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News ::
Don't Read This.
14 Jun 2002
Modified: 15 Jun 2002
Money today is popular because it's profitable... not for those who use it but for those who issue it. Money, like gasoline, is popular because commercial enterprises have created a society around it where all reasonable alternatives have been eradicated....
Free Trade and Fiat Money Fun

The Summary


1 Human / Civil Rights
Predatory lending
2 Exchange rates
Money is not a commodity.
3 Free Trade
Buying the World
4 Money Fundamentals — Money Science, Real Money
Money is Local, Money is about trade, Barter
The Hierarchy of Money
5 Federal Reserve system vs. Mutual Credit System
Similarities and Differences
Extending Credit is not the same as Lending Money

6 National Mutual Credit Banking system
Money Creation
More Money Creation
The right to NOT create money
Lending Money
Islamic Banking
7 State issued Money
8 Conclusions


Another day older and deeper in debt,
Oh Lord doncha call me ‘cause I can’t come,
I owe my soul to the company store

— Big John, a 1950s U.S. pop song


Many years ago I wrote an article about money and one reader wrote back with a question. "Yes" she agreed, "money is popular, but WHY is it popular?" I have never been able to answer that question to my satisfaction but I have had some responses.

Money today is popular because it's profitable... not for those who use it but for those who issue it. Money, like gasoline, is popular because commercial enterprises have created a society around it where all reasonable alternatives have been eradicated.

Still the details (like, WHY?) were vague. Then I ran into this, by Warren Mosler:

“African communities that were engaged in subsistence production and internal trade had no need for European currency. Walter Rodney reports on a widespread practice employed by the colonial powers to force Africans to use their currency:...colonial governments forced Africans to produce cashcrops [ie labor for money] no matter how low the prices were. The favourite technique was taxation. Money taxes were introduced on numerous items cattle, land, houses, and the people themselves. (Rodney, 1972, p. 165) ... In addition, as the only local source of British pounds, the colonial authority was also in a position to determine the price it would pay for those goods and services.”

So there’s the answer: Using government money forces people to be dependent on working for money rather than being self-sufficient and they have no control over the value of their labor.


Feeling more and more like Big John these days? Wondering why nobody seems to like the U.S.? Wondering why the media keeps saying that the war against terrorism involves, “... military intelligence, international cooperation, and banks”? First, one must to understand The Big Lie.

The lie is the seemingly innocuous fact that banks claim to be lending money when it is the borrower who is creating money. Depending on who you read, US banks can now create between $30,000 and $70,000 for each $1,000 deposited.

If there is the slightest doubt here, you must check it out; here's the confirmation from Edward Flaherty. More neat stuff can be found at Flaherty’s website . Flaherty is a professor of economics and stalwart spokesman for the Federal Reserve System. If he admits it, then it’s gol-dang true. For further confirmation, see Gary North


Start at the beginning: when I give you my IOU, I am creating money. Right? Putting a currency into circulation — ok? Well it's the same at the Mutual Credit Bank (explained below); the MC banking system never claims to be “lending Money” — only to be extending credit. Or to be allowing the client to create credit. Well, it's the same with commercial banks too: they approve credit. But When Smith signs the mortgage papers at that commercial bank, HE creates credit money and HE is responsible to repay it. The commercial banker is only a clerk who approves Smith's credit, thereby creating money out of thin air. And then charges an exorbitant interest on the “loan,” as if the money had existed all along.

The Lie is that the banker claims that he is “Lending Money” from his vault when he's actually conjuring up the money from thin air. The Bigger part of the Big Lie is that any “creditworthy” person can get a loan. This is a civil rights issue. (The Largest part of the big lie is that banks have the right to create money, but we’ll get to that later)

Credit cards and checking accounts demonstrate the principle of money creation, albeit on the back of the federal money system — but you can get the picture: when you write a check, you “create” money... ok? Now imagine a society where only certain elite group, say... bankers, corporateers and politicians, are allowed to have a checking account or credit cards, and you start to get the picture about how civil rights fits in.

Money, like free speech, should properly flow from the individual. But that is not the case today. Taking the power of money creation away from the individual is a civil rights issue.

Credit is uneven and undemocratic in the US as well as the rest of the world. Banks refusal to lend to ethnic minorities in the US has always been a problem (sandard practice, called redlining) and that has kept minorities ‘in their place,’ for a long time, but the problem goes exponentially deeper than that; there is a bias toward lending to corporations and against individuals. In a sense, individuals are considered “sub-prime” credit risks while corporate bodies are considered “prime” borrowers. For example: when a corporation wants some money they can simply create it by issuing corporate bonds. Can you do that? If not then maybe it's because you are a “high risk” sub-prime borrower.

Further example:

From Molly Ivins, Seattle Times, 5 Oct 1998 p. B5
“Long term Capital used $2.2 billion in capital from investors as collateral to buy $125 billion in securities. Then it used those securities as collateral to enter into neato financial transactions valued at $1.25 trillion... [the deal then went bust]”

“The Federal Reserve Bank of New York decides that the ‘sophisticated’ investors in Long Term Capital ... should not be allowed to lose their money. And so, the New York Fed brings in Goldman Sachs, Merrill Lynch, UBS of Switzerland, J.P. Morgan and others,” to put up the $3.5 billion bailout.

Can you buy a house like that? 0.175 percent down? Does the Federal Reserve board step in when you have a problem with the mortgage? Then maybe there is an uneven playing field. The irony here is that your battle for “creditworthiness” is against fictional entities called corporations which enjoy more rights than actual human beings, and virtually none of the personal responsibilities. This is definitely a civil rights issue.

The stories are legion:

A representative of the SBA (Small Business Administration — which, by the way, defines “small” as “30 or more employees”) appeared on BBC radio a few months back to explain how business is conducted in the US. One of the details he emphasized is that when a borrower has messed up and LOST a few million dollars, the SBA does not disparage such characters from having another go. In fact, he stressed, they are encouraged because they have “learned” something. Our representative proudly announced that they have had such clients return 3... 4... even 5 times.

But if an individual goes bankrupt he or she is hauled into court and his or her credit is kaput for 7 years.

As it happens, the US Congress was busy at this particular time, tightening the bankruptcy laws as they apply to individuals and “sub-prime” borrowers and locking down the credit card laws. Individuals facing bankruptcy are now “means tested” and families earning over $51,000 have to file under Chapter 13 instead of 7. As a result they cannot be absolved of their debt entirely (as can a corporation) but will have 3 to 5 years to pay off credit card debt under court order.



Now as through this world I ramble,
I see lots of funny men,
Some rob you with a six gun,
And some with a fountain pen.

—Woody Guthrie, Pretty Boy Floyd.


What we have here is a banking system based on ... you guessed it: predatory lending. What is predatory lending? Let Henry explain:

“For example, if a bank lends to a trust client who is a minor, or who had no business experience, to start a risky businesses, that resulted in the loss not only of the loan but the client trust account, the bank may well be required by the court to make whole the client.”

“Now, there is a close parallel in most Third World debts, to the above example where sophisticated international bankers knowingly lend to dubious schemes merely to get the fees and high interest, knowing that ‘countries don't go bankrupt’ as Walter Wriston famously proclaimed. The argument for Third World debt forgiveness contains a large measure of lender liability.”

— Henry C.K. Liu, from Email, 02 Mar 2001
(Henry teaches economics at University of Colorado)
So there are laws to protect you from the predators. But as usual the details are always in the language. There are innumerable predatory lenders out there many of whom specialize in the practice, Citigroup being the largest in the US. Their website proclaims as much: “Citigroup is the largest sub-prime lender in the country.”

Notice the language. For the same reason a bribe in the US is called a “campaign contribution,” the predator now becomes a “sub-prime lender.” Of course the sub-prime lender follows “very strict regulations” as does the “campaign contributor.” For a sampling of the regulatory process you might like to visit the U.S. House of Representatives, Committee on Banking and Financial Services, where they make the regulations.
The discussion centers around sub-prime lenders and two examples of their practices are cited:

“Mr. LaFalce: An example is cited, a bank which offered a Visa/MasterCard with a limit to $1,500, although in the fine print it said it was only required to extend $400. The catch to getting the card was that the customer had to agree to a bank-sponsored credit education program for a fee of $289 plus $11.95 in shipping and handling. The card also came with an annual fee of $49 and a processing fee of $19. And the author of the letter goes on to cite numerous other examples.”

“Another bank offered a deal to sub-prime customers that is similar. While working with a third-party financial institution, the bank targeted customers by telephone and offered a card with a $600 credit limit. The card also charged $20 application fee and a travel certificate that cost $545”

But in 81 pages of testimony there is not the slightest hint that these practices were wrong except by the speaker, and certainly not any talk about regulating such practices.

So from the Citigroup website we can read, “Typically, recipients of sub-prime loans pay higher fees and other costs, but these loans are not necessarily predatory.”

A banking system that makes borrowing more costly for poor people than for rich people. Not Predatory. Right.

But Shareholder Action Network sees things in a different light. To them the words Sub-prime and predatory are virtual synonyms.

“The industry frequently cites the fact that poor borrowers are a greater financial risk, and therefore the lender needs to charge higher interest, include credit insurance, etc. However, if risk were truly in line with the interest rates and fees of the loans, profits would resemble those of regular banks . . . According to Forbes Magazine, 'Sub-prime consumer finance companies have returns up to six times greater than those of the best run banks.' . . . With predatory loans, the interest and points are unconscionably high, especially considering that these are fully collateralized loans, . . . Fees may total 15 to 20 percent of the loan amount.”

And so it is that Citigroup recently acquired Associates First Capital, the second largest sub-prime lender in the US.

An interesting citation... evidently farmers have a problem getting credit too:

“... Katherine Ozer, executive director of the National Family Farm Coalition, a network of grassroots organizations ...says the farm debate should focus on conservation, rural development, ACCESS TO CREDIT, fair income, and food access that better links farmers to low-income groups.” (emphasis added)

When corporations and rich people are “prime” and Everybody Else — including third world nations — are “sub-prime” then the credit system is hugely un-democratic. The problems are built into the banking systems world-wide and it is a civil rights matter.


“If Cuba has successfully carried out education, health care, culture, science, sports and other programs, which nobody in the world would question, despite four decades of economic blockade, and revalued its currency seven times in the last five years in relation to the US dollar, it as been thanks to its privileged position as a non-member of the International Monetary Fund.”

Address by Dr. Fidel Castro Ruz to The Group of 77, Havana, April 12, 2000



"If India had acquiesced in making its currency fully convertible, it could have been listed
among the countries in crisis today."

Hindustan Times, January 12,1998
"Vulture Capitalism," by N. C. Menon, P. 1


It should be clear to even the most economically challenged person that the price of stocks on Wall Street have no basis in real terms. They form bubbles and they burst. Well, Currency exchange rates are determined the same way stocks are valued.

Exchange rates are not determined by anything real like the value of labor or commodities. They are determined by investment houses in New York, London, Singapore and Tokyo who bet on their favorite team. Does the dollar look good today? Then place your bets, gentlemen. If enough of the gents bet on a “hard” currency like the dollar, then the dollar goes up and they can celebrate their remarkable perspicacity with cheaper Cuban cigars and a less expensive Russian vodka.

This is like having the score of a baseball game determined by letting a gaggle of sports aficionados argue about each team's merits and then determining the final score based on the results of the debate, rather than what actually happened on the field.

In case you didn't catch that the first time: it's like letting the audience of the David Letterman Show determine the score of a baseball game, a week before the game, by screaming into the Applause-O-Meter ... and then calling the audience, “the experts.”

Now, if you imagine that one of the baseball teams is made up of Southern and Eastern Players while the opposing team, as well as the aficionados, are of primarily Northern and Western extraction, then the picture comes into sharper focus. We do this after having passed through the “Age of Enlightenment,” and Tom Paine's “Age of Reason” and arrived at the information age unscathed.

There has got to be a better way of determining currency exchange rates.

“Anyone who claims that the best system we can devise is one that allows the yen/dollar exchange rate to fluctuate from 120 to 80 to 120 — a swing of 50 per cent in each direction over an 18 month period — must be asked to think again.”

“New Economic Realities” by Ismail Serageldin
Al-Ahram Weekly, 27 Jan. - 2 Feb. 2000, Issue No. 466, Cairo

But there are those who profit from exchange rate swings and they will steadfastly defend a flawed system. These people are generally called “Economists” in the media.

“... Citicorp’s purchase in May [2001] of Mexico’s largest bank, the Grupo Financiero Banamex-Accival, or Banacci, for $12.5bn, is being seen in the financial press as the precursor to a flood of US takeovers of Mexican companies, or what Grey Newman, chief Latin American economist at Morgan Stanley Dean Witter, called a ‘Wall of Money.’ Damian Fraser, an analyst at UBS Warburg, is quoted in the Financial Times as rating Mexican companies as having a 40 per cent lower purchase price than equivalent companies of equal profitability in the US.”

The Ecologist, Banking on Mexico, vol. 31 No. 6 July/August 2001, p.9

Yes indeed. Things are a lot cheaper in Mexico, Asia, Russia, South America, etc., once their currency has been driven into the ground by people manipulating the exchange
rates. Is this all done on purpose?

Henry Liu: “A controversial feature of the new shape of the financial system is that the bulk of its participants now have a vested interest in instability. This is because the advent of high-technology dealing rooms has raised the level of fixed costs. High fixed costs imply a high turnover is required for profitability to be achieved. High turnover tends to occur only when markets are volatile. In a way, the most destabilizing environment for modern financial institutions is a relatively stable exchange rate environment.”

The Problems with the International System of Money and Finance.


James Tobin: “It is hard to escape the conclusion that the countries' currency distress is serving as an opportunity for an unrelated agenda such as the obtaining of trade concessions for US corporations and expansion of foreign investment possibilities.”

Hindustan Times, citing economist James Tobin, January 12,1998, “Vulture Capitalism,” by N. C. Menon, Page 1


The following is an extremely condensed version of the article “The Time Value of Money” BY Bob Blain, Ph.D. Professor of Sociology at Southern Illinois University at Edwardsville.


(The original chart shows 74 countries)

Exchange Rate Exchange Rate in Minutes
Japan 145.61 2.4
Switzerland 46.65 2.5
Germany 45.71 3.0
United States 1.49 3.1
El Salvador 12.61 82.7
Honduras 8.02 259.8
Bangladesh 50.92 415.5


FIRST COLUMN: Exchange Rate

This is the country's exchange rate in 1995 — that is: $1.49US will buy you 145 Japanese Yen, or 8.02 Honduran Lempira.

SECOND COLUMN: Exchange Rate in Minutes

This is the amount of time, on average, a citizen in each country spends to earn that amount of money. That is: for 2.4 minutes, a Japanese worker can buy 415 minutes (nearly 8 hours) of Bangladeshi time via the currency exchange casino.

Economists have no problem with this state of affairs. As Richard Stimson said in his book, “Probably more economists agree on the issue of free trade than any other question.” But there is a niggling question here, and Blain puts it this way:

“Are these differences due to differences in productivity? If that were so, we should expect the products of the most productive countries to be cheaper, not more expensive, than the products of less productive countries. Instead, exchange rates make the products of the supposedly most productive countries more expensive than those of the least productive countries. It is directly opposite to what fair price would dictate.”

The above is by no means the definitive article on exchange rates, but it demonstrates that there are simple means available to examine and determine fairer exchange rates.


MONEY (today’s credit currency) IS NOT A COMMODITY

There have been currency crises in 87 countries since 1975. Never in the history of the world have so many countries had such unstable banking systems. The cause is the foreign currency exchange market as well as the free movement of money globally. The cause of this is what some have called “high-tech” economics. Macro economics which says that currencies have nothing whatsoever to do with commodities.

The entire exchange rate system is founded on (yet another) single Big Lie: “Money is a commodity.” So let's start at the beginning.

Fiat money has no intrinsic value; that indeed, is the definition of fiat money (And to be painfully clear here, we are talking about all money that is lent into existence or simply created by a "lender of last resort," without a sound commodity backing, and not simply the Federal Reserve style fiat note). Fiat money is a valueless medium of exchange, not a commodity. While a gold backed note can be redeemed for gold, a fiat currency can be redeemed for only more fiat money. To say then, that this fiat currency shall trade for another fiat currency, based on its “market value” (which is zero) may raise the eyebrows of certain skeptics.

However, if money was a commodity, the issue would be resolved. So modern economic theory cures the problem with a simple solution: decree. Money is now a commodity by edict, regardless of any dictionary definition, and contrary to all independent observation. It was by this same strategy that Peter Pan was able to fly.

There are probably a million ways to prove that money is
not a commodity, but here's just one simple explanation.

The gold backed dollar was an example of a commodity backed currency. A gold note was redeemable with a certain specific amount of gold, so the note itself might be seen as a commodity. A hat check is a good analogy of a commodity backed currency; when you check your hat, the commodity, you get a hat-check ticket which is essentially a commodity backed note. You can trade the hat check (this analogy would work better if everyone wore identical hats) to someone else, thus spending it... or you can redeem it for a hat.

When the government withdrew the backing for silver and gold notes it essentially said “you can't have your hat back; you can only spend your note now.” Since most people never redeemed their notes for gold anyway, they didn't give it much thought but in the hat check analogy we can see that what the government has done by claiming that this newly irredeemable money is a commodity, is to say “the hat check, which earlier merely represented a hat, is now IN FACT a hat itself. You can wear the ticket on your head, hang it in your closet, or spend it as you please.”

Money is not a commodity, exchange rates are humbug, and the consequences for 87 countries have been severe.



“If Tony Blair genuinely believes in the boundless opportunities of globalization (Financial Times report August 2nd), he should concentrate his energies ... and begin to dismantle barriers to the cross-border flow of labour. ‘Just Do It’, Mr. Blair.”

— Martin Khor, Director, Third World Network
Letter to Financial Times, 11 August 2001

“Open trade is not just an economic opportunity, it is a moral imperative. Trade creates jobs for the unemployed. When we negotiate for open markets, we're providing new hope for the world's poor. And when we promote open trade, we are promoting political freedom.”

— G. Dubya Bush


In 1976 Milton Friedman made the case for Free Trade and got the.. ahhh...whooo.. I almost wrote “Nobel Prize” there didn't I. But of course he didn't get the Nobel Prize for Economics, because there is no such thing. Nobel never specified an economics prize — you can look it up in any Almanac, or see: CEPA

It is actually the Riksbank Prize for Economics that Friedman got. Check it out: In the late 1960s, the Swedish central bank (Sveriges Riksbank) established a prize known as the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel.” Anyway Friedman got his “prize” for saying (paraphrase) “MMMM-mmmmm free trade, the wave of the future.” Or something like that. If you really need the exact wording, it's here.

Now I am just wondering here, Friedman is a trained economist, right? I mean he went to school; he studied and finished his degree, right? Somebody help me out here if I am wrong about this. What I am wondering is if he ever studied what free trade is in Econ 101, because free trade is about mobility of raw materials, capital, labor and products. So how can it be that a prize-winning economist of any sort, can promote “free trade” without ever mentioning the mobility of the labor force? What school exactly did Friedman go to?

Chakravarthi Raghavan puts it this way: “[about the past damage to poor countries caused by free trade] . . . this important condition [mobility of labor] is normally brushed aside in economic literature by assuming either perfect competition in commodity markets or perfect mobility of labour and capital once administrative barriers to trade are removed.”

That is to say, economists simply assume that all labor is mobile when they surely know for a fact that labor is not mobile.

This freedom of workers to move about is fundamental to Interstate Commerce, so revered in the US; they should know about these things. To prohibit a Texan from going to California to seek his fortune in the music industry might seem like a merciful idea but it would be a “restraint of interstate commerce.” Workers in the US and the European Union can go where the work is. That is fundamental to free trade. But in the Global “Free Trade” Market they cannot.

Nonetheless, not a day goes by without someone in the British media raving on about “bogus asylum seekers” and “economic migrants.” Same thing in the US.

Molly Ivins (Seattle Times, Jan 11, 1999, B5) noticed that the Immigration an Naturalization Service (INS) got a revamping in 1996. More money; more power. Coincidentally this was the year after the WTO was formed in Uruguay. The INS budget was increased to nearly a billion dollars a year; more than the FBI, more than the Drug Enforcement Administration with their famous war on drugs, and more than Customs. Check bouncing is now a deportable crime for LEGAL immigrants. The INS now sports 15,000 armed officers with arrest powers. Says Molly, who noticed the focus of arrests on Asians, Africans, Cubans, Latin Americans and Haitians, “... you notice that immigrants from Europe or Australia do not seem to end up languishing in the hoosegow for years while the INS looks over their paperwork.” But minorities do. A Cuban who bounces a check can now get a “life sentence” because they are not deportable, since the US does not have diplomatic relations with Cuba because of ... aaahh... Cuba's human rights abuses.

When the labor force is locked in by passport and visa laws, we do not have free trade. When refugees are turned away because they are “economic migrants” it is sheer quackery to suggest that money and merchandise should move freely without borders in the name of free trade.

To argue against this thesis is to argue in favor of lying, deceit and duplicity... but that's just what today's economists argue. As one recent critic put it, for example, “Now let’s examine the impact of removing passport and visa laws: squarely in the hip pocket.” (That is, it’s too expensive to consider)

What our critics always ignore is that the other solution — the easier solution — is to stop promoting the fundamentalist free trade dogma of the IMF, the World Bank, GATT, NAFTA, FTAA, MAI, GATS etc. That is, if our critic cannot bring himself to opening up the borders then the obvious solution is to stop the lying and duplicity. And since we do not in fact have free trade then all of the other trade policies of the IMF et. al. become equally questionable.

Yet the policies of these institutions always remains the same: austerity policies or structural adjustment policies, like user fees for essential services like primary health and education or abrupt increases in the price of water in the name of market 'reforms,' more layoffs, less government spending on social programs, less credit for small farmers and small businesses, more privatization, pressure to export, slashing of workers' rights and environmental standards, liberalization of trade policies — all of these policies have nothing to do with “free trade” because “free trade” does not exist. The policies are clearly aimed to produce higher profits for multinational corporations. And none of these trade organizations have shown any willingness to open their meetings to discuss matters such as these.

The obvious point that is being avoided is “why does free trade hurt poor countries” and the answer is because the people in rich countries who promote free trade with one hand, are blocking free trade with the other, with border patrols and passport laws.

The question remains: if economists are willing to lie about free trade then where does the doctrine of deceit stop? For a bit more on that topic try:

“How the Economists Got It Wrong” by James K. Galbraith, a crystal clear description of the Old Boyz Network in the education system.

also, The French Economics Students Revolt and the post-autistic economics newsletter (in English)
and The American Economics Students Revolt: 346 people have now signed the Cambridge Proposal and the “Kansas City Proposal”.


BUYING THE WORLD With money pulled from a hat.

“By the late 1970s, there was a huge increase in the dollars floating around the world economy - the rate of growth in dollars between 1973 and 1980 was 20 times the growth in volume of trade.”

Adventures of the Dollar, by Howard M. Wachtel,
professor of economics at the American University, Washington, DC


“The trade deficits started modestly in 1975,” wrote Richard Stimson (Playing with the Numbers: How So-called Experts Mislead Us about the Economy” Westchester Press, 1999) and here are some late figures on that.

1995 $180 billion
1996 184 b
1997 198 b
1998 298 b
1999 372 b
2000 409 b

To date the US has now bought a modest 3 trillion dollars worth of the world's finest commodities with money conjured up with the help of a magic wand. Nowadays the US is buying the globe at the rate of over a billion dollars a day.

And the best part is that you can conjure up and lend US dollars from nothing, but you get paid back in uranium, gold, diamonds, copper, oil, grains, vegetables... all sorts of nice things. The question remains unanswered: why do southern countries fall for this stuff?

This link may help explain things:
In Focus: Multilateral Debt Burden by Soren Ambrose

“Key Point: The IMF and the World Bank are 'preferred creditors' who gain power over impoverished countries as the amounts owed to them increase.”
(also, see: Predatory Lending above)

And what will happen when the poor suckers in the South figure it out? Well, then we go to Plan B: Star Wars.
“The U.S. Space Command, set up by the Pentagon in 1985, describes itself in ‘Vision for 2020’ this way: ‘US Space Command dominating the space dimension of military operations to protect US interests and investment’.”
You gotta love that word “investments.”

From Karl Grossman, professor of journalism at
the State University of New York College

In the past 30 years the US has bombed or attacked Syria, Lebanon, Nicaragua, Sudan, Korea, Vietnam, Cambodia, Laos, Iraq, Guatemala, Japan, East Timor, Nicaragua, El Salvador, Colombia, Dominican Republic, Somalia, Haiti, Yugoslavia, Panama. What do these countries have in common? They are all non-members of the World Trade Organization. Since the invention of the WTO only Japan has joined willingly; the South American countries and have been “persuaded” by friends such as Mr Pinochet.

As Gore Vidal observed: “The United States is always at war; perpetual war for perpetual peace.” And it looks like the wars of the future will be fought against non-WTO members.



Poor countries producing commodities cannot possibly compete against rich countries producing credit money.



“... We have a problem trying to define exactly what money is...the current definition of money is not sufficient to give us a good means for controlling the money supply...”

— Alan Greenspan, 17 February 2000
Congressional testimony



Arthur Clarke once said that people were a science and he backed up his thinking by noting that electricity is a science. Even though at any given time one cannot predict what a particular electron might do, one can predict with great accuracy what the masses will do. People, said Clarke, are the same. And, I say, money is the same.

The whole point of analyzing money at it's roots is that if the basic assumptions are wrong then all that follows will be flawed and open to abuse. If physicists continued to assume that the atom was miniature of celestial bodies then all progress in that field and in related fields such as engineering, architecture, chemistry — virtually the entire modern world — would have ground to a halt a hundred years ago.

Furthermore, the science of money and the implementation of that science are two separate things. Physicists talk about ‘absolute zero’ temperatures and absolute vacuums when neither is achievable in real life. But worries about implementation cannot stop them from the realities of theory. And so it is for money: one cannot stop every few minutes to ask “but how can we implement this?” One has to get the theory right and once that is settled, deal with the best and most acceptable implementation.

SO . . .


When Smith gives Jones a bushel of wheat for a bushel of corn, economists tell us we have a barter transaction. What we actually have is two sales and two purchases, in one concise, efficient, transparent, transaction. But where is the money?

The money is the corn and the wheat.

Recall that various cultures throughout history have used different things for money, such as cattle, salt, gold, tobacco, seashells, or... corn and wheat.

The first money, what I will call REAL Money, to be clear, is commodities (goods & services, including labor). Smith is using wheat as money; Jones is using corn as money and both are acceptable to the other.

Since the term “money” has come to mean a “coin” or “note” or “gold” or “credit card” or “check” and has even become synonymous with “currency” the point has to be made very clear that the original money; the first money; the fundamental; the very root of all monies, as a “means of exchange,” is the commodities themselves.

Real Money is commodities. ALL commodities. I must emphasize this because if that is incorrect then it remains to be shown which commodities are, and which are not, acceptable in trade or barter, and why. Remember this stuff for later — it's important.

So.... if REAL money is commodities; What is money? Money is, if it's legitimate, a Commodity Substitute. But today, beware, because there are all kinds of money— some of them worthless.

Traditional economists don't like this train of thought; even Thomas Greco, one of today's more modern monetary theorists, has rejected the notion. But the fact is that it is true and it is important.

At the CREATION level, where money first comes into existence, there are two main types of currencies:

1. COMMODITY BACKED MONEY (ie gold note)
2. CREDIT BACKED MONEY (ie. home loan)

(There is also the CIRCULATION level, checks, coins, notes, digital transfers etc. This paper does not deal with them because they are all just different, and less relevant, forms for moving money born at the CREATION level.)

Commodity money is backed by, guess what?, commodities; it is redeemable, by the issuer for commodities. The model for commodity money is the IOU which is also redeemable by the issuer.

Credit Backed money is also an IOU but redeemable sometime in the more distant future with something that doesn’t exist yet, won’t exist for quite some time, is less well defined and has more loopholes.

As you get up to speed here you will come to realize that virtually all of our money today is credit money, and commodity money has been abandoned. This is not a good sign

Another bad sign is this deal of creating money as credit. Here is how it boils down.

Smith's Credit vs Bank Credit

When Smith lends a bushel of corn to Jones' it looks like this

Smith ----corn----> Jones
Barter / commodities, (Real Money)
-> Commodity backed currencies ie. gold notes
-> The IOU (local, personal)
-> Local Credit currency (Mutual Credit)
-> Local Fiat currency (Ithaca Hours)
-> Centrally issued credit money (Fed Reserve notes, bonds)
-> Centrally issued unbacked fiat currency
-> Manipulatives/Speculatives (Stocks, mutual funds, pension funds)
-> Derivatives, hedge funds etc

The first 4 items above have none of the Factors That Degrade Currencies, below.

It's credit money from a remote central source
It's pure fiat money (not even backed by credit)
It's money created or earned from speculation/ non-productive activity
It's undemocratically issued, inequitably distributed money
It's from a social money system run for profit
Its redemption value is unclear
Its redemption is paid in another unstable currency

For a really amusing article that turns this logic on its head see S. Bell's story, a convoluted and backward explanation of the hierarchy of money from one of the Fed sycophants. Some people will say anything to keep their job when the pay is right.


“Money is an information system” That's the latest soundbite. There is some truth to it depending on what kind of money we are talking about. The most secure form of money will have the most detailed information in a plain language.

-> Barter has that information, but it is stored in the traders' heads. Why Smith trades his collection of Buddy Holly records for a Barbra Streisand autograph is something that only Smith can explain and surely he could write a book about it. The point is that the information is detailed and whole. Nothing is missing: how else can you explain the fact that traders agree to accept as more valuable, that which their trading partner deems less valuable?

In addition, there is no middleman. No, as J.W. Smith said, “governments, bankers, and subtle finance monopolists of every shade trying to siphon to themselves others' wealth.”

-> Commodity backed currencies like the gold backed note are essentially barter by proxy. Bankers have avoided this system for centuries because it's easy to understand and profits from sub-prime borrowers would evaporate. So Smith's siphon is under severe restraints in this model.

-> The IOU is the basic model of credit and commodity currencies. Credit currencies are inferior to commodity currencies. But a locally issued IOU is so secure that frequently the details are not written down. “I'll get you a new coat next time I go to town,” is sufficient. Just as frequently, when they are written down, there are details that are taken for granted based on custom and past history:

“To Jean-Pierre: IOU one dinner for two. —Walt”

With this IOU certain things are simply understood: dinner will be at 7 pm, not 3 am; it will not be boiled straw; the date will be established later and will not be inconvenient, etc.

Look for this kind of information the next time you handle a bank note. The notion that a state issued note, with its one-size-fits-all, generic standardization, can replace the IOU, and maintain any means of establishing value, is odd to say the very least. Yes, of course we can tell the difference between $.59 and $.58 but at the expense of all the other relevant information.

-> At the community currency level, speaking strictly about mutual credit, this is essentially an organized IOU system. The information is transformed into a more uniform method of establishing value by denominating currencies in hours and/or widely used commodities. Credit is extended interest-free. Smith's “siphon” is not yet in the picture. People pay for banking service but they pay their neighbors, not some high-roller in Bel-Aire, and they don't pay in blood.

To rephrase that idea, if mutual credit were adopted nationally, high priced bankers would be replaced with local clerks and the cost of banking would drop to a fraction of its former self.

-> Local Fiat currency: Ithaca Hours have worked well for many years. The problem is that they are backed by nothing but faith; same as Federal Reserve notes they replace. The people running Ithaca Hours have the best intentions, but when they retire who will replace them and how trustworthy will they be?

-> Centrally issued credit currencies such as we use today have no relevant information on them at all. The value of a note is not enhanced by having the signature of the Secretary of the Treasury on it. The only relevant information displayed is the denomination, which is “fungible.” And that only informs you that a 5 dollar bill is worth five times a one dollar bill. When a pack of Rice Krispies costs $1.49 one day and $2.29 the next, what is the value of a dollar bill? When a cup of coffee costs 65 cents in Ames Iowa and $4.75 in Los Angeles, what is the value of a dollar bill as compared to a Japanese yen or German mark? Do prices rise or does money lose value? Or both? How will you ever know?

At this level the “siphon” appears: the elite group authorized to create money while pretending to lend it from their vault. For profit. The pretence comes at a price. Any clerk can approve credit for a small fee — usually only a few dollars. Bankers who can claim to “lend” real money (when in truth they are simply approving credit) can command interest at .

-> Centrally issued unbacked fiat currency: slightly more slippery than the above. Or less slippery; it depends on the details.

-> The Manipulatives/Speculatives: Stocks, mutual funds, pension funds etc. carry Negative information. All positive information has been erased and you have to hunt for it on your own in the pages of newspapers or printed documents all in 4 point type and in arcane language that only your accountant can understand for $100 an hour. If your pension fund has not collapsed and you get a pension payment that is wildly more than you paid in, it is because you are collecting money paid in by someone who will not be collecting it because s/he is dead, and the directors of the fund have inadvertently failed to seize it as their bonus (read the fine print!).

I am being flippant here but for the past five years I have been listening to stories on BBC about how the British regulators have no power to help the millions of people who, for one reason or another, lost their life savings to these loosely regulated organizations. Every month there is a new disaster.

-> Derivatives, hedge funds - carry a cube root of negative information times the speed of light. Only five people in the world understand these things and they aren't talking. With almost no money as collateral, these guys manipulate billions of dollars to nobody's benefit but themselves.
_ _ _


When a grocery-store coupon in the US (a commodity-backed currency) must, by law, state “actual value 1/20th of a cent” on the face, should Federal Reserve Notes not be required to state “non-redeemable” on them? And “Nominal Value, 4 cents,” (the cost of printing)?



“Mutual Credit can be viewed as an extension of the long-established practice of trade credit which businesses offer to one another in the normal course of business. They simply sell to their customers on what is called “open account,” which means that they deliver the merchandise and bill their customer for the amount due. A certain amount of time is allowed for payment to be made. It may be 15, 30, or 60 days, or more, depending on the customs of that particular line of business.”



There are a lot of similarities between Federal/commercial banking and the mutual credit banking system. Both create money out of thin air based on the borrowers collateral. Well, ok, I can't think of any more similarities.


-> When you pay a “loan” back to a Federal/commercial Bank, you pay it back with Federal notes; when you pay off a mutual credit loan you have to produce something of value acceptable to the community.

The Fed banker simply assumes (incorrectly) that all money is equal. It is of no concern to him whether the loan is repaid with money earned from a hedge fund scam, a Savings and Loan deal, or from the sale of vegetables. But the MC banker is concerned with all aspects of money and its impact on the community.

So it is entirely within the scope of the MC bank to refuse to accept money “earned” from non-productive activities. If the MC banking system was operating during the Savings and Loan scam, all that speculative money that was permitted to flood the country after the bankruptcies would simply not have been recognized as legitimate and thus would not have been allowed to pollute the money supply.

This is all connected to the initial definition of money: it is a Means of exchanging commodities; it is NOT a commodity in itself. So making money by manipulating public money is not a legitimate activity and the public who owns that money has the right to demand that institutionalized gambling, speculation, or any kind of non-productive use which they deem harmful, be banned, limited, restricted, controlled or whatever.

-> Mutual credit is denominated in hours and/or commodities. Fed/commercial banks denominate in ones, fives, tens, twenties, and hundreds.

-> Mutual credit can create a commodity backed currency (see below). The Feds can too, but they won’t.

-> Mutual credit extends credit without interest; the Fed/commercial system extends credit, but they call it “lending money” and then they charge interest.

-> The Fed/commercial system favors absentee ownership (even the banks are owned by absentee landlords), competition, undemocratic money creation, and recognizes economic hardship of bankers but not of citizenry (at the expense of citizenry). MC is local in all respects.

-> David Korten describes capitalism as “Use of money to make money for those who have money.” That is an apt description of the Fed/commercial banks. Mutual credit might be described as “the use of money as a means of exchange.”

-> The Fed/commercial system has its “Lender of Last Resort” and “Moral Hazard” which means that there is a moral hazard when you charge the citizenry for insurance against bank failure while that insurance actually encourages bankers to take more risks knowing there is a “lender of Last Resort” to bail them out because they are “too big to fail.” The “moral hazard” is that, in this casino, money earned is private, and money lost is public.

As Noam Chomsky said, neoliberal global capitalism means “socialism for the rich and capitalism for the poor.” The MC system sees the fallacy in centralization and bigness and holds local bankers accountable for their actions.

-> The Fed thinks money is global and should move freely anywhere it wants. MC says that money is local and communities can block attacks from foreign money. The phrase "economic imperialism" is not in the Fed/commercial banking dictionary. Mutual credit understands economic imperialism and is a means of combatting it.

-> The Fed/commercial system claims to lend to all "creditworthy" people and proceeds to lend at high rates to the poor and low rates to the rich. They then pride themselves on their careful policing of “predatory lenders.” Under the Fed system, many people are simply not "creditworthy." MC lowers the bar. MC recognizes that money, like free speech, emits from the individual, not government and not banks.

-> Commercial bank lending is like musical chairs: somebody HAS to lose at each round because money is lent into existence, but the money to pay the interest is not; bankruptcies are part of the scheme. And it is the bankruptcies themselves that prop the system up because the money lent into existence continues to circulate even though the “borrower” has gone broke.

This situation cannot be written off as being simply “risky,” as in “life is 'risky'.” The money system is a public infrastructure and implies equanimity, but Fed/commercial system is set up to require a certain number of human sacrifices per year to appease the banking gods. This is a system which culls the innocent, simple, and ingenuous, while assuring that only the most abhorrently avaricious, and rapacious will survive. This is not survival of the fittest — it's survival of the most morally and ethically repugnant.


The big difference is that mutual credit is community based and its money creation is based on community needs and desires which is based directly on their economic activity in commodity exchange. The gist is that the Fed guys have taken the notion of credit or “collaterization” to be the only feature of banking that they are interested in, and they have had One Hell Of A Big Fat Party with it.

The big difference is that Fed/commercial banking creates money based on a single criterion: profit. They don't care what happens to individuals; to families; to the quality of life; to the landscape; to the town; to the community; to the State; to the Nation; or to the Earth. Their SOLE criterion is profit. If you can turn a buck on the deal, a check for $10 billion can be cut right now.

That is money that is created out of thin air, and no community voice will be heard as to the effects of the "loan" on others.

The Fed/commercial system is a means of imposing the elite's will on communities which would otherwise want no part of the plan. For example, if you went to most any town or community and tried to drum up interest in privatizing schools you would find more opposition than agreement. People don't want their schools which are now locally controlled, privatized and run for profit. They don't want to sell out their kids to corporate interests. So finding people in the community to work on the project would be tough. But when George Dubya was governor of Texas he pledged to provide $3 billion in Federal loans for new charter schools in Texas.

Thus, any community opposed to privatized schools has just lost the battle. This is how economic imperialism works. It took a whole lot of money to draw out the greediest most aggressive and insensitive people in the state to force privatization on communities who otherwise wanted no part of it.

This kind of economic imperialism goes on daily around the world in the form of the MacDonalds invasion and the Wal-mart attack. It’s called Americanization in Europe and it destroys communities. Be prepared:
“Does Ithaca Need Wal-Mart?” by Paul Glover.

If somebody came up with an idea of how to make money by getting people to chain their kids to a post in the back yard and feed them dog food, there can be little doubt that, if the returns were great enough, it would eventually be funded by some enterprising bank or politician.

Local mutual credit banks would allow communities to combat that kind of attack.

I will not look for data that shows that mutual credit is more free from corruption and trickery than centrally issued money. There are plenty of people around who would defraud their local mutual credit system. That is not the point; the point is that hucksters at the local level can be held accountable. Corporate fraud cannot. The Savings and Loan scandal (and corporate accountability in general) has made that entirely clear. If a society ever evolves to (returns to, actually) the point that corporations and government workers can be held fully accountable then some forms of State issued currencies might become less risky, more democratic and more attractive.


Extending Credit is not the same as Lending Money

Creditworthiness is a person’s value in a “Net Worth” kind of way. It’s a lending against their Human Capacity. Jim can swim 3 km per hour Judy can swim 2. Judy can do math better, faster and with fewer mistakes than Jim. Each has their abilities and that can be an economic factor, but since one person’s strength is another person’s weakness, people tend to have similar Human Capacities.

Human capaci
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The title is dead on.
14 Jun 2002
You shouldn't read this.

It is written by an educated person with the intent to deceive. In common parlance, an asshole.

Disregard the post. This dissertation on economics is the kind of rot that can actually damage the brain.
Dead On as a Missile
15 Jun 2002
Cowardly Carl ir right.

Political-economic literacy is exactly what pseudo-economists at the World Bank Group and their puppet professors at so-called "universities" fear the most.

Knowledge is the most dangerous thing to totalitarianism.

That's why anonymous "carl" and his cohorts will do everything in their diminishing power to make genuine political-economic self-education as discouraging as they can.

Such as creating the 9-11 fiasco.

Accelerating political-economic literacy and informed citizenship (thanks largely to the Internet) was the PRIMARY motive behind the 9-11 attack.

The message behind the corporate-government's 9-11 terrorism is:



WAVE A FLAG (American or Israeli will do).







(Too bad we caught you!)
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The title is dead on.
15 Jun 2002
You shouldn't read this.

It is written by an educated person with the intent to deceive. In common parlance, an asshole.

Disregard the post. This dissertation on economics is the kind of rot that can actually damage the brain.