2025-05-26
"Babylonian money magic".
What is it? Does the Fed practise it? Does the Bank of England practise it?
"Money is a Commodity"
No it isn't. I don't like to disagree with the presenter, but I must.
Money is the hydraulic fluid that courses through the pipes of the financial system and enables people to sell the goods that they produce into the markets, and to buy the goods that others produce from the markets.
Money represents goods and services produced. But it is liquid - it can be subdivided (unlike goods and services) and swapped for other goods and services of different value. Money enables markets and obsoletes barter.
Like liquids, money can be stored in tanks (banks) for use at a future date. This enables lending and borrowing without distorting the markets' price discovery processes.
It is fundamentally a means to measure the goods and services available for purchase in the markets.
It can be lent out for others to use whilst the owner has no immediate need for it, thus enabling the borrower to gain access to goods before he has earned the money to pay for them. It still represents goods and services already produced and available in the markets.
The "Babylonian money magic" breaks this rule.
The banks that are short of deposits to lend out can and do create fake money which does not represent goods and services available in the market, with a few keystrokes on a computer. The fake money is otherwise indistinguishable from real money which is backed by goods and services available in the markets. Suddenly there is more money chasing goods in the markets than there are goods and services available.
Result 1:
Inflation - the market's "price discovery" processes adjust the prices of goods and services to soak up the additional money.
This is why Central Banks reserve the right to issue money, and control the amount of money that retail banks can issue. As the loan is repaid (by earned money!), this imbalance is corrected as the repaid money is removed from circulation (but who knows what the banks actually do with the balances repaid?).
Result 2:
Banks grow rich on (a) the interest payments, which unlike the loan have to be paid from earned money, and (b) the banks now have additional "deposits" (until the loan is repaid and cancelled) which can be used to back more lending ... until the loan is eventually repaid.
In a growing population, the total additional fake money in the system also grows ...
Before the invention of banks, the world used a (more or less) fixed supply of gold and silver, even copper and nickel coinage as money, thus preventing the Babylonian money magic. Coins cannot be so easily minted in and out of existence as bank accounts and paper money! Nevertheless, debasement of the coinage (remove silver, add nickel etc) did take place and contributed to the fall of the Roman Empire, when nobody trusted the Roman money any more.
OK, that said, now watch the presentation about the Fed from the Mises Institute:
(39 minutes)
Like / Dislike this video here.
Do the same factors apply to the Bank of England? I'll leave this as an exercise for my readers ...
