternative to Bugs Moran in Chicago.
If anything Mr Capone was worse than Mr Moran.
The Austrian theory of monetary creation has a sort of Genesis in that one day a commodity that had emerged as the most valuable became used as the medium of exchange and hence ‘money’, not used up in transactions. This takes a day-by-day look at reality, basing it on actual human behaviour. It happened to be gold or silver in most economies, metal which are rare, effectively useless industrially in days of yore (not now), and which happened to be relatively inert chemically, albeit gold is more likely (ceteris paribus) found in its elemental state. It is quite right that if everyone thought that gold and silver were just soft rather useless metals, their values would plummet, but people value gold not so much from their own point of view, but essentially because they speculate or expect that others are likely to do so, and it is this high level of confidence that makes gold such a good bet. It has entered the language in ways that show this, if you do some good work, a colleague might say figuratively ‘This is pure gold‘.
There are instances of currencies of sorts emerging spontaneously in isolated, economies, such as in the pure socialism of a prison, cigarettes or drugs being used as a ‘currency’ (before being consumed eventually no doubt), but also in times of hyper-inflation, either barter emerges or a foreign currency is substituted where it is available.
What the film avoided, probably deliberately, as it was seeking to explain that we were in the Fiat Matrix, not show a way out, was to talk of the consequences of ending the expansion of money, a sudden contraction, the collapse of the banks and the emergence of the underlying economic reality and the shrinkage of the financial sector, the bankruptcy of many large corporate behemoths and the collapse of private equity as the Cantillon effect is reversed, leaving a clear forest floor for actual economic activity as the underlying reality asserts itself.
Count me among those disappointed with this flick. When people say central banks create money out of thin air, or with the stroke of a pen, or with clicks on a keyboard, they’re not exactly wrong, but they are being pretty superficial. I’ve been looking for a good book that describes in some detail how the fed works, so far I haven’t found one. Saying “it’s just hocus pocus” is unsatisfying, and also incorrect. It’s hocus pocus, but it’s not just hocus pocus.
Yes Mr Ed.
Honest money is not compatible with the present bank-corporate state – and there would be great suffering if the Credit Bubble system collapsed. Well scrub “if” – as this system is going to collapse, the only question is “when?”.
Russians know this already – as they have experienced such a collapse, first of socialism and then of the Corporate Credit Money Bankerism that was imposed in Russia – due to Western “advice” (from the Clinton Administration – that gang of thieves).
Not that the system Russia has now is really any better – there is still Credit Money in Russia, it is just that Russians are being looted by other Russians now (not by Western Corporations seeking to loot Russian natural resources and giving Credit “Money” in exchange).
It is much like the Covid “vaccine” given in Russia, which was no more “safe and effective” than the toxic stuff injected in the West – but at least it was made in Russia, it was not profiting Wall Street.
And it was much less difficult to get a fake “vaccine certificate” in Russia. Most Russians were not really injected.
@ bobby b. – it’s a fair question, which might be why you asked it.
But volatility in the value of currency is relatively-easy to measure, and it mostly-consists of inflation, which is very-accurately tracked in most developed economies as much as anything because of it’s political impact. So it’s very easy to zero out the impact of most currency volatility and show just the volatility in the price of (for example) gold – as you will see in this inflation-adjusted record of the price of gold in inflation-adjusted US dollars for the last century.
https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart
And you’ll see that it is – literally – all over the shop. Silver is just the same although there are fewer peaks
https://www.macrotrends.net/1470/historical-silver-prices-100-year-chart
but the multipliers are similar.
llater,
llamas
If your entire monetary system is based on benefitting a small Corporate elite at the expense of everyone else, why not have a pharmaceutical (Covid “vaccine”) system based on the same principle? Why not? Who is going to stop you? If anyone tries – just call them a paranoid conspiracy theorist, and laugh at them.
The principle of public-private partnership is not just present in money – with (contrary to Milton Friedman) an “increase in the money supply” NOT meaning that everyone suddenly has X amount more money, but really meaning a small group have lots more money which they can use to buy real assets, such as land, before ordinary people see the Credit Money (hello Cantillon Effect), it also comes in regulation to.
As recently as the 1980s it would have been considered odd (to put the matter mildly) for American government regulators to be part funded by the very companies they are supposed to be regulating – but from the 1990s the principle of institutionalised corruption, companies part funding the very bodies that are supposed to be policing them, has become increasingly common – both in the United States and internationally.
So, for example, when one says that Pfizer’s products have been approved by government regulators – one is really saying that Pfizer has approved them, and the Corporate State government (in some nations – and increasingly internationally) does not allow such corporations to be sued in the courts for the injuries and deaths their “vaccines” cause.
In much the same way saying “the government regulates the banks” overlooks the basic fact that governments and banks are joined at the hip, governments depend on the Credit Money – just as the Corporate elite do.
“But the science” – the “science” that says Credit Money does not rip-off most people (to benefit a small elite), is as sound as the “science” that says that C02 from China is fine, but C02 from Western countries is evil.
Academics and other “experts”, whether in economics, Climate, or medicine (or anything) are often conformists – unwilling to face total ruin, life in a cardboard box on the street, for the truth.
But then perhaps one has to be a bit of a “weirdo” to be willing to sacrifice everything for the truth.
To Frank’s point, banks create deposits out of thin air, balanced by loans on the other side of the books. Bank runs arise when deposit holders all try to realise their right to transform a bank balance into cash, which they cannot create out of thin air. This could be solved by restricting the ability of depositors to withdraw cash. Mutual funds that invest in illiquid assets such as property have the ability to put in place such gating arrangements.
The central bank does create cash out of thin air. In principle you could have a fiat money system without a central bank that does this, but that then is much closer to the mutual fund model. I believe this is similar to what they had in Scotland during the free banking era, but can’t recall the details.
Jon eds – fiat money without Credit Bubble banking was suggested by the “Old Chicago School” (before Milton Freidman and co took over) back in the 1930s – banks would be “shylocks”, just lending out real savings of cash money, and fiat money would be created by the Treasury.
I do not support this idea because I am a (boo-hiss) a Hard Money man – Commodity Money (gold. silver, whatever people choose to value – without state or banker power), but it was NOT Hard Money people who defeated the Old Chicago School – the basic point is that powerful interests benefit from the Credit “Money” of the banks (backed by the government) – the Cantillon Effect is real, and the people who benefit from it, dominate our world.
As for “Scotland in the Free Banking era” – people who “deposited” gold (or silver) in a Scottish Bank could find that they did NOT get it back – and the courts said that was fine, regardless of their contract.
Legal corruption, the courts putting the interests of the banks above the contractual rights of ordinary, did not start in 1935 – it goes back a very long time indeed.
The sage’s cousin has worked hard but there are far too many transitions and animations in the video for my liking.
A 30 minute version without that stuff would be more likely to hit home.
One positive (of many) bits of feedback from my documentary for The Cobden Centre, was that a “left leaning” friend of mine told me that he was very persuaded that the free market should set interest rates. Pleased to hear him say this, I didn’t remind him that I had tried to explain this to him over numerous discussions. A film carefully edited with interesting background music score has a way of focusing the viewers mind. Additionally it was my view that points needed to be repeated and entertaining/amusing “fillers” were required to drive the message home if the work was going to attempt to change minds. Viewers that already excepted the fundementals might grow impatient, but I was willing to ignore that to avoid preaching to the converted.
As for money being created out of thin air, I am aware that what’s being created is actually credit. But that doesn’t quite hit home as clearly as “money” and one must be clear that that credit is excepted as an expansion of the money supply after it gets spent into the economy. A Cantillion effect. The issue that is what is it being created for? Is it productive efforts, or driving up assets?
Through my many conversations with Jim Brown (HardmoneyJIm), I take his points seriously that money creation for productive business could be good. To date I am not entirely clear on how it would be implemented against asset class speculation. Only that banks should be free to fail and governments and central banks should play no part.
Reforming the Bank of England Act to mandate it to protect the value of the pound from one generation to the next is a good and viable step forward rather than to leap to demands to end the BoE. Their mandate to focusing on 2% inflation is insane. As Keith Weiner put it, the debasement of a monetary system is a feature not a bug.
I would also like to bring attention to https://www.honestmoneyinitiative.com/ and support them if you agree with what they are trying to achieve.
Thank you kindly to all those that did watch it. I know I have more to do and welcome suggestions (and funding opportunities). You can reach me at clive@cobdencentre.org