In Trinity of Truth, my last article, I showed how under our current system it is impossible to simply ‘print money’; rather (Fiat) currency must be borrowed into existence. This leads to the conclusion that it is impossible under our system to inflate away debt by printing; every new unit of currency printed must be balanced by a matching unit of new debt, else the books of the bank of issue (Central Bank) will not balance.
The CB indeed creates new currency out of ‘thin air’… but only against an offsetting asset. Normally, the asset is a treasury bond; the treasury borrows, and the CB prints against the treasury borrowing. This is called monetization when the CB does it; it is called check kiting if anyone else does it. Sovereign debt and currency supply grow hand in hand.
Some people suggest we change the system so government can simply print currency, without borrowing, without involving a CB. At first sight, this seems like a good idea; after all, why not eliminate the middle man, why create debt along with ‘desperately needed’ new currency? The answer is threefold, and as always involves The Whole Truth.
First, history clearly shows that printing without borrowing has been tried, over and over again, with inevitably disastrous results. Ancient China ran on a Silver standard. The Chinese government, the emperor, ran short of funds… like all governments everywhere… and the Chinese Emperor decided to issue paper ‘chits’ and decree that these chits were money, money as good as Silver. The Emperor had power to enforce this policy… at the point of a spear… and soon paper chits flooded China.
The chits started to depreciate as soon as they were issued. The holders of the chits, the people, were impoverished… and impoverishment led to bloody revolution and overthrow of the emperor’s dynasty. This scenario happened so often that the Chinese wrote laws outlawing paper currency. Nevertheless, Chinese dynasties continued to print ‘money’… without borrowing… and dynasties continued to collapse.
When Marco Polo completed his famous journey, he brought back Chinese gifts… among other things, paper money. Western kings and the Pope were so shocked by the idea of using paper as money, they decided this must be the work of the Devil… and burned the paper. Nevertheless, in a few hundred years, Western powers embraced paper… but in a different form.
This post was published at GoldSilverWorlds on November 19, 2015.