WHY BITCOIN?
BitcoinReality vs. Central Banks.
The Monetary Evolution for Humanity
For My Baba´s Soul, All Children, and Humanity in Total Peace.
Part 2:
The Tool of Inflationary “Keynesianism”:
Manipulation of Interest Rates and “Reserve Requirements”.
An important point to be understood, when we are talking about central banking in bed with governments is the following: inflation is not the only economic problem. The large deficits in a state will siphon off huge sums of capital from productive private investment to unproductive and parasitic government spending. This will finally cripple productivity and healthy economic growth, and raise interest rates considerably.
Who suffers in the end? The tax-paying public.
De Soto describes this process more detailed: “The state obtains easy financing in the form of loans and inflation, the cost of which goes unnoticed by the citizens, who do not initially experience a heavier tax burden.” [ Jesús Huerta de Soto, “Money, Bank Credit, And Economic Cycles” (2012), 3rd ed., p. 648.]
The parasitic tax burden will increase in the future, due to the forced repayment of the billions and trillions deficit plus high interest charges.
Whatever tools- or tricks — the central banking structures and the governments (i.e.: selling Treasury bonds) apply, in the end we see the chronic and accelerating inflation of our time — and the ultimate cause is the fundamental change in the monetary system.
Money, once based on gold centuries ago, as the currency, and where banks were required to redeem their notes and deposits immediately in hard money, we now have a perverted system of fiat paper money, cut off from gold and issued by government-privileged Central Banks.
The Central Banks enjoy a monopoly on the printing of paper money or creating digital fiat-money out of thin air, and through this money they control and boost an inflationary fractional reserve banking system which pyramids deposits on top of a total of reserves determined by the Central Banks.
De Soto explains this process eloquently:
“In short, bankers have discovered their Philosopher´s Stone (much like the one sought-after in the Middle Ages), which enables them to create new monetary units from nothing, and thus to generate hidden wealth, harming and deceiving third parties in the process. In account books depositors are formally recognized as the owners of such wealth, but in practice it does not belong to anyone (however, economically speaking, it belongs to the bankers themselves)…The wealth banks have gradually accumulated can and must be returned to the citizens.” [ Jesús Huerta de Soto, “Money, Bank Credit, And Economic Cycles” (2012), 3rd ed., pp. 248–249.]
When it comes to the sophisticated term “reserve requirements”, it should be clear that reserve requirements are more an inflationary than a restrictive monetary device.
Just as government safety codes can decrease safety by setting a lower limit for safety measures and inducing private firms to reduce safety downward to a specified minimum level, so reserve requirements can serve as lowest common denominators for bank reserve ratios.
Free competition, on the other hand, will generally result in banks voluntarily keeping higher reserve ratios. Yet, banks expand their loans and credits — and increase the supply of the total money supply: more inflation. Later on, it becomes clear, why any kind of banking with intermediaries or centralized ledgers and accounting-method is doomed to fail and simply cannot be trusted.
Let Rothbard´s wisdom in “The Mystery of Banking” (p. 230) speak here for itself, which we have been witness to: “The bankers found that the helpful cartelization of the national banking system was not sufficient. A central bank, they believed was needed to provide a lender of last resort, a federal governmental Santa Claus who would always stand by ready to bail out banks in trouble. Furthermore, a central bank was needed to provide elasticity of the money supply.
A common complaint by bankers and by economists in the latter part of the national banking era was that the money supply was inelastic.
In plain English, this meant that there was no governmental mechanism to assure a greater expansion of the money supply — especially during panics and depressions, when banks particularly wished to be bailed out and to avoid contraction.” This is why the privately owned and controlled Federal Reserve System was deliberately designed as an engine of inflation, the inflation to be controlled and kept uniform by the central bank. The banking system was created exactly this way, so that only the Federal Reserve Banks could print paper notes. Rothbard continues on p. 237 in “The Mystery of Banking”: “The member banks, no longer able to print cash, could then only buy it from the Federal Reserve by drawing down deposit accounts at the Fed.
The different reserve requirements…were preserved, but the Fed was now the single base of the entire banking pyramid…All national banks were forced to become members of the Federal Reserve System, while state banks had a voluntary choice; but non-members could be controlled because, in order to get cash for their customers, they had to keep deposit accounts with member banks who had access to the Fed…The new central bank, being an arm of the federal government, carries the great prestige of that status, and also has a legal monopoly on the issue of notes.”
US-American inflation and gold outflow proceeded continuously, despite the pleas of the U.S. that foreign central banks abstain from redeeming their dollars in gold. Rothbard concludes this historical reality of a monetary comedy in “The Mystery of Banking”: “Pressure to redeem by European central banks led President Nixon, on August 15, 1971, to end Bretton Woods completely and to go off the gold standard internationally and adopt a pure fiat standard. The short-lived and futile Smithsonian Agreement of December 1971 tried to retain fixed exchange rates but without any gold standard — an effort doomed to inevitable failure, which came in March 1973. Thus President Nixon in effect declared national bankruptcy and completed the failure to honor commitments to redeem in gold initiated by Franklin Roosevelt in 1933.
In the meanwhile, Congress had progressively removed every statutory restriction on the Fed´s expansion of reserves and printing of money. Since 1971, therefore, the U.S. government and the Fed have had unlimited and unchecked power to inflate; is it any wonder that these years have seen the greatest sustained inflationary surge in U.S. history?”
Once you understand the systematic criminal system of the fiat-inflationary and debt-based central banking and fractional reserve banking, you come to the same logical deduction like Rothbard (p. 262: “The Mystery of Banking”), which was the only realistic alternative to central banking before Bitcoin was born: “Since we must adopt some definition of weight, I propose that the most convenient definition is one that will enable us, at one and at the same time as returning to a gold standard, to denationalize gold and to abolish the Federal Reserve System…
I propose that, in order to separate the government totally from money, its hoard of gold must be denationalized; that is, returned to the people. What better way to denationalize gold than to take every aliquot dollar and redeem it concretely and directly in the form of gold?
…In short, the new dollar price of gold (or the weight of the dollar), is to be defined so that there will be enough gold dollars to redeem every Federal Reserve note and demand deposit, one for one. And then, the Federal Reserve System is to liquidate itself by disgorging the actual gold in exchange for Federal Reserve notes, and by giving the banks enough gold to have 100 percent reserve of gold behind their demand deposits. After that point, each bank will have 100 percent reserve of gold, so that a law holding fractional reserve banking as fraud and enforcing 100 percent reserve would not entail any deflation or contraction of the money supply. The 100 percent provision may be enforced by the courts and/or by free banking and the glare of public opinion….Our plan would at long last separate money and banking from the State. Expansion of the money supply would be strictly limited to increases in the supply of gold, and there would no longer be any possibility of monetary deflation.
Inflation would be virtually eliminated, and so therefore would inflationary expectations of the future. Interest rates would fall, while thrift, savings, and investment would be greatly stimulated. And the dread specter of the business cycles would be over and done with, once and for all.”
For a deeper understanding, Jesús Huerta de Soto´s analysis, [“Money, Bank Credit, And Economic Cycles” (2012), 3rd ed., pp. 260–262.] in connection with “credit expansion” and fractional reserve banking is essential to digest: “The crucial problem posed by credit tightening (as we will examine in the following chapters) consists of the fact that the very process of credit expansion based on a fractional reserve inevitably triggers the granting of loans unsupported by voluntary saving, resulting in a process of intertemporal discoordination, which in turn stems from the distorted information the banking system imparts to businessmen who receive loans generated ex nihilo by the system. Hence businessmen rush out to launch investment projects as if society´s real saving had increased, when in fact this has not been happened. The result is artificial economic expansion or a “boom”, which by processes we will later study in detail, inevitably provokes an adjustment in the form of a crisis and economic depression. This sums up the negative effects exerted on the real economy by the financial practice of expanding credit through the issuance of fiduciary media (deposits).
The crisis and economic recession reveal that a highly significant number of investment projects financed under new loans created by banks are not profitable because they do not correspond to the true desires of consumers. Therefore many investment processes fail, which ultimately has a profound effect on the banking system. The harmful consequences are evidenced by a widespread repayment of loans by many demoralized businessmen assessing their losses and liquidating unsound investment projects (thus provoking deflation and the tightening of credit); they are also demonstrated by an alarming and atypical rise in payment arrears on loans (adversely affecting the bank´s solvency).
Just as the money supply was expanded to the bank multiplier, artificial economic expansion fostered by the ex nihilo creation of loans eventually triggers an endogenous recession, which in the form of a widespread repayment of loans and an increase in arrears, reduces the money supply substantially….Therefore the fractional-reserve banking system generates an extremely elastic money supply, which ‘stretches’ with ease but then must contract just as effortlessly, producing the corresponding effects on economic activity, which is repeatedly buffeted by successive stages of boom and recession.
‘Maniac-depressive’ economic activity, with all its heavy, painful social costs, is undoubtedly the most severe, damaging effect the current banking system (based on a fractional reserve, in violation of universal legal principles) has on society.”
De Soto [“Money, Bank Credit, And Economic Cycles” (2012), 3rd ed., p. 262.] connects the dots with the only sound and hard money-system known during his time: “In conclusion, we have seen that the fractional-reserve banking system can contract and drastically reduce the money supply just as easily as it expands credit and increases the money supply. In other words, the system generates an elastic and extremely fragile stock of money which is subject to great convulsions that are very difficult, if not impossible, to mitigate or stop.
This monetary and banking system contrasts with inelastic systems (for example, the one that combines the classic gold standard with a 100-percent reserve requirement), which do not permit disproportionate expansion of the money supply (the worldwide production of gold has been growing in recent centuries at the rate of 1 to 2 percent per year). Moreover they offer the following advantage:
due to the fact that these systems are inelastic (gold is indestructible and throughout history, the world has accumulated a very inflexible stock of it), they do not permit any abrupt decline, nor (logically) any credit or monetary squeezes which exert debilitating effects on the economy, as opposed to the current situation for which the existing banking system is responsible”.
The disbalanced chaos with its spectrum of social damages can be understood within the context of economic “errors”: “Now the fact that entrepreneurs respond to credit expansion by behaving as if saving had increased triggers a process of maladjustment or discoordination in the behavior of the different economic agents. Indeed entrepreneurs rush to to invest and to widen and lengthen the real productive structure even though economic agents have not decided to augment their saving by the volume necessary to finance the new investments. In a nutshell, this is a typical example of an inducement to mass entrepreneurial error in economic calculation or estimation regarding the outcome of the different courses of action entrepreneurs adopt. …This error in economic calculation stems from the fact that one of the basic indicators entrepreneurs refer to before acting, the interest rate (along with the attractiveness of terms offered in the credit market), is temporarily manipulated and artificially lowered by banks through a process of credit expansion”. [Jesús Huerta de Soto, “Money, Bank Credit, And Economic Cycles” (2012), 3rd ed., pp. 351–352 (with footnotes supported by von Mises).]
In line with de Soto´s logical reasoning I can conclude that only a banking system governed by a 100-percent reserve requirement — and a 100-percent gold standard — would at least guarantee coordination between the naturally created supply and demand of present and future goods in the market and, because of this balanced condition, prevent the profound maladjustments which the current banking system produces and which ultimately generate economic crises and recessions.
With a 100-percent reserve requirement, banks would continue to loan what is (voluntarily) saved, yet entrepreneurs would tend to invest saved funds in a much more cautious, realistic, and responsible manner. If, from the beginning, business-people were to encounter greater obstacles to financing specific entrepreneurial projects, “such difficulties would be the logical manifestation of the healthy functioning of the only market mechanism capable of halting the initiation of unprofitable investment projects in time, and thus avoiding their unwise and discoordinated execution, which the current system promotes during credit booms.” [Jesús Huerta de Soto, “Money, Bank Credit, And Economic Cycles” (2012), 3rd ed., p. 763.]
Rothbard, one of the famous liberty-advocating Austrian economist, emphasizes in his book “The Mystery of Banking” (p.268), that “It is vital, then, not only to denationalize the issuing of money as well as the stock of gold, but also to denationalize the dollar, to remove the good old American dollar from the hands of of government and tie it firmly once again to a unit of weight of gold.
Only such a plan as ours will return, or rather advance, the economy to a truly free market and non-inflationary money, where the monetary unit is solidly tied to the weight of a commodity produced on the free market. Only such a plan will totally separate money from the pernicious and inflationary domination of the State.”
Ludwig von Mises was one of those strong believers that free banking in practice would approximate a 100 percent gold or silver money. Free banking and 100 percent metallic money advocates in the 19th century included Henri Cernuschi and Victor Modeste in France, and Otto Hübner in Germany. In order to focus on the criminal analysis of the (central) banking system, Modeste´s thoughts should be elaborated here: he realized that demand deposits, like banknotes beyond 100 percent reserves, are illicit, fraudulent, and inflationary as well being generators of the business cycle. Demand deposits, like banknotes, constitute “false money”. But Modeste´s policy conclusion was different. Modeste pointed out that “false” demand liabilities that pretend to be but cannot be converted into gold are in reality tantamount to fraud and embezzlement. Modeste concludes that false titles and values, such as false claims to gold under fractional-reserve banking, are at all times “equivalent to theft; that theft in all its forms everywhere deserves its penalties…that every bank administrator …must be warned that to pass as value where there is no value…to subscribe to an engagement that cannot be accomplished…are criminal acts which should be be relieved under the criminal law.” [ Victor Modeste in Rothbard´s “The Mystery of Banking”, “Le Billet des banques d`emission est-il fausse monnaie?” [Are Bank Notes False Money?], Journal des économistes 4 (Oct. 1866), pp.77–78 (translation by Rothbard).]
So, the answer to fraud, then, is not more intransparent administrative regulation, but prohibition and or total prevention of tort and fraud under general law.
On page 97 in “The Mystery of Banking of Banking”, Rothbard clearly makes the point, that “modern fractional reserve banking is a shell game, a Ponzi scheme, a fraud in which fake warehouse receipts are issued and circulate as equivalent to the cash supposedly represented by the receipts.” Rothbard asks his readers the fundamental question: “Where did the money come from? It came — and this is the most important single thing to know about modern central banking — it came out of thin air.
Commercial banks — that is, fractional reserve banks — create money out of thin air. Counterfeiters, too, create money out of thin air by printing something masquerading as money or as a warehouse receipt for money. In this way, they fraudulently extract resources from the public, from the people who have genuinely earned their money. In the same way, fractional reserve banks counterfeit warehouse receipts for money, which then circulate as equivalent to money among the public. There is one exception to the equivalence: The law fails to treat the receipts as counterfeit”.
The Criminal Nature of “Fractional-Reserve Banking” and Credit Expansion:
It is essential to comprehend the question of why, when we are analyzing the criminal roots of the (central) banks´ “fractional reserve banking” and their interconnected actions on multitude of levels within our societies and human lives in totality.
De Soto summarizes Hoppe´s conclusions: “Hans-Hermann Hoppe explains that this type of contract is detrimental to third parties in at least three different ways. First, credit expansion increases the money supply and thereby diminishes the purchasing power of the monetary units held by all others with cash balances, individuals whose monetary units thus drop in buying power in relation to the value they would have had in the absence of credit expansion. Second, depositors, in general are harmed, since the credit expansion process reduces the probability that, in the absence of a central bank, they will be able to recover all of the monetary units originally deposited; if a central bank exists, depositors are wronged in that, even if they are “guaranteed” the repayment of their deposits at any time, no one can guarantee they will be repaid in monetary units of undiminished purchasing power.[Jesús Huerta de Soto, “Money, Bank Credit, And Economic Cycles” (2012), 3rd ed., pp.708–710.; See in detail original sources of literature: Hoppe, “How is Fiat Money possible? — or, The Devolution of Money and Credit”, pp.70–71;]
Third, all other borrowers and economic agents are harmed, since the creation of fiduciary credit and its injection into the economic system jeopardizes the entire credit system and distorts the productive structure, thus increasing the risk that entrepreneurs will launch projects which will fail in the process of their completion and cause untold human suffering when credit expansion ushers in the stage of economic recession.”
The beauty of logical deduction is that even a seven year old child can understand the essence of the incalculable damages caused by the current fractional reserve banking. De Soto continued: “…, when the purchasing power of money declines in relation to the value money would have were credit not expanded in a fractional-reserve environment, participants (depositors and, especially, bankers) act to the detriment of third parties.
The very definition of money reveals that any manipulation of it, society´s universal medium of exchange, will exert harmful effects on almost all third-party participants throughout the economic system.
Therefore it does not matter whether or not depositors, bankers, and borrowers voluntarily reach specific agreements if, through fractional-reserve banking, such agreements influence money and harm the public in general (third parties). Such damage renders the contract null and void, due to its disruption of the public order. Economically speaking, the qualitative effects of credit expansion are identical to those of the criminal act of counterfeiting banknotes and coins, an offense covered, for instance, by articles…of the new Spanish Penal Code. Both acts entail the creation of money, the redistribution of income in favor of a few citizens and to the detriment of all others, and the distortion of the productive structure. [De Soto adds in his footnote: “…The crime of producing counterfeit currency is defined in terms of a perpetrator´s act and not in terms of the specific personal damage caused by the act.”]
Nonetheless, from a quantitative standpoint, only credit expansion can increase the money supply at a fast enough pace and on a large enough scale to feed an artificial boom and provoke a recession. In comparison with the credit expansion of fractional-reserve banking and the manipulation of money by governments and central banks, the criminal act of counterfeiting currency is child´s play with practically imperceptible social consequences.”
Murray N. Rothbard concludes that in an ideal free-market economic system: “Fractional-reserve bankers must be treated not as mere entrepreneurs who made unfortunate business decisions but as counterfeiters and embezzlers who should be cracked down on by the full majesty of the law. Forced repayment to all the victims plus substantial jail terms should serve as a deterrent as well as to meet punishment for this criminal activity.” [Murray N. Rothbard, “The Present State of Austrian Economics”, Journal des Economistes et des Etudes Humaines 6, no. 1 [March 1995]: pp. 80–81; reprinted in Rothbard, The Logic of Action [Cheltenham, U.K.: Edward Elgar, 1997], p. 165).]
As de Soto explains the act of criminal theft in the historical context of “The Irregular Deposit Contract Under Roman Law” [See detailed explanations: Jesús Huerta de Soto, “Money, Bank Credit, And Economic Cycles” (2012), 3rd ed., pp. 27–36]: In this constitution, the emperor Gordianus indicates to Austerus, ‘if you make a deposit, you will with reason ask to be paid interest, since the depository should thank you for not holding him responsible for theft, because he who knowingly and willingly uses a deposited good for his own benefit, against the will of the owner, also commits the crime of theft’. Section 8 of the same source deals expressly with depositories who loan money received on deposit, thus using it for their own profit. It is emphasized that such an action violates the principle of safekeeping, obligates depositaries to pay interest, and makes them guilty of theft, as we have just seen in the constitution of Gordianus.”
To be continued…in Part 3:
The Missing Link in the Operations of the Criminal Central Banking Cartel…
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