My thoughts on money and banks

This is not a cut and paste but a summation of my own thoughts on the matter of paper currency and related items. Just a ramble, if you will, with my limited training in economics and thoughts on the economy of today.

There has been a lot of discussion around national debt, the gold standard and the inherent worthlessness of paper currency. Most of the talk makes assumptions that I have decided that I do not agree with.

In the very beginning, humans hunted and/or gathered for enough to keep themselves and their families alive. When some would have an excess, they would barter with others for other surplus items they needed or desired. Eventually, both people and tribes found things they could do better due to either innate talent or local resources and started to specialize. As this progressed, the original barter system proved impractical because the people who wanted your goods might not have what you desired to trade for it. Hence, some bright stars developed "mediums of exchange".

The original mediums of exchange were commodities like salt or gold, and they stood the test of time for many years due to their universal demand. Eventually, though, nations replaced the hard commodities (an abstract representation of value) with currency (an abstract representation of an abstract representation of value). Currency was originally backed up by real commodities a la Fort Knox, but this has now fallen by the wayside and currency is, in and of itself, been deemed to have intrinsic value by the government of the particular country.

It is popular to bemoan the departure from the gold standard and to say that the paper money has no value redeemable in a specific commodity. It is also popular to complain that the government spends money it does not have through borrowing from banks or other nations that hold its currency, thus indebting its citizens and requiring additional taxes to pay it back.

But what is the true nature of this cash?

The true value of any nation is what it produces. The GDP is a good approximation of that. Since we are now a very specialized society (we don't mine our own ores, build our own cars or grow our own food for the most part), we need some objective medium of exchange to represent each citizen's claim for a portion of that national product, theoretically in proportion to the effort that citizen has put into producing it.

Fixed commodities such as gold are problematic in today's society. Its availability is dependent on both the domestic holdings of gold and the amount of gold ore in a particular nation (somewhat similar to the availability of petroleum deposits in this day and age). For a country to base the fundamental medium of exchange of its GDP on a commodity that's available supply is fixed and arbitrary is, again, impractical.

So a nation decides to print or mint controlled amounts of documents that, in the aggregate, stand for the total output of the country. This medium, through supply and demand, provides each citizen with the ability to exchange the goods or services they produce for those they desire. The amount is finite and varies with the national output. Someone bargains their time, labour and skills in return for currency at competitive rate in the marketplace. Those who have higher demand skills and abilities command a proportionately higher return. Others take excess amounts they have earned and, alone or in conjunction with others, develop new production through the employment of others, thus becoming the capitalists. People then take the share of the GDP they
have earned, as represented by the money they hold, and purchase the goods they need and/or desire. Foreign nations trade amongst themselves for domestic currency, and redeem that currency at a rate that represents the desirability of any currency to purchase the goods of the issuing country.

This is simple, but it has gotten all cocked up.

First, instead of our governments issuing and maintaining the levels of money proportionate to the GDP, they allow a central bank (a private 3rd party in the case of the US) to issue it and regulate the levels. Instead of currency representing a share of the GDP, it becomes seen as a commodity in itself, defeating the purpose it was created for.

Second and directly related, this central bank and the other banks are allowed to expand the money supply by lending cash they do not hold on deposit. This increases the money supply without a corresponding increase in GDP, devaluing the currency and starting an inflationary
spiral. An argument can be made for lending fiat money for the start up or expansion of businesses that ad to the GDP, but much of the lending is for consumer goods and the additional money circulated results in inflation.

Third, these same bankers have convinced the governments that any excess currency needed for government aims must be borrowed. Borrowed from the banks that create cash out of nothing to lend and who then profit on the interest.

Governments have also compounded this by deciding that segments of society who do not contribute to the production of that society should receive a portion of it anyway and have set up entitlement programs to provide them with money representing this unearned claim.

To my way of thinking, the banks are the main culprit and the governments are accessories by buying into the banks' assertions that bankers control the money. A responsible government would control its own money supply and would ideally vary that supply in proportion to national output. It would not confiscate the claim to goods earned by people and redistribute it to those who have not contributed, possibly barring support for the truly disabled. Further, if those in another nation sold their goods into the domestic market in exchange for the domestic currency and chose to use that currency to purchase domestic goods to be exported, more power to them. The production capacity and desirability of goods would, by necessity, determine the rate of
exchange between currencies.

If the government needs more currency for its legitimate objectives, print more. Don't borrow it. The downside is that, unless the government aims increase GDP, the price of goods produced would increase due to the interaction of aggregate national supply and demand while the foreign exchange rates would be similarly affected. On the other hand, if the government needed less, reduce the available money supply accordingly.

In this scenario, there would be no need to even levy taxes at a national level since the government could produce the cash it needed to buy the required goods and services in the marketplace (recognizing, of course, that improper use of this ability could destabilize their
national economy). Bottom line is that the citizens' futures would not be compromised by the need to repay "debt" to the bankers and provide them with a healthy income for no particular reason than they created money out of thin air.

Thomas Jefferson was extremely critical when Hamilton et al advocated for the creation of a central bank in the USA. It looks to me like his reservations were warranted based on history. The banks actually control the nation. They create the money and then expect the government to borrow that money to bail them out when their schemes go awry.

Leaving the credit standard would be painful in the short term, but returning the purpose of money to its ideal use would, in the long run, benefit everyone except the bankers and those who use their paradigm to get something for nothing.

Just my $0.02