By Eduard Qualls, Special for USDR
Money is not a physical element—nothing is money by definition. Money is a creation of the human mind, for human use, for the facilitation of human commerce.
Money is, in fact, the promise of the economy that issued it that the economy itself will make goods and services available for exchange in the standard and units displayed by the tokens created to carry that exchange-promise. All money is, therefore, promissory debt.
Silver, gold, platinum, any of the metals used for bullion coinage in the past—or any certificates based on holding bullion—were an encumbrance on the economies that used them.
They force their economy to go into debt twice, once with the token’s economic promise of exchange for goods and services, and again, because the token had to have been created with that same value in precious metal already generated and on hand. This is the equivalent of being required to have a house on whose walls your mortgage contract is written, and signed by you, in order to go out and buy a house of equal value.
Recognition of this nonsense is the reason fiat “let it be” currency now dominates the world. The method of creation of this money is paralleled in all the largest economies. Within the United States it follows the following method.
When the officers of the Federal Reserve decide in committee that the US money supply needs to grow, they send someone from the Federal Reserve Bank of New York City to buy debt obligations that are being sold by the US Treasury. In this example, we’ll use a single dollar.
When the check used to pay for those obligations returns to the Fed for clearance, it hands out a dollar it has printed in the name of the People and Economy of the United States.
The Treasury deposits this dollar in the commercial banking system of the United States.
The commercial banks are required by regulation to retain only 15% of that dollar deposited with them: this is the fractional reserve requirement. The remaining 85¢ can be lent to those the bank deems credit worthy.
When that 85¢ is re-deposited with the banks, 15% of this amount can be also be handed out in loans. With this progression, each $1 added by the Federal Reserve can be expanded by the commercial banking system into an additional amount, approaching $5.70.
Export receipts have the same expansionary effect—like the Fed, they inject new dollars, from a separate economy.
If the Federal Reserve were to sell some of its holdings of US debt obligations, it would take back that dollar and, by the math, the amount of lendable deposits would shrink by near $4.70. Import payments force that same collapse of the money supply.
Thus fiat money, with the fractional reserve requirement, allows the money supply to expand or contract with economic need—it allows the market to breathe—and avoids the debilitating limitations that bullion currencies must always face.
Eduard Qualls, author of Community Capitalism: Pulling Capitalism Back From Its Own Abyss, is a political and economic realist—a militant moderate—with a growing national reputation for his insights into the problems facing the United States and the World. His MSBA, combined with his knowledge of languages, cultures and history, gives him the skill to explain complex issues in ways that almost anyone can grasp to their benefit.