Posted by: graemebird | April 7, 2007

Pyramid/Ponzi-Money. ‘Hallowed By Time And Usage’

Clearly the normal banking behaviour that we get today is not fraud. The laws sanctify it, the banks, for the most part, can meet their obligations, and it has been going on in the West since the early Middle Ages.

But it is inherently dodgy by its nature.

When we explain monetary economics to people its useful to split the money supply into cash and coins and “FIDUCIARY money” and the fiduciary money is that money that the banks have pyramided upon the monetary base.

Right there we have an oppurtunity for a bit of ringcraft. Because once we’ve explained what fiduciary money is we can from there on in (without malice) start referring to it as “PYRAMID-BANK-MONEY” and from there “PONZI-MONEY”.

Now here is the thing. Whereas what you see your local teller or ‘customer service officer’ or loan officer doing on a day to day basis isn’t ACTUALLY dodgy. Its more that the entire way of doing things is INHERENTLY dodgy and thats a very fine distinction for some people to get their head around.

Here is one of my efforts to clarify terms and get some of these ideas across…

This post however appeared to be too provocative for the alleged libertarian site “Thoughts On Freedom” Who have chosen to obstruct the debate everytime the discussion turns to monetary matters. To obstruct the debate was the motive behind the last time that Humphreys picked a fight with me by specifically blocking me form one of the threads. He had blocked me from one-thread-only. And it was the one to do with monetary matters.

In point of fact the guy is a natural born leftist. Or an ex-devotee in search of a new religion.

OK sock-puppet Bill. Stay on track or go away. Now you got anything to say about the main thread-topic? Or the subsidiary thread-topic of money?

Fractional reserve always begins as fraud and embezzlement. And then becomes hardwired into the system.

What has happened over the centuries is that all sorts of measures have been taken to accomodate what was originally fraud. The FREE-SWINDLERS side of the argument wishes to do away wih these accomodating measures without doing away with the latent fraud.

Fractional reserve might exist in a small way without fraud. But even in that case its likely going to be the result of government action, subtle or otherwise, that gets it going.

So for the meantime its best to just ban fractional reserve. We’ve got to get used to the idea that some things have to get freed up after others. Fractional reserve ought to be freed up sometime after most of the justice and law enforcement system is privatised and running with high order efficiency.

That is supposing you don’t think its inherently a swindle that is.

The freedom to engage in fractional reserve is really only the freedom to swindle. But we moderns don’t see it that way these days because we’ve had banking-and-government power bundled up with eachother since before Cosimo Medici (and during the ‘free banking’ of the Medicis they had waves or mass unemployment as well… and not due to any minimum wage).

Here is the best way to define the various terms. Of course some variation is alright. But one wants to have a good reason to use other terms.

Cash: Notes and coins.

Monetary Base….

(1) Under our system those notes and coins held by the banking system. Usually added to that is any cash that each bank can get on-call from the Reserve bank. Which in the textbooks would say something like…. ‘cash’ held with the reserve bank. Whether or not this cash actually exists or does not exist but might be printed if necessary…. the distinction between these two alternatives is not important. Whats important, why we might include this as part of the ‘monetary base’ is that the banks could potentially get more cash from this source on-call.

So the monetary-base aka ‘high-powered money’ can be seen as that raw material from which the banks are able to PYRAMID ‘FIDUCIARY MONEY’ on top of. Typically they don’t count the notes and coins held by the public in this definition though this is somewhat arbitrary. But it is in recognition of the fact that the banks must have possession of the cash, or have it on-call, before they can start PYRAMIDING the Fiduciary-money on top of it.

(2) Under fractional reserve gold…. monetary base would be ingots and coins held by the banks only.

(3) Under 100% backing the concept of “monetary base” would be obsolete. And money would merely be the metals that were in circulation in coin and ingot form.


1. The money supply, under our current system, is notes and coins held by the public plus on-call promises to supply these notes and coins by the financial system. But they must be on-call-promises that the public thinks it owns. We are not talking here about your unused credit card limit. Because that unused limit is not something you think you own.

Now why this bizzare ‘you think you own’ talk? Well the reason is that the banking system and the government have gone so far to bolster this fiduciary money, or Pyramid-money or Ponzi-Money that technically and legally you don’t own the cash in your cash-card account.

Of course in reality you DO own it and this is just legal-overkill to shore up what is an inherently dubious setup.

In other words the money supply is Notes and coins held by the public plus the on-call Ponzi-money of “OURS” we hold at the banks. In the textbooks we hear these referred to as “Demand Deposits”.

We don’t tend to add the monetary base to this figure as this would be double counting.

Other financial instruments counted in the monetary supply figures of M2 and M3 aren’t really money. They are actually just financial instruments. But for reasons too complicated to get into here….. movements in these composite figures are actually a far better predictor of movements in aggregate demand then movements in the actual money (cash and ponzi-bank-money) that these financial-instruments further pyramid on top of.

It is CORRELATION and NOT causation that leads M3 to anticipate spending patterns better then growth in money (CASH+PONZI-BANK-MONEY) as such.

2. Under 100% backing the money supply would simply be coins and ingots in circulation. Most of this would be held in your safe at home or by the banks, and you’d have a debit card like with E-Gold to get about with.

So for the money supply to increase folks would actually have to dig this gold/platinum/silver/copper and other potential worthies.. out of the ground and turn it into ingots or coins.

Under modern conditions most of it would likely be turned into ingots since debit cards for medium-sized purchases would be easier then coins.

There is something very righteous about only being able to create money via digging it up. Since when we go to find and dig these needle-in-the-haystack-elements up we find other things in the haystack and increase our resources accordingly.

When we invest in the capital equipment for drilling and mining to find these needle-in-the-haystack monetary elements we will also, on the side, be increasing the flow of our other mined resources.


Ponzi-Money or Pyramid-Money can be rapidly created and it can be just as rapidly be destroyed. In fact if our reserve bank decided to stop printing any more money, and took away any guarantees it has to our banking system….. if it did this the money-supply would collapse and go on collapsing in successive waves.

Since the bank-created-money is Ponzi-Money it can suddenly collapse either nationally or locally. With a central bank its true that its unlikely to collapse for any great length of time NATIONALLY, but in that case to prevent it from collapsing locally the tendency is to keep the money-supply expanding TOO FAST nationally.

In any case doing business within the ponzi-money system is always, even if well-managed, akin to attempting to swim in a swimming pool with choppy waves hitting you obscuring what it is you ought to be doing. As opposed to 100% backing where the pool is being filled via two hoses and the water is flat.

PYRAMID MONEY CAN COLLAPSE. But once a monetary metal comes into being it stays that way. This is something that George Reisman points out. This is why 100% backing is critical, not just to the prevention of inflation, but at least as critically to the prevention of recessions.

The monetary metals stay in existence once they are pulled out of the ground and turned into ingots and coins…. they stay in existence, for practical purposes FOREVER since they are the least reactive metals to oxygen that there are. They are durable and they don’t get destroyed. Check your reactivity series if you don’t believe me.

The yearly mining of these metals is but a fraction of the total amount of these metals that has ever been mined in the history of humankind. And so we ensure for ourselves a fantastically stable and slowly growing money supply once we have dealt with transitional problems and so long as we don’t allow the creation of any of this Pyramided or Ponzi-money.

A slowly growing money supply. But one that never actually collapses. Not nationally, and not locally either. Really the worst you might expect locally would be a slow drain, and this would reflect real economic loss of viability if it happened.


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