6 § DGC Magazine September Issue The True Nature of Money

The True Natureof Money

by Dr. Zeno Dahinden

The Magic of FIAT Money

Modern money (called FIAT Money) is moneymade out of nothing and comes into being throughthe creation of government, business and privatedebt. This becomes possible through a collusionof interest between governments and privatelyowned banks (i.e. Central Banks and the Fed).You might rightfully wonder how one can createmoney from nothing – the same money that we

labor and sacrice for all our lives.

Let me try to explain the magic of FIAT moneycreation using a simple but technically 100%

accurate example recounted by G. Edward Grifn

in a talk on the Federal Reserve System recordedin Los Angeles on November 1994.It all starts with the government side of the equation.The government runs out of money and needs letus say 10 billion USD to pay its running expensesover the next weeks. Congress thus goes to theTreasury and requests the money. Treasury tellsCongress that they must be kidding because alltax receipts have long been spent in January andFebruary (most of it by the way to the Fed for servicing the government’s debt). But don’t worry,they say, and together they go down the road tothe Federal Reserve System. The Fed has beenwaiting for them since this is one of the reasons ithas been created.

Once they arrive at the Fed, the Fed ofcial takes

out a big check book and write a check over 10billion USD to the US government. At that point,we have to ask the question where this moneycame from. The astounding answer is that there isno money, technically speaking there is not even achecking account, there is just a check book. Thismoney came into being in the precise moment

the Fed ofcial signs the check. This money

was created out of nothing and is loaned to thegovernment at interest.The Treasury then deposits this money in agovernment checking account at the FederalReserve System Bank (which is properly speakingnot even a bank) and the government starts to writechecks to pay for its projects. Let us now follow asmall part of this money to better understand whathappens on the banking side of things.The postman next door receives a government-issued check over 100 USD and brings it to his

commercial bank down the road. The bank ofcial

deposits this 100 USD check and goes to the loanwindow to announce that 100 USD have just beendeposited and the bank can now loan money. Thismakes everybody waiting outside the loan window joyous because this is one of the reasons peoplego the bank – to loan money. Some people arehowever a little concerned because it is only 100USD that were deposited. Do not worry the bank

ofcial says, we can loan you up to 900 USD. How

is this possible?Let me explain: the Fed has ruled that a minimumof 10% of all outstanding loans must be kept ondeposit (this is called fractional banking). Since100% of 10% (i.e. 100 USD) is 1000 USD, thebank can thus loan 900 USD based on the 100USD that were deposited earlier. At this point, wehave to ask the same question – where did thisnew money come from? The amazing answer isthe same – this money was created from nothingand comes into existence at the precise momentthe loan is signed.In summary, as a result of the government’s needfor 10 billion USD, a total of 100 billion USD havebeen created from nothing – all of it collectinginterest for the banking side of the partnership.Interest on nothing!There is one important difference in the use of themoney loaned to the government and the moneyloaned to us by the commercial banks. While thegovernment uses this money to pay for its projects,the banks do not use it on their own projects, butloan it to us for our projects against interest andsecured by our assets. While the large part of our

DGC Magazine September Issue § 7

8 § DGC Magazine September Issue

prots from this nothing money thus goes back to

the banks via interest payments, the banks willtake our assets if we fail to pay interest on nothingmoney.What then is the conclusion: there is

no businesslike banking business

. Only the banks are ableto create unlimited wealth out of nothing – this istrue magic.

Loss of Purchasing Power

Let us now follow the diffusion of this newly createdmoney into the economy. Since FIAT money ismade out of nothing, every time new money iscreated and injected into the economy, the newmoney ‘borrows’ its value from the existing moneyand thus debases it. We experience this as a lossin purchasing power which is the phenomenon

of ination (i.e. a hidden tax) or, more properly

speaking, the appearance of rising prices.I say appearance of rising prices because in termsof

REAL Money

, prices do not change over long

periods of time. Rising prices (i.e. ination) are

the result of ‘making money from nothing’. As

recounted by G. Edward Grifn, in ancient Rome,

a one ounce gold coin (i.e. REAL Money) bought

you a ne toga, a handcrafted belt and a pair of sandals. Today, you can walk into any ne men’sstore and, with a one ounce gold coin, buy a nesuit, a handcrafted belt and a ne pair of shoes. In

other words, the real price of these things

has notchanged in thousands of years

. Real Moneytherefore is the best protection of purchasingpower, since it is not subject to manipulation (i.e.

ination) and thus ensures long-term price stability

- something which our central banks proclaim astheir core objective and which none of them haveeven remotely achieved. Quite on the contrary, our central banks, by creating an unlimited amountof money from nothing, became the primarydestructors of purchasing power and enabled theconcentration of wealth into the hands of fewer and fewer superrich and exceedingly powerfulinstitutions and individuals.At this point, we have to ask another question: didanybody get our

lost purchasing power

which

resulted from ination or did it just evaporate into

thin air? The answer is:

for every loser, there isa winner.

Who got our lost purchasing power? It

is the people who got the money rst before it was

injected into the wider economy. Who are thesepeople? Obviously the government who got the

rst check over 10 billion USD and then the people

lining up at the loan window when the new moneyentered the commercial banking side of things.These people got our lost purchasing power. Bythe time most of us receive this newly createdmoney, it has already been debased and is worthless and than when it was issued.

Through the phenomenon of ination or, more

properly speaking, loss in purchasing power,all FIAT money is eventually destined for the

‘graveyard of FIAT currencies’

(as proposed byJames Turk, CEO of GoldMoney). On the other hand, REAL Money (i.e. Gold and Silver) willalways maintain its value and prevail in times of crises irrespective of governments, ideologies or place in history. Why is this so? Because FIATmoney is subject to government and central bankmanipulation whereas real money cannot be

inuenced by small interest groups and is only

subject to supply and demand resulting frommillions of people freely interacting with each other.This is why no interest group has ever been ableto manipulate the value of REAL Money and whygovernment and central banks thought it necessaryto move away from REAL Money towards FIATMoney in order to manipulate the money supplybecause they needed more and more money thanwas available. They thus debase the money’s

purchasing power through ination and enable the

exponential concentration of enormous WEALTHAND POWER into the hands of a very few.

What can we do about this?

First, we obviously have to move away from

FIATMoney

(i.e. money made out of nothing) towards

REAL Money

(i.e. money with intrinsic value). Whyis this so important? Because the core functionof money is that of a temporary store of value topreserve purchasing power over extended periods

of time, and inating money is simply a terrible

store of value.

The True Nature of Money