Fractional-reserve banking

Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank's accounts at the central bank. Fractional-reserve banking is the current form of banking practiced in most countries worldwide.

Fractional-reserve banking allows banks to act as financial intermediaries between borrowers and savers, and to provide longer-term loans to borrowers while providing immediate liquidity to depositors (providing the function of maturity transformation). However, a bank can experience a bank run if depositors wish to withdraw more funds than the reserves that are held by the bank. To mitigate the risks of bank runs and systemic crises (when problems are extreme and widespread), governments of most countries regulate and oversee commercial banks, provide deposit insurance and act as lender of last resort to commercial banks.

Because banks hold reserves in amounts that are less than the amounts of their deposit liabilities, and because the deposit liabilities are considered money in their own right, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying base money originally created by the central bank. In most countries, the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and capital adequacy ratios. This can slow down the process of money creation that occurs in the commercial banking system, and helps to ensure that banks are solvent and have enough funds to meet demand for withdrawals. However, rather than directly controlling the money supply, central banks usually pursue an interest rate target to adjust the rate of inflation and bank issuance of credit.

History

See also: Banknote

Fractional-reserve banking predates the existence of governmental monetary authorities and originated many centuries ago in bankers' realization that generally not all depositors demand payment at the same time.

In the past, savers looking to keep their coins and valuables in safekeeping depositories deposited gold and silver at goldsmiths, receiving in exchange a note for their deposit (see Bank of Amsterdam). These notes gained acceptance as a medium of exchange for commercial transactions and thus became an early form of circulating paper money. As the notes were used directly in trade, the goldsmiths observed that people would not usually redeem all their notes at the same time, and they saw the opportunity to invest their coin reserves in interest-bearing loans and bills. This generated income for the goldsmiths but left them with more notes on issue than reserves with which to pay them. A process was started that altered the role of the goldsmiths from passive guardians of bullion, charging fees for safe storage, to interest-paying and interest-earning banks. Thus fractional-reserve banking was born.

If creditors (note holders of gold originally deposited) lost faith in the ability of a bank to pay their notes, however, many would try to redeem their notes at the same time. If, in response, a bank could not raise enough funds by calling in loans or selling bills, the bank would either go into insolvency or default on its notes. Such a situation is called a bank run and caused the demise of many early banks.

The Swedish Riksbank was the world's first central bank, created in 1668. Many nations followed suit in the late 1600s to establish central banks which were given the legal power to set the reserve requirement, and to specify the form in which such assets (called the monetary base) are required to be held. In order to mitigate the impact of bank failures and financial crises, central banks were also granted the authority to centralize banks' storage of precious metal reserves, thereby facilitating transfer of gold in the event of bank runs, to regulate commercial banks, impose reserve requirements, and to act as lender-of-last-resort if any bank faced a bank run. The emergence of central banks reduced the risk of bank runs which is inherent in fractional-reserve banking, and it allowed the practice to continue as it does today.

During the twentieth century, the role of the central bank grew to include influencing or managing various macroeconomic policy variables, including measures of inflation, unemployment, and the international balance of payments. In the course of enacting such policy, central banks have from time to time attempted to manage interest rates, reserve requirements, and various measures of the money supply and monetary base.

Regulatory framework

In most legal systems, a bank deposit is not a bailment. In other words, the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability on the balance sheet of the bank. Each bank is legally authorized to issue credit up to a specified multiple of its reserves, so reserves available to satisfy payment of deposit liabilities are less than the total amount which the bank is obligated to pay in satisfaction of demand deposits.

Fractional-reserve banking ordinarily functions smoothly. Relatively few depositors demand payment at any given time, and banks maintain a buffer of reserves to cover depositors' cash withdrawals and other demands for funds. However, during a bank run or a generalized financial crisis, demands for withdrawal can exceed the bank's funding buffer, and the bank will be forced to raise additional reserves to avoid defaulting on its obligations. A bank can raise funds from additional borrowings (e.g., by borrowing in the interbank lending market or from the central bank), by selling assets, or by calling in short-term loans. If creditors are afraid that the bank is running out of reserves or is insolvent, they have an incentive to redeem their deposits as soon as possible before other depositors access the remaining reserves. Thus the fear of a bank run can actually precipitate the crisis.

Many of the practices of contemporary bank regulation and central banking, including centralized clearing of payments, central bank lending to member banks, regulatory auditing, and government-administered deposit insurance, are designed to prevent the occurrence of such bank runs.

Economic function

Fractional-reserve banking allows banks to create credit in the form of bank deposits, which represent immediate liquidity to depositors. The banks also provide longer-term loans to borrowers, and act as financial intermediaries for those funds. Less liquid forms of deposit (such as time deposits) or riskier classes of financial assets (such as equities or long-term bonds) may lock up a depositor's wealth for a period of time, making it unavailable for use on demand. This "borrowing short, lending long," or maturity transformation function of fractional-reserve banking is a role that many economists consider to be an important function of the commercial banking system.

Additionally, according to macroeconomic theory, a well-regulated fractional-reserve bank system also benefits the economy by providing regulators with powerful tools for influencing the money supply and interest rates. Many economists believe that these should be adjusted by the government to promote macroeconomic stability.

The process of fractional-reserve banking expands the money supply of the economy but also increases the risk that a bank cannot meet its depositor withdrawals. Modern central banking allows banks to practice fractional-reserve banking with inter-bank business transactions with a reduced risk of bankruptcy.

Types of money

There are two types of money in a fractional-reserve banking system operating with a central bank:

1. Central bank money: money created or adopted by the central bank regardless of its form – precious metals, commodity certificates, banknotes, coins, electronic money loaned to commercial banks, or anything else the central bank chooses as its form of money.
2. Commercial bank money: demand deposits in the commercial banking system; also referred to as "chequebook money", "sight deposits" or simply "credit".

When a deposit of central bank money is made at a commercial bank, the central bank money is removed from circulation and added to the commercial banks' reserves (it is no longer counted as part of M1 money supply). Simultaneously, an equal amount of new commercial bank money is created in the form of bank deposits.

Money creation process

Main article: Money creation

At least one textbook states that when a loan is made by the commercial bank, the bank is keeping only a fraction of central bank money as reserves and the money supply expands by the size of the loan. This process is called "deposit multiplication". However, as explained below, bank loans are only rarely made in this way.

The proceeds of most bank loans are not in the form of currency. Banks typically make loans by accepting promissory notes in exchange for credits they make to the borrowers' deposit accounts. Deposits created in this way are sometimes called derivative deposits and are part of the process of creation of money by commercial banks. Issuing loan proceeds in the form of paper currency and current coins is considered to be a weakness in internal control.

The money creation process is also affected by the currency drain ratio (the propensity of the public to hold banknotes rather than deposit them with a commercial bank), and the safety reserve ratio (excess reserves beyond the legal requirement that commercial banks voluntarily hold – usually a small amount). Data for "excess" reserves and vault cash are published regularly by the Federal Reserve in the United States.

Money multiplier

Main article: Money multiplier

The expansion of $100 through fractional-reserve banking with varying reserve requirements. Each curve approaches a limit. This limit is the value that the "money multiplier'" calculates.

The money multiplier is a heuristic used to demonstrate the maximum amount of broad money that could be created by commercial banks for a given fixed amount of base money and reserve ratio. This theoretical maximum is never reached, because some eligible reserves are held as cash outside of banks. Rather than holding the quantity of base money fixed, central banks have recently pursued an interest rate target to control bank issuance of credit indirectly so the ceiling implied by the money multiplier does not impose a limit on money creation in practice.

Formula

The money multiplier, m, is the inverse of the reserve requirement, R:

$m={\frac {1}{R}}$

Example

For example, with the reserve ratio of 20 percent, this reserve ratio, R, can also be expressed as a fraction:

$R={\tfrac {1}{5}}$

So then the money multiplier, m, will be calculated as:

$m={\frac {1}{1/5}}=5$

Money supplies around the world

Components of US money supply (currency, M1, M2, and M3) since 1959. In January 2007, the amount of "central bank money" was $750.5 billion while the amount of "commercial bank money" (in the M2 supply) was $6.33 trillion. M1 is currency plus demand deposits; M2 is M1 plus time deposits, savings deposits, and some money-market funds; and M3 is M2 plus large time deposits and other forms of money. The M3 data ends in 2006 because the federal reserve ceased reporting it.

Components of the euro money supply 1998–2007

See also: Money supply

In countries where fractional-reserve banking is prevalent, commercial bank money usually forms the majority of the money supply. The acceptance and value of commercial bank money is based on the fact that it can be exchanged freely at a commercial bank for central bank money.

The actual increase in the money supply through this process may be lower, as (at each step) banks may choose to hold reserves in excess of the statutory minimum, borrowers may let some funds sit idle, and some members of the public may choose to hold cash, and there also may be delays or frictions in the lending process. Government regulations may also be used to limit the money creation process by preventing banks from giving out loans even though the reserve requirements have been fulfilled.

Regulation

Because the nature of fractional-reserve banking involves the possibility of bank runs, central banks have been created throughout the world to address these problems.

Central banks

Main article: Central bank

Government controls and bank regulations related to fractional-reserve banking have generally been used to impose restrictive requirements on note issue and deposit taking on the one hand, and to provide relief from bankruptcy and creditor claims, and/or protect creditors with government funds, when banks defaulted on the other hand. Such measures have included:

1. Minimum required reserve ratios (RRRs)
2. Minimum capital ratios
3. Government bond deposit requirements for note issue
4. 100% Marginal Reserve requirements for note issue, such as the Bank Charter Act 1844 (UK)
5. Sanction on bank defaults and protection from creditors for many months or even years, and
6. Central bank support for distressed banks, and government guarantee funds for notes and deposits, both to counteract bank runs and to protect bank creditors.

Reserve requirements

The currently prevailing view of reserve requirements is that they are intended to prevent banks from:

1. generating too much money by making too many loans against the narrow money deposit base;
2. having a shortage of cash when large deposits are withdrawn (although the reserve is thought to be a legal minimum, it is understood that in a crisis or bank run, reserves may be made available on a temporary basis).

In some jurisdictions, (such as the United States and the European Union), the central bank does not require reserves to be held during the day. Reserve requirements are intended to ensure that the banks have sufficient supplies of highly liquid assets, so that the system operates in an orderly fashion and maintains public confidence.

In addition to reserve requirements, there are other required financial ratios that affect the amount of loans that a bank can fund. The capital requirement ratio is perhaps the most important of these other required ratios. When there are no mandatory reserve requirements, which are considered by some economists to restrict lending, the capital requirement ratio acts to prevent an infinite amount of bank lending.

Liquidity and capital management for a bank

Main articles: Capital requirement and Market liquidity

To avoid defaulting on its obligations, the bank must maintain a minimal reserve ratio that it fixes in accordance with, notably, regulations and its liabilities. In practice this means that the bank sets a reserve ratio target and responds when the actual ratio falls below the target. Such response can be, for instance:

1. Selling or redeeming other assets, or securitization of illiquid assets,
2. Restricting investment in new loans,
3. Borrowing funds (whether repayable on demand or at a fixed maturity),
4. Issuing additional capital instruments, or
5. Reducing dividends.

Because different funding options have different costs, and differ in reliability, banks maintain a stock of low cost and reliable sources of liquidity such as:

1. Demand deposits with other banks
2. High quality marketable debt securities
3. Committed lines of credit with other banks

As with reserves, other sources of liquidity are managed with targets.

The ability of the bank to borrow money reliably and economically is crucial, which is why confidence in the bank's creditworthiness is important to its liquidity. This means that the bank needs to maintain adequate capitalisation and to effectively control its exposures to risk in order to continue its operations. If creditors doubt the bank's assets are worth more than its liabilities, all demand creditors have an incentive to demand payment immediately, causing a bank run to occur.

Contemporary bank management methods for liquidity are based on maturity analysis of all the bank's assets and liabilities (off balance sheet exposures may also be included). Assets and liabilities are put into residual contractual maturity buckets such as 'on demand', 'less than 1 month', '2–3 months' etc. These residual contractual maturities may be adjusted to account for expected counter party behaviour such as early loan repayments due to borrowers refinancing and expected renewals of term deposits to give forecast cash flows. This analysis highlights any large future net outflows of cash and enables the bank to respond before they occur. Scenario analysis may also be conducted, depicting scenarios including stress scenarios such as a bank-specific crisis.

Hypothetical example of a bank balance sheet and financial ratios

An example of fractional-reserve banking, and the calculation of the "reserve ratio" is shown in the balance sheet below:

Example 2: ANZ National Bank Limited Balance Sheet as of 30 September 2037
Assets	NZ$m	Liabilities	NZ$m
Cash	201	Demand deposits	25,482
Balance with Central Bank	2,809	Term deposits and other borrowings	35,231
Other liquid assets	1,797	Due to other financial institutions	3,170
Due from other financial institutions	3,563	Derivative financial instruments	4,924
Trading securities	1,887	Payables and other liabilities	1,351
Derivative financial instruments	4,771	Provisions	165
Available for sale assets	48	Bonds and notes	14,607
Net loans and advances	87,878	Related party funding	2,775
Shares in controlled entities	206	[subordinated] Loan capital	2,062
Current tax assets	112	Total Liabilities	99,084
Other assets	1,045	Share capital	5,943
Deferred tax assets	11	[revaluation] Reserves	83
Premises and equipment	232	Retained profits	2,667
Goodwill and other intangibles	3,297	Total Equity	8,703
Total Assets	107,787	Total Liabilities plus Net Worth	107,787

In this example the cash reserves held by the bank is NZ$3,010m (NZ$201m Cash + NZ$2,809m Balance at Central Bank) and the Demand Deposits (liabilities) of the bank are NZ$25,482m, for a cash reserve ratio of 11.81%.

Other financial ratios

The key financial ratio used to analyze fractional-reserve banks is the cash reserve ratio, which is the ratio of cash reserves to demand deposits. However, other important financial ratios are also used to analyze the bank's liquidity, financial strength, profitability etc.

For example, the ANZ National Bank Limited balance sheet above gives the following financial ratios:

1. The cash reserve ratio is $3,010m/$25,482m, i.e. 11.81%.
2. The liquid assets reserve ratio is ($201m + $2,809m + $1,797m)/$25,482m, i.e. 18.86%.
3. The equity capital ratio is $8,703m/107,787m, i.e. 8.07%.
4. The tangible equity ratio is ($8,703m − $3,297m)/107,787m, i.e. 5.02%
5. The total capital ratio is ($8,703m + $2,062m)/$107,787m, i.e. 9.99%.

It is important how the term 'reserves' is defined for calculating the reserve ratio, as different definitions give different results. Other important financial ratios may require analysis of disclosures in other parts of the bank's financial statements. In particular, for liquidity risk, disclosures are incorporated into a note to the financial statements that provides maturity analysis of the bank's assets and liabilities and an explanation of how the bank manages its liquidity.

Criticisms

Main article: Monetary reform

Main article: Fractional-reserve banking

Criticisms of fractional reserve banking and central banking have been put forward from a variety of perspectives, although the most vigorous and sustained criticism now comes from libertarians and anarcho-capitalists such as Austrian economists Jesús Huerta de Soto and Jörg Guido Hülsmann, American politician Ron Paul, and commentators such as historian Thomas Woods, Jim Grant of Grant's Interest Rate Observer and former US Budget Director David Stockman. Most in the mainstream (both on the left and right) remain silent on the issue of fractional reserve banking and central banking, although past critics have included mainstream economists such as Irving Fisher, and Milton Friedman. Within the economics profession, most criticisms are from the Austrian School. There are also critics from outside the economics profession who advocate monetary reform.

Terminology

Critics of fractional reserve banking and the related fiat paper monetary system may refer to it by the term debt-based monetary system, or credit-based monetary system. They may also refer to money created in parallel with debt as debt money or endogenous money, reflecting the fact that virtually all new money is currently created by people or businesses or governments further indebting themselves to banks. This monetary system is called "endogenous" because the money supply is flexible, expanding in parallel with the demand for debt and stalling or contracting when demand for debt declines. Some consider this a perverse and dysfunctional way of introducing new money into the economy.

The term, "debt-based monetary system," and related terms such as "debt money" are not used by conventional economists. Mainstream economists often refer to "debt money" by its antonym "credit" and distinguish between types of money only after the money is created. The very definition of "money" and the distinction between "debt" and "money" (and their respective economic effects) are still sources of vigorous ongoing debate. Mainstream economists rarely if ever discuss the origins of modern money and generally do not actively discuss or comment on the fact that virtually all money is now created through individuals, or businesses, or governments going into debt to government-sponsored commercial banks. Discussion around the nature of "debt-based" money and the arguments over its effects on the economy are notably absent from most established mainstream academic economic publications and most mainstream economists instead argue that the origin of different kinds of money (and the volume of their issuance) does not really matter, at least in the long run. This mainstream idea is referred to as the theory of "money neutrality". Some commentators have speculated that the unusual silence around the topics of fractional reserve banking and central banking and the staunch refusal to consider alternative theories of money can be attributed to the simple fact that many economists are on the payroll of the major commerical or central banks of the world and are beholden to those banks for their livelihood. Those economists who dare to speak about such topics are simply not employed by the banks, by government-sponsored universities or by international financial institutions and are not published in mainstream economic publications and, therefore, their views are not widely disseminated to the general public who are generally taught by government-sponsored teachers and receive their news from the mainstream media.

Key criticisms

Commentator Willis L. Krumholz stated in The Federalist in July 2014:

The bottom line: There is a gun to the head of the American economy. We can continue these easy-money policies that cause inflation, enable excessive government spending, and engineer more bubble-fueled financial crisis, or we can allow interest rates to rise, which would surely plunge the economy back into recession. Either way, our current course is not sustainable.

Founder of the self-styled "New Austrian School", Professor Antal E. Fekete, has stated the following in relation to the current monetary system:

The world economy, sagging as it is under the weight of its debt tower and fast depreciating irredeemable currencies, is clearly on its way to self-destruction. The forcible elimination of, first, silver and then a hundred years later of gold, from the monetary system removed the only ultimate extinguishers of debt we have. In consequence, total debt can only grow, never contract. The process is hidden since the unpaid and unpayable debt is accumulating as sovereign debt of governments. The world is deluding itself that sovereign debt can increase indefinitely as governments can extend its maturity indefinitely. In 2008 we had the wake-up call that it cannot. Unless we stop the proliferation of debt, the world is facing prolonged deflation, depression, continuing capital destruction, bankruptcies and unprecedented unemployment. It is leading to a breakdown of law and order. It could spell the end of our civilization.

In August 2004, four years before the Global Financial Crisis of September 2008 and the ongoing financial crises in Europe and elsewhere, Austrian commentator Robert K. Landis stated the following:

No, the die is cast: we shall have the catastrophe. Our fiat monetary system got a reprieve in the 1980's, not a deliverance. All that has happened since, with the fantastic mispricing of credit the Greenspan Fed has engineered, and the massive global malinvestment this has engendered, is that the dimensions of the unraveling have become more dire.

Mises called this one too: "Certainly, the banks would be able to postpone the collapse; but nevertheless, as has been shown, the moment must eventually come when no further extension of the circulation of fiduciary media is possible. Then the catastrophe occurs, and its consequences are the worse and the reaction against the bull tendency of the market the stronger, the longer the period during which the rate of interest on loans has been below the natural rate of interest and the greater the extent to which roundabout processes of production that are not justified by the state of the capital market have been adopted."

With respect to the form the denouement will take, much has been written within the gold community on the subject of whether we face hyperinflation or deflationary depression as the prelude to monetary collapse. Both sides of the debate appear to accept the premise that whatever may transpire will bear a linear relationship to what now exists. The disagreement centers on the direction the line will go. But today's markets are fully linked by derivatives and technology, and they are patrolled by wolf packs of large, leveraged speculators not noted for their patient outlook. So it seems likely that the terminal monetary crisis will unfold on virtually an instantaneous and discontinuous basis, once the fog of statistical deceit and false market cues begins to lift and a clear trend either way becomes evident. We are not likely to enjoy the luxury of observing either a deflation or an inflation unfold in the fullness of time, but rather, just as Mises foretold, a final and total catastrophe of our fiat monetary system.

Financial commentator Jim Willie has written the following regarding the current fiat money system:

The West cannot solve its problems, hardly properly described as a financial crisis anymore, under the current framework bound to the fiat paper currencies. The global monetary war is heating up notably. The heavy liquidity has caused unfixable distortions in every conceivable bond market niche. The new and better debt devices have been exposed for their shams. The leading central bankers lost their credibility long ago. The weakness is as broad as it is deep, a reliance upon paper wealth and paper structures and paper contracts, during a time of zero bound interest rates and unfettered hyper monetary inflation to cover the debts. Almost no foreign USTreasury Bond buyers exist anymore. The US has become Weimar Amerika, a fascist enclave.

On 5 March 1997, in a speech in the House of Lords in London England, the Earl of Cathiness made the following observations:

...it is also a good time to stand back, to reassess whether our economy is soundly based. I would contest that it is not, not for the reason to which the noble Lord, Lord Eatwell, alluded, which is that it is the Government’s fault, but our whole monetary system is utterly dishonest, as it is debt-based. “Dishonest” is a strong word, but a system which by its very actions causes the value of money to decrease is dishonest and has within it its own seeds of destruction. We did not vote for it. It grew upon us gradually but markedly since 1971 when the commodity-based system was abandoned.

Let us look at what has happened since then. The money supply in 1971 was just under £31 billion. At the end of the third quarter of last year, it was about £665 billion. In 25 years it has grown by a staggering 2,145 per cent. Where has the money come from? Interestingly, the Government have only minted a further £20 billion in that time. It is the banks, the building societies and our commercial lenders who have created the balance of £614 billion. If this rate of growth is projected over the next 25 years, the money supply in 2022 will be over £14,000 billion.

All that new money bears interest paid either by us as individuals, by companies or by the Government. Today the Government pay over £30 billion annually in interest charges — coincidentally about the same as the total money supply only 25 years ago. Governments since then have abdicated their responsibility for producing new money and controlling the money supply so that now they are marginalised. In 1971 government notes and coins accounted for 14 per cent of the money supply. Now it is only about 3.5 per cent. “So what?”, noble Lords might ask.

The problem is that it is commercial lending that has boosted the money supply, thus increasing debt and, as sure as night follows day, inflation follows growth in money supply of this sort...

Conventional wisdom tells us that in order to create new jobs and boost the economy, interest rates have to be reduced. That has happened. People are encouraged to borrow to invest and spend. That has happened. As the continuing flow of new money finds its way into the economy, inflation will follow and up will go interest charges again to reduce the level of borrowing. In order to pay the increasing levels of interest, borrowers will once more have to reduce expenditure in other areas of economic activity. The cycle will continue, but the next time, as before, we will all start deeper in debt and with a burden harder to carry. Personal debt has already increased by nearly 3,000 per cent since 1971. How much more can we take? I hope, for the sake of our economy, without which we cannot finance what we want to see — a good health service and a good social security system among other things — we will question this conventional wisdom.

We all want our businesses to succeed, but under the existing system the irony is that the better our banks, building societies and lending institutions do, the more debt is created. The noble Lord, Lord Kingsdown, said that there is little that can be done about debt. No, I do not believe that. There is a different way: it is an equity-based system and one in which those businesses can play a responsible role. The next government must grasp the nettle, accept their responsibility for controlling the money supply and change from our debt-based monetary system. My Lords, will they? If they do not, our monetary system will break us and the sorry legacy we are already leaving our children will be a disaster.

On 4 November 1999, Lord Sudeley stated in the House of Lords:

The only way in particular to stop inflation is to stop banks from creating credit. The supply of money should be removed from banks and should be assumed by governments, who should issue it on a debt-free basis. Such a view is supported by five disparate quarters: the noble Lord, Lord Beswick, in the debate which he introduced to this House in 1985, Disraeli, the Vatican under Pope Pius XI in his Encyclical Quadragesimo Anno in 1931, the Tsars of Russia in the last century, who prevented the setting up of a privately owned central bank, and, above all, Abraham Lincoln, who said that governments should create, issue, and circulate all currency and credits needed to satisfy the spending power of governments and the buying power of consumers.

By adopting those principles, the taxpayer would be saved immense sums of interest. Lincoln’s greenbacks were generally popular, and their existence let the genie out of the bottle with the public becoming accustomed to government-issued, debt-free money. The year after Lincoln’s assassination, Congress set to work at the bidding of the European central banking interests to retire the greenbacks from circulation and to ensure the reinstitution of a privately owned central bank under the usurers’ control.

During the history of the United States, the money power has gone back and forth between Congress and some privately owned central bank. The American people fought off four privately owned central banks before succumbing to a fifth privately owned central bank, at that time essential, owing to the period of weakness during the Civil War.

The founding fathers of the United States knew the evils of a privately owned central bank. They had seen how the Bank of England ran up the British national debt to such an extent that Parliament was forced to place unfair taxes on the American colonies, leading to their loss following, the American Revolution.

I now conclude. Once the fundamental decision is taken to prevent sterling from being debt-based, the Commonwealth could act as the right monetary union to use sterling debt-free as a genuine alternative to the dollar and the euro.

Norm Franz states in his Money and Wealth in the New Millennium:

Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves.

12th century Chinese scholar Hu Zhiyu stated:

Paper money, the child, is dependent on precious metals, the mother. [Inconvertible paper notes are therefore] orphans who lost their mother in childbirth.

Robert H. Hemphill, credit manager of the Federal Reserve in Atlanta, stated in 1939:

If all the bank loans were paid, no one would have a bank deposit and there would not be a dollar of coin or currency in circulation. This is a staggering thought. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. When one gets a complete grasp of the picture the tragic absurdity of our hopeless position is almost incredible, but there it is. It (the banking problem) is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.

British monetary reformer Michael Rowbotham states the following in his book, The Grip of Death (the title being derived from the literal origin of the word "mortgage"):

It is actually not in the least surprising that nations are chronically in debt, governments have inadequate resources, public services are under-funded and people are beset by mortgages and overdrafts. The reason for all this monetary scarcity and insolvency is that the financial system used by all national economies worldwide is actually founded upon debt. To be direct and precise, modern money is created in parallel with debt. The reason for the failure of economists to question patently invalid monetary data becomes clear - there is a total acceptance by them of the most extraordinary method for supplying money to the modern economy.

The creation and supply of money is now left almost entirely to banks and other lending institutions. Most people imagine that if they borrow from a bank, they are borrowing other people's money. In fact, when banks and building societies make any loan, they create new money. Money loaned by a bank is not a loan of pre-existent money; money loaned by a bank is additional money created. The stream of money generated by people, businesses and governments constantly borrowing from banks and other lending institutions is relied upon to supply the economy as a whole. Thus the supply of money depends upon people going into debt, and the level of debt within an economy is no more than a measure of the amount of money that has been created...

All around us, the gross failure of modern economics screams out to be addressed. The towering indifference of those shining offices scraping the sky above the menacing ghettos of Brooklyn; the speculative channelling of billions of pounds of volatile international finance, which can leave a country prosperous one week and plunged into decline the next; the ludicrous production of cheap goods of poor durability, so that jobs are 'protected', and we can recycle the materials and make the goods all over again; the ridiculous export drives by which every country simultaneously attacks the economies of every other nation, under the pretence that such global free trade improves the general wellbeing; the staggering waste of a throwaway, quick-growth, all-new spiral of constant economic change; the outrageous financial debt which Third World countries have actually paid many times over, but which, due to interest, is now larger than ever before - a debt which forces those impoverished nations to compete to supply goods already in surplus; the cynical manipulation of human emotions into buying fashion-obsessed trivia; the burgeoning transport demands of escalating economic growth and centralisation, with identical goods crisscrossing the globe, regardless of environmental cost; the fact that despite the incredible productive capacity of the modern economy, people are obliged to work harder, with ever greater efficiency, forever forced to adapt and retrain or face a life of indignity and misery as one of the unemployed.

Both those in work and out must watch, as the world they know and understand changes almost in front of their eyes like some nightmarish Kafka-esque novel. This is the era of accelerating economic change. The benefits are highly dubious, and no-one even pretends that the economy is responding to what people actually want. The only justification offered for the changes is that this is 'the age of progress', and 'you can't stop progress', even if you are human and the progress you are discussing is supposed to be about people and the lives they might lead in the future. The world of economics has got mankind by the throat and everyone knows it, and no-one has a clue where we are going or why we are going there.

But is this surprising? If a monetary system is invalid or flawed, then the entire economy is based on the mathematics of error, and must be riddled with the effects. If the financial system upon which our economies are built is defective, and yet monetary considerations dominate our economic decisions, should we be surprised if the results are less than satisfactory?

The major role played by bank credit, which forms over 95% of the money stock in most developed nations, suggests that it cannot but be implicated in these trends. This is further suggested by the way that banking has literally become the focal point of modern economic management, through manipulating interest rates. The stargazers of Whitehall and the Federal Reserve hold their councils, trying to tread the non-existent tightrope between growth and recession by debating quarter percentage-points of interest rates. Alan Greenspan, the Chairman of the Federal Reserve, engagingly describes his task in controlling the American economy through adjusting interest rates as a matter of 'taking the champagne away once the party has started'. Businessmen around the world hold their breath, measuring his every word, wondering what he will decide. There could be no greater indictment of contemporary financial economics than this; that a fluctuating financial digit on a single computer system in a single street in a single country should have the ability to dominate the economies of an entire planet...

The past thirty years are almost unique by comparison with the previous three centuries in the lack of attention that has been directed at debt and the financial system. Throughout the eighteenth century, there were repeated calls for reform. During the nineteenth century, excessive banking was held by many to be directly responsible for the waves of appalling poverty that swept Europe and America during a period of increasing industrialisation and agricultural development. In this century, during the depression of the 1930s, the financial system effectively seized up and brought virtual collapse to the economies of the world in an age which was, perhaps for the first time, obviously wealthy, and in which technology offered people real freedom as well as material prosperity. One observer judged that over 2,000 schemes for monetary reform were put forward at that time - all with a common theme in their outright rejection of the debt-based financial system as it then operated. The same system continues to this day, modified in small details, but unchanged in principle; and the recent financial crisis in Asia shows the potential for collapse still exists.

However the issue of economic volatility through booms, slumps, crises, and collapses has never been the sole point of criticism. It is the long-term trends that a debt-based financial system fosters which are most destructive. The most obvious of these is declining personal solvency. Mortgages support over 60% (£420 billion) of the money stock in the UK and over 70% ($4.2 trillion) in the US. Housing-debt statistics for the UK and the US show that there has been a dramatic decline in true home ownership as mortgages become higher and ever more widespread. There can be little question that relying upon housing debt to supply money to an economy lacks economic and political justification. However, taken in conjunction with the marked rise in commercial debt, mortgages have a knock-on effect. In an economy where the price of goods is elevated by commercial debt and consumer incomes are deeply eroded by mortgage debt, there is a persistent and subtle advantage given to low-quality, mass-produced goods, and growth is fostered in this direction. The persistent decline in product durability and the growth-culture of a rapacious consumer society can be directly traced to the debt-based financial system.

The financial system has also generated a serious distortion of agriculture. Excessive farming debt has driven out the most efficient producers - small/medium sized farms. Meanwhile, the relentless pursuit of farming and processing methods oriented towards a low-price market now involves the production of foodstuffs of poor nutritional value, inferior to that which the land can provide and inferior to that which consumers actually desire.

The nature of growth within a debt economy affects not only the quality of output, but distribution and marketing. Intense competition for sales within a debt-based economy results in the use of transport as a competitive strategy by businesses. This has led to a progressive breakdown of local and regional supply networks, and marketing over ever-greater distances, leading to escalating commercial traffic demands.

At the international level, trade is deeply affected by the debt-based financial system. The aggressive pursuit of maximum export revenues, rather than seeking a simple balance of trade, is entirely due to the fact that even the wealthiest nations operate from a position of gross insolvency. International trade has degenerated into a competition between nations to alleviate their indebtedness, rather than a process involving a mutually beneficial exchange of goods and services.

Endemic Third World debt is also directly attributable to the reliance upon debt and banking to supply money. The theoretical model of borrowing from the World Bank/IMF, investing in development and repaying loans from export revenues, is one of the great failures of contemporary economics. The persistent inability on the part of debtor nations to repay these loans suggests strongly that the nature of the indebtedness suffered by the Third World has absolutely no actual legitimacy or validity...

The more one explores the broad impact of debt, the more apparent it becomes that bank-credit constitutes a dysfunctional form of money. An economy based almost entirely upon bank-credit and debt experiences an intense drive for growth, regardless of need or demand. Bank credit engenders financial dependence, injects instability and fosters growth-distortions, both within an economy and throughout the international arena.

Reform of the debt-based financial system is clearly not a minor issue. It is not a matter of fiddling around with taxes, incomes and allowances to make things apparently more equal, more efficient, or perhaps more straightforward. Changing the debt-based financial system involves gradually altering the very foundations upon which national and international economics is based. Monetary reform is concerned with attempting to determine a new principle for the supply of money to an economy - the purpose being to create a supportive financial environment in which more constructive economic trends are allowed to emerge, and in which more benign systems of overall economic management become possible. In view of the rapacious onslaught on the environment, the waste of natural resources and the social and political friction caused by de-regulated commerce and capital flows, this is at once a promising, but a sobering prospect.

Dr Chris Leithner states in his book The Evil Princes of Martin Place:

The inflation that necessarily results from fractional reserve banking is a “tax” by which the early recipients of counterfeit money expropriate late recipients’ wealth. The tax is particularly insidious because it’s so well hidden. Few people — apparently including banksters and mainstream economists! — understand it (or, if they understand it, certainly don’t draw attention to it); and still less do they discuss its ethical and distributional implications. Obviously, it’s in insiders’ interest to distract outsiders’ attention from the source of the counterfeiting. It’s also in their interest to reverse the order of causality with respect to the cause and consequences of inflation, and thereby further to bamboozle the public. Accordingly, governments and mainstream economists don’t attribute the consequence (rising prices) to its single cause (inflation); instead, they brazenly and diametrically incorrectly insist that rising prices cause inflation! (p. 143)...

Gosplan, the Soviet Union’s central planning agency, set targets for the production of steel, cement and myriad other goods and services; Western central banks set targets for the Overnight Cash Rate and the Consumer Price Index. The chaotic consequences of central plans, Soviet and Western, necessarily reverberate throughout the economy … It’s quite comical: people who claim they “believe in the free market” blindly and unthinkingly affirm central banking and its relentless interventions into the market. Elementary logic completely escapes them: if you reject central planning in general, then you must also reject specific aspects like the central planning of money. If you abhor attempted price-fixing, then you must abhor the attempt to fix the Overnight Cash Rate. (pp. 254-55)...

[I]t is highly improbable that the combination of a pure gold standard and a 100% reserve for deposits has ever resulted in a prolonged rise of prices. The historical record is telling: in no year from 1492 to the present has the total supply of gold increased by more than 5%. (p. 552)

Ron Paul stated in his book End the Fed:

American presidents actually worked to implement and defend the gold standard, which put a brake on the ability of the largest banks to expand credit without limit. The gold standard worked like a regulator in this way. Ultimately, banks had to function like every other business. They could expand and make risky loans up to a point, but when faced with bankruptcy, they had nowhere they could turn. They would have to contract loans and deal with extreme financial pressures. Risk bearing is a wonderful mechanism for regulating human decision making. This created a culture of lending discipline.

In the jargon of the day, the system lacked "elasticity." That's another way of saying that banks couldn't expand money and credit as much as they wanted. They couldn't inflate without limit and count on a centralized institution to bail them out...

The banking industry has always had trouble with the idea of a free market that provides opportunities for both profits and losses. The first part, the industry likes. The second part is another issue. That is the reason for the constant drive in American history towards the centralization of money and banking, a trend that not only benefits the largest banks with the most to lose from a sound money system, but also the government, which is able to use an elastic system as an alternative form of revenue support. The coalition of government and big bankers provides the essential backbone of support for the centralization of money and credit...

Consider the Soviet case: to my knowledge, no business ever went under with the Soviet system but society in general grew ever poorer. Think of that Soviet system applied to the banking industry and you have the Fed.

He also wrote the following in March 2013:

Remember that under a fractional reserve banking system only a small percentage of deposits is kept on hand for dispersal to depositors. The rest of the money is loaned out. Not only are many of the loans made by these banks going bad, but the reserve requirement in Euro-system countries is only one percent! If just one euro out of every hundred is withdrawn from banks, the bank reserves would be completely exhausted and the whole system would collapse. Is it any wonder, then, that the EU fears a major bank run and has shipped billions of euros to Cyprus?

The elites in the EU and IMF failed to learn their lesson from the popular backlash to these tax proposals, and have openly talked about using Cyprus as a template for future bank bailouts. This raises the prospect of raids on bank accounts, pension funds, and any investments the government can get its hands on. In other words, no one's money is safe in any financial institution in Europe. Bank runs are now a certainty in future crises, as the people realize that they do not really own the money in their accounts. How long before bureaucrat and banker try that here?

Unfortunately, all of this is the predictable result of a fiat paper money system combined with fractional reserve banking. When governments and banks collude to monopolize the monetary system so that they can create money out of thin air, the result is a business cycle that wreaks havoc on the economy. Pyramiding more and more loans on top of a tiny base of money will create an economic house of cards just waiting to collapse. The situation in Cyprus should be both a lesson and a warning to the United States. We need to end the Federal Reserve, stay away from propping up the euro, and return to a sound monetary system.

In the foreword to Fiat Money Inflation in France, Mr John McKay wrote the following:

The story of "Fiat Money Inflation in France" is one of great interest to legislators, to economic students, and to all business and thinking men. It records the most gigantic attempt ever made in the history of the world by a government to create an inconvertible paper currency, and to maintain its circulation at various levels of value. It also records what is perhaps the greatest of all governmental efforts—with the possible exception of Diocletian's—to enact and enforce a legal limit of commodity prices. Every fetter that could hinder the will or thwart the wisdom of democracy had been shattered, and in consequence every device and expedient that untrammelled power and unrepressed optimism could conceive were brought to bear.

But the attempts failed. They left behind them a legacy of moral and material desolation and woe, from which one of the most intellectual and spirited races of Europe has suffered for a century and a quarter, and will continue to suffer until the end of time. There are limitations to the powers of governments and of peoples that inhere in the constitution of things, and that neither despotisms nor democracies can overcome.

Legislatures are as powerless to abrogate moral and economic laws as they are to abrogate physical laws. They cannot convert wrong into right nor divorce effect from cause, either by parliamentary majorities, or by unity of supporting public opinion. The penalties of such legislative folly will always be exacted by inexorable time. While these propositions may be regarded as mere commonplaces, and while they are acknowledged in a general way, they are in effect denied by many of the legislative experiments and the tendencies of public opinion of the present day. The story, therefore, of the colossal folly of France in the closing part of the eighteenth century and its terrible fruits, is full of instruction for all men who think upon the problems of our own time.

C.J. Maloney wrote of the desperation of Henry VIII of England to counterfeit gold by engaging charlatan-alchemists:

Despite his formidable education and great historic reputation, the disastrous interventions into the economy, the lifelong dishonesty with the currency in his care and, most of all, his laughable attempts to bring a sorcerer into his court to conjure gold, mark the great King Henry VIII as a fool. Yet there is no reason, be warned, for anyone to feel superior to the King; one only needs to pick up a newspaper to see that though alchemy may be a dead science, it has merely taken up new forms. This has always been and always will be, for its immortality is powered by economic man’s most dangerous, fondest wish, the one that will drive us to endless imbecilities and repeated destruction – the ardent desire to believe that you can get something for nothing. His adherence to that belief made King Henry VIII a man of his times – and ours.

In his treatise, The Ethics of Money Production, which was published by the Mises Institute in October 2008, Jörg Guido Hülsmann presents (at pages 238-239) the following description of the perverse rise of fiat money and fractional reserve banking:

There is no tenable economic, legal, moral, or spiritual rationale that could be adduced in justification of paper money and fractional-reserve banking. The prevailing ways of money production, relying as they do on a panoply of legal privileges, are alien elements in the capitalist [i.e., true free market] economy. They provide illicit incomes, encourage irresponsibility and dependence, stimulate the artificial centralization of political and economic decision-making, and constantly create fundamental disequilibria that threaten the life and welfare of millions of people. In short, paper money and fractional-reserve banking go a long way toward accounting for the excesses for which the capitalist economy is widely chided.

We have argued that these monetary institutions have not come into existence out of any economic necessity. They have been created because they allow an alliance of politicians and bankers to enrich themselves at the expense of all other strata of society. This alliance emerged rather spontaneously in the seventeenth century; it developed in multifarious ways up to the present day, and in the course of its development it created the current monetary institutions.

…The driving force that propelled the development of central banks and paper money was the reckless determination of governments, both aristocratic and democratic, to increase their revenue, if necessary in violation of good faith and of all established rules of commerce.

The father of the Deutsche Mark, Wilhelm Röpke (1899-1966) stated:

It is not the gold standard that failed, but those in whose care it was entrusted.

Many monetary reformers claim that a fiat money/fractional-reserve based banking system is inherently destructive and inevitably generates debasement of the currency, extreme inequality, the destruction of the middle class and wrenching business crises. Vladimir Z. Nuri has analyzed fractional reserve banking and considers it a form of economic parasitism. Ellen Hodgson Brown has compared fractional reserve banking and the charging of compound interest on created money with cancer. George Soros also believes banks have become a "parasite" holding back the economic recovery and an “incestuous” relationship with regulators means little has been done to resolve the issues behind the 2008 crisis.

These views are not accepted by mainstream government-supported economists. For example David Andolfatto, Vice President in the Research Division of the Federal Reserve Bank of St. Louis, has openly called Dr. Ron Paul a "pinhead" for holding such views. He later tried unsuccessfully to delete or retract his statements and expressed his regret over making the comments.

Critics of fractional reserve banking frequently argue that since money creation requires loans from the banking system, people are required to go further into debt in order for any new money to be created. They theorize that this eventually causes credit cycles (or business cycles) and debases the means of exchange. They also argue that if debts were ever paid back, there would be no money and the economy would collapse in a debt-deflation trap. They therefore argue the system is inherently unstable, requiring constantly increasing injections of debt just to avoid deflationary collapse. They claim this is ultimately unsustainable.

Many critics find it problematic that banks "create money out of nothing" and consider this fundamentally immoral, akin to counterfeiting and/or embezzlement.

Some also link the alleged negative effects of fractional reserve banking with central banking and a government-enforced "paper" or fiat currency, which they claim allows the practice of fractional reserve banking to continue without a "natural" limitation on the growth of the money supply, thereby causing inherently unsustainable "bubbles" in asset and capital markets, which are vulnerable to Ponzi-like speculation by highly leveraged hedge funds and other bank agents.

Reformist economists such as Murray Rothbard support a "full reserve" banking system and criticize fractional reserve banking as inherently fraudulent. Murray Rothbard held this view very strongly throughout his life. Other reformist economists are more tolerant of fractional-reserve banking and support free banking instead of full reserve banking.

Basic debate

The economic, environmental and social effects arising from money creation through fractional-reserve banking have been subject to much heated political debate for well over two centuries.

Many Austrian economists and monetary reformers focus on the combined use of fiat currency, fractional-reserve banking and central banking as a negative feature of modern monetary systems. These commentators use the term "debt-based monetary system" to refer to an economic system where money is created primarily through fractional-reserve banking techniques, using the banking system. This form of money is called "debt-based" because as a condition of its creation someone must go into debt in order for the money to be created and it must be paid back plus interest at some time in the future.

To some commentators, this implies that as the money supply and the economy grows, the general populace becomes increasingly indebted at the same time due to the fact that debt grows in parallel with money supply growth, and increasing interest payments (from either taxpayers or indebted consumers) are needed to pay bondholders as the money supply grows.

One argument posits that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits do not yet exist, they too must be borrowed into existence to pay off the interest on the previous loan. To some, this implies that the money supply must grow exponentially at the same rate as economic growth and compounding debt in order for the monetary system to remain solvent, as economic activity would be stifled with a static volume of money when interest became due, because in a static-money world no new money could be found to be taken out of circulation to allow debtors to pay outstanding interest to creditors.

Others argue that there is in fact no mathematical necessity for the stock of money in a debt-based system to grow, as the "turnover" or "flow" or "velocity" of money can increase to allow for compounding interest payments. However this does imply that economic growth would need to be positive to allow the fixed stock of money to turnover sufficiently to pay for the interest compounding on top of the debt. This may mean that Ponzi-like dynamics bubble up in "pockets" of the economy with interest payments being allowed in a fixed money economy, but these debt-fuelled bubbles of higher spending or speculation would pop and die out relatively quickly as there would be no central bank to keep the bubbles alive with further money creation.

Gold, silver and other precious metals have in the past been used as money. Because of the difficulty in increasing the supply of precious metals quickly, some monetary reformers believe a return to the gold standard, or a similar system of "hard" or "real" asset-backed currency, is the only way to stabilize the growth of the money supply. These monetary reformers often refer to the gold standard and silver standard as "sound money" or "honest money".

Distorting Effects on the Economy

In a 2003 statement to the U.S. House of Representatives, Ron Paul stated "if unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny".

Some economic thinkers (primarily members of the Austrian School) and political commentators believe that a debt-based monetary system amounts to a subtle form of monetary "fraud" in that it creates money "costlessly" through the use of fractional-reserve banking techniques.

Michael Rowbotham is an active proponent of monetary reform, and argues that this system of money supply is perverse and inherently monopolistic and "anti-democratic", as it creates an inflationary exponential growth imperative in the economy which leads to over-centralization and environmentally damaging and unstable over-consumption. Critics such as Rowbotham argue that the indebted are forced to induce new consumers to spend their way into debt so existing loans can be repaid with new debt-created money. Failure to achieve this goal results in foreclosure for those businesses and insolvency in the banking system that leads to economic collapse due to the sudden contraction of the money supply. This failure is inevitable due to the fact that, eventually, debt-saturated businesses and governments will no longer be able to force individuals into further debt due to the fact that they are already debt-saturated themselves. Once this point is reached, economic collapse is inevitable without wholesale debt repudiation.

Mark Anielski as well as some political thinkers such as Rowbotham and some economists (such as Hyman Minsky, Steve Keen and Mike Shedlock) argue that this system of money supply has characteristics similar to a pyramid scheme, where the newly indebted are compelled to induce others into debt to pay off their own debts. It is therefore argued by a number of monetary reformers that fractional-reserve banking and the associated exponential growth of money in the economy "forces" the economy towards indebted consumerism.

Rowbotham argues that a major negative side-effect of the debt-based monetary system is its effect on agriculture, claiming that residential development produces by far the greatest continuous injection of debt money into modern debt-based economies because banks secure loans primarily with developed property and are therefore willing to issue more debt-money against property development than any other asset class. Therefore, significant super-normal profits can be generated by re-zoning agricultural land and replacing it with low-density housing. If this is correct, this trend will lead to the destruction of fertile arable land, as farmers cannot compete to retain fertile arable land from property developers at the periphery of major population centers, and as this land is then progressively re-zoned for speculative new residential development. Rowbotham predicts that the global supply of fertile arable land will systematically and catastrophically decline as perverse monetary incentives inherent in the current debt-based system favor short-term speculative land development over long-term food security, leading to a broad decline in the quality and nutritional value of agricultural produce and, eventually, a dramatic increase in the prices of many "soft" commodities - which could then lead to actual food shortages for poorer segments of the world population. This has been referred to as the problem of "Peak Everything".

Throughout the latter 20th century farmland has been steadily lost. Over 20% of farmland was lost in the US between 1950 and 2003. Much of that loss has been due to conversion of farmland to urban sprawl.

If for any reason the monetary system broke down, urban populations (nominally "rich" but poor in terms of direct access to food supply) could find basic foodstuffs either rationed or contaminated with lower quality products (or unavailable at any price) ultimately resulting in food security becoming a major public policy issue, particularly if combined with oil supply shortages or an oil price spike, as major population centers worldwide are almost entirely reliant on mass transportation of food from distant (or even foreign) locations to survive day-to-day. In addition, fresh water (an essential commodity that is subsidised in its production and price fixed by state-controlled entities in virtually every country around the world) appears to be rapidly diminishing through pollution and over-use, further threatening the global food supply in coming decades, resulting in what some commentators are describing as a global water crisis of "horrific" proportions. Las Vegas and California are also facing water crises oscillating between undersupply of water (due to excessive urbanization and population growth outstripping investment in dam and water reserves) and flooding (at least partially caused by the same urbanisation and associated poor drainage of land).

A steady succession of food-quality scandals involving Mad Cow Disease in Britain, the fraudulent supply of horse meat sold as beef in Europe, rat poison found in Polish dairy products and rat meat fraudulently sold as lamb in China could be seen as the logical conclusion of Rowbotham's analysis, as economic pressures build to systematically debase the quality of inputs throughout the food chain as producers fight the effects of cost-push inflation and try to satisfy the need for ever-increasing productivity in the industrialized food industry by systematically debasing their products until they are not fit for human consumption, but are allowed to be consumed by the authorities anyway because of the urgent need to feed the general population within their shrinking incomes. For example, it is alleged that Mad Cow Disease was caused by British authorities reducing heating standards in the waste meat rendering process to reduce the cost of food production in Britain. Food scandals are becoming so prevalent a new term "Food Fraud" has become popular to describe this escalating phenomenon, mirroring monetary fraud in the wider economic system. If Rowbotham's analysis is correct, these food contamination and food debasement scandals will become ongoing and endemic in coming years, but may be censored by the authorities in future to avoid widespread protests. This has already occurred in China with authorities trying to censor reports of toxic melamine in Chinese milk products and in the UK with British authorities downplaying or delaying information relating to the huge scale of the horse meat scandal. Max Keiser has made a direct connection between stealth monetary debasement throughout the banking system and stealth debasement of inputs throughout the British food chain. Quality adjustments in official CPI measurements often reduce the rate of inflation by assuming quality improvements - however no government has taken into account these food scandals in increasing the effective rate of inflation by taking into account dramatic reductions in the quality of food production. If the dramatic degradation in the quality of food production was fully taken into account, it is likely that "true" inflation would be measured far in excess of official figures, (such as with the UK horse meat scandal or where food stamps suddenly become unavailable). As food is an essential commodity for life, those who experience a sudden drop off in food access or food entitlements are effectively experiencing hyperinflation without the government having to formally report CPI numbers that telegraph this reality. Nevertheless for those who are poisoned or mal-nourished with "fake food", hyperinflation has occurred nevertheless.

Chris Martenson has summarized the exhaustion of basic resources by the current monetary system in the following manner:

When the price of money itself is distorted, then all prices are merely derivative works of that primary distortion. Some prices will be too high, some far too low, but none accurately determined by the intersection of true demand and supply.

If risk has been taken from where it belongs and instead shuffled onto central bank balance sheets, or allowed to be hidden by new and accommodating accounting tricks, has it really disappeared? In my world, risk is like energy: it can neither be created nor destroyed, only transformed or transferred... All over the globe we see regions in which ancient groundwater, in the form of underground aquifers, is being tapped to meet the local demand. Many of these reservoirs have natural recharge rates that are measured in thousands, or even tens of thousands, of years. Virtually all of them are being over-pumped. The ground water is being removed at a far faster rate than it naturally replenishes. This math is simple. Each time an aquifer is over-pumped, the length of time left for that aquifer to serve human needs diminishes. Easy, simple math. Very direct. And yet, we see cultures all over the globe continuing to build populations and living centers - very expensive investments, both economically and energetically – that are dependent for their food and water on these same over-pumped aquifers.

In most cases, you can calculate with excellent precision when those aquifers will be entirely gone and how many millions of people will be drastically impacted.

And yet, in virtually every case, the local 'plan' (if that's the correct word to use here) is to use the underground water to foster additional economic/population growth today without any clear idea of what to do later on. The ‘plan’ such as it is, seems to be to let the people of the future deal with the consequences of today's decisions.

So if human organizations all over the globe seem unable to grasp the urgent significance of drawing down their water supplies to the point that they someday run out, what are the odds we'll successfully address the more complex and less direct impacts like slowly falling net energy from oil, or steadily rising levels of debt? Pretty low, in my estimation.

Others consider that the core problem is not food security, nor overpopulation, nor environmental destruction, nor excessive carbon emissions due to non-pricing of energy producing externalities, nor excessive "specialization" of labor in the midst of monetary dysfunction, but excessive government regulation, causing capital and environmental destruction.

The fundamental problem with the current monetary system that all Austrian economists agree on is that, although there may be debate regarding where the malinvestment and unsustainable activity is occurring, this must be taking place somewhere in the midst of unsustainable credit growth.

Effects on economic health: Ponzi scheme dynamics

According to Michael Rowbotham and many Austrian theorists the expansion of money through debt is unsustainable and necessarily fuels and creates economic bubbles. This concentrates wealth in the hands of private banks as the populace is forced into debt simply to own a home and educate their children, hoping that the loans can be repaid by others going into debt in greater amounts later to purchase the assets they themselves have purchased through incurring large amounts of personal debt. However, debt expansion leads to price appreciation of assets through speculation as the financial market becomes riskier and this process is unsustainable in the long run, with the last cycle of indebted being wiped out when they cannot find anyone to buy the assets they themselves have purchased by going into massive debt. Doug Noland, Steve Keen, Edward Chancellor, Bill Bonner and many others have compared this type of market to an enormous State-sponsored global monetary Ponzi scheme.

The bust phase of this Ponzi-like business cycle occurs when "debt-based" money growth cannot continue because the debt levels are already at saturation levels, meaning growth in debt money slows or contracts, catching newly indebted businesses and consumers who are left out of the growth cycle, triggering a combined liquidity and solvency crisis when markets seize up due to a collapse in the artificially-supported prices in financial markets.

Effects on the environment

There are also critics in the left-wing and environmentalist camps who contend fractional reserve banking (by creating a necessity for indefinite economic growth) leads to environmental destruction and a sudden, catastrophic depletion of the earth's natural resources as the unsustainable, exponential consumption of the world's scarce natural resources reaches its inevitable limits.

Inherent problems with the system

Some monetary reformers predict that there will be an increased incidence of financial crises in the developed world, as economic and population growth inevitably slow and as the success of financial sector lobbying results in increased tax loopholes and a reduction in effective redistributive taxes which, combined with the debt-legacy of the welfare state, allows an intense and unsustainable concentration of wealth and political power in the financial services sector.

Some monetary reformers argue that perverse incentives in the financial services industry lead to collusive relationships between governments and bankers which are economically and socially destablizing in the long run.

Given that the financial system requires ever higher levels of indebtness from the general populace for its solvency, it is vital that the indebted "victims" who must sink deeper into debt for the system to survive do so voluntarily and willingly and are not made aware of the consequences of purchasing consumables with debt money. Some isolated politicians have previously highlighted the fact that mainstream media organizations appear to downplay or minimize the seriousness of deficit spending by government and debt-sourced spending of all kinds.

Bankruptcy laws differ to a small degree in different jurisdictions but in all developed economies unpaid debt results in legal penalties, property confiscation on behalf of the creditor and income sequestration. Although in Muslim, Christian and Jewish religious practice there have been traditions of debt relief or laws against usury, in no modern Western jurisdiction are any debts periodically forgiven or cancelled in recognition of the inherent impossibility of repaying debts in circumstances where the debt-based monetary cycle has inevitably resulted in too little new debt money being injected into the money supply to pay for the currently outstanding debts.

On a national level, if the issuance of government bonds becomes unsustainable, sovereign bankruptcy can occur - and has occurred many times in history. Sovereign debt crises due to the inability of nations to pay interest on government bonds have occurred frequently and regularly in the third world and less frequently (every 30 years or so) in the first world as a result of high levels of unsustainable public debt - often because private debts are assumed by a corrupt government through large private bank bailouts. The Latin American debt crisis is an example of sovereign debt levels becoming unsustainable, resulting in a currency crisis and economic collapse, as interest rates rise precipitously due to the inability of the national government to attract financiers to purchase new government bonds to inject new debt money into the ailing economy.

At such times, it is the responsibility of the IMF to come in as a kind of supranational central bank to mediate between the national government and international financiers. The role of the IMF as central bank to the world has similar responsibilities and risks inherent in central banking which are described below in relation to the role of the Federal Reserve. If the IMF repeatedly intervenes to save financiers from loss when sovereign bankruptcy occurs, this has a tendency to induce moral hazard and can encourage the financing of reckless government spending and borrowing.

A single currency regime such as the Euro can mask national liquidity or solvency crises, by ensuring that a national currency is not quickly exchangeable for another, thereby restricting the ability of national governments to depreciate their currencies and cutting off the possibility that the real value of government bond interest repayments could decline relative to other currencies. This may however increase the risk of bond default where indebted national governments cannot pay back the interest payments in the denominated common currency.

Types of downturns

Main article: Austrian Business Cycle Theory

Austrian Business Cycle Theory states that artificially low interest rates set by any coercive price-fixing entity will inevitably stimulate malinvestment in the wrong capital projects which will inevitably lead to an unsustainable boom followed by a bust. However, the precise nature of the downturn and the way in which losses are allocated within the economy are both dependent on the actions government and bankers take to forgive debt or control credit and there are two main kinds of debt money contraction that can cause a collapse in the value of inflated assets.

A "credit squeeze" occurs where new debt money is difficult to access without a high credit rating. At such times marginal borrowers, or those who have borrowed at the end of any debt-induced asset bubble, get "squeezed" out of further borrowing and a contraction in the growth of new debt money occurs, triggering a slow down in the growth of inflated assets. Those assets can then be "harvested" by the private banks through widespread foreclosure or bankruptcy and re-sold to those with the money to buy the distressed assets.

A "credit crunch" occurs where new debt money is not available at any interest rate - even for those with previously acceptable credit ratings - due to widespread insolvency in the banking system. At such times, it is the banking system itself that is insolvent and other financial institutions (including overseas financiers) become reluctant to lend to the domestic banking system, resulting in the domestic banking system being unable to issue loans even to credit worthy borrowers.

At any stage during the downward spiral of a "credit crunch", the central bank in a modern economy can try to save the system from complete economic meltdown by purchasing (either indefinitely or temporarily) the failed debts of the private banks. This involves swapping depreciating "failed" assets with hard cash, thereby allowing the banks to maintain their net asset position and continue to give the impression of solvency to their auditors and depositors. However, doing so results in cash being transferred to the private banks in exchange for bad debt, thereby violating the general economic precept to avoid moral hazard and effectively makes liquid the failed lending decisions of the private banks. In the U.S. banking system this is called "opening the Fed discount window", where the Federal Reserve temporarily purchases the failed investment portfolios of distressed private banks in exchange for cash. However, this rescue measure may only delay, rather than avoid, the realization of losses in the banking system, as the central bank cannot "force" new borrowing into the system to inject new debt money into the money supply. Somebody has to be a counterparty to borrow the debt money that is being offered. If all market participants realize a "bubble" has formed in assets markets, there will be few (or no) buyers for new debt money, as no one wants to borrow to buy inflated assets no one else will buy. Money markets can therefore remain illiquid even with intense central bank support.

Furthermore, banks can go bust even with intense central bank support, if the issue is not one of liquidity, but one of solvency.

Market meddling and pushing on a string: "You can't taper a Ponzi Scheme"

Some monetary economists describe the opening of the Fed discount window after the bursting of an asset bubble and swapping of "junk" with new money as "pushing on a piece of string", as this measure does not solve the key problem – creating new credit (or debt money) to keep up the growth in the money supply and maintain the required level of liquidity in credit markets. This is because unlimited central bank money and low interest rates allow credit creation, but cannot force it into the system. In order for any new debt money to be created, someone has to borrow the excess reserves in order for the money to be injected into the system. With an endogenous money system, money is only created if someone wants to borrow money from a bank. If corporations and individuals are already heavily indebted (or insolvent after the bursting of a debt-induced bubble) there are no credit-worthy borrowers to lend to. This means there are no new buyers at the margin to keep asset prices at high levels. If there are no new marginal buyers, "liquidity" - or debt growth - dries up and volumes and prices drop suddenly, forcing liquidation and creating a sudden cascading effect in highly leveraged markets very similar to the end of an unsustainable Ponzi scheme. The only ones able to stimulate the economy are the tiny minority of bankers who have been bailed out by the central bank and even if they spent lavishly to try to "help" the economy, this would in no way compensate for the lack of spending in the general economy.

To encourage fresh borrowing, central banks generally combine these rescue measures with an interest rate cut to encourage more new borrowing to allow the existing (failed) debts to be liquidated at or close to their original value. When Alan Greenspan repeatedly resorted to this tactic to revive illiquid money markets this became known in the market as the "Greenspan put", as the effect of these repeated reductions in interest rates was similar to a put option in the stockmarket, insuring banks' lending mistakes would be covered up by the Federal Reserve.

When interest rates cannot go any lower (the so-called "zero bound" monetary problem) and people still will not - or cannot - load themselves up with more debt, then to stave off a collapse of market prices due to the drying up of marginal buyers at inflated debt-saturated prices central banks have resorted to "Quantitative Easing" - which is the abandonment of interest rate setting and the targeting of bulk purchases of bank assets to artificially pump up their price and keep the banking system solvent. In addition, the Keynesian solution is to run large public deficits and indebt future generations (who, they hypothesize, are more likely to be able to pay through increased future growth). Fabian socialists, and Keynesian economists such as Paul Krugman and Robert Shiller, argue that governments must take charge of the responsibility of spending more (and taking on more debt) on behalf of the public (who are too fearful to take on more debt themselves) in order to compensate for the immediate and urgent present insufficiency in total private consumption. Paul Krugman and Robert Reich are prominent advocates of the policy of spending trillions of government money to help stimulate the economy, if spending billions does not work. For economists such as Paul Krugman, if the "more and more government spending" solution does not work initially, it is a sign that not enough government money has been spent. It is his view that the "deflationary" Japanese recession from 1991/2 could have been cured by the Japanese government going into even more debt than the current net debt to GDP ratio of 110%. Although some commentators have puzzled over exactly which group Krugman blames for the crisis, Krugman repeatedly calls for the government "to do more" and "spend more" as the "responsible" way out of the crisis, regardless of the true culprits or cause of the crisis. When pressed to find culprits he identifies "extremist" Republicans and, somewhat paradoxically, those who call for fiscal restraint to be the real source of the debt crisis and the downgrading of US sovereign debt. How increasing the debt load will solve the debt problem is never explained, apart from Krugman repeatedly stating that the "long-term" debt problem is not as important as the immediate and urgent "lack of spending" problem. Krugman has also been the principal supporter of "Abenomics" which is the experimental application of extreme Keynesian "remedies" in Japan to try to stave off permanent recession. To date these policies have been notable failures, not even stimulating the economy in the short term. Krugman again explains this by arguing the policy should go even further.

Krugman has never advocated the simple solution of debt default as the way to solve the debt crisis, despite de-emphasizing the scale of the debt by arguing that we (mostly) "owe it to ourselves". If this was the case, debt default would be the easiest solution. On the other hand, Paul Krugman has yet to clearly identify a country or a time when government spending became excessive or was out of control and resulted in too much accumulation of debt and malinvestment during an economic slowdown. He has intimated that, perhaps, the Greek government may have spent too much, but he treats that as an isolated case and not applicable to the rest of Europe or the United States, despite some countries having comparable debt levels to Greece's. He has also never explained or written about what happens after government stimulus spending inevitably stops, which Austrians argue would inevitably result in an even bigger slump if it is not continually replaced with something similar or bigger. If further attempts at artificial government-induced "stimulus" are attempted, Austrians argue that this pointless exercise would simply further distort capital structures throughout the economy. They therefore see the slump as curative, even if it results in bank runs and financial crises. They see light at the end of the depression, once the re-pricing of capital goods and financial assets returns the economy to a sound, stable footing - provided no bailouts occur, debts are liquidated and reduced or cancelled and provided asset prices are permitted to fall.

Although there is active debate as to whether Keynesian "stimulus" policy (spending money and thereby indebting future generations, with the government spending debt-sourced money on projects the private sector would not touch) can actually help the economy long term, there is no argument that this would undoubtedly help the present group of private bankers, as increased income from the interest payments on new government bond issuance offsets the decline in private sector debt and allows banks to survive when otherwise they may face collapse due to the fatal impairment of their balance sheets through private debt write-offs after an unsustainable debt-fuelled bubble bursts.

As government debt is effectively an asset on the books of the banks, increasing Treasury bond issuance necessarily increases the profitability and net asset position of the debt-issuing banks - at least until government insolvency or mass tax evasion renders the value of those bonds worthless.

Perhaps in recognition that increasing debt to solve a debt crisis does not work even in the short term, in early 2013 Krugman resorted to advocating the coining of a debt-free trillion dollar platinum coin to solve the debt crisis and revive the economy. Some Austrians have argued Krugman's support of the trillion dollar coin is the logical reductio ad absurdum of Keynesian economics.

In summing up the difficulties involved in endless rounds of ad hoc policy intervention designed to save the current dysfunctional monetary system, Max Keiser simply stated the following:

You can't taper a Ponzi Scheme.

Inequities in the debt-based monetary system

Many inequities arise because of the damage an overly leveraged financial system and big spending government can have on the real economy, especially when combined with central bank interventionism. The two key problems endemic with this system are (1) increasing inequality and (2) unstable markets. No mainstream political party or government appears to address increasing inequality by advocating reductions in fractional reserve banking. In respect of the second problem, the standard short term government strategy to help the banks out of the "tailspin" of an insolvency crisis follows a standard chronology:

The government first tries to stimulate the economy and spend money into the markets directly without individuals needing to borrow and spend, thereby "inflating" its way out of economic crisis by causing asset prices to rise and bank balance sheets to appear solvent. It currently does this principally by borrowing newly created money from the central bank and then spending this new money on projects that the private sector is not already engaged in.

Unfortunately, there is no easy solution to an economy-wide insolvency crisis caused by excessive credit expansion. In a sound money system the credit would not have been created, so dealing with the problem once created is inherently flawed. If a slow down of money and credit occurs, this exposes those who came late to the boom and transfers assets to the banking system via widespread insolvency. If the central bank encourages even more lending or the government spends more money this creates more distortions and uncertainties in the market, hampering long term investment. Government spending is often attempted as a way to stave off widespread insolvencies but this only further distorts the economy through widespread malinvestment. Later, after the immediate crisis, when tax receipts from the private sector decline due to reduced private investment, governments are often forced to reduce basic social services or welfare to the poor to pay for the increased bond payments to bankers and other wealthy investors, making those least responsible and least able to pay for the crisis suffer wrenching economic hardship due to excessive public and private debt/credit creation.

Antal E. Fekete compares quantitative easing to the repeated supply of opium by an immoral drug dealer to a dependent drug addict:

The explanation for this self-destructing behavior is the addictive, debilitating and mind-corrosive nature of paper money, in direct analogy with that of opium. The high caused by administering the opium pipe to the patient (read: administering QE) had to be repeated when the effect faded by a fresh administration of more opium (read: more QE2).

Aside from the moral hazard issue, the key risk with quantitative easing is that the central bank exposes the financial system to disruptive inflation, as the growth in the money supply spirals out of control due to the need to save the banks from themselves. This eventually tends to precipitate a currency and/or government bond crisis, as the debt-based currency becomes completely dysfunctional when either the currency becomes worthless or when debtors - including government debtors - cannot even pay interest on the debt money.

For these reasons, a collapse in confidence in the solvency of the domestic banking system (and the central government) is one of the most complex and difficult policy issues any central government can face. If the central bank continues to try to save the current players in the banking sector by continually printing money and inflating its way out of the crisis, at some point hyperinflation suddenly appears, and has appeared many times in history.

Some commentators have observed that the media and the Fed have to constantly come up with new terms (such as "quantitative easing") to hide the fact that they are simply repeating the same failed policy of monetary inflation that corrupt sovereigns have deployed at the end of failed regimes many times over the millenia. This is also now referred to by some monetary reformers and economists as "socialism for the rich and capitalism for the poor", as many indebted consumers will still lose their houses and be declared bankrupt regardless whether or not the central bank intervenes to save marginal lenders who have been made insolvent through their mis-timing of the credit cycle. Future generations of innocent taxpayers may ultimately finance any bail out of reckless lenders, as the money used to fund any bail out will be funds diverted from the general revenue of the central government.

In times of crisis, some bankers still refer to Walter Bagehot's 1873 commentary on monetary crises, Lombard Street, in an attempt to gain insights into the way in which central bankers should revive illiquid banking systems. However this old text may be outdated in circumstances where the community's debt limits have been reached and where the banking crisis arises from insolvency or environmental depletion rather than illiquidity. A prime example where aging demographics combined with reckless bank lending in a purely fiat debt-based monetary system resulted in economic problems which no amount of money printing or government spending could fix can be found in the case of the Japanese asset price bubble. Some believe the West will repeat the mistakes of the Japanese and the result will be environmental destruction, worldwide monetary disorder and instability and economic decline.

Debt Saturation, Unstable Markets and the Keynesian Endpoint

Keynesians often refer to Keynes' dictum "In the long run we are all dead" to justify artificially low interest rates and short-term stimulus spending by government to "kick start" a stalled economy where pre-existing private debt levels have caused spending to collapse. Tyler Cowen has responded to this Keynesian rejoinder with the following response:

The famous Keynesian rejoinder, “In the long run we are all dead,” is less comforting when that long run comes into sight. Short-run planning is a hard carousel to stop, especially when there are frequent election cycles, but the federal government must act soon...

The technocratic Keynesian recommendation was to run deficits in bad times and surpluses in good times. But except for one stretch during the Clinton administration, this notion has been broken since the early 1980s. In the United States, at least, Keynesian economics has failed to find the necessary political institutions to enact and sustain a wise version of the theory.

Now that fiscal constraints are starting to bite, many politicians are afraid to reform or even to discuss changes in the largest problem areas...

Fiscal austerity may sometimes sound like a dogmatic religion, but fixed principles often help us do the right thing, especially when temptation beckons. Professor Buchanan argued that the real choice was between a religion of budget balance and a rule of illusion.

...the rigor of the numbers will soon sweep away the fiscal illusion. The only question is whether we will end the charade on our own terms or continue to play the fool.

David Stockman has argued that Keynesian central bank policies have reached a dead end where massive leverage of the populace has reached its logical limits and lower interests rates (even negative interest rates) will not encourage people to spend themselves into further indebtedness. David Stockman has stated the following:

...Household debt growth in Portugal [has] soared by 6X in the decade before the financial crisis compared to nominal GDP growth of 2X. Self-evidently, the household leverage ratio had escalated into uncharted territory, perhaps explaining why Portugal’s economy is struggling under the burden of “peak debt”. And, yes, Portugal is an outlier - the victim of getting German borrowing rates on Greek economic habits. But it aptly illustrates the futility of pushing credit on a string when balance sheets are already saturated with debt.

The Italian economy was in the debt pyramiding business much earlier, of course, but the same point holds true. As shown below, in just the eight years leading to the 2008 financial crisis, credit advanced to the private sector (households and business) nearly tripled, rising at a 10% CAGR during that period compared to nominal GDP growth of barely 3% per year.

Since 2008, by contrast, credit growth has flat-lined, but surely not because interest rates were too high. The self-evident problem is that debt and leverage were too high; the debt fueled boom after the euro was inaugurated simply consumed all the balance sheet runway that was available.

Now the Italian economy must grow the old fashion way. That is, not through credit fueled spending but via supply side expansion in the form of investment, enterprise and more labor hours and labor productivity. And precisely what can the monetary central planners in Frankfurt do about the latter?

Indeed, peak debt is a problem throughout the Eurozone. In just 9 years the household leverage ratio in Spain, for example, nearly doubled from 55% to 93% of GDP. Since the crisis, it has been slowly receding, but, again, that is not a sign that Europe’s miniature interest rates are too high; its evidence that the Keynesian debt trick — the one time ratcheting of leverage ratios — is over and done.

Nassim Taleb posits that with increasing debt comes increasing fragility as markets end up standing on a "knife-edge" between precipitous currency devaluation due to money printing and widespread insolvency/depression due to slowing organic money supply growth. It therefore becomes increasingly difficult for central banks to control volatility in heavily indebted world markets, until it ultimately becomes impossible to control.

No current commentator predicts bankers, politicians or government employee unions will spontaneously reform themselves. Noted commentator Bill Bonner and others have described politicians, welfare recipients, bankers and other tax beneficiaries as economic "zombies" obsessed with preserving their own coercively acquired incomes and unable to adapt to new economic realities. He has predicted that the "zombies" will continue to "steal" as much as possible and parasitically live off the productive efforts of others until the whole monetary system collapses. Some commentators have criticized so-called "zombie" bureaucracies such as the TSA as not only deadweights on the real productive economy, costing millions of tax dollars each year; their very existence hinders economic productivity. It is alleged that once these organizations are created and fed by government fiat, these "zombies" never die because there is no natural market mechanism to provide the necessary feedback signalling that they are unwanted by consumers.

The difficulty with any attempt at reform measures is that the "Ponzi" elements of finance are inextricably tied to pension funds and "real" elements in the economy, making it impossible to eliminate the "cancer" without damaging the wealth-creating structures as well. This creates an impossible "Hobson's choice" for the government: a choice between allowing the central bank to continue creating financial bubbles and price distortions and wealth inequality, or allowing real market prices to prevail and initiating a financial crisis (which may be short term in nature but devastating nevertheless). No government in recent years has chosen to allow interest rates to rise, thereby making a Faustian bargain with central banks to allow the flow of massive illicit income to banking institutions in return for some semblance of financial stability, at least in the short run. Commentator Max Keiser has referred this problem as having "zombie" bankers, "The Walking Dead" create a "Suicide Banking" pact, describing the paradoxical situation where virtually every politician and economist acknowledges that "Too Big To Fail" is a dysfunctional policy but no one has a viable solution, given that the banking system is "rigged to blow" if threatened. He also refers to the current crisis as a fight to the death not between countries or ethnic groups or political ideologies but between future-oriented, prudent and conservative "Savers" on one side and present-focused, imprudent and overconsuming "Speculators" on the other.

Many non-mainstream financial commentators believe the U.S. and the E.U. will soon experience terminal financial crises, but there is vigorous on-going debate amongst numerous commentators regarding whether this terminal currency crisis will end in hyperinflation and currency destruction (making government bonds worthless) or repeated bouts of deflation and depression (making government bonds more valuable). Most - but not all - Austrian commentators now believe the denouement will inevitably result in hyperinflation and render the U.S. dollar near-worthless in real terms, as U.S. bond and dollar holders compete to offload excess holdings in the face of massive ongoing issuance. Mike Shedlock and Antal E. Fekete are amongst a small group of deflationists who believe contracting credit will continue to have a deflationary impact on the economy, causing government bonds to become even more valuable over time.

Some mainstream economists also now consider that QE is causing deflation rather than inflation, essentially copying and adapting Antal E. Fekete's earlier work.

No hyperinflationist has yet fully explained the precise mechanism by which massive amounts of new debt money will be injected into the economy to fuel hyperinflation. There has been no detailed explanation from the hyperinflationists regarding how, with so few potential credit-worthy borrowers (including governments), the new money (via the issuance of new debt) will be injected into the economy in sufficient volume to trigger hyperinflation in the absence of extreme government policies (such Congress authorizing every citizen to be issued with $30,000 vouchers, or a civil war, or other natural catastrophe).

Gary North is one of the few Austrians who does not predict the extremes of either hyperinflation or deflationary depression, but rather expects a continuation of steady, moderate price inflation encouraged and controlled by the Federal Reserve, against a background of ongoing extreme boom-busts in the real economy and the slow but systemic impoverishment of the middle class.

Austrian commentator Robert K. Landis believes there will be a combined deflationary/inflationary catastrophe.

It should be noted that Austrians consider these predictions essentially subjective political predictions and not economic predictions, given that the decisions made by the government and central banks will determine the direction the crisis will go. The only outcome which may bring in to question Austrian business cycle theory would be the spontaneous onset of full employment, lower asset prices and financial stability in the midst of ongoing massive QE by the central banks and zero interest rates. All other outcomes (including deflation or inflation) will depend on central bank decisions and on where we are in the bubble cycle (beginning, middle or end). In the beginning, it can be expected there will be strong inflation in asset prices during the financial upswing. At the end, it can be expected there will be a precipitous fall in asset prices as the credit bubble pops. Otherwise Austrian business cycle theory has little to say about the movement of any particular aggregate CPI measure over the course of the cycle and little interest in such predictions as they are peripheral to the real issue of distorted resource allocation and unstable markets.

Leaving aside the debate between deflationists and hyperinflationists, and in stark contrast to the predictions of deflationary or hyperinflationary catastrophe from the Austrians, monetarist, Keynesian and neo-classical economists regard the current financial system as benign and the current financial distress as temporary and not structural in nature. Most advocate "tweaking" of government policy (such as temporary increases in government spending) to get us out of the current crisis. No mainstream economist identifies the problem as fundamental or structural and no mainstream economist advocates a return to full reserve banking, the gold standard or free banking. Indeed, most financial analysts still use the normal distribution - or "Bell Curve" - to represent the likely distribution of future returns in financial markets. This continues despite extensive research demonstrating that the normal distribution does not apply to financial market returns, which display so-called "fat tail" distributions, with much more volatility at the extremes than the normal distribution would predict. The Austrian view - that the economy will either slide into depression or hyperinflation under the stresses of the current debt-based monetary monetary system - may be supported by more recent analysis of actual financial market behavior under conditions of high debt and extreme stress. And recently even mainstream economists, such as senior IMF adviser Dr Robert Shapiro, now openly acknowledge that the inter-dependencies created by the issuance of Credit Default Swaps and other risk-related financial products by reckless under-capitalized banks has created a situation of extreme global financial vulnerability, where the world is only weeks away from a complete and total financial "meltdown". John Butler of Amphora has observed that "business cycles" have become "financial cycles" with central bank manipulation of markets, and these cycles have become increasingly violent and unstable, with shorter durations and increasing frequency. To him, this signals the dying stages of a failed system, much like a spinning top slowing down and oscillating more frequently and more violently from side to side before coming to a sudden stop. According to John Butler, increases in stock prices are not a sign the economy is recovering, but is a sign of central bank-induced inflation - the first stages of currency collapse.

Regardless whether the government chooses hyperinflation or periodic deflationary depression as the way out, throughout history, only two real alternatives occur in the midst of economic or financial crisis: ever greater centralization (often on a "higher level") or disintegration of the core power structures and (eventually) rejuvenation. Accordingly, many of the more extreme monetary reformers and conspiracy theorists anticipate repeated and ever more desperate attempts at higher-order centralization, as the existing co-ordinated state-based central bank architecture becomes discredited through repeated economic failure and environmental crises caused by the need for unsustainable exponential debt-driven economic "growth" within the current debt-based financial architecture. This centralization is anticipated to include the empowerment of the UN to increasingly intervene in the domestic political affairs of nations, the IMF and EU to increasingly intervene in the domestic financial affairs of member nations, and the declaration of martial law and the imposition of fascist-style restrictions on civil rights and freedom of speech by the political Establishment to physically protect it from anarchy or military coup when the bubble of debt completely bursts, through a precipitous currency crisis, debt-created depression, environmental crisis or oil shortage. Ultimately this is anticipated to yield either repressive world government or chaos (or most likely both), with a world central bank stationed in Basel, Switzerland. During this transition period, some analysts and conspiracy theorists anticipate multiple wars to force governments into the BIS financial "net", impotent and counterproductive price controls, repeated sell-offs of monopoly state assets in a desperate attempt to feed private domestic banks with steady income to keep the value of government bonds collapsing, and then, once this attempt (to feed unsustainable compounding debt with any remaining basic infrastructure) destroys any remaining parts of the productive economy, there will be in the end enforced rationing of basic essentials to ensure continued supply of food and oil to senior government officials, bankers and their associates amidst widespread general starvation and chaos, as the coalescence of a corrupt banker-government coalition solidifies to eliminate potential dissent and ensure the forced elimination - by any means necessary - of any actual or potential competing currencies that could threaten the viability or legitimacy of the monopoly currency, which could include war against any country considering using any currency other than US dollars to price essential commodities such as oil and the compulsory confiscation of all privately-owned gold (gold being the ultimate reserve currency, still used by central banks as a universally accepted medium of exchange for the settlement of international debts).

Some have speculated that the overthrow and attempted assassination of Col. Gaddafi and his family in 2011 Libyan "civil war" was triggered by Col. Gaddafi's open attempt to price Libya's oil in gold, which is the reaction many would expect for a country that "dared" to price an essential commodity in anything other than a Western paper currency.

There have been many monetary crises throughout history. Some commentators have noted that our present system and the strategies attempted by governments to reflate the economy closely resemble the failed theories of John Law and the Mississippi bubble of the early 18th century. There are a number of standard warning signs of impending depression or hyperinflation caused by a complete breakdown of trust in any monetary system. Just prior to the complete collapse of the pyramid scheme of public and private debt, the economic system tends to feed on itself, and in the past, where debt-created depressions or periods of hyperinflation have occurred in Europe, the U.S. and China, there has been a sustained spike in predatory economic behavior, as the heavily indebted central government and producers are forced to find more extreme (previously considered unethical) methods to extract any remaining wealth from increasingly desperate and impoverished consumers, who are either unwilling or unable to go into further debt without forceful coercion. Long-term investment and sustained capital investment are almost impossible in this environment because the "measuring stick" of return on investment (the real value of money) is so uncertain at times of debt-induced credit crunch, depression or hyperinflation.

As potential new borrowers and international financiers are scared away from participating in the pyramid scheme of debt and borrowing further, the monetary system seizes up, starved of the fresh injections of debt money it needs for its survival, thereby precipitating economic anarchy, widespread lawlessness and insolvency of the monetary and banking system. Some have described the moment when governments cannot borrow any more from banks to keep up the growth in debt money as the "Keynesian Endpoint" or "Keynesian Endgame" or point of "Debt Saturation" - which is the point in time when in extremis "emergency" measures by the government to kick-start the economy by increasing total gross debt have no lasting positive effect on GDP. Antal E. Fekete identifies this "crisis" point as the point when the marginal increase in total gross debt has no positive marginal effect on GDP. According to Professor Fekete, once the marginal productivity of debt turns negative, a disastrous depression is inevitable.

Recent studies have indicated that debt turns toxic at between 80 and 100 percent of GDP. Beyond this, further increases in debt reduce GDP rather than stimulate it.

This final denouement is triggered when borrowers cannot be found to buy depreciating, already-indebted, assets, and international financiers reduce lending as they experience losses on pre-existing loans either through asset or currency depreciation. Some analysts predict that the monetary system will seize up due to a deflationary depression or a sustained period of stagflationary hyperinflation resulting in a "final and total catastrophe of our fiat monetary system."

Examples of debt and monetary crises can often be found after failed wars, when international financiers realize the heavily indebted government they funded will not gain the resources it planned to seize as a result of the waging of aggressive war. When this pay-off does not materialize, the losing government is left with the debt of war without the ability to offset this government debt through the imposition of reparations on the defeated nation and the acquisition of the defeated state's resources, thereby boosting the victorious state's GDP and tax revenues. This sudden monetary collapse occurred to Germany after the First World War and Japan after the Second World War.

Whatever the trigger, the key warning sign of any impending monetary crisis and economic anarchy is a sudden currency crisis, or a sudden spike in domestic interest rates, or a sudden credit crunch or the announcement of a bank holiday. Early warning signs that the private banks themselves are aware of an impending breakdown in the solvency of the financial system would be any combination of some or all the following: a spike in the oil price (which is an internationally accepted, inherently limited, store of value, and therefore can act as a modern form of hard currency, oil sometimes being referred to as "black gold"), "backwardation" in gold, and silver and sudden price spikes in other stable, non-perishable, inherently limited natural resources essential for non-discretionary industrial production; a spike in the futures contracts for vital agricultural commodities such as sugar, corn, wheat, soybeans and rice, as investors realize the debt-based monetary system has squeezed supplies of arable land; a sudden flight of money to Treasury bills and/or a sudden spike in the interest rate differential between short-term Treasury bills and asset-backed corporate paper (or a sudden spike in the LIBOR rate in London) - and then, in the very late stages of a credit crisis, a sudden and disorderly flight of money away from government bonds and a "shock" or "panic" collapse in government bond prices, as banks perceive that some governments will ultimately find it impossible to pay interest on their debt from coercively acquired taxes.

Shortly thereafter, some monetary reformers predict that there would be desperate, but ultimately futile central bank intervention involving massive, repeated bouts of "quantitative easing", then a currency crisis, then a panic run on a number of marginal, insolvent banks and hedge funds as desperate wealthy investors try to get cash out before the pyramid scheme collapses to invest in inherently limited, non-perishable, in-demand commodities such as oil and gold (and undeveloped agricultural and industrial land in areas of the world with strong economic growth), followed by a recession or depression in the broader heavily indebted economy as credit contracts but base money continues to rise exponentially.

Historically, during periods of monetary disorder, a predator-prey mentality generally grips society, with parasitic or predatory activity being witnessed, eating away at the last vestiges of the middle class. In such circumstances the following activities continue to be profitable and proliferate during monetary disorder: international banking and financial services to the wealthy elite, to assist in secreting their assets outside the jurisdiction; drug trafficking and distribution to ease the psychological stress on those slipping down the social ladder into poverty and homelessness; security and protection services to the wealthy; entertainment services to the wealthy, including gambling, prostitution (male, female and child) and "exclusive" nightclubs and bars servicing the wealthy; luxury imported goods and services; military and defense contracting and procurement (as a form of high-level security services for elite government employees), propaganda and media services defending and glorifying and legitimizing the State; and all forms of coercive government activity generally (as the tendency towards fascist-style controls feeds on itself in a positive feedback loop around a triangle of increasing government employee numbers scared away from the shrinking private sector, a banking industry supporting government jobs and big business and defense contracting supporting and feeding both).

It should be noted that in 2011 banks started paying police directly, presumably to ensure protection from the public should widespread protests commence against their alleged embezzlement activities. Commentators have observed that police forces around the world are being subtly re-trained from protecting citizens to protecting governments from citizens.

In 2010 Ireland and Greece experienced similar financial crises along the lines described above and many financial commentators and politicians expect more countries to go through the same debt crisis. In 2011, Tunisia experienced a financial and political crisis that was almost identical to those already experienced on the poorer European periphery, except that in this case the pre-existing political establishment quickly fled the country in fear for their safety - with some allegations that the wife of the deposed leader, Leila Trabelsi, ordered the country's central bank to transfer 1.5 tonnes of gold to Zine El Abidine Ben Ali and his family. The Egyptian uprising resulted in Hosni Mubarek fleeing after desperate attempts were made by him and his associates to preserve his family's wealth and power. Several newspapers have reported that, once again, appropriating the nation's gold reserves was a major priority for the fallen leader. Following the overthrow of the ruling elites in Tunisia and Egypt, other North African countries have experienced similar uprisings - all attributable to higher food prices, according to some noted commentators, who have accused Fed Chairman Ben Bernanke of literally having "blood on his hands" due to the encouragement of food price inflation via sustained inflationary loose-monetary policies. The central banker has denied that his inflationary loose-monetary policies have contributed to food inflation and Chicago Fed President Charles Evans has called for even more quantitative easing and inflation as a way out of the on-going crisis, despite previous attempts having failed to stimulate the economy. Implicit in Mr Bernanke's and Mr Evan's argument is the assumption that the central bank can create "good" inflation in some markets and avoid "bad" inflation in others. This alleged central bank power to direct good inflation and abate bad inflation is derided by a number of commentators.

Noted British Telegraph commentator Ambrose Evans-Pritchard has called these the first Malthusian "Food Revolutions" of the modern era, as "agflation" causes political instability on the periphery of major economies worldwide - particularly those countries that have already denuded their agricultural base and have to import grain and other foods to survive.

It is also reported that very complex, delicate negotiations are taking place between debtor and creditor nations to swap government bonds with gold at prices far in excess of the declared "market price" of gold. These so-called "off-market" deals - and possible diversions of government-owned gold to corrupt bankers and political leaders - are signs the Keynesian Endpoint has arrived and the politicians and bankers recognize they have lost control of the economic system and must focus on saving themselves. Max Keiser reports that it appears powerful nations will negotiate repatriation of their gold and smaller nations will either have to accept their gold is lost or face war if they attempt to repatriate their own gold home. Germany and other countries have started to slowly repatriate their gold in anticipation that gold may not be available at any price in future.

Finally, it should be noted that, with the collapse of Tsarist Russia, the establishment of the fifth and final central bank of the United States, the destruction of the fiat-issuing fascist regimes in Italy, Germany and Japan post-WWII, and the collapse of communism in the 1990s, there no longer exists any major economy where the banking system is fully government-owned or has any strictly enforceable social responsibilities beyond pure profit motive. All major world economies have now adopted essentially the same monetary system, with profit-driven private banks (government-licensed institutions legally permitted to engage in unlimited credit creation) able to pocket profits during upswings and socialize losses during downswings by use of central bank asset swaps. If critics are correct that all such systems are doomed to severe boom-bust cycles because of excessive expansion of speculative credit and endemic moral hazard, it is to be expected that all major economies will also experience essentially the same kind of environmental and food crises, and even allegedly "strong" economies such as China will experience severe economic downturns at some stage. However, equally, if critics are correct that fractional reserve banking, excessive credit expansion and artificially low interest rates are at the root of all financial crises, then higher reserve ratios and capital requirements for domestic banks (or the existence of heavily controlled nationalized banks) should reduce the severity of economic crises in those economies with higher reserve requirements for their own banks.

Potential solutions

Many consider it too late to reform the financial system. Although, as in Greece and Ireland, a few lucky or well-connected individuals will profit from the ongoing financial crisis, the vast majority will suffer and be impoverished in the long run given the extent of the malinvestments and distortions now inherent in the system. There is now so much debt in the system that the reduction in money supply growth necessary to curb malinvestment and financial bubbles would only result in financial crises and mass bankruptcies and, ultimately, business assets being transferred to the banking system. This is obvious when one observes that with no debt there is no money. With a slowing economy and reduction in money supply all assets subject to debt would inevitably be flushed through the banking system as a mathematical necessity. Therefore virtually all assets will ultimately end up under the control or ownership the banking system or its allies and associates if money supply growth slowed and/or interest rates rose due to a return to a gold standard or other similar restriction on money supply growth

Given it is virtually impossible to see how the financial system could go back to a stable money regime, it is likely the ultimate "crisis" will not be financial. Rather it is likely to be environmental or social, such as an oil shortage or water crisis or international war, as the financial system that generates ongoing malinvestment and wasted resources must continue (and accelerate) in order for there not to be a catastrophic depression. This implies that malinvestments will continue and ultimately a significant proportion of the world's natural resources will be wasted.

In those rare isolated countries where the financial crisis hits before the environmental or social crisis, aggregate debt levels are exposed as unsustainable. When this happens there are only a limited number of possible scenarios, and as each country reaches its debt limits each country will need to choose between these alternatives, as Iceland, Ireland, Cyprus, Greece and many other countries have already experienced. The debt is monetized, the debt is forgiven by the creditor, the debt is repudiated by the debtor and defaulted upon, the debt is postponed by temporary suspension of repayments, or the debtor finds unexpected or new ways to pay back the debt, which may include theft or confiscation from others.

The "Icelandic Solution" involved repudiation. Private banks were allowed to fail and social security measures for the poor and indebted were increased. However this option is virtually impossible in other larger, less homogeneous countries given the power of the financial services sector over government in most other countries. It should be noted that all IMF member countries have a central bank at the heart of their financial system. The UK went so far as to trigger anti-terrorism legislation against Icelandic banks in a bid to pressure Iceland to pay out claims against its private banks.

As Iceland proves, often the simplest and cleanest solution for any debt-fuelled crisis is simply to default and not attempt to pay back the loans - particularly if the debt has been created unethically or fraudulently. If, as Paul Krugman and other Keynesians have argued "we owe it to ourselves", then there should be no problem repudiating that debt as it would merely involve an accounting adjustment. This was the solution chosen by Iceland, even in circumstances which involved powerful international creditors. Despite enormous pressure from the UK government to try to force the Icelandic government to bail out its banks, it chose not to do so and allowed the private banks to default. The Greek government also partially defaulted on its debts in 2012. David Graeber, author of Debt: The First 5000 Years has stated a global debt Jubilee is inevitable. However, particularly where government debt default is involved, bankers generally do everything to avoid this "inevitable" outcome because it (a) reduces the value of their asset (debt-based government bonds) (b) reduces or even destroys their income stream (interest on bonds) and therefore may affect their retained earnings in future (and their credit rating and compliance with Basel III rules on Tier 1 capital) (c) can result in a systemic crisis as many banks will be using that government debt to satisfy their liquidity requirements and reduce counterparty risk - even more so under Basel III (which requires a minimum proportion of "liquid" assets to be held by the banks - and those "assets" mainly consist of government bonds) and (d) signals to other countries that it is possible to escape debt without consequence and so potentially reduces the value of government debt in surrounding countries. Self-interested bankers are therefore often desperate to avoid government debt default, and generally much prefer an economy to be strangled by debt rather than be freed of it.

Confiscation or theft is the desperate debtor's second best option, if creditors are so powerful the debtor feels it cannot default. The sudden confiscation of part of "insured" bank depositors' savings in Cyprus is an extreme example of the last option and is the international bankers' and creditor governments' preferred "solution" as it means their debts get repaid, however unjustly.

As an example of the consequences of the two alternatives, Iceland did not try to save its private bankers but instead permitted them to default on private bond payments. Ireland on the other hand guaranteed private bank debt and in doing so subjected the taxpayers of that country to decades of payments for debts that were not incurred on their behalf or for their benefit. This could be interpreted as theft through the taxing of future generations tomorrow to pay off creditors of private bankers today. Many commentators have observed that in 2010 Iceland recovered much faster than other countries such as Ireland. In his extensive analysis of the aftermath of the banking panic in Ireland, Michael Lewis wrote of his puzzlement that the timid Irish government thought it was beyond the bounds of acceptable political discourse to consider default on privately issued Irish bank bonds, when Iceland successfully defaulted and only after this did they nationalize their banking system. Commentators still dispute the relative costs and benefits of the policies implemented in Iceland and Ireland. The inflation rate has remained higher but unemployment rate remained substantially lower in Iceland compared to Ireland.

In the absence of outright default, some governments simply delay addressing the issues of debt and default, with the central bank buying government bonds and manipulating the stockmarket and other asset and commodity markets to keep solvency in the banking system and government alive. Time may allow re-inflation of the markets through the gradual injection of new debt money into the system through new borrowings. It is a rare "black swan" event for a cluster of private businesses or banks to default at the same time and governments often hope that this will not happen again once it has happened already. However, if the crisis is one of national solvency, waiting passively for recovery may only delay - and exacerbate - the final catastrophe as the debt-based monetary system pushes all businesses slowly towards the next crisis by confusing and misleading market participants with false price signals, particularly as they relate to interest rates. Once the next crisis hits because of even more confused price signals due to government interference in the market for money, time is something panicked financiers and investors are least likely to want to give up when the threat is never getting their money out of the imploding investment bubble. In extreme cases banks could set up "independent" corporate investment vehicles to buy the assets associated with the bad debt, thereby allowing borrowers to liquidate their investments and allow time for the markets to re-inflate. Alternatively, these "sour" loans, that have gone bad through too much debt overwhelming the markets, could be dumped or "hidden" on the central bank's balance sheet, and swapped for more secure government debt (financed through compulsorily acquired taxes, which are immune from the risk of private bankruptcy). However the holding costs involved in these measures would be extremely high and would not guarantee that the losses could be averted if no new gullible investors could be found to offload these distressed assets. More fundamentally, these short-term "parachutes" used after bubbles burst do not save ordinary borrowers from foreclosure and bankruptcy, nor do they address the pernicious long-term dysfunctional aspects of fractional reserve banking described above. These problems are temporarily averted, only to be dealt with yet again by the next generation of indebted governments and peoples. Simply deferring the crisis and repeatedly bailing out the banks may simply entrench misallocation of resources within the financial and governmental sectors, starving private businesses of the savings needed to invest and produce.

The preferred long-term free market solution (outright default and a return to free market money and the abolition of legal tender and central banks) is extremely unlikely. In addition, given that bankers and central banks "stole" most of the people's gold, with mass confiscations dating back to the 1930s in the US and earlier in Europe, an immediate and uncompensated return to the gold standard now would simply further enrich bankers and impoverish workers through crushing deflation, as the value of the assets the middle class had previously saved in (housing and mutual funds) collapsed and gold (the "elite banker's money") suddenly soared in value, allowing bankers yet another generation of largesse from past theft. It should be noted that one of the principal financial assets of both the IMF and the US central bank is confiscated gold (the other being government bonds). Less than 1% of all pension fund assets held by the general public are currently allocated to physical precious metals and many mutual funds have mandates effectively prohibiting them from holding physical precious metals. If the gold price were to soar, the very institutions most responsible for financial disorder would be those most likely to benefit from the chaos, having already positioned themselves to benefit from any price explosion in gold.

Given that both the Icelandic and radical free market solutions are effectively impossible to implement to any significant extent, some analysts of the current debt-based monetary system consider that, after decades of excess debt and fiat money, the current capital structure is so distorted and malinvested, the food supply so industrialized and vulnerable to shocks, and the environment generally so polluted from government-protected mining and mass industrialization that there is no hope for the vast majority of the middle class and indeed the mass of humanity in the coming decades as a combination of periodic confiscation and selective debt monetization destroys any stability in the world economy.

Getting back to a market-based banking system would require, at minimum: (1) abolition of all deposit insurance; (2) eliminating the doctrine of "Too Big to Fail" by prohibiting the central bank from buying any assets from insolvent banks; and (3) allowing the market to set interest rates by removing this price fixing power from the central bank and allowing the real inter-bank market to set interest rates. However, such changes to the global monetary system would likely trigger immediate bank runs on the weakest banking institutions and (most likely) a systemic crisis, resulting in a sudden deep depression in the short term and a period of minimal or no capital investment in the medium term as access to lending dried up from suddenly illiquid financial institutions. Although in the minds of many Austrians, the resulting system would be greatly preferable to the current dysfunctional and unsustainable system, the transition period would likely be so traumatic that no democratic government (or no government at all) would likely countenance such deregulation, nor would they likely be allowed to by the banks themselves.

Government and banking have become so intertwined there is virtually no difference between them, as banks bail out governments who in turn bail out banks in Ponzi scheme fashion.

Coercive, rule-bound government, by its very nature, can only perpetuate itself if it constantly maintains a monopoly of force and is widely respected as the final arbiter of disputes between any two parties within its jurisdiction. Governments do not obtain their revenue through donations or voluntary payments but rather either tax the populace or print fiat money to spend on projects the government deems worthwhile. There is therefore an inherently dangerous power in government spending. Good government exists to provide public goods, regulate externalities and protect and enforce property rights. However, if government force is used not for public purposes but to protect and enhance the power of a tiny political and financial elite, parasitic thieving forces can take over monopoly government and destruction of the economy can occur without the ability of the people to revolt or defend themselves against the depredations of government force. Destructive policies can therefore continue for longer than the survival of the economy itself, especially if people have been lulled into complacency by a long history of relatively benign government whilst parasitic forces slowly take over power from behind the scenes. Some consider that modern democracy has been subverted and that the two-party choices being presented today are a charade, with little real difference between duopoly political parties, which are just shams to cover the slow but inexorable takeover of the levers of power by the financial "elite", who do not respect nor care about the will of the people, who they consider too stupid or powerless to be treated seriously. Since the mid-1990s and even earlier it has been argued by many commentators that the gold default of August 15, 1971 would inevitably lead to economic disaster due to the distorting and parasitic effects unlimited fiat money and credit creation would have on the productive private economy. The relentless exponential growth in retirement and welfare benefits will now be enough to bankrupt many Western governments (including the United States). No one in power today appears willing to tackle either the corrupt banking industry or government largesse. Too many in power have a vested interest in the continuation of the system of spiraling inflation and debt to stop it, even if it could be stopped. Whilst the general economy suffers, old infrastructure collapses, man-made environmental crises abound, retailers go bankrupt, millions are foreclosed upon and are left homeless (whilst at the same time hundreds of thousands of houses lie empty and decaying in major economies around the world) and real average incomes are decimated, perversely, banking bonuses and lobbyists' incomes have skyrocketed and the powers of the Fed and other central banks have increased because of increased regulatory duties despite their previous failures. Despite this obvious incompetence and despite repeated failures of policy at the highest levels, anyone advocating solutions beyond those approved within failed mainstream two-party thought is commonly labelled "insane", "crazy" or an "extremist". Noted gold investor, Jim Sinclair, has publicly stated that the chaos has one cause - bankers have bought governments around the world and today's bankers are little more than irredeemably shallow "sociopaths", unable to grow a conscience and unable to foresee or care about the broader societal consequences of their actions beyond their own incestuous social groupings. Leading British specialists in the pathology of the psychopath, Professors Robert Hare and Paul Babiak suspect the banking industry does indeed attract psychopaths and probably has a much higher proportion of mentally unstable psychopaths as executives compared to other industry sectors, although their comprehensive test (determining the degree of psychopathology in the workplace) has yet to be applied to the banking sector or to senior government officials or politicians. Michael Price, co-director of the Centre for Culture and Evolutionary Psychology at Brunel University in London agrees that the characteristics that make for good traders and investment bankers are very similar to those that define psychopaths. Former UK drug tsar David Nutt has stated that the banking crisis was caused by too many bankers taking cocaine.

It should be noted that through the gigantic stream of interest from mortgages and government debts, even junior bankers earn around US$370,000 (or around £236,000 in the UK) and this has steadily increased even in the aftermath of the financial crisis. Those who head up the "Too Big To Fail" banks earn around US$18 million per year, with some executives doubling their own pay in 2010. Lawyers who service and support the international banking and business community are reported to be earning up to US$2 million a year even in small peripheral countries such as Australia. Banks' share of profits of the total economy has steadily grown to take in around 30% of total profits of all US listed companies.

Given many of these people are not actually producing services people would voluntarily pay for in a genuine free market economy, many of these service providers associated with the issuance and distribution of monopoly currency would be made redundant or be rendered unemployable almost immediately upon a return to a true free market gold standard. It is to be expected that these people would be violently opposed to any change in the status quo given the dramatic change in lifestyle that this would necessitate. In particular, it is to be expected that these people would specifically oppose the abolition of legal tender laws and fight against any formal declaration by any government that fractional reserve banking is a form of embezzlement or counterfeiting, or that the current financial system is a Ponzi scheme (which are generally illegal in most Western countries if they are not government-supported).

Jim Sinclair suggests that many senior participants in the international banking and derivatives industry should be jailed to protect the public from repeatedly being "raped" by their scams and has the following conclusion on his website:

For years I have been telling you that there is NO PRACTICAL SOLUTION to the total of all the mistakes that have been made since Roosevelt, in a depression, started it all.

Jim Sinclair considers it too late to save the system and recommends people become self-sufficient and buy gold to await the inevitable collapse of the political and economic system and the associated breakdown in the division of labor.

Max Keiser has stated that the culture of actual physical sexual coercion and harrassment allegedly exhibited in the financial services industry is simply symptomatic and an outgrowth of a culture of financial rape and exploitation. In order to be part of the system, you must be blind to its consequences. Therefore, no one with a conscience can become powerful enough within the system to fundamentally change trajectory from its current catastrophic path.

Ironically, many victims of rape and abuse come to blame themselves and never fight back, preferring to adapt to a life of abuse or enslavement. This is called "learned helplessness" in psychological terms. Doug French finds a direct analogy between the dynamics of physical rape and financial abuse, with many indebted individuals blaming themselves for their predicament and refusing to default on their debts, even though it would be in their clear financial interest to do so.

John Perkins, author of Economic Hitman, has openly stated that the U.S. government is merely a front runner for major corporate interests and has brutally assassinated leaders of countries where reform has been attempted. The zealotry and extremism against genuine and honest monetary reformers on the one hand and the payoffs and largesse given to unprincipled and corrupt supporters of the current monetary regime on the other ensure there is no path of reform left for those potential leaders with a conscience.

Dimitry Orlov, author of Reinventing Collapse, has written extensively about the striking similarities between the collapse of the USSR and the multiple environmental, economic and social crises facing the USA. He also predicts economic, political and social collapse in much of the West and in particular predicts that peak oil will result in some countries being cut off completely from oil supplies resulting in sudden social upheaval and starvation and believes that it is too late for any kind of meaningful reform:

(US military adverturism overseas) is just a very striking example of being unable to stop, even though what you're doing isn't actually working...

By demolishing as much of the social infrastructure as exists in the country... you will end up with an even less literate population that will be unable to oppose the government, unable to stand up for themselves and demand that their rights and needs be met...

People who think they can somehow skirt the financial system are wrong. They will be dominated by the Bernankes of this world and others. There isn't really a way out except to make do without money. And that's kind of what I try to explain to people is: Reduce your needs for any kind of interaction with the official economy and you will do better.

Given these repeated financial crises arising from the fiat monetary system, many monetary reformers predict that there will inevitably be widespread default or hyperinflation or depression - or most likely all three simultaneously in what Ludwig von Mises predicted would be a "final and total catastrophe" of our unsustainable, Ponzi-like, fiat monetary system. After this environmental or social "catastrophe" in which a significant proportion of the population may die through starvation or war a spontaneous market-induced return to the gold standard is anticipated to be the most likely result. Other possible solutions following the catastrophe include a mass movement away from government controlled fiat currencies and widespread acceptance of Bitcoin or other crypto-currency, returning the economy to a more stable and less debt-based money supply, a return to legally enforced full reserve banking combined with the issuance of government-issued debt-free fiat currency, or free banking and the issuance of private coinage and private money. If these solutions are not initiated soon, it can be expected that an economic crisis will ensue at some stage, as environmental crises and destruction of arable land slow GDP growth in developing nations and fewer young people in developed economies can be found who are willing to go into debt in sufficient magnitude to pay off the debts that have already been accumulated. As extreme inequality increases, and environmental and financial crises repeatedly erupt, many believe a political crisis will eventually result in calls for revolution and fundamental monetary reform. However, as noted above, some commentators consider that it is already too late to avoid a combined financial, environmental and demographic catastrophe even if reform is now attempted.

Even if worldwide economic catastrophe cannot be averted at this stage of the metastasizing financial crisis, choices will still need to be made by each government in response to the crisis. On-going, worsening, debt-created crises in the economy and society (and the unsustainable damage to the environment caused by debt-created overconsumption) are likely to turn monetary and economic policies either to the extreme left or to the extreme right, as there are a number of competing solutions to the debt-based monetary "problem". This is already happening, with the Greek elections seeing the biggest gains in extreme left and extreme right wing parties.

It should be noted that some commentators consider that Western governments have in recent years chosen a combination of the "worst" of all possible options: bailing out banks and increasing government spending and indebtedness whilst periodically trying to enforce austerity against the middle class and the ordinary working class. Some have called Western government policy reactions to the financial crisis as a decisive move towards "Crony Capitalism" that is neither "free market" nor "socialist" but rather the ad hoc acts of a corrupt banker-government cabal devoid of any political philosophy or underlying, consistent economic rationale. If this is correct, the destruction of economic capital in those countries adopting the Crony Capitalist model in response to the financial crisis will likely result in the descent into quasi-Third World status.

Libertarians, Austrians and free market money

Libertarians and Austrian School supporters envision a voluntary society of free markets (where banks - however large - are allowed to fail if they cannot perform their obligations), small (or no) government and the abolition of monopolistic legal tender laws, allowing money backed by a free market gold standard or silver standard to come back in circulation (or some other free market money system such as Bitcoin). It should be noted that even a partial return to the gold standard (allowing foreign central banks to redeem US government bonds in US gold) would result in the gold price having to rise to US$12,000 - US$20,000 per ounce.

It should be noted that free market Austrians do not advocate deregulation of the financial services sector, as they consider that the industry itself currently violates free market principles.

It must also be emphasized that a necessary pre-condition in establishing a true free-market order would be the complete abolition of all legal tender laws and the abolition of monopolistic central banking, including repeal of the Federal Reserve Act of 1913. "Capitalism" or "the free market" cannot be blamed or held responsible for current dire economic conditions given this coercive government prohibition against competition in currency creation. Some Keynesians dismiss this desire to return to the gold standard by pointing out that financial crises occurred prior to the creation of the Fed. Austrians counter by stating that such crises, although possibly less frequent, have been more severe and long-lasting after the creation of the Fed. In addition even those "panics" which occurred prior to the creation of the Fed had monetary causes relating to fractional bank regulation and speculation. Some Libertarians would also support experimentation with full reserve banking, recognizing that when fractional-reserve banking is combined with the gold standard a strong cyclical bias (and the systematic transfer of real wealth to the banking system) is normally inevitable. Those Libertarians who support full reserve banking would strongly support more flexible and forgiving bankruptcy laws in a fractional reserve banking environment, recognizing that no stigma should be attached to bankruptcy given the anti-Libertarian "unjust acquisition" of real wealth implicit in central banking, compulsory legal tender laws, fractional reserve banking and taxation.

In the absence of sound money, over time large private corporations become mere extensions of powerful government and banking fiat. David Stockman has stated the following:.

It not only shows that the so-called recovery is tenuous and highly skewed to a small slice of the population at the top of the economic ladder, but also that statist economic intervention has now become wildly dysfunctional. Largely based on opulence at the top, Wall Street brays that economic recovery is under way even as the Main Street economy flounders. But when this wobbly foundation periodically reveals itself, Wall Street petulantly insists that the state unleash unlimited resources in the form of tax cuts, spending stimulus, and money printing to keep the simulacrum of recovery alive.

Libertarians such as Murray Rothbard argue that in such a toxic monetary environment resource allocation is perverted by some or all of the following factors: corrupt alliances between so-called "private corporations" (which are often extensions of government or banking interests) and regulators; increasingly intensive business structures to suit the needs of a concentrated and cartelized banking system; and the constant overriding of small communities and local government planning with central government directives to satisfy the needs of big business. In such a corrupted monetary system, libertarians argue that financial and man-made environmental crises cannot legitimately be blamed on "private" corporations but rather blame must fall squarely on the true source of the problem - centralized government control of credit and money, which in turn dilutes private property rights (especially in relation to traditional owners and farmers) and creates massive distortions in scarce resource allocation, with financial and environmental crises being the predictable consequence.

Regarding the current accumulation of government bonds and private debt, many Libertarians believe that the creation of the Federal Reserve under the Federal Reserve Act of 1913 was unconstitutional and consider that at least some of this accumulated debt should be canceled or forgiven prior to a return to the gold standard in recognition of its fundamental illegitimacy. Arguably this would be supported by the "just acquisition" jurisprudence of legal philosopher Robert Nozick and Libertarian advocate Murray Rothbard. As Murry Rothbard states:

Many libertarians fall into confusion on specific relations with the State, even when they concede the general immorality or criminality of State actions or interventions. Thus, there is the question of default, or more widely, repudiation of government debt. Many libertarians assert that the government is morally bound to pay its debts, and that therefore default or repudiation must be avoided. The problem here is that these libertarians are analogizing from the perfectly proper thesis that private persons or institutions should keep their contracts and pay their debts. But government has no money of its own, and payment of its debt means that the taxpayers are further coerced into paying bondholders. Such coercion can never be licit from the libertarian point of view. For not only does increased taxation mean increased coercion and aggression against private property, but the seemingly innocent bondholder appears in a very different light when we consider that the purchase of a government bond is simply making an investment in the future loot from the robbery of taxation.

In late 2010, financial commentator Max Keiser started the Buy Silver Crash JP Morgan Campaign 2010 in an attempt to expose the flaws underlying the fractional reserve banking system. In 2011 when the silver price dropped he then began to promote Bitcoin and cyrpto-currencies as a way of retaining wealth outside the banking system when Bitcoin was less than $5. Max Keiser has described the current economic system not as "Capitalism" (which is a now defunct term in his view), but as "Debtism" - emphasizing the dominant role finance now plays in all economies still popularly described as "capitalist" by the mainstream.

Free Banking and Full Reserve Banking

On the issue of the required level of bank reserves, Austro-libertarians are sharply divided on the optimal solution to eliminate the price distorting and destructive forces inherent in fractional reserve banking.

Some Austrian scholars advocate "free banking", where banks are legally permitted to engage in fractional-reserve banking activities provided they comply with the standard laws against fraud and are not supported in any way against the possibility of bank runs and are forced into bankruptcy should they not be able to pay their debts as and when they fall due. Provided depositors are clearly made aware that their demand deposits are being lent out and are not universally available for immediate withdrawal and provided there is no way in which such banks are propped up in the face of bank runs, free banking advocates do not support outlawing fractional reserve banking as embezzlement per se.

Advocates of this system of banking include Lawrence White, Steven Horwitz, George Selgin, and Kevin Dowd, amongst others. F.A. Hayek also advocated the de-nationalization of money production and implicitly supported a free banking financial system in some of his works on monetary reform.

Rothbardian-oriented Austrian scholars advocate "full reserve banking", considering fractional-reserve banking and the associated issuance of irredeemable paper money to be inherently fraudulent, unethical, unjust, disruptive and dysfunctional, akin to embezzlement and counterfeiting. Full reserve banking would require banks to retain in reserve all deposits that are legally available for immediate withdrawal, and permit lending only from longer-term deposits.

Advocates of this system of banking include Murray Rothbard, Jesus Huerta de Soto, Jörg Guido Hülsmann, and financial commentator Mike Shedlock, amongst others.

Commentators David Stockman and Michael Shedlock also support the creation of full reserve postal savings banks that do not lend out money from checking accounts. According to Michael Shedlock:

And the solution is so easy too. Open a bank that charges nominal fees for checking and makes no loans. Such a bank would not need loan officers or other high-priced personnel. It would offer safekeeping of money and simple checking accounts for a fee.

Those who want interest on their money should have to take a risk, the risk of a possible loss.

Finally, and as I have pointed out before, lending of checking accounts is outright fraud. Checking accounts are supposed to be money available on demand, but since Greenspan authorized Sweeps in 1994, almost none of it is.

Most recently, in late 2010, two British MP's, Douglas Carswell and Steven Baker, sought to introduce legislation into the British Parliament that would allow depositors to decide if their money should be lent out and for what period. If this legislative reform were to pass, British depositors would have the option to elect to save their money in full reserve bank accounts.

In early 2013, the idea of full reserve banking began to reappear in mainstream circles, after other "remedies" appeared to fail or only defer the next crisis, but not solve the banking "problem". Even some "establishment" economists such as Jeffrey Sachs have openly criticized unregulated fractional reserve banking, and called for a clear legislative division between heavily regulated and controlled liquidity-supplying high-reserve fractional reserve banking and open unprotected speculation, which would be subject to risk of bankruptcy.

Antal E. Fekete of the New Austrian School advocates return of real bills (which are self-liquidating debt) and criticizes the Rothbardian position opposing fractional reserve banking as impractical and ahistorical. He has stated:

The altercation between the American Austrians and the New Austrian School of Economics is a tragic waste of talent. We should settle our differences not by mud-slinging and by calling names, but through high level scientific debates... I sincerely hope that they accept and we can join forces in preparing the ground for the triumph of the gold standard after a brief reactionary period in history dominated by the regime of irredeemable currency.

Market Money: Gold and Silver and Crypto-Currency

In the absence of reform, many Austrians and libertarians are actively buying gold and silver and transferring savings to Bitcoin or other free market crypto-currencies all of which cannot be created at the whim of governments. Many Austrians believe crypto-currencies and gold and silver and other essential commodities are ideal investments during this period of fiat money expansion and experimentation, as no government in the history of the world has ever escaped economic catastrophe and debasement of the currency after adopting a pure fiat money and keeping money in bank deposits is becoming increasingly risky as governments renege on promises to keep depositors' money safe.

In relation to crypto-currencies, although self-limiting and privacy-protecting crypto-currencies such as Bitcoin, Etherium and Monero may assist in protecting many people from the wealth-destroying effects of inflation and protect against the risk of confiscation of bank deposit savings (as occurred in Cyprus and other countries following the Great Recession of 2008), the broader economic power of banks and governments to control the economy will not be substantially constrained even by widespread adoption of self-limiting crypto-currency because the money-making powers of governments and bankers will not be constrained by the movement of capital into crypto-currency unless so-called "hyperBitcoinization" occurs and the central banks stop supporting private banks with bailouts and new fiat money when private depositors disappear (which at this stage is highly unlikely). Individuals will still be earning money in domestic fiat and periodically transferring savings to crypto-currency and therefore job choices and economic decisions will still be driven by pricing in fiat currency in the absence of "hyperBitcoinization". Even if the movement of capital from fiat to crypto does materially affect the banks by way of bank runs and capital outflows, the governments may seek to ban crypto exchanges and replace the self-limiting crypto currencies with their own depreciating crypto in the same manner that they confiscated gold and swapped it for fiat in the Great Depression. Although the creation and widespread adoption of crypto-currencies are both consistent with Austrian pro-market principles and may allow citizens to keep a portion of their personal wealth outside the traditional fiat money/banking system, the economic effects of monopoly control of fiat money by governments and bankers will still continue, as will the deleterious effects of fractional reserve banking described above, as governments will still have the power to create potentially unlimited sums of money to overpower any economic forces aligned against them and repeatedly bail out banks as they have many times in history. Unless governments and banks are forced to accept gold or self-limiting crypto currency for payment of taxes and as bank deposits, the business cycle and the destructive effects of fractional reserve banking will continue essentially unabated (perhaps with more frequent bank bailouts by central banks and more open conflict with the virtual Bitcoin economy). Without forceful revolution or banks and governments submitting to the will of the market in setting a free market money standard (and accepting that free market money for taxes and deposits) crytpo-currency will remain a marginal influence on the wider economy. Some argue that Bitcoin holders should transfer their wealth to real physical resources (land and security services) and enter political lobbying, as eventually the "fight" for real land and real resources will still ultimately occur in the "real world" which will require virtual wealth to be converted to real resources to successfully compete with the real resources of governments and banking interests, who already have a near monopoly control of real resources.

In summary: Unless banks or the government mint are forced to issue gold or crypto-currency in exchange for fiat currency, their power in distorting markets and prices will not be substantially affected by the widespread adoption or popularisation of crypto-currencies and the environmental and economic effects described above will continue essentially unabated. If there are substantial economic effects governments will likely ban or regulate crypto currency exchanges in a repeat of the strategy used during the Great Depression in relation to gold.

Neo-Chartalism and Modern Monetary Theory

Neo-Chartalists and associated advocates of Modern Monetary Theory (MMT) also accept that the current bank-dominated monetary system is dysfunctional, but advocate reform within the strictures of a fiat monetary system rather than looking to return to a commodity-based monetary system.

Most advocates of MMT support permanent perpetual deficit spending throughout the economic cycle to support the economy, believing governments can never go bankrupt in a fiat monetary system. Some advocate spending debt-free fiat money to inject sufficient funds into the economy to keep the population solvent.

Austrians and sound money advocates criticize supporters of MMT not in their description of the current monetary system (which many Austrians consider reasonably accurate) but for their "shallow" understanding of the dangers of unfettered government spending through fiat money creation and their "naive" support of deficit spending and inflationary policies as an "easy" way out of economic crises. Most Austrians consider MMT a version of socialism applied to the monetary system, with the problems that paradigm entails, including the risk of government corruption and the naive assumption of government omniscience.

Debt-free fiat money

The concept of (non-crytpo) fiat debt-free money is most notably represented by Michael Rowbotham, Stephen Zarlenga of the American Monetary Institute, Bill Still producer of the well-known Money Masters videos and Ellen Hodgson Brown and can be traced back to Social Credit arguments from C.H. Douglas amongst others. They advocate various forms of "pure" fiat money issuance by government, without the need for the government to issue a bond to print or issue the fiat money, combined with full reserve banking or (at least) high reserve banking. More recently, mainstream economists have begun to seriously consider the issuance of debt-free money as a policy solution to the current ongoing crisis.

Currently virtually all money issued in modern economies is initially sourced from debt; in other words, it is "debt money" because it is created via some entity (government or business or individuals) borrowing fiat money into existence and the money being created by a bank before it is spent by the government or by a business or by an individual. "Debt money" is therefore money created in parallel with debt or credit via the process of fractional reserve banking or the issuance of a bond from the central bank.

"Debt-free money" is a "true" or "pure" fiat currency issued by the Treasury of a central government, where there is no requirement for its eventual return as a condition of its creation (except by way of payment of taxes). This can occur either through debt monetization where the central bank exchanges government bonds with fiat money or where the central bank issues money directly to the government to spend without any bonds being created in the first place. In either case, the government gets to spend pure fiat money without any need to pay interest on bonds or to pay the money back to the bank in future. It is argued by Rowbotham and others that this method of issuing new money would allow for the substantial lowering of tax rates, would allow public works projects to be funded cheaply, and would stimulate economic development, if the fiat money is spent sensibly on inflation-lowering long-term capital projects.

Michael Rowbotham seeks the cancellation of "unjust" debts (such as third world debt), and, crucially and most importantly, a social security safety net involving a guaranteed minimum debt-free income (sourced from government-issued debt-free money independent of any central bank) for all citizens in the debt-based economy. Under this proposal, which is supported by a number of Canadian academics, every adult citizen would be given a livable debt-free income transferred electronically into their bank account, simply by virtue of their citizenship. They could then use this debt-free money to pay off their mortgages or to live, debt-free, without being compelled to work as a wage slave in the market economy if they chose not to. The government would finance these payments simply by ordering the private banks to accept their electronic instructions as legal tender. It would therefore not result in the expansion of government debt. This increase in "pure" fiat money issuance to the populace would be carefully and simultaneously combined with a steady increase in reserve requirements on the banks to balance the inflationary effects of pure fiat with the deflationary effects of a controlled restriction on the issuance of credit.

Ex-U.S. Treasury Department analyst Richard C. Cook also supports the issuance of debt-free money and zero-interest credit by the central government and has provided a detailed blueprint of monetary reform recommendations to transition to a debt-free money supply.

Some commentators have speculated that the issuance of massive amounts of debt-free pure fiat money is already happening, and we are currently living in a massive money printing experiment, as so-called "quantitative easing" will never be reversed. Ambrose Evans-Pritchard has warned:

If Lord Turner's helicopters are ever needed, we can be sure that the Anglo-Saxons and the Japanese will steal a march, while Europe will be the last to move. The European Central Bank will resist monetary financing of deficits until the bitter end, knowing that such action risks destroying German political consent for the euro project.

By holding the line on orthodoxy, the ECB will guarantee that Euroland continues to suffer the deepest depression. Once the dirty game begins, you stand aside at your peril.

A great many readers in Britain and the US will be horrified that this helicopter debate is taking place at all, as if the QE virus is mutating into ever more deadly strains.

Bondholders across the world may suspect that Britain, the US and other deadbeat states are engineering a stealth default on sovereign debts, and they may be right in a sense. But they are warned. This is the next shoe to drop in the temples of central banking.

Properties

According to its proponents, government-issued debt-free fiat currency (such as debt-free notes and coins) can circulate perpetually in the economy as "stable" money and although not as secure as hard currency, government-issued debt-free notes and coins (such as United States Notes and silver certificates) do not have the same effects of debt-based money (which require pertpetual interest payments to be tied to the creatin of new money). It should be noted however that fiat currency can be a source of hyperinflation if its production is not controlled, as the government has the potential to issue unlimited amounts of fiat currency - provided it is accepted as "money" by the private banking system. Notably, the Federal Reserve reportedly threatened not to recognize the trillion dollar platinum coin should the Obama Administration try to mint one. Debt-free notes and coins in circulation (being defined as M0) now account for a tiny fraction of the total debt-based M3 money supply in all modern debt-based economies (and debt-free M0 is also generally less than 10% of the total M2 money supply in most developed economies).

Instead of money being created "indirectly" and "furtively" at the point of loan creation by the private banking system, with periodic bailouts to already-rich bankers and a "boomerang" boom-bust cycle as debt levels expand and contract, this debt-free "pure fiat" money would be created directly and openly by the democratically elected government and permanently issued to its citizenry by way of instruction to the private banking system. An example would be the coining of a trillion dollar platinum coin by the US government to pay off some of the Federal debt and continue its deficit spending in times of recession or depression. There would be no requirement for this money to returned (plus interest) and be extinguished as a condition of its creation, which is the central feature of all debt money systems.

Michael Rowbotham argues that this system of "debt-free" money issuance would not dramatically raise consumer prices (or at least would not be as inflationary or as dysfunctional as the current compounding debt-based system). He argues that this would also reduce overconsumption and the associated environmental damage associated with debt-based consumerism. It would also give individuals the free time to engage once again in non-marketable religious, artistic and recreational activities if they chose to do so.

It is acknowledged that, in the absence of tax rates which ensure the return of this "pure" fiat to government coffers, this would be "inflationary" in the traditional sense, but proponents of debt-free fiat money issuance argue that if this "pure" government spending is directed to capital works projects and other long-term projects, this "pure" fiat money issuance would not result in excess price inflation, although it would dramatically increase base money. Michael Rowbotham argues that if bank reserve and capital ratios were increased and bank regulations on derivatives were imposed at the same time as the increase in "pure" base money was occurring, the two policies would balance each other out and no appreciable price inflation would be felt by the public at large. The increase in base money would be inflationary, but the increase in reserve requirements would be deflationary, resulting in no significant net increase in the total money supply (assuming the government was sufficiently skilled in balancing these forces through the transition to a predominantly debt-free monetary system).

It is to be expected that these policies would be violently opposed by the private banking "elite", as it would render impotent their control over the money supply, dissipating this crucial decision-making power away from its current power base, from private banks to elected governments. It would also be likely to reduce economic growth, dramatically increase the cost of labor and, potentially, result in an exacerbation of price inflation and malinvestment. However, Rowbotham, Zarlenga and Still all argue that this proposal would address the problem of inequality inherent in a debt-based monetary system and reduce the devastating impact of personal bankruptcy and allow individual citizens to quickly recover from financial hardship. They also argue that this social security measure (and government spending in general) would not have to be paid for by future generations from future streams of income tax.

Criticism of "Greenbacker" debt-free money issuance

In late 2010, Ellen Hodgson Brown and Austrian School commentator Gary North engaged in an intense debate over the direction of monetary reform, with gold-standard supporter Gary North accusing Brown of going down a path that inevitably leads to the economics of fascism and hyperinflation. Government deficit spending funded with either paper money or compliant public bank lending is not a substitute for private consumption due to the inability of coercive goverment to invest rationally long-term, given the economic calculation problem inherent in socialized economies and the interests of governments and politicians being very different from the average consumer. North argues that it is not possible to trust a coercive, non-market entity - government - to limit its spending in circumstances where pure fiat money is in the hands of politicians and that inflation, being an invisible tax, is much harder to resist than regular taxes. Greedy, corrupt, short-sighted politicians could buy off special interest groups to get elected and the general public could only watch on the sidelines as the purchasing power of their dollars steadily declines; this decline would be blamed on currency speculators and eventually foreign currencies (including "natural" monies such as gold and silver and copper) would have to be banned and confiscated from the public to ensure continued use of depreciating fiat. The fundamental error of Brown's analysis, according to North, is that Brown expects the source of the problem - corrupt governments bought and paid for by bankers - to be the source of the solution. She calls for a move away from war spending, whilst recoginizing that the current fiat monetary system favors government spending on war. To date, she has yet to reconcile these inconsistencies in her writings.

Mike Shedlock agrees with the abolition of fractional reserve banking, but criticizes the concept on similar grounds as North. Commenting on a bill to end the Fed introduced by Representative Dennis Kucinich, he wrote: "Neither sound money nor the free market comes from printing money into existence. Arguably the only thing worse than the Fed printing money out of thin air is Congress printing money out of thin air for the purpose of full employment and/or any other absurd ideas Congress has."

Peter Schiff also believes getting rid of the Fed and returning money issuance to Congress would be worse than the current system.

Austrians criticize leftists' inability to see that printing money and government spending is not the same as voluntary spending by private individuals as government spending from printed money distorts the capital structure; does not result in lasting economic growth due to the economic calculation problem; and is not subject to normal cautious profit and loss considerations given that the government can continually recover from errors by simply printing the money it spends. They also avoid or ignore the fact that historically governments have often acted in their own self-interest and concentrated power in themselves and their corrupt associates and families rather than benignly ruling for the benefit of the populace and their long-term interests. Every sovereign - without exception - that has been given the unfettered power to print fiat money has eventually printed too much debt-free money and in the end had to ban competing currencies (such as foreign currency or metallic money), and in the end faced revolt, revolution, hyperinflation or other social catastrophe.

Debt-free money issuance: Support from free market Austrians

In contrast to Gary North's attacks on "Greenbacker" Ellen Hodgson Brown, and Mike Shedlock's criticism of debt-free money printing by Congress as the worst of all choices, noted Austrian monetary economist Joseph Salerno has voiced his support for the idea of debt-free money issuance in comparison to the current debt-based system, if a choice is to be made between the two. In his defense of the trillion dollar coin idea, he states the following:

Let me be clear: my intention is not to deny that the trillion-dollar coin is a ludicrous and dangerous idea; it is rather to point out that the Fed is a more ludicrous and dangerous idea.

In relation to the "dangers" of Congressional control of the money supply, Salerno responds as follows:

Obviously, congressional control of the fiat money supply is far from the ideal monetary system, which involves the complete separation of government and money through the establishment of a commodity money, such as gold, the supply of which is determined exclusively by market forces. Nonetheless, there is much merit in replacing the opaque and pseudo-scientific control of "the money supply process" by the entrenched bureaucrats of the Fed with overtly political control of money by elected officials and partisan Administration appointees.

Salerno outlines a number of advantages of "simple inflation" over the current debt-based round-about system of money creation:

...as a permanent policy, it would be a wonderful device for wresting control of monetary policy from un-elected, secretive, and pseudo-scientific Fed bureaucrats and placing it under a Congress subject to popular scrutiny and elections. Of course this would not be an ideal system, which would be a hard money consisting of a market supplied commodity like gold. But it would have a number of significant advantages over the present Fed-dominated system. First, as just noted, money creation by Congress would be far more transparent and understandable to the public than the arcane procedures by which the Fed expands the money supply. Second, the injection of new money directly into the economy via government purchases of goods and services would avoid the continual and systematic distortion of financial markets and the interest rate currently caused by Fed open market operations. This process of “simple inflation” as Mises called it would, therefore, certainly produce rising prices but would not generate business cycles of recurring booms and busts. Finally, the Fed could no longer operate as a bailer-outer of last resort, surreptitiously bailing out gigantic domestic and foreign financial institutions in the absence of discussion and consent by Congress and the knowledge of the public.

Public Fractional Reserve Banks

Ellen Hodgson Brown supports nationalization of the private banking system once the full losses on the banks' portfolios are recognized. Ellen Hodgson Brown has repeatedly called for the creation of publicly-owned banks similar to the North Dakota model, where the interest earned by these state government-owned banks could be ploughed back into local economies financing public works and local government services instead of being sucked out of local communities into the major commercial banks. She has cited numerous historical examples where public banks worked successfully for many decades, including in Australia and Costa Rica, as examples of the viability and benefit of public fractional reserve banks.

Switzerland (a notionally "capitalist" country) has a predominance of "public" banks along the lines advocated by Brown and has followed this system with notable success for over a century.

Brown also supported "QE2" - which she described as a necessary and desirable funding of government spending via money printing rather than by the indirect means of issuing of interest-bearing government bonds, which simply allows private bankers to profit from costless money creation.

It should be noted that most monetary reformers who call on the government to take back the money creation function from debt-supplying private for-profit banks also call for full reserve banking instead of nationalization to remove the bank's alleged "embezzlement" and "counterfeiting" abilities.

It should also be noted that if Austrian claims that fractional reserve banking produces business cycles is correct, public ownership of banks will not stop periodic economic crises and business cycles from occurring, unless strong controls and very high reserve ratios are imposed on all banks. Without this, many consider the "solution" of publicly-owned fractional reserve banks merely perpetuating the problem.

Stephen Zarlenga's AMI organization has strongly criticized Brown's support of fractional reserve banking as perpetuating the very problems she seeks to solve. Jamie Walton, from the AMI, wrote the following review:

Brown’s plan to takeover (rescue?) the big banks to continue a “fraud” within the safety of government is totally wrong. Placing the “fraud” in government doesn’t make it right, but might make it harder to stop. Does Brown realize that her statements and conclusions are inconsistent, and that what she proposes leads to exactly the same things that she’s claiming to be opposed to?

Experience shows that if the issue of money is unduly affected by commercial incentives, then, over time, “commercial loans” (i.e., debt) will dominate over more direct methods of issue. So we’d be kept in exactly the same position we’re in now: within a totally unnecessary, ever-growing and impossible-to-pay debt trap.

Obviously the sensible action to take is to remove the “fraud” and debt and retain a healthy and competitive banking sector. This is easily done with a law based on the existing provisions in the U.S. Constitution.

But Brown avoids this obvious solution and instead advocates that our government gets into banking.

It seems incredible that Brown is now advocating what she’s described throughout most of the book as fraud, counterfeiting and Ponzi, pyramid or ‘smoke-and-mirrors’ schemes. Why? Perhaps the answer lies in Brown’s apparent confusion and/or fundamental misunderstandings about the nature of money and the role of government in society, and about monetary history and monetary reform.

Left-leaning ideas

The highly successful "Icelandic Solution" of debt relief for the poor and criminal sanctions against corrupt bankers was implemented by a left-wing government although some question whether the policies truly reflected left-wing ideas given the constraints on Icelandic policy-making at the time. This policy response is consistent with left-wing, libertarian or free market perspectives. Somewhat ironically the current mix of policies adopted by established governments around the world (bailing out banks and continuing to run up debt and tax ordinary citizens) belongs to no consistent political ideology other than being "mainstream". No government has provided a coherent defense of this policy mix other than suggestions that this ad hoc mix of emergency measures was needed for expediency to "save" the current system - and (possibly) due to corruption within the political system. The current mix of policies adopted by governments worldwide belongs to no political ideology as they appear to have been adopted "on the run" by governments around the world in the middle of the crisis.

Some left-leaning commentators consider the current system a form of "structural violence" against the impoverished majority and would support additional longer-term measures such as raising minimum wages immediately after a financial crisis (rather than reducing wage rates - which they argue only prolongs the depression through reduced spending), taxing the banking system and the implementation of strongly redistributive income and land taxes to ensure the financially dispossessed are "replenished" with income. They would also support a social security safety net involving the provision of unemployment benefits and government-supplied free medical care, education and other essential services and public goods. It is to be expected however that this coercive regulatory regime would result in the systematic destruction of the entrepreneurial class as profits are squeezed by rising costs. In addition, without the issuance of debt-free fiat currency the result of these programs would be the persistent, exponential, accumulation of government debt, financed by the private banking system by the issuance of government bonds. If not properly managed, this could result in a progressively higher tax burden and may result in higher interest rates in the long term, as financiers require higher interest rates to lend to the increasingly indebted central government. Without the issuance of debt-free money these policies can be self-defeating, with the net result simply being that a larger stream of guaranteed income goes to the private banking system via the issuance of interest-bearing government bonds (which are purchased by the private banks "out of nothing" through fractional reserve banking techniques). This government debt must then be financed in perpetuity by compulsorily acquired taxes from future generations.

It could be argued that the early success of extreme so-called "right-wing" (but socialist government-guided) fascism in Nazi Germany and Italy in the period after World War I was a response to the economic chaos created by the debt-based monetary system in early 20th century Europe. Some of the economic policies introduced by Hitler and Mussolini were in direct response to the economic collapse and social anarchy caused by soaring government and personal debt levels in both countries in the post-Versailles Treaty era, and arose directly from the writings of Gottfried Feder and indirectly from the writings of Silvio Gesell and others regarding the problems inherent in an interest-charging debt-based monetary system. Although many historians justifiably criticize many of the non-economic policies of the fascist governments of Germany and Italy during this period, the economics of fascism seemed to provide a degree of prosperity to the populace, and arguably achieved the government's stated objective of restoring economic and social order during the pre-World War II era. These economic policies and their results are the subject of vigorous debate even today. (See also Inflation in Nazi Germany.)

Similarly it could be argued that socialism and communism were movements inspired by the inequalities caused by the intense (and in Karl Marx's view unsustainable) concentrations of monetary wealth, power and influence allegedly inherent in the practice of capitalism in a laissez-faire economic environment. Marx alluded to a connection between parasitic capitalism and fractional reserve banking but did not study the issue in detail.

The communist/socialist solution to the problem of fractional reserve banking is simple: re-enfranchising workers through widespread organization and unionism, complete removal (and if necessary, violent non-democratic removal) of the allegedly "parasitic" financial, capitalist and upper classes, wholesale repudiation of government debt resulting in complete debt default; forced expropriation of land and wealth from the upper classes to the dispossessed and needy working classes; nationalization of the private banks (which has required armed coups by the military in some past revolutions); and the return of the banking function from a dominant, speculative to a subordinate, administrative institution, where the banking system is reduced to a subservient arm of the centralized Leviathan. In this system, government-owned banks are directed by government policy; often provide different kinds of loans to different industry sectors at different interest rates depending on the perceived "needs" of the economy and the community; normally have a significant proportion of non-performing loans due to weak or non-existent bankruptcy laws; and periodically "forgive" failed debts in recognition of the impossibility of some businesses in paying this debt money back. In addition, individuals are prohibited from possessing large property holdings, in excess of their individual needs.

It is to be expected that the profitability of the government-owned banking system would be more stable - but dramatically lower - than that in a debt-based economy. It is also to be expected that a significantly higher misallocation of resources could occur in this system, where lending decisions are "infected" by political considerations and are not made on the basis of expected return on investment. The risk of corruption in the banking system is also expected to be higher where there is no separation between the political and monetary systems in an economy. Market-oriented monetary reformers and neo-classical economists therefore do not support nationalization of the private banking system.

It should be noted that partial nationalization of the private banking system would only be temporary, as any remaining private banks could still engage in unlimited fractional reserve banking and facilitate the eventual acquisition and control of any strategic assets in a partially socialized economic system. It is to be expected that in the absence of complete nationalization of the banking system, the private banking system would eventually dominate the financial system in any nominally socialist society.

It should also be noted that some consider the present government-directed and controlled monetary system to have communist elements, and therefore any dysfunction surrounding the financial system should really be ascribed to the defects of Marxist theory, rather than to any defect in capitalism, as capitalism no longer exists with central bank-dominated financial systems now prevalent worldwide. If this is the case, the current monetary system is not "capitalist" but rather has more "communistic" elements than commonly understood by the general public, who are led to believe communism "lost" and capitalism "won" the Cold War.

Corporatism, Crony Capitalism, Confiscation and Crisis

Assuming current trends continue, "Corporatism", "Rigged Market Capitalism", or so-called "Crony Capitalism" will continue. This means ongoing bond, stockmarket and house price rigging to keep asset prices up (and interest rates down) superficial respect for property rights but periodic confiscation by inflation or default when deemed necessary by a government-banker cabal who consider themselves above natural law. This implies ongoing "immunity" for market manipulating banks on the basis that they are "too big to jail" and the continued collusion of central banks with private banks to manipulate an increasing number of financial and commodity markets in a futile effort to control capitalism for their own survival, eventually destroying any semblance of functioning capitalism resulting in an increasingly volatile financial system. Some believe we have already reached this point where world financial markets are completely artificial and prices in many markets no longer reflect reality. Even former Fed officials now admit QE simply involves newly created money being gifted to large Wall Street banks at the expense of ordinary American workers. Ongoing "extraordinary emergency" purchases of government bonds by central banks continue every month for years, keeping interest rates artificially low and allowing government spending to continue to expand, along with a volatile heavily indebted private economy. If these "emergency" QE measures continue indefinitely this will eventually result in indefinite depression as markets are manipulated beyond the control even of the central banks, prohibiting market "clearing" and prohibiting the reallocation of resources away from the government and financial sectors. Crises in Cyprus and Greece are an indication of what will happen in other marginal countries should the current system continue - periodic financial crises and bank runs from capital controls on marginal economies resulting in impoverishment of the general populace. For major economies that are not so vulnerable to financial crises and capital flight even in the midst of massive QE, it is expected that an environmental or food crisis will eventually be triggered by ongoing malinvestment. Without debt relief, "following the rules" of debt will mean that the government will have to suddenly confiscate from the populace simply to pay back creditors. Ultimately, with a compliant populace, bankers and governments will periodically, without warning, "steal", "tax" or otherwise confiscate deposits, savings and wealth to keep the financial system alive, whilst continuing to try to grow the money supply through fractional reserve banking. Without reform or revolution, this perverted Keynesian "upside down" combination of "socialism for the rich and capitalism for the poor" will inevitably result in chronic cascading "supply" crises in commodity markets as price signals no longer "work" due to market manipulation and price "smoothing" stifling price rises that must occur for production of essential commodities to remain profitable, thereby ultimately resulting in actual supply and demand mismatches in many essential commodity markets (such as the gold and silver markets). This will ultimately produce a tiny (but massively wealthy) speculative banker class, a bloated and ineffective government sector, a private sector that mainly services lucrative government contracts (or is otherwise starved of capital and funding) and the complete destruction of the middle class, resulting in a steadily increasing disenfranchised, desperate, intergenerational underclass.

David Stockman has the following comments in relation to the current monetary system:

Accordingly, the central banking branch of the state remains hostage to Wall Street speculators who threaten a hissy fit sell-off unless they are juiced again and again. Monetary policy has thus become an engine of reverse Robin Hood redistribution; it flails about implementing quasi-Keynesian demand–pumping theories that punish Main Street savers, workers, and businessmen while creating endless opportunities, as shown below, for speculative gain in the Wall Street casino.

At the same time, Keynesian economists of both parties urged prompt fiscal action, and the elected politicians obligingly piled on with budget-busting tax cuts and spending initiatives. The United States thus became fiscally ungovernable. Washington has been afraid to disturb a purported economic recovery that is not real or sustainable, and therefore has continued to borrow and spend to keep the macroeconomic “prints” inching upward. In the long run this will bury the nation in debt, but in the near term it has been sufficient to keep the stock averages rising and the harvest of speculative winnings flowing to the top 1 percent.

The breakdown of sound money has now finally generated a cruel endgame. The fiscal and central banking branches of the state have endlessly bludgeoned the free market, eviscerating its capacity to generate wealth and growth. This growing economic failure, in turn, generates political demands for state action to stimulate recovery and jobs.

But the machinery of the state has been hijacked by the various Keynesian doctrines of demand stimulus, tax cutting, and money printing. These are all variations of buy now and pay later—a dangerous maneuver when the state has run out of balance sheet runway in both its fiscal and monetary branches. Nevertheless, these futile stimulus actions are demanded and promoted by the crony capitalist lobbies which slipstream on whatever dispensations as can be mustered. At the end of the day, the state labors mightily, yet only produces recovery for the 1 percent.

Paul Krugman has criticized David Stockman's analysis of rising debt levels. Others have criticized Paul Krugman's analysis. Paul Krugman's argument (essentially) is that debt does not matter because we (mostly) owe it to ourselves, but he never advocates repudiation or cancellation of the debt on the same basis.

Status under current systems

Whatever their political leanings, nearly all monetary reformers agree that the current financial and economic system imposed on the populace by governments worldwide, involving coercive legal tender laws, the perpetuation of government-protected private banks (organizations legally permitted to engage in unlimited and inherently speculative fractional-reserve banking activities during boom times, with recourse to monopoly central banks - and in some cases corrupt governments - to provide bail outs of fiat money during downturns), "deregulated" labor markets (which have the effect of increasing the marketization and commodification of human activity), strictly enforced bankruptcy laws (which permit the periodic transfer of assets from failed bankrupt investors caught at the end of "Ponzi-scheme" cycles to the private banks and their associates) and personal income tax (which, combined with periodic economic collapses, dispossesses the majority of the populace from their accumulated income and wealth and transfers this wealth to the owners of illicit government bonds) amounts to an inherently unstable, unjust and dysfunctional financial system resulting in environmentally damaging over-consumption and massive worldwide malinvestments, the systematic and irredeemable destruction of fertile arable land, and the government-sponsored (and ultimately unsustainable) oppression of the indebted, impoverished and economically enslaved majority.

The two major hopes for a return to stable money are a return to the gold standard or widespread adoption of crypto-currency with banks (or those that provide bank-like services in future) being required to accept either gold or crypto as deposits. Either would be consistent with Austrian principles. Should this take place, many of the problems raised above will disappear although the transition to a more stable asset-based money supply would likely be fraught with conflict between the established order and the new.

Criticisms of textbook descriptions of the monetary system

A paper published in the Bank of England's Quarterly Bulletin states "While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality."

Glenn Stevens, governor of the Reserve Bank of Australia, said of the "money multiplier", "most practitioners find it to be a pretty unsatisfactory description of how the monetary and credit system actually works."

Lord Adair Turner, formerly the UK's chief financial regulator, said "Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo – extending a loan to the borrower and simultaneously crediting the borrower’s money account".

Former Deputy Governor of the Bank of Canada William White said "Some decades ago, the academic literature would have emphasised the importance of the reserves supplied by the central bank to the banking system, and the implications (via the money multiplier) for the growth of money and credit. Today, it is more broadly understood that no industrial country conducts policy in this way under normal circumstances."

Recent studies find that the creation of money as bank credit is limited by the demand for credit, not by the reserve requirement because private banks have been able to acquire sufficient reserves in various ways to meet the growing demands for credit. These findings are invalidating the descriptions provided by current economic textbooks.

Criticisms on the basis of instability

In 1935, economist Irving Fisher proposed a system of 100% reserve banking as a means of reversing the deflation of the Great Depression. He wrote: "100 per cent banking ... would give the Federal Reserve absolute control over the money supply. Recall that under the present fractional-reserve system of depository institutions, the money supply is determined in the short run by such non-policy variables as the currency/deposit ratio of the public and the excess reserve ratio of depository institutions."

Today, monetary reformers point out that fractional reserve banking leads to unpayable debt, growing inequality, inevitable bankruptcies, and an imperative for perpetual and unsustainable economic growth.

Criticisms on the basis of legitimacy

Austrian School economists such as Jesús Huerta de Soto and Murray Rothbard have also strongly criticized fractional-reserve banking, calling for it to be outlawed and criminalized. According to them, not only does money creation cause macroeconomic instability (based on the Austrian Business Cycle Theory), but it is a form of embezzlement or financial fraud, legalized only due to the influence of powerful rich bankers on corrupt governments around the world. Politician Ron Paul has also criticized fractional reserve banking based on Austrian School arguments.

See also

• Asset liability management
• Austrian business cycle theory
• Basel II
• Basel III
• Chicago plan
• The Chicago Plan Revisited
• Credit theory of money
• Endogenous money
• Full-reserve banking
• Positive Money

Further reading

• Crick, W.F. (1927), The genesis of bank deposits, Economica, vol 7, 1927, pp 191–202.
• Friedman, Milton (1960), A Program for Monetary Stability, New York, Fordham University Press.
• Meigs, A.J. (1962), Free reserves and the money supply, Chicago, University of Chicago, 1962.
• Paul, Ron (2009). "2 The Origin and Nature of the Fed". End the Fed. New York: Grand Central Publishing. ISBN 978-0-446-54919-6.
• Philips, C.A. (1921), Bank Credit, New York, Macmillan, chapters 1–4, 1921,
• Thomson, P. (1956), Variations on a theme by Philips, American Economic Review vol 46, December 1956, pp. 965–970.

External links

• Money creation in the modern economy Bank of England
• Regulation D of the Federal Reserve Board of the U.S.
• Bank for International Settlements – The Role of Central Bank Money in Payment Systems