Its always about the money

Alan Blinder does a fantastic job in documenting the history of how the government along with the private central bank (The Federal Reserve in the US) created the nation’s money to control and manage the nation’s economy from 1961 to 2021. The book tells the story how government, business and academic leaders, officials and authorities struggled in competing to justify and implement their economic theories, opinions and ideas on how to fix and repair the nation’s economy when things start to go bad. The story also includes their struggle in trying to predict the outcomes of their actions.

There is no lack of rumors and myths about government operations especially when it comes to how the nation’s money is created, managed, controlled and spent. Along with some recent books on the subject (such as: “The Deficit Myth” by Stephanie Kelton and “The Creation from Jekyll Island by G. Edward Griffin and now “The Monetary and Fiscal History of the United States” by Alan Blinder), there has also been an explosion of information on the internet on how banking and financial systems work along with how governments, private central banks and private commercial banks create money and use money to gain political power and status. Some good and some bad along with some interesting conspiracy theories.

I was well into my forties when I started to learn about modern money systems. At first, I could not believe it. This was not what I was taught about money in my younger days. To me the most stunning realization was that most modern money is created by issuing loans without having the physical money to loan but by simply entering the loan amount into the borrower’s account. In other words, pretending to lend money but expecting to be paid back (with interest!) with money that the borrower will need to earn. Think about this. if a “lender” does not have the money to lend you but just simply convinces you that the numbers that have been entered into your bank account is money and you have to pay it back with money that you have to earn (plus interest!), what would you call this? When government create money by borrowing this way, they call it fiscal policy. When the private central bank (the Federal Reserve in the US) wants private commercial banks to create money by giving out these type of loans to individuals, businesses and corporations which include governments, they lower interest rates to encourage and promote more borrowing. Whatever you call it, it is borrowing money from private bank corporations and institutions that do not have money to lend but just pretend to lend it by entering numbers into the borrowers account and these numbers are now considered money. The higher that the numbers in these accounts go the more debt there is and the more money there is.

Furthermore, I learned that when money is created for a loan, it is then supposed to be eliminated when the loan is paid back and the money that was created for the loan would no longer exist but the bank gets to keep the interest that was paid. Not too sure what supposed to happen if the loan defaults but, I do not think it would be a problem since the bank did not have the money for the loan in the first place and if the borrower defaults on the loan the bank should be able to take ownership of whatever asset the loan was used to purchase or produce which will probably have some value.

At first glance, this does not seem like a legitimate way to run an economy and do business. It looks like some sort of shady deal or some type of scam. Perhaps even some type of Ponzi or Pyramid scheme. Giving private banks the opportunity to profit from money they do not have is a hard pill to swallow. I actually thought that banks would lend money that their customers deposited and this is why the banks could offer some interest. Because the banks could use the money that was deposited to lend out for a higher interest and that is how they made money. This is how it was explained to me and would seem like a fair and legitimate way of doing business. I realize that financial systems are complex and am just scratching the surface with what I have learned so I am sure there is more to this and that there are benevolent goals behind some of the thinking. I also realize that the borrowers would need to meet the bank’s requirements to get a loan like this and would have to put up some collateral but, the borrowers can be individuals, businesses, companies, corporations and of course governments with governments probably doing most of the borrowing and is probably why government debt keeps increasing year after year.

I am not so sure that lending money to governments this way is the best or most effective or productive way to create, manage and control a nation’s money and economy but, it is certainly a windfall for the private banks! The banks say this special privilege that allows them to create money for the government is necessary because if the government creates the money themselves they will not be able to control spending. This does not appear to be the case since in recent years government spending has always increased resulting in government debt always increasing with no sign of it ever being paid back. Furthermore, there is no incentives for the banks to encourage governments to pay back their debts because the more government debt there is the more money there is and the more interest is paid to private banks and the more profit banks can make for their board members and shareholders.

Equity market corporations, brokerage houses, mortgage companies and their shareholders also frown on governments creating the nation’s money without borrowing it because they say this would be socialism. Creating, managing and controlling the quantity of money is the most powerful way to control a nation’s economy and is one of the government’s most important jobs right up there with national defence and protecting our privacy so I do not think governments should be delegating this authority to private banks. The process for creating money should not result in using tax dollars to pay the principal and interest on loans that were given out by private banks creating money for the loans. Private banks should only be allowed to lend money that they actually have that has been deposited by their customers. Banks should not be allowed to create money. The government should be the only authority allowed to create money and it does not have to be a socialist government. This would also work for capitalism. If banks do not have enough money to lend to businesses and corporations to expand and increase their capital to grow their business operations, the government can lend them the money. The private central bank (the Federal Reserve in the US) can be replaced with a National Bank.

Governments not controlling spending is not a good thing but at least if governments create the money themselves instead of allowing private banks to lend them money that the banks create there will be no national debt that has to be paid back and no interest that the government has to pay to the banks. Both the banks and governments seem to be working as a partnership and governments do not seem to make much effort to explain how they create, manage and control a nation’s money to their citizens. Government budgets never really explain this or present this information.

Governments have the authority to create money without borrowing it from private banks but have chosen to put themselves into debt by borrowing money that private banks create and do not appear to be concerned about using tax payer dollars to pay back the loans and to continue to pay private banks huge amounts of interest. Throughout history all money that has been created, managed and controlled this way eventually becomes worthless as a result of inflation due to governments continuing to create money by borrowing from banks. Unfortunately, history has also shown that governments creating their own money without borrowing it from the banks also resulted in the money becoming worthless due to inflation caused by governments continuing to create more and more money. So except for being good for banks, it does not look like allowing the banks to create the money for the government and having the government borrow it has resulted in governments controlling spending any better.

One of the main strategies used by governments to keep the economy growing is by promoting and encouraging borrowing, especially government borrowing which of course creates more government debt. The Gross Domestic Product (GDP) represents the size of the economy which is the amount of money the economy is worth. When the economy is continuously growing, the GDP is also continually growing. Similar to any addiction, more and more borrowing is needed to have the same effect on economic growth. When the government debt starts to become greater than the value of the GDP, technically it will no longer be possible to pay back the government debt.

If it continues, the buying power of money will start to be significantly reduced and if the government debt starts to become higher than the GDP, the money and financial systems will probably collapse. If this happens, the system is reset and the cycle is repeated. During the run up there will be mostly good times but as the reset approaches and is implemented there will be some bad times and war is also a possibility. It could be many years after a reset before the economy can get back to what would be considered good times. This cycle has been repeated continuously throughout history from the Chinese Dynasties to the Roman Empire to Germany after World War One and in the 21st century in Argentina, Venezuela and to many African nations. If the US can avoid this cycle, they would be the first. Since 1961, there have been many countries that have had a reset including many European countries when the Euro was adopted in 1999. Some with good results, some with mixed results and some with bad results. There will probably be many more monetary and financial resets in the future for the world’s nations.

It’s not only governments that do not always have good reputations in managing a nation’s money, many businesses, corporations even entrepreneurs and financial institutions including investment firms and banks also do not always have good reputations for managing money. They have also been known to participate in nefarious and criminal activities and may not always act in responsible ways for their clients, customers and employees or for their communities and environment.
Weather governments borrow money that banks create or create the money themselves, there is no real value in this money. It will have value because we normally have faith in the government and would be willing to work and exchange good and services for this money. This money will also have value because we will need it to pay our taxes. If our trust and faith in the government goes, so will our trust and faith in the money they create. Governments need our support to stay in power but to encourage them not to devalue their money by creating too much there also needs to be legislation in place to ensure that the purchasing power of money is not devalued over time. If we do not have at least some trust and faith in the government, we will not have a civil nation nor a civil economy. Without trust and faith in government, there will be some type of black market or anarchy based economy. I do not think this would represent progress. A government can be thrown out of power and a new one voted in.

The challenge with governments is to have democratically elected ones with honest elected politicians and officials that are not corrupt or will not become corrupted and abuse the government’s power. Including, not abusing the government’s power to create the nation’s money. Societies and their citizens need to learn how to elect, operate and manage democratic governments much better! Easier said than done! The challenge with business, corporations, financial institutions including banks and invest firms is to educate and encourage them how to become more responsible and less greedy which would result in much less government regulations and smaller governments. Also much easier said than done!

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