MODERN MONETARY SYSTEM

The Biggest Scam in the History of Mankind

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

~ Henry Ford

Air is present everywhere but we never come across a question “why is it there?”. Because it is quite obvious to not ask that question. Similarly, we never wonder whether the monetary system that we have opted from years is even reliable or not? Is it trustworthy? Even though the monetary system has a huge stake on the people but no one talks about it because no one exactly knows anything about it. Let’s look at the overlooked aspects of the monetary system. So, to begin with we need to understand what exactly the monetary system means. A monetary system is a complex structure by which a government infuses money into the economy of a country. It usually comprises of three main players that are the treasury department of government, the central banks, and commercial banks. The main motto for which this system was introduced was to provide liquidity, prevent inflation & promote moderate long-term interest rates. But the problem with the modern monetary system is that it is not serving the purpose for which it was established.

It all begins when a political party goes for an election and offers various incentives in front of the people to win the elections. These incentives include promises for infrastructure development and freebies which include free food to the poor, free electricity, and many more. But these expenditures are so huge that they can’t be fulfilled with the revenue itself. We all know what to do when we want to spend more than our income, we go for borrowings. All these promises create a burden on the government finances and for the sake of their fulfillment government has to make an expenditure that exceeds their revenues. The government needs more and more funds but the problem is that the net revenue of the government lies within a fixed range but their expenditures go sky high. Now there is only one option left in front of the government to raise money and that is borrowings. This is what we call Deficit spending (The situation when the expenditure made by the government exceeds its revenue).

Government is the biggest borrower of the country and borrows money from foreign institutions and the central bank of the country. To raise money from the central bank, The government follows a complex structure in which it issues bonds (Which is a debt instrument issued by the central governments to be used as a mortgage for raising money from the central bank) against which they receive money which can be used by them for numerous reasons. The extensive problem arises here. The bonds increase national debt which is to be paid back in the future with interest. The National debt is called national for a reason because it puts an obligation to pay back the debt on us, the citizens of the country. It is the people who will pay taxes to pay back the debt with interest.

The bigger problem is that this debt can’t be repaid. It is right in front of our eyes but we are not able to see that the Modern monetary system is itself flawed. Before you make any judgements, let’s make things a little clearer. Suppose there is a new economy and there is no currency in existence there. So, to begin with, their economic process government needs to infuse liquidity in the economy. For this purpose, the government of the country will issue bonds against which they will receive currency and infuse liquidity. This will create a debt of equal amount that of the currency issued. The government bonds represent the total value of the currency in circulation.

So, let’s take an example that the currency issued was 100 units. This will lead to a national debt of 100 units of currency. It is quite obvious that all the debts carry a certain rate of interest with them. In this case, the bonds carry a certain rate of interest which is to be paid back along with the principal amount. But have you ever wondered how the government will manage to pay back the interest amount? Suppose the interest rate is 20%. So, the amount that is to be paid back is 120 units but the currency in circulation is 100 units only. Even if the whole principal of the debt is paid back then also the interest amount will remain unpaid.

So, it is ethically not possible to pay back the national debt at any cost. To pay the interest amount, the government will issue more bonds and again raise money from the central bank which will further lead to an increase in national debt and so the obligation to pay interest. So, this endless cycle will go on forever. It creates a burden on future generations to pay back the debt. Indirectly the government is stealing the prosperity of the future generations for making excessive expenditure today.

This system is made in such a way that the majority don’t understand it and the top leaders can get the maximum benefit out of it. People say money doesn’t grow on trees but the truth is modern monetary system creates money faster than trees can grow. The government uses the money created by the central bank out of nothing, yes! Out of nothing. Don’t believe me? You will be surprised to know that earlier the currency was backed by gold and it was able to hold its credibility but then the gold standard was taken off on 15th august 1971 which means now the currency isn’t backed by gold. Rather now it is backed by bonds which are nothing but an instrument of debt. This is where the currency isn’t able to hold its credibility but no one know about it.

The gold reserves of India account for 695.3 tonnes (Approximately worth Rs. 3,052,510,159,036.86 or 3 trillion Rupees) whereas the total value of the currency in circulation in India is 28.3 trillion Rupees. So just see yourself how secure our currency is, we have reserves for only 10% currency of the economy. But now the question comes where does all this currency supply go to? It’s quite simple, it is used by the government for national infrastructure development projects, public works & Wars. This moves the currency from the government to different hands. From here a new form of theft starts which is the commercial banks.

All the government employees (Infrastructure workers, Government servants, soldiers, etc..) deposit their cash with the bank they have an account with. From here Fraction reserve lending (Also known as the Required reserve ratio, under this, the banks are allowed to keep a fraction of your deposits and lend the rest out) comes into play. Let’s take an example to understand it better.

Let’s suppose the initial deposits made to the bank are Rs. 1000 and the fractional reserve ratio is 10%. Then following situation will come into play.

In the above example, a saver keeps all his deposits into the bank i.e., Rs.1000, and out of which the bank keeps Rs. 100 as Fractional reserve and these reserves of cash are known as Vault cash. And the remaining amount is loaned out but still, your bank account balance will show Rs. 1000, this is because in place of those Rs. 900 the bank keeps a document called Bank credit (which shows that the bank is liable to pay us Rs.900 even though they don’t have it). The person who takes the loan uses it for making an investment or purchase and that amount is further deposited into the bank by the receiver of money. This process similarly goes on many more times.

Thus, it creates a money supply of Rs. 6513.2 against the total reserves of Rs. 650. That is like 10 times the reserves. This is how commercial banks pump money supply in the economy through the process of redeposit and relent. Isn’t it too easy for the banks to create money out of thin air just by typing few numbers? You will be surprised to know that nearly 92-96% of the global money supply is created by Commercial banks, not central banks.

It might sound like a fascinating idea for many but let me remind you that the price of all the goods and services in the economy is like a sponge and it soaks more and more money in the pool of money and gets bigger. The more the currency supply comes the more rise in prices of commodities. This is where the actual Inflation comes from. The true definition of Inflation must be an expansion of money supply and the rising prices are just the symptoms.

You must be thinking that “Whether the government is aware of it or not?”. Well yes, but they have all the possible benefits to hide it from the general public to maintain their power, fulfill promises, contest elections, etc. The government always dreams to be in a position where inflation rises significantly but people could progress it. One of the reasons behind it is to pay back the loans taken at an interest rate in cheaper terms as the government is the biggest borrower of the economy. High inflation rates which are higher than the actual when accounted for inflation helps the government in paying back loans effectively as the money loses its value faster than the accounted inflation rate. This system benefits those who create and get to spend it first into circulation before the effect of it on the economy.

Now the question comes what are the consequences of this system on the general public?

This is not good for the economy or the citizens but it puts the government in an advantageous situation where they are free to infuse liquidity into the economy with the almighty powers of printing. But this system is responsible for most of the inequalities of the world. Gone are the days when a family can survive on a single paycheck. The reason behind all these problems is none other than our familiar term “Inflation”.

“BY THIS MEANS GOVERNMENT MAY SECRETLY AND UNOBSERVED, CONFISCATE THE WEALTH OF THE PEOPLE, AND NOT ONE MAN IN A MILLION WILL DETECT THE THEFT”

~JOHN MAYNARD KEYNES

At this point, we all are curious to know how this system can be changed or modified so that the prosperity and the purchasing power of the people remain constant over the years? The answer is CRYPTOCURRENCIES which is a topic for some other time.

THANK YOU!! :)