Debt-Based Monetary System Demands Ever More Debt—Part III—Fractional Reserve Banking

12 May


The FOUNDATION for our Debt-Based Monetary System:  PROMISES to Pay that Can’t Possibly be Kept.

For the past several months, I’ve been exploring an hypothesis that strikes me as fantastic, unlikely and yet (probably) true. In broad strokes, it’s the idea that our fiat, debt-based monetary system requires ever more total debt to function.  Going deeper into debt is not optional; we are forced by our debt-based monetary system to do so.  I.e., if the American people ever stop going deeper into debt, the whole debt-based monetary and economic system will collapse like a junkie forced to quit heroin cold turkey.

If my hypothesis is roughly correct, the persistent growth in the National Debt (it nearly doubled under Obama) is not the result of governmental negligence or self-serving politicians who get elected by promising more “free lunches” (services purchased with debt). Instead, our National Debt must increase (perhaps geometrically) in order to feed, protect and sustain our debt-based currency and economy.

In an asset-based (gold based) monetary system, debt is liability to be avoided.

In a Debt-Based Monetary System (DBMS), debt is a form of wealth to be sought after and increased.

If so, President Trump’s express and implied promises to cut the National Debt and federal government’s deficit spending can’t be kept without collapsing the economy. Like it or not, because we have a DBMS, Trump must increase the National Debt.

We must go deeper into debt until, for whatever reason, we can’t go deeper into debt.  When we can’t go deeper into debt, the system will implode.

In short, I believe that we’re riding a debt “tiger” which we can’t dismount without being consumed.

Parts I & II

This article is the third installment of a series of articles entitled “Debt-Based Monetary System Demands Ever More Debt”.

The first article offered an introduction and overview of the general hypothesis. That hypothesis postulates that our $20 trillion National Debt is not so huge as to be unpayable due to accident, negligence or unbridled political ambitions. The National Debt is enormous and continuously growing because it must grow continuously (and perhaps geometrically) in order to feed and sustain our Debt-Based Monetary System (DBMS). The National Debt is not accidental; it’s intentional and necessary. If this hypothesis is roughly correct, President Trump will have to choose between:  1) significantly increasing the National Debt; and, 2)  precipitating an economic collapse. I predict he’ll chose to go deeper into debt.

The second article offered some insight into the nature of today’s Debt-Based Monetary System (DBMS) and whether it is more accurately described as a “Ponzi scheme,” “pyramid scheme,” or perhaps something else.  As it turns out, the DBMS has some characteristics of a Ponzi scheme and some of a pyramid scheme but is, in any case, another “form of financial fraud”.

Part III

Most people who investigate the nature of money soon discover a strange reality concerning the creation and manufacture of our currency. The Department of the Treasury of the U.S. government actually prints our paper currency for about a nickle per currency unit. Thus, it costs virtually the same sum to print each $1, $5, $10, $20, $50 and $100 bill. That shouldn’t be a surprise. All of those bills are about the same physical size and require the same amount of paper and ink.

The surprise, however, comes when folks find out that those 5-cent pieces of paper are subsequently loaned into circulation by the Federal Reserve System at full face value.

How’d you like to be able to make or purchase little pieces of paper for 5 cents each that could be subsequently loaned to debtors for anywhere from $1 to $100 each?  Your markup would vary from 1,900% to 190,000%.  Do you think you could make a profit if you could lend a nickel’s worth of paper and ink for $1?  How ‘bout for $100?  Can you think of any other product that carries as high a profit potential as fiat currency?

I don’t claim that anyone in government or the Federal Reserve is actually generating a 190,000% profit off the issuance of paper $100 bills.  Nevertheless, the mere possibility should get you talkin’ to yourself.

And, what exactly, is the nature of these magical “bills” issued by the Federal Reserve?

Well, they’re not “money”. Money is a tangible asset like gold or silver.  Paper or even digital monetary media could pass for “money” if they were redeemable in the form of a tangible asset from the source that issued the paper or digital media.

But, by law, the Federal Reserve Notes (FRNs) you’re carrying in your wallet are not redeemable ever by the government and/or Federal Reserve in gold or silver. They’re a kind of “currency,” but I’m not even sure that that word provides an accurate description of our FRNs.

They are, however, definitely a “debt-instrument” precisely because they will never be redeemed by the government or Federal Reserve that issued them. The government is issuing “promises to pay” (FRNs) that, by law, never have to be actually kept or paid.  Because they aren’t redeemed by the issuing government or Fed, they remain debts forever.  

For example, suppose you work for and/or sell products to the government. The government “compensates” you with paper or digital FRNs. Those FRNs are promises to pay.  A payment is the receipt of a tangible item of value like a gold or silver coin, a car, a house or a flat-screen TV.  FRNs are a currency of sorts, but the law is clear that those FRNs will never be redeemed/paid by the Fed or government (except as an acceptable medium for paying your taxes).

Imagine that you could issue little pieces of paper to “pay” your debts.  Well, you can.  They’re called “checks” issued by you off your private “checking account”.   When you issue a check to pay for a house, car or flat-screen, the value of that check is charged to and deducted from your personal “checking account”.  

Now, imagine that you were free to issue as many checks as you liked, but none of your checks could ever be charged back to your checking account.  You could use your checks to purchase a house, a mansion, a car, a Rolls Royce, a flat-screen TV or a 1,000-seat movie theater–and never actually pay (redeem) the promised debt from your account.  For you, everything would be free.  How rich could you become?  How much power could you wield?  Lots?

Well, that’s how our debt-based monetary system works for the government and/or Federal Reserve.   

Q: If FRNs are a promise to pay, and thus a debt-instrument—who will keep that promise if not the government and/or the Fed?

A: The public is expected keep that promise to pay. How? By accepting the intrinsically-worthless (legally irredeemable) FRNs they’ve received from government and/or the Fed in return for their work or property.  Wee duh Peepul accept those worthless pieces of paper as if they were “payments” rather than mere “promises to pay” (debt instruments).  We’re not really paid for our work or property when we receive FRNs.  We’re “paid” when we trade those FRNs to some other private seller for a fair amount of his work or property.  

Suppose I received $1,000 FRNs from the government as if they were a “payment” for some work I did for the government.  Those FRNs are irredeemable debt-instruments that will never actually be paid for by the government by deducting their value from from the government’s account.  Nevertheless, I will be “paid” when I spend those FRNs on some other third party’s goods or services.  

For example,I could hire John Smith to fix the leaks in my roof for $1,000.  Smith would expend his time and asphalt to patch my roof and accept the FRNs I’d received from government as his “payment”.  Technically, by trading my FRNs to Smith, I’d be “paid” for the work I did for the government.  But I wouldn’t be paid by the government.  The original debt would not be deducted from the government’s account.  The roofer Smith would be “paying” the government’s debt to me as if he were a surety for the government.  The government wouldn’t have to pay its own debt.

Then, Smith would have to take that $1,000 in FRNs and find some other idiot willing to to trade work or property to Smith for the $1,000 in debt instruments (promises to pay) as if they were payments.  Then, in order to actually be “paid,” that idiot would have to find another moron willing to accept that $1,000 in promises to pay as if they were an actual “payment,” etc.  

On the face of it, this Debt-Based Monetary System doesn’t seem so bad.  After all, in the end, we each receive some sort of tangible “payment” for our work or property.  But our DBMS is bad because the government never really has to pay its debts.  Instead, We the People are unwittingly “paying” the government’s debts.  Government never has to really “pay” it’s bills. It issues FRNs as “promises to pay,” but those promises are never kept by government itself.   Government makes the “promises,” but it’s up to the People to keep and “pay” those promises.

Pretty slick, hmm? It’s equivalent to being able to issue checks against your private checking account that are never actually charged to you account. You could issue a promise to pay with each of your checks, but you’d never have to redeem that promise and actually pay your debt by withdrawing real money out of your checking account.

Think how rich you could become, if you never had to redeem any of the checks you’d written on your checking account.

Think how rich, powerful and enormous government could grow, if it never had to redeem any of its debts/promise-to-pay with actual payments. In fact, a Debt-Based Monetary System (DBMS) may be the cornerstone for any government to not only become big but even tyrannical.

Most who study the current DBMS conclude that the Federal Reserve System is responsible for “spinning” enormous sums of currency “out of thin air”. Figuratively speaking, this “spinning” takes place at the top level in Washington DC.

There’s some truth in that conclusion, but thanks to fractional reserve banking, the biggest “spinning” takes place at the level of your local bank. Under fractional reserve banking law, a bank can treat U.S. (and other) bonds as collateral for making loans to the public. More, under U.S. fractional reserve banking laws, the bank that holds U.S. bonds in its vault can lend up to nine times the face value of those bonds to the public.

In other words, if a bank buys $1 million worth of U.S. bonds and deposits those bonds into its bank vault, that bank can legally “lend” up to $9 million to the public to purchase homes, automobiles and flat-screen TVs. This $9 million is “spun out of thin air”. It doesn’t actually exist in the sense that the bank has $9 million in cash or tangible assets in its vault to disperse to the public.

Instead, the bank merely writes one or more checks for, say, $9 million to some borrowers to deposit into their private checking accounts. This $9 million is “spun out of thin air”. It’s an accounting unit denominated in fiat, debt-based dollars that has no objective correlative.  It’s imaginary “money”.  There’s nothing like ounces of gold or barrels of crude oil issued by the bank that can be used by the bank to redeem the bank-created $9 million other than the public’s willingness to accept this “imaginary currency” as if it were real, redeemable “money” in return for their work, productivity or property.

Once the bank’s check has been deposited into the borrower’s account, then, the borrower can write his own checks on those imaginary, “freshly-spun” accounting units. The borrower can use these imaginary accounting units to purchase wood, shingles, copper wire as well as the services of carpenters, roofers and electricians to build a new home or commercial building.

The heart of the DBMS is the degree to which the public gives its “full faith and credit” to the mere promises to pay” (debt instruments) issued by the Federal Reserve, government and, especially, local banks.  In our DBMS, virtually no one is actually “paying” his debts.  All are simply giving—and accepting—mere “promises to pay” (debt-instruments) as if they were payments (assets).

The DBMS is a magnificent system. It is magnificent in terms of effects and audacity.  So long as the public retains its ephemeral faith in the government’s ability to pay the debt that underlies our debt-based currency, the system can not only survive, but can multiply its wealth by up to nine times. (Again, if a bank deposits $1 million in U.S. bonds into its vault, it can lend up to nine times that amount in “imaginary” currency to the public.) This 9X multiplier can “stimulate” a people and an economy to consume up to nine times as much ($9 million) as its apparent wealth ($1 million in U.S. bonds) might otherwise justify.

Imagine how rich you could become if, for every $10,000 you deposited into your checking account, you could write $90,000 in checks that were NSF (non-sufficient-funds) and legally irredeemable. No banker’s fees or fines imposed on you for writing NSF checks. How rich, how powerful could you become if you could issue $9 in imaginary checks for every $1 you deposited into your bank accounts?

Similarly, how rich, how powerful could government become if it were free to issue checks that were legally irredeemable and “NSF”?

Likewise, how “stimulated” could the economy become if it would “jump” by the “9X multiplier” every time some legally approved bonds were deposited into bank vaults?  Thanks to fractional reserve banking, debt would no longer be something to avoid.  Instead, debt would become desirable.  Every million dollars worth of debt we created might be used as bank collateral to lend another $9 million to the public.  

But what is that debt?  Nothing but a promise to pay.  The debt has no tangible reality.  It’s as subjective as an imaginary kiss.  The debt instruments sitting in bank vaults provide the foundation for our DBMS–and yet those debts are nothing but promises.  What’ll happen when the public realizes that our brave, new DBMS is built on nothing but promises?  What’ll happen if the public realizes that the promises can’t be kept and the debts can’t ever actually be paid?  The whole DBMS of the United States and even the world is as illusory as the the clothing imagined in the fable about the Emperor’s New Clothes.  The whole world believes the “emperor” is clothed magnificently until some kid points out that, actually, the emperor is buck nekkid (or, in financial terms, utterly bankrupt).  

Our entire Debt-Based Monetary System is based on the presumption that our government is not insolvent or bankrupt.  But it is.  And it has been ever since government completely abandoned the asset-based (gold-based) monetary system in A.D. 1971 (when President Nixon stopped redeeming foreign-held dollars with gold).  The government hasn’t actually “paid” a debt with a tangible asset for 46 years.  Ohh, they’ve discharged trillions of dollars worth of debt with more paper and digital promises to pay.  

Our government hasn’t actually “paid” its debts for nearly one-half century.  By that measure, government has been bankrupt for nearly half a century.   If you don’t see that, you’re cut from the same cloth as the people in the fable who all agreed that the emperor’s clothes were magnificent–event though he wasn’t actually wearing any clothes.  The world believes the “emperor” (the U.S. government) is fabulously wealthy.  So long as that belief persists, the world will continue to accept debt-based, fiat dollars as if they were payments rather than mere promises to pay.   So long as that belief persists, the DBMS will continue to function magnificently.  

But if and when the world finally realizes that the “emperor” is buck nekkid and bankrupt, the DBMS and world economies will collapse into chaos.  


•  In a real, asset-based monetary system (based on, and redeemable in, some tangible substance like like gold or silver) that tangible asset can only be acquired by hard physical effort and the genuine productivity of pulling precious metals out of the ground.  On the other hand, our Debt-Based Monetary System operates based on little more than “promises to pay”.

Q:  How hard is it to mine one ounce of gold out of the ground?

A:  Very.  People sometimes die in the process.

Q: How hard is it to produce debt instruments?

A: Not hard at all. In theory, all you need is a pen, paper and a convincing line of B.S. to convince a lender that your “promise to pay” is credible.

Get that? At bottom, in the DBMS, all you need to be rich is the capacity to make seemingly credible promises. You don’t need to actually make “things” for trade—only promises.

How hard is that? You don’t need more factories and employees to make more widgets or deeper holes in the ground to extract more physical gold. All you have to do is produce a credible promise to make more widgets or dig more gold.  Truth is irrelevant.  Reality is irrelevant.  In our DBMS, actual productivity is optional.  All you really need are more credible promises to pay. (Build a better promise and the world will beat a path to your doorstep.)  

Tell me that’s not so.  Tell me that you haven’t seen the hustlers, con-artists, politicians and billionaires prosper based on false promises rather than actual productivity.  The best part of this world goes to the liars rather than to the actual workers.

If that description sounds far-fetched, answer me this: Why do we have a “consumer-based” economy? Why not a “production-based” economy?

What is “consumerism” if not evidence that we no longer need actual productivity to boost our standard of living? Instead, we can seemingly survive on our mere capacity to issue “promises to pay” (debt instruments) rather than actual payments (tangible gold and silver coins or trade in our own products).

It’s simple. China sells us actual things (tangible wealth) that they’ve manufactured and, in return, we give them promises to pay (debt instruments) that will never be paid in full. That’s why China has over $1 trillion in US debt instruments. We’ve been “paying” China with mere promises to pay—and those promises are piling up.

Some Chinese have begun to wonder if our “promises to pay” will (or even can) ever be kept. Will our debt-instruments ever be redeemed with tangible wealth? A the Chines ponder these questions, they begin to lose their “full faith and credit” in U.S. dollars. They’re starting to look at other payment options like gold or the yuan or a new banking system for the “BRICS”. They’re losing their faith in debt-based dollars. As they do, the dollar-based prices of Chinese should rise.

Even so, the Chinese remain dumb enough to accept our promises to pay as if they were or could ever be actual payments. What a bunch of idiots, hmm?

Of course, you and I have spent the last 46 years of our lives also accepting the government’s promises to pay (FRNs; debt-instruments) as if they were payments. Ergo, we’re not any smarter than the fool Chinese, are we? And our government’s promises to pay (debt) are piling up.  We call that pile the National Debt.  Government claims that debt is only $20 trillion. Some say it’s really over $200 trillion. In either case, that debt is already too large to ever be actually paid in full.

Q: What’s going to happen when the American people realize that the National Debt (government’s promises to pay) can’t and won’t be paid?

A: They’ll lose the faith in our fiat, debt-based dollars that alone supports our monetary and economic system.

Q: What then?

A: The economy will “faw down, go boom!”  

Q:  What’ll happen to the price of gold?  

A:  It will skyrocket.

Our DBMS is truly genius—so long as the economy is growing and our standard of living is rising. So long as Wee Duh Peepul think we’re getting something for nothing (we can “consume” without having to actually having to work, “produce” and “pay”), we’ll go along with the program and keep accepting government’s promises to pay as if they were payments.   So long as the economy seems strong, we will defend the promise of the “emperor’s new clothes” to the death.

But if the economy goes into recession or depression, our faith in fiat, debt-based currency will wane. Increasingly, we’ll want payments (gold, silver and other other tangible forms of wealth) for our work and property rather than subjective promises to pay (debt-instruments like FRNs) that we (finally) recognize as impossible to keep and therefore worthless.  (Remotely, we might even demand actual “payments” from the government rather than mere “promises to pay”.)

If and when the moment of recognition comes, those who’ve trusted in, and given their full faith and credit to, the Debt-Based Monetary System will find their faith is false. They’ll learn that the debt-instruments (promises to pay) that they’d trusted in to store their wealth are worthless and their wealth is gone.

Except for the timing (which is nearly impossible to predict), it’s actually pretty simple.  Any fool can see that the U.S. and global debts are too great to ever be repaid in full.  As I’ve said for five years, I’m guesstimating that at least 50%—and probably 80 to 90%—of our debt (promises to pay) will be repudiated by an express refusals to pay and/or by hyperinflation.

Once you see that what can’t be paid, won’t be paid—and that our debts (promises to pay) must fail, everything else (other than the timing) becomes obvious. The Debt-Based Monetary System is going to crash precisely because the total debt (promises to pay) is finally seen to be too great to be paid in full.  When that happens, those who store their wealth in a tangible, objective medium like gold, silver, land, tools, food, water, bullets and guns should do OK—they might even prosper dramatically. But, those who continued to trust in the DBMS and store their wealth in the form of paper debt-instruments will be impoverished.

More Promises

After I wrote the the first article in this series, I promised to explain the “why” behind the DBMS in the second article. But, in that second article, I was diverted by some observations concerning Ponzi schemes in the second article and never got to the “why”.

Nevertheless, I promised once again to present the “why” in this third article. And I really, really meant to keep that promise. Really.

However, as fate would have it, I have once again been diverted (this time, by observations concerning fractional reserve banking) and the “why” is not yet apparent.

Therefore, I shall have to issue a new-and-improved promise (this one might even be backed by Special Drawing Rights issued by the IMF) that next time (article #4), I will absolutely, positively explain the “why” behind the Debt-Based Monetary System.

Scout’s honor. Cross my heart and hope to get fabulously wealthy.

(Are you beginning to see tangible evidence that promises that are easily made are also easily broken and shouldn’t be trusted? If so, good. One of the fundamental rules of sensible investing is that you should to take all promises (debt instruments) with much salt.)


Tags: , ,

5 responses to “Debt-Based Monetary System Demands Ever More Debt—Part III—Fractional Reserve Banking

  1. D

    May 17, 2017 at 8:44 PM

    Adask, good article and well written. The piece I think you are missing is the military industrial complex. I think we use our military might to enforce the debt based system on the world and Americans. If a country doesn’t comply we take them out or kill the leader. Or we nuke them. The nuclear threat is intertwined with the money and they both feed of each other. I am referring to bill engdahl’a work.

  2. dog-move

    May 18, 2017 at 12:15 PM

    Alfred in the previous article you mention the Maestro Alan Greenspan, he who gave us the term “irrational exuberance”. Where is he now, as the markets are exhibiting “irrational exuberance”, yet again? I suspect he is in an advisory capacity to the current sitting Fed Gov., Queen Yelled.
    In your book ‘The Nature of Money” you have a quote on page 22 from “Gold and Economic Freedom” by Sir Alan Greenspan. “The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of the tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of society lose value in term of goods. When the economies books are finally balanced, one finds that the loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.”
    It seems that the Maestro has indicated that we may very well have a large price rise coming relative to all the debt (money) that has been created.

  3. palani

    May 18, 2017 at 1:35 PM

  4. Felipe

    May 18, 2017 at 8:15 PM


    I think you will enjoy the above linked article.

    It’s on usury, double entry bookkeeping, accounting, time, money, etc.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s