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Monetary system

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Banknotes of Kyrgyzstan

The monetary system is the system of exchange of services for some commonly accepted token. Usually, forms of property for currency created by a bank.

Today's reality[edit]

Most of what ordinary people and activists believe about the monetary system is wrong.

In reality, banks have special powers to create money by putting funds "on deposit", loaning new money into existance, and to accept currency from others as well, thus having sufficient credit with the central bank to satisfy that central bank's demands for fractional reserves (historically) or capital adequacy (the system more typically used today).

Under dollar hegemony, the United States Federal Reserve effectively sets the value of all money in the world relative to oil, since only dollars can buy oil - this is changing, see Iran Oil Bourse. This situation has persisted since 1970 when the US violated the Bretton Woods agreement that forced the US to redeem currency in gold. The institutions set up under that agreement (the IMF, BIS and World Bank) all persisted but with new agendas controlled by the US government. Collectively, these institutions decide which countries go bankrupt! A new institution, the WTO, was added to limit the power of rival trade blocs and ensure that there was a means to punish countries which wished to limit access to their resources or market.

Debt vs Money

[|editable xfig format]

Note that debt is always much greater than circulating money PLUS time deposits combined ! Here is why D/M > 1 :

  • cyan: the economy needs money for the transactions. Banks pay no interest on this. The amount could be lowered by higher velocity of money
  • yellow: banks allow savings and time deposits, that is temporarily withdrawing money from circulation. To make up for this amount, others will have to get new loans with a higher accompanying debt behind it. Banks pay interest on these savings
  • red: the DEBT is much (depending on the average status of loans and interest, usually appr 2x, in USA 3x times) greater than the circulating money PLUS time deposits combined. Banks take interest on the debt.

As you see, the impression that banks loan out their depositors money is false. Banks take interest on the debt, that is far more than all money in the system, yet the savings+time deposits that banks pay interest for.

Green: most economies have a very small amount of debt-free money This is usually negligible part of the money supply, eg. in USA, the coins that is a small fraction of paper money that is a small fraction of the total amount of deposits. Banks prefer this stays small, so the debt stays huge. Because green is negligable, it is mathematically impossible to pay off debt: the money supply would drain up !


It would be reasonable to dwell the debt-free part of the money supply. Electronic markets, using auditable, cryptography based systems will allow this. Even very smooth interfacing to our USD (GBP, EUR, ... or your government's currency) system will be possible. Imagine a debit card which can be used to pay anywhere, without a significant cash-deposit behind. The necessary cashflow can be maintained with a very small amount of money in the system, by accumulating many accounts, and non-fraud money based transactions in the background. For example when you pay in Walmart, USD is transferred to Walmart, but what decreases from your account (when there was no USD on it) ? Gold, some share, or whatever sell-strategy you instruct your electronic agent, the same way you do on the stock-market. The stock-market shows how such market can be integrated into the law-systems. Bewarned that stock-market is heavily manipulated, most significantly by tulipomania effect (elevated prices).

People must learn a lot to understand savings. In any case, without getting debt-free money into circulation, the debt is growing unbearable, this effects taxes and prices. WE CAN GET DEBT-FREE MONEY INTO CIRCULATION. Computing guys, lawyers, join your forces.

The current system where people use money created by private banks (in a way most people do not understand - yet) automatically transfers ALL wealth of the world to those hands. People (falsely) believe they are able to keep their wealth by producing more. In reality they are losing all their wealth (and influence), until they realize this is a monetary problem that cannot be cured by fiscal methods. See Monetary Fraud Model


In a barter system people exchange thing on the basis of the worth of the particular product to each party. However, as the deskilling of the population began to take hold some people began to make only one set of products, this proved to be not very productive, since if you are making airplanes, you won't be able to exchange them for bread, since nobody would grow enough to pay you. Therefore, some communities began to use some commodity that most everybody used (some used gold, some salt (hence the word salary), in Hitchhikers Guide to the Galaxy a community used leaves).

Then when banks began to open up people would receive a note from the bank stating that they could redeem a certain amount of currency from that bank, and some communities began using those notes. Soon bankers have realised that most notes will never be redeemed, and they have began publishing notes without having the currency to back those notes up. Today's monetary system is based on trusting banks to loan only to those who will generate more money, and pulling back other loans from those who fail to do so. Even if the money supply does not expand (and no inflation, like with the EUR) the debt is huge, and impossible to pay off. Those who cannot create money lose out. The whole economy pays a crazy fee to banks for interest on debt, appr 20% of the GNP (above what banks pay on money on savings account). Also, this results in what is commonly called a depression or recession.


The list of alternatives to the monetary system:

  1. [Robertson] "Creating New Money" and "Monetary Reform - Making it Happen" (free downloads) explain how to prohibit private banks to create money. Details the roles and the smooth transient period. Instead of 100% reserves, declares electronic money as legal tender, put to circulation by the central bank debt-free as public revenue. A must read.
  2. gift economy
  3. barter (not a very good alternative)
  4. Monetary reform movement is catching up:
  5. New monetary system is born. Technology helps:

See also[edit]