What an interesting subject.
Over at Ellen Brown’s blog people are talking about money, what it is, who should decide what it is, what’s right, what’s wrong. So many opinions about a seemingly simple, everyday part of our lives.
Often discussions like that center on paper money, which is unfortunate because paper money is a relatively small percentage of money in circulation. Most money, as a federal reserve official once told me, is “held on account”, a ledger entry or digital number in some bank or other. Just as in your personal life the actual currency you might hold at any given time is a small percentage of the money you have available, so it is in the larger economy.
But let’s go back in time a bit. For decades before 1913, the United States had no central bank, no Federal Reserve. At present, currency in the US is in the form of “Federal Reserve Notes” in various denominations, the largest being $100 bills. This is an historic anomaly in itself; at one time there were $10,000 bills. But that’s another subject for another time, maybe.
But was there paper money in the US during the period before there was a central bank? Yes. Banks issued notes – bearer paper – promising to “pay to the bearer on demand” the amount specified. These notes could circulate as money and were widely accepted, although they didn’t have to be accepted. They were not “legal tender” notes. But anyone who possessed them was entitled to redeem them from the bank that issued them. That, too, is a subject for another time.
Other entities besides banks, including individuals, can of course issue notes as well. This is a practice that continues today. Usually, such notes are a promise to pay a sum of money to someone else. When someone takes out a loan from a bank, for example, he signs a note – a promise to pay – back to the bank. In that form, it is a promissory note from the payor – the maker – to the payee. It is not a promise to anyone else.
However, the law provides that when such a note is endorsed “in blank” by the payee, then it becomes “bearer paper”. In other words, at that point the note could circulate as money, if it was widely accepted. But in practice such notes never are. I mean, would you accept, as the equivalent of $100,000, a note in that sum from John Smith to First National Bank of Ohio, if it bore the apparent endorsement in blank of the First National Bank of Ohio?
And yet, through the “miracle” of “securitization”, all sorts of financial institutions all over the world in fact have accepted such notes not only as circulating money, but as bank reserves, which are sometimes called “high-powered money”, money that is sort of more than simple circulating money.
What I’ve just described is at the very heart of the financial crisis. You may well ask, and should ask, how notes that would never be widely accepted as money in circulation by individuals can somehow be transformed into money that banks and large financial institutions trade in, and accept as real money amongst themselves? The fact that this has occurred over the last 30 or so years to a very high order of magnitude in banks and financial institutions is one of the central realities of the global financial “system”; thus if there is a problem, it raises very fundamental questions. Such as: what is money? How is that determined? Who, or what, determines it?
The truth is, Ellen Brown and her fans don’t have a clue. Or maybe they do, but they don’t realize the implications of their position. According to them, the government decides what is money and issues it at will. It is strictly a sovereign prerogative, and in carrying it out the sovereign answers to no one. Says Ellen Brown fan Jere Hough:
“The ultimate question is one of sovereignty. Who is sovereign? Because the issuance of money or currency has always been a sovereign prerogative. In a republic or democracy the “people” are supposed to be sovereign, and therefore should control the issuance of money. In a dictatorship or monarchy the ruler is “sovereign”, and issues the money.”
I don’t doubt that such a “system” could be instituted and enforced, but not without a terrifying level of tyranny. There could not be a clearer statement – indeed an act, because it would be far more than simply talking – that a government will be bound by no rules whatsoever than if it adopted what Brown and her followers advocate. Even the Federal Reserve, for all its arrogance and power, shies away from such a posture.
Who or what is sovereign, indeed. If the sovereign says that up is down, is the universe thereby inverted on its say-so? Is something true apart from our willing it to be true? If yes, then we must bring our will into conformity with what is true; if not, then the stronger will prevails. At that point, will is everything. Truth is nothing.
People have lived under such regimes, predicated upon such an understanding. It’s always been a nightmare.
This is an old debate, and ultimately it is not about money; it is about religion. One of my favorite movies (I like movies) is “Man for All Seasons”, which is based on a play, which in turn is based on contemporary accounts of the trials and tribulations of Sir (later Saint) Thomas More. The same question raised by Ellen Brown follower Mr. Hough comes up multiple times. At one point, More is in custody being questioned by a board of inquiry into why he hasn’t endorsed the marriage of Henry VIII to Ann Boleyn, and he gives the following rhetorical, partial explanation:
“Some people think the earth is round, others think it flat….but if the earth is flat will the king’s command make it round; and if the earth is round will the king’s command flatten it? No…”
Later the main witness against him at his trial, Richard Rich, recounts a conversation while More is being held in the tower:
“What if there be an act of parliament that says that I, Richard Rich should be king? Would you accept it?”
“That I would,” responded More, “for then you would be king. But I will put you a higher case: what if there be an act of Parliament that God should not be God?”
In both cases More, through the author of course, is getting at the same thing: even sovereignty has its limits.
Ellen Brown and her fans don’t buy that. More’s the pity (pun intended).
And with that, I’ve brought up religion, at least in an oblique way, a subject I would ordinarily avoid. But if Norm Pattis can do it, so can I.