Money – What and How – 2 – Central Bank
How it works in practice.
Central bank issues currency at face value. Minister of finance issues treasury bonds to pay for this currency. Bonds are with interest at face value of issued currency, so for example 5% of $50,000,000 of dollar bills of various face values such as $5 or $100, etc. Bonds are backed by our collective ability to pay or re-pay this interest. Currency is backed strictly by Law, nothing else, no gold or silver or any physical substance whatsoever. In effect, by virtue of the bonds being backed by our collective ability to pay or re-pay, and the bonds paying for the issued currency, by extension currency is backed by this same collective ability to pay or re-pay, but that makes no sense whatsoever since there is no inherent value of money in the first place besides this ability to pay or re-pay. If instead it was backed by some substance, we could then work to acquire this substance to then pay what we owe with it, but the only substance we can acquire is currency and this acquisition is done by borrowing more of it.
If we only borrow a single amount at a fixed interest rate, let’s say 5%, it takes 20 years to go bankrupt and bankruptcy is inevitable. The reason is that the central bank only accepts the currency it issues as payment for interest on this loan. Once we make a loan, we have to use some of that loan to make a payment on the interest, the capital we hold is correspondingly reduced, yet the debt is not, it remains at the original amount because we’re not paying part of the capital, only the interest. But there’s a trick: Keep borrowing more money just to pay the interest on the original loan. But there’s a problem with this. We still only have the original amount borrowed for our own use, because any subsequent loan is used directly to pay interest on this original loan, nothing else. It just goes straight back from whence it came without ever seeing the light of day. Eventually, we owe more in interest than the original loan because we kept borrowing to pay for that interest. But there’s a trick: Keep borrowing more money.
If you haven’t figured it out already, our economy is one of debt. Everybody owes the central bank, nobody is owed anything except the central bank because any money given as payment to anybody for anything is owed to – was borrowed from – the central bank.
At the street level, it works a little bit differently but not by much. Street banks, unlike the central bank, cannot issue currency. However, they can issue electronic money and they can do this with no limit whatsoever, so long as they get promissory notes as payments for this electronic money. Promissory notes are almost exactly like treasury bonds, but with our personal signature instead of the minister of finance’s signature. We are individually liable for those promissory notes, while we are collectively liable for the treasury bonds. But basically, we give promissory notes in exchange for electronic money, for which we pay or re-pay interest at face value. However, we don’t pay back a loan, we pay according to the promise we made. We don’t pay back a loan because there is no loan, the money was created from the promissory note itself, it was financed by our promise to pay. That’s also how it works for treasury bonds, but at least we get a physical substance in exchange, i.e. the manufactured dollar bills, though they have no intrinsic value like I said. Anyways, typically we get a check from the bank in exchange for the promissory note we gave it.
Two guys – Bill and Bob – agree to make an exchange. Bill gives Bob a piece of paper with Bill’s signature. Bob gives Bill a piece of paper with Bob’s signature. Each piece of paper can be used by the other for financial trading, according to face value on it, plus whatever value added by terms and conditions stipulated on the pieces of paper. Bill’s piece of paper has terms and conditions that stipulate Bill will pay Bob interest at face value of 5% per year, and monthly payments, until the obligation stipulated therein has been fulfilled. Bob’s piece of paper contains no such condition, it only has face value. Bill’s piece of paper names Bob as the payee, and also stipulates Bob can use it to trade. Bob’s piece of paper has no named payee, so it’s made out to the holder or bearer, for the full amount on demand, and it can also be used to trade. Bill’s piece of paper is called a promissory note, and should contain this mention in prominent text. Bob’s piece of paper is called currency and otherwise doesn’t contain any particular terms and conditions, which makes it a demand promissory note, payable to the bearer in full on demand. Both pieces of paper have the same face value amount of $100, but Bill’s piece of paper adds value with interest to be paid on top of the capital of $100, making the two pieces of paper of unequal value in practice. When Bill trades with currency, he cannot negotiate the value of that piece of paper, it can only buy stuff for $100 worth. Bob, however, has a piece of paper he can trade with, and it’s more valuable by at least 5% face value per year plus however long it takes to pay back the whole sum, capital plus interest, so maybe about $200, and he can buy stuff for $200 worth, and it is negotiable in total value between face value up to maximum value according to terms and conditions.
The above is how it works at the simplest level, yet that’s exactly how it works at any level, though we paint it with lively colors like Promissory Note, Bank Loan, Currency, Central Bank, Treasury Bonds, Minister of Finance, Acts and Laws, Legal Tender, etc, etc, etc. The paint we put on it doesn’t change its nature one bit, it’s still an exchange of two pieces of paper of unequal value. Interestingly enough, the only true value comes from Bill, since he’s the only guy who promises to pay anything to anybody at any time, and he promises to pay this using the pieces of paper Bob gave him. Bob makes no promise whatsoever to pay anything to anybody at any time, except by using pieces of paper he himself gives in the first place.
Bill: I promise to give Bob more of Bob’s paper which Bob gave me.
Bob: I promise to give Bill less of my paper than Bill promised to give me of my paper. Then, when Bill can’t pay me (inevitable), I take Bill’s shit cuz Bill owes me – here’s the proof on paper with Bill’s signature. I could be a nice guy and forget Bill’s debt, but I wouldn’t have set up this deal in the first place if I was indeed a nice guy. But I guess Bill doesn’t care, cuz he’s got money to buy shit. Well, until I take Bill’s shit cuz Bill owes me.
The promise on currency is as follows:
I, THE CENTRAL BANK, promise to pay the bearer of this NOTE, the full amount of this NOTE, on demand, (using currency, which means just another NOTE which contains the same promise as this NOTE).
Literally, a circular promise fulfilled by itself.
This promise above is not expressly stipulated on the note itself, but that’s exactly how it works in practice. The Central Bank issues the promises with which it pays all other promises it issued in the first place, and only in exchange for promises made by others to pay using promises issued by the Central Bank in the first place, which means the Central Bank never ever ever pays anybody anything at any time whatsoever ever ever. And each new promise issued by the Central Bank comes with the obligation to pay interest on it, which is included in the promises the Central Bank got in exchange for those, which means even if I exchange my old $100 dollar bill for a new $100 dollar bill, I still have to pay whatever interest there is still left to pay for the old $100 dollar bill (which I don’t have anymore, so that’s kind of unfair), on top of the interest to be paid for the new $100 dollar bill (which I now hold, which is also sort of unfair).
But there’s a trick: Stop borrowing money. Forever.
Instead of exchanging my old bills for new bills, let’s just assume that’s what I did, but instead of paying interest for new bills using new bills, I pay that interest using my old bills, which I just give back. I’m broke cuz I ain’t got no more money, but what’s the fucking point anyways.
Or, this trick: Issue our own money.
We already do this, but we call it a Promissory Note instead of Currency. But it makes no difference since Currency is backed by the Promissory Notes we sign, so why not forget about Currency and just issue Promissory Notes instead? Ah, yes, but what are they backed by if not Currency, therefore by our collective ability to re-pay using Currency, which was borrowed – financed – using the Promissory Notes we issued, and round we go? Fuck it. Fuck the Central Bank. Let’s issue our own currency at cost, not at face value, no interest, no tax. Gotta borrow for a house, a car, a trip across the globe? No problem, charge a single and proportionately tiny service fee just to keep things running at the street bank, regardless of the total amount of the “loan”, because it’s not really a loan if it’s financed by our signature, is it now.
Here’s a crazy idea. Let’s back this new currency with a genuine physical thing, and let’s call it what it really is instead of “Dollar” or “Pound” or “Rand” or whatever it’s called now. We’ll call it manhour. So, a nice meal would cost about 1 manhour, cuz that’s about how long it takes to make that nice meal, and that’s about how long we gotta work to earn that much money to pay for it now. But look at how much a house would cost: 250 manhours, maybe 500 if it’s a nice one. Ridiculously cheap, right? But have you seen how quick a house goes up these days? It takes about a week to build, completely ready to live in, paint and furniture and all the crap. A full-time job is about 2,000 hours per year. Fuck, we can pay for a house in 3-6 months. Why the fuck do we keep paying for 40 years?
Here’s another crazy idea. If money is now backed by an actual thing which is exactly what it says it is – manhour – why charge a profit? This is like telling the boss I worked 50 hours when in fact I worked 40 hours. He’s gonna tell me to fuck off and only pay me the 40 hours I actually worked. The concept of profit becomes a blatant lie, which nobody would readily accept. Unless we twist the way we say it “Yeah, I charge a little more manhours just in case I need to put in more man-hours to do the job, you understand.” Which is exactly the reasoning now with fiat money. But when we don’t put in the extra man-hours because we’re so fucking good at our job, we don’t give back the profit we charged in the first place, do we now? That boss that told you to fuck off when you told him you worked 50 hours when in fact you worked 40 hours, he tells his clients you worked 60 hours to justify his profit. We just keep going with the fucking lie, and sometimes we add more lies to justify keeping that unjustifiable profit we charged “just in case”, and sometimes we go one step further and fuck with the job on purpose to justify the future lie we anticipate we’re gonna tell to justify keeping the profit we charged in the first place, you know, to make it look genuine. There’s a whole lotta job fucking just for that single purpose – to keep the full paycheck we feel we deserve in spite of all the job fucking we do to justify keeping that paycheck we feel we deserve. In fact, that’s where the bulk of the extra 39 1/2 years of house payments come from – job fucking just to keep a full paycheck we feel we deserve in spite of all the job fucking we do to justify keeping the full paycheck we feel we deserve. Everybody pays everybody else’s job fucking, but we just call it profit. Because in the end, we all understand it’s a lie, and we all seem to think we can take it to the extreme, and we do, and we pay for it with years of extra job fucking, and so on, to justify all the job fucking we do, and so forth.
Here’s a final crazy idea. You’re done with the job and the job is done? Get the fuck outta here and stop fucking with the job. You got better things to do than to fuck with the job just for a goddamn paycheck you feel you deserve in spite of all the job fucking you do. Then, you can charge less for your work, which means others won’t have to job fuck so much to pay for your work, so yet others won’t have to job fuck so much to pay for their work, and round we go, right back to you.
Are you a banker? This post’s for you. Enjoy. Oh yeah, and if you are a banker, get a real fucking job doing real useful shit.
Martin Levac copyright 11:36 10/5/2016
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