We need to return to ‘real’ money to solve the economic crisis

By Dominic Frisby

Dominic co-wrote a feature documentary about the global financial crisis, ‘The Four Horsemen’ and his most recent short film, ‘Debt Bomb’, went viral with 250,000 hits in two weeks. He also has a column about gold and money for Moneyweek.

He has recently written a book looking at the mess the West finds itself in – he explains how changing our currency system could help us get out of the financial crisis…

I’ve heard a lot of explanations for the financial crisis in which the West now finds itself. I’ve read a lot of the touted solutions.

But I’ve not heard one high-profile economist, banker, journalist or politician – those who can actually influence the fixing of ‘this mess’, in other words – suggest that the problem lies in our system of money.

We spend a lot of time thinking about how to make more money. But few think about how our system money actually works.

Money: We spend much of our time thinking about how to make more money – but few think about how the system works

It’s a system that has been in operation globally for just 40 years – since the US finally departed the gold standard in 1971.

The Bank Of England calls it ‘fiduciary money’, others ‘fiat currency’. Under this system, money is the issuance of governments. It is the law that we use it. Banks have the power to create money through lending.

Under ‘full reserve’ banking, a bank can only lend out as much money as they have on deposit – I deposit £10, they can lend out £10. So the amount of debt created is directly linked to the amount of savings there are.


But we operate under ‘fractional reserve’ banking. A bank need only have on deposit a mere fraction of the money they lend out. I deposit £10, the bank can lend out £100 – so £100 is created and spent in the economy.

As money is no longer linked to anything tangible – as it was, for example, under the gold standard – there is now almost no limit to how much money can be created. The amount of money that gets created is further exacerbated by the ‘fractional reserve’ banking process.

The more money there is, the more its purchasing power is diluted and the higher prices inevitably rise.

Some benefit hugely from this system: those who control money, and those who are at or near its point of issuance. Governments and banks, in other words.

They have the power to create money (whether by printing or through lending) and to then charge interest on it. They also get to buy assets with their share of the newly created money, before prices rise to levels that reflect the new money in circulation.

So there is a constant transfer of wealth to these sectors. And it compounds over time. It’s how the state and finance have both grown to such disproportionate size.

It’s how banking has become so over-leveraged. It’s how the gap between rich and poor has grown so large. It’s how the next generation has become so indebted.

It’s how house prices get so inflated and unaffordable. Any number of unnecessary evils can be traced back to this system of money, which we have no choice but to accept and use.

Let me give you another example to think about.

In 1914, when gold was official money, neither Britain nor Germany had enough of it to pay for World War One.

Once they’d spent their gold, the war should have ended. But both governments took their countries off the gold standard, ran up colossal deficits and printed the money they needed, thereby passing the bill – and the buck – onto their people. This was an essentially fraudulent action made to suit a political agenda.

Over 16million killed. Another 20million wounded. Then came wave after wave of consequences – German reparations, Weimar hyperinflation, the rise of Hitler and another world war. If there had been no government monopoly on money, if they hadn’t had this power to issue money, this just couldn’t have happened to anything like the same extent. An astonishing thought. It’s why many praise gold for its “restrictive force” on governments.

Governments and banks should operate by the same rules as the rest of us. No bail-outs, no deficit spending, living within your means, real risk of failure forcing prudent conduct – all that kind of stuff.

The monopoly that governments and banks have on money gives them too much power. Whether by incompetence or worse, that power will inevitably get abused. The best way to stop the abuse of power is to spread it as widely and thinly as possible.

We need a system of money that is independent.

My book, Life After The State, is a simple-to-understand look at the mess the West now finds itself in, and how changing our currency system could help us get out of it.

I am publishing it via crowd-funding with Unbound and I’m delighted to say it is now fully-funded. But you can still pre-order one of the special editions.

Read more: http://www.thisismoney.co.uk/money/news/article-2226778/We-need-return-real-money-solve-economic-crisis.html#ixzz2BTaaX3os
Follow us: @MailOnline on Twitter | DailyMail on Facebook

30 responses to “We need to return to ‘real’ money to solve the economic crisis

  1. I’ve just pre-ordered the ebook

  2. But we operate under ‘fractional reserve’ banking. A bank need only have on deposit a mere fraction of the money they lend out. I deposit £10, the bank can lend out £100 – so £100 is created and spent in the economy.

    This is wrong. Under full reserve banking, banks can’t lend any demand deposits at all. Under fractional reserve, they can lend a certain proportion- say 90%- of their demand deposits, keeping the remainder (10%) fraction as reserve. Hence, “fractional reserve”. So, if you deposit £10, they can lend £9, and keep £1 in reserve. They aren’t allowed to lend 10 times their demand deposits, they are allowed to lend 9/10ths of their demand deposits.

    This is a pretty common misunderstanding. The multiplier effect occurs because Bank A can lend £9 to a customer who deposits it in Bank B, who lend £8.10 to another customer who deposits it in Bank C, who lend £7.29 to another customer… which ends up if you sum all those deposits up as 10 times the original £10. But that’s not the same.

    The article actually demonstrates the problem with a gold standard. No government will choose fiscal responsibility and losing a war over fiscal expansion and winning a war. So long as there is paper money, they will simply go off the gold standard, which is precisely what they did in the past, so it’s unlikely that a new gold standard would act as a restraint. It never has before.

  3. In a real crisis, even under the gold standard, the governments would leave the gold standard and adopt creative economic policy, but the question is whether the gold standard would have restrained the development of the bubble in the first place, making such crises rarer. Clearly, they did have boom and bust before – so even if you argue it would have been harder for Brown to have blown the bubble up as much as he did under a gold standard, bubbles would still be possible.

    It’s a little like the euro – the “discipline” of EMU was meant to be a good thing, as countries all knew they couldn’t print willy-nilly – but that merely makes the ultimate crisis even worse than otherwise.

    His central point that governments should just be restricted in their spending to what they raise in revenue bears a strong similarity to the euro at present – the austerity mirrors similar austerity in the 1930s under the gold standard, with the difference that they could just come off the gold standard then, whereas now Greece et al would need to set up new currencies from scratch, taking months, during which time deposits would flood out of the banking system…

    I’m interested in reading the book – but this man is Moneyweek’s commentator on the mining sector – and I wonder if his book is designed to encourage investment in the mining stocks he promotes? As the book hasn’t been written yet, I can’t say whether it does or not.

  4. If governments had been willing to impose truely savage levels of taxation they could have carried on the First World War – but they were only prepared to tax the rich at 50% or more (and there are not enough rich people to finance a massive war) hence the “inflation tax” (which is what it really was – a way of taxing ordinary people at a rate that would be politically impossible to legislate).

    The gold link was weak even in the 1920s (people like Benjamin Strong being too blame), but the United States did not offically go off the gold standard tilll 1933. The “gold link” that finally went in 1971 was a figleaf – but even fig leaves have their uses…..

    Fractional reserve banking – I have had some savage debates on that (at heart I am a lending from real savings man). However, one can get broad libertarian agreement on “the banks should never be bailed out – or allowed to break their contracts” (that might be a de facto end to FSB without any “ban” upon it, it would certainly drastically limit FSB).

  5. Gold as a standard is stupid because there simply isn’t anywhere near enough of it so using it would cause massive inflation in the price of gold, rendering it unusable by industry, and making jewellery massively more expensive if it could even be used for that at all….

    We are stuck with currency as the value of things because it is the only thing we can alter the supply of to keep up with the actual economy.

    Sure, it’s misused. So are interest rates, taxes and off-the-book government spending. The only way round it is to minimise government.

    Incidentally, The Bank Of England was a private institution until 1946…

  6. keddaw, you haven’t understood the gold theory – the fact that there isn’t enough gold to serve as the entire world money supply is irrelevant. Maybe you should have noticed that most money is not held in notes and coins anyway?

    Nathan Lewis in his Gold: our once and future money argues no gold at all is required to run a gold standard. A paper currency can just be pegged to gold The government would accept gold payments at the pegged rate, if anyone wanted to pay in specie, but nearly all transactions would take place either electronically or using the paper/copper coins of a currency pegged to gold. Of course, a currency pegged to gold can be depegged in a crisis…

    There are arguments for and against – but in order to take part in the debate you have to understand the terms of the debate first. No one is suggesting physical gold being the entire money supply of any country. See http://www.amazon.com/Gold-Future-Money-Agora-Series/dp/0470047666 and there may be a pdf somewhere on the Internet.

  7. He argues the volume of money would be managed by a central bank with a sole focus, not on inflation, but on maintaining the peg to gold at the peggged rate.

  8. Well, I’ve downloaded the PDF from there but all it does is keep trying to connect to Amazon, so, dunno what that’s all about.

    Anyway, the point of a gold standard is that the central bank reserves are gold, and the currency is convertible to gold on demand. “I promise to pay the bearer one pound of gold”, kind of thing. That’s the “terms of the debate”, DJ. We’re libertarians. We mumble about the gold standard in our sleep. We stop random passers by and start haranguing them about the gold standard. Cut us open, and there’s “gold standard” written through us like a stick of rock has “Blackpool”. We shout “Gold standard!” at the moment of sexual climax. Really, I don’t think libertarians are short of understanding of “the terms of the debate” regarding gold currency.

    So anyway, whatever Lewis is suggesting, it’s not a gold standard as understood normally. It seems a strange scheme. Is he suggesting having bankers manipulate the volume of M3 to keep the gold price stable? That would be… both weird and pointless.

  9. No, Ian – just say no to the connection to Amazon, and you will see that behind that screen, the PDF of the book is open.

    Ian, the terms of the debate are whatever has been written on the subject – think of it like a literature search before doing a PhD – Nathan Lewis’ book is part of the literature on the subject. You would have to read his book for a full explanation – I can send you the PDF if you email me.

  10. A gold “standard” is stupid – but not for the reason that keddaw mentions. Keddaw’s reasoning was actually refuted by Mises a century ago – “Theory of Money and Credit” 1912 (although Americans might also point to Frank Fetter).

    Either gold is the money or it is not (and there is more than enough gold – indeed the whole thought process about whether there is “enough” of X commodity money is wrong) – it is the “standard” that is a stupid idea. It allows credit expansion (i.e. boom-busts).

    By the way “creative” economic policy by government means fraud. Prosperity is not established in this way.

    And if government wants to spend a fortune on war – it should be honest enough to tax the people (the ordinary people) to do so.

  11. Busts (such as that of 1929) are, of course, caused by the preceding credit-money expansion “boom”.

  12. There should be no Central Bank (no Bank of England or Federal Reserve), there should be no “National Banking Acts” forbidding people “discounting” the debt paper of special banks (such as the big New York Banks that the 1860s legislation supported) if that is what they want to do.

    And there should be no “peg to gold” and no “rate”.

    Either the gold is the money or it is not – if it is not, the government should be honest enough to say it is not (not pretend that that it is).

    Of course I believe that buyers and sellers should be allowed to use any commodity they wish as money (not just gold).

    And, also of course, no commodity should have a “fixed exchange rate” to any other commodity.

    Trying to fix the price of silver in terms of gold (or gold in terms of silver) is wrong.

  13. Paul is right, it’s is not about a ‘gold standard’ being declared by government, it’s jushe correct thing to do is to get rid of the central bank and legal tender laws and you’ll see gold emerge naturally as a currency.

    Gold advocators don’t advocate gold because it’s shiny, it’s because it’s the best form of currency.

    Unfortunately it’s harder to get to this point than it is to come out of gold money

  14. keddaw’s reasoning was actually completely misunderstood by everyone.

    But no matter.

    No commodity can be used as a reserve currency. The principle is crazy. There has to be general agreement on the relative value, the value cannot fluctuate in an open market otherwise the currency itself becomes too uncertain, the supply must be fixed etc. etc.

    If gold was reintroduced as a common reserve then its value would go so high as to make extracting it from seawater commercial. Which would massively alter supply and mess up all economies.

    Also, contrary to what JFen says, gold is valuable because it’s shiny. It is currently valuable because it’s always been valuable because its shiny. It will remain valuable because idiots believe it will remain valuable because it has always been valuable because it’s shiny.

    • Jesus christ it’s hard where to start with that amount of economic illiteracy.

      “There has to be general agreement on the relative value”
      Then it’s not relative is it?

      “the supply must be fixed”
      What about food, water, hell if we need it for money – a commodity, might as well have supply restrictions, price controls, central command over everything.

      As for those last two points here’s something you should read and it will save me energy.


  15. Governments do not gain from the present system, private banks do. The problem is that governments have effectively handed the creation of our money supply to private institutions – well, 97 percent of it at least. Which means that virtually all money is circulation is ‘debt-money’. Governments could, and should, create that money themselves. Why don’t they? Well, perhaps some people like things the way they are!

  16. It really is quite simple. It is ‘debt-money’ because money is created through debt, and therefore all money in circulation is owed by someone. Call it ‘debt-based money’, if you like, but what you call it is of little consequence. What is, is that a money system that relies on debt to function is deeply flawed and a fundamental cause of many of our current economic problems.

  17. Governments do benefit from the current system. As if governments had to borrow from real savings (i.e. borrow from real savers) they would have to pay higher interest rates.

    “But governments could just print the money and spend it”.

    Like the Finance Minister “Levi the Print” in Israel some years ago – a pathetic idea and an absurd practice.

  18. Of course no “agreement on value” is needed. All buyers and sellers need to agree on is price – not value.

    After all a buyer thinks (for example) the house is worth more than the gold coins he is offering (otherwise he would not offer them) and a seller thinks the house is worth less than the gold coins (otherwise he would not accept them).

    The idea that there needs to be “agreement on value” is a basic fallacy. Indeed if people did “agree on value” (as opposed to economic value being subjective) there would be no trade.

  19. You are confusing two separate issues – the creation of the money supply and Government borrowing. However, there is a common solution, because governments could (and should) create the nation’s money supply and spend it into circulation – debt free. That would not be a licence to ‘print’ money, though, because to function correctly the system would need to be properly regulated to link the amount of money in circulation to economic activity. And it is certainly something that could be placed in the hands of the politicians!

  20. Aynuk – so governments should create money and then spend it.

    Levi the Print lives!

    Seriously – many thanks for honestly describing your position.

    I, of course, totally oppose you (and will do so till my death), but I praise your honesty.

    If a government can not tax people (ordinary people, “the rich are not paying their fair share” is Obama nonsense that only a rabble of deluded daytime television viewers could believe) to fund its spending desires – it should spend less.

    Not print money (or create it by computers – or whatever).

  21. First of all, that last sentence of mine should read ‘certainly *not* something that could be placed in the hands of politicians’.

    JFen: Governments would not have a monopoly on money, only a responsibility for creating it. Surely it is right and proper that the creation of a nation’s money supply should be a matter of state control. But even under a full reserve system banks could still offer loans – they would just need to come to a different arrangement with their depositors.

    Paul Marks: I don’t know where you got the idea from that under the system of money creation that I advocate governments would not be able to tax people. The only thing that would change is the way that money is created and put into circulation.

    • That reasoning can extend to any good deemed ‘essential’ – food for instance, but we know how that turns out.

      The states money would have to be enforced as a monopoly, otherwise it would be outcompeted by private mints(As governments WILL print), if what you mean – that instituitions can offer their own currencies.

  22. Aynuk.

    Just when I praised you for honesty – you decide to be write something like your last comment.

    Of course if governments are only going to spend money they take in taxes (and no more) there would be no need for governments to print money (or create it via computers).

    As for the idea that governments can be trusted to create money – as long as banks are forced to carry 100% (government fiat money) reserves……

    This was the position of General Peron – and was exactly the policy he put into practice when he came into power. It did not work out too well.

    Is left “libertarianism” turning into Peronism?

    All the “anti big business” stuff should have warned me.

  23. There was, of course, no good reason for Congress to ban private mints in the 1850s.

    A private mint that tried to debase the coinage would go out of business – as soon as people discovered what they had done. Only government can get away with such fraud.

    A modern example.

    A man in Indianapolis (a couple of years ago) started to mint “Liberty Dollars” full weight and purity coins.

    He was arrested.

    Was he arrested because his money was debased?

    Of course not.

    It is the government money that is debased (that is fraud) – and they do not like to be shown up by honest money producers.

  24. This is like trying to knit fog.

    Perhaps it would help some of you understand the relatively simple concept of money creation – and how the present system has much responsibility for our present indebtedness – if you take a look here:


  25. What is responsible for our present indebtedness is two things.

    The smaller factor is the bank bailouts (the corporate welfare) – the bankrupt banks should, of course, have been allowed to go bankrupt.

    However, the larger factor is the out of control Welfare State. It must be remembered that even if fractional reserve banking did not exist the major nations of the West would still be going bankrupt – their out of control Welfare States would see to that.

    As for money.

    Please use any commodity you, and a willing partner, wish – or use bits of paper, if you can get someone to voluntarily accept them.

    Of course only a complete idiot would trust government fiat (order – whim) money.

    Governments will just print (or create money in other ways) to finance either their own spending or the spending of others (gripped by the “demand” fallacy in blissful ignorance of Say’s Law).

    Government should have nothing to do with the production of money. Money should be that commodity (or commodities) that buyer and sellers freely choose to use as money. Historically that has tended to be gold and silver (although in the future this may change).

    If there must be government spending it should be 100% financed by taxes.