HiddenMysteries ThE-Magazine - Volume 6 - UNDERLYING FLAWS IN CREDIT & MONEY SYSTEMS

By Ron Kean
Comments by Dan Meador

Yes, the US dollar is chiefly based on credit, but that does not mean it is not backed. The dollar is backed mostly by debt, and much of that debt is secured with tangible collateral assets and equity interests. Most dollars are issued in book entry form by private commercial banks, not the Fed. The books of those commercial banks balance. The credit dollars they have issued are backed by assets booked against them. Same with the Fed. The Fed's books balance. All Federal Reserve credit has assets booked against it. It's all backed. 100%. But mostly not with gold. The reason why debt functions well as backing for a credit based monetary system is that the existence of high quality debt implies an ongoing demand for dollars to pay the debt and the interest.

That means that goods and services of real value are continually being exchanged by debtors for dollars needed to service their debts. That gives the dollars value. That's the real 'backing'. The debtor's debt is the creditor's asset. The dollars paid by the debtors are recycled to the creditors. The creditors cycle the dollars back to the debtors when they buy goods and services from those debtors. The banks are middlemen in the process, but it is not necessary to be a bank to create credit.

In theory, any two or more persons can create credit money. The Fed has relatively little to do with this process, provided it does not manage to manipulate interest rates to levels higher or lower than what the market sets. True, the Fed 'earns' some $26 billion per year in seignorage due to its defacto currency monopoly, and the Fed must turn over all its profit to the Treasury. Even so, $26 billion per year is a drop in the bucket compared to the GDP and even when compared to explicit taxes. A credit based fractional reserve money system can function perfectly well in the complete absence of all government imposed reserve requirements, in the complete absence of an imposed central bank, and arguably even in the complete absence of gold backing.

Unrestricted competition among money issuers (credit issuers) in a free market tends to produce stable prices and a stable, sound monetary system, due to the feedback between interest rates and changes in price levels, and due to the fact that no one bank, in competition with other banks, can push more of its money into the market than the market is willing to accept. Any 'excess' credit issued by a bank would bounce right back to that bank through the clearing system, just like it does now. The banks can even denominate their fractional reserve credit money in gold, if that is what the market demands.

Ron Kean


The first matter to consider is that there is no hard money in the system. The "credits" we trade to "defer payment of debt" are predicated on (1) obligations of the United States, or (2) obligations of the private sector.

To attack this problem, we need to "look behind" the thing. The way to do that is to ask, "What is wealth and where does it come from?"

The simple answer is, "All good things come from God." In other words, all wealth originates with a natural resource. This can be seen from a reasonably simple formula derived from two principles set out in a small pamphlet produced by The American Economic Foundation titled " Ten Pillars of Economic Wisdom". (The AEF address used to be 51 East 42nd Street, New York, N.Y. 10017).

The formula is as follows: Man's Material Welfare = Natural Resources + Human Energy x Tools (MMW = NR + HE x T).

MMW is inclusive. It includes the essentials of food, shelter and clothing, and everything else we need for comfort, security, recreation, work, etc. Natural resources are expendable (mineral resources including petroleum, gold, etc., which cannot be reproduced in the same location year after year) and replenishable (agricultural). Even in the most primitive setting, man had to spend mental and physical energy to harvest and consume natural resource, thus accounting for human energy. The only multiple factor is tools. Tools increase production per man hour. A farmer in the last century might plow five acres per day with a team of mules and his crude plow, where the modern Great Plains grain farmer can plow upwards of a hundred acres per day with his 4-wheel drive tractor and 16 to 20-bottom plow. American agriculture serves as a wonderful example as our farmers increased production by over 600% from 1950 through 1990, thus freeing a tremendous amount of labor (HE) for other enterprise. In our system, when it was operating properly, agriculture accounted for about 70% of all new wealth while petroleum production and mining accounted for the other 30%.

Through the 1960s, each new agriculture dollar generated $7 for the overall economy via the "trade turn" as the agriculture commodity passed through processing, manufacturing, packaging, distribution, etc. The "commercial" natural resource dollar was worth about $5 to the the overall economy.

Each "new wealth" (NR) dollar is free and clear (profit to the economy) beyond the cost of production. This is where "wealth surplus" or wealth accumulation originates.

The "credit dollar" (borrowed into existence) always has a cost: It must be paid back to the creditor with interest. If the average interest rate is 10%, then we have "Production cost + 10%", or where the overall economy is concerned, MMW - 10%.

Since the banking cartel has a monopoly on credit and what passes for money, other than a reasonably insignificant number of private loans, the constant interest drain acts as a hidden tax that ultimately translates to inflation. Inflation undermines all financial assets for all people other than the few who are wealthy enough to benefit from the interest curve and take advantage of the continuing and escalating liquidation process that is the inevitable result.

Real inflation for essentials from 1973 through the middle of this decade exceeded 400%. From approximately 1973 through 1990, America's poor and low income classes increased from 35% to approximately 50% of the population while middle and upper-middle income classes declined from 55% to around 40%. Only about 14% of the population enjoyed significant benefits from the period. In this environment, the wealthiest 1% of the nation's families increased holdings from 22% to over 38% of the nation's wealth.

The situation is complicated by our "trade" policy. In the last two decades, we've exported a significant portion of our manufacturing (by 1990, U.S. government employed more than all American manufacturing), and we've all but destroyed our natural resource industries, thus undermining the source of new wealth -- American family farms continue to be liquidated at the rate of about 500 per week. We first had a post-depression high number of private and business bankruptcies in 1981, and the number has continued to escalate.

The inflation effect makes the overall system extremely vulnerable. This flaw is revealed in Mr. Kean's synopsis: Where "credit money" is secured by mortgaged assets, perceived value of currency itself depends on asset value. When the inflationary bubble breaks, the FRN-denominated monetary system will go to hell in a handbasket. Hard assets such as gold, silver, grains, etc., should then enjoy a time of premium value.

The general fraud perpetrated by the banking cartel has another Achilles heel that hasn't worked its way through the system yet. That is, "credit" transactions via Federally chartered financial institutions and other financial institutions locked into the Federal Reserve System, the Federal Deposit Insurance Corporation, etc., have no independent right to issue "credit", and in the event of default, do not have a private right to foreclose whatever debt is defaulted.

Virtually all "credit" (loans) is hypothecated on credit of the United States.

The original "association" charter grants the institution the right to provide basic financial services such as checking and savings accounts to qualified association members. Prior to going beyond that, they respectively must be licensed as Treasury tax and loan depositaries. In that capacity, they function as "fiscal agents" of the United States. To engage lending activity, they must be licensed or chartered as a Federal Home Loan Bank,, Farm Credit Bank, or something on that order. In the latter capacity, they function as "mixed-ownership" government corporations. They may originate loans and service accounts, but in the event of default, the United States is principal of interest and United States Government must pursue foreclosure, etc. Relevant information is posted on the research page of the Law Research & Registry web site: http://www.LawResearch-Registry.org/

Reason should reinforce this conclusion: Article I Sec. 10 of the U.S. Constitution prohibits the several States from emitting bills of credit. Obviously, state governments cannot endorse and enforce what the Constitution prohibits them from doing directly. Consequently, the private bill of credit that allegedly backs the "fiat" monetary system is hardly worth the paper it is written on.

Without going into too much detail on any aspect of our current credit and monetary systems, it is reasonably easy to see that they are unlawful, and they facilitate a mathematically impossible economic scheme.

Unfortunately, the "academic" view Mr. Kean articulated so well dominates common perception. When we address principles of physical economy, and the law, rationale behind popular trends breaks down.

Dan Meador

Footnote: Dan Meador has passed away since this article was written

Volume 6 ThE Magazine Contents

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