The Hidden Tyranny of our Money

By Victor Gómez-Enríquez

The Hidden Tyranny Of Our Money provides an analysis of our present monetary system. It shows that by controlling the creation of money and manipulating the money supply, a small cabal of financiers has acquired immense power in the world during the last three hundred years. 
 

• Language: English
• Publisher: Black House Publishing Ltd
• Release date: Jan 2, 2019
• ISBN: 9781912759835

Book preview

Chapter I

Introduction

This book is the result of the author asking some basic questions about the economic crisis in 2008. What was the origin of the financial crises such as those in 1929 and 2008? Are they really inevitable? — a natural feature of a free-market economy? Or are they avoidable? and if so what can we do to prevent them?

The official explanation is that the economies in this world are subject to cycles of booms and busts that happen more or less regularly and are inevitable. However, nobody speaks about the role of the monetary system in all of this or, more specifically, whether the kind of money that we use has any effect in economics.

One exception to this rule is given by the Austrian School of Economics whose major exponent is Ludwig von Mises[1]. According to this school, economic cycles are the result of artificial credit expansion via what economists call fractional reserve banking. Simply explained, this means that in a first stage and in a context of low interest rates set by the central bank, commercial banks create excess money out of thin air, that they lend at interest, and this produces false signals in business opportunities that provoke so called malinvestments (badly allocated investments) on the part of entrepreneurs. Then, on a second stage, when the market exposes these bad decisions, a depression takes place that tries to correct what went wrong and restore equilibrium again.

The fact that most of the money, around 97 per cent of the money supply, that we use today is created by fractional reserve banking supports the Austrian theory of the business cycle. Imagine that one creates a lot of dollar bills by using a printing press and one introduces this money into the economy little by little, starting with family, friends and people that one trusts most. What would be the effect of this action? Has the economic community more wealth because it now possesses an additional heap of money created out of thin air? Is it not natural to think that the people who have received some of this extra money will start increasing spending accordingly? For example, a group of real estate entrepreneurs might overestimate housing demand because there is an excess supply of money that has been artificially created, so that they therefore decide to build too many houses, thus creating a housing bubble. When the bubble pops, a depression takes place that tries to lead the housing market into equilibrium again.

Very few people know that all money in existence has been created out of debt and most of it by commercial banks through fractional reserve banking. Only a tiny portion is created by the central bank. We will describe the process in more detail later in the book. Suffice it to say in this chapter that, since the creation of money implies a debt, for each dollar that is created into existence, we must return an amount equal to this dollar plus the interest. Thus, when we pay our debts, we withdraw more money from circulation than was created.

Fractional reserve banking allows commercial banks to create money out of nothing by making loans. This leads us to the distinction between usury and interest, which will be addressed later in the book. For the moment, we will say that interest refers to the increase of wealth overtime due to fruitful human labour, whereas usury is the result of demanding some goods and services after a period of time from a loan of something that has no intrinsic value. For example, if I lend something valuable, called the principal, to someone and demand that after some time the principal be returned together with some goods and services, this additional last part is the interest. If, on the other hand, I create some money out of thin air and I lend it at interest, this is usury. Thus, usury in our view does not mean excessive interest in loans, which is the traditional definition in our times, but a way of earning some profit from a fraudulent loan.

One problem with the Austrian school explanation of the business cycle is that it is not the mainstream one in current economics. On the contrary, we can say that very few economists give credit to the Austrian school of Economics. This is the reason why almost no one speaks in the mainstream media about the Austrian theory of the business cycle.

Apart from the Austrian school, there have been some people in politics, academia and business who have seen something unscrupulous in our monetary system. For example, the famous British economist John Maynard Keynes, referring to the monetary system, wrote in The Economic Consequences of the Peace[2] that:

By this means the government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft.

The British Nobel prize laureate in Chemistry (1921) Frederick Soddy also studied economics and stated in his book Wealth, Virtual Wealth and Debt[3] regarding the monetary system that:

If we reasoned similarly in physics, we should probably discover that weight possessed the property of levitation.

Henry Ford (1863-1947), founder of Ford Motor Company, is quoted as saying that:

It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.

Thomas Edison (1847-1931) was ardently opposed to the gold standard and debt-based money. Famously, he was quoted in the New York Times stating "Gold is a relic of Julius Caesar, and

interest is an invention of Satan."[4]

Sir Josiah Stamp, director of the Bank of England (1928-1940), while speaking at the University of Texas in 1927 is quoted as saying:

The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin …; Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they will create enough money to buy it back again …; Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in …; But, if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit.

Congressman Louis T. McFadden, Chairman of the House Banking and Currency Committee, in a speech on 10th June, 1932, said that:

Some people think the Federal Reserve Banks are U.S. government institutions. They are not …; They are private credit monopolies which prey upon the people of the U.S. for the benefit of themselves and their foreign customers, foreign and domestic speculators and swindlers, and rich and predatory money lenders.

John Kenneth Galbraith, former professor of economics at Harvard, stated in his book Money: Whence it came, where it went[5] that:

The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.

Milton Friedman, Nobel Prize winning (1976) marketeconomist, is quoted as saying in a National Public Radio interview (Jan 1996) that:

The Federal Reserve definitely caused the Great Depression by contracting the amount of currency in circulation by one-third from 1929 to 1933.

At the Conference to Honour Milton Friedman held at the University of Chicago on 8th November, 2002, the then Governor of the Federal Reserve Board, Ben S. Bernanke, stated:

Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

Finally, Martin Wolf, Chief Economics Editor of the London Financial Times, wrote on 9th November, 2010 that

The essence of the contemporary monetary system is the creation of money out of nothing, by private banks’ often foolish lending.

In view of the previous quotes and remarks, we can say that some very intelligent and well informed people have considered our present monetary system as deceitful, inefficient, and presented to the public in a way that makes it appear very complex when in reality it is not. It seems that it has been conceived as an instrument to cheat on the public so that they are robbed by a clique of bankers and politicians without being aware of it.

In this book we will show that this is indeed the case. That our monetary system is flawed and it is the main cause of the recessions of 1929 and 2008 and the rampant inequalities in society today. But not only that. The present monetary system confers immense power to an elite that controls the money supply and uses this power in turn to buy all important communications media, install presidents in governments, dictate the main trends in academia, and decide the course of geopolitics in the world.

This is the reason why nobody speaks nowadays about the influence of the monetary system in economics, politics, etc. Because if someone does, he or she would instantly commit career suicide. In other words, if a prestigious university professor or a famous journalist would dare speak about the evils of our present monetary system, he or she, would be immediately discredited and probably fired. In this context, it is to be noticed that criticism of our monetary system has been decreasing since 1913, the year in which the Federal Reserve Act was passed, and especially since 1971, the year in which the Bretton Woods system was brought to an end by President Nixon’s defaulting on his obligations (Nixon shock), so that it is very hard to read or hear something critical of the system today. This indicates that the control of mainstream media by the elite is much more powerful today than it was in the past.

In the rest of the book, we will first address in Chapter 2 the question of money. How it is defined and what kinds of money have been used throughout history. We will also make the distinction between sound and unsound fiat money.

In Chapter 3, we will examine some examples of successful fiat money in history to show that the use of fiat money does not necessarily lead to a catastrophe.

Taking the U.S. Federal Reserve as a model, we will describe our present monetary system in Chapter 4. We will see that it originated with the creation of the Bank of England and has been in existence for three hundred years. We will also discuss in this chapter the meaning of the petrodollar system and the performance of the European Central Bank and that of the central banks of the BRICS countries.

The consequences of having a private elite issue and/or control the money supply will be discussed in Chapter 5.

The benefits of letting the state issue and control the money supply will be seen in Chapter 6.

In Chapter 7 we will describe a solution proposed to solve the problems of our present monetary system. Several solutions for the countries in the European Monetary Union will also be proposed.

We will conclude with an Epilogue in Chapter 8, in which we will analyse the present day situation and summarize the conclusions.

Chapter II

What is Money? Sound and Unsound Fiat Money

Commodity Money

In order to understand the concept of money, let us imagine first that we live in a society in which there are no advanced social institutions, no state. If people living in this society want to trade something, they would probably have to resort to barter. That is, they would interchange goods and services directly. For example, a cow could be traded for a certain amount of grain.

However, after some time, experience shows that certain commodities would be accepted