Reply #86: "The money is counterfeit in the sense that it is backed by nothing." [View All]

[PatrickSMcNally]

Several classical misconceptions are wrapped up in their. First of all, the statement that bankers can create money out of thin air is false in a literal sense insofar as it suggests that if a bankers wife wishes to do some expensive shopping all that's needed is for the banker to print some extra dollar bills. That is false. What the fractional reserve lending concept relates to is that banks are allowed to nominally lend out more money on credit than they actually hold. This does not, however, automatically translate into money for the bank. Bad loans and bad investments will ultimately cause a bank to go under. A bank's profits depend on lending money in a wise way so as to be able to count upon loans being repaid.

The problems of the last few decades are linked with the fact that in an oversurplus economy there is much less room for the classical type of honestly profitable investment. Giving out loans on interest to be paid at a later date can only fuel the economy to the extent that such loans contribute to setting up new enterprises which increase the volume of consumer goods and services and hence add to what is exchanged in the economy. That in turn justifies the printing of higher volumes of dollar bills which corresponds to the increased volume of trade going on in the economy. When the growth of the economy does itself compell the increase of the money supply then the original investor can subsequently claim a share of this new money as profit. But if an economy is overfilled with more goods and services than people know what to do with, such as is the case with the modern USA, then there is less room available for such honest profitable investments in the classic sense. In a deregulated environment, such as the USA has moved towards since the Reagan era, that reduction in opportunties for productive investment in the classical sense results in a growth of Enrons, WorldComs and Halliburtons. None of this has anything much to do with the decisions made back in 1913. These are issues of the modern-day highly developed economy.

But the real misconception which seems to run through your comments here seems to be related to the gold standard, although I don't think you've actually mentioned that yet. The gold standard failed because there simply isn't enough gold in the world at large to account for all of the exchanges which people make everywhere across the world. In fact, the idea that money should be "backed" by something is a fundamental error. Money by its nature is merely the result of a social consensus arrived at by some form or other. What makes a dollar bill in my pocket valuable is only the fact that I'm reasonably confident that when I go to eat tomorrow the people will recognize this same consensus which allows them to take the bill from me, even there is nothing which they can actually do with it. If someone actually discovered a means of doing something useful with dollar bills, say, for example, if it was found that the bills could be used as roof shingles and a roof-constructor saved money when using them as a substitute, then dollar bills would begin disappearing and a money shortage might occur.

With the gold standard in place what used to occur was that when the economy was on the rise people would carry on too many transactions, produce too many goods and services, for all of this to be backed by gold in each case. Then when a drop in confidence occurred people would panic and run to the bank to try to claim a share of gold because they knew there wasn't enough to back everything in the economy. The banks would crash then as they ran out of gold and still had customers waiting in line for their share. The original formation of the Fed was part of an attempt to get away from these older problems. It had nothing to do with a conspiracy and the problems of today have to be understood on their own terms as problems of the modern economy.