|by J. Walter Plinge
TABLE OF CONTENTS
1 Human / Civil Rights
2 Exchange rates
Money is not a commodity.
3 Free Trade
Buying the World
4 Money Fundamentals — Money Science, Real Money
Money is Local, Money is about trade, Barter
The Hierarchy of Money
5 Federal Reserve system vs. Mutual Credit System
Similarities and Differences
Extending Credit is not the same as Lending Money
6 National Mutual Credit Banking system
More Money Creation
The right to NOT create money
7 State issued Money
Another day older and deeper in debt,
Oh Lord doncha call me ‘cause I can’t come,
I owe my soul to the company store
— Big John, a 1950s U.S. pop song
FIAT MONEY FUN
Many years ago I wrote an article about money and one reader wrote
back with a question. "Yes" she agreed, "money is popular, but WHY
is it popular?" I have never been able to answer that question to my
satisfaction but I have had some responses.
Money today is popular because it's profitable... not for those who use it
but for those who issue it. Money, like gasoline, is popular because commercial
enterprises have created a society around it where all reasonable alternatives
have been eradicated.
Still the details (like, WHY?) were vague.
Then I ran into this, by Warren
African communities that were engaged in subsistence production and internal
trade had no need for European currency. Walter Rodney reports on a widespread
practice employed by the colonial powers to force Africans to use their currency:...colonial
governments forced Africans to produce cashcrops [ie labor for money] no
matter how low the prices were. The favourite technique was taxation. Money
taxes were introduced on numerous items cattle, land, houses, and the people
themselves. (Rodney, 1972, p. 165) ... In addition, as the only local source
of British pounds, the colonial authority was also in a position to determine
the price it would pay for those goods and services.”
So there’s the answer: Using government money forces people to be
dependent on working for money rather than being self-sufficient and
they have no control over the value of their labor.
Feeling more and more like Big John these
days? Wondering why nobody seems to like the U.S.? Wondering why the
media keeps saying that the war against terrorism involves, “... military
intelligence, international cooperation, and banks”?
First, one must to understand The Big Lie.
The lie is the seemingly innocuous fact that banks claim to be lending money
when it is the borrower who is creating money. Depending on who you read, US
banks can now create between $30,000 and $70,000 for each $1,000 deposited.
If there is the slightest doubt here, you must check
it out; here's the confirmation from
Edward Flaherty. More neat stuff can be found at Flaherty’s
website . Flaherty is a professor of economics and stalwart spokesman
for the Federal Reserve System. If he admits it, then it’s gol-dang true. For
further confirmation, see Gary
Start at the beginning: when I give you my IOU, I am creating money.
Right? Putting a currency into circulation — ok? Well it's the same
at the Mutual Credit Bank (explained below); the MC banking system
never claims to be “lending Money” — only to be extending credit. Or
to be allowing the client to create credit. Well, it's the same with
commercial banks too: they approve credit. But When Smith signs the
mortgage papers at that commercial bank, HE creates credit money and
HE is responsible to repay it. The commercial banker is only a clerk
who approves Smith's credit, thereby creating money out of thin air.
And then charges an exorbitant interest on the “loan,” as
if the money had existed all along.
The Lie is that the banker claims that he
is “Lending Money” from his vault when he's actually conjuring
up the money from thin air. The Bigger part of the Big Lie is that
any “creditworthy” person can get a loan. This is a civil rights
issue. (The Largest part of the big lie is that banks have the
right to create money, but we’ll get to that later)
Credit cards and checking accounts demonstrate the principle of money creation,
albeit on the back of the federal money system — but you can get the picture:
when you write a check, you “create” money... ok? Now imagine a society where
only certain elite group, say... bankers, corporateers and politicians, are
allowed to have a checking account or credit cards, and you start to get the
picture about how civil rights fits in.
Money, like free speech, should properly
flow from the individual. But that is not the case today. Taking the power
of money creation away from the individual is a civil
Credit is uneven and undemocratic in the US as well as the rest of the world. Banks
refusal to lend to ethnic minorities in the US has always been a problem (sandard
practice, called redlining) and that has kept minorities ‘in their place,’ for
a long time, but the problem goes exponentially deeper than that; there is
a bias toward lending to corporations and against individuals. In a sense,
individuals are considered “sub-prime” credit risks while corporate bodies
are considered “prime” borrowers. For example: when a corporation wants some
money they can simply create it by issuing corporate bonds. Can you do that?
If not then maybe it's because you are a “high risk” sub-prime borrower.
From Molly Ivins, Seattle Times, 5 Oct 1998 p. B5
Long term Capital used $2.2 billion in capital from investors
as collateral to buy $125 billion in securities. Then it used those
securities as collateral to enter into neato financial transactions
valued at $1.25 trillion... [the deal then went bust]”
“The Federal Reserve Bank of New York decides that the ‘sophisticated’ investors
in Long Term Capital ... should not be allowed to lose their money. And so,
the New York Fed brings in Goldman Sachs, Merrill Lynch, UBS of Switzerland,
J.P. Morgan and others,” to put up the $3.5 billion bailout.
Can you buy a house like that? 0.175 percent down? Does the Federal Reserve
board step in when you have a problem with the mortgage? Then maybe there is
an uneven playing field. The irony here is that your battle for “creditworthiness” is
against fictional entities called corporations which enjoy more rights than
actual human beings, and virtually none of the personal responsibilities. This
is definitely a civil rights issue.
The stories are legion:
A representative of the SBA (Small Business Administration — which,
by the way, defines “small” as “30 or more employees”) appeared on
BBC radio a few months back to explain how business is conducted in
the US. One of the details he emphasized is that when a borrower has
messed up and LOST a few million dollars, the SBA does not disparage
such characters from having another go. In fact, he stressed, they
are encouraged because they have “learned” something. Our representative
proudly announced that they have had such clients return 3... 4...
even 5 times.
But if an individual goes bankrupt he or she is hauled into court and his or
her credit is kaput for 7 years.
As it happens, the US Congress was busy at this particular time, tightening
the bankruptcy laws as they apply to individuals and “sub-prime” borrowers
and locking down the credit card laws. Individuals facing bankruptcy are now “means
tested” and families earning over $51,000 have to file under Chapter 13 instead
of 7. As a result they cannot be absolved of their debt entirely (as can a
corporation) but will have 3 to 5 years to pay off credit card debt under court
Now as through this world I ramble,
I see lots of funny men,
Some rob you with a six gun,
And some with a fountain pen.
Guthrie, Pretty Boy Floyd.
What we have here is a banking system based on ... you guessed it:
predatory lending. What is predatory lending? Let Henry explain:
“For example, if a bank lends to a trust client who is a minor, or who had
no business experience, to start a risky businesses, that resulted in the loss
not only of the loan but the client trust account, the bank may well be required
by the court to make whole the client.”
“Now, there is a close parallel in most Third World debts, to the above example
where sophisticated international bankers knowingly lend to dubious schemes merely
to get the fees and high interest, knowing that ‘countries don't go bankrupt’ as
Walter Wriston famously proclaimed. The argument for Third World debt forgiveness
contains a large measure of lender liability.”
— Henry C.K. Liu, from Email, 02 Mar 2001
So there are laws to protect you from the predators. But as usual the
are always in the language. There are innumerable predatory lenders out
there many of whom specialize in the practice, Citigroup being the largest in
the US. Their website proclaims as much: “Citigroup is
the largest sub-prime lender in the country.”
(Henry teaches economics at University of Colorado)
Notice the language. For the same reason a bribe
in the US is called a “campaign contribution,” the predator now becomes
a “sub-prime lender.” Of course the sub-prime lender follows “very strict
regulations” as does the “campaign contributor.” For a sampling of the
regulatory process you might like to visit the U.S. House of Representatives, Committee
on Banking and Financial Services, where they make the regulations.
The discussion centers around sub-prime lenders and two examples of their practices
“Mr. LaFalce: An example is cited, a bank which offered a Visa/MasterCard
with a limit to $1,500, although in the fine print it said it was only required
to extend $400. The catch to getting the card was that the customer had to
agree to a bank-sponsored credit education program for a fee of $289 plus $11.95
in shipping and handling. The card also came with an annual fee of $49 and
a processing fee of $19. And the author of the letter goes on to cite numerous
“Another bank offered a deal to sub-prime customers that is similar. While working
with a third-party financial institution, the bank targeted customers by telephone
and offered a card with a $600 credit limit. The card also charged $20 application
fee and a travel certificate that cost $545”
But in 81 pages of testimony there is not the slightest hint that these practices
were wrong except by the speaker, and certainly not any talk about regulating
So from the Citigroup website we can read, “Typically, recipients of sub-prime
loans pay higher fees and other costs, but these loans are not necessarily
A banking system that makes borrowing
more costly for poor people than for rich people. Not Predatory. Right.
Action Network sees things in a different light. To them the words Sub-prime
and predatory are virtual synonyms.
“The industry frequently cites the fact that poor borrowers are a greater
financial risk, and therefore the lender needs to charge higher interest, include
credit insurance, etc. However, if risk were truly in line with the interest
rates and fees of the loans, profits would resemble those of regular banks .
. . According to Forbes Magazine, 'Sub-prime consumer finance companies have
returns up to six times greater than those of the best run banks.' . . .
With predatory loans, the interest and points are unconscionably high, especially
considering that these are fully collateralized loans, . . . Fees may total 15
to 20 percent of the loan amount.”
And so it is that Citigroup recently acquired Associates First Capital, the
second largest sub-prime lender in the US.
An interesting citation... evidently farmers have a problem getting credit
... Katherine Ozer, executive director of the National
Family Farm Coalition, a network of grassroots organizations ...says the
farm debate should focus on conservation, rural development, ACCESS TO CREDIT,
fair income, and food access that better links farmers to low-income groups.” (emphasis
When corporations and rich people are “prime” and Everybody Else — including
third world nations — are “sub-prime” then the credit system is hugely un-democratic. The
problems are built into the banking systems world-wide and it is a civil rights
“If Cuba has successfully carried out education, health care, culture,
science, sports and other programs, which nobody in the world would question,
despite four decades of economic blockade, and revalued its currency seven
times in the last five years in relation to the US dollar, it as been thanks
to its privileged position as a non-member of the International Monetary
"If India had acquiesced in making its currency fully convertible, it
could have been listed among the countries in crisis today."
It should be clear to even the most economically challenged person that
the price of stocks on Wall Street have no basis in real terms. They form
bubbles and they burst. Well, Currency
exchange rates are determined the same way stocks are valued.
Exchange rates are not determined by anything real like the value of labor
or commodities. They are determined by investment houses in New York, London,
Singapore and Tokyo who bet on their favorite team. Does the dollar look good
today? Then place your bets, gentlemen. If enough of the gents bet on a “hard” currency
like the dollar, then the dollar goes up and they can celebrate their remarkable
perspicacity with cheaper Cuban cigars and a less expensive Russian vodka.
This is like having the score of a baseball game determined by letting a gaggle
of sports aficionados argue about each team's merits and then determining the
final score based on the results of the debate, rather than what actually happened
on the field.
In case you didn't catch that the first time: it's like letting the audience
of the David Letterman Show determine the score of a baseball game, a week
before the game, by screaming into the Applause-O-Meter ... and then calling
the audience, “the experts.”
Now, if you imagine that one of the baseball teams is made up of Southern and
Eastern Players while the opposing team, as well as the aficionados, are of
primarily Northern and Western extraction, then the picture comes into sharper
focus. We do this after having passed through the “Age of Enlightenment,” and
Tom Paine's “Age of Reason” and arrived at the information age unscathed.
There has got to be a better way of determining currency exchange rates.
“Anyone who claims that the best system we can devise
is one that allows the yen/dollar exchange rate to fluctuate from 120 to
80 to 120 — a swing of 50 per cent in each direction over an 18 month period — must
be asked to think again.”
But there are those who profit from exchange rate swings and they will steadfastly
defend a flawed system. These people are generally called “Economists” in the
“... Citicorp’s purchase in May  of Mexico’s largest bank, the Grupo
Financiero Banamex-Accival, or Banacci, for $12.5bn, is being seen in the financial
press as the precursor to a flood of US takeovers of Mexican companies, or what
Grey Newman, chief Latin American economist at Morgan Stanley Dean Witter, called
a ‘Wall of Money.’ Damian Fraser, an analyst at UBS Warburg, is quoted
in the Financial Times as rating Mexican companies as having a 40 per cent lower
purchase price than equivalent companies of equal profitability in the US.”
The Ecologist, Banking on Mexico, vol. 31 No. 6 July/August
Yes indeed. Things are a lot cheaper in Mexico, Asia, Russia, South America,
etc., once their currency has been driven into the ground by people manipulating
the exchange rates. Is this all done on purpose?
Henry Liu: “A controversial feature of the new shape of the financial system
is that the bulk of its participants now have a vested interest in instability.
This is because the advent of high-technology dealing rooms has raised the
level of fixed costs. High fixed costs imply a high turnover is required for
profitability to be achieved. High turnover tends to occur only when markets
are volatile. In a way, the most destabilizing environment for modern financial
institutions is a relatively stable exchange rate environment.”
James Tobin: “It is hard to escape the conclusion that
the countries' currency distress is serving as an opportunity for an unrelated
agenda such as the obtaining of trade concessions for US corporations and
expansion of foreign investment possibilities.”
Times, citing economist James Tobin, January 12,1998,
,” by N. C. Menon, Page 1
The following is an extremely condensed version of the article “The
Time Value of Money” BY Bob Blain, Ph.D. Professor of Sociology
at Southern Illinois University at Edwardsville.
(The original chart shows 74 countries)
Rate Exchange Rate in Minutes
Japan 145.61 2.4
Switzerland 46.65 2.5
Germany 45.71 3.0
United States 1.49 3.1
El Salvador 12.61 82.7
Honduras 8.02 259.8
Bangladesh 50.92 415.5
FIRST COLUMN: Exchange Rate
This is the country's exchange rate in 1995 — that is: $1.49US will buy you
145 Japanese Yen, or 8.02 Honduran Lempira.
SECOND COLUMN: Exchange Rate in Minutes
This is the amount of time, on average, a citizen in each country spends to
earn that amount of money. That is: for 2.4 minutes, a Japanese worker can
buy 415 minutes (nearly 8 hours) of Bangladeshi time via the currency exchange
Economists have no problem with this state of affairs. As Richard Stimson
said in his book, “Probably more economists agree on the issue of free trade
than any other question.” But there is a niggling question here, and Blain
puts it this way:
“Are these differences due to differences in productivity? If that were so, we
should expect the products of the most productive countries to be cheaper, not
more expensive, than the products of less productive countries. Instead, exchange
rates make the products of the supposedly most productive countries more expensive
than those of the least productive countries. It is directly opposite to what
fair price would dictate.”
The above is by no means the definitive article on exchange rates, but it demonstrates
that there are simple means available to examine and determine fairer exchange
MONEY (today’s credit currency) IS NOT A COMMODITY
There have been currency crises in 87 countries since 1975. Never
in the history of the world have so many countries had such unstable banking
systems. The cause is the foreign currency exchange market as well as the
free movement of money globally. The cause of this is what some have called “high-tech” economics.
Macro economics which says that currencies have nothing whatsoever to do
The entire exchange rate system is founded on (yet another) single Big Lie: “Money
is a commodity.” So let's start at the beginning.
Fiat money has no intrinsic value; that indeed, is the definition of fiat money
(And to be painfully clear here, we are talking about all money that
is lent into existence or simply created by a "lender of last resort," without
a sound commodity backing, and not simply the Federal Reserve style fiat note).
Fiat money is a valueless medium of exchange, not a commodity. While a gold
backed note can be redeemed for gold, a fiat currency can be redeemed for only
more fiat money. To say then, that this fiat currency shall trade for another
fiat currency, based on its “market value” (which is zero) may raise the eyebrows
of certain skeptics.
However, if money was a commodity, the issue would be resolved. So modern
economic theory cures the problem with a simple solution: decree. Money is
now a commodity by edict, regardless of any dictionary definition, and contrary
to all independent observation. It was by this same strategy that Peter Pan
was able to fly.
There are probably a million ways to prove that money is not a commodity,
but here's just one simple explanation.
The gold backed dollar was an example of a commodity backed currency. A gold
note was redeemable with a certain specific amount of gold, so the note itself
might be seen as a commodity. A hat check is a good analogy of a commodity
backed currency; when you check your hat, the commodity, you get a hat-check
ticket which is essentially a commodity backed note. You can trade the hat
check (this analogy would work better if everyone wore identical hats) to someone
else, thus spending it... or you can redeem it for a hat.
When the government withdrew the backing for silver and gold notes it essentially
said “you can't have your hat back; you can only spend your note now.” Since
most people never redeemed their notes for gold anyway, they didn't give it
much thought but in the hat check analogy we can see that what the government
has done by claiming that this newly irredeemable money is a commodity, is
to say “the hat check, which earlier merely represented a hat, is now IN FACT
a hat itself. You can wear the ticket on your head, hang it in your closet,
or spend it as you please.”
Money is not a commodity, exchange rates are humbug, and the consequences for
87 countries have been severe.
“If Tony Blair genuinely believes in the boundless opportunities of globalization
(Financial Times report August 2nd), he should concentrate his energies ...
and begin to dismantle barriers to the cross-border flow of labour. ‘Just
Do It’, Mr. Blair.”
Open trade is not just an economic opportunity, it is a moral imperative.
Trade creates jobs for the unemployed. When we negotiate for open markets,
we're providing new hope for the world's poor. And when we promote open
trade, we are promoting political freedom.”
— G. Dubya Bush
In 1976 Milton Friedman made the case for Free Trade
and got the.. ahhh...whooo.. I almost wrote “Nobel Prize” there didn't
I. But of course he didn't get the Nobel Prize for Economics, because
there is no such thing. Nobel never specified an economics prize — you can
look it up in any Almanac, or see: CEPA
It is actually the Riksbank Prize for Economics that Friedman got. Check it
out: In the late 1960s, the Swedish central bank (Sveriges Riksbank) established
a prize known as the “Bank of Sweden Prize in Economic Sciences in Memory of
Alfred Nobel.” Anyway Friedman got his “prize” for saying (paraphrase) “MMMM-mmmmm
free trade, the wave of the future.” Or something like that. If you really
need the exact wording, it's here.
Now I am just wondering here, Friedman is a trained economist,
right? I mean he went to school; he studied and finished his degree, right?
Somebody help me out here if I am wrong about this. What I am wondering is
if he ever studied what free trade is in Econ 101, because free trade is
about mobility of raw materials, capital, labor and products. So how can
it be that a prize-winning economist of any sort, can promote “free trade” without
ever mentioning the mobility of the labor force? What school exactly did
Friedman go to?
Chakravarthi Raghavan puts
it this way: “[about the past damage to poor countries caused by free trade]
. . . this important condition [mobility of labor] is normally brushed
aside in economic literature by assuming either perfect competition in commodity
markets or perfect mobility of labour and capital once administrative barriers
to trade are removed.”
That is to say, economists simply assume that all labor is mobile when they
surely know for a fact that labor is not mobile.
This freedom of workers to move about is fundamental to Interstate Commerce,
so revered in the US; they should know about these things. To prohibit a
Texan from going to California to seek his fortune in the music industry
might seem like a merciful idea but it would be a “restraint of interstate
commerce.” Workers in the US and the European Union can go where the work
is. That is fundamental to free trade. But in the Global “Free Trade” Market
Nonetheless, not a day goes by without someone in the British media raving
on about “bogus asylum seekers” and “economic migrants.” Same thing in the
Molly Ivins (Seattle Times, Jan 11, 1999, B5) noticed that the Immigration
an Naturalization Service (INS) got a revamping in 1996. More money; more power.
Coincidentally this was the year after the WTO was formed in Uruguay. The INS
budget was increased to nearly a billion dollars a year; more than the FBI,
more than the Drug Enforcement Administration with their famous war on drugs,
and more than Customs. Check bouncing is now a deportable crime for LEGAL immigrants.
The INS now sports 15,000 armed officers with arrest powers. Says Molly, who
noticed the focus of arrests on Asians, Africans, Cubans, Latin Americans and
Haitians, “... you notice that immigrants from Europe or Australia do not seem
to end up languishing in the hoosegow for years while the INS looks over their
paperwork.” But minorities do. A Cuban who bounces a check can now get a “life
sentence” because they are not deportable, since the US does not have diplomatic
relations with Cuba because of ... aaahh... Cuba's human rights abuses.
When the labor force is locked in by passport and visa laws, we do not have
free trade. When refugees are turned away because they are “economic migrants” it
is sheer quackery to suggest that money and merchandise should move freely
without borders in the name of free trade.
To argue against this thesis is to argue in favor of lying, deceit and duplicity...
but that's just what today's economists argue. As one recent critic put it,
for example, “Now let’s examine the impact of removing passport and visa laws:
squarely in the hip pocket.” (That is, it’s too expensive to consider)
What our critics always ignore is that the other solution — the easier solution — is
to stop promoting the fundamentalist free trade dogma of the IMF, the World
Bank, GATT, NAFTA, FTAA, MAI, GATS etc. That is, if our critic cannot bring
himself to opening up the borders then the obvious solution is to stop the
lying and duplicity. And since we do not in fact have free trade then all of
the other trade policies of the IMF et. al. become equally questionable.
Yet the policies of these institutions always remains the same: austerity policies
or structural adjustment policies, like user fees for essential services like
primary health and education or abrupt increases in the price of water in the
name of market 'reforms,' more layoffs, less government spending on social
programs, less credit for small farmers and small businesses, more privatization,
pressure to export, slashing of workers' rights and environmental standards,
liberalization of trade policies — all of these policies have nothing to do
with “free trade” because “free trade” does not exist. The policies are clearly
aimed to produce higher profits for multinational corporations. And none of
these trade organizations have shown any willingness to open their meetings
to discuss matters such as these.
The obvious point that is being avoided is “why does free trade hurt poor countries” and
the answer is because the people in rich countries who promote free trade with
one hand, are blocking free trade with the other, with border patrols and passport
The question remains: if economists are willing
to lie about free trade then where does the doctrine of deceit stop? For
a bit more on that topic try:
Economists Got It Wrong” by James K. Galbraith, a crystal clear description
of the Old Boyz Network in the education system.
also, The French Economics Students Revolt and
the post-autistic economics
newsletter (in English)
and The American
Economics Students Revolt: 346 people have now signed the Cambridge Proposal
and the “Kansas City Proposal” .
BUYING THE WORLD With money pulled from a hat.
“By the late 1970s, there was a huge increase in the dollars floating
around the world economy - the rate of growth in dollars between 1973 and
1980 was 20 times the growth in volume of trade.”
“The trade deficits started modestly in 1975,” wrote Richard Stimson
(Playing with the Numbers: How So-called Experts Mislead Us about the Economy” Westchester
Press, 1999) and here are some late figures on that.
1995 $180 billion
1996 184 b
1997 198 b
1998 298 b
1999 372 b
2000 409 b
To date the US has now bought a modest 3 trillion dollars worth of the world's
finest commodities with money conjured up with the help of a magic wand.
Nowadays the US is buying the globe at the rate of over a billion dollars
And the best part is that you can conjure up and lend US dollars from nothing,
but you get paid back in uranium, gold, diamonds, copper, oil, grains, vegetables...
all sorts of nice things. The question remains unanswered: why do southern
countries fall for this stuff?
This link may help explain things:
In Focus: Multilateral
Debt Burden by Soren Ambrose
“Key Point: The IMF and the World Bank are 'preferred creditors' who gain
power over impoverished countries as the amounts owed to them increase.”
(also, see: Predatory Lending above)
And what will happen when the poor suckers in the South figure it out? Well,
then we go to Plan B: Star Wars.
The U.S. Space Command, set up
by the Pentagon in 1985, describes itself in ‘Vision for 2020’ this way: ‘US
Space Command dominating the space dimension of military operations to protect
US interests and investment’.”
You gotta love that word “investments.”
From Karl Grossman, professor of journalism at
the State University of New York College
In the past 30 years the US has bombed or attacked
Syria, Lebanon, Nicaragua, Sudan, Korea, Vietnam, Cambodia, Laos, Iraq, Guatemala,
Japan, East Timor, Nicaragua, El Salvador, Colombia, Dominican Republic,
Somalia, Haiti, Yugoslavia, Panama. What do these countries have in common?
They are all non-members of the World Trade Organization. Since the invention
of the WTO only Japan has joined willingly; the South American countries
and have been “persuaded” by friends such as Mr Pinochet.
As Gore Vidal observed: “The United States is always at war; perpetual war
for perpetual peace.” And it looks like the wars of the future will be
fought against non-WTO members.
THE FREE TRADE BOTTOM LINE
Poor countries producing commodities
cannot possibly compete
against rich countries producing credit
“... We have a problem trying to define exactly what money is...the current
definition of money is not sufficient to give us a good means for controlling
the money supply...”
— Alan Greenspan, 17 February 2000
MONEY IS A SCIENCE
Arthur Clarke once said that people were a science and he backed up his
thinking by noting that electricity is a science. Even though at any given
time one cannot predict what a particular electron might do, one can predict
with great accuracy what the masses will do. People, said Clarke, are the
same. And, I say, money is the same.
The whole point of analyzing money at it's roots is that if the basic assumptions
are wrong then all that follows will be flawed and open to abuse. If physicists
continued to assume that the atom was miniature of celestial bodies then all
progress in that field and in related fields such as engineering, architecture,
chemistry — virtually the entire modern world — would have ground to a halt
a hundred years ago.
Furthermore, the science of money and the implementation of that science are
two separate things. Physicists talk about ‘absolute zero’ temperatures and
absolute vacuums when neither is achievable in real life. But worries about
implementation cannot stop them from the realities of theory. And so it is
for money: one cannot stop every few minutes to ask “but how can we implement
this?” One has to get the theory right and once that is settled, deal with
the best and most acceptable implementation.
SO . . .
When Smith gives Jones a bushel of wheat for a bushel of corn, economists
tell us we have a barter transaction. What we actually have is two sales
and two purchases, in one concise, efficient, transparent, transaction. But
where is the money?
The money is the corn and the wheat.
Recall that various cultures throughout history have used different things
for money, such as cattle, salt, gold, tobacco, seashells, or... corn and wheat.
The first money, what I will call REAL Money, to be clear, is commodities (goods & services,
including labor). Smith is using wheat as money; Jones is using corn as money
and both are acceptable to the other.
Since the term “money” has come to mean a “coin” or “note” or “gold” or “credit
card” or “check” and has even become synonymous with “currency” the point has
to be made very clear that the original money; the first money;
the fundamental; the very root of all monies, as a “means of exchange,” is
the commodities themselves.
Real Money is commodities. ALL commodities. I must emphasize this because if
that is incorrect then it remains to be shown which commodities are, and which
are not, acceptable in trade or barter, and why. Remember this stuff for later — it's
So.... if REAL money is commodities; What is money? Money is, if it's legitimate,
a Commodity Substitute. But today, beware, because there are all kinds of money— some
of them worthless.
Traditional economists don't like this train of thought; even Thomas Greco,
one of today's more modern monetary theorists, has rejected the notion. But
the fact is that it is true and it is important.
At the CREATION level, where money first
comes into existence, there are two main types of currencies:
1. COMMODITY BACKED MONEY (ie gold note)
2. CREDIT BACKED MONEY (ie. home loan)
(There is also the CIRCULATION level,
checks, coins, notes, digital transfers etc. This paper does not deal with
them because they are all just different, and less relevant, forms for moving
money born at the CREATION level.)
Commodity money is backed by, guess what?, commodities;
it is redeemable, by the issuer for commodities. The model for commodity
money is the IOU which is also redeemable by the issuer.
Smith's Credit vs Bank Credit
Credit Backed money is also an IOU but redeemable sometime in the more distant
future with something that doesn’t exist yet, won’t exist for quite some time,
is less well defined and has more loopholes.
As you get up to speed here you will come to realize that virtually all of
our money today is credit money, and commodity money has been abandoned. This
is not a good sign
Another bad sign is this deal of creating money as credit. Here is how it boils
When Smith lends a bushel of corn to Jones' it looks like this
Smith ----corn----> Jones
When the bank lends money to Jones for a house it looks like this
Bank ----IOU----> Jones
(The bank gives an IOU to Jones because the bank creates the money out of
nothing and it must then return it, or un-create it, when the loan is paid
off) If Alan Greenspan doesn't know what money is, this is a likely cause:
his money never had a definition to start with.
MONEY IS LOCAL
People are local, communities are local, crops are local, rivers are local,
lakes are local, the climate is local, mineral deposits are local, forests
are local, and even the oceans are local, as you might find if you compare
swimming in the Caribbean to swimming in the Antarctic. Only corporations,
it seems, are global.
Commodities vary from one region to the next. In the tropics they grow bananas
and coconuts. In the mountains; coffee. Some regions have mineral deposits
or fish and others do not. Each region has its own set of commodities. It
should be clear then that, if commodities are local, and if Real Money is commodities,
then Real Money is obviously local. By extension then all legitimate currencies
have to be local. Talk of an international currency is subversive imperialist
Globalization may have its homogenizing effects and you may find Nike-wearing
computer hackers from Argentina to the Netherlands, but climate is local and
crops and mineral deposits will always be local. And money is local.
If the present system is left in place, the US will end up with one region
and that will look like New York City. Already the east coast of the US has
merged into one large city and the west coast is going the same way.
When the Local quality of money is not respected, large metropolitan
areas will inevitably colonize and degrade or destroy outlying territories.
When you see a flock of Wal-Marts in Britain or a Red Lobster in Zimbabwe,
that’s the first sign of infection.
That is because areas like New York who produce nothing
but money and consume everything else, create more (credit) money than the
surrounding areas, so colonization such as they have done in Atlantic City,
Miami, and Key West to mention just a few, becomes irresistable.
When New York investors focused on Atlantic City for example, they created
a boom which Americans are inclined to believe is good, but when the investors
pulled out they left the town to decay, leaving hundreds of acres of rotting
housing and hotels for the locals to deal with. They did not return the property
to its pristine state before they left. For more on this, see “Money
A national mutual credit system could prevent the economic colonization and
destruction of communities, as well as the economic subjugation mentioned above,
where outsiders such as Mr. Dubya, decide school policies for areas where he
does not live and will never have to send his kids.
MONEY IS ABOUT TRADE
subject: Re: I rephrased the question
date: Mon, 17 Jul 2000
from: "William F. Hummel" <email@example.com>
to: "J. Walter Plinge" <firstname.lastname@example.org>
Hello Mr. Plinge, <snip>
Again, I can't make sense of your question. What
does "tying the US dollar to the productivity of the economy" mean? If
you are referring to the exchange value of the dollar, that is determined
in the market place, not by the Fed. There is no way of knowing the
'productivity' of the economy except in looking back at the historical
Money is about trade. This statement risks being redundant in that
it seems to state the obvious, but I can assure the reader that, in personal
correspondence with bankers and economists (like the above), many have expressed
confusion, dismay and even anger at the suggestion that money has anything
to do with commodities. There is a large problem here. Seriously.
Because economists can think of other uses for money, they resist
this notion. They say money is:
a unit of accounting an
a store of value a
standard a measure of value
a receipt for value a
tool of empire
a medium of exchange a
tool for speculative profit
a system of accounting a
a transferable claim a
lien against value
an information system
While much of that stuff may be true, in the end it’s hard to deny the fact
that money is about trade and commodities because...
without commodities there could
be no money system. (!)
If there is an economist somewhere — anywhere in the world— who can refute
that statement, please, let me know. I'd love to hear all about
My e-mail address is below.
MONEY HAS RULES
Money is a science and there are rules; scientific laws.
The thing is that money is a specific thing, and it is NOT other things.
There are some legitimate scientific rules actually. In the other sciences
they are called "laws" but that term may be a little risky right now. The
rash of free-market fundamentalists gripping the world today proposes that any restrictions
on the use of money are, by definition, bad. These are people
who freely accept that one should not pour turpentine into the Mercedes'
gas tank. That's a rule they can live with. They accept that there is a certain
proper way to hold a Cuban cigar. They accept that as a good rule. And they
are simply adamant about the rule forbidding white shoes after Labor Day.
But any rules about money are rejected out-of-hand. Deregulation! they cry.
These people should be sent back to school for a decent education.
Money is about commodities and trade is about commodities. Money is about trade.
And, yes, there are Laws of Money just like there are laws of gravity.
J.W. Smith, says that
barter exchanges are “imperfect” and he will have lots of company in that
opinion. Traditional economists scoff at barter. They say it's prehistoric.
What their comments are to the fact that multinational corporations are increasingly
turning to barter, I have not heard. Today around 20 percent of these companies'
transactions are conducted with barter through organizations such as IRTA (International
Reciprocal Trade Association).
In Russia, before the IMF imposed over 200 structural reforms (!), more than
any imposed on any other country, (the vandals are at the gate and they have
torn it from its hinges), barter was used for 60 percent of transactions including
payment of taxes (from the BBC Radio 4 series “The Red Menace” 1999).
Barter may have its limitations but it is our present money system that is “imperfect.” In
a barter economy a laborer would likely demand a minimum payment of food, shelter
and clothing (even slavery included a modicum of health care). But in today's
money system, in most cities around the world one can find full time employment
that will not furnish even the funds to provide sanitary housing leave alone
food or extras.
I am not however advocating a return to barter; what I am advocating is a money
system such as Mutual Credit, that delivers at least something close to the
value that barter does.
The truth is that barter is the most efficient, simple, secure, transparent
transaction available. It is the money system today that is inadequate,
arcane, unscientific, deceptive and confusing. And expensive,
if you count the thousands of economists writing billions of pages of convoluted
analyses of a system so unnatural that most observers cannot understand why
it didn't collapse twenty-five years ago. For just a tiny sampling of this
paper jungle see http://ideas.uqam.ca/ which
81,299 working papers,
1,063 series and
In addition, it holds information about over
institutions as well as over
who have registered with HoPEc
....and this is just one website... there are many others like it,
or if you prefer, you can visit the 12 Federal Reserve regional sites...
or read up on the stuff at the IMF site, the WTO site, the World Bank site,
the Bretton Woods site, the ... the... possibilities are endless. More impenetrable
papers have been written about economics, it would seem, than the entire
field of nuclear physics. Only 5 percent of the US forests remain — if you
are wondering where the trees went, I think we have the answer here.
The money and effort expended trying to keep this boat afloat
with bandaid fixes far exceeds the cost of honest repairs.
BARTER: BOTH SIDES BENEFIT
In the days of Marco Polo a trader might leave his home with a string of
glass beads in search of exotic goods. Suppose he finds himself in India
and he trades his beads for a flask of saffron. When our trader returns home
he could use this saffron to buy many times the amount of glass beads
than he had started with. And the trader in India would also be able to trade
his or her new glass beads for many times the amount of saffron originally
spent. Both traders benefit from barter.
Now consider the Southern spinach farmer. Modern technology can put the spinach
farmer in touch with buyers in Europe or the US who already know where the
cheapest spinach in the world is to be found. If the world price of spinach
is $400 a ton, the buyer might, if he or she is feeling benevolent, offer $402
per ton. More likely they will offer $350.
If this trade goes through, the buyer in the North will be able to exchange
his or her new purchase for many times the original investment and the
Southern farmer will be able to trade his or her newfound fiat money for .
. . nothing more than the value of the spinach they just sold.
Marco Polo would not like this deal. This is a raw deal.
Today’s money is convenient. It is a convenient way of separating the producers
of real goods from their market. With a legitimate commodity backed currency
our spinach farmer would not have been deceived. But separating producer
and buyer is also disadvantageous to the southern producer.
By separating buyer and producer, the producer is not able to judge the real
value of his or her own product — a skill that would be second nature in a
barter environment where supply and demand are in face to face contact. In
today's environment the grower judges the value of his produce only by what
other producers are being paid, the “world price,” rather than the actual demand
from the eventual buyers. That is, the law of supply and demand are subverted.
For one example, the typical cashew farmer in Mozambique is paid 9 cents a
pound for a product that retails for $9 a pound around the world. Producers
of goods would do better in a barter system (they could scarcely do worse).
Can it be any wonder that poor countries do not benefit from free trade?
THE HIERARCHY OF MONEY
All money is not created equal. Starting
with the most secure money, barter, the further you go down the scale, below,
the riskier the money is. For a social money, risk is the determining factor
of whether a currency is “good” or “bad.”
Money, like the air, the sun, the wind, and the rain, is Public Property.
Nobody can own it or “privatize” it, and nobody can dictate the laws of money.
It is not the place for a private banker or government bureaucrat to make a
unilateral decisions about a public currency. That is, a society's money should
be of the soundest type possible, and the decisions about money should be democraticly
THE RISK SCALE
-> Barter / commodities, (Real Money)
-> Commodity backed currencies ie. gold notes
-> The IOU (local, personal)
-> Local Credit currency (Mutual Credit)
-> Local Fiat currency (Ithaca Hours)
-> Centrally issued credit money (Fed Reserve notes, bonds)
-> Centrally issued unbacked fiat currency
-> Manipulatives/Speculatives (Stocks, mutual funds, pension funds)
-> Derivatives, hedge funds etc
The first 4 items above have none of the Factors That Degrade Currencies,
FACTORS THAT DEGRADE CURRENCIES — Watch out if:
It's credit money from a remote central source
It's pure fiat money (not even backed by credit)
It's money created or earned from speculation/ non-productive activity
It's undemocratically issued, inequitably distributed money
It's from a social money system run for profit
Its redemption value is unclear
Its redemption is paid in another unstable currency
For a really amusing article that turns this logic on its head see S.
Bell's story, a convoluted and backward explanation of the hierarchy
of money from one of the Fed sycophants. Some people will say anything to
keep their job when the pay is right.
EXPLANATIONS OF THE RISK SCALE
“Money is an information system” That's the
latest soundbite. There is some truth to it depending on what kind of
money we are talking about. The most secure form
of money will have the most detailed information in
a plain language.
-> Barter has that information, but it is stored in the traders'
heads. Why Smith trades his collection of Buddy Holly records for a Barbra
Streisand autograph is something that only Smith can explain and surely he
could write a book about it. The point is that the information is detailed
and whole. Nothing is missing: how else can you explain the fact that traders
agree to accept as more valuable, that which their trading partner deems
In addition, there is no middleman. No, as J.W. Smith said, “governments, bankers,
and subtle finance monopolists of every shade trying to siphon to themselves
-> Commodity backed currencies like the gold backed note
are essentially barter by proxy. Bankers have avoided this system for centuries
because it's easy to understand and profits from sub-prime borrowers would
evaporate. So Smith's siphon is under severe restraints in this model.
-> The IOU is the basic model of credit and commodity currencies.
Credit currencies are inferior to commodity currencies. But a locally issued
IOU is so secure that frequently the details are not written down. “I'll
get you a new coat next time I go to town,” is sufficient. Just as frequently,
when they are written down, there are details that are taken for granted
based on custom and past history:
IOU one dinner for two. —Walt”
With this IOU certain things are simply understood: dinner will be at 7
pm, not 3 am; it will not be boiled straw; the date will be established later
and will not be inconvenient, etc.
Look for this kind of information the next time you handle a bank note. The
notion that a state issued note, with its one-size-fits-all, generic standardization, can
replace the IOU, and maintain any means of establishing value, is odd to say
the very least. Yes, of course we can tell the difference between $.59 and
$.58 but at the expense of all the other relevant information.
-> At the community currency level, speaking strictly about mutual
credit, this is essentially an organized IOU system. The information is transformed
into a more uniform method of establishing value by denominating currencies
in hours and/or widely used commodities. Credit is extended interest-free.
Smith's “siphon” is not yet in the picture. People pay for banking service
but they pay their neighbors, not some high-roller in Bel-Aire, and they don't
pay in blood.
To rephrase that idea, if mutual credit were adopted nationally, high priced
bankers would be replaced with local clerks and the cost of banking would drop
to a fraction of its former self.
-> Local Fiat currency: Ithaca Hours have worked well for many
years. The problem is that they are backed by nothing but faith; same as
Federal Reserve notes they replace. The people running Ithaca Hours have
the best intentions, but when they retire who will replace them and how trustworthy
will they be?
-> Centrally issued credit currencies such as we use
today have no relevant information on them at all. The value of a note is
not enhanced by having the signature of the Secretary of the Treasury on
it. The only relevant information displayed is the denomination, which is “fungible.” And
that only informs you that a 5 dollar bill is worth five times a one dollar
bill. When a pack of Rice Krispies costs $1.49 one day and $2.29 the next,
what is the value of a dollar bill? When a cup of coffee costs 65 cents in
Ames Iowa and $4.75 in Los Angeles, what is the value of a dollar bill as
compared to a Japanese yen or German mark? Do prices rise or does money lose
value? Or both? How will you ever know?
At this level the “siphon” appears: the elite group authorized to create money
while pretending to lend it from their vault. For profit. The pretence comes
at a price. Any clerk can approve credit for a small fee — usually only a few
dollars. Bankers who can claim to “lend” real money (when in truth they are
simply approving credit) can command interest at <pick any number>.
-> Centrally issued unbacked fiat currency: slightly
more slippery than the above. Or less slippery; it depends on the details.
-> The Manipulatives/Speculatives: Stocks, mutual funds,
pension funds etc. carry Negative information. All positive information has
been erased and you have to hunt for it on your own in the pages of newspapers
or printed documents all in 4 point type and in arcane language that only
your accountant can understand for $100 an hour. If your pension fund has
not collapsed and you get a pension payment that is wildly more than you
paid in, it is because you are collecting money paid in by someone
who will not be collecting it because s/he is dead, and the directors of
the fund have inadvertently failed to seize it as their bonus (read the fine
I am being flippant here but for the past five years I have been listening
to stories on BBC about how the British regulators have no power to help the
millions of people who, for one reason or another, lost their life savings
to these loosely regulated organizations. Every month there is a new disaster.
-> Derivatives, hedge funds - carry a cube root of negative
information times the speed of light. Only five people in the world understand
these things and they aren't talking. With almost no money as collateral,
these guys manipulate billions of dollars to nobody's benefit but themselves.
_ _ _
When a grocery-store coupon in the US (a commodity-backed currency) must,
by law, state “actual value 1/20th of a cent” on the face, should Federal
Reserve Notes not be required to state “non-redeemable” on them? And “Nominal
Value, 4 cents,” (the cost of printing)?
BANKS vs. MUTUAL
Credit can be viewed as an extension of the long-established practice
of trade credit which businesses offer to one another in the normal course
of business. They simply sell to their customers on what is called “open
account,” which means that they deliver the merchandise and bill their
customer for the amount due. A certain amount of time is allowed for
payment to be made. It may be 15, 30, or 60 days, or more, depending
on the customs of that particular line of business.”
There are a lot of similarities between Federal/commercial banking and
the mutual credit banking system. Both create money out of thin air based
on the borrowers collateral. Well, ok, I can't think of any more similarities.
-> When you pay a “loan” back to a Federal/commercial
Bank, you pay it back with Federal notes; when you pay off a mutual credit
loan you have to produce something of value acceptable to the community.
The Fed banker simply assumes (incorrectly) that all money is equal. It is
of no concern to him whether the loan is repaid with money earned from a hedge
fund scam, a Savings and Loan deal, or from the sale of vegetables. But
the MC banker is concerned with all aspects of money and its impact on the
So it is entirely within the scope of the MC bank to refuse to accept money “earned” from
non-productive activities. If the MC banking system was operating during the
Savings and Loan scam, all that speculative money that was permitted to flood
the country after the bankruptcies would simply not have been recognized as
legitimate and thus would not have been allowed to pollute the money supply.
This is all connected to the initial definition of money: it is a Means of
exchanging commodities; it is NOT a commodity in itself. So making money by
manipulating public money is not a legitimate activity and the public who owns
that money has the right to demand that institutionalized gambling, speculation,
or any kind of non-productive use which they deem harmful, be banned, limited,
restricted, controlled or whatever.
-> Mutual credit is denominated in hours and/or commodities.
Fed/commercial banks denominate in ones, fives, tens, twenties, and hundreds.
-> Mutual credit can create
a commodity backed currency (see below). The Feds can too, but they won’t.
-> Mutual credit extends credit without interest; the
Fed/commercial system extends credit, but they call it “lending money” and
then they charge interest.
-> The Fed/commercial system favors absentee ownership
(even the banks are owned by absentee landlords), competition, undemocratic
money creation, and recognizes economic hardship of bankers but not of
citizenry (at the expense of citizenry). MC is local in all respects.
-> David Korten describes capitalism as “Use of money
to make money for those who have money.” That is an apt description of
the Fed/commercial banks. Mutual credit might be described as “the use
of money as a means of exchange.”
-> The Fed/commercial system has its “Lender of Last
Resort” and “Moral Hazard” which means that there is a moral hazard when
you charge the citizenry for insurance against bank failure while that
insurance actually encourages bankers to take more risks knowing there
is a “lender of Last Resort” to bail them out because they are “too big
to fail.” The “moral hazard” is that, in this casino, money earned is private,
and money lost is public.
As Noam Chomsky said, neoliberal global capitalism means “socialism for the
rich and capitalism for the poor.” The MC system sees the fallacy in
centralization and bigness and holds local bankers accountable for their actions.
-> The Fed thinks money is global and should move freely
anywhere it wants. MC says that money is local and communities can block
attacks from foreign money. The phrase "economic imperialism" is not in
the Fed/commercial banking dictionary. Mutual credit understands economic
imperialism and is a means of combatting it.
-> The Fed/commercial system claims to lend to all "creditworthy" people
and proceeds to lend at high rates to the poor and low rates to the rich.
They then pride themselves on their careful policing of “predatory lenders.” Under
the Fed system, many people are simply not "creditworthy." MC lowers
the bar. MC recognizes that money, like free speech, emits from the individual,
not government and not banks.
-> Commercial bank lending is like musical chairs:
somebody HAS to lose at each round because money is lent into existence,
but the money to pay the interest is not; bankruptcies are part of the scheme.
And it is the bankruptcies themselves that prop the system up because the
money lent into existence continues to circulate even though the “borrower” has
This situation cannot be written off as being simply “risky,” as in “life is
'risky'.” The money system is a public infrastructure and implies equanimity,
but Fed/commercial system is set up to require a certain number of human sacrifices
per year to appease the banking gods. This is a system
which culls the innocent, simple, and ingenuous, while assuring that only the
most abhorrently avaricious, and rapacious will survive. This is not survival
of the fittest — it's survival of the most morally and ethically repugnant.
The big difference is that mutual credit is community
based and its money creation is based on community needs and desires
which is based directly on their economic activity in commodity exchange.
The gist is that the Fed guys have taken the notion of credit or “collaterization” to
be the only feature of banking that they are interested in, and they
have had One Hell Of A Big Fat Party with
The big difference is that Fed/commercial banking creates money based on a
single criterion: profit. They don't care what happens to individuals; to families;
to the quality of life; to the landscape; to the town; to the community; to
the State; to the Nation; or to the Earth. Their SOLE criterion is profit.
If you can turn a buck on the deal, a check for $10 billion can be cut right
That is money that is created out of thin air, and no community voice will
be heard as to the effects of the "loan" on others.
The Fed/commercial system is a means of imposing the elite's will on communities
which would otherwise want no part of the plan. For example, if you went to
most any town or community and tried to drum up interest in privatizing schools
you would find more opposition than agreement. People don't want their schools
which are now locally controlled, privatized and run for profit. They don't
want to sell out their kids to corporate interests. So finding people in the
community to work on the project would be tough. But when George Dubya was
governor of Texas he pledged to provide $3 billion in Federal loans for new
charter schools in Texas.
Thus, any community opposed to privatized schools has just lost the battle.
This is how economic imperialism works.
It took a whole lot of money to draw out the greediest most aggressive and
insensitive people in the state to force privatization on communities who otherwise
wanted no part of it.
This kind of economic imperialism goes on daily around the world in the form
of the MacDonalds invasion and the Wal-mart attack. It’s called Americanization
in Europe and it destroys communities. Be prepared:
Ithaca Need Wal-Mart?” by Paul Glover.
If somebody came up with an idea of how to make money by getting people to
chain their kids to a post in the back yard and feed them dog food, there can
be little doubt that, if the returns were great enough, it would eventually
be funded by some enterprising bank or politician.
Local mutual credit banks would allow communities to combat that kind of attack.
I will not look for data that shows that mutual credit is more free from
corruption and trickery than centrally issued money. There are plenty of
people around who would defraud their local mutual credit system. That is
not the point; the point is that hucksters at the local level can be held
accountable. Corporate fraud cannot. The Savings and Loan scandal (and corporate
accountability in general) has made that entirely clear. If a society ever
evolves to (returns
to, actually) the point that corporations and government workers can
be held fully accountable then some forms of State issued currencies might
become less risky, more democratic and more attractive.
Extending Credit is
not the same as Lending Money
Creditworthiness is a person’s value in a “Net Worth” kind of way. It’s
a lending against their Human Capacity. Jim can swim 3 km per hour
Judy can swim 2. Judy can do math better, faster and with fewer mistakes
than Jim. Each has their abilities and that can be an economic factor,
but since one person’s strength is another person’s weakness, people tend
to have similar Human Capacities.
Human capacity is finite. Credit is finite. Neither
Ross Perrot, Bill Clinton nor Dubya Busch can do anything infinitely better
than someone else. Nonetheless, in today’s Money society, Bill Gates is permitted
to appear infinitely “better” than someone else. Everyone else. Today he can
be 3 billion times richer or more "creditworthy" than an Indonesian farmer....
and next year he can be 4 billion times more "creditworthy". There is no limit.
But as a human being, Bill Gates is not infinitely better than anyone.
He may be better at some things, but he cannot do other things: like grow food,
like the Indonesian farmer.
If our money system today was a true representation of life, Bill Gates would
have to be better than everyone else in the world at fixing airconditioners,
film directing, and septic tank pumping. He would have to be able to grow food better
than anyone else. He would have to be a better typist than anyone in the
world, and so on. Sadly, none of that is true, and there is an obvious problem
One person’s creditworthiness cannot be infinitely greater than that of another.
In fact, within a very narrow spectrum, everyone around the globe has essentially
the same creditworthiness.
Yet when Bill Gates wants to borrow $4 billion so he
can scam the German government with some bug riddled software “subscription” the
American banksters stand ready willing and able to accommodate their “prime” borrower
by extending credit. This defies the Laws
of Money: if Bill is a prime customer, the bankers
should be lending him real money; comodity backed money. But they can’t do
that because they don’t have any.
Furthermore, look at credit from the IOU model:
An IOU between friends is so common that many times we don’t bother to
write them down. An IOU between community members who don’t know each other
strains the security of that IOU. An IOU between total strangers stretches
the limits of security to the breaking point, and exchanging IOUs anonymously
with people in foreign countries who speak different languages and have
huge cultural and economic differences, verges on the certifiably insane. Given
this state of affairs, it would seem silly to base a national currency
on credit... and then exchange that currency for foreign currencies. But
that is exactly what we are doing today.
In the mid-1990s the Japanese system had strained so much that they were considering
100 year home mortgages. That is to say, accepting an IOU from generations
of people not even born; possibly never to be born. There is nothing logical
or scientific about extending credit to people who may never exist. In fact
there is nothing very scientific about extending credit for 20 or 30 years.
IOUs are only secure for short distances whether that distance is measured
in miles or years.
A more logical approach to the home mortgage credit phenomenon would be to lend
money not extend credit. But for that one needs to have actual
money which is not credit based. Commodity backed money does not exist either
in the present system or in mutual credit system. Fortunately the MC system
provides a means of creating commodity backed currencies. See “Creating More
6. NATIONAL MUTUAL
CREDIT BANKING SYSTEM
A national system of mutual credit banks with a national commodity
backed currency would solve most of the problems outlined above. The
only problem with mutual credit is the perception that it is a community
currency, and while that is true, it can also be the design for a national
The key to this proposal is that each community would
have its own bank. One bank. Their bank. And
that bank would be run by the local people, much as local schools are run
now with their Parent Teachers Associations and open government. That is,
it should be a participatory democracy, not a representative democracy.
To keep the banking system from falling under the control of a few self-interested
individuals the leadership should not be permitted to become entrenched. Officials
(president, v.p. etc) should not be permitted to hold leadership positions
for more than 4 years in their lifetime; board members should serve no more
than 4 years in any 10 year period and no more than 2 years in a 4 year period.
Boards of directors should be as broadbased as practicable; 50 or 100 ... 150
would help decentralize the board. The bigger the better. Salaries should not
be higher than other businesses and volunteerism should be encouraged. You
get the drift. The whole community should be involved. A community that takes
no interest in it’s banking system will soon have an outsider in charge.
What is a community? Good question. People in the US probably have lost that
information. That's a tough break. Europeans, Asians, Africans, South Americans
will have to re-educate Americans.
When the Federal Reserve was set up they had the right approach; they
set up 12 regional banks. What they got wrong was choosing geographic regions
instead of economic regions. If they had done it right, their regional
map would look less like a checkerboard and more like a topographical map.
There would be spots of cities surrounded by suburban areas which would
in turn be surrounded by rural, farm, and parkland, etc.
Each community could adopt policies according to the economic region they were
in and they could change those policies to suit their needs. The communities
could be informed and educated about which policies will facilitate which goals
via a national networking system.
The reason for this arrangement is that money is local (see above), and regions
that produce commodities (rural/farm) simply cannot compete with regions that
produce money (cities). Granted, that analysis is based on observing the damages
caused by credit money. What would happen with commodity backed money? Who
knows? There is no data on that for the simple reason that there has never
been a true commodity backed currency. So setting up regions is just a precaution.
So establishing economic regions establishes a baseline from which communities
can choose policies to make decisions. Want to increase growth? Do this...
Want to slow growth? Do that. It becomes a community decision.
But don’t we have that now? A democracy? No. Most local communities are representative
democracies not a participatory democracies. The sad fact is that virtually
all representation goes to monied interests, not to the citizens. Correcting
the banking system can change that.
1) It creates the path by which individual communities can
connect with others in a similar economic situation rather than remaining
isolated. Banking policies for a city may be entirely different than those
for a farm community.
2) It allows thousands of small communities to pool resources and
information with other communities with similar economics and similar goals
3) It simplifies the implementation of a single national currency
because having thousands of individual community banks is the route to an exchange
rate nightmare. By designating a few economic regions, exchange rates may be
unnecessary; banking policy might resolve that.
4) It is an implementation aid. It maps out where the mc banks
are, and where they are not. Knowing that a community is covered by an mc bank
can mean that a boycott of the fed bank can commence and hopefully it will
shut down for lack of business. This is the thin end of the wedge. (!) (And
to think that Barclay's just shut down 167 community banks in the UK :-)
5) By having one bank per community there is a basis for
establishing collaterized lending. From such a community core they could establish
just how much money that community could lend based on the total value of the
community and its ability to use its assets as collateral.
The typical mc transaction goes like this: Jim, who has no money goes
out and has his fuel oil tank filled for the winter by Judy. The cost:
MC$100. Jim pays with a mc note: (think of it as a check) that says “Jim
pays Judy MC$100.” The bank debits Jim’s account and credits Judy’s.
In a normal bank this would involve some shuffling around of money on the computer
from one account to another — that is, shuffling of money that already exists.
In a mc bank, the money that goes into Judy’s account is created by Jim’s check
and certified by the bank. Got it? New money is created when Jim gives
his check to Judy. And Jim is now in hock for MC$100. When Jim finds some work
and he gets a check and he can cancel the debt.
CREATING MORE MONEY
Traditional mc theory says that if Jim did have money in the bank,
then that money would be used to pay Judy, thus preventing Jim from creating
money. As Riegel himself says, “Only the moneyless can create money.” But
this does not follow the rules of the IOU, it only follows the rules of
banking. What Riegel is saying essentially is that a person with money
cannot legitimately issue an IOU.
The theory of the IOU says that when Jim gives Judy his IOU, then Judy may
buy something else with it, legitimately, and the IOU can circulate as money.
But the banking system cuts that circulation short instantaneously through
its expedient and omniscient clearing process. This brings an abrupt halt to
the circulation of money.
There is nothing in the IOU theory that says that a person with money cannot
issue an IOU. There are good reasons to allow a person with money to issue
more, and circulation is a prime example. The rule to apply here is caution,
not abstinence. To abandon caution on this point is to lead to the present
credit fiasco we have on our hands today. But to abstain is to limit the money
supply to the point of strangulation. Society needs a currency that can circulate.
To that end I propose the creation of money by other means and will use the
commodities market for an example.
Creating Commodity Backed Money
Here we are at Bob’s Fine Commodities, a commodities market. Today the
market happens to be empty and the books are free of debt, and Bob has
MC$30,000 in his bank account. Lucky Bob. Tomorrow Bob will get in a load
of sorghum powder and that will cost him, coincidentally, MC$30,000.
The local mc bank has decided to let Bob create new money by issuing an
IOU for his sorghum, rather than debiting his account for all that fine
sorghum powder. Here’s the method and the reasoning:
1) The community would benefit by having more
money in circulation.
2) Bob will neither gain nor lose by the transaction, and it won’t affect
his present account.
3) The new money will go to the sorghum producer, not Bob
4) The money created will be fully redeemable;
fully backed. And it will not involve a warehouse or Fort Knox; it will be
backed by a commodity in the marketplace.
5) It’s all done via a special account (ie they give Bob a Second account)
on the mc bank computer which is debited MC$30,000 when Bob pays the sorghum
6) It will be extinguished as Bob sells the sorghum, and deposits the
7) Profits go to Bob’s regular account when all the sorghum money is
8) This same scheme can be applied cautiously to other situations.
Bob could have a special account for each commodity he deals with. Other
businesses that buy and sell could use the same system. Businesses could
even use it with their payroll. This would be a major accomplishment: for
the first time labor costs would be part of the commodity backing of a
9) The decision to increase or decrease the money supply is entirely
10) When Bob gets a load of seaweed and fly wings in, the bank can opt
11) Without Fort Knox type warehousing the value of the commodity is
always the current market value; something that did not/could not occur with
the Fort Knox gold backing.
12) It’s brought to you by the makers of MC banking. Nobody else can
do it so cleverly and with such decorum.
This is all essentially a credit transaction but it differs from the home
loan kind of credit transactions/money creation we have today.
1) There is no interest.
2) The collateral is not future dependent; it exists immediately.
3) This is a currency that can withstand foreign currency exchanges based
on market value.
This scenario opens the door to another dimension. One of the features of
mutual credit is that the accounts must balance to zero. If Judy has MC$100
and Jim has MC$-100 that gives a MC$0 balance.
Thus it is easy to see that someone must always have no money. It may be
possible for Jim to owe MC$1 to 100 people and thus Jim would have a MC$-100,
while everyone else would have a positive balance. Still that’s not so encouraging.
But as we saw above a person could have two accounts, one zero or negative,
and one positive and the total bank balance would still be zero. Mull it
over and let me know, I think it’ll work just fine.
The Right to Not Create Money
One of the connundrums of the modern ecologist battling against environmental
destruction is: How can you reward someone for
NOT cutting down the rainforests?
That’s a dang enigma, that is. How can you reward people for not doing
something that’s harmful but profitable? But of course the solution is (entirely)
in the money system... Look at what we have today in contrast to mutual credit:
TODAY: a bunch of
elitists who produce nothing of value control the issuing of money.
MUTUAL CREDIT: says
that it is producers of goods and services should issue money.
And therein lies the crux of the matter.
Why? Well, because when government and bankers are in charge of the money
supply they want some action. They want a flurry of economic activity.
Bankers want more and bigger customers even if those customers are headed
straight for bankruptcy — they are the most profitable kind. When people
are in charge of their own currencies they may very well choose a reduced
money supply and less economic activity.
I just read a little story about the Kogi community in Columbia for instance.
It seems that the World Bank had some money for them all bundled up and ready
to go, for “sustainable development.” The Kogis were less than thrilled. They
wanted to know what the Bank meant by “sustainable” and what is “development?” Then
they told the bankers to get lost. Those Kogis are pretty smart. Real smart.
I have never heard of nation telling the World Bank to shove off...
even countries with their own "economists."
What is more is that MC is the route to equitable exchange rates and to someone
inclined to cut down trees in the Amazon that means better pay. I don’t know
what they get for trees down there now, but when the world price of processed
cashews is $700 a ton (35¢ a pound) then you know the trees are virtually
free to Americans. A proper exchange rate would mean the north would buy less
and the south could reduce their labors.
And that’s how you can reward people for not doing something that’s harmful
Now we have a system for creating money with some integrity. Banks can
lend actual commodity money and get out of the infinite credit business.
No more excuses for fractional reserve lending. This would slog down the
feeding frenzy that now exists in the hyperactive US style Infinite-Credit
markets but since the creation of money in the mc system would be in the
hands of commodity producers, money to pay interest would be created easily
enough. No problem there. John Turmel and others have focused on usury
as their sole goal but I am inclined to think that it is not interest per
se that is the problem; it is the combination of the creation of
money with interest.
Is there a case for money creation via credit lending? If so, I have not found
it yet. Collaterized commodity backed money lending: yes. Collaterized credit
money creation: no.
I will not get into the issue of savings accounts, interest and demurrage until
this issue of commodity money creation has been through some extensive peer
It is worth noting that there exists now a banking system that has many
of the features of the mutual credit system: Islamic banking.
You will be hearing a lot these days about Islam and “Islamic Fundamentalists” in
the news, but the one thing you (Americans and British at any rate) will
not be likely to hear much about is the Islamic Banking system which is
closer to mutual credit banking system than the Fed/commercial system.
Islamic banking is interest-free and not-for-profit.
I have always felt that money is a Science thing, not a Religion thing and
surely western bankers will scoff at the Islamic system. Nonetheless, the west
could learn something from Islam. It is, after all, the west that has the “faith
based” monetary system... and it is the western system which is based neither
on science nor religion.
If there is a conflict between Islamic countries and western ones this is a
fundamental issue because the American form of capitalism requires continuous
growth and it will be the goal of the US banking system, now that Russia is
out of the way, to destroy the Islamic system.
A) Any predetermined payment over and above the actual
amount of principal is prohibited. No interest; no fees; no “favors.”
B) The lender must share in the profits or losses arising out of the enterprise
for which the money was lent.
C) Making money from money is not Islamically acceptable. Money is only
a medium of exchange, not a commodity; it has no value in itself, and therefore
should not be allowed to give rise to more money, simply by being put in a
bank or lent to someone else (ie. no interest payments). This purchasing power
(money) cannot be used to make more purchasing power (money) without undergoing
the intermediate step of it being used for the purchase of goods and services.
D) Uncertainty, risk or speculation is also prohibited. No currency casino;
no futures; no options; no forward foreign exchange transactions.
E) Investments should only support practices or products that are not forbidden —or
even discouraged— by Islam. Trade in alcohol, for example would not be
financed by an Islamic bank; a real-estate loan could not be made for the construction
of a casino; and the bank could not lend money to other banks at interest.
INDIA'S FIRST COMMERCIAL BANK
Now the salesman has got his foot in the door. He will
no be leaving soon and he will not take a polite “no thank-you” for an
THE S PLAN
There is a growing movement that has suddenly
and mysteriously appeared on the scene — seemingly global — that supports
the idea that money should be issued interest-free by the state.
All the figures show that some 95 percent of money is issued by banks
at interest and since the banks do not create the money to pay the interest,
the system will collapse. Nobody seems to disagree on that point
(except the monatarists).
The disagreement is on the solution. The new proposal, the S Plan (or Soverignty
Plan, among other names), suggests that moving
the ability to create money from the Right
arm of the Political/Corporate/Banking cartel... to
the Left arm, will fix all the problems. Mutual credit backers
complain that this still denies the real creators of money, commodities producers,
their right to create money.
The sudden dominance of the S Plan and the superficial arguments used by its
promoters suggest that there is some powerful lobying going on by people with
a lot of money.
This is a very dangerous plan, for it replaces one fiat currency with another
and props up a bogus system which leaves the money creation to an elite group.
The following is a list of names and organizations I have found associated
with the promotion of government issued money. These people may not be part
of a "conspiracy" but they certainly display a grand naïveté in
their approach to money and heirarchical organizations. They need educating. EDUCATE
Peter Challen, Randall Wray, John Courtneidge, Frank McManus, Kevin Donnelly,
Ken Palmerton, Frank McManus, Alistair McConnachie, Brian Leslie, Diana
Forrest, Michael Hudson, Fred Harrison, Wes Burt, Richard Kay, Dr. J. H.
Hertz, George Sale, Alistair McConnachie, Mike Rowbotham, John Johansen-Berg,
Jack Hornsby, Donald Martin, Robert Arnold, Edward Hamlyn, David Weston
and James Gibb Stuart, Don Bethune, Finlay Thompson, Richard Douthwaite
Sustainable Economics Newsletter
The Christian Socialist Movement
British Association for Monetary
Campaign for Interest Free Money
Christian Council for Monetary Justice
Christian Ecology Link
COMER (Committee on Monetary and Economic
Community for Reconciliation
Forum for Christian Peace Groups
Forum for Stable Currencies
Green Party Economics Policy Group
Institute for Rational Economics
Nascent Youth Group
Scottish Monetary Reform Society
NESARA has sponsored US legislation that proposes such a state
issued currency. The only redeeming factor in the
Nesara plan is that it is not run for profit itself. Nonetheless
the for-profit lenders are left in place albeit more restricted.
Boiled down it looks like this:
1) The US Federal Reserve banking system needs an overhaul
2) The foreign currency exchange system needs an overhaul
3) The free movement of credit money across borders is a major
4) The mutual credit banking system solve the problems
Over-centralization and over-simplification in the form of one-size-fits-all
currencies are major culprits.
To those for whom this is such an immense problem
that it simply cannot be fixed I say, please don't shoot the messenger. I will
be the first to admit that it seems to be an insurmountable problem, but the
first thing is to get past the denial stage. You can't fix a problem that is
banned from the discussion.
Start by acknowledging that China and India don't buy into the "money is a
commodity" lie; you cannot buy and sell their currencies. Capital controls
are common in many countries. Spread the word.
Democracy is where everyone has a vote. Participatory Democracy (as opposed
to representative democracy) does not concentrate decision making powers in
the hands of a few, it has a broad base. Decentralize. This is a civil rights
Thanks to friends for helpful suggestions:
© 2001 copyright J. Walter Plinge, France
Distribute freely if kept intact and not for profit or for print media
If cited or posted elsewhere please advise me
Coming soon to a CRT near you:
There's No Such Thing As “Green