Last week, we wrote about declining confidence in government– in any countries, people are trusting politicians and the government less and less. If you are like the most people, you probably don’t have too high of an opinion of the government. This begs the question: do you really want the government controlling your money?
Money is power. As English writer and politician John Dalberg-Acton once said, “Power tends to corrupt, and absolute power corrupts absolutely.”
The idea behind modern democracy is to avoid too much concentration of power to escape this pitfall. This is why the US government, for example, is divided into executive, judicial, and legislative branches– checks and balances.
But why, then, does the economy of the United States operate on a currency controlled by a single bank? Isn’t that a whole lot of concentration of power?
That’s the point. If central banks can control the supply of a currency at will, they can have a lot more control over the economy. That also means they have a lot more control over your wealth.
Central banks are supposed to use this power for good. Their mandate is to pursue stable prices and full employment, and for the most part, they do their best to achieve it. Sometimes, though, the devil is in the details.
When it comes to central bank operations, there are clear winners and losers. To understand who the winners and the losers are, consider the process of money creation.
When the supply of a currency increases, it puts downward pressure on the price of the currency. The total amount of currency is still worth the same– it’s just that there is now more of it, so each unit of the currency is worth less.
In a nutshell, value is transferring from the old money to the new money. That means that the people who own the old money are losing, and the people who get the new money are winning. This means it’s very important to understand the money creation process. Who gets the “new” money?
Most of the money in circulation is not printed by central banks. Rather, it’s created by private banks in the form of loans.
Anyone who gets a loan is getting some of the value from the “old” money. There are two main forms of debt created by private banks; household and corporate. People buying homes and cars and business expanding and improving their operation generates jobs, so this is in line with pursuing full employment.
The problem is that debt servicing comes along with this debt. Banks create new money, but they get back even more than they created. This means that the real winners of money creation are the banks. The losers are those who keep their savings in government-issued currency.
Ordinary, hard-working people get drained from two sides– on one hand, their money is constantly losing value. On the other hand, household debt is at an all time high, with the average American paying 9.5% of their income on debt each month.
One of the reasons governments prefer this kind of currency is taxation. One good way to understand how this works is looking at Walmart vs. Main Street.
This debt-based system is often criticized for making the rich richer and the poor poorer, and squeezing the middle class. Since borrowers are beneficiaries of money creation, those who are able to borrow more tend to get ahead of those who can’t.
A big business that already has lots of assets, like Walmart, is better able to get loans and expand their operations than small Main Street businesses. Walmart can sell products at a loss to bankrupt competitors, buy out competition, and sell cheaper products by operating at a bigger scale.
This dynamic has resulted in increasing income inequality since the era of unrestrained money creation began with the end of the gold standard. This can be seen in the graph below:
Big government and big corporations have a strange kind of symbiosis. Large corporations make campaign donations and lobby for regulations which make life difficult for small businesses.
In other words, debt-based money creation favors the formation of ever-growing mega corporations which feed politicians much more cash than smaller companies. The transfer of wealth from “old” money to “new” money greatly helps this process by accelerating the centralization of money and power.
Economist Warren Mosler once illustrated the nature of government-issued currencies to an audience in a lecture hall. He removed a business card from his wallet and asked if anyone wanted to buy it from him for $100. The audience laughed.
Then he asked them to suppose that all of the exits to the lecture hall were locked except for one, and a man with a 9mm pistol was standing guard at it. The guard would only let them exit if they had one of his business cards. Suddenly $100 didn’t sound so ridiculous anymore.
Government-issued currencies have no real value of their own. Their value is derived from demand, which gives governments a huge incentive to force people to use them.
When people use a government-issued currency, they are placing their economic power into that currency. The more economic power concentrates in a currency, the more power the people who control the currency have.
This means governments also have an incentive to try to get as much activity as possible conducted using their currency. If tasks like caring for children and the elderly are done by paid employees rather than unpaid family members, the currency and the government become more powerful.
Silver does not need people to use it in order to be valuable. It is valuable of its own right. For thousands of years, people have valued silver for its beauty and industrial applications.
There is no need for governments to force people to use silver, and using silver doesn’t give insane amounts of power to anyone. Silver can be mined all over the world, and no single government controls the silver supply.
The difficulty of mining silver prevents it from being debased, making it a stable safe haven against irresponsible and inept governments. Investing in silver and using it as money is not only a way to protect your money. It’s also a way to prevent government abuse of power and overreach.
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