Our Monetary System Is Not a Fiat Money System*

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JAG's picture
JAG
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Our Monetary System Is Not a Fiat Money System*

Note Bernanke’s assumption (highlighted above) in his argument that printing money would always ultimately cause inflation: “under a fiat money system“. The point made by endogenous money theorists is that we don’t live in a fiat-money system, but in a credit-money system which has had a relatively small and subservient fiat money system tacked onto it.

We are therefore not in a “fractional reserve banking system”, but in a credit-money one, where the dynamics of money and debt are vastly different to those assumed by Bernanke and neoclassical economics in general.[10]

Calling our current financial system a “fiat money” or “fractional reserve banking system” is akin to the blind man who classified an elephant as a snake, because he felt its trunk. We live in a credit money system with a fiat money subsystem that has some independence, but certainly doesn’t rule the monetary roost—far from it.

This quote is from Steve Keen's "The Rolling Cavaliers of Credit" from Feb 09. A fascinating, but laborious read.

My "take" from it was that our monetary system is really two separate systems, a credit-money system, and a fiat money system. The credit money system, the much larger of the two is experiencing significant deflation, while the smaller fiat money system is experiencing significant inflation. This is the point of reference that the inflation/deflation debate was missing this whole time (at least for me). 

Steve Keen is DaMan!

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Re: Our Monetary System Is Not a Fiat Money System*

What that author failed to realize is that the fiat money cannot exsist until the bank credit did which leaves us only using 100% bank credit as our true medium of exchange.  The fiat system has no independence because it simplely does not exsist until the credit (interest bearing debt) does.  I really like seeing postings like this because these really get right to the heart of what is wrong with our monetary system.

Another thing he passed up is the fact that credit and money simply are not the same thing.  Credit is what you owe, money is what you use to pay off debt.  Under our system there is no actual money, only credit, but we do use credit for money simpley because the banking system has deceived the people into believing that credit is money.

When one really studies our monetary system you'll quickly realize that there is only one thing we use for money, bank credit.  Bank credit is the true money in our system because it is what we use for our medium of exchange.

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Thomas Hedin
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Re: Our Monetary System Is Not a Fiat Money System*

P.S. Bernanke is 100% accurate in saying that we don't use a fiat money system but the type of inflation (increase in the money supply(free of debt)) he speaks of would be a really good thing because it would allow the people to get out of debt.....the last thing the banking system wants.

Price inflation (which most people confuse with inflation)is another matter all together.  We should call it for what it really is, and it's an increase in the cost of doing business.  Taxes and Interest on borrowed 'money' is what causes all the price inflation.  Having a lot of funds in your bank account wouldn't drive up your prices as a business, but having a lot of interest bearing debt in order to have those funds would drive up your cost of doing business, which in turn would drive down your wages, increase the price of your products, or force you to use a cheaper raw material, and we can see all of this in our every day lives.

Then tack on the taxes (which constantly go up) and that increase in your cost of doing business also goes up making it harder and harder for American businesses to stay afloat.

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Re: Our Monetary System Is Not a Fiat Money System*

Hello all,

Jeff, it looks like Bernanke has learned Greenspan's art of double talking while sounding very technical.  So, are Federal Reserve notes fiat?  And what backs up the money if anything?

Is our money fiat?

There is much disagreement and confusion as to the exact definition of “fiat money.” Basically fiat money is anything declared money (legal tender) by law. Webster’s New World Dictionary defines fiat as an order issued by legal authority.

Black’s Law Dictionary [Sixth Edition, 1991] defines “fiat” as an “A command or order to act.  Arbitrary or authoritative order or decision.”  “Fiat money” is likewise defined as, “inconvertible paper money made legal tender by a government decree.”

So what is legal tender?

“All coins and currencies of the United States (including Federal Reserve notes and circulating notes of Federal Reserve banks and national banking associations), regardless of when coined or issued, are legal tender for all debts, public and private, public charges, taxes, duties, and dues. 31 U.S.C.A. § 392.”  Under the prevailing U.S.C.A. definition, past commodity and fiduciary coins and currency are on equal footing with current Federal Reserve notes.

What backs up the money?

All money is debt (liability) - but it is still backed up with collateral.  Most of the debt is private and it is collateralized by the property and assets of the borrower.  The money government borrows is collaterialized with treasury bills and other securities.  The Fed backs nothing, all risk is taken by borrowers but inexplicably the banks charge interest.

What money is neither fiat nor legal tender?

My interpretation is that "checkbook money" (bank deposits) is neither fiat, legal tender or backed up by anything other than FDIC insurance.  Checkbook money is not mentioned in any legal statutes that I'm aware of and it is unique in not being backed. 

Money is backed when a loan is issued (collateral) which makes it a liability to the borrower.  When the money is deposited in a bank account (checkbook money) it also becomes a liability to the bank.  This opens a can of worms legally but the courts don't want to touch our money system which I think is cowardly and reason for many judges to be dismissed.

Thomas Hedin wrote:

Price inflation (which most people confuse with inflation)is another matter all together. We should call it for what it really is, and it's an increase in the cost of doing business. Taxes and Interest on borrowed 'money' is what causes all the price inflation. Having a lot of funds in your bank account wouldn't drive up your prices as a business, but having a lot of interest bearing debt in order to have those funds would drive up your cost of doing business, which in turn would drive down your wages, increase the price of your products, or force you to use a cheaper raw material, and we can see all of this in our every day lives.   

Well said,  the inflation bogeyman is greatly over-stated and misunderstood.  The real concern should be deflation as our system is inherently deflationary.  All money is temporary, it must eventually be repaid in extinguishing debt.  If borrowing stops or even continues at a constant rate, the money supply will deflate as debt repayments are taken out of circulation. 

The money supply must constantly grow in order to prevent deflation - that's the mechanical problem, not inflation.  How much does the money supply have to grow to keep things stable?  That's the question that should be asked.

Larry

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JAG
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Re: Our Monetary System Is Not a Fiat Money System*

Thomas and Larry,

Thanks for your replies. Let me pick your brain again, if I may. In the cited article Dr. Keen states

Our starting point for analysing the economy should therefore be a “pure credit” economy, in which there are privately issued bank notes, but no government sector and no fiat money. Yet this has to be an economy in which intrinsically useless items are accepted as payment for intrinsically useful ones—you can’t eat a bank note, but you can eat a pig.

So how can that be done without corrupting the entire system. Someone has to have the right to produce the bank notes; how can this system be the basis of exchange, without the person who has that right abusing it?

Graziani (and others in the “Circuitist” tradition) reasoned that this would only be possible if the producer of bank notes—or the keeper of the electronic records of money—could not simply print them whenever he/she wanted a commodity, and go and buy that commodity with them. But at the same time, people involved in ordinary commerce had to accept the transfer of these intrinsically useless things in return for commodities.

“Therefore for a system of credit money to work, three conditions had to be fulfilled:

In order for money to exist, three basic conditions must be met:

a) money has to be a token currency (otherwise it would give rise to barter and not to monetary exchanges);

b) money has to be accepted as a means of final settlement of the transaction (otherwise it would be credit and not money);

c) money must not grant privileges of seignorage to any agent making a payment.”[11]

In Graziani’s words, “The only way to satisfy those three conditions is …:

to have payments made by means of promises of a third agent, the typical third agent being nowadays. When an agent makes a payment by means of a cheque, he satisfies his partner by the promise of the bank to pay the amount due.

Once the payment is made, no debt and credit relationships are left between the two agents. But one of them is now a creditor of the bank, while the second is a debtor of the same bank. This insures that, in spite of making final payments by means of paper money, agents are not granted any kind of privilege.

For this to be true, any monetary payment must therefore be a triangular transaction, involving at least three agents, the payer, the payee, and the bank.” ( p. 3).

Thus in a credit economy, all transactions are involve one commodity, and three parties: a seller, a buyer, and a bank whose transfer of money from the buyer’s account to the seller’s is accepted by them as finalising the sale of the commodity. So the actual pattern in any transaction in a credit money economy is as shown below:

(see article for diagram)

This makes banks and money an essential feature of a credit economy, not something that can be initially ignored and incorporated later, as neoclassical economics has attempted to do (unsuccessfully; one of the hardest things for a neoclassical mathematical modeller is to explain why money exists, apart from the search advantages noted above. Generally therefore their models omit money—and debt—completely).

It also defines what a bank is: it is a third party whose record-keeping is trusted by all parties as recording the transfers of credit money that effect sales of commodities. The bank makes a legitimate living by lending money to other agents—thus simultaneously creating loans and deposits—and charging a higher rate of interest on loans than on deposits.

My question regarding this is, who could we trust as the "bank". I don't want to trust the government for obvious reasons, but trusting a private bank is no better as we can see presently. Who do we trust to be the "people's" bank?

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Thomas Hedin
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Re: Our Monetary System Is Not a Fiat Money System*

I'll take a stab at this........ here goes....

Our starting point for analysing the economy should therefore be a “pure credit” economy, in which there are privately issued bank notes, but no government sector and no fiat money. Yet this has to be an economy in which intrinsically useless items are accepted as payment for intrinsically useful ones—you can’t eat a bank note, but you can eat a pig.

We do operate on a pure credit economy, but having an economy built on pure credit always, in time fails, as we are seeing now.  We have privately issued bank notes which are not government issued.  What the author fails to realize is that a medium of exchange should only be used to enhance fair trade.  What we use for money (numbers) is probably the best form of money ever invented, but the principles under which it functions right now is what is wrong with our money.  Our monetary system has be debauched (switched from an evidence of wealth to an evidence of debt).

So how can that be done without corrupting the entire system. Someone has to have the right to produce the bank notes; how can this system be the basis of exchange, without the person who has that right abusing it?

We could have an honest and moral monetary system if we switched our money system back from an evidence of the debts that people owe to the banking system to an evidence of the peoples production all based on wealth with no debt.  Wealth money -vs- debt money.  I own -vs- I owe.  This could be done without privately issued bank notes.  It could be done using our electronic system by adding numbers into an account and paying  the people to do production that benifits all of society.  Of course this would have to be written into legislation designed to do that very thing, which is exactly what the Minnesota Transportation Act would do.

Graziani (and others in the “Circuitist” tradition) reasoned that this would only be possible if the producer of bank notes—or the keeper of the electronic records of money—could not simply print them whenever he/she wanted a commodity, and go and buy that commodity with them.

But this is exactly what the banking system is doing today.  Banks can create brand new money by loans or investments.  100% of money that banks create is created as a gift to themselves.  Banks purchase everything they buy with a promise to pay.  Now the catch is, banks do not just print up money and but whatever they want.  The only way we get any money from the banking system is when they loan it to us at interest.  To better understand this please read Modern Money Secrets.

But at the same time, people involved in ordinary commerce had to accept the transfer of these intrinsically useless things in return for commodities.

Anyone has the right to refuse a transaction.

In order for money to exist, three basic conditions must be met:

Therefore for a system of credit money to work, three conditions had to be fulfilled:

The credit is what a person owes, money is what is used to pay debts.  The author tries to state in effect that two different things can be the same thing when they clearly cannot be.  Truth be known we really don't have any real money(final payment) in our system.

a) money has to be a token currency (otherwise it would give rise to barter and not to monetary exchanges);

The dictionary states "anything of only nominal value similarly used, as paper currency" but that is currency and it is not called money by any law.   Money could be electronic numbers stored in a bank account, just so long as those numbers went into circulation as a payment.  The moment they go into circulation as a debt they are a form of credit because its an evidence of what someone owes. 

b) money has to be accepted as a means of final settlement of the transaction (otherwise it would be credit and not money);

The author is correct here.  Money is final payment, credit is not money. 

c) money must not grant privileges of seignorage to any agent making a payment.”[11]

Seignorage is profit made from minting of coins as a profit to the government, I'm just unsure where he is going here with this one.  Who is this agent he speaks of?

to have payments made by means of promises of a third agent, the typical third agent being nowadays. When an agent makes a payment by means of a cheque, he satisfies his partner by the promise of the bank to pay the amount due.

Here is classic dis-information.  When a person writes a check, that is an "order to pay" which is completely different from a "promise to pay". 

Banks simpley do not have to make good on their promise to pay because our corroupt court system simplely will do nearly anything that this banking system wishes.  It couldn't be more clear than when Byron Dale sued the Federal Reserve Bank of Minneapolis to make good on their promise to pay. 

Once the payment is made, no debt and credit relationships are left between the two agents.

The author left out the fact that in our system in order for any 'money' to exsist someone (person, business, government,) had to go into debt to the banking system and pay interest on it.  Whoever holds the 'money' is holding an evidence of someone's debt.

But one of them is now a creditor of the bank, while the second is a debtor of the same bank. This insures that, in spite of making final payments by means of paper money, agents are not granted any kind of privilege.

All our paper currency is an evidence of debt.  Just the fact that the word "note" is printed on the top should make that clear, but FRN's are not legal promises to pay because they do note adhear to the law.

For this to be true, any monetary payment must therefore be a triangular transaction, involving at least three agents, the payer, the payee, and the bank.” ( p. 3).

Why should the banking system get a cut from every transaction taking place in America?  This is exactly what they do today because 100% of our medium of exchange is loaned to us at interest, allowing the banks to get a cut from every transaction out there.  This needs to change.  We the people should be the ones getting the benifit of our production, not the banking system.

Thus in a credit economy, all transactions are involve one commodity, and three parties: a seller, a buyer, and a bank whose transfer of money from the buyer’s account to the seller’s is accepted by them as finalising the sale of the commodity. So the actual pattern in any transaction in a credit money economy is as shown below:

Banks don't transfer money from the buyers's account to the seller's account.  The banks transfers it's promise to pay(credit) from one account to another.  Final payment is never made in that entire situation because what they are using for their medium of exchange is an evidence of what someone owes the banking system, at interest, of course.

This makes banks and money an essential feature of a credit economy, not something that can be initially ignored and incorporated later, as neoclassical economics has attempted to do (unsuccessfully; one of the hardest things for a neoclassical mathematical modeller is to explain why money exists, apart from the search advantages noted above. Generally therefore their models omit money—and debt—completely).

I'll tell you why money exists, to make honest and fair trade possible.  Credit exsists to transfer wealth from the producers to the non-producers.  The banking system only wants the people to think in terms of credit, and has confused the public with believing that money and credit are the same thing, which they are not.  The last thing the banking system wants is for the people to realize that the solution to our ecomonic mess is to put final payment into the system so that the people can become free from debt and still have a meduim of exchange.  If that author wants to learn more about debt, money, credit, ect... then he should visit www.wealthmoney.org and read Byron's whitepapers.

It also defines what a bank is: it is a third party whose record-keeping is trusted by all parties as recording the transfers of credit money that effect sales of commodities. The bank makes a legitimate living by lending money to other agents—thus simultaneously creating loans and deposits—and charging a higher rate of interest on loans than on deposits.

The only reason people trust the banking system is because the people simply do not understand how our system works and who it benifits, because if they did we would have a revolution before tomorrow morning.  Banks work overtime by spewing lies and dis-information like this to keep the people from really realizing just how badly the banking system is stealing from them.  Banks could make a legitimate living if they operated under just and fair principles, but as of right now they do not.  All deposits are a form of credit.  This author is a bank sympithizer.

My question regarding this is, who could we trust as the "bank". I don't want to trust the government for obvious reasons, but trusting a private bank is no better as we can see presently. Who do we trust to be the "people's" bank?

When it comes to trusting a bank I think the safest answer is you can only trust out banking system to pass legislation that benifits themselves.  I agree with you that we shouldn't trust our government, and to make sure our government is held in check we need to put pressure on our local state represenatives to pass laws like the Minnesota Transporation Act that way we the people can have money put into the system that we don't have to borrow and pay interest on it allowing us to get out of debt to this parasitic banking system. 

I personally believe that the U.S. Governement should issue and control the nations money supply by spending money into circulation instead of loaning it from private banks who just create it as a book-keeping entry.  I also believe that just short of a miracle, at this present time, it is an impossible task.

But what we can do is put pressure on out state legislators enact legislation at the state chartered banking level to regulate the banking 'industry' to put final payment into the system so that way people like you and me can have prosperity returned to our land.  The solution to our financial nightmare is so simple it's mind boggling.  Lets forget about trusting the banks, because we know we can't, and lets start pushing for legislative solutions to get us out of debt to these parasitic banksters.

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