Gold Research Analysis
Richard Russell's 'The Fantasy System', which was posted here on August 5th, has generated a lot of reader response.
The key point of Russell's essay can be summed up in the following paragraph: 'I say fantasy because the central banks are able to create money at will, with no discipline to stop them. This I believe - is immoral, even evil. The current system allows a central bank to create money out of nothing - whereas I and my fellow Americans have to work for that same money.'
This process of creating 'money out of nothing' is made possible by fractional reserve banking. As its name implies, banks keep a reserve, i.e., assets, for only part of their liabilities. For that portion for which they don't keep a reserve, they can create money (i.e., bank liabilities) out of nothing.
It is important to understand this process of fractional reserve banking. For this reason, I append below my correspondence with Denny Jackson, who believes that Russell doesn't go far enough in presenting the insidious nature of fractional reserve banking.
In my opinion Richard Russell's article falls short in two respects: He fails to make clear the distinction between price inflation (or deflation) and monetary inflation, and his term 'fantasy system' glosses over the criminal fraud of fractional reserve banking, the root cause of virtually all economic evils.
The confusion between monetary and price inflation (or deflation) is critical because so few people understand that price inflation is simply an effect while monetary inflation is the root cause. Indeed, most people have been trained to think that inflation is synonymous with rising prices, which draws attention away from the true picture. In fact, in an honest, full reserve, commodity money system, price deflation would be the norm, resulting from increased productivity and technical advances. Far from being harmful to an economy, price deflation under a fixed monetary standard benefits consumers and producers alike as not only retail prices fall, but the price of raw materials used by producers also falls. Also, no undue hardship is born by either debtors or lenders, as monetary values change little over time. On the other hand, in a monetary system inflicted by fractional reserve banking (of which zero reserve fiat money is simply the extreme end), the price of money in terms of other commodities will be continually varying according to the whims of the bankster managing elite, leaving everyone who uses the money uncertain as to its value (if any) in the future.
Russell also confuses the issue when he states that the mountain of debt created requires inflation to handle it because borrowers become unduly burdened with a falling supply of money. That again puts the cart before the horse. Ultimately any amount of debt requires inflation to handle it. There is tremendous pressure against any monetary deflation in a 100% debt money system such as ours, since interest on the debt requires the creation of ever more money to service it. Retirement of the original debt would still leave the interest outstanding which would require another loan to pay off and the cycle continues. Indeed, payment of all outstanding debt would leave the nation without any money whatsoever! Monetary deflation in a debt money system means that someone somewhere is defaulting on their loan.
The real problem is not a central bank system per se as Russell implies, but with fractional reserve banking at any level, especially fictional reserve pure fiat currency imposed by a crooked government to benefit the banksters who control it. Centralizing the fraud and making a cartel of it simply makes it impossible to escape it. Theoretically at least, a central bank could function without harming the nation if it were restricted to using gold and silver coin (and deposit receipts) as the Constitution requires, and was not permitted to make loans, a power not granted by the Constitution.
An honest society cannot be built on a foundation of dishonest money and a flagrant disregard of fundamental law. Let's call things by their right names and not call fraud 'fantasy.'
A wonderful analysis. May I post your essay to the GoldMoney site?
Your analysis of fractional reserve banking is spot-on accurate, but I think you are being a little harsh on Russell. Isn't the 'fantasy' system he describes only made possible by fractional reserve banking? Isn't the process of creating money out of 'thin air' - which results from fractional reserve banking - the process being described by Russell even though he doesn't call it that? Maybe I'm reading more into Russell's essay than I should, but I know from reading him over the years that he understands fractional reserve banking and its impact.
I like Russell's essay very much because it describes in layman's terms how insidious the process of money creation has become. And it is of course a process made possible by fractional reserve banking.
You have my permission to post my piece if you'd like, and feel free to use my name.
Of course you're right. I didn't really mean to be too critical of Russell, who no doubt thoroughly understands the whole sorry mess, though I'm not familiar with his writings. My point is that I think he could, and should, do a better job explaining it to the average Joe, whom I assumed was the intended target of the essay. To those who understand the difference between price and monetary inflation and deflation it is quite clear, but very few people do understand and the distinction is critical to understanding why fractional reserve banking is so pernicious. As long as Joe Sixpack thinks that inflation and deflation are just changes in prices, he never pays any attention to the man behind the curtain pulling the monetary strings that give rise to the wild inflationary swings that make his life miserable. Also I just think Russell could have hit the fractional reserve banking fraud harder. The blow is deflected by pointing to central banking as the culprit, or at least the main culprit. The reason central banking is so damaging is due to its power to monopolize the exploitation of fractional reserve currency and to force it on everyone under color of law. The real culprit is the total disregard of constitutional limitations by Congress and the courts, and ultimately the massive ignorance and apathy on the part of We the People, the only ones who will ever enforce the Constitution.
The fractional/fictional reserve banking system is no fantasy. It's a very real fraud that needs to have a stake driven through its heart. I understand Russell's point and it's a good one. It just should be put more clearly. Thanks for listening.
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