The Revenge Of Jesus

The "haunted, frightened tree of complete ignorance" in whose hollow lives sonia gandhi is entirely funded by metaphysical money. And this funny money monopoly is taught to the flower of our youth as "macroeconomics." But paper is NOT money, as the "promise to pay" printed on it and signed by the Governor of the Reserve Bank of India indicates. The paper is just a "money substitute." The Governor is thus engaged in "violation of contract." This funny money is depreciating in value with each passing day - thereby eroding the Capital of the poor. If they save, the worth of their savings is eroded by inflationism, which is "deliberate policy." The funny money monopolists are destroying the Capital of the poor. And civilisation can only advance if capital is accumulated.

Capital is cities and towns - and their roads and streets. Capital is houses - and shops. The people of India do not have these. Instead, the haunted, frightened tree of complete ignorance is hell bent of "welfarism" - which is entirely "capital consumption." It is "criminally insane" to engage in welfarism funded by inlfationism.

The immediate solution is the "de-nationalisation of money."

Money must be something hard, something tangible, like the cowries being sold in Puri, with different values for cowries of different sizes. People must be free to exchange their goods and services for monies of their choice. Gold, silver, cowries... whatever.

The question then arises about the legal rules by which commercial banking will be carried out. These should be the preserve of "private law" - that is, the Law of Contract. Depositors can then make two kinds of contracts with their bankers - either a "term deposit" or a "demand deposit." The banker must keep a 100 percent reserve against all demand deposits. He can only loan out his term deposits - and credit creation as a method of inflation will be ended. Thus, all paper notes will be redeemable on demand; further, all depositors will be secure - in private law, without any central bank.

Sound money and free banking do not need "international agreements" - no IMF-World Bank-G20 bullshit. In the good old days, the Municipal Bank of Amsterdam kept a 100-percent reserve; and the burghers of the City personally audited the gold stock every year. Prudent private bankers are the overseers of the market economy - and they are kept honest and prudent by their wise customers, who know what money is. It is NOT paper. And it is certainly not government paper.

The poor people of India would prosper with sound money. Their Capital would be preserved - and capital is the life-blood of Capitalism. Individuals possess Capital - with which they speculate depending on their own fancies. The "national economy" which supposedly grows at some "growth rate" that chacha manmohan and montek are carefully measuring is metaphysical nonsense. Fiction. In truth, these criminally insane money monopolists are destroying civilisation itself. In a country with so much extreme poverty, their insanity is even more criminal.

Also, these money monopolists know nothing about what "economic stimulus" means. They think printing more paper notes  and issuing them stimulates economic activity. Nonsense. Demand is generated and wealth is produced when goods and services are produced and exchanged - not money. When the paan-wallah sells his paan, he is possessed of resources to demand all other goods in the market, except paan, which he will not buy. In a nutshell, Jean Baptiste Say's "Law of Markets" says the sale of X gives rise to the demand for all non-X, or all "non-competing goods." But our poor people do not even possess the freedom to produce and sell goods and services peacefully amongst each other, from alcohol and ganja to music and dance. All "demand" is being destroyed by State Restrictions. This, while what they call "stimulus" is entirely inflationary, and a means of capital consumption. Criminally insane. Money must be de-nationalised immediately.


(You can read my brief column explaining Say's Law of Markets here.)

Of course, it might happen that our The State refuses to give up its money and banking monopoly. In which case a war must be waged against them - a "civil war." A war between good and evil. Between Capitalism, which is Good, because we produce goods, and Socialism, which is Evil and Anti-Social, and produces Bads. Like Bad Money.

True capitalism is all about sound money, a "medium of exchange" that people accept voluntarily. This money monopoly of The State is another instance of the "misuse of force." It must be ended forthwith.

The statue outside the gates of the Reserve Bank of India headquarters in Nude Elly is that of Yama, the God of Death. Interesting, what?

These detestable banksters ought to be nailed on crosses of gold - which is why I titled this post "the revenge of Jesus." But I was not referring to the metaphysical Christian God; rather, I was referring to the very physical Professor Jesus Huerta de Soto, whose books on money and banking have enlightened me considerably, showing me the way. His approach is theoretical, historical and legal - and, in the historical context, he tells of a King of Spain who executed a banker who failed to redeem his paper notes on demand; the fucker had his head cut off right outside his bank.

I say: Crucify them on crosses of Gold.

Private money.

Corruption, Tyranny - And False Hope

Yet another corruption scandal has broken - and public sector bankers have been found to have lent vast sums of money to real estate companies by bending rules. But this is nothing new. Public sector banks have been looted by State personnel for decades - and, when the banks have gone belly-up, the same State has stepped in to pump in public money.

Further, with central banking, fiat paper money and fractional reserves, which results in "credit creation out of thin air," modern banking, irrespective of the nature of ownership, is steeped in fraud. The only solution is private money - and free banking under Law: that is, money and banking governed by Property and Contract. However, just for a laugh, you might enjoy reading what Kaushik Basu, chief economic advisor to the government of India, said when asked for his reactions to this banking scandal.

Yet, I can take all this corruption without getting too perturbed. After all, corruption exists because the system is designed wrong. Indeed, the system is designed for corruption. If we design things right - as with private money - corruption will cease.

What really gets my blood boiling is reports of tyranny by the personnel of this corrupt State. Here is a report of bulldozers backed by police and municipal functionaries "razing to the ground" some of Mumbai's "dance bars." This is the destruction of Property. This is the destruction of Liberty.

Once again, we must see that the only solution is the inviolability of Property. Only if this Principle is inserted into our Constitution can Liberty prevail - for all. My sympathies lie entirely with the dancing ladies. Today, as the report above says, the police insist that these dance bars are "illegal." Tomorrow, if Property is made inviolable, then such actions by the police will become "illegal" - and that is the direction in which we must proceed.

While this blog has been consistently championing Property and Liberty - and urban self-government - the mainstream media seems stuck in the status quo. In yesterday's post, I discussed an Indian Express editorial supporting Manmohan. Today, there is an editorial in the Times of India that talks about the BJP's victory in Bihar - and concludes, therefore, that this party can be an "acceptable and credible alternative to the Congress."

In reality, 58 out of the 91 BJP MLAs in the Bihar Assembly have serious criminal charges against them. In Karnataka, the BJP chief minister is mired in corruption. And in Gujarat, their poster boy, Narendra Modi, is not exactly "my cup of tea" - and that is putting it mildly. If the CONgress is bad; the BJP is worse - according to me, because they mix Hindoo chauvinism with their politics.

Thus, just as the editors of the Indian Express displayed a "false hope" in Manmohan Singh, the editors of the ToI have placed false hope in the BJP. In stark reality, there is now no political party capable of governing this vast nation. None of them have the right kind of personnel - and that is simply because none of them have the right kind of ideology.

Between Lawrence White And Me

Lawrence H White, FA Hayek Professor of Economic History, University of Missouri, St. Louis, has responded to my post of this morning in these words:

Sauvik, why in the case of banking do you uncharacteristicly want to prohibit peaceful voluntary practices? I fear that you don't understand them. The premises on which you found your prohibitionism are false. In fact, (1) Free banks CANNOT issue fiduciary media at will. They have to be prepared to redeem them, which is costly. Read up on Mises' theory of what limits the extent of note-issue under gold redeemability. (2) Under a gold standard, fiduciary media (banknotes, checking accounts) ARE backed by gold. Banks do hold gold reserves to redeem them. They don't hold 100% reserves of gold, but any solvent back does hold sufficient other assets in addition to gold to buy all its liabilities back.

I think he should respond to Joseph T Salerno’s article that I citied in my post of this morning.

However, even on this point of his, I am fortunate to have Doug French, President of the Mises Institute with me today, in an interview to the Daily Bell. I quote:

Daily Bell: We have an interest in free banking here at the Daily Bell. We think any kind of financial system is allowable in a free market and that competition will sort them all out so long as government is not involved — and we do think in a free market that a gold and silver private market standard would evolve as it has historically. Do you think this is an intellectually defensible position?

Doug French: Certainly freely competitive banking is far better than the state-regulated, fractional-reserve, fiat-currency, central-bank-cartelized banking system we have now. However, in practice, in a free market, I don't believe that the market would accept fractional reserves. It would be regarded as embezzlement at best and fraud at worst. Fractional-reserve systems have fallen apart since the ancient goldsmiths issued more gold receipts than they had gold for. I can appreciate the theorizing, but when the rubber meets the road, the sternest task master — the market — would just not allow it.

Fractional-reserve banking depends upon hope and prayer: hope that not everyone shows up for their money all at once and pray that the borrowers pay their loans back. That's not a sound basis for a banking system and requires the force of government to keep it propped up.

Daily Bell: Do you think Mises's position might have evolved toward free banking if he was alive currently? Was Rothbard's position evolving toward free banking before his untimely death?

Doug French: Murray wrote in an article that now is the appendix to his book The Mystery of Banking "Ludwig von Mises was one of those believing that free banking in practice would approximate a 100 percent gold or silver money." Mises believed "that demand deposits, like bank notes beyond 100 percent reserves, are illicit, fraudulent, and inflationary as well as being generators of the business cycle." I believe this was also Murray's view when he passed away.

Daily Bell: Is there anything wrong with fractional-reserve/fiat money in a free-market environment?

Doug French: You couldn't have fractional reserves and fiat money in a free market. It would not last one day. Fractional reserves require a central bank to cartelize the banking system. In a free market, demands on deposits would instantly shut down banks who engaged in fractionalized banking by lending out their customers' deposits.

No one would accept paper money with no backing but for the power of government to require people to accept it through legal-tender laws.

I rest my case.

Some More Useful Knowledge

While on the phone with Chandra the other day, I was suddenly reminded of the fact that there is an expanded 2nd edition of my Free Your Mind: A Beginner’s Guide to Political Economy. This was written in Mangalore in 2004, and Sudha Shenoy helped me a lot with many worthwhile comments. Of course, it was never published because my Mangalore adventure was interrupted by the police; but, some years later, London’s International Policy Network published this 2nd edition in a CD titled Ideas For A Free Society that was distributed all over the world, especially the Third World.

Chandra informed me that Free Your Mind (first edition) is now out of print, so I found my copy of the IPN CD and e-mailed him the relevant file, hoping he will be able to find a publisher.

While reading review comments from eminent people at the end of the book, I was also reminded of another short book I had written then, as an accompaniment to Free Your Mind.

This was titled Free Your Life: A Citizen’s Guide to Justice & the Law. I found this too quite easily, and both these are now available as free downloads on this blog.

I have kept both editions of Free Your Mind available. The first is better suited for schoolchildren, around the age of 15. The second is for the college-going, and adults. I hope you find these useful knowledge.

Free Your Mind 2nd edition is available here.

Free Your Life, here.

Both are also permanently featured on the right-hand bar, along with all the other free downloads.

The Mystery Of Banking - 6

How do we get from here to there? The answer is evident in the previous post – we need just one sound bank, which will attract all the real money, store it safely, and also return it to the depositor on demand. So we need to build a City called New Amsterdam. And we need public authorities of this City to “stand above” this bank, to ensure that the contents of its vaults match the records in its books. This is Solution # 1.

Of course, if our The State wants to fix the monetary mess it has engineered, it can re-engineer the banking system, which it owns. It can declare a Financial Emergency, permitted in the Constitution, sack 99.9 per cent of its worthless staff, abolish all the wasteful subsidies, close down entire departments and ministries, and put a halt to all its “pork-barrel” schemes like the NREGA etc. It can them institute legitimate banking and sound money Under Law. If our The State does all this, it can bring its own house to order, and ours as well. This is Solution # 2.

Of course, as Mr. Morrison put it, “You cannot petition the Lord with prayer.” The State is unlikely to do anything unless a real crisis develops. So we the people need to know how to create such a crisis, a crisis that will force the hand of our The State.

Here is what we the people can do.

First, the money and banking system that exists today is designed to subsidize borrowers and penalize savers. So The People should borrow. Interest rates are down. And gold prices are shooting. So my advice to all the people is this: Borrow – and invest in Gold, either physical gold or gold ETFs. If you have Property, take loans against this property (at low interest rates) and invest everything in gold. In time, gold prices will keep on rising, as the supply of gold is limited. In time, the value of the fiat paper notes will keep on declining. At some stage, gold dealers will no longer sell gold for this paper. The fiat paper system will collapse. The State will then try to ban gold sales, ban gold imports, or even, as happened in the USA, move to confiscate private holdings of gold. There will be social unrest. Maybe even civil war. However, this is the non-violent way of destroying the fiat currency system. It is insolvent. It will fall. It must – if all of us switch to Gold. (Or silver, platinum etc.)

Murray Rothbard predicted this happening in the US of A. In his great booklet, What Has Government Done To Our Money: The Case For A 100 Percent Gold Dollar, Rothbard said that, when another recession hits (as it has now):

“The United States authorities would then be faced with two stark choices. One would be to allow the entire banking system to collapse, along with virtually all the deposits and depositors in that system. Since, given the mind-set of American politicians, and their evident philosophy of "too big to fail," it is certain that they would be forced to embrace the second alternative: massive, hyper-inflationary printing of enough cash to pay off all the bank liabilities. The redeposit of such cash in the banking system would bring about an immediate runaway inflation and a massive flight from the dollar.” (p.134) [Thanks to LRC.]

The US of A is pursuing the latter course. As is our The State.

In the US of A, Obama has advised the citizenry to buy stock. But some wise people have rejected this advice, for good reasons.

In India, I am advising the people to borrow – and buy gold.

You decide for yourself.

With this, I close this series of posts on money and banking. Hope you all learnt something valuable from this effort.

To conclude, some good news. Mint has just published my column entitled “In Defence of Individualism.” It can be accessed here. Enjoy the read.

The Mystery Of Banking - 5

Permit me to offer some constructive criticism to the “Islamic judgment on paper money” that I have been citing favourably all along. It is this: The error is in the language; indeed, in the very title.

Paper is always a debt – as with an IOU. And money is always hard. We err grievously when we call paper “money.” It is nothing of the kind. The term “paper money” can be called a oxymoron. We must correct our language.

For example: Suppose I strike a deal for 1 kilo ganja @ 10,000 rupees. If I pay by paper notes, I should politely ask the dealer, “Will you accept this debt for 10,000 rupees signed by the governor of the RBI?” If our language is exact, then so is our understanding. When I use this language, I mean that I am NOT paying money: further, that the money is to be paid by the issuer of the paper.

We would all understand then that the RBI is not honouring its debts. We would understand that, in our markets, we are just passing meaningless debts around. We would be able to easily identify the criminal: Our The State. When the RBI gives its figures of “money supply,” we would all laugh. And we would laugh at all the “economists” too.

Should debts circulate in markets? I would say: If the people are doing this voluntarily, accepting payments in debts, they should be allowed to continue to do so. Islamic law prohibits the use of State force in the matter – so there cannot be “legal tender.” Anything else goes.

As far as the Rule of Law is concerned, it should “stand above” the issuer of debt. In case of default, the issuer should be incarcerated in a debtors’ prison, on a diet of bread and water. Indeed, nowadays we have gold ETFs in India. What happens in case the issuer of the gold ETF defaults? The same punishment should befall all note issuers in case of default.

Add to this the Contract in case of demand deposits: that they are for “safekeeping”; Property has not been transferred; hence lending out any portion of these amounts to criminal misappropriation. This means 100 per cent reserve banking. All depositors are secure. And all note-holders are also protected Under Law. Islamic jurisprudence should not have any problems with this, since All Property Titles are Based on Real Property.

Let us now turn to a historical example: that of the Municipal Bank of Amsterdam, established in 1609, which maintained a 100 per cent reserve for over 170 years. What follows is an extract from one of my unpublished books (in case there are any serious publishers of non-fiction out there).

After a period of great monetary chaos and fraudulent banking based on fractional reserves, the Dutch people set up the Municipal Bank of Amsterdam in 1609, intending to put an end to these troubles and establish “an institution committed to universal legal principles governing the monetary irregular deposit.” [This is the technical term de Soto uses for the demand deposit.]

More precisely, the bank was founded on the principle that the obligation on the part of the bank in a deposit contract was to maintain the constant availability of the deposit money in favour of the depositor: that is, a 100 per cent reserve with respect to all demand deposits. For over 170 years, the Bank of Amsterdam faithfully kept this commitment and no matter what the crisis, every depositor was always easily paid. This made the bank a Pillar of Capitalism at a time when the City of Amsterdam’s trade spanned the globe. As inflations and wild speculations occurred in many parts of Europe, money went to Amsterdam in order to find a safe haven. The commerce and wealth of the city of Amsterdam flourished. The Dutch bank was admired all over Europe, finding praise in the writings of Adam Smith and David Hume.

Smith wrote that the bank “professes to lend out no part of what is deposited with it, but, for every guilder for which it gives credit in its books, to keep in its repositories the value of the guilder either in money or bullion.” He added that this was ensured by the City itself, for the bank was under the direction of four burgomasters who changed every year. Each of them had to visit the vaults, match their contents with deposits in the books and declare under oath that all was well. Adam Smith noted how, in 1672, when the King of France marched into Holland and the Dutch were in danger of being conquered, the Bank of Amsterdam withstood the crisis, satisfying every last claim for payment. We can only conclude how this reputation for solidity must have mattered in making Amsterdam the financial capital of Europe at a time when John Law had wrecked the financial system of France, and Britain too had suffered many a financial crisis.

Between 1780 and 1820, things went wrong and the Bank of Amsterdam began to violate the principles upon which it was founded. The result: “The financial predominance of Amsterdam was replaced by the financial system of the United Kingdom, a much less stable and less solvent system based on the expansion of credit, deposits and paper currency.”

Did the Bank of Amsterdam make any profits? Adam Smith had noted that the City of Amsterdam derived a fair bit of revenue from the bank, because it charged a ‘warehouse rent’ for the money deposited with it; and a fee of 10 guilders was charged for every new account. But the crucial point about the bank’s profits comes from De Soto:

"… the Bank of Amsterdam did not try to attain disproportionate profits through the fraudulent use of deposits. Instead… it contented itself with the modest benefits derived from fees for safeguarding deposits and with the small income obtained through the exchange of money and the sale of bars of stamped metal. Nevertheless, this income was more than sufficient to satisfy the bank’s operating and administration costs, to generate some profit and to maintain an honest institution that fulfilled all of its commitments."(p. 101)[Download pdf file here.]

If this was done once, it can be done again. Banks are central to Capitalism, and they must be Under the Law – traditional legal principles rather than democratically fabricated legislation. These principles should also be widely understood amongst the populace, so that the moral consensus of society gives them requisite force. All paper notes will be convertible and all depositors will then be secure Under Law. Most importantly, there will be neither inflation nor the recurrence of boom-bust cycles. The poor will be able to slowly accumulate Capital – with which to play the great game of Capitalism. And it will be Real Capitalism – in which the most important ingredient of the market, Money, will be produced by The Market itself, and not by the government.

I will discuss how we go “from here to there” tomorrow. Stay tuned.

The Mystery Of Banking - 4

The critical problem we face as individuals when we deal with bankers is that of TRUST.

This is an old problem, noted even in the Koran. As our Islamic judgment on paper money notes:

“The first issue that arises is the one of amana (trust): Your gold is in trust with a treasurer. What does Islamic Law have to say on this issue? Allah ta’ala says in the Qur'an in Surat al 'Imran (3, 74):

Among the People of the Book there are some who,
if you trust them with a pile of gold,
will return it to you.
But there are others among them who,
if you trust them with a single dinar,
will not return it to you,
unless you stay standing over them.”

If we interpret “standing over them” in a modern sense to imply the Rule of Law, that is, a law based on Property, then the critical problem of our times is that The Law does not stand over the banker. Rather, cliques of corrupt banksters have taken over The State and The Law – and they are standing over us. Immorality and Injustice rule the world. How were things different in ancient times?

Jesus Huerta de Soto’s monumental work on “Money, Bank Credit and Economic Cycles,” is a must read for all those interested in these important matters, so grossly misunderstood in our age. (A free pdf download is available from the Mises Institute, here.) His study is, in essence, an economic analysis of juridical institutions: in other words, how The Law has been historically applied to banking, and how this critical TRUST (amana) was secured, by “standing over them.”

The book is over 800 pages long, but if I may offer its most important finding, then it is this: under Roman Law, the depositor was protected under Contract.

Roman jurisprudence treated a demand deposit as money held for “safekeeping,” to be handed back on demand. The banker was NOT free to lend out any portion of a demand deposit. To do so would invite charges of criminal misappropriation. The Law stood over the banker.

However, Romans were also free to place “term deposits” with bankers, and these were treated under Contract as “loans.” The banker could lend out of these funds, provided he returned them at the end of the prescribed term.

Roman Law thus meant 100 per cent reserves against demand deposits. If we apply this legal insight to modern times, this implies the end of the fraudulent “fractional reserve system” that multiplies “property titles without property.” Banknotes will be backed 100 per cent by specie. All depositors will be secure. Those who lend Capital to banks will face risks, and earn interest. Most importantly, bankers will not be able to create credit (deposit money) out of thin air. The problem that brought down Peel's Banking Act of 1844 will not recur.

This means Sound Money, Free Banking, and Good Law, based on Property and Contracts.

De Soto also examines the last instance of such legitimate banking in the world, the Bank of Amsterdam, which maintained a 100 per cent reserve from about 1609 to about 1780 – and drew the admiration of both Adam Smith as well as David Hume. He regrets that the Bank of England was not modeled after this honest bank; rather, it was a clone of the fraudulent Bank of Sweden, which pioneered fractional reserves, and which awards the Nobel prize in Economics today. We can be sure that Jesus Huerta de Soto will never win this prize. Ha ha.

I will discuss the Bank of Amsterdam and the critical question of “how we can move from here to there” tomorrow. Stay tuned.

In the meantime, do read Aristotle the Geek’s blog post on Interest. He deals with the historical roots of the religious bans on usury, and also the fraud that is “Islamic banking” in India. This post is a good accompaniment to my earlier post (part 3 of this series).

The Mystery of Banking - 3

Friedrich Hayek once wrote that “prudent private bankers are the overseers of the market economy.” If bound by the Rule of Law, the private banker is forced to be prudent. He undertakes the safekeeping of the hard money of his customers, and he provides the crucial link between saving and investment, by which real savings are converted into Capital. It is such bankers that the modern world seeks, instead of the banksters we have today.

Under the Rule of Law, every person is free to accept whatever hard money he deems fit, as payment for goods and services sold. There is no “legal tender” – which is based on the misuse of State force. There is therefore no monetary nationalism. International payments will most probably be settled in gold, a homogeneous international money. This is, broadly speaking, the Islamic position on the issue.

The Islamic judgment on paper money concludes:

Imam Malik said money is “any merchandise commonly accepted as a medium of exchange.” This implies two things:

A) Money has to be a merchandise. Therefore it could be paper. But paper only for the value of the paper itself, not for what is written on it. Money must be something tangible (‘ayn). Money cannot be a liability of any kind.

B) Money must be commonly accepted. Therefore it cannot be imposed. No-one can say it is obligatory on you. No-one can even make the Gold Dinar obligatory on the people. The Gold Dinar and the Silver Dirham become a currency out of free choice, not as the result of decree. Paper money is imposed on people. This obligation is not accepted in Islam for two further reasons:

—The fraudulent nature of the offer: they oblige you to accept something above its value (its real value is zero).

—The obligation of the offer: you are obliged to accept it whether you like it or not.

However, Muslims must note, with sound, hard money and legitimate banking, there will be interest. The saver who defers consumption will earn interest, and the borrower who uses this savings to fund his current investments will pay interest. The banker will earn his bit too, as the middleman between the two.

Islam still has problems with this, as is reflected in this judgment, but I do believe that all traders charge a lower price for cash-on-delivery, while charging a higher price for deferred payments. This is interest. Since the morality of Islam is the morality of traders, I am confident that a search of historical records of the early days of Islam will show such transactions occurring regularly in the markets, and these were not considered riba (unjust profit).

And as for paper notes – we are rapidly moving towards a world of electronic money. The use of paper notes nowadays is extremely small, compared to earlier times. Electronic money can easily be linked to gold. This is the future of legitimate private banking.

The task before the theoretician, therefore, is to find a solution to the problem under the Rule of Law – which is based on Property. We have already seen how the current system of money and banking is a fraud, based on Property Titles Without Property. This fraud is backed by State force – including legal tender laws and central banking. All this is totally immoral.

Yet, there are many who believe that free banking is equivalent to free swindling. And yes, it can be so, if bankers are not bound by sound law, based on Property. We are fortunate today that a good deal of research has been conducted on these matters, including studies of the laws and banking practices of the past. I will discuss this tomorrow.

What my reader might want to think about till then is just how totally wrong John Maynard, Lord Keynes was. It is surely not accidental that Keynes called himself an “amoralist.” Fortunately, the ideas of such thinkers do not last forever, because, as a wise man observed, “any system not based on Truth and Justice cannot last long in human affairs.”

Recommended reading: Aristotle The Geek’s blog post on Keynes, the “favourite economist of the fascist.”

Tomorrow we will discuss Truth and Justice in the area of money and banking. Stay tuned.

The Mystery Of Banking - 2

I was going to take the discussion one step further, but a reader has written saying that he does not understand how credit is created out of thin air. I will therefore pause to review this important point. It is crucial to a correct understanding of what will follow.

Let us return to the goldsmiths of London, in the era before bearer paper notes came to be circulated in markets as money substitutes. All paper notes in this age have a name on them. These notes cannot be circulated. No goldsmith in this age would issue more notes than the gold he had in stock. The note is a liability. And there is no incentive for increasing liabilities. All notes are therefore Property Titles Based On Real Property: Gold.

Enter the bearer note. And paper becomes money. And some goldsmiths find that their papers have “gained currency” and are widely trusted and circulated.

Now, someone turns up at the office of one such goldsmith asking for a loan of 1,00,000 pounds sterling. The goldsmith does not have that much gold in his reserves to lend. He therefore thinks of something crooked.

He lends out 1,00,000 pounds sterling in PAPER.

He will earn interest although NO CAPITAL is being lent.

We now have Property Titles Without Property. The chap who gets the loan uses the notes to “buy” assets. There is thus a “redistribution” of assets.

As for the crooked goldsmith, his liabilities (notes) are greater than his assets (gold) – but he is gambling on all notes not coming up for redemption at once. If they do, he knows he will be caught out, because the claims to property exceed the property.

At this stage, The Law is perfectly clear. The paper note is a debt, and is payable on demand. If any goldsmith defaults, he goes to a debtor’s prison, where he is put on a diet of bread and water till his properties are sold and his debts repaid.

The crooked goldsmith does not like this Law. And, for him, and some of his friends, the profits from lending out mere paper are too alluring. They therefore think of a scheme called “central banking.” They pool in a percentage of their reserves in the central bank that will be “lender of last resort.” The idea is that all banks will not crash together. And whenever any one has a problem, the central banker will step in. In the meantime, their banking cartel, all members of the central bank, will earn interest by lending out PAPER. Credit will NOT be based on Capital.

Yet, this is NOT a legal solution to the problem. The problem in law is the existence of Property Titles Without Property. These exist because credit has been de-linked from Capital. That is, credit is being created out of thin air – and this thin air is being lent out at interest. Real properties are being redistributed. This is the game that is afoot.

Of course, any such scheme is prone to crises, as the multiplication of Property Titles Without Property is inherently unstable. However, when The Law is jettisoned, the only recourse available is State Force.

With central banking, monetary nationalism, and The State as the sole issuer of currency notes, The Law is hijacked by the crooks.

This makes The Law ineffective. Once Property Titles Without Property become “legal,” the banksters are allowed free rein. Within a few hundred years, all currency notes, throughout the world, become Property Titles Without Property.

The “real robbery” that occurs is when these currency notes are used, as “legal tender,” to take over “real” goods. There is a “redistribution” of real assets. Borrowers gain; savers lose. The resulting inflation causes further redistribution.

The critical error is in The Law, which has always been based on Property. With central banking, the name of the game becomes property-less papers. And the game is one of constantly increasing the supply of these papers. How can The Law cope? It cannot. It was therefore pre-destined that the US dollar would finally break all ties with gold – as happened in 1971.

In other words, the peculiar problem of our age is that The State and The Law are on the side of crooks. Force is being misused. What should be illegal is legal. This is inevitable when The Law is no longer based on Property.

Recommended reading: An Islamic scholar’s judgment on paper money. Note how the basic understanding is simple, based on judgments of the past, all looking at the matter from the viewpoint of Property.

I will continue the discourse on money and banking tomorrow.

The Mystery Of Banking - 1

To understand the mystery of banking and credit creation, let us go back in time to when the first goldsmiths of the ancient City of London issued paper notes against gold deposits. These were nothing but “warehouse receipts”: the paper note had your name on it; it promised to pay you the amount of gold mentioned, on demand; and it was signed by the goldsmith.

The paper note was a Property Title Based On Real Property.

In time, as the number of goldsmiths grew, they discovered the magic of “bearer notes”: the gold could be claimed by anyone holding the note. These notes became “paper money”: they circulated in the markets. Clearinghouses evolved to sort out inter-goldsmith balances.

This first paper money was also a Property Title Based On Real Property.

Enter the crooked goldsmith. Once his notes had “gained currency,” and were widely accepted, the crooked goldsmith realized that he could make “loans” by just issuing paper: that is, paper that was not backed by gold. He could create credit out of thin air. This is how modern banks create “deposit money”: they open a current account in the loanee’s name and “deposit” money into it.

Deposit money created by banks begins the process of credit creation based on Property Titles Without Property.

This is why Peel’s Banking Act of 1844 failed. The paper currency issued by the Bank of England was made redeemable on demand, but banks created so much deposit money that redemption had to be repeatedly suspended, until it was finally abandoned. (Without a debate in the House of Commons, as Rothbard records in his history of economic thought.)

Understand the crux of the problem: The Rule of Law, which is based on Property, cannot work where the claims are more than the properties. When the crooked goldsmith issues more notes than the gold he holds, the precise legal problem is but this: there are more claimants to gold than the stock of gold.

Actually, this is also the precise problem with today’s “toxic paper” in the USA. As Hernando de Soto writes:

“… the primary cause of the current economic crisis: the trillions of dollars of "toxic paper" on the balance sheets of financial institutions. This poisonous paper is scaring off potential creditors and investors who lack the legal means to understand what this paper signifies, how much there is, who has it and who might be a bad risk.”

It is “property-less paper” (derivatives pyramided on debt) that is the root cause of the current crisis.

De Soto says:

“Governments have debased paper by carelessly allowing into the market a biblical flood of financial instruments derived from bad mortgages nominally valued at some $600 trillion or more than twice as much as all the rest of the world's legal paper, whether it represents cash, traditional financial assets, or property, tangible or intangible.”

This is the pyramiding of debt based on property-less property titles. 600 trillion dollars worth of debt based on the “real property” of just 19 million physical homes. The solution is not “recapitalizing banks” or “government spending”: the only real solution, which De Soto endorses, is sorting out these papers, a painstaking process, so that each individual paper is tied to a precise individual asset, or to nothing, as the case may be.

We need a Rule of Law solution to banking, the industry that supplies money, because without it banking will not be very different from gambling. We need a Rule of Law solution that ties papers to real Property, for this is the only moral course The Law can take. If we have this solution, we have Sound Money as well as Laissez-Faire Banking. We also have secure depositors – for The Law must, above all, protect the depositor.

I will discuss these ideas tomorrow.