Dual Entry Accounting - Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe - Part V – Final Catastrophe and Hope for the Future

10/21/2011 Portland, Oregon - Pop in your mints…

As the western world braces for a full scale currency collapse, we have endeavored here at The Mint to offer an explanation as to why these events are taking place and, along the way, offering the obvious solution to the chief problem, mistaking credit for money. 

For those of you who have missed Part I, Part II, Part II, and/or Part IV, you may read them by clicking on the following links:

Dual Entry Accounting - Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe - Part I

Dual Entry Accounting - Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe - Part II - Irony

Dual Entry Accounting - Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe - Part III – Money or Credit?

Dual Entry Accounting – Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe – Part IV – The Catastrophe at Hand

If you require only a brief summary, Part IV above offers a relatively brief and comprehensive summary of the previous three.  Now where were we…

Ah yes, in the United States, circa 1968, a time not so unlike our own.  The Vietnam war was becoming increasingly unpopular and the social climate was ripe for protest.  The US had run up a large and increasing trade deficit with the rest of the world.  It was becoming clear that if foreign dollar holders were to redeem a significant amount of their Federal Reserve Notes, which we now understand to be banknotes and not money proper, for gold, which we now understand to be money proper, the Federal Reserve would not be able to deliver enough gold.

The solution, if it can be called that, was to gradually increase the amount of Federal Reserve Notes required to obtain an ounce of gold from $35 to $41 between 1968 and 1971.  Then, in 1971, with the US dollar collapsing in value and the Bretton Woods system falling apart at the seams, then President of the United States Richard Nixon announced that US dollars were no longer convertible into gold.  The event is now referred to as the Nixon Shock.

And a shock it was.  The US dollar, the benchmark of Central Bank currencies throughout the world, was now officially backed only by the faith that it would continue to be accepted in trade.  The Federal Reserve had defaulted.

Most of the world still lives by this faith today, and if anything, the delusion that a banknote issued by a Central Bank which has defaulted on its obligation to deliver real money on demand has only grown.

The reason that the large scale catastrophe of modern Central Banking lies before us is that over the last 40 years, the lack of gold and silver to back the banknotes in circulation has been replaced by the expectation that governments, and by extension their subjects (citizens), will produce enough goods and perform enough services to repay the obligations represented by the banknotes. As the unrestricted quantity of banknotes and obligations to deliver banknotes in existence will always tend to exceed the stock of goods and services, these obligations are impossible to repay.

Human beings are fallible.  It is normal and should be expected that they will not be able to deliver on certain obligations.  The natural beauty of banknotes redeemable in gold and silver was that, if it was suspected or observed that a person or entity would be unable to pay their obligations, the creditor would move to seize the gold, silver, or other assets that the debtor had pledged as collateral.

The seizure of collateral or the threat of seizure was often enough to correct the failed human action or decisions that were leading to the net loss of wealth incurred by the activity which was undertaken.  In economic parlance, we would call this the correction of the malinvestment of resources.

Without gold and silver to act as a natural limitation on the supply of banknotes and other forms of credit, the bad decisions that lead to the malinvestment and the activities that lead to the destruction of wealth and resources can continue for a very long time.

The use of gold and silver as money had another, more important function that is often overlooked.  Gold and silver are inert, non-consumable objects.  Their hoarding and use as money will not generally cause starvation or want.  In fact, the hoarding of gold and silver of money would have the effect of lowering general prices as productivity increased, naturally creating an incentive to decrease production which in turn would raise prices, making the expenditure of more silver and gold necessary and in turn raise prices, creating a natural  incentive to produce.

Gold and silver allow the economy to naturally regulate itself and, by virtue of the difficulty in extracting them, cause the rest of the earth’s resources to be used in harmony with each other.

Finally, gold and silver are inanimate objects.  Their recognition and possible seizure as collateral does not threaten the liberty or life of a person.  However, because modern central banking has replaced money proper and placed credit in its place, it will become increasingly common to entire societies held as security for a debt that many of them had no direct hand in creating. This is the logical end of using credit as money.

It is the truth that will bring tragedy to the earth.

Without the natural counterbalance to trade and growth which gold and silver money had provided for over 9,000 years, man’s activities, whether productive or destructive, have continued nearly unchecked for the past 40 years.  It is staggering to think of the catastrophe that awaits if man is truly on the path to destruction.
Man, by nature, is always on the path of destruction, but the use of gold and silver as money served to correct him before he strayed too far down it.

Most people alive today have been trained to believe that using Gold and Silver as money is an unnecessary and environmentally harmful process.  Even Adam Smith believed that if the effort expended to mine metals to create money could be directed to other, more useful activities, that humanity would be better off.

What Smith did not realize was that man would not always direct its energies to useful activities.  Like modern Socialists, he underestimated the power of self interest inherent in all human action.  Today we are preparing to reap the consequences of 40 years of unrestricted and more often misguided human actions.

While it may be too late to avoid the catastrophe that Modern Central Banking may bring upon us, it is comforting to know that a return to the understanding and use of gold and silver as money offers hope for a future of truly infinite possibilities.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

P.S.  For more ideas and commentary please check out The Mint at http://www.davidmint.com/

Key Indicators for October 21, 2011

Copper Price per Lb: $3.23
Oil Price per Barrel:  $87.40

Corn Price per Bushel:  $6.49  
10 Yr US Treasury Bond:  2.20%
FED Target Rate:  0.07%  ON AUTOPILOT, THE FED IS DEAD!

Gold Price Per Ounce:  $1,642 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%
Unemployment Rate:  9.1%
Inflation Rate (CPI):  0.3%
Dow Jones Industrial Average:  11,809  

M1 Monetary Base:  $2,056,000,000,000 RED ALERT!!!
M2 Monetary Base:  $9,570,500,000,000 YIKES UP $1 Trillion in one year!!!!!!!

Dual Entry Accounting - Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastropche - Part IV – The Catastrophe at Hand

10/20/2011 Portland, Oregon - Pop in your mints…

For those of you who have missed Part I, Part II, and/or Part III, you may read them by clicking on the following links:

Dual Entry Accounting - Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe - Part I

Dual Entry Accounting - Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe - Part II - Irony

Dual Entry Accounting - Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe - Part III – Money or Credit?

Again, for those of you who are too lazy to click the links, here we offer a brief summary to get you up to speed:

Central Banking is the physical expression of Man’s need to safeguard his wealth and to increase trade.  A Central Bank’s usefulness and scope were greatly increased when dual entry accounting could be employed to manage a Central Bank’s accounts.

The Central Bank’s role as a storehouse of wealth has generally attracted the attention of the Government, which is the physical expression of Man’s need to protect his life.  The Government, in this capacity, does not generate wealth and must maintain itself either by taxing its subjects or borrowing funds.

The Central Bank, as the repository of wealth and facilitator of trade, by default creates a majority of the banknotes which circulate in a society.  As such, the Central Bank becomes the natural creditor of the Government.  Whether it lends funds directly to the Government or indirectly, the result is the same.  That result is that the use of its subject’s wealth by the Government is greatly facilitated by the existence of a Central Bank.

Having established the fact that some form of both a Government and a Central Bank will naturally, in some form, come into existence and become increasingly interdependent, the only question is one of the size and scope of such entities.

Today, that the scale of modern Central Banking is excessive and that the potential for catastrophe is unprecedented.

The reason for the unprecedented scope of Central Banking is that money, as it is widely understood today, does not really exist.  Rather, banknotes issued by Central Banks, which are by definition credit instruments, are misunderstood to be money proper by a majority of the people in the developed and semi-developed world.

This misunderstanding flies in the face of 9,000 years of human history, in which Gold and Silver in bar and coin form have been tacitly used as money proper.  It is this misunderstanding which has set the stage for the greatest catastrophe in history to occur.

Federal Reserve Notes Begin to Replace Gold and Silver as the concept of Money for a Generation

 The misunderstanding of money and credit began, like many experiments, in Northern Europe with the establishment of the Bank of Amsterdam.  Established in 1609, the Bank of Amsterdam is widely recognized as at least a precursor to modern central banks.  For over 400 years since it was established, the use of banknotes issued by a Central Bank which are not directly convertible to coin has slowly but steadily increased.

Modern Central banks issuing banknotes were subsequently formed in Europe, England, and Japan.  As these Central banks and their successors began to slowly absorb the true money supply and issue banknotes in their place, man began to slowly transfer the concept of money proper from Gold and Silver and attribute the qualities of money to the banknotes issued by the Central Bank.

This process of wealth absorption greatly accelerated in 1913 when the United States of America granted a 100 year charter to its third Central Bank, the Federal Reserve.  The FED, as it is commonly known, was to act primarily as a reserve and to create "money" (read banknotes) as necessary.  At the advent of World War I, the FED stepped in and issued bonds to finance the war and after the war the FED was granted exclusive control of the money supply in the United States.

In 1933, in the midst of what was to be the great depression in the US, President Franklin D. Roosevelt signed Executive Order 6102 which required citizens to deliver all but a small amount of gold coin and bullion held by them to the FED in exchange for $20.67 worth of Federal Reserve notes (the banknotes issued by the FED) per ounce.

Naturally, most citizens with large quantities of gold at the time had it transferred to Switzerland.
Then, by decree, the Government raised the price of redeeming gold from the FED to $35 per ounce.  Redemption could only be made by Foreign parties as, naturally, it was now illegal for US Citizens to own gold.

Federal Reserve notes were now the only form of "money" that an entire generation of Americans were likely to handle.  However, foreigners could still redeem the Federal Reserve notes for gold, though they rarely did, at $35 per ounce.

After World War II, the US emerged as the most powerful nation on earth.  It was only natural that the western governments would peg their currencies at a fixed exchange rate to the US dollar (Federal Reserve Note) which was redeemable in gold at $35 per ounce.  This is commonly known as the Bretton Woods system.

The system held together for around 20 years, accepting that $35 US Dollars were as good as gold until 1968, when things began to get dangerous...

Stay tuned and  Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

P.S.  For more ideas and commentary please check out The Mint at http://www.davidmint.com/

Key Indicators for October 20, 2011

Copper Price per Lb: $3.06
Oil Price per Barrel:  $86.34

Corn Price per Bushel:  $6.50  
10 Yr US Treasury Bond:  2.18%
FED Target Rate:  0.07%  ON AUTOPILOT, THE FED IS DEAD!

Gold Price Per Ounce:  $1,622 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%
Unemployment Rate:  9.1%
Inflation Rate (CPI):  0.3%
Dow Jones Industrial Average:  11,542 

M1 Monetary Base:  $2,056,000,000,000 RED ALERT!!!
M2 Monetary Base:  $9,570,500,000,000 YIKES UP $1 Trillion in one year!!!!!!!

Dual Entry Accounting - Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe - Part III – Money or Credit?

10/19/2011 Portland, Oregon - Pop in your mints…

For those of you who have missed Part I and/or Part II, you may read them by clicking on the following links:

Dual Entry Accounting - Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe - Part I

Dual Entry Accounting - Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe - Part II - Irony

For those of you who are too lazy to click the links, we do not blame you.  Below we offer a brief summary to get you up to speed:

Central Banking is the physical expression of Man’s need to safeguard his wealth and to increase trade.  A Central Bank’s usefulness and scope were greatly increased when dual entry accounting could be employed to manage a Central Bank’s accounts.

The Central Bank’s role as a storehouse of wealth has generally attracted the attention of the Government, which is the physical expression of Man’s need to protect his life.  The Government, in this capacity, does not generate wealth and must maintain itself either by taxing its subjects or borrowing funds.

The Central Bank, as the repository of wealth and facilitator of trade, by default creates a majority of the banknotes which circulate in a society.  As such, the Central Bank becomes the natural creditor of the Government.  Whether it lends funds directly to the Government or indirectly, the result is the same.  That result is that the use of its subject’s wealth by the Government is greatly facilitated by the existence of a Central Bank.

Having established the fact that some form of both a Government and a Central Bank will come into existence and become increasingly interdependent, the only question is one of the size and scope of such entities.
Central Banking, like alcohol and socialism, may be a good idea when used in moderation.  However, each one of these also represents a catastrophe waiting to happen.  For if the circumstances under which they are created or used take an unfavorable turn, they wealth and lives of many may be lost in a very short period of time.

It is clear today that the scale of modern Central Banking is excessive and that the potential for catastrophe is unprecedented.

How, when, and most importantly why will this catastrophe take place?  As mere mortals, we can only answer the why and speculate as to the how and when.

Why, then, will the current system of Central Banking come to an end which will cause wealth destruction on a scale which will make the weapons of war seem like child’s play in comparison?

The answer, fellow taxpayer, is that money as it is widely understood today does not really exist.

You read correctly.  What a majority of the developed and semi-developed world uses as a store of wealth, unit of account, and medium of exchange, is a figment of the collective imagination.

Allow us to explain.  It is generally understood today that the value of money is not necessarily in money proper, rather the value of money is found in the ability of the bearer to exchange said money for goods and services.  What is often overlooked in this observation is that, for money to be exchanged for something of value between willing participants of a transaction, what is used as money in the transaction must be universally perceived to have value that is easily transferable between parties.

Following this logic, what society uses as money is, by definition, simply another good which is widely recognizable as useful in exchange and therefore carries a price premium (we will call it the monetary  premium) of a certain amount usually far above what some economists would incorrectly* call the good’s “intrinsic” value.

* We say incorrectly because value judgments, while often influenced by what are known as “market” or “intrinsic” values, are by definition made by the individuals who willingly enter into a transaction, not disinterested observers.  It is for this reason that it is more accurate to appraise value by observing price points of transactions on “the margin” (i.e. transactions that are actually taking place) as opposed to appraising value based on past transactions or transactions imagined to take place in the future.  Many are the hypothetical gains and losses of those who refuse to enter into transactions because they are waiting for and offer at “market prices” or the “intrinsic value” of an item.

Regardless of the monetary premium that a good may carry, whatever is used as money, by definition, must be a tangible good.  Otherwise, we are dealing with credit, which is a promise to pay in money at a future date. Credit may be given in exchange in the place of money and is often traded at a discount to money delivered immediately. 

The distinction between money and credit is common knowledge to but it is important to make a clear distinction in order to properly understand what happens next.

In roughly 9.000 years of human history, it has been tacitly agreed upon that silver and gold, usually in coin or bar form, are the highest and most widely recognized goods used as money and that the accumulation of silver and gold represent wealth. 

Examples of Money Proper - Courtesy of Mark Herpel - www.dgcmagazine.com

As you recall, the concept of a Central Banking arose in response to the need for man to protect his wealth.  You will further recall that in order to both protect wealth and facilitate trade, a Central Bank creates banknotes which represent a claim on the wealth being protected by the Central Bank. 

These banknotes which the Central Bank creates are, by definition, credit and not money.  They are generally the highest, least discounted, form of credit which is traded, but this does not change the fact that the banknotes are credit and thus carry an implied risk of default.  This risk of default places the ultimate limit on the circulation and acceptance of the banknotes in trade.

From time to time, when a Central Bank’s ability to protect the wealth entrusted to it came into question, banknotes would be presented to the Central Bank to be redeemed for the amount of silver and gold which they represented.  If the Central Bank could not produce the amount of silver and gold that was being redeemed, the Central Bank was considered to be in default and, as word of the default spread, the banknotes in circulation would trade at an ever increasing discount to real goods.

This logic further supports the fact that banknotes are credit, subject to default risk, and not money proper.

Can you now smell the impending catastrophe?  Or, to put the question more directly:

What’s in your wallet?  More tomorrow,

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

P.S.  For more ideas and commentary please check out The Mint at http://www.davidmint.com/

Key Indicators for October 19, 2011

Copper Price per Lb: $3.25
Oil Price per Barrel:  $86.11

Corn Price per Bushel:  $6.38  
10 Yr US Treasury Bond:  2.16%
FED Target Rate:  0.07%  ON AUTOPILOT, THE FED IS DEAD!

Gold Price Per Ounce:  $1,671 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%
Unemployment Rate:  9.1%
Inflation Rate (CPI):  0.3%
Dow Jones Industrial Average:  11,505  

M1 Monetary Base:  $2,201,800,000,000 RED ALERT!!!
M2 Monetary Base:  $9,554,000,000,000 YIKES UP $1 Trillion in one year!!!!!!!

Dual Entry Accounting – Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe – Part II – Irony

10/17/2011 Portland, Oregon – Pop in your mints…

 

For those of you who have missed or long since forgotten Part I, please take a moment to review it here:

 

Dual Entry Accounting – Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe – Part I

 

Our tale continues:

 

As the Fixed income markets continue to crumble, all eyes in Finance are now on a summit of European leaders that will take place next Sunday, when many persons will be watching sporting events, enjoying the outdoors, protesting, or toiling to eke out a meager existence on this earth.

 

What happens in Europe next Sunday may be simply another act in the game of extend and pretend that until now has been the only strategy employed by Western governments and their Central Banks in response to the bankruptcy of the world’s largest banks and governments.

 

On the other hand, it may be a Pearl Harbor type of event for the Euro and other currencies.

 

Since we do not know what will befall mankind this coming Sunday, we must endeavor to understand how the Western world has arrived at this critical juncture in history.  We began last week, by exploring the often underestimated contribution of Luca Pacioli to the commonwealth of society:  The dissemination of Dual Entry Accounting methods used in Genoa, Florence, and Venice circa 1492.

 

Today, we will explore the great irony that Dual Entry Accounting – what we call man’s greatest innovation, has made possible what we are calling man’s greatest catastrophe, Modern Central Banking.

 

In order to do this, we begin with a brief history and explanation of the concept of Central Banking and its relationship to government.

 

The concept of Central Banking is rooted in man’s need for security as well as his recognition of his co-dependence on his fellow man to increase his well being through trade.  It takes time and energy to obtain and protect wealth.  It also takes time and energy to barter with counterparties while trading differing goods without a suitable means of exchange.

 

A bank, in its simplest form, provides a secure place to store wealth.  A natural extension of this activity is for the banker to extend credit and act as a clearing house for commerce by assuming a de facto role as an issuer of currency in the form of banknotes which represent a claim on wealth held at their bank.  The existence and circulation of these banknotes greatly facilitated trade.

 

As trade and consequently the wealth of mankind increased both in volume and geographical reach, there was increasingly a need for a larger banking interest to store the excess wealth of the individual banks and to honor the banknotes emitted by the individual banks.  This larger banking interest, formed by and for the benefit of the individual banks, is what we today call a Central Bank.

 

The complexity of maintaining banking accounts was greatly facilitated and made possible on a large scale by the use of dual entry accounting.  The ability for individual banks to maintain accounts on a larger scale made possible the existence of a Central Bank to act as a clearing house amongst banks.  Hence, our premise that Dual entry accounting enabled Central banking.

 

Now, on to the role of Government in relation to Central Banking.  If Central Banks arose because man needed someone to look after his wealth, governments arose because man needed someone to look after his life.  Governments were formed in response to the natural human need for a common defense.

It is not hard, then, to imagine that Governments, in whatever form, relied heavily upon and supported the formation of both individual banks and Central Banks.

Why would Governments need banks and Central banks?

 

Governments are generally given license by the members of society to use whatever means necessary to preserve their lives.  As such, they assume the role as the apparatus of compulsion and coercion in that society.

 

As the apparatus of compulsion and coercion, the government, by definition, cannot generate wealth.  At best, it can only create the conditions under which individuals may create wealth, but the activities of government as a provider of security never directly create wealth.  Because they cannot create wealth, they must either borrow from or tax the populace in order to fund their activities of compulsion and coercion.

 

Storage of Wealth and Tax Collection Service provided with a smile

The Central Bank, as the ultimate repository of wealth, offers a convenient source of both credit and, in a later wave of Central Banks of which the Federal Reserve is a prime example, tax collection services.

As you can see, a Central Bank is an indispensible institution both for individuals in terms of storing wealth and facilitating trade, as well as for Governments who have an insatiable need for tax revenues and credit.

 

The existence of a Central Bank, for all of the benefits that it may bestow, unwittingly makes the wealth of those it serves a natural target for those who are anxious to obtain that wealth through unjust means.

 

Central Banking, like alcohol and socialism, may be a good idea when used in moderation.  However, each one of these also represents a catastrophe waiting to happen.  For if the circumstances under which they are created or used take an unfavorable turn, the wealth and lives of many may be lost in a very short period of time.

 

Needless to say, the scale of modern Central Banking is beyond what would be advisable, and the potential for catastrophe is unprecedented.

 

How, when, and most importantly why will this catastrophe take place?  We can only answer the why, and we will tackle it tomorrow as we are spent.

 

Stay tuned and Trust Jesus.

 

Stay Fresh!

 

David Mint

 

Email: davidminteconomics@gmail.com

 

Key Indicators for October 17, 2011

 

Copper Price per Lb: $3.35
Oil Price per Barrel:  $86.24

Corn Price per Bushel:  $6.40
10 Yr US Treasury Bond:  2.15%
FED Target Rate:  0.07%  ON AUTOPILOT, THE FED IS DEAD!

Gold Price Per Ounce:  $1,671 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%
Unemployment Rate:  9.1%
Inflation Rate (CPI):  0.4%!!!   UP UP UP!!!
Dow Jones Industrial Average:  11,397  

M1 Monetary Base:  $2,201,800,000,000 RED ALERT!!!
M2 Monetary Base:  $9,554,000,000,000 YIKES UP $1 Trillion in one year!!!!!!!