Tuesday, September 30, 2008


(Week 10 - Tuesday, Sept. 30)

In yesterday's column I offered commentary on the first half of the Friday evening debate between John McCain and Barack Obama, which was directed towards the current financial crisis in the economy, and President Bush's proposed $700 billion dollar "rescue plan" to save the speculative financial "industry" and the banking system. Much of the discourse was about how the "debt" the Federal government would inevitably take on in any such plan would ultimately have to be made up in the future through ever more prudent priorities concerning taxing and spending.

In my view, this is a hopelessly off-target attempt to address the problem. The Federal "debt" is not a fiscal phenomenon (i.e. an imbalance between taxing and spending), but arises out of improper monetization (i.e. the process by which money itself is created and issued) [see Cols. # 19 – 21]. We can gain a dramatic insight into the difference between these two perspectives by examining the real "cost" of the Iraq and Afghan wars, which preoccupied much of the last half of the debate.

It can hardly be disputed that the wars in the Middle East are costing our country dearly in materiel, blood and lives. Many also argue that it is costing us the love, trust and admiration of our fellow human beings in the community of nations, and some even say that it is costing us our sacred honor for the supposedly devious reasons for which it was entered into (to be sure many feel otherwise). One would find little disagreement that the conflicts are imposing costs in carnage and suffering on the Iraqi and Afghan people that are difficult to even imagine, not to mention the toll that it is taking on their infrastructure and lands.

All this said, the question remains, what is the "cost" of these war sin terms of money? Each of the candidates lamented the vast sums that are being spent on these conflagrations. I understand where they are coming from, but I would suggest that there is another way of looking at the matter.

From the beginning of this series of columns I have examined and frequently referred to the private-bank-loan transaction by which our money supply is created and issued. I have also tried to show that it sets up a monetary dynamic whereby ever greater amounts of money need to be borrowed from the banking system and spent into circulation in order for people to be able to make the principal payments on old loans, plus the "interest" payments on those loans, while maintaining a necessarily growing money supply.

If this fails to occur, then the money supply will begin to contract, bankruptcies will multiply, and the economy will spiral down into recession or depression. Somebody has to keep going deeper into "debt". It does not matter to the banking system whether it is the people in the private or the public sector that feel compelled to make the plunge. At present, the confidence of the borrowing public is at low ebb, and their ability and willingness to take on vast quantities of new "debt" is largely exhausted. This means that if the economy is to not go into the tank the Federal government has no choice, seemingly, except to step in as the "borrower of last resort".

The key to making this work is to find a way to generate the political will to take on a vast public "debt". Spending on universal medical care, freely available education, public infrastructure, cleaning up the environment, and a dignified basis of support for all its citizens has been so discredited in the eyes of the public as "wasteful spending" (which is not to say that some things proposed are not indeed foolish and wasteful), that a political will sufficient to allow the government to borrow the huge sums necessary to stave off economic collapse under the current "debt" load cannot, as a practical matter, be attained. What can succeed in creating such a mandate is to start a war against a feared and hated enemy. Then no amount of "financial sacrifice" (i.e. government borrowing) is too much, and almost any politician who says otherwise runs a grave risk of being turned out at the next election cycle.

Far from being a net "cost" to the economy, the Iraq and Afghan wars have been the great engines of money creation that have kept the economy from imploding. I would hasten to add here that I am not saying that our national leaders have consciously gotten this nation embroiled in the Middle East morass for the purpose of going into "debt". On the contrary, on the whole they sincerely believe that the war is "costing" money that will have to be, in some vague and unspecified way, made up for by fiscal frugality after the conflict(which is an illogical notion given the virtual imperative imposed on the people by the private-bank-loan transaction to go even deeper into "debt" whenever new money is created)

When money is created and spent into circulation, it does not stop with the procurement for which it was originally issued, even if that is for weaponry. It goes into the paychecks of whoever produces the products and the profits of the company they work for, and thereafter becomes blended into the monetary pool. I would urge the reader to contemplate the thought that, of the dollars in his or her wallet or bank account right now, a large portion have entered into circulation as a result of government borrowing to pay the "costs" of the Iraq and Afghan wars. Monetarily speaking, if it were not for these wars, those dollars would very likely not be in existence, and the economy would be proportionally contracted, arguably to the point of recession or depression.

To be absolutely clear, this is not a rationale to start a war (or go into "debt" even for more benign domestic reasons). It is, rather, an absolutely compelling reason to change the basis of the monetary system away from one in which the madness of having to borrow the nation's money at "interest" from a private banking system becomes an effective economic imperative at whatever ruinous cost.

What I am saying here is nothing new. The fact that war, in its many guises, has been the great engine of money creation when the public could not be aroused to the task of taking on vast quantities of "debt" for any other purpose has been long discussed in classic economic writings, but has virtually disappeared from the more "sophisticated" canon of modern texts.

The real monetary "cost", then, of the wars in the Middle East is not the vast sums of money "borrowed" to finance them (which, unlike lives, can be created in any amount by the "flick of a pen"), but the ever deepening penetration of public consciousness with the flawed basic premise of the "private-debt-money" system itself (i.e. that the numbers associated with money creation at "interest" are the "hard realities" that must be accounted for, and everything else is a "cost"). It is a lesson that we as a modern civilization will have to relearn. In my view, this is what McCain and Obama need to be talking about if they are serious (and I can only imagine they are) about stopping these wars.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Monday, September 29, 2008


(Week 10 - Monday, Sept. 29)

On Friday evening the two "major-party" candidates for President, John McCain and Barack Obama, met for the first face-to-face debate of the Presidential campaign. Overall the session was divided into two main segments, their respective themes being the current financial crisis in the economy, and the Iraq and Afghan wars in the Middle East. In this installment, let us take a look at the first segment, the current financial crisis.

Moderator Jim Lehrer opened with the question - "Where do you stand on the financial recovery plan?" (the "financial recovery plan" being, presumably, the $700 billion dollar bailout of the financial industry proposed in an address to the nation by President Bush earlier in the week).

I found the responses of both candidates to be evasive and non-substantive. They lapsed into the vague platitudes, truisms and bromides that virtually always seem to attend economic issues. For Senator Obama's part, he talked about the need for "more oversight", measures "to make sure that we protect taxpayers", arrangements to "make sure that "none of that money is going to pad CEO bank accounts", and steps "to make sure that we're helping homeowners". Senator McCain's replied by asserting the need for more "transparency", "accountability", "oversight" and options that don't require the government taking over. These are all very fine sentiments, but, borrowing from a Presidential debate in 1984 between Walter Mondale and Gary Hart, "Where's the beef?" That is, where is the substantive thought in their respective responses?

I would ask the reader, if the words and phrases attributed to each candidate above were cut out and presented without identification as to who uttered them on this particular occasion, could you tell which belonged to whom? Or, rather, are they not in fact abstract vagaries professed endlessly in the common political-speak by which politicians attempt to garner credit for sincere intent, and create an aura of being on top of the problem, but convey no substantive thought on the matter at issue?

Both declined to be responsive in the first go-round to the clearly stated intent of the moderator's question, so he felt obliged to re-ask it. The answers were only slightly more responsive the second time around. Obama deferred in part by saying that "we haven't seen the language yet", and McCain related an inspiring in is own right, but irrelevant in this case, anecdote about General Eisenhower to reiterate his point about "accountability".

In yesterday's column I stated that, "...if returning the monetary franchise to the people where it rightfully belongs is not at the heart of a proposed solution, then it is no solution at all." There was no mention whatsoever about the need to return the monetary franchise to the American people, and so in my view there was no effective dialogue about a solution. In fact, neither candidate even mentioned the monetary system, let alone the private-bank-loan transaction by which the nation's money is created and issued, or the collapsing fractional reserve formula which is creating the perception of the supposed urgency to push through a "rescue plan" immediately before the banking system shuts down.

This is a far cry from when three-time Democratic Party nominee for the Presidency, William Jennings Bryan, declared in his famous "Cross of Gold" speech in 1896:

"If they ask us why we do not embody in our platform all the things that we believe in, we reply that when we have restored the money of the Constitution, all other necessary reforms will be possible, but until this is done there is no other reform that can be accomplished."

Can one imagine a "major party" Presidential candidate saying such a thing today? Perhaps more importantly, can one imagine a national audience understanding what he is talking about? This is a point to keep well in mind before we blame McCain or Obama for their failure to address the core issue at the heart of the financial crisis. A culture-wide amnesia has descended on the populace related to the monetary issue, and, of course, the "major candidates" we get are a natural reflection of that.

To be fair, both candidates made attempts at more substantive responses as they talked about the need to "balance the budget". What was missing, however, was any awareness that the current financial crisis is not in its nature a fiscal problem (i.e. related to balancing taxing and spending), but a monetization problem (i.e. related to how and by whom money is created and issued) [see Cols. #19 – 21]. Until they gain such a realization, their "debates" on this critical issue will continue to be almost completely unresponsive to the wrenching financial turmoil that citizens, the nation and the world are experiencing at present.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Saturday, September 27, 2008


(Week Nine - Saturday, Sept. 27)

I would suggest that there is an answer to the current "debt crisis" that is very straightforward and consistent with common sense. This is the time to pause, take stock of what has happened, and do some soul searching before getting stampeded into any multi-hundreds-of-billions-of-dollars "bailout" scheme that only serves to compound the mistakes of the past. In my view, there is a better way. I hereby propose the outlines of a genuine solution based on three principles.

Principle #1:

As a society we need more and more to see money, not as a means for private gain, but as a channel for serving the needs of our fellow man and taking care of the planet. This is not a mere truism or sentiment. It is the only practical way forward. The current monetary order grew out of the current monetary culture as naturally as a tree grows from its own seed, and now we are seeing the fruit thereof.

If the whole truth be told, it is not only the financiers who have entertained a measure of avarice in their hearts when it comes to money. Dare I say that virtually everyone has unduly coveted it to a degree in their own respective spheres, and acted on that impulse, at least in part, within the context of to their own opportunities? Who has not accepted what has come to them through the system as their due, while protesting against what is perceived to be the unwarranted fortune of others? I mean no judgment or accusation by this. We all have an inner conscience to which we must give an accounting, and I have my own to face.

I believe that a society-wide change of consciousness about money is possible, and would be reachable if each person strove to cultivate a right inner attitude.

Principle #2:

The "debt"-based private-bank-loan mode of money creation and issuance must be abolished, and the people must rouse themselves to reclaim their sovereign power to create and issue their own money. I don't mean to sound dogmatic on this point, but I believe that if returning the monetary franchise to the people where it rightfully belongs is not at the heart of a proposed solution, then it is no solution at all. This is a principle that cannot be compromised in any hybrid "rescue plan" without re-planting the seeds of the monetary order's, and thereby the social order's, undoing.

Public issuance of currency is not a scheme to get "free" money out of the government. Rather, it is the taking up of a responsibility that we as citizens have neglected for too long. We have allowed our monetary affairs to be taken over by a private agency, the so-called "Federal Reserve" (which is neither "Federal", nor a "Reserve"), and our own currency to be doled out on terms favorable to the private interests are represented by it. Now we will have to get serious about, not only our prerogatives as a sovereign people, but also our duties as stewards of an essential trust.

As a practical measure, the first step politically would be to repeal the Federal Reserve Act. This does not mean demolishing its buildings and telling its employees to look elsewhere for work. Rather, the skills and dedication of the workforce could be turned to good account in helping to administer a new way of handling money.

Nor does it mean abolishing private banking, or even the lending of money by banks at interest. The banks would continue to perform their necessary services, but the essential change is that they would cease to be the agencies that issue our money supply. In their new configuration they would operate more like savings-&-loans and credit unions do now.

Principle #3:

There must be established a world trading order in which the relative values of currencies are allowed to find their equitable exchange ratios through the normal processes of trade, much like water finds its own level. This would tend to happen naturally now, except that the "interest" charge that is attached to the issuance of virtually all currencies is constantly draining them of their value, thereby igniting "trade wars" by which nations feel obliged to make up for that lost value through a "positive trade balance". It is not possible for every nation to have a "positive trade balance" with every other nation. The result is that no just and stable equilibrium can be achieved in the global economy.

My proposed new world trading order would be essentially the "level playing field" that the sincere proponents of "free trade" aspire to, but cannot seem bring about. I welcome any other thoughts.

Respectfully offered, Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Friday, September 26, 2008


(Week 9 - Friday, Sept. 26)

Following are selected excerpts from President Bush's speech to the nation on Wednesday evening in which he addressed the current financial crisis, and urged the adoption of a proposed $700 billion dollar scheme to "rescue" banks and other major financial institutions. To his words quoted below, I have added my own commentary and explanatory (in my view) inserts in [brackets].

"Financial assets related to home mortgages have lost value during the house decline, and the banks holding these assets have restricted credit." [These "financial assets" are people's mortgage contracts that "investors" have bought up with money borrowed from banks in order to be the recipients of their "interest" payments. (see Col. #5)]

"As a result, our entire economy is in danger." [The condition of our "entire economy" is being linked to the interests of the financial speculators who are buying up our "debt" paper.]

"So I propose that the federal government reduce the risk posed by these troubled assets and supply urgently needed money so banks and other financial institutions can avoid collapse and resume lending." [It is being proposed that the federal government borrow money to replace what the banks lost through speculative lending. The phrase "avoid collapse and resume lending" is an indirect reference to the idea that the money lent to buy such "troubled assets" is on deposit in the lower courses of the fractional reserve pyramid, and constitute, therefore, much of the "reserves" that are supporting the consumer borrowing above it.]

"This rescue effort is not aimed at preserving any individual company or industry." [It is aimed at preserving the gains of the speculative financial "industry".]

"See, in today's mortgage industry, home loans are often packaged together and converted into financial products called mortgage-backed securities. These securities were sold to investors around the world... Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac." [Fannie Mae and Freddie Mac have been presented to the public as financial agencies dedicated to getting people into their own homes. Whatever good may have been done through them in this respect, the President's words are a tacit admission that "when push comes to shove", it is the "investments" of speculators in home mortgages who are getting "bailed out", while the investment of the homeowners who pay them is not taken seriously into account.]

"The decline in the housing market set off a domino effect across our economy." [This is another way of saying that the decline of the housing market has precipitated a collapse of the fractional reserve formula.]

"When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses. Before long, these securities became so unreliable that they were not being bought or sold. Investment banks, such as Bear Stearns and Lehman Brothers, found themselves saddled with large amounts of assets they could not sell." [The phrase "incur serious losses" makes it seem (though not explicitly) as if banks and speculative "investors" were holding money that is now being lost. They were not holding money; only speculative paper that gave the appearance of being money because there was always someone else waiting in the wings, presumably, that had money in hand that they were ready to trade for that paper. There is virtually as much money in the economy as there was a month ago, except that now the holders of it are not so willing to play at the gaming tables in the casino that the monetary system has become.]

"I'm a strong believer in free enterprise, so my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business." [Then why do we not let the speculators go out of business, and leave the productive sector unburdened by their "enterprise"?]

"And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And, ultimately, our country could experience a long and painful recession." [The American people possess the key to their own credit, and that is to issue their own adequate supply of money directly out of their own public treasury, which is the sure antidote to "recession".]

"But given the situation we are facing, not passing a bill now would cost these Americans much more later." [I find this to be a misguided sense of urgency. It is as if we the people are being rushed to plunge back into the "debt"-money system before we have had a chance to think about what it has wrought. This is our perfect opportunity to see the workings and consequences of the private-bank-money system exposed and examined. If the enforcement of the fractional reserve formula were suspended, we could let the money in the banks just be money (not "reserves"), and that would allow us to take any time we needed to come to our senses.]

"First, the plan is big enough to solve a serious problem. Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system." [If one finds dead leaves clogging one's gutters, the sensible thing to do is to flush them out, or at least allow the natural flows of water over time to do so. Why, then, do we not allow the "troubled assets (i.e. unsupportable "debt" contracts) that are clogging the financial system" to be flushed out?]

"The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal." [The President is acknowledging that the government is effectively the borrower of last resort (after the people lose confidence and/or are no longer willing or able to borrow more) for the private monetary system.]

"And when that happens, money will flow back to the Treasury as these assets are sold, and we expect that much, if not all, of the tax dollars we invest will be paid back." [This is wishful thinking. The proliferation of "debt", public and private, will only continue.]

"The final question is, what does this mean for your economic future?" [This "bailout" would insure that our economic life in the future would be consumed by ever greater quantities of "debt."]

"Earlier this year, Secretary Paulson proposed a blueprint that would modernize our financial regulations. For example, the Federal Reserve would be authorized to take a closer look at the operations of companies across the financial spectrum and ensure that their practices do not threaten overall financial stability." [I fear that "modernize our financial regulations" is a euphemism for transferring even greater power to the institutions that have presided over the crisis that is now coming to pass.]

To be clear, I am not singling out our current President as the scapegoat. Truth be told, I don't hear either of the "major" Presidential candidates say anything that gives an indication that they have distanced themselves from the mode of thought that got us into this mess (though some of the less regarded do, namely Ron Paul, Dennis Kucinich, Cynthia McKinney and Ralph Nader). Surely President Bush has had his part in this, but so have previous presidents, and virtually everyone who has in their own sphere helped to shape the economic life. This is not a time for haste, blame or recrimination. Rather, it is a pause for soul-searching, both as individuals and as a nation. I do not exclude myself. I think that there is a bright new future than can come out of this "financial crisis," but it will not happen by making an ill-conceived and massive "bailout" of the failed ideas and practices of the past.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Thursday, September 25, 2008


(Week 9 - Thursday, Sept. 25)

In the last two columns I have described the lower and middle zones of the image I am using to describe the fractional reserve formula that governs how banks can create and issue new money (a stone block wall which resembles a sort of tall pyramid). The lower zone consists of a foundation course of money on deposit in the banking system which are the proceeds of borrowing by the Federal government, and a number of layers stacked on top of that which are composed of the money on deposit of the banking system's biggest customers (large corporations, major public entities, the mega-wealthy).

Above the base layers are the middle courses, where we find the bank deposits of the hard-working, bill-paying, family-raising wage earner, small businessman and consumer (i.e. the "middle class") who perform the bulk of the wealth-creation work in society.

The Sub-Prime/Revolving-Credit Courses:

The top zone (upper courses) of the fractional reserve pyramid is made up of the money on deposit in the banking system of the people who are borrowing to live. Any pretense of this being funds that are "invested" is virtually gone. This is the level of "finance" where people live from "paycheck-to-paycheck" (if they are fortunate), and "loans" are taken out to buy groceries, put gas in the car, and pay for uninsured medical care. These are the folks who live in the financial purgatory of sub-prime mortgages, credit card dependency and payday lenders.

Whether consumers in the sub-prime/revolving-credit zone default on their "debts" is of little consequence to the monetary system as a whole. Business at this level is all gravy to the banking system, with little cost, except printing and postage on the billions of "new offers" they send out in the mail. That specifically is why people in the midst of a major credit-card "debt" crisis continue to have their mailboxes stuffed with new offerings, even from the same companies they are in arrears to. If the consumer went bankrupt the "debt" on these cards would lapse, but all the money that could have been squeezed out of their beggared estates would by that time have been collected anyway. Fresh "credit money" created out of thin air could be safely issued again, next time on even harsher terms.

For a system that depends ostensibly on the ability of people to pay their "debts", the controlling factor in the pressure-relieving bankruptcy game is not as simple as "loan repayment, or no", but rather the stratum in which any default occurs. In the base strata of the monetary pyramid, institutional default will convulse and even threaten the existence of the system itself (at least that is the fear fed by the fractional reserve formula). As one moves up the pyramid, this default-phobic reflex becomes progressively less operative to the point where in the top zone the banking system does not even want its customers to pay up. That is why privately credit card companies refer derisively to their customers who do pay their bills in a timely manner as "deadbeats". Their business practices result in keeping the consumer running ever faster on a tread-wheel of revolving credit, at increasingly harsh terms, the end of which is almost certain to be bankruptcy.

It should be noted that the soundness of the financial blocks in the bottom row still depend, however indirectly, on the performance of some of the lesser grade courses on top. Their portfolios are ultimately "debt"-based, and so depend on real people being able to "perform" on their financial obligations. A certain amount of rot can be tolerated, but let that be the problem of the middle managers in the upper layers. Of late, however, these prime players have had to reach further up into the realms of "sub-prime and revolving debt" in an attempt to keep their own stones in the "fractional reserve" wall patched up with enough money on deposit.

The perverse logic of this whole scheme is that if the common man goes bankrupt, even if millions do (especially in the sub-prime/revolving-credit zone), it is treated in the world of high-finance and the politics that attend it mainly with lip service, because their "loan" proceeds are not strategic stones in the wall (not the "reserves" for much "credit money" creation), but if a major bank fails it threatens to bring down the whole credit structure. The crazy upshot of this situation is that there is a degree of reality to it; as long, that is, as we the people accept the dubious "financial realities" of a monetary order that is based on the "fractional reserve formula" as propounded by powerful media, financial and political interests.

And so the public may acquiesce (if history is any guide) to these "bailout" schemes, albeit amidst indignant demands for more "accountability" in the system this time around. Those who labor to make mortgage payments, sub-prime and prime, are losing their homes by the millions, while Fannie Mae and Freddie Mac (the financial agents for those "investors" who "own" their mortgages) are getting hundreds of billions of dollars in "bailout" money. The fortunes represented by the lower courses of the fractional reserve pyramid scheme are thus secured, the banking system is "saved", and the system is made ready to go another round of "debt"-money expansion.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Wednesday, September 24, 2008


(Week 9 - Wednesday, Sept. 24)

Yesterday I described how the lower courses of the image I am using to describe the fractional reserve formula that governs how banks can create and issue new money (a stone block wall which resembles a sort of tall pyramid) are ostensibly closely linked to the fortunes of the banking system's biggest customers (large corporations, major public entities, and the mega-wealthy). Thick portfolios of "debt"-paper instruments (securities) which supposedly represent wealth (bonds, mortgages, stocks, etc.) are used as collateral for borrowing massive amounts of money into existence, which in turn constitute the base of "reserves" upon which creation and issuance of the "credit money" that constitutes the bulk of the money supply rests (or at least that is how the world of high finance imagines it to be).

The Middle Courses:

Above the base are the middle courses, where we find the bank deposits of the hard-working, bill-paying, family-raising wage earner, small businessman and consumer (i.e. the "middle class"). In real physical and human terms, these folk are the ones who perform the bulk of the wealth-creation work in society. They make their living by growing food, making things and servicing people's needs. Their money in the bank is where the bulk of the pyramid lies. Ultimately all production is meant for consumption, and the "consumer" in this country is effectively synonymous with "middle class". It buys virtually everything that is sold on the market, either directly or indirectly. The personal credit of middle class has been the great engine of monetary growth since WWII. We have truly established a consumer society, and its real and dubious glories have become synonymous with the "American Dream".

The middle courses can generally be thought of as occupying three zones. The first one up (closest to the base) is where the biggest investments in people's lives are financed. The preponderant factor here is home-loan mortgages. This has been seized upon by the banking system as the great engine of "debt"-money creation in the private economy (which is why it is in trouble now). A certain rate of default can be tolerated in this stratum as long as there is enough floating cash or willing credit worthiness in the housing market to purchase homes that enter into default, thereby avoiding any serious disturbance to the continuing escalation of "real estate values." The system itself is soulless, and does not care if a person has a home (to be sure, people in the system may care). It is effectively concerned that there exists enough solvency in the peoples lives, however desperately obtained, to keep its tottering credit pyramid from crumbling.

The next zone up is maintained by purchases for big ticket items and durable goods. This is the level of borrowing for education, high-end vehicles, luxury lifestyles, small business investment, and personal financial "investments." Higher rates of default are tolerated here, but it would have to be very high to pose any threat to the monetary structure.

The top layer of the middle zone up consists of small business and consumer loans for mid-to-minor capital items (economical vehicles, appliances, furniture, vacations). The consequences of loan default at this level with respect to the economy are less severe simply because "credit money" at this level is not supporting much of a credit structure above it. Very high rates of default can be tolerated. Such a phenomenon usually becomes a political problem before it becomes an economic one, as far as the financial system is concerned. Lesser neighborhood banks could find themselves in trouble, but that is not, relatively speaking, a great threat to the monetary pyramid itself. There is always, it seems, another buyer who can step in cover the equity in a repossessed car.

Tomorrow we will talk about the economic trauma increasing numbers of people are living in in the top zone of the fractional reserve pyramid.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Tuesday, September 23, 2008


(Week 9 - Tuesday, Sept. 23)

In yesterday's column I drew a word picture to help the reader visualize the monetary system as a wall made up of courses of stone (bundled "loans" of money borrowed at "interest" from the banking system) that resembles in shape a sort of tall slender pyramid, whose ends slope towards each other, but also curve in such a way that they reach for the sky, but never quite meet. The nature and shape of the wall is determined by the "fractional reserve formula," which governs how banks create and loan out money.

The foundation stones of the pyramid are Federal bonds, which are essentially the loan contracts for money the Federal government borrows directly from the Fed, that winds up on deposit as the initial "reserves" in the banking system. The second course or layer of stones in our pyramid is the first cycle of "credit money" created by banks and then deposited back into the banking system. From there, each cycle of new money created through the loan process and deposited in the banking system is represented by successive courses.

Each course of stone is theoretically of the same nature in terms of the "debt-based-money" it represents, but they occupy relatively different positions in the structure of the wall. If one or more stones (bundles of loans) of an upper stratum failed, that would not threaten the integrity of the pyramidal wall as a whole, as there is little or nothing in the way of newly created money that is being supported above it (i.e. that it is designated as the "reserves" for). If, however, a stone near or at the bottom were to crumble, it could threaten the integrity of the wall as whole (as a significant portion of the loan bundles above it would have been created using it as the original "reserves"). If a few stones at or just above the foundation course were to disintegrate it, would threaten the wall's very existence.

It is obvious that, structurally speaking, the layer of government bonds supporting the dollar is the most crucial. Accordingly, this "high-powered" base strata cannot be allowed to fail without bringing the whole system down. This is why (it is said) the "full faith and credit of the Federal government", "backed" by the full force of same, stands ready to see that this does not happen. This, then, makes the government bonds "backing" the dollar the logical "investment of last resort" (the one that will fail only after all the others have failed), regardless of whatever else is going on in the financial order (which is why these bonds are selling at a premium in the current crisis).

The next several courses up are made of the "reserves" that are on deposit at the major commercial and investment banks. These represent the first levels of "credit money" created on the basis of the "high-powered money" on deposit from loans to the Federal government. They do not constitute the foundation per se, but are so closely linked to it that for a major bank or banks to fail is deemed to be tantamount to the failure of the system itself. If a big bank fails, by the rules of the game a lot of other loans that piggy-back off the "reserves" its money on deposit represents would, by the rules of the banking system, not be supported. In the prevailing view, monetary liabilities for which the large banks are responsible must be honored so as not to precipitate a fatal undermining of the system. When that possibility seemed to loom, the Federal government has in the past intervened (as with FDR's "banking holiday" and "suspension of gold redemption", the Continental Illinois bailout, and the Mexican "debt-restructuring").

Closely linked to the viability of these bottom courses are the fortunes of the banking system's biggest customers, including large corporations, major public entities (states, cities, bonding districts, etc) and the mega-wealthy. These are the "important players", and confidence in the system rests, it would seem, on the public perception of their remaining able to pay their "debts." This imperative is commonly deemed to be significant enough, depending upon circumstances and the vagaries of the political process, to warrant, supposedly, government rescue from insolvency (as for the Chrysler Corporation and New York City bailouts).

In tomorrow's column I will describe the upper courses of the fractional reserve pyramid, and show how their relative positions in the monetary structure accounts for the evidently scant regard the regular hard-working, bill-paying citizen is receiving in the spate of current proposals designed, supposedly, to save the financial system.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Monday, September 22, 2008


(Week 9 - Monday, Sept. 22)

In yesterday's column I gave a brief description of how a banker who has $10,000 in "reserves" on deposit in his bank can use them as a basis for creating $9,000 in new money to "loan" out. When the borrower spends the money, almost all of it winds up in the bank accounts of the people he pays it to.

To keep the math simple for our illustration let us assume that our borrower spends all the money in one place, and the entire $9,000 ends up on deposit in one bank. From the perspective of the banker at this institution this newly borrowed and spent money is regarded as $9,000 dollars in "fresh reserves." In other words, he can use this $9,000 as a basis for creating yet more money to "loan."

Let us suppose another person walks into the office of the banker in whose bank the $9,000 in "fresh reserves" has been deposited, and asks to borrow some money. Based on the $9,000 that has just been put on deposit in his bank, he can now write a check for newly created money to lend to this new borrower in an amount up to $8,100 ($9,000 times 9/10), leaving, as the banking system describes it, $900 ($9,000 times 1/10) as a "fractional reserve."

The person with whom he spends this newly created $8,100 will presumably deposit it in his bank account, and this deposit will be seen by his bank as $8,100 in "fresh reserves," upon which, in turn, this banker will be able to create another $7290 ($8,100 times 9/10), and leaving an additional $810 dollars ($8,100 times 1/10) "in reserve."

This process can continue for many successive cycles as new money created and loaned out by one bank is deposited in another, where it is seen as fresh reserves that can be used as the basis for creating yet another round of money to loan. For each cycle the amount of new money created and fresh reserves deposited diminishes in proportion to the fractional reserve ratio. In the long run it approaches "0", but it never quite gets there. The amount does, however, become so small that the procedure does effectively provide a limit to how much "credit money" can be created from the quantity of "high-powered money" originally borrowed into existence from the Fed by the Federal government, which ended up on deposit in the banking system, thereby seeding the fractional reserve process.

It may be helpful for the reader to visualize the monetary system as a pyramid. The foundation stones of the pyramid are Federal bonds, which are essentially the "loan" contracts by which the Federal government borrows money from the Fed, and which winds up on deposit(as "high-powered money") as the initial "reserves" in the banking system. The first cycle of "credit money" created by a bank and then deposited in the banking system forms the next course of blocks in our pyramid. From there, each cycle of new money created through the loan process, and deposited in the banking system is represented by successive courses of stones. Each course of stone is shorter by the fraction represented in the fractional reserve ratio (1/10 in our example), so the lengths of the courses (the amount of new money that can be created and re-deposited as a fresh reserve base) are never quite zero. This suggests the image of a pyramidal-shaped wall with ends that slope towards each other, but also curve in such a way(asymptotically) that they reach for the sky, but the slopes never quite meet. The fundamental shape imparted by the fractional reserve ratio gives this pyramid an appearance that is relatively tall and slender, so much so perhaps that it is suggestive of a degree of instability.

Still if the courses of stone are sound, the structure might stand. The problem is that in monetary terms, the courses are not sound; they are crumbling. This is because they are being eaten away by "interest" charges against the money supply.

If a person takes out a bank loan and spends the money into circulation, the value of those dollars (the stones in our monetary pyramidal wall) are, from the moment they are issued, beginning to be eaten away by the interest charges on the loan. For example, suppose a person borrowed and spent $100 from a bank. He has thereby added $100 dollars to the money supply. There is, however, an "interest" charge attached to that money that is accruing as long as that $100 is in circulation. Because this "interest" charge in practical terms constitutes a net subtraction from the net value (amount of money) realized from that loan, it is effectively eating into the principal proceeds of the loan that brought it into being. Given enough time, the monetary value of the loan will be fully consumed (e.g. $100 will still be owed, despite $100 or more having already been paid in, as is typical in a revolving credit scheme).

Looking at the face of the wall, one sees a shape that resembles a pyramid, but one that is fundamentally unstable because the courses of stone of which it is composed (the bundles of dollars that are created and put into circulation via bank loans) are crumbling (being eaten away by "interest" charges). The present monetary system is the ultimate "pyramid scheme" (new "debt" money attracted to the scheme by old "debt" money). One can scramble to find new material to repair the growing holes in the blocks (find new borrowed money to "bail out" the financial interests whose bundles of money are "invested" in the lower courses of the wall), and thereby attempt to save the wall itself (keep the monetary system from collapsing), but patching can be effective only for so long. Ultimate collapse is inevitable.

For one with eyes to see, this is precisely the image, I would suggest, of what is happening with our monetary structure at present.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Saturday, September 20, 2008


(Week 8 - Saturday, Sept. 20)

Two columns ago I described how the goldsmith banker of the 15th century initiated the practice of keeping a quantity of gold in reserve in his vaults which represented a fraction of the outstanding receipts that he had issued against that gold (and which now effectively circulated as money). This fraction was determined by the size of reserve he deemed necessary to be reasonably certain that in the normal course of business (apart from a "run on the bank") he would have enough gold on hand to redeem any receipt for it that was presented at the teller window.

Yesterday I described the first steps of the "fractional reserve" mode of money creation used in modern banking, and asserted that it is superficially similar to the fractional reserve method of the goldsmith banker in that it requires the banker (in the language of the profession) to keep in "reserve" a quantity of money that is at minimum a certain "fraction" of what he is giving out as "loans," as a hedge against the bank becoming "insolvent" (going broke). Anything "reserves" beyond that level are called "excess" (i.e. "reserves" upon which new money could be created, but has not yet been).

Note that in each of these processes the banker is essentially creating new money; the goldsmith when he is writing out multiple claims against a reserve supply of gold in his vault, and the modern banker when he is writing out a check against a "reserve" supply of paper or electronic deposits of money in his bank.

Despite what may seem like close parallels between these two processes, they are fundamentally different, and have opposite effects.

The goldsmith banker is in possession of an actual reserve supply of something (the quantity of gold in his vault) that can be dipped into to stave off catastrophe in a time of emergency (much like a reserve of grain can stave off starvation during a drought). Catastrophe in this case would be defined as the goldsmith running completely out of the precious metal, with the result that he could no longer redeem at his teller window a promissory note he had issued that said the bearer was entitled to receive his (the note bearer's) gold. In this event, public confidence in his operation would collapse, notes still outstanding would become worthless paper, and his business would be declared "insolvent" or "bankrupt." It should be noted, however, that this would not have transpired until his reserve of gold was completely exhausted.

The modern banker is not in possession of any such reserve supply of something that he can dip into to stave off catastrophe in a time of emergency. His "fractional reserve" is a bookkeeping illusion. In yesterday's column I described how if a banker has $10,000 in "reserves" on deposit in his bank reserves, he is allowed to create $9,000 in new money to "loan" out.

In the idiom of the banking profession, of this $10,000, the banker has loaned out $9,000, and kept $1,000 "in reserve." Note, however, that none of the original $10,000 of "reserves" on deposit is actually loaned out. It all remains on deposit. The status of the $10,000 has changed only in the sense that this particular $10,000 has now been spoken for as the baseline of money on deposit that the banker could use to create $9,000 in new money. To speak as if $9,000 was loaned (as if some money on deposit was lent to someone and left the bank), and $1,000 kept "in reserve" (as if it were in any way comparable to the tangible reserve of the goldsmith banker) is to mutter nonsense.

According to the rules of "fractional reserve" banking, if the person who had that $10,000 on deposit came to the teller window and withdrew it, the $9,000 that had been created using it as a baseline would now be unsupported. If the owner of the $10,000 withdrew even a small part of it, say $100, that would mean that 9/10 of $100 ($90) would be unsupported in their formula, and a way would have to be found very quickly to either "call in" (cause to be repaid) $90 of that loan, or find $100 dollars in new "reserves" (money that was not yet designated as supporting newly created money on top of it).

If a modern bank dips into its "fractional reserve" for even a single dollar, the formula by which it is governed is violated, and the whole fragile structure by which it creates "credit money" comes undone. This singular fact transforms what should be among the social order's most stable institutions (banking), into a game of brinksmanship by which, in the pursuit of their mandate to maximize profits, bankers are obliged to come as close to "needing" to use their "fractional reserve" as possible, while knowing that if they miscalculate and step over that line their bank will instantly "fail" (be declared "insolvent"). The banking system as a whole has been moving ever closer to the "fractional reserve" tipping point, has gone past it, and can no longer stop its own fall. That is why the Federal government is, in people's perceptions, being obliged to step in.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Thursday, September 18, 2008


(Week 8 - Friday, Sept. 18)

In yesterday's column I described how the 15th century goldsmith banker held a minimum quantity, "fractional reserve," of gold in his vaults, relative to the much greater face value of the receipts or claims for that gold that he had issued, to serve as a hedge against not being able to redeem a receipt in a time of unusually high demand (which would signify his operation's bankruptcy). I also asserted that a pseudo version of the goldsmith's method, recreated in our time as the so-called "fractional reserve system," has planted the seeds of the present collapse of the financial sector.

The "fractional reserve system" of the modern banking era operates according to a formula that defines two-levels of money creation, the second being constructed upon the foundation of the first.

Level 1: "High-powered money" is the bankers' term for money created and put into circulation as a result of "borrowing" from the Federal Reserve itself by our Federal government.

Level 2: "Credit money" is money which is created and enters into circulation through the private-bank-loan transaction by which participants in the economy (except the Federal government) "borrow" money from private banks.

Creation of "High-Powered Money":

When the Federal government determines that it needs to "borrow" money, the Treasury Secretary (or his agent) approaches the Fed, and asks for a loan. The Fed agrees to "loan" the money, but requires security (collateral) in the form of bonds offered by the Federal government and signed by the Secretary of the Treasury.

The government prints and delivers the bonds to the Fed in exchange for newly created dollars being credited to its account at the Federal Reserve. These bonds, then, act effectively as "loan contracts" between the government and the Fed. It is critical to note that the Fed created this money out of nothing ("thin air") at the moment it credited the account. In addition, the face value of the bonds (the value printed on their face indicating the amount due the holder upon maturity) is much greater than the amount of money the government "borrowed." This is due to the "interest" charges which accrue from the date the bond is issued to when it is redeemed (paid off).

As the Federal government spends these new funds they end up on-deposit in the bank accounts of those contractors, builders, suppliers, service providers, employees, etc. to whom the money was paid. For purposes of this illustration, let us ignore the relatively small amount that circulates as pocket cash, and assume that all of it winds up on deposit in the banking system.

This new money "borrowed from" (in actuality "created by") the Fed and on-deposit in banks is referred to as "high-powered" money. The total quantity of high-powered money on deposit in the banking system, combined with a number known as the "fractional reserve ratio" mandated by the Federal Reserve Board of Governors, determines how much "credit money" the banking system can create through the bank-loan process. The formula that governs the procedure works basically as follows.

The "Fractional Reserve Ratio":

Let us assume that the "fractional reserve ratio" has been set by theFed at 1/10 (10%). In mathematical terms, this means that the banking system as a whole (The Fed and the private banks it oversees combined) have the potential of creating an amount of money that is the quantity of high-powered money on deposit, times the inverse of the "fractional reserve ratio." If the ratio is 1/10th, this allows the banking system to create overall an amount of money which is a multiple of the inverse of that number (i.e. 1 ÷ 1/10), which equals 10.

Simply put, this means that if borrowing and spending by the Federal government causes a billion dollars of "high-powered money" to be created and put on deposit in the banking system, the private banks can use this billion dollars as a foundation ("fractional reserve") to create another nine billion dollars of new "credit money." The total amount of new money, "high-powered" and "credit," that can be created through this process, is equal to what the Federal government "borrows" and spends into circulation, times ten (in this case, ten billion dollars).

Creation of "Credit Money":

To show how the process unfolds, let us suppose that $10,000 dollars of high-powered money has wound up on deposit in a given bank. The banker at this institution has thereby gained $10,000 dollars in new "reserves" against which he can create new money to "loan" out. The question is, how much can he create?

Since the banker in our example has $10,000 dollars of "reserves" on deposit, he can create up to $9,000 dollars in new money to "loan." Let us suppose that someone comes in and asks for a $9,000 loan, and his application is approved. The banker writes a check for (or electronically credits an account in the amount of) $9,000 dollars, and gives it to the "borrower." According to the way bankers think about this process, the banker in our scenario has just "loaned out" $9,000 dollars, and has, as required, left $1,000 "in reserve" as a hedge against the bank becoming "insolvent" (i.e. going broke).

At first glance, the process described in the above paragraph looks very much like the method the goldsmith banker used to protect his bank from becoming insolvent. Common sense dictated that he keep in reserve in his vaults an amount of gold which represented a reasonable percentage (fractional reserve) of the face value of gold receipts he had issued that were circulating as money in the economy, as a hedge against an unusual level of demand for the redemption of those receipts by his clientele who, overall, had been "loaned" the same gold several times over. Similarly, the rule governing modern banking which requires banks to keep in "reserve" a certain "fraction" of their money when they create loans, would seem to be a common sense measure to provide a margin of insurance against the possibility that the banks might find themselves in the position of not being able to redeem their depositors' accounts for cash at the teller window.

These two scenarios have, upon cursory look, a very similar appearance. If one examines more closely what is really happening, however, it will be found that these respective processes are very different, and have, not similar, but virtually opposite effects. The fractional reserve practice of the goldsmith banker lent a measure of stability to their system, but the so-called "fractional reserve" formula of modern banking is the very source of its chronic instability. In tomorrow's column we will continue with the description of how the "fractional reserve formula" unfolds, and take up the thread of how it is at the root of the collapse in the financial markets at present.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:


(Week 8 - Thursday, Sept. 18)

The mode of banking now in use is commonly described as "fractional reserve banking." The expression "fractional reserve" is one that is carried forward from an earlier form of the craft known as "goldsmith banking." As applied to modern practice, this expression is a misnomer that effectively obscures any true understanding of how our present monetary system operates, and why it is currently in such distress. To get a clear picture of this, it is first necessary to gain an understanding of what "fractional reserve" originally meant, and then how the concept has been misapplied.

In Europe of the 15th century there were many smiths that worked with gold, and therefore required vaults to securely store this precious material of their craft. Over time citizens and merchants that owned their own gold and used it in trade found the metal to be inconvenient and hazardous to keep in their personal possession. Consequently goldsmiths engaged in the sideline business of storing people's gold in their vaults, and issuing a receipt for the storage.

These receipts began to circulate as a currency with tradable value, as if they were the gold itself, and so became a form of paper money redeemable in gold. As payment the goldsmith charged a percentage of the value of the gold stored.

The goldsmith noticed that under normal circumstances only a very small percentage of his customers at any given time would redeem their receipts (i.e. take possession of their gold). For long periods the great majority of their metal merely gathered dust in his vault. At length it occurred to him that he could write more receipts and offer to "loan" the gold he was entrusted to hold to others, with an "interest" charge attached of course. In actuality he had nothing to loan because the gold already belonged to another customer, but who would know the difference. He could, in effect, profit on gold that he had, in a figurative sense, "created out of thin air."

The key to making this scheme work is that he would need to limit the amount of receipts issued such that the gold that he had on hand would, in the normal course of business, represent at least a certain "fraction" of the face value of the outstanding paper claims against it. This gold on deposit, then, would act as a "fractional reserve" that could be dipped into in the event that he experienced an unusually high demand for redemption at any given time.

The goal of the whole arrangement to the goldsmith was to issue as much "interest-bearing" paper as he dared against the stock of gold in his possession (thereby maximizing his income), while guarding against the possibility that the day might come when he would not be able to redeem with gold a receipt that was presented to him.

At first the scheme was a trade secret. As its workings became an open secret, many people regarded it as simple fraud, but others deemed it a necessary way to get the quantity of medium into circulation that a growing commerce demanded. In any case, the populace was eventually obliged to accept the goldsmiths' methods as the accepted way of doing business, or effectively forego much of its money supply.

By this mechanism the goldsmiths effectively began to operate as "banks-of-issue" (banks that create and issue money), and "fractional reserve banking" was born. The scheme worked well as long as there was not a "run on the bank"; that is, a rush by depositors to redeem their receipts for the gold because they had lost confidence in the institution.

As a sidebar to the goldsmith-banker story, it bears mentioning that this group has borne a great onus in the historical reckonings of many would-be monetary reformers. It is easy to find good reason for that assessment, but the whole story is not so simple. It could be argued that they were in effect coming up with a money–creation mechanism that did in fact put a great deal of currency into circulation in an age when that was sorely needed for its own inherent reasons. They operated in a time when the society itself did not have a sufficient sense of the science of money to create an adequate system in the public sphere where it rightly belongs (the same might be said of the situation with respect to money and banking that we find ourselves in today).

Were the goldsmiths simply a class of scam artists, or were they people who saw an essential need of the society around them and found an innovative way, however imperfect, to meet it? The answer presumably is both, and all degrees in between. They were, after all, people. Many deem the legacy they left behind as threatening the demise of civilization. It could also be argued, however, that had they not initiated such a practice, the evolution of Western society would have been seriously hindered. I leave that question to the reader's judgment.

In tomorrow's column we will begin to examine how a pseudo version of the goldsmith's method, recreated in our time as the "fractional reserve system," has planted the seeds of the present collapse of the financial sector.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Wednesday, September 17, 2008


(Week 8 - Wednesday, Sept. 17)

One of the great secrets of the capitalist system is that it depends on bankruptcy to survive. This is how air is let out of the bubble of unsupportable "debt" attached to our money supply due to the demand for ever greater "interest" payments attached to the issuance of our dollars. Otherwise pressures associated with "debt" would become too high for the system to be sustained. Indeed, if one were to check the historical record, this is how capitalism has achieved longevity. The trick for those players who would survive, and even prosper, is to make sure that the air expended is someone else's air.

Regular episodes of widespread financial failure restore a sort of pseudo-confidence in the system because anyone whose balloon doesn't get popped experiences a sense of relief, is in a positions to exercises relatively more control in the social order for his "success," can feel like a "winner" (one of the "smart" ones), and may even wax righteous in their faith in the system. After all, so the thinking goes, does not the occurrence of such periodic convulsions to the economic order provide a way to weed out its "less fit" players (for the good of all or course), and correct "imbalances" in the system (never mind that these "imbalances" are due to the instability inherent in a system in which there is never enough money in circulation for people to pay their debts)?

A prime example of how the debt-bubble-deflation-through-bankruptcy process operates has transpired in the Midwest Farm Belt over the century - almost since the establishment of the Fed. At the time of the passage of the Federal Reserve Act, a third of the people lived on the farm, and at the start of WWII it was still a quarter of the populace. Now less than two percent remain, and it is questionable as to how many of these are "farmers" in the sense of being independent entrepreneurs (as opposed to subcontractors for major food cartels).

In the history of the world there has never been a population that has been evicted off its land, much less from a plain as fruited as the American Midwest, without wrenching trauma. How then was this fiercely rooted rural society removed in little over a generation? It was done by creating a context in which it was not possible for the occupants as a whole to make the ends meet in their financial lives (i.e. pay their expenses, earn a living, and have enough to reinvest into another crop), and then let them work it out in a desperate scramble to see who could hang on.

The factor that made the farm situation untenable was not, as claimed, "over-production" (in a world where tens of thousands of children perish each day of starvation-related causes). It was, rather, the so-called "debt" against a money supply that is "borrowed" into existence from private banks on terms that made it financially "impossible" for the producer (in this case the farmer and supporting rural businessman) to receive enough for his product in the marketplace to avoid the necessity of taking on ever more "debt".

For reasons that are complex, the shortfall of buying power available to complete the market cycle in any "debt-money" regime was directed first in a concerted way against the rural sector (as historically it has generally been). Meanwhile, there were policy papers put out by corporate think tanks that, for example, called for ". . . a program, such as we are recommending here, to induce excess resources – primarily people – to move rapidly out of agriculture." (An Adaptive Program for Agriculture – by the Committee for Economic Development (CED)). The practical way to do this was to manipulate the monetary situation in such a way that farmers could not receive for their product a "parity price" (one that would allow them to make a living, and keep them in structural balance with other participants in the economy).

Fundamentally, the "farm problem" is in reality a monetary problem. Historically, it almost always has been. The key to evicting the rural population from the land was to hide its true nature with a subterfuge ("farmers are being too productive"), and then rig the markets so that their financial collapse played out over a period of time.

Accordingly, farmers were obliged to go broke at a rate of a percent or two per year. Those still struggling to not be one of the losers typically saw no other course but to show up at the auctions of their bankrupt neighbors and pick up the equity in their capital supplies and equipment at pennies on the dollar. Old "debts" (air in the bubble) were wiped out in part because not enough could be salvaged, and the net "indebtedness" of the countryside experienced some relief, but the growth of the bubble resumed, and eventually almost everyone went down, except those who had deep enough pockets, or a position of advantage within the system (e.g. large corporate operations), sufficient to enable them to pick up the pieces of their neighbors' ruined lives. This process was wrenching, both for the rural folk involved directly, and the country as a whole.

The vital rural community is now virtually gone, and what is left effectively are corporate farming contractors (which often are now getting good prices and high subsidies), "Wal-Mart" regional commercial strips (to which there adhere increasingly satellite communities), and food imported from "cheap-labor" plantations (where the Mexican farmer is being economically driven off his land, and effectively compelled to migrate across our southern border).

Of course, since the demise of the rural areas, the "debt-bubble-deflation" scheme has moved on to the manufacturing sector, as our industries (e.g. the automotive complex in Flint) have been shipped overseas. Now the "service industries" are being forced out (e.g. the transfer of customer-service phone banks to India), followed closely by the intellectual sector (e.g. hi-tech programming).

Naturally, this has all been extremely traumatic, but these "adjustments," going back to the pre-WWII days, exist yet in the memory of our more elderly fellow citizens who lived through them. Still, we as a nation have not noticed the economic elephant in the room; i.e. the debt-bubble-deflation-through-bankruptcy process.

The "debt" bubble has to be deflated somewhere, and it was inevitable that the game should move at last to the banking-and-finance sector, which has been most instrumental in bringing this distress to the rest of the economy. This is what is happening at present.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Tuesday, September 16, 2008


(Week 8 - Tuesday, Sept. 16)

During the recent Bear-Stearns (BS) meltdown, a stock trader friend told me about the billions of dollars that had supposedly been lost, and asked incredulously, "Where did all that money go???" The answer I gave him was "It didn't go anywhere. It wasn't money. It was the air in a speculative bubble." Let me explain.

The morning of the BS crash its stock was trading for $60 (before it fell to two dollars later in the day). This represented a supposed "net worth" for each share then of $60. The next question is "Where was this $60?" The simple answer is that it was an abstract number that was calculated from an anticipated "price-earnings ratio" (i.e. the ratio between the price an "investor" pays for a stock and the amount of money he expects to "earn" from holding it), much as the "value" of bonds, bundled mortgages, and other investment vehicles are reckoned respectively from their "discount rate", "interest rate" or "rate of return".

The concepts these financial expressions refer to are not money. They are only promises (or anticipations in the case of stocks) to pay a "return on investment" at some point in the future. The "value" of stocks expressed in dollars is a theoretical number based primarily on calculations by traders of dividends expected to be paid by the stock, and a subjective estimation of the "risk" that such proceeds might not be realized.

Stocks may have the illusion of being money because, while there is still life in the stock-market game, one can redeem them for cash. This is to say that the owner of a given stock may assume that there is someone out there who will be willing to bet his own cash-in-hand against the prospects that a given stock will pay dividends at a rate that is at least as high as what other traders in the current market expect, and/or there will be other "investors" coming along that will anticipate an equivalent or higher dividend in the future, and thus be willing to pay even more for the stock, thereby allowing the current "investor" to "cash in" (sell his stock) at a profit.

Within a market where participants imagine that they can expect a "10% return on investment" (given the range of financial opportunities available where the "investor" could put his money), for a share stock of in BS to be "worth" $60, there must exist momentarily in the trading culture an anticipation that it will be paying out $6 at the end of its fiscal year. This is affected by many factors, but in general anticipated dividend and perceived risk govern what price traders are willing to pay. Even the most optimistic "investor" realizes that prices of stocks cannot increase exponentially forever, but they are betting that they can buy into the market, and then sell their holdings for a "profit" before the speculative psychology that drives prices up in market goes bust. When it does pop the expectations reverse, and there ensues a stampede to "cash in" one's stocks, such as the one the market experienced yesterday.

I anticipate that there will be cries in the media about how many billions of dollars are being "lost" through this latest market contraction, but this would not be an accurate characterization of what is transpiring. In previous columns we have already seen how virtually every dollar in circulation is created and issued through the process of someone going into a bank and "borrowing" money which the banker creates on the spot with the "writing of a check." If tomorrow's newspaper headlines try to tell us that 'billions of dollars have been lost to the economy' since the morning before, we should ask ourselves, "Does that mean that millions of people were suddenly possessed to walked into banks yesterday, where they took cash out of their pockets or funds out of their accounts, and paid down the principal balances on their loans, whereby the banker was obliged to extinguish (mark "paid") this money, thereby wiping it off of his books, and leaving the nation with billions of dollars less in circulating medium?"

Common sense would tell us that nothing of the sort happened. It follows, then, that there are essentially the same number of dollars in circulation as there were twenty-four hours before. The only change in the money supply will be the net differential between the quantity of dollars "borrowed from" vs. "paid back to" the banking system, as is the case on any given day. What has really happened is that "billions of dollars" worth of speculative air has been let out of the bubble of (unrealistic) expectations that the actual dollars in circulation are expected to support.

Notwithstanding, as we arise to this new day, the papers and morning shows will no doubt be filled with hysteria about how the financial world is about to come undone. A few minutes ago I turned on the radio just in time to hear a financial "analyst" warn that we may be on the verge of another "depression." Such alarming talk carries with it very real danger if it is not carefully considered in that it can become self-fulfilling prophecy all too easily.

We the people have a choice. We can either believe the catastrophic hype we are being bombarded with, or we can look around and see that, as ever, the sun beams down, the rains fall, the plants grow, the infrastructure persists, and the hands, hearts and minds remain willing and able to do the work. The whole "financial crisis" that the world is experiencing right now is not some objective reality that the universe is laying upon us. It is, rather, an illusion that we as a human race have created, believed in, and sacrificed our very life substance to.

This may seem to many to be an extreme, even bizarre, assertion, but it is something that we would do well to contemplate seriously now, as an antidote to being overcome by fears about money. I do not hereby mean to dismiss the very real suffering that people experience under the boot of the monetary system (I suffer with it also), but we can be free of it if we as a society can wake up what is happening. That is what the discourse about money that is being put forth in these columns is intended to be all about.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Monday, September 15, 2008


(Week 8 - Monday, Sept. 15)

With six weeks worth of this column having gone out, it is perhaps time to take a look at how it has been received so far, and how it might proceed into the future. The response has been gratifying; more so than I could have expected. I say this with respect to numbers of people who have opted-in, and the many thoughtful questions, comments and critiques received. This is all greatly appreciated.

There are at least two places on the net where these columns are posted (on the initiative of others) as they come out, and a complete set maintained. These are listed at the bottom of this page. Others have offered to do the same, set up a dedicated website, or otherwise help to get these and other of my writings out. There have been more offers than I have been able to follow up on so far, but I am grateful for every one. I am moved by the news that a number of people have indicated that they make hard copies of the columns and give them to people they know who might be interested.

The greatest challenge with the columns so far, I am informed, is that some folks are having a difficult time keeping up with the volume of reading. These articles are meant to be short enough in length to read over the proverbial "morning cup of coffee," but people today often lead harried lives (got to keep up with the monthly "interest" payments, after all), and have a difficult time in finding place for even the smallest tasks. Many are indeed keeping up with whatever they hope to get out of the content, but others are not.

The content is designed to be a tightly reasoned and integrally connected discourse that can (supposedly) in a step-by-step manner help the reader awaken to a wholly different perspective about money than is offered in the conventional dialogue. I write each article in mindfulness that there may well be readers who are joining in for the first time, or rejoining after an absence. Consequently, each installment has to be at least minimally decipherable to the uninitiated within the terms and context presented in any given piece. That said, much groundwork for understanding is laid as the series unfolds, and if parts are missed something is inevitably lost. There are many readers who, according to the feedback I am getting, feel the same way, and experience frustration if they "fall behind." There are others who work to consolidate their understanding by going back over past installments.

In light of these considerations, plus other commitments coming up in the near future, I am contemplating taking a two-week breather from October 5 through 19 during which no new installments will come out. The series would pick up again starting October 20, and presumably focus on the issues that have gained public attention during the run-up to election day on November 4. I would welcome whatever thoughts anyone has about this.

There is yet much that needs to be said about money and the economic times that we live in. I don't anticipate that subject will ever be exhausted. Accordingly my commitment to getting this dialogue out, through New View on Money and other channels, remains ongoing. Thank you for your patience with this process and continuing interest.

I close with a monetary thought for the day:

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

Thomas Jefferson, letter to the Secretary of the Treasury Albert Gallatin (1802)

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Saturday, September 13, 2008


(Week 7 - Saturday, Sept. 13)

Over that last year, the reading and viewing public has been increasingly regaled with personal horror stories about vulnerable people being lured by shady mortgage brokers into signing contracts using deceptive practices and on falsified terms. Such contracts typically were loaded with questionable financial gimmicks such as "adjustable rate mortgages," "balloon payments" and "zero-principal mortgages," and had principal loan balances that were simply beyond the financial reach of the borrower.

It is becoming evident that the "sub-prime housing crisis" is only the tip of the proverbial iceberg. Now it appears that the nation's two largest mortgage finance companies, Fannie Mae and Freddie Mac, will need a massive injection of capital (some reports say as high as $300 billion dollars), or an outright takeover by the Federal government, to keep them in business.

So, what has gone wrong? The media is filled with finger-pointing and recrimination about how with the "sub-prime," and now the "prime," mortgage industries have been driven to the verge of collapse. There seems to be a growing consensus that the politically ballyhooed deregulation of the financial industry over the last three decades has allowed unscrupulous financial entrepreneurs to run amok, and that this is the prime cause of the crisis. If only, so the wistful thinking goes, there had been sound financial management in the industry this crisis would never have happened.

That unscrupulous financial entrepreneurs have run amok is beyond doubt, but does it follow that had more prudent financial stewardship been in place, then arriving at a point of crisis would have been avoided? Let us examine the question.

Suppose that the financial industry had not been deregulated and/or had been more conservatively managed. Then hundreds of thousands, if not millions, of these reckless loans would presumably not have been made. This also means, it should be noted, that many billions of dollars of new money would not have been created by the banking system, and loaned into circulation.

When a bank makes a loan for a mortgage, the new money this transaction generates goes from the pocket of the buyer, to that of the seller, and then continues to circulate as he spends it into the money supply. Over the last several decades, the mortgage market has been flogged by government policy and financial practice for all it is worth as an engine of new money generation for the economy. If there had not been all this bloated "prime" and "sub-prime" borrowing, hundreds of billions of dollars that are circulating in the economy right now would not exist. That means that much of the money in the typical person's wallet or bank account would not be there. With a greatly diminished monetary pool, there would be much less money in circulation to make payments on mortgages that had been contracted before the latest wave of borrowing, and less circulating to meet the needs of commerce.

This is a classic catch-22 situation. If we borrow more money from the banks, then we experience a bubble of prosperity, followed by a crisis of excessive "debt" when the payments come due. If we refrain from borrowing, then not enough money enters into circulation to meet old "debts," plus maintain an adequate money supply to do our business. For the last half-century we have chosen the path of rapidly increasing borrowing. The more frugal option, then, is the road not taken, and so we do not experience its effects. Nonetheless, there is a "debt" crisis at the end of either scenario.

The answer to the mortgage crisis is to stop borrowing our money supply at "interest" from a private banking system, and start issuing it publicly through the U.S. Treasury. This would take away the impetus to manipulate the housing market towards higher prices decade-after-decade as the primary engine for "debt"-money creation. Publicly-issued money is the path, I suggest, to a stable market with prices that are consistent with the actual physical cost and human effort required to build and maintain the housing we live in.

None of this is to say that the cavalier conduct of unscrupulous financial entrepreneurs is in any way justified, or that it has not greatly exacerbated the cost in personal suffering of the "debt" crisis. The reality, though, is that a "debt" crisis was sure to emerge, in one form or another, regardless of their conduct. Fiscal stewardship is an administrative problem, but the mortgage crisis is at root a consequence of faulty money creation.

Already in the newspapers I see proposed various schemes to fix the mortgage industry, virtually all of which involve borrowing ever more massive quantities of money to finance so-called "bailouts," and giving yet more control to the people and institutions that have presided over the present fiasco. This is the wrong answer.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Friday, September 12, 2008


(Week 7 - Friday, Sept. 12)

On September 11, 2001 two hijacked airliners slammed into the Twin Towers of the World Trade Center in New York City, another into the Pentagon in Washington DC, and a fourth went down in a field in Pennsylvania. This cathartic event is destined to define the world for our time, perhaps for all time, contingent upon whether we choose to be merely reactive, or to grow in the face of the reckoning it presents. Do the commonly invoked religious/ideological arguments, a supposed "clash of civilizations," or even the phenomenon of terrorism constitute the most fundamental questions presented by this event? Is it not, rather, about whether humanity is able take a quantum evolutionary step up upon this calamity, or instead succumb to a descent into deepening acrimony, violence and darkness. Fear ripples out, the Constitution is subverted, military forces deploy, dark specters haunt the media, and World War III is talked about by pundits as a foregone conclusion. America, many fear, slides towards losing its principles, its mission, and its destiny, much to the detriment of the world at large.

Seven years have passed. The task of civilization now is to redeem horror of "9/11" to a new meaning. In a veritable sense, this tragic event was a culminating convergence of an unrecognized historical malady that has its roots in ancient times. To a great extent, it arose out of the failure of humankind to come to a profound realization of the true nature of "Money." To be sure, heated debate in the public discourse that touches upon money swirls around the event, but because it rarely talks about how and by whom it is created and issued, it is for the most part a distraction that misses the mark. The blessing that the medium of money potentially represents has been co-opted for gain, much to the undoing of human well-being and edification.

Those gleaming towers were magnificent structures, but to many of the impoverished masses around the world they seemed to mock their desperate plight. In an address to the nation shortly after the catastrophe our President, George W. Bush, asked rhetorically "Why do they hate us?", and then answered, "They hate our freedoms." I have no doubt that there are those who peer at America with hateful, envious eyes, and covet the intention of doing it violence, but we are a nation of providence, constituted to bring something new to the world.

The American Revolution was a three-legged stool. Two of the legs any schoolboy who does his lessons is familiar with; i.e. (1) personal freedom within the context of (2) democratically-determined law. But, what was the third leg? It was the bringing of a new economic order founded on the ideal that the people are sovereign, and endowed with the essential right of the sovereign; 'to coin our own money and regulate the value thereof,' and thereby possessed of the means to not fall under the heel of the moneylender.

Our consciousness of that third mandate has slipped, almost to nothing, until we are become the world agent of the Bank-of-England (now Federal-Reserve) "debt-money" system; the very foe that our colonial forebears defeated on the battlefield, and the people have through episodes of our history striven to eradicate.

I would suggest that "they" (the resentful millions of the world, to the extent that that is the case) do not hate us for our freedom, but for our failure to live up to its promise. We have let our nation become the instrument for exporting the private-debt-money tyranny that those who came before us once had the inspiration and common sense to resist. Fortunately, the dream does not die easily, as the people of the world still await the awakening of America to its authentic calling.

The world is now one world, and faces all-together a convergence to a terrible 'end-of-time'; or the opening up to a liberating new dispensation. The providential moment of ultimate choosing is at hand, and the 911 event was a throwing down of the gauntlet. This assault was meant to take the world from us; let us resolve to take it back, and this time rectified to a more perfect truth.

Emphatically, none of this is to absolve the heinous acts that were committed on that terrible September morning, nor to say that those responsible need not be brought to justice. Rather, it is a call to regain our destiny as individuals, as a nation and as a world community.

In holy writ we are admonished to "get wisdom; and with all thy getting get understanding." Horrific images of 9/11 and its fallout have been burned into the hearts and minds of people in every niche of the globe. It is necessary now that they be informed with new understanding. Rather than seek vengeance out of a feeling of being victimized, it is imperative that we the people of this nation, and indeed the world, embrace the opportunity for maturation that this crisis presents, and step up upon it to a new vision; one founded upon true brotherhood in a just social order, and that made manifest in a transformed economic life.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

Thursday, September 11, 2008


(Week 7 - Thursday, Sept. 11)

It is a feature of the growing malaise in American politics that, no matter who we elect, they seem to do essentially the same thing once they get into office. The sharp distinctions the candidates were at pains to draw between themselves prove to be of little consequence because once they assume their duties their real mandate is to keep the bankruptcy re-organization process moving forward so the country can at least function while the "debt" continues to climb.

To make the game palatable to the electorate, they inherit a tacit public relations mandate, which is to deflect attention from the fact that the "debt" is a monetary problem that is caused by the nation having given up the power to create its own money supply. Instead, they will feel obliged to exhort the people endlessly that if only we adopted the right taxing and spending priorities, then budgets would be balanced, the economy would "grow," and the "debt" would start to be paid. Such rhetoric only obscures the real problem.

I have followed the pronouncements of both Obama and McCain carefully and have heard no evidence that either is at all aware that of the true nature of the "debt" problem, though that is not to assume that they don't have thoughts in private. Several of the other Presidential aspirants have given some indication that they possess a measure of understanding. These are Ron Paul, Dennis Kucinich and Ralph Nader. Unfortunately, none has demonstrated the level of urgency on the matter that would show that they realize that, without rectification of the monetary system, their otherwise laudable intentions will be in the end moot (to be fair, Ron Paul might be an exception, but his cure, the gold standard, is as bad as the disease).

This has not always been the case in American Presidential campaigns. At the Democratic Convention in Chicago in 1896, Williams Jennings Bryan declared, in what has come to be known as his "Cross of Gold" speech, "If they ask us why we do not embody in our platform all the things that we believe in, we reply that when we have restored the money of the Constitution, all other necessary reforms will be possible, but until this is done there is no other reform that can be accomplished."

The nominating conventions of that era were not choreographed media events. They were actual deliberative conclaves. The public at that time was savvy about the basic principles of money, and the delegates knew what Bryan was talking about (would the delegates of today?). In fact they were so moved that the speech propelled him from being the dark-horse candidate, to the party's nominee (the position Obama occupies now) for three election cycles.

What does all this say about the monetary knowledge, understanding and wisdom of, not only the current Presidential candidates, but also we the people who elect them? Shall we passively watch them on TV while they pour themselves out to pander for our approval, or would it be better to seek a way to help them become edified through this process? After all, one of them will be our next President. We the people certainly have no stake in their futility. Let us hope that whoever is elected will have a better chance to lead than merely manage the bankruptcy of our nation.

So, how might this be done? I would suggest that we the people take on the task of learning about money, and then work to open up a public discourse in which the candidates can feel free to join in. I have reason to believe that they have thoughts and questions about the subject, but do not feel free to give them voice. Many of us complain that they are scripted, but with our often gaff-obsessed, litmus-issued judgmental attitude, we keep them imprisoned in their script. Their evident failings notwithstanding, these are bright, talented and motivated people. Surely they are capable of the monetary conversation.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites: