The question of whether money is destroyed and recreated or simply stored to be relent again is a difference without distinction.
The real question is, does the amount of money in a system remain the same or is it constantly expanding? If it is constantly expanding is this out of necessity to keep the system going?
If the answer to both questions is “yes”, and if it is banks that create money out of thin air, then it is those (individuals and groups) who control the Banks that truly control the society based on that system.
The central question then becomes, WHO (really) controls the Banks?
(Since all firms eventually end up owned or controlled by Banks through equity ownership, the population gets more and more in debt, and elected politicians need financing and so are not responsible to the people but to their financiers)
By Banks I mean Financial Institutions not just traditional banks.
I think the answer is "yes" and "yes" and "yes", so therefore those who control the Banks control the system. I can't claim I know who owns the banks, but I am downright certain they aren't owned by people who prioritize the best interests of the United States and its citizens.
Excellent - I really enjoyed this post. You got pretty far with the toy economies. And to think, there are Ph.Ds who spend years comming to the same conclusions. Likely because they have to unlearn all the neoclassical economics they've been taught. Here are a few thoughts I had as I read it:
To take a toy economy further, I had to add more entities, supply/demand curves, and account for time, hence Sim Economy. This revealed two phenomenon relevent to this blog: 1) There is a time delay between the creation of new money and the completion of the circuit. This is analogous to velocity in the Fisher Equation, and a larger amount of new money is needed to "prime the system" if the delay is larger (velocity is smaller). One interesting effect of this delay in the modeled large dynamic system is that it actually impedes the extinguishing of debt. New money can be created before the original debt is extinguished. 2) Over time an excess of money is accumulated in the system, which either ends up in the banks, or ends up causing inflation since production and consumption are presumed to be stable. This inflation rate is proportional to total interest payments plus total savings. Inflation reduces the value of debt in real terms, so it might account for all or part of the Debt Repayment Dilemma.
I had always pondered the empirical evidence that for over 200 years, Capitalism has produced the greatest explosion of material wealth in mankind's history. How? Considering the Iron Law of compounded interest, why has the system not collapsed? In the 19th century under a gold standard, wealth and living standards went up even though there were periods of deflation. Neoclassical economics tells us this is not possible. Then how? Higher productivity. It lowers the cost goods and services by replacing direct wages with capital. This is another possible reason for Capitalism's longevity.
One important caveat: Although I learned some interesting things from my Sim Economy model, I'd caution that it's just a model and is only as good as the assumptions made during its creation - GIGO.
Thanks for the kind words. Good thoughts. Did your model account for asset inflation? That seems to be a major reason we didn't have consumer inflation for a while -- the funds channeled into US assets instead. Stocks went up but not the price of bread, etc.
No, I did not include asset inflation, just price and wage inflation. However, the money accumulated over time in the bank could be considered Investment Goods, especially if it collects interest. I would have needed to add that as a category and program the rules. This is a little different because Investment Goods have essentially an infinite supply and demand is actually driven up by price rather than down. An inverted demand curve.
FINANCIALISATION and Satanic Phoenician Mega Trillionaire Central Banks? by Professor Richard A. Werner, D.Phil. - Improved and made better by Satchidanand
Do we Need Satanic Phoenician Mega Trillionaire central banks? by Professor Richard A. Werner, D.Phil. - improved and made better by Satchidanand
THE SATANIC PHOENICIAN MEGA TRILLIONAIRES, THE ROTHSCHILDS, THE ROCKFELLERS, THE BLACK NOBILITY CONTROL BIDEN, PUTIN AND XI - THEY CHOOSE TO DESTROY EMPIRES - THEY CHOOSE WHICH EMPIRES TO RAISE UP - THEY DO IT BY FINANCIALISTATION!
Lord Acton, a shrewd observer of power, concluded:
“Power tends to corrupt and absolute power corrupts absolutely.”
Lesser known is that he also seems to have been aware of the power in the hands of the bankers:
“The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”
Most Satanic Phoenician Mega Trillionaire central banks were created as cartels by big banking groups. Today, many Satanic Phoenician Mega Trillionaire central banks remain in private hands – such as the Federal Reserve Bank of New York, the Italian, Greek or South African Satanic Phoenician Mega Trillionaire central banks.
The solution to this concerted threat to our civil liberties and our freedom can only be to try to advance the opposite agenda: the decentralization of power.
We can decentralize power in our monetary system by abandoning the big banks and instead creating and supporting local not-for-profit community banks and ultimately a system of local public money issued by local authorities as receipts for services rendered to the local community.
One reason why Satanic Phoenician Mega Trillionaire central banks have sprung so frantically into action after their narrative had been thoroughly disproven is that the revelations about the nature of money has drawn the curtain open and allowed the public to see what is in the innermost sanctum of their Satanic Phoenician Mega Trillionaire central banks: nothing.
Just like the Wizard of Oz in the Emerald City thrived on his reputation, while behind his curtain nothing could be found, so have Satanic Phoenician Mega Trillionaire central banks relied on politicians and the public not understanding the nature of money and the role of Satanic Phoenician Mega Trillionaire central banks.
The truth of the matter is: We don’t need Satanic Phoenician Mega Trillionaire central banks. Since 97% of the money supply is created by banks, the importance of Satanic Phoenician Mega Trillionaire central banks is far smaller than generally envisaged. Moreover, the kind of money that commercial banks create is not privileged at law. Legally, our money supply is simply private company credit, which can be created by any company, with or without banking license.
"By the time [Douglas] published his 1931 book The Monopoly of Credit, he had begun increasingly to emphasize the central role of debt to the banking system. Today, Douglas scholars put his critique of the banking system at the center of his work."
Monetary circuits and the problem of ever-growing debt was the only aspect of Social Credit theory that I knew about until I saw this series of posts. I had read the basic ideas on some blog or another - I can't remember which one - and they seemed so immediately sensible that they've been the bedrock of my economic thinking ever since then. I just can't see any way to escape the conclusions that, in a modern economy:
(1) Money is lent into existence by the central bank
(2) Because it is lent at interest, the amount of money owed to the bank is always greater than the total amount in existence,
(3) Therefore, however prosperous some people might be on a micro-scale, the average debt load in a nation is bound to grow.
Inflation can alleviate this problem, but only up to a point, and in fact all central-banking economies require steady inflation in order to function. And while this state of affairs is tolerable when the whole economy is growing rapidly enough to keep pace with the debt burden, things get really bad for the lower classes when growth slows or stalls, and a prosperous steady-state economy is totally unworkable.
Hence the criticism of environmentalists, and even some of the more hardcore social conservatives, for "capitalism," with its demands for endless growth... really it is the debt economy that demands endless growth, since the average citizen must always be deeply in debt, and this debt can only be managed (but never repaid!) by finding more and more stuff to sell to one's fellow debtor-citizens. (Of course most of us don't sell consumer goods directly, we'll usually be working for a firm of some sort, but the basic needs are still the same.)
All of this seems much more solidly-reasoned than the stuff about toy models and the A+B>A theorem. So it doesn't surprise me that later Social Credit thinkers (plus the entire Monetary Circuit school) have ended up putting it front and center.
I fully agree. Putting the monetary circuit at the center is much clearer than the earlier approach the social credit theorists took. The ever-growing debt load seems to be a genuine problem for the current system, and is the basis for the "ever growing unsustainable" economy.
It can be donde using the circular flow of income diagram although I think is a bit simple except one I have seen on Wikipedia lol and it requires someone that knows how to use a graphic design software
None of these models you cover discuss inflation. Rather than "destroying" money, perhaps some thought should be given into the relative amount of inflation produced every time money is devalued by additional money being entered into the system. Obviously money is not "destroyed" when a debt is paid - except perhaps if the government were to actually pay off a bond on its expiry without rolling it over into a new one.
These theoretical models all seem to fail to take any consideration of what actually occurs in the debt market, and the role the bond market serves in the economy as a whole. To a certain extent, transactions over a certain amount are done in Treasuries (or Bunds, Gilts, etc.) rather than Dollars (or Euros, Yen, etc.) The world quite literally revolves around debt rather than what you and I view as "currency", and a serious understanding of the bond market and its role in large transactions is necessary to understand the real macro view, rather than these simplified models.
Furthermore, value is created or extracted by labor - there are additional inputs into the system beyond just the money created (and later "destroyed" in these models) by the banks.
I borrow money, I buy a bulldozer, I extract iron ore from the ground, I sell it to someone, I pay the bank back. The value of the iron ore has to enter the system somehow.
Dave borrows money, he builds a refinery, he buys the iron ore from me, he turns it into steel bars and sheets, he sells it on to someone else, he pays the bank back. The value of the work done by turning iron ore into steel has to enter the system somehow.
John borrows money, he builds a factory, he buys the steel bars and sheets, he transforms them into i-beams and nuts and bolts and rivets and various other standard form factors to be used in construction. He sells those on to other people, he pays the bank back. Value was created by transforming the steel. A sensible model must account for that.
Now, there is an argument out there that claims all money ultimately derives from extractive labors or external sources (e.g. solar/tidal/etc power) and therefore all economics is ultimately depletionary, but I don't quite buy that. We are, after all, communicating by means of sending lightning through symbols carved into sand.
Since the "money" created by banks making loans is fake, a confidence game of asserted value just like the prices of tulips in Holland, can it really be "destroyed" when the loans are payed off by the lendee?
Does not some thing need to actually exist before it can be destroyed?
Of course money exists. You can buy things with it. That's what money *is*. To call that "fake" when you can quite literally go buy everything with it, is a ridiculous assertion. It's the kind of claim you'd quite rightly dismiss as postmodernist drivel if made in any other context.
10) Just the other day I came across this article in National Affairs from 2018, discussing the need for local banking to support small business needs, compared to the few large banks financializing everything under the sun. The concept of reducing risk through bundling assets (loans) and securitizing them is suspect. The section near the end, THE CENTRALIZATION OF MONEY, contains some discussion possibly relevant for to this post.
Why We Need Traditional Banking Amar Bhidé Winter 2018
11) Last thought for tonight: although I gather around 90% of the money created is created by banks, the government also creates some (thin air or otherwise), so that can play into this analysis more than has been discussed. I suppose it introduces the extra complexity of multiple circuits, but that view may put us closer to reality?
6) I also have an idea that perhaps this circuit modeling will help solidify, as I lack the background to extend it too far myself. Essentially, I suggest we can separate money into "promise" money and "real" money. Promise money is money in the state of being loaned and transferred from the bank's account to the borrower's account. It has not yet been spent and thus has no value stored in it. Once it has been used to obtain goods or services (via labor and/or capital), then value gets added to it and it becomes "real" money. [This idea cannot possibly be original with me, but I have not seen it presented that way, although this MCT discussion may be close.? Someone must have presented it, but probably using other language?]
7) Thus, following one or more of the commenters below, when the loan is paid back, the principal is paid back and the promise money loan asset held by the bank disappears, or perhaps is converted to real money in circulation. But the interest paid to retire that debt is "real" money because value was added to it before presenting it to the bank. It remains an asset of the bank for whatever use they make of it.
8) But following Keen's idea that the loaned paper money is not destroyed, but an accounting of its repayment is made and then it is stored for later reuse: my initial thought was that if it is not being used as money, then until it is, it is just some paper in a box. But if the repayment of principal is really a conversion of "promise" money to "real" money, then perhaps this "money" is now a valid asset of the bank. It is storing the value [wealth] of its initial use, or subsequent uses along the circuit, until it comes back to the bank. It seems that experiment showing how the loan was created from nothing should now follow the end repayment accounting and see if the money disappears or is moved to a new "spendable" account.
9) I suspect it will take someone who knows double entry bookkeeping better than I do to possibly follow and explain the "conversion" from promise to real value money [if the idea has any validity at all?].
A really great post and topic to explore and present, one I have been thinking about for some time, although the DSC and MCT models and details are new to me. A lot to absorb and learn, I suspect. Thank you for taking the time and effort to examine these ideas and post them here.
It took me a vey long time to understand that banks (and governments) could create money out of thin air. But using the term "thin air" implies a fairy dust type of arbitrary and capricious form of creation, while calling it "endogenously created" suggests the money was created purposefully, which in general it was.
Several thoughts I have had play into this posting and may help guide additional discussion [or not!]
1) I have come to perceive or realize that "money" is nothing more than an "agreement" to use some particular (physical or abstract) medium to provide the functions of being a medium of account ($, euros, pesos, etc.); a medium of exchange; and a store of value. The concept of a store of value seems to me to not receive quite the level of consideration it should.
2) Thus money is a very important invention [and may have been invented much earlier than we might surmise], but it is not a "thing". The use of commodities (shells, coins, paper, cattle, nails, etc.) works no better or worse that virtual digital computer entries if the agreement remains in place, and is trusted among the participants using said money.
3) The concept of value needs deeper attention because economics was originally called political economics, and today should be called psychological-political-economics. The value associated with a given idea, good, or service can and does vary, over time and between/among valuers. It is clearly subjective, not fixed.
4) The variation of value over time I call its "persistence". Many services and too many goods have a short value span, such as food waiter service or some newspapers; while legal services and selected electronics, clothes, or other goods hold their value for an extended period. The longer the persistence of value, the more copies of that "wealth" that can be created from a given quantity of inputs (labor + capital) before replacements may need to be supplied.
5) I gather the Keynesians consider money to be the fuel of the economy, supposedly increasing demand when it is available vs. not so much when it is absent. I think instead that we should consider money as lubricating the economy, while the real "fuel" is innovation and entrepreneurship. If you have a good idea or a good business plan, you can find the money to implement it (via banks or venture capitalists). If you have trouble finding a funding source, then your economic or business goals are starving for lubrication, not fuel.
These toy economies remind me of the toys at Dollar General -- which provide minutes of fun before breaking.
Individual banks do not create money out of thin air, and even the overall banking system has its limits for monetizing assets. Until recently, a bank needed to maintain a cash reserve to offset 10% of its demand deposits. And even without that requirement, they still need to met the cash needs of customers with demand deposits. Finally (or firstly) a bank has to have initial money to lend out in the first place. Our US real world economy started up with gold and silver coins, with banks being able to issue notes which lost value the further you went from the issuing bank.
Bankers buy consumer goods. So do some of those who save money. People save money in order to spend it later. Indeed, the US economy is morphing into one with far more money spenders than money earners, given that the Boomers are retiring.
Or take the toy economy of your previous post. It started with a factory. Somebody built that factory. I assume they got paid. Either those factory builders have fat bank accounts to live off of until the next factory order comes in or Douglass' toy economy started in a state of serious depression.
---
Maybe I'm being unfair to jump to the attack without walking through the models more carefully, but my brain refuses to think once it hits a premise it deems to be absurd. I lost the ability to finish learning Feynmann diagrams once I learned that you need to assume that electrons have infinite mass in order to normalize the integrals. Ditto for learning functional computer languages which replace all loops with recursion. My inner caveman wins out.
The 10 percent reserve requirement was dropped fairly recently
Back when Douglass was writing, banks had to worry about bank runs, and people kept significant cash.
When a bank makes a secured loan, it is not making money out of thin air. It is minting money out of a real asset which lack the ideal properties of money (infinitely divisible, compact, etc.) And thanks to interest and the need to make payments, the new money comes packaged with new demand for money.
OK, that last paragraph was mainly a rebuttal to hard money types who view FRNs as worthless funny money. But it is a bit relevant to money cycle theories as well. When such money is "destroyed" money demand is also destroyed. Were I to pay off my home mortgage (Oh happy day!) much money would be "destroyed" but my monthly money needs would drop by a couple of kilobucks. The first factor is deflationary, the latter inflationary.
OK. To be clear, I don't have any particular horse in this race vis a vis "hard money" gold bugs and so on.
I would say I'm confident banks do create money when they lend, and confident that fractional-reserve banking and debt-based money is both unethical and ill-advised for society. Beyond that... I am not proposing any particular alternative. I think the Chicago Plan Revisited had merit. I think Reisman's 100% full reserve gold currency has merit, etc.
With the petrodollar, we seem to have settled on the worst possible system so virtually anything else would be better.
> It seems to me likely that Douglas Social Credit theory died out when it did because it confronted mainstream economic theory at the height of its power without having access to the necessary tools to rebut it.
Well, both theories are also homologous to mainstream Keynesian economics.
Consider the following two models:
*Model 1:*
We have two economic actors (worker-consumers W and firms F), there are no banks or savings and the economy is conducted entirely in gold.
F has M money which it spends on the wages, salaries, and other payments it makes to W, the worker-consumers, who in turn create CG, consumer goods. With a quantity of goods CG and a supply of money M available, the price P is M/CG. Therefore, when the worker-consumers spend the M they received, the total cost is P, and they receive all of CG.
F then was earned back the M it spent on production.
*Model 2:*
There are still two economic actors (worker-consumers W and firms F), there are no banks and the economy is conducted entirely in gold. However, now we will assume that the worker-consumers W wish to save some money, S.
Again F starts out with M money which it spends on the wages, salaries, and other payments it makes to W, the worker-consumers, who in turn create CG, consumer goods. With a quantity of goods CG and a supply of money M available, the price P is M/CG.
However, rather than spend all of its wages on consumer goods, W decides to save some of its money by hiding it under the floorboards. Therefore, what the worker-consumers spend is not M, but M-S. And this breaks the circuit!
If F charges P for each CG, then the amount of money required (M/CG) to purchase all of the CG is M. But consumers W are only willing to spend M-S, so the demand is insufficient to purchase all of the goods. F collects M-S. W buys [M-S) / P] goods, and the excess goods rot in warehouses!
If F lowers the price P to [(M-S)/CG], so that it sells all of its inventory, then the sum of money that F receives is M-S. In this case, W still buys [(M-S)/P] goods but since the price is now [(M-S)/CG] this is sufficient to buy all of the goods. F collects M-S.
In either case, though, F has only collected M-S. In other words, it is operating at a loss. Concluding that business is unprofitable, it shuts down the firm rather then continuing to throw away money and instead also decides to save its remaining money under the floorboards.
In a “real” (as compared to “toy”) economy, where there are many firms competing, the firms will fully account for their cost M that was paid as wages, and therefore charge a price of M/CG for their own goods. Each firm’s owners will expect (or at least hope) that through superior quality, advertising, and distribution that they will earn enough to pay back M to the bank, while *the other guys’ firms* suffer the losses caused by the leakage. While some firms will be “winners” and others “losers,” in the aggregate, there is not enough money available to firms (M-S) to make back their money (M). The result will either be firms shutting down, the development of debt which the economy has so far not had, or reversion to a barter system as all the gold gets hidden under floorboards and disappears from the economy.
*Conclusion*
The banks are credit are completely superfluous to MCT. The key component is savings itself.
Thus we see that MCT is homologous to mainstream Keynesian economics, whose conclusion is that savings must be discouraged, and its effects on the economy mitigated via a deflationary monetary policy.
I do not think they are homologous, because gold and/or cash can have a velocity that keeps it in circulation. The Austrian economist George Reisman's book CAPITALISM: A Treatise on Economics has a thorough explanation of why the Keynesian model is wrong in an economy with fully-backed gold-based money.
This MCT/DSC problem seems *very specific* to contemporary credit money created and destroyed in each cycle. The problem seems to go away if, like Steve Keen or Milton Friedman or many other economists, you assume that money isn't created and destroyed by the cycle.
If the MCT theorists are right about money creation and destruction, their logic follows. If they are wrong about it, then it doesn't. I don't know if they are right or not. Steve Keen is one of the best economic modelers I know of and he says they are wrong. The evidence of ever-growing debt compared to the size of the money supply, as well as the Werner paper I linked, suggests they're right.
When I don't know the answer to something, I just say I don't know the answer - and I don't know the answer to this one.
> If the MCT theorists are right about money creation and destruction, their logic follows. If they are wrong about it, then it doesn't. I don't know if they are right or not.
That boils down to a semantic question of how one defines "Money". Economists speak of different types of money like M0, MB, M1, M2, and M3 for this reason. Do not confuse a semantic dispute for one of substance.
> I do not think they are homologous, because gold and/or cash can have a velocity that keeps it in circulation.
So does money in bank accounts. Not that it's even clear how "circulation" is relevant here.
> This MCT/DSC problem seems *very specific* to contemporary credit money created and destroyed in each cycle.
The problem you describe in your article is that of savings. The creation and destruction of money in each cycle is completely incidental to the logic.
Congratulations this is a superbly written essay, I have been researching DSC for almost a year now and while I saw some similarities with the Austrian approach to banking I did not know about the MCT. I will make another separate comment in regards to the theorem but first I will comment on money and banking. The fractional reserve theory is widely accepted by economist which means banks expand money supply although what is wrong about it is the need of deposits first to lend and then multiply the money as explained in the book where does money come from?, "Positive money" proponents in England and other groups. It can be confirmed as well by the decreasing percentage o reserves lowering even to reach 0% reserves and only requiring "capital adecuacy".
But in simple terms the words create and destroy might be confusing, we could think about it as money injected and extracted of the circuits, including the financial only circuit of currency exchange, QE, government bonds and place in a battery out of any circuit however since fiat money (digital ledgers) only require a computer system and electricity the supply of money is virtually endless hence the creation word used, destruction word might be imply when viewing it as an accountancy cycle where loans repayment cancels the account therefore destroying the money or extracting it to the abstract battery.
TY for the kind words. I used the word "create" and "destroy" because that's what the MCT theorists used. From what I understand the key point is that the banks do not intermediate and hence the velocity of any given unit of money is 1 or close to it.
The question of whether money is destroyed and recreated or simply stored to be relent again is a difference without distinction.
The real question is, does the amount of money in a system remain the same or is it constantly expanding? If it is constantly expanding is this out of necessity to keep the system going?
If the answer to both questions is “yes”, and if it is banks that create money out of thin air, then it is those (individuals and groups) who control the Banks that truly control the society based on that system.
The central question then becomes, WHO (really) controls the Banks?
(Since all firms eventually end up owned or controlled by Banks through equity ownership, the population gets more and more in debt, and elected politicians need financing and so are not responsible to the people but to their financiers)
By Banks I mean Financial Institutions not just traditional banks.
I think the answer is "yes" and "yes" and "yes", so therefore those who control the Banks control the system. I can't claim I know who owns the banks, but I am downright certain they aren't owned by people who prioritize the best interests of the United States and its citizens.
Excellent - I really enjoyed this post. You got pretty far with the toy economies. And to think, there are Ph.Ds who spend years comming to the same conclusions. Likely because they have to unlearn all the neoclassical economics they've been taught. Here are a few thoughts I had as I read it:
To take a toy economy further, I had to add more entities, supply/demand curves, and account for time, hence Sim Economy. This revealed two phenomenon relevent to this blog: 1) There is a time delay between the creation of new money and the completion of the circuit. This is analogous to velocity in the Fisher Equation, and a larger amount of new money is needed to "prime the system" if the delay is larger (velocity is smaller). One interesting effect of this delay in the modeled large dynamic system is that it actually impedes the extinguishing of debt. New money can be created before the original debt is extinguished. 2) Over time an excess of money is accumulated in the system, which either ends up in the banks, or ends up causing inflation since production and consumption are presumed to be stable. This inflation rate is proportional to total interest payments plus total savings. Inflation reduces the value of debt in real terms, so it might account for all or part of the Debt Repayment Dilemma.
I had always pondered the empirical evidence that for over 200 years, Capitalism has produced the greatest explosion of material wealth in mankind's history. How? Considering the Iron Law of compounded interest, why has the system not collapsed? In the 19th century under a gold standard, wealth and living standards went up even though there were periods of deflation. Neoclassical economics tells us this is not possible. Then how? Higher productivity. It lowers the cost goods and services by replacing direct wages with capital. This is another possible reason for Capitalism's longevity.
One important caveat: Although I learned some interesting things from my Sim Economy model, I'd caution that it's just a model and is only as good as the assumptions made during its creation - GIGO.
Thanks for the kind words. Good thoughts. Did your model account for asset inflation? That seems to be a major reason we didn't have consumer inflation for a while -- the funds channeled into US assets instead. Stocks went up but not the price of bread, etc.
No, I did not include asset inflation, just price and wage inflation. However, the money accumulated over time in the bank could be considered Investment Goods, especially if it collects interest. I would have needed to add that as a category and program the rules. This is a little different because Investment Goods have essentially an infinite supply and demand is actually driven up by price rather than down. An inverted demand curve.
FINANCIALISATION and Satanic Phoenician Mega Trillionaire Central Banks? by Professor Richard A. Werner, D.Phil. - Improved and made better by Satchidanand
Do we Need Satanic Phoenician Mega Trillionaire central banks? by Professor Richard A. Werner, D.Phil. - improved and made better by Satchidanand
THE SATANIC PHOENICIAN MEGA TRILLIONAIRES, THE ROTHSCHILDS, THE ROCKFELLERS, THE BLACK NOBILITY CONTROL BIDEN, PUTIN AND XI - THEY CHOOSE TO DESTROY EMPIRES - THEY CHOOSE WHICH EMPIRES TO RAISE UP - THEY DO IT BY FINANCIALISTATION!
Lord Acton, a shrewd observer of power, concluded:
“Power tends to corrupt and absolute power corrupts absolutely.”
Lesser known is that he also seems to have been aware of the power in the hands of the bankers:
“The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”
Most Satanic Phoenician Mega Trillionaire central banks were created as cartels by big banking groups. Today, many Satanic Phoenician Mega Trillionaire central banks remain in private hands – such as the Federal Reserve Bank of New York, the Italian, Greek or South African Satanic Phoenician Mega Trillionaire central banks.
The solution to this concerted threat to our civil liberties and our freedom can only be to try to advance the opposite agenda: the decentralization of power.
We can decentralize power in our monetary system by abandoning the big banks and instead creating and supporting local not-for-profit community banks and ultimately a system of local public money issued by local authorities as receipts for services rendered to the local community.
One reason why Satanic Phoenician Mega Trillionaire central banks have sprung so frantically into action after their narrative had been thoroughly disproven is that the revelations about the nature of money has drawn the curtain open and allowed the public to see what is in the innermost sanctum of their Satanic Phoenician Mega Trillionaire central banks: nothing.
Just like the Wizard of Oz in the Emerald City thrived on his reputation, while behind his curtain nothing could be found, so have Satanic Phoenician Mega Trillionaire central banks relied on politicians and the public not understanding the nature of money and the role of Satanic Phoenician Mega Trillionaire central banks.
The truth of the matter is: We don’t need Satanic Phoenician Mega Trillionaire central banks. Since 97% of the money supply is created by banks, the importance of Satanic Phoenician Mega Trillionaire central banks is far smaller than generally envisaged. Moreover, the kind of money that commercial banks create is not privileged at law. Legally, our money supply is simply private company credit, which can be created by any company, with or without banking license.
https://satchidanand.substack.com/p/financialisation-and-satanic-phoenician
"By the time [Douglas] published his 1931 book The Monopoly of Credit, he had begun increasingly to emphasize the central role of debt to the banking system. Today, Douglas scholars put his critique of the banking system at the center of his work."
Monetary circuits and the problem of ever-growing debt was the only aspect of Social Credit theory that I knew about until I saw this series of posts. I had read the basic ideas on some blog or another - I can't remember which one - and they seemed so immediately sensible that they've been the bedrock of my economic thinking ever since then. I just can't see any way to escape the conclusions that, in a modern economy:
(1) Money is lent into existence by the central bank
(2) Because it is lent at interest, the amount of money owed to the bank is always greater than the total amount in existence,
(3) Therefore, however prosperous some people might be on a micro-scale, the average debt load in a nation is bound to grow.
Inflation can alleviate this problem, but only up to a point, and in fact all central-banking economies require steady inflation in order to function. And while this state of affairs is tolerable when the whole economy is growing rapidly enough to keep pace with the debt burden, things get really bad for the lower classes when growth slows or stalls, and a prosperous steady-state economy is totally unworkable.
Hence the criticism of environmentalists, and even some of the more hardcore social conservatives, for "capitalism," with its demands for endless growth... really it is the debt economy that demands endless growth, since the average citizen must always be deeply in debt, and this debt can only be managed (but never repaid!) by finding more and more stuff to sell to one's fellow debtor-citizens. (Of course most of us don't sell consumer goods directly, we'll usually be working for a firm of some sort, but the basic needs are still the same.)
All of this seems much more solidly-reasoned than the stuff about toy models and the A+B>A theorem. So it doesn't surprise me that later Social Credit thinkers (plus the entire Monetary Circuit school) have ended up putting it front and center.
I fully agree. Putting the monetary circuit at the center is much clearer than the earlier approach the social credit theorists took. The ever-growing debt load seems to be a genuine problem for the current system, and is the basis for the "ever growing unsustainable" economy.
I had some difficulty visualizing the flows in the different models. perhaps including diagrams would be helpful?
I'm not a very good visual-spatial thinker myself so I'm not the one to do it. :(
It can be donde using the circular flow of income diagram although I think is a bit simple except one I have seen on Wikipedia lol and it requires someone that knows how to use a graphic design software
By the way, you are one of my favorite writers
Mine too
For clarity and instructive value he's among the best (maybe the best) on substack
Thank you gentlemen, that is very kind!
Regarding footnote 3: "2014 empirical study that has proven that banks really do create money out of thin air"
Richard Werner who made this study is on substack: https://rwerner.substack.com/
Oh awesome! TY.
It sounds (at first glance) as an excuse for inflation and usury…..
It is.
https://treeofwoe.substack.com/p/social-credit-and-monetary-circuit/comment/70673922
None of these models you cover discuss inflation. Rather than "destroying" money, perhaps some thought should be given into the relative amount of inflation produced every time money is devalued by additional money being entered into the system. Obviously money is not "destroyed" when a debt is paid - except perhaps if the government were to actually pay off a bond on its expiry without rolling it over into a new one.
These theoretical models all seem to fail to take any consideration of what actually occurs in the debt market, and the role the bond market serves in the economy as a whole. To a certain extent, transactions over a certain amount are done in Treasuries (or Bunds, Gilts, etc.) rather than Dollars (or Euros, Yen, etc.) The world quite literally revolves around debt rather than what you and I view as "currency", and a serious understanding of the bond market and its role in large transactions is necessary to understand the real macro view, rather than these simplified models.
Furthermore, value is created or extracted by labor - there are additional inputs into the system beyond just the money created (and later "destroyed" in these models) by the banks.
I borrow money, I buy a bulldozer, I extract iron ore from the ground, I sell it to someone, I pay the bank back. The value of the iron ore has to enter the system somehow.
Dave borrows money, he builds a refinery, he buys the iron ore from me, he turns it into steel bars and sheets, he sells it on to someone else, he pays the bank back. The value of the work done by turning iron ore into steel has to enter the system somehow.
John borrows money, he builds a factory, he buys the steel bars and sheets, he transforms them into i-beams and nuts and bolts and rivets and various other standard form factors to be used in construction. He sells those on to other people, he pays the bank back. Value was created by transforming the steel. A sensible model must account for that.
Now, there is an argument out there that claims all money ultimately derives from extractive labors or external sources (e.g. solar/tidal/etc power) and therefore all economics is ultimately depletionary, but I don't quite buy that. We are, after all, communicating by means of sending lightning through symbols carved into sand.
Since the "money" created by banks making loans is fake, a confidence game of asserted value just like the prices of tulips in Holland, can it really be "destroyed" when the loans are payed off by the lendee?
Does not some thing need to actually exist before it can be destroyed?
It's fairy money. It only exists as long as you believe in it.
Of course money exists. You can buy things with it. That's what money *is*. To call that "fake" when you can quite literally go buy everything with it, is a ridiculous assertion. It's the kind of claim you'd quite rightly dismiss as postmodernist drivel if made in any other context.
You can't tell people they have been conned, because they will double down in their belief in the con.
10) Just the other day I came across this article in National Affairs from 2018, discussing the need for local banking to support small business needs, compared to the few large banks financializing everything under the sun. The concept of reducing risk through bundling assets (loans) and securitizing them is suspect. The section near the end, THE CENTRALIZATION OF MONEY, contains some discussion possibly relevant for to this post.
https://www.nationalaffairs.com/publications/detail/why-we-need-traditional-banking
Why We Need Traditional Banking Amar Bhidé Winter 2018
11) Last thought for tonight: although I gather around 90% of the money created is created by banks, the government also creates some (thin air or otherwise), so that can play into this analysis more than has been discussed. I suppose it introduces the extra complexity of multiple circuits, but that view may put us closer to reality?
Continuing:
6) I also have an idea that perhaps this circuit modeling will help solidify, as I lack the background to extend it too far myself. Essentially, I suggest we can separate money into "promise" money and "real" money. Promise money is money in the state of being loaned and transferred from the bank's account to the borrower's account. It has not yet been spent and thus has no value stored in it. Once it has been used to obtain goods or services (via labor and/or capital), then value gets added to it and it becomes "real" money. [This idea cannot possibly be original with me, but I have not seen it presented that way, although this MCT discussion may be close.? Someone must have presented it, but probably using other language?]
7) Thus, following one or more of the commenters below, when the loan is paid back, the principal is paid back and the promise money loan asset held by the bank disappears, or perhaps is converted to real money in circulation. But the interest paid to retire that debt is "real" money because value was added to it before presenting it to the bank. It remains an asset of the bank for whatever use they make of it.
8) But following Keen's idea that the loaned paper money is not destroyed, but an accounting of its repayment is made and then it is stored for later reuse: my initial thought was that if it is not being used as money, then until it is, it is just some paper in a box. But if the repayment of principal is really a conversion of "promise" money to "real" money, then perhaps this "money" is now a valid asset of the bank. It is storing the value [wealth] of its initial use, or subsequent uses along the circuit, until it comes back to the bank. It seems that experiment showing how the loan was created from nothing should now follow the end repayment accounting and see if the money disappears or is moved to a new "spendable" account.
9) I suspect it will take someone who knows double entry bookkeeping better than I do to possibly follow and explain the "conversion" from promise to real value money [if the idea has any validity at all?].
A really great post and topic to explore and present, one I have been thinking about for some time, although the DSC and MCT models and details are new to me. A lot to absorb and learn, I suspect. Thank you for taking the time and effort to examine these ideas and post them here.
It took me a vey long time to understand that banks (and governments) could create money out of thin air. But using the term "thin air" implies a fairy dust type of arbitrary and capricious form of creation, while calling it "endogenously created" suggests the money was created purposefully, which in general it was.
Several thoughts I have had play into this posting and may help guide additional discussion [or not!]
1) I have come to perceive or realize that "money" is nothing more than an "agreement" to use some particular (physical or abstract) medium to provide the functions of being a medium of account ($, euros, pesos, etc.); a medium of exchange; and a store of value. The concept of a store of value seems to me to not receive quite the level of consideration it should.
2) Thus money is a very important invention [and may have been invented much earlier than we might surmise], but it is not a "thing". The use of commodities (shells, coins, paper, cattle, nails, etc.) works no better or worse that virtual digital computer entries if the agreement remains in place, and is trusted among the participants using said money.
3) The concept of value needs deeper attention because economics was originally called political economics, and today should be called psychological-political-economics. The value associated with a given idea, good, or service can and does vary, over time and between/among valuers. It is clearly subjective, not fixed.
4) The variation of value over time I call its "persistence". Many services and too many goods have a short value span, such as food waiter service or some newspapers; while legal services and selected electronics, clothes, or other goods hold their value for an extended period. The longer the persistence of value, the more copies of that "wealth" that can be created from a given quantity of inputs (labor + capital) before replacements may need to be supplied.
5) I gather the Keynesians consider money to be the fuel of the economy, supposedly increasing demand when it is available vs. not so much when it is absent. I think instead that we should consider money as lubricating the economy, while the real "fuel" is innovation and entrepreneurship. If you have a good idea or a good business plan, you can find the money to implement it (via banks or venture capitalists). If you have trouble finding a funding source, then your economic or business goals are starving for lubrication, not fuel.
These toy economies remind me of the toys at Dollar General -- which provide minutes of fun before breaking.
Individual banks do not create money out of thin air, and even the overall banking system has its limits for monetizing assets. Until recently, a bank needed to maintain a cash reserve to offset 10% of its demand deposits. And even without that requirement, they still need to met the cash needs of customers with demand deposits. Finally (or firstly) a bank has to have initial money to lend out in the first place. Our US real world economy started up with gold and silver coins, with banks being able to issue notes which lost value the further you went from the issuing bank.
Bankers buy consumer goods. So do some of those who save money. People save money in order to spend it later. Indeed, the US economy is morphing into one with far more money spenders than money earners, given that the Boomers are retiring.
Or take the toy economy of your previous post. It started with a factory. Somebody built that factory. I assume they got paid. Either those factory builders have fat bank accounts to live off of until the next factory order comes in or Douglass' toy economy started in a state of serious depression.
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Maybe I'm being unfair to jump to the attack without walking through the models more carefully, but my brain refuses to think once it hits a premise it deems to be absurd. I lost the ability to finish learning Feynmann diagrams once I learned that you need to assume that electrons have infinite mass in order to normalize the integrals. Ditto for learning functional computer languages which replace all loops with recursion. My inner caveman wins out.
Individual banks do, in fact, create money out of thin air.
https://professorwerner.org/pubs/can-banks-individually-create-money-out-of-nothing-the-theories-and-the-empirical-evidence/
You can deem it absurd if you want but that's how the system works. Even the banking industry admits that nowadays.
The open question seems to be whether the money they create is destroyed.
The 10 percent reserve requirement was dropped fairly recently
Back when Douglass was writing, banks had to worry about bank runs, and people kept significant cash.
When a bank makes a secured loan, it is not making money out of thin air. It is minting money out of a real asset which lack the ideal properties of money (infinitely divisible, compact, etc.) And thanks to interest and the need to make payments, the new money comes packaged with new demand for money.
OK, that last paragraph was mainly a rebuttal to hard money types who view FRNs as worthless funny money. But it is a bit relevant to money cycle theories as well. When such money is "destroyed" money demand is also destroyed. Were I to pay off my home mortgage (Oh happy day!) much money would be "destroyed" but my monthly money needs would drop by a couple of kilobucks. The first factor is deflationary, the latter inflationary.
OK. To be clear, I don't have any particular horse in this race vis a vis "hard money" gold bugs and so on.
I would say I'm confident banks do create money when they lend, and confident that fractional-reserve banking and debt-based money is both unethical and ill-advised for society. Beyond that... I am not proposing any particular alternative. I think the Chicago Plan Revisited had merit. I think Reisman's 100% full reserve gold currency has merit, etc.
With the petrodollar, we seem to have settled on the worst possible system so virtually anything else would be better.
> It seems to me likely that Douglas Social Credit theory died out when it did because it confronted mainstream economic theory at the height of its power without having access to the necessary tools to rebut it.
Well, both theories are also homologous to mainstream Keynesian economics.
Consider the following two models:
*Model 1:*
We have two economic actors (worker-consumers W and firms F), there are no banks or savings and the economy is conducted entirely in gold.
F has M money which it spends on the wages, salaries, and other payments it makes to W, the worker-consumers, who in turn create CG, consumer goods. With a quantity of goods CG and a supply of money M available, the price P is M/CG. Therefore, when the worker-consumers spend the M they received, the total cost is P, and they receive all of CG.
F then was earned back the M it spent on production.
*Model 2:*
There are still two economic actors (worker-consumers W and firms F), there are no banks and the economy is conducted entirely in gold. However, now we will assume that the worker-consumers W wish to save some money, S.
Again F starts out with M money which it spends on the wages, salaries, and other payments it makes to W, the worker-consumers, who in turn create CG, consumer goods. With a quantity of goods CG and a supply of money M available, the price P is M/CG.
However, rather than spend all of its wages on consumer goods, W decides to save some of its money by hiding it under the floorboards. Therefore, what the worker-consumers spend is not M, but M-S. And this breaks the circuit!
If F charges P for each CG, then the amount of money required (M/CG) to purchase all of the CG is M. But consumers W are only willing to spend M-S, so the demand is insufficient to purchase all of the goods. F collects M-S. W buys [M-S) / P] goods, and the excess goods rot in warehouses!
If F lowers the price P to [(M-S)/CG], so that it sells all of its inventory, then the sum of money that F receives is M-S. In this case, W still buys [(M-S)/P] goods but since the price is now [(M-S)/CG] this is sufficient to buy all of the goods. F collects M-S.
In either case, though, F has only collected M-S. In other words, it is operating at a loss. Concluding that business is unprofitable, it shuts down the firm rather then continuing to throw away money and instead also decides to save its remaining money under the floorboards.
In a “real” (as compared to “toy”) economy, where there are many firms competing, the firms will fully account for their cost M that was paid as wages, and therefore charge a price of M/CG for their own goods. Each firm’s owners will expect (or at least hope) that through superior quality, advertising, and distribution that they will earn enough to pay back M to the bank, while *the other guys’ firms* suffer the losses caused by the leakage. While some firms will be “winners” and others “losers,” in the aggregate, there is not enough money available to firms (M-S) to make back their money (M). The result will either be firms shutting down, the development of debt which the economy has so far not had, or reversion to a barter system as all the gold gets hidden under floorboards and disappears from the economy.
*Conclusion*
The banks are credit are completely superfluous to MCT. The key component is savings itself.
Thus we see that MCT is homologous to mainstream Keynesian economics, whose conclusion is that savings must be discouraged, and its effects on the economy mitigated via a deflationary monetary policy.
I do not think they are homologous, because gold and/or cash can have a velocity that keeps it in circulation. The Austrian economist George Reisman's book CAPITALISM: A Treatise on Economics has a thorough explanation of why the Keynesian model is wrong in an economy with fully-backed gold-based money.
This MCT/DSC problem seems *very specific* to contemporary credit money created and destroyed in each cycle. The problem seems to go away if, like Steve Keen or Milton Friedman or many other economists, you assume that money isn't created and destroyed by the cycle.
If the MCT theorists are right about money creation and destruction, their logic follows. If they are wrong about it, then it doesn't. I don't know if they are right or not. Steve Keen is one of the best economic modelers I know of and he says they are wrong. The evidence of ever-growing debt compared to the size of the money supply, as well as the Werner paper I linked, suggests they're right.
When I don't know the answer to something, I just say I don't know the answer - and I don't know the answer to this one.
> If the MCT theorists are right about money creation and destruction, their logic follows. If they are wrong about it, then it doesn't. I don't know if they are right or not.
That boils down to a semantic question of how one defines "Money". Economists speak of different types of money like M0, MB, M1, M2, and M3 for this reason. Do not confuse a semantic dispute for one of substance.
> I do not think they are homologous, because gold and/or cash can have a velocity that keeps it in circulation.
So does money in bank accounts. Not that it's even clear how "circulation" is relevant here.
> This MCT/DSC problem seems *very specific* to contemporary credit money created and destroyed in each cycle.
The problem you describe in your article is that of savings. The creation and destruction of money in each cycle is completely incidental to the logic.
Congratulations this is a superbly written essay, I have been researching DSC for almost a year now and while I saw some similarities with the Austrian approach to banking I did not know about the MCT. I will make another separate comment in regards to the theorem but first I will comment on money and banking. The fractional reserve theory is widely accepted by economist which means banks expand money supply although what is wrong about it is the need of deposits first to lend and then multiply the money as explained in the book where does money come from?, "Positive money" proponents in England and other groups. It can be confirmed as well by the decreasing percentage o reserves lowering even to reach 0% reserves and only requiring "capital adecuacy".
But in simple terms the words create and destroy might be confusing, we could think about it as money injected and extracted of the circuits, including the financial only circuit of currency exchange, QE, government bonds and place in a battery out of any circuit however since fiat money (digital ledgers) only require a computer system and electricity the supply of money is virtually endless hence the creation word used, destruction word might be imply when viewing it as an accountancy cycle where loans repayment cancels the account therefore destroying the money or extracting it to the abstract battery.
TY for the kind words. I used the word "create" and "destroy" because that's what the MCT theorists used. From what I understand the key point is that the banks do not intermediate and hence the velocity of any given unit of money is 1 or close to it.