I've discussed it with a few close family members and friends -- and with a few exceptions, I've been relatively quiet about this.
Have you ever wondered why so many people are so deep in debt, why the U.S. government, is so deep in debt, and why there never seems to be enough money without taking out a loan to get access to more?
There's a reason for that, and that reason is the thing I've been keeping so quiet about.
Before I let the cat out of the bag about this thing that will very likely affect you, your friends, and your family in a bad way, let me explain why I haven't been vocal about this... until now.
Roughly two and a half years ago I was getting ready to start the first of the two economics classes I needed to finish my bachelor degree. The idea of taking an economics class was about as appealing to me as a root canal or being massaged with a cheese grater, but I needed the classes to graduate.
It was about a month before I was to start my first economics class when I came across the dirty little secret that practically guarantees to flush the economies of the world down the toilet.
That's right. I didn't say the American economy, or the economy of some obscure country who's name sounds funny when pronounced with an accent... I said the economies of the world.
As I went through those economics classes, I tried to prove myself wrong. When I couldn't, I sat on it.
Since it seemed like there was no way to avert this disaster, there was little that could be done to prevent or prepare for it. I wasn't about to run around like Chicken Little, saying the dollar's falling if I couldn't, at least, offer a suggestion about how it could be fixed.
Besides, just because I couldn't prove myself wrong, doesn't mean I wasn't..... Right?
So... I kept the secret to myself.
I imagined that bringing the topic up would be like walking up to complete strangers and saying something like...
"Hey, guess what... You're going to die! -- I doesn't matter how much you fight it, how much you try to prevent it, or how much you try to prepare for it, you're still going to die..."
"...and you know what else? -- You're probably not going to survive dying."
If you think that's a bizarre thing to say, you can understand why I kept my mouth shut.
I learned this dirty little secret, by asking two seemingly innocent questions.
1. What is money?
2. Where does it come from?
Kids often ask their parents where babies come from, but I don't know many people who ask where money comes from. We all want it, and even when we have it, we want more... but have you ever wondered what money really is?
Just think about this for a moment... What is money, and where does it come from?
I'll start with what money isn't -- Money Isn't Evil!
Here's the boring definition of money. Money is:
1. A tool for trade.
2. A store of value. (Even with inflation, money usually holds it's value longer than a piece of fruit, or uncooked meat )
Here's what money REALLY is....
Money is the mortar that holds the bricks of civilization together. Money is a tool for trade and a store of value, but it is much more than that.
Money allows us each to work as specialized parts of an integrated society that works like a finely tuned machine. It allows us to be artists, scientists, doctors, teachers, police officers, and writers.
Money has taken on many forms over the past few thousand years since civilization began, but without it we would be too busy trying to catch and grow our own food to pursue trivial pursuits like science or medicine.
What's the value of knowing the nature of planets if you're on the verge of starvation, and you can't eat them? Why would you want to use medicine to live past the age of 35 anyway?
This is what money is, and why it's so important. On an individual level, it helps us get what we want and need.
I'm going to suggest that where money comes from is just as important as what it is, and this is where the dirty little secret lies.
With the way our current money system works, we get money from banks. Granted.... paper money is printed, and coins are minted.... but the bulk of our money is essentially poofed into existence by banks.
We use what is called fractional reserve banking. In a moment, I'll explain how it works in plain English, but it'll make more sense if I first explain the problem it solves.
The Problem Fractional Reserve Banking Solves
Just like there are people who, with practice, get good at sports or playing a musical instrument -- there are people who, with practice, get good at getting and keeping money.
If a government were to print enough money to support an economy, and then stop, we would have a limited supply of money. -- This is similar to how the gold standard would work. --
The people who are good at getting and keeping money would then go about starting and growing their pile of money. Eventually they would have all, or most of the money.
Since the money is pulled from the economy, people can't sell goods or services because other people don't have money to buy them with. People don't go to work because employers don't have money to pay them.
At best, this situation triggers an economic recession, but it's more likely to be an economic depression -- like The Great Depression.
At this point, the ability to come out of a recession or depression depends on whether the people with the big piles of money spend some of it, or simply sit on the pile... waiting for it to hatch.
How Fractional Reserve Banking Works - And The Problem It Causes
When I said before that banks poof money into existence, I wasn't kidding.
Banks are allowed to lend out more money than they have. There are laws that place limitations on this practice -- usually requiring banks to keep a percentage of the amount they've loaned on deposit.
There have been times where many, or all of the people with accounts at a bank tried to get the money in their accounts all at once. Since the bank loaned it out, it didn't have the money.
This is called a run on the bank, and it... err... caused a few problems.
Here's a model that paints a picture of how fractional reserve banking works...
Imagine there is a person who has the entire money supply. This person has $100, and since it's all the money in the world, he wants to keep it safe...
So he deposits it in a bank account. This bank has rules it is required to follow. It can lend money, but it is required to have at least %10 of the amount it has loaned in a deposit account.
It just so happens that the same day the $100 deposit account was opened, Dirty Dan was put "in the dog house" by is wife.
The problem with this is that he didn't have a dog house, so to be "in the dog house" -- he had to build one first.
After drawing up a set of plans, checking with a few suppliers, and getting a building permit, he figured he'd need $1,000 to finished the job.
Since Dirty Dan didn't have $1,000, he went to the bank for a loan.
The bank loan officer looked at the ledgers, and saw that it had $100 in a deposit account, and let Dirty Dan know that it had enough on deposit to loan him the $1,000 for five years...
As long as he agreed to pay it back in monthly installments, and paid and additional 10% interest on $1,000 each year.
The loan officer told Dirty Dan that when the loan was paid in full, he'll have paid back the $1000, plus another $500, but he had the five years to do it in.
Since he knew that the sooner he built the dog house and got in it, the sooner he could get out -- he knew that he was still getting a great deal so he accepted the loan.
Then Dirty Dan began to repay the loan, but after he had payed back $1,000 there was no more money, and he would have to take out another loan -- that the bank would charge interest on -- so he could pay back the remaining $500 he owed.on his dog house payments.
This is the Fatal Flaw in the Fractional Reserve Banking System
As long as people are taking out loans, a fractional reserve banking system allows an economy to flow smoothly, even when people who are good at getting and keeping money sit on their money pile and wait for it to hatch.
The fatal flaw is that over time, interest charges eat up the entire money supply... and then after that is gone there always has to be more money owed to banks than the money there is in the economy.
This makes it impossible for everyone to be completely out of debt because there isn't enough money in the system for that to happen.
It gets even worse because, over time, the gap between the size of the total debt and the money available to repay it gets bigger and bigger.
This creates a near perpetual interest generating machine for the banking system, but the system eventually implodes.
Think of The Great Depression as a warning shot or a gentle and brief preview of what is to come if we don't fix this flaw in our money system.
My Suggested Solution
The fractional reserve banking system isn't all bad, and -- in fact -- has the potential to reduce the severity and duration of economic recessions and depressions. This means that recessions and depressions can be made to happen less often, and be less bad.
All that's needed -- really -- is another method for creating money needs to be added to our money system.
The caveat is that it must be limited so that it only creates enough money to cover the interest charged on loans.
If we have runaway printing of money, we create so much of it so fast that it ends up having little or no value. This is exactly what happened to the German Papiermark during and after the first world war.
The "trick" is to maintain the balance of creating enough money to allow people to get out of debt if they choose to do so without also creating so much money so fast that it causes a currency to collapse.
I'm sure this idea isn't perfect, and if somebody has a better one, I'm willing to let go of the idea I came up with, and run with theirs.
However, I do believe that implementing this small tweak to our money system has the potential to allow our economy to run relatively smoothly for hundreds of years... or longer.
The important question to ask is -- What can you do?
Discussing theory has it's value, but it doesn't make sense if you can't actually DO SOMETHING..
Right?
Fortunately, there is something you can do. You can start by contacting your elected officials to express your concerns about the fatal flaw in our money system, and your ideas on what could fix it.
Here are a couple of places you can look to get started:
The United States isn't the only nation that is suffering from the effects of the fatal flaw in the fractional reserve banking system. If you live outside the United States, you probably know who to express your concerns better than I would.
When should you get started?
Well... When would now be a good time?
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