“Paper money eventually returns to its intrinsic value ---- zero.”
"Banks lend by creating credit. They create the means of payment out of nothing."
Ralph M. Hawtrey, Secretary of Treasury, England
Over the last three years, the Irish economy has gone from boom to the verge of bust, needing a major bailout. In a globalised world, the economies of nations are interlinked. If Ireland went down, it would definitely hurt the UK, Ireland is the fifth largest export market; the trade is worth around £23.8 billion. David Cameron emphasised this in his statement: "We export more to Ireland than we do to Brazil, Russia, India, China combined”. In addition to economic ties, there are ties of culture, language and history.
Therefore, the British government and the Euro were compelled to organise this bailout, in order to halt the potential domino effect, from the collapse of the Irish economy, creating another dive into recession. Spain and Portugal seems to be going in a similar direction with a growing budget deficit, and there is already talk of them being bailed out in the future.
In the chaos of recession and bailouts, they have lost sight of the causes of the problems. As a non-Economist, I believe that Fiat money is a contributing factor towards the cycles of booms and busts. The Fiat money system is inherently unstable, its merit depends on maintaining the conviction of the masses that the intrinsically ‘worthless’ paper money has some value; when they lose total faith, it results in the nightmare scenario - a run on the banks and the entire thing collapses, leading to the ultimate bust. This is the most critical situation, thus rare in history. In most cases, when the economy is not going towards a major bust (recession), it is in a state of boom or normality.
Another factor that contributes towards the instability of the Fiat money is the quantity in circulation. The economic geeks have various terms and means of measuring this. In essence, the quantity is controlled by the banks rather than determined naturally through market forces to reflect the actual level of wealth generated in the country. Of course, that would mean abandoning the Fiat system, and pegging the currency to something like gold or silver.
This Fiat system allows the banks to print money, creating wealth out of nothing, this will naturally cause imbalance, because the banks can go on creating and lending, the rest can go on inflating their debts. No wonder the rich get richer and poor get poorer. The more you lend the more money you make, excessive lending also led to the increase in risk of many defaulting and depreciation of currency. This is how the recession started in the US housing market, and like a virus infected others.
The subsequent lending process by the banks is a greater problem, as money is lent from the deposits made by the public, with the pretext that it owns the money. Therefore, the debtors owe the bank, rather than the depositors; this is fraud on a mass scale.
The banking system is also unnatural, because the medium of exchange (money) should not be subjected to manipulation by a section of the population, and this is precisely what the bankers do. In a natural environment, real economic wealth is created by the efforts of all and traded through barter or exchanged via a currency like gold and silver. Just examine the long human history and one would struggle to find cycles of booms and busts.
What the Euro should be bailing out is the actual system in place; replace the Fiat currency with gold and silver, or some other commodity with an intrinsic value that is not monopolised by a group of people. Consequently, the banks would not be able to create credit out of thin air and place the masses under constant debt. Lending would be backed by actual wealth – not pegged by the printing of paper money. Any money lent must be done with the permission of the depositors as the money belongs to them.
Most important is that the banks should only take a commission on the money being lent to cover their services, and profit earned from the money lent should be shared out amongst the depositors, because they are the ones who own the money. This would conform to the spirit of democracy, as it would remove the monopoly of the banks, and the power would go back to the people rightfully.
Yamin Zakaria (email@example.com)
Published on 23rd November 2010