Democratize Money – The Paperback

Not withstanding that Zachary Karabell debunked the very existence of the Laws of Economics in The Atlantic, (https://www.theatlantic.com/business/archive/2013/04/the-laws-of-economics-dont-exist/274901/ ) economic laws like supply and demand, Gresham’s Law, the law of self-interest and the law of competition do exist and have an immutability to them. How money is created is not an economic law, but an institutional arrangement that has changed over time and is subject to future change.

The current monetary creation institution, fractional reserve banking, at least partially causes some empirically observable generalizations (a fancy way to say laws or consequences, without being quite so rigid): contractions (as far as recessions and depressions) and expansions (as far as booms)–the business cycle, money attracting money (wealth accumulations), poverty, and political inequality (as Boss Tweed said, he didn’t care who had the right to vote as long as he got to pick the candidates). Now, not all of these consequences of the way we currently create money are independent of one another, but they all can be ameliorated if we changed how we created money to monetizing citizens. I spell all of this out in my Kindle Book, Democratize Money Monetize Citizens A Proposal. https://www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Daps&field-keywords=democratize+money+monetize+citizens+a+proposal

Perhaps of more interest to most, is that Democratizing Money provides a way to fund a tax-free, basic income. Available in e-book and now paperback versions.

This is a book your elected representatives should read.  Tell them you will be testing them over it in each November.

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Revisiting Fractional Reserve Banking

Revisiting Fractional Reserve Banking

by T. Edward Westen, 2017

I allege here that fractional reserve banking is one of the underlying causes of the boom and bust cycle we quaintly call the business cycle.

Let us start with an example. Suppose there exists an economy with $300 cash and one bank which has $100 that it can lend and $25 more dollars in reserve. It lends it to a borrower who used the money to buy a long term asset (an asset which will hold value without significant depreciation for say 100 years). The borrower repays the bank $10/month plus internet. The bank stays fully loaned out so it immediately lends the $10 to another borrower who also buys a long term asset with his loan proceeds. He pays the bank back at $1/month plus interest. Each month the bank lends money to borrowers who always purchase long term assets. So at end of 10 months, the bank has $100 in outstanding loans which have created $259.37 in assets in the 10 months the bank has been fully loaned out. I assume the interest on the loans goes for overhead and the like and is not invested in loans. If the bank invests it in loans the assets created by those loans would have been worth more than $259.37 at the end of ten months.

100

10

10

10

10

10

10

10

10

10

10

10

1

1

1

1

1

1

1

1

1

1

11

1.1

1.1

1.1

1.1

1.1

1.1

1.1

1.1

1.1

12.1

1.21

1.21

1.21

1.21

1.21

1.21

1.21

1.21

13.31

1.331

1.331

1.331

1.331

1.331

1.331

1.331

14.641

1.4641

1.4641

1.4641

1.4641

1.4641

1.4641

16.1051

1.61051

1.61051

1.61051

1.61051

1.61051

17.7156

1.771561

1.771561

1.771561

1.771561

19.48717

1.948517

1.948517

1.948517

21.435688

2.143569

2.143569

23.579257

13.579257

259.37383

27.158514

Loan Amount, Payments toward Principle, Total of Assets Purchased with Loan Proceeds. Each column represents one month. Each row represents loans beginning with the load amount and the payments to the bank follow.

There are a couple of ways to look into the future given this scenario.

FIRST, let us suppose in the 11th month of this example that the fellow who borrowed and paid off the first $100 loan needs or wants to sell his asset which is still worth about $99. Let us further suppose the asset’s owner finds a buyer willing to pay the $99, the worth of the asset. The buyer goes to the bank for a loan. The buyer offers the asset that he or she is about to purchase as collateral. However, at this point in the banks lending cycle, staying fully loaned out, the Bank only has $27.16 to lend that month.

SECOND, let us suppose none of the borrowers over a five period (6o months) need or want to sell assets and the bank continues to stay fully loaned and its borrowers continue to invest their loan proceeds in assets with a 100-year life. In this case, borrowers have amassed over $5,556.24298 in long term assets. Notice the assets decided by the total currency in our system is, $5,556.24298/$300, is able to cash out only 5.4% of the assets assuming we can use all the currency in the system, which of course we can’t for $100 of the currency is loaned to borrowers and $25 is in bank reserves. Now given that the average amount the bank has available to lend in any given month is $29 or 0.5% of the total assets purchased in the preceding 5 years.

NOTE that the consequences in both situations are the same: assets lose value simply because there is not sufficient currency available to cash them out at their depreciated value. When there is insufficient currency (a lack of people with money willing to buy at a given market rate) be we say the market is over valued and a market correction results in, sometimes a drastic, revaluation of assets held in the economy to lower values.

Yes, the scenario is simple and not at all like the real world. However, it does illustrate that the business cycle, the cycle of expansion and contraction in a never ending cycle is largely caused by a fractional reserve banking system allowing assets to be purchased and not allowing for sufficient currency to allow their owner sell them except at a loss.

It is also noteworthy that the base money supply is also based on debt. Perhaps if the base money supply were based on citizen sovereignty, democratizing money or monetizing citizens, the business cycle would be at least flattened a bit.