Our Credit-Financed Monetary System: A Risk to Freedom and Prosperity

Banking crises raged again, and customers emptied their accounts—in the USA, at Credit Suisse Switzerland. They fled to accounts in other banks or away from all banks in banknotes. Since banks lend more than they received in money, they are all unsoundly financed. The individual bank is a risk, and all banks together are a total risk. The flight of customers away from accounts reveals this clearly.

Digital Money for the Purpose of Citizen Control

Now, some circles and some central banks are not thinking about a restriction or an end to the fractional reserve system, where the banks lend out more than they have stored. Instead, the escape route for customers, for citizens, is to be blocked, and for cash to be restricted.

A wide variety of means are being tried. Book money, that is, bank balances, will one day become digital money, booked only electronically and no longer paid out in notes. The central banks themselves are thinking of making such money commercially available. However, they have the problem that direct possession of digital money would put citizens in the position of having a direct deposit with the central bank. The banking system would then become superfluous. At least in crises, as we just experienced, a run on the banks would be even more likely—in search of ultimate security, customers could then also move their money to the central bank at the push of a button. The problem of digital central bank money—also nothing more than book money—has not been solved.

Vulnerable Book Money, Unreliable Central Banks

All money that is only available in bank accounts and only booked remains a problem even with such forms of protection and control. Banks have little credibility to have enough of it when panic strikes. On the other hand, the central banks and authorities can block, transfer, and amputate the accounts. And they did so repeatedly in the last decade right before our eyes. Thus, the customer easily goes from the frying pan into the fire.

Therefore, in the Cyprus crisis, spurred by the Greek crisis of the euro, the banks were bankrupt. The highest authorities of the European monetary economy, the ECB, the EU Commission, and the supervisory authorities decided that all customer deposits had to be converted into shares of the bankrupt Cyprus banks—a blatant expropriation. Only after an international outcry did they desist from this.

For their part, the sanctions against Russia after the Ukraine invasion showed the vulnerability of book money accounts. The large reserves of the Russian Central Bank lying in Western banks were blocked, perhaps to be expropriated later for the reconstruction of a Ukraine destroyed by Russia. For these reserves were not sacks of gold, but book money, credits for oil and gas, that is, mere claims of Russia on the banks. If digital money became the rule, then such actions would be possible even more quickly, and more comprehensively, against all people—even as taxes. After all, that’s what negative interest rates were before.

The State War on Cash

In addition to book money, there circulates real money—central bank notes. The banks’ sight deposits with the central banks also count as such. If citizens withdraw the money in the form of such notes, they leave the banking system, they become “free electrons,” uncontrollable. Therefore, the central banks and authorities are not big on banknotes. Their circulation must be restricted.

Thus, in the EU, one is no longer allowed to pay anything over 10,000 euros in cash. Even across national borders, people are not allowed to carry higher amounts. The EU, otherwise eager for a barrier-free internal market—constantly leveling and harmonizing it—is all of a sudden rebuilding the national borders…against cash. The ECB has also cancelled the 500-euro note.

For these actions against cash in notes, the typical arguments must be employed—the fight against money laundering, against tax evasion, against criminality. But this has reversed the burden of proof. The citizen with cash in hand is now fundamentally suspect and must justify himself—a downgrading of the citizen that is unworthy of the rule of law, but against which there tends to be only very hesitant signs of displeasure.

Money “by the Grace of God”—Out of Thin Air

If notes, central bank money, appears today as “real money,” this is only because decades ago the really real money, the gold-backed notes and the gold coins, were withdrawn from the citizen by authoritarian pen strokes. “Wir, Wilhelm von Gottes Gnaden” [We, William by the Grace of God] and the Reichstag cancelled the exchange of notes for gold coins in 1914, and almost all European governments did likewise. Great Britain went off the gold standard in 1931, the U.S. confiscated all private gold in 1934, against heavy penalties, and devalued the dollar right thereafter.

Again, the U.S. canceled the exchangeability of the dollar for gold in 1971, an option the other central banks still had until then. Even the weak imitation of gold, the paper banknotes, are not safe from government pen strokes. When central banks and governments get it wrong, a “currency reform” orders a forced exchange into new notes with smaller numbers on them—as happened in 1923 and 1948 in Germany, and in many emerging countries.

The International Monetary Fund had its scientists run a dual exchange rate against book money and notes. They are working on a digital money that central banks could introduce nationally, and based on the idea that notes would then be devalued against digital money. Banknotes as second-class money: you had to come up with that first. The central banks would only accept banknotes at a discount, and the banks would of course accept them as well.

This is reminiscent of the Roman-soldier emperor Maximinus Thrax, who tried to solve his financial problems by excessively minting coins, or, rather, tin plates. Terrible inflation was the result, and the emperor forbade his tax officials to accept this tin, ordering that taxes be paid in real goods—metals, grains, oil. The state thus outlawed its own money. Shortly after, the emperor himself took a bad turn—that is, he was stabbed to death (238 AD).

In Search of Alternatives

The public is looking for alternatives to vulnerable book money and banknote money that is overshadowed by threats. During the banking crisis, the price of cryptocurrencies surged. Cryptocurrencies are not everyone’s cup of tea, but if they are, it’s Ethereum, which gives the impression that it can one day outstrip banks and stock exchanges not as money but as blockchain.

Otherwise, investors will go to private banks, which don’t make commercial loans, and don’t create book money. They invest the customers’ money directly in securities, past their own balance sheet and at the investors’ risk. These banks themselves are therefore safe. Industry could still be financed but instead by credit through loans, promissory bills, bonds, all of which would be placed in customers’ deposits.

Others prefer real estate, which, however, consists in immobile, “sitting ducks” and is defenselessly exposed to the tax bill, rent caps, and the arbitrary planning of the superstate. Or one buys into money market funds, which hold very short-term securities and should survive panics.

A Swiss private banker, on the other hand, has created the RealUnit, an investment company as a money substitute with only real investments outside the banking system. This “money” is traded on the Bern Stock Exchange daily, and in the Ethereum blockchain around the clock for free. In the future, it should even be possible to use it with a mobile phone for everyday payments—a glimmer of hope.

And another alternative, albeit put on hold—for the time being: “The Narrow Bank” in the USA applied for a license and will not give loans, will not invest anything, but will put the deposits of customers directly into sight accounts of the Federal Reserve, something banks can do. This makes them safe, no longer book money, converted back into central bank money, so to speak, and they earn a slight interest rate to boot. None of this is to the Fed’s liking, and its lawyers have been blocking the request for five years now with weak arguments. All central banks are deeply intertwined with the banking system and protect its interests more than those of the money-using citizen.

But citizens do well to stand up for their freedom, stronger and louder than ever, against any curtailment of cash and its use.