Where does money come from? I am not talking about the ways in which we earn an income but rather of how new money comes into being. Does it grow on trees? Is it made by computers? Can we dig it out of the ground?
According to a video posted on the Bank of England website, central banks create new money electronically and use it to buy financial assets such as treasury bonds from banks and institutional investors. They describe this procedure, euphemistically known as quantitative easing (a smoke and mirrors expression if ever I heard one), as unconventional. The Knot Garden prefers irresponsible.
This method of managing a country’s monetary base, which has parallels in the ancient practice of coin clipping, might be compared with the behaviour of an individual who takes out a loan and then prints counterfeit banknotes to repay it. The perpetrator would be convicted of a serious fraud and thrown into jail.
Governments have granted themselves the legal right to create money out of thin air using a sort of electronic alchemy. Ben Bernanke notoriously proclaimed in his infamous 2002 speech addressing the spectre of deflation that “The US government has a technology, called a printing press, that allows it to produce as many dollars as it wants at essentially no cost”. This assertion reeks of arrogance and complacency and presents a dangerously unbalanced proposition.
By pursuing a philosophy of creatio ex nihilo, politicians and central bankers appear to be assuming the role of gods. We mere mortals, looking on in horror, would rather invoke the counter principle of ex nihilo, nihilo fit.
If you increase the supply of something in the absence of a commensurate increase in demand, its price usually falls. You would expect this principle to apply to the value of money but, in the occult sphere of central banking, it does not seem to work in the usual way. According to the OECD website, the widely used M3 measure of money supply has been expanding in the G7 countries at a high – and accelerating – rate for the last couple of decades. The increase has been particularly marked since the credit crisis reached a climax in 2002, as central banks have turned to quantitative easing with a vengeance. And yet so far inflation has proven remarkably stubborn to provoke. Eventually, however, the piper will insist on being paid.
New money is made in the modern world using computers and thus the printing press, used for centuries to produce bank notes, is gradually becoming a metaphor. There is, however, another form of money, important historically but now considered a relic. It is of little relevance to today’s economy and is universally reviled by central bankers. The monetary role of precious metals has diminished to the sole function of acting as a store of value for a small number of individuals. However, gold and silver may have the potential to form the basis of fully fledged currencies once again.
Last week I opened a GoldMoney account, purchasing a little over an ounce of gold. Unlike conventional arrangements for holding precious metals with banks, which operate the scam of fractional reserves, GoldMoney deposits are backed by the full amount of metal, which can be withdrawn for physical delivery at any time. Customers can make electronic transfers of precious metals to other holders of GoldMoney accounts. They can also purchase goods and services using a prepaid GoldMoney card, although this requires conversion of precious metal into the relevant fiat currency.
While we do not yet have a true gold or silver-based currency, The Knot Garden believes that we are heading in the right direction. Such a currency, offering stability, security and practicality, would truly be a cause for celebration. Except, of course, for the central bankers and politicians.