Episode 519 of the Max Keiser show was aired on British TV screens on 5th November. Mr Keiser’s background and experience is in economics in general and financial services in particular. The first half of his show is invariably given over to kicking banksters and their political enablers with his interlocutor and co-host, Stacy Herbert. Entertaining sport though this always is, it starts to lose its appeal after the first couple of hundred times of watching it, and regular viewers tend to drift-off into snooze mode until the second half of the show, which is usually given over to a guest appearance by someone who usually (but not always) works in the economics/financial services world. Sometimes the guest has something really interesting to say, other times less so. Episode 519 was, for me, heading towards the so-so pile – until the very last couple of minutes, when I suddenly sat up and paid attention.
The guest was Charles Hugh Smith, an American writer whose website “Of Two Minds” is, according to Mr Smith, #25 of the top 100 finance blogs. With about four minutes of his show left Max suddenly and quite out of the blue asked a riveting question. He asked Mr Smith for his thoughts about the possibility of rolling up all of the world’s major currencies – such as the dollar, renminbi and euro into a new global super-currency similar to the IMF’s Special Drawing Rights (SDRs). Mr Keiser asks the question with a little smile on his face, almost as though he’s joking. Mr Smith doesn’t laugh, and immediately comes back with the perfectly sensible reply that it all depends on who controls that currency; and then speculates about the possibility of bitcoin being used for this purpose.
Now this is really heavy-duty stuff; potentially world-changing stuff. It’s not the first time the question’s been asked, of course – not by a long way; but ever since the implosion of the western world’s banking system in 2008 imagining a planet without the mighty US dollar as the global reserve currency is now being openly discussed a little more frequently. Although it’s not surprising that this isn’t leading the six o’ clock news – or even getting a mention – it most definitely should be.
Any country that has the means to provide the base currency which almost every other country on the planet uses for trading purposes is in an extremely powerful position. It’s no coincidence that now and in the past these countries have also been major military powers too, because one of the main reasons why a nation can earn the right to provide the global reserve currency is that its government isn’t likely to be overthrown anytime soon – either by internal revolution or by foreign invasion, which means its currency is relatively stable and secure, which makes it good for trading purposes.
Until relatively recent times global reserve currencies were linked to some type of precious commodity – such as gold or silver – meaning that, in theory at least, the country producing the currency could, if required, replace its paper money with gold or silver metal. In the early 1970s the US decided to sever the link between the dollar and gold. Ever since then the dollar has been a pure fiat currency, in other words not officially tied to anything of value. Of itself that’s not necessarily a problem but, as Charles Hugh Smith pointed out, it all depends on who’s controlling the currency. If it’s an honest group of citizens using their very considerable power humanely and responsibly no one need lose any sleep; but if it’s a bunch of villains incapable of resisting the temptation to make themselves and their cronies unbelievably wealthy there’s only going to be one outcome. The fact that the western banking system blew up in 2008 gives us a bit of a clue about the people who have been controlling the global reserve currency for the last couple of decades.
A good way of understanding how our money system works is to think about what happens when you walk into a bank and ask for a loan – a mortgage to buy a house, say.
Let’s suppose a customer wants to borrow £100,000 from a bank to buy a house. When a bank approves the loan what happens is the customer makes a deal with the bank such that the bank will pay the £100k price of the house providing the customer agrees to return the £100k – plus a sizeable interest payment – over a number of years – twenty five say. The deal is such that at the end of the twenty five years the customer would have paid back considerably more than he borrowed – £150k, say. All bank loans work like this.
Now look at the above transaction through the eyes of the person who sells the house, the person who receives the £100k. What he’ll have is a piece of paper that says the buyer’s bank is giving him £100k. The inference is that that bank is parting with £100k of its own money – in other words that it had £100k of its own real money tucked away somewhere that it’s now paid out to the seller of the house, £100k that it will get back from the buyer, plus interest, over the next twenty five years. The house-seller might even think that if he really, really wanted to he could take his piece of paper back to the bank that produced it and tell them he doesn’t want their bit of paper and would they please change it for £100k worth of their gold bullion that they surely have stashed in a vault – and the bank would happily do that. In other words there is a commonly held view that whenever a bank makes this kind of payment, £100k in this case, that it has £100k worth of something really valuable – such as gold – which it could use for the payment if it wanted to, instead of a piece of paper. Given that that’s basically how banks actually started out in life it’s not very unreasonable for some people to have that view. But… that commonly held view is completely wrong.
Whilst banks do indeed have a certain amount of assets of real value – such as gold bullion – these assets are just a tiny, tiny fraction of the value of the payments they make in the form of loans. In the above example when the bank approves the loan all that happens is a clerk will type some numbers into a computer, and hey presto! £100k is instantly created out of cyber-space. Brand new money; just like that. It is that simple.
Now the other really important part of the story to grasp is this:
When the bank agrees to loan the customer £100k – plus interest obviously – the customer agrees to two things:
1. That he will pay the bank £100k – plus interest – over the next twenty five years, and
2. That the bank will own the house until such time as the whole amount of the £100k – plus interest – has been paid.
So, a bank clerk types a few numbers into a computer and immediately obtains in return a real asset – the house – plus a promise from the customer to make regular sizeable payments to the bank for the next twenty five years, sizeable payments which the customer will only be able to make by selling his labour, most probably for twenty five years; and all it costs the bank is the clerk’s wages to do the relevant admin. From the banks’ point of view, what’s not to love?
So what does this have to do with reserve currencies? Well, everything; because once it’s clearly understood how something like a mortgage loan actually works all one needs to do is scale the model up a few billion times to see how a global reserve currency works.
When a country is able to supply the global reserve currency it becomes like the bank in the above example – the biggest bank on the planet. It can obtain real assets, such as oil say, from another country by simply having a clerk type a few numbers into a computer. Or the reserve currency producer can use its artificial money in the form of loans – just like the bank in the above example. It can make loans of the reserve currency to other countries in exchange for promises from that country to repay the loan – plus interest obviously. So the country that produces the reserve currency obtains real goods (such as oil) or it ties other countries to what are often ruinous long-term debts, by simply using a clerk to type a few numbers into a computer and hey presto! brand new reserve currency is created. The country receiving the loan promises it will repay it – plus interest of course – mainly from taxes obtained from the real labour of its citizens for the next X number of years. In addition, countries taking loans of reserve currencies are invariably tied to buying goods from the same country that produced the loan out of cyberspace.
So the country producing the reserve currency gets something of real use and value – oil, or the products of human labour – in exchange for a few seconds of some admin clerk’s time. From the point of view of the reserve currency-producing country, what’s not to love?
A bit of background
Prior to the end of the World War Two the British pound was the de facto reserve currency. After the war, when Britain was effectively bankrupt, it became the mighty dollar.
The transition from sterling to dollar effectively happened at one of the most important events of its day, the Bretton Woods Conference, which took place in the closing days of the war. Representing British economic interests at the conference was the mighty JM Keynes, he who said:
Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.
Keynes tried to prevent the coronation of the dollar, knowing full well, obviously, what the consequences would be for the British economy: it would mean that countries would prefer to trade in dollars rather than sterling, and that Britain would lose its monopoly on obtaining real goods for artificial money – and the US would henceforth occupy that very privileged position. It’s sort of obvious why Keynes did all he could to prevent it happening. Of course, he was always going to fail, but he tried; and his plan was a very good one.
Keynes knew full well that the US was never going to allow Britain to retain its privileged position as producer of the world’s reserve currency, so what he came up with was an entirely new model for facilitating global trade: the bancor. The bancor would not be controlled by any one country, and any country would have the right to use it.
It was a fine effort by Keynes, but it was always doomed to fail – not because of any inherent weakness in the idea, but because the monumental power and quick profits that can be had by any country with the means to produce the world’s reserve currency was too irresistible for the brash new kid on the block, the US government – which has long been the play-thing of the US banking system. Why should it share the wealth of the planet when it had suddenly found itself in a position to have it all?
The crucial difference between the new American empire at that time and the old British empire was that there’s no evidence that economists of the old empire ever had an idea such as bancor until Keynes came along, by which time it was already too late to use it. In other words, even if Britain had wanted to create a truly equitable global economy (which is highly unlikely) when it had the chance to do it – prior to World War One – the idea of bancor, or anything like it, possibly didn’t exist. However, when the United States assumed control of the global economy in 1945 it most definitely did know about bancor, because Keynes had tried to introduce it; so the US had the golden opportunity to do something truly heroic: it could have fashioned a world economy that was more equitable than anything that had ever been. But just like every empire that had come and gone before the attractions of vast loot for tiny handfuls of powerful people were too irresistible to ignore, and the new empire simply took over from where the old one left off.
Back to the present
Today, with the almost inevitable demise of the US dollar as the global reserve on the not-too-distant horizon, bancor and ideas similar to it are suddenly being talked about all over again. The words “supranational currency”; i.e., a global reserve currency that’s beyond the control of just one country or, to be more accurate, a tiny handful of grasping all-powerful scoundrels, is being discussed all over again. Hence we have the likes of Max Keiser raising the subject of the IMF’s SDRs, and Charles Hugh Smith wondering about the wider potential uses of bitcoin.
Now I don’t pretend to be an expert on bitcoin, but what I do understand is that it doesn’t appear to be controlled or managed by any one country. It’s a form of mainly cyber-currency that can be used for financial transactions by anyone with access to bitcoin software on their computer or mobile phone.
There’s absolutely no reason why bitcoins cannot or should not be used in this way. Buyers and sellers should be able to deal with each other any way they like, and I’m sure bitcoins should be every bit as effective for this purpose as tally-sticks were for several hundred years in Britain. However, could it become the global reserve currency, as Charles Hugh Smith wondered? I don’t think so, mainly because of how one obtains bitcoins to start with.
An individual may obtain bitcoins mainly by buying them with some other currency, or by receiving them in payment from someone in return for goods or services, or by working for the bitcoin system in what is called “mining”. That may be all well and good at an individual level – for managing small financial transactions – but would a government be able to pay for public services for its people or invest in long-term infrastructure projects by using bitcoin? I don’t think so. But there are a couple of useful features about bitcoin which could be adapted for the much bigger financial transactions that countries need to undertake. The technology is clearly here to stay so cannot, and should not be rejected. It should be improved.
The principle of fiat currency
A fiat currency is one that has no intrinsic value, but does have the authority of the state for it to be used in financial transactions – like a piece of paper that says it’s worth £10. The piece of paper is almost worthless as a piece of paper, but if the government decrees that it can be used for any financial transaction up to the value of £10 then it suddenly has real value.
Just like the example of the house sale, or the country that buys a quantity of oil using the global reserve currency, the actual money used for these transactions is fiat currency: money of no intrinsic value of itself, but money that’s given real purchasing value by decree of the state. Most of the major currencies are fiat currencies, and bitcoin is a fiat currency.
There’s absolutely nothing wrong with fiat currency, per se, and it’s obviously been successfully used in many financial transactions for many, many years. The problem, as Charles Hugh Smith immediately pointed out when Max Keiser asked the question, is who controls it.
It’s pretty clear to see that in the days when most financial transactions were done using gold or silver metal anyone who had an abundance of gold or silver was a rich person. The reason why those metals were used rather than most other metals – iron say, or bronze was because they were relatively scarce. So it was easier for rulers to control the economy of the land over which they ruled by simply controlling the supply of gold and silver. In other words, gold and silver were used as money because their scarcity made it easier for rulers to hoard them up and use those metals as tools of control. This point is seldom discussed, yet it’s fundamental to understanding a key feature of money: its importance to rulers as a tool of political control.
As fiat currency gradually replaced the importance of gold and silver metal in daily financial transactions the importance of banks, and their human owners, assumed ever-greater significance – because banks produced the fiat currency. Banks began to replace the importance of gold and silver metal. Although gold and silver have always retained some monetary value they became less and less important to how economies actually worked, and hence less important to rulers as tools of control. This transition of the primacy in the monetary system of gold and silver towards bank-produced fiat currency was obviously not lost on bankers such as Mayer Rothschild, one of the most powerful financiers of his day, who is attributed with saying:
Give me control of a nation’s money and I’ll care not who makes the laws.
Or industrialist Henry Ford, who is said to have claimed that:
It is well that people do not understand our banking and monetary system, for if they did I believe there would be a revolution before tomorrow morning.
So, it’s vitally important to have a clear understanding of how money has always been used by rulers, just as it’s used to this day, as a major tool (or weapon even) for controlling people. Whoever controls money supply also controls the people, which is pretty much what Rothschild probably said; and for that reason real democracy will never exist until the people not only have direct control of political decision-making, but also have direct control of money supply.
The specific monetary device that rulers use for control is their power to determine the monetary value of labour – the minimum wage. It’s the modern variation of slavery. Just as a slave must give their labour to some tyrant or die so too must a wage-slave. But if a person is protected by the state such that his all basic needs are protected and guaranteed in return for providing some of his labour to the state (no more than twenty hours a week say) he would not have to sell his labour to anyone else unless he wanted to, unless he was offered a fair price for his work. The labour a person is able to provide is their property, to sell at a price that they and they alone should decide.
EnMo Economics is a system I invented for providing a humane and equitable method for managing the economy. The full details of it are irrelevant to this essay, but it would help if I explain that the word EnMo is constructed from the words Enough and More which are, I believe, the two main components of the economy which are fundamentally different, but related. In EnMo, the state is responsible for ensuring that everyone has Enough in terms of essential needs to live happy and secure lives, whilst those who want More in terms of non-essentials may have it supplied by the private sector.
The relevant and radical bit of EnMo as far as this essay is concerned, is that it assumes that money is a human right, like water; which on a local level means the state is obliged to ensure that everyone has Enough of it to live happy and secure lives; and on a global level it means that every country has Enough of the global reserve currency to meet the costs of whatever imports it needs for supplying basic essentials to its population. The basic resource that underpins and powers the system is human labour. In return for the human right of money, a commitment is required by those of working age, and who are able to work, to contribute a modest amount of their labour (twenty hours a week or less) to helping provide essential public services. Those who want More money may have it by working in the private sector as well as or instead of working in the public sector. But because all basic essential needs would be provided by the state no one would have to work in the private sector unless they wanted to.
The essential principle here is that money is a human right, like water. That doesn’t mean we must be supplied with a swimming-pool full of the stuff every day – just enough for basic needs. For most of human history economies have been managed on the principle that money is not a human right, that it’s the personal property of a tiny handful of elite rulers with the power to distribute it or withhold it as they see fit; rulers who ensure they always have far more than they ever need whilst the people they rule have little or none at all; rulers who use their control of money to force those they rule to do things they would never otherwise do – such as risking their lives to travel to distant places to murder other poor people, just to make the already-rich money-owners even richer.
I’ve already shown that modern money is created quite literally out of thin air – or cyberspace – so in actual fact it’s even easier to make available to people than water – should rulers feel so inclined, which they never have been. So all we require is a system of government committed to ensuring that all people have enough money to guarantee their essential needs, a system of government committed to managing an effective method of administering money in a fair and equitable way. Most western governments, trapped in the bankster-imposed “austerity” mindset as they are, have the ridiculous situation where they have crumbling public services – supposedly because there’s no money to run them (when in actual fact all a government needs to do is switch a computer on) – at the same time as they have massive unemployment. It doesn’t take a genius to see that the two problems should cancel each other out. But our governments do not choose to do that. They choose instead to make people suffer in order to drive down the cost of labour so that elites in the private sector may make vast fortunes for themselves. Therefore, the first essential step to having a fair and humane economy is to create a fair and humane government.
EnMo Economics assumes such a government, a government that is truly run by the people (a well-informed people), for the people, using direct democracy at all levels of political decision-making. Furthermore it assumes such a system of government on a global scale – which is something else we haven’t got… yet.
Bitcoin and the global reserve
So could bitcoin be used as the new global reserve currency? In my view no, not in its present form, but the technology could very definitely be made use of eventually.
For a start it’s very difficult to use bitcoin unless you have a computer or mobile phone or, even more fundamentally, electricity. That instantly excludes a sizeable chunk of the world’s population at a single stroke – the chunk of the world’s population that most desperately needs a fair and equitable monetary system. In other words, although bitcoin or something like it could work very well in an EnMo Economy within the private sector as a means for obtaining More non-essentials, it would be less than useless in many parts of the world for making sure that everyone had Enough. So although there may be a time in the distant future when bitcoin or something like it could indeed be used as a global reserve – when everyone on the planet has access to computers and mobile phones (and electricity) – it cannot yet provide the solution to the urgent problem of the imminent demise of the dollar as the global reserve.
What does exist right now and could, in theory at least, resolve the problem almost overnight is the IMF’s special drawing rights (SDR). This is not to suggest that SDRs, per se, are the solution; they’re not. But what’s especially relevant and original about SDRs is that they’re not directly controlled by any one country. Of course, the United States wields a disproportionate influence in the way they’re presently managed – as it does with almost everything else – but the principle of a global reserve not directly controlled by any one country is a very important place to start, which is pretty much what Keynes suggested almost seventy years ago.
So here we have four of the main components for creating a new, fair, global reserve currency. Firstly, we have the fundamental principle that money is not the personal property of tiny handfuls of politically powerful individuals, it’s a human right for ALL people. Secondly, we have the already-existing principle of fiat currency which provides the means for this to be possible, for governments to create out of thin air whatever money they need. Thirdly, we have in the shape of SDRs an already-existing embryonic concept for a new global reserve currency, a currency that no one country can fully control; and, fourthly, we have a new economic philosophy – EnMo Economics – which ties this all together in a new monetary theory.
In a world using EnMo Economics every government would be tasked with ensuring that the people have Enough of everything they need for happy and secure lives, in return for a commitment by the people to work some of the time for public services. To help them administer this, governments would be able to produce whatever money they need, money they could only use in their own countries.
The principle is also used in international trade between governments. A global reserve currency would be produced by a global central bank which is not controlled by any one country but is instead an agency of the United Nations, controlled by and answerable to the General Assembly. This central bank would operate on the principle that money is a human right and that every country in the world has a right to an allocation of the global reserve based on their essential needs and the number of people working in their public services.
As for the private sector, it would be free to function according to the requirements of local and international laws. Any private business would be required to accept as legal tender either the global reserve or any money produced by its own government. In addition to that any private business may also use other currencies if it wanted to do so.
So in its present form I don’t think bitcoin could be used as the global reserve. Not only are there the technical limitations already mentioned, but in its present form governments would not be able to obtain bitcoin unless they bought it in sizeable quantities; and unless they could do that by using their own self-produced currency, currency created out of thin air, there’s just no point in a government using some other currency to buy bitcoins – it might as well just use the other currency for its purchases. Although bitcoin is almost certainly here to stay for small-scale private-sector transactions – at least until such time as a better technology is invented – I can’t see it becoming something governments could use.
The most important conclusions to make are:
1. No meaningful economic reform can occur until significant political reform happens.
2. Money is a human right, like water.
3. EnMo Economics proposes an economic model which could provide real social and monetary justice on a global scale for the first time in human history.