Q&A:s The Monetary System & Fractional Banking

Discussion in 'Economics' started by JohanLinden, Aug 31, 2011.

  1. A look into the arguments against our current monetary system, and the criticism surrounding fractional banking with fiat money.

    There are thousands of opinions and experts that claims that our monetary system, a fractional banking system backed by fiat money, is doomed to fail. The idea got even more popularized by the criticized but also praised documentary Zeitgeist. There is also a lot of critical, often gold-related, websites such as gold-eagle and lewrockwell who make these claims.

    Here follows a summation of some arguments used to criticize our current monetary system:

    Our monetary system is totally based on fiat (faith) money without any real value or promise. What many people, especially from the younger generation, do not know is that there was a time where people could exchange their money for gold. Today they are guaranteed to exchange their money for exactly nothing in the end.

    All things will at some time in history return to its intrinsic value. That means that paper money will at some point be worth only the paper it is written on.

    Debt grows exponentially, while the economies' of states grows like s-shaped curves. That must lead to a debt that will sooner or later being too big to being paid back. All economies depending on this monetary system will therefore eventually crash.

    Although the claims above seem very logical, a few arguments arise that are not so often answered by the people who are making those claims:

    1 You are not forced to take credit. So you are never forced to pay any exponentially growing interest to some evil bank. How bad can it be to let people freely do business with their own chosen terms?

    2 Most creditors are likely to be included in our economies. The economies that we are told will be destroyed be the exponentially growing interest in the long-run. So the only thing that can really happen to our economy is that money goes from the people making bad business to the people who are doing smart business. Kind of like how the system has worked since the beginning of time.

    3 Even if we had a gold standard we could and would still have exponentially growing debt. If you lend someone ten ounces of gold you would still want to have eleven ounces back. So that argument is not specifically related to our current monetary system, but to all free economy systems.

    4 If the fractional banking system of today is so bad, how come most countries, that are economically and politically stable, have had their monetary system intact since War World II?

    5 The fact that debt is growing exponentially may sound alarming, but exponentially only means that it grows by a certain factor every year. If debt increases by 2% every year it is growing exponentially, but it is growing at a fairly low rate. It will take 35 years for that debt to double. The growth of debt is met by economic output, such as services, natural resources and production of goods which is constantly being added to the economy. So an exponentially growing debt will be met as long as people work. Increasing debt also means inflation or that the value of money/debt decreases. With an increasing population and economic growth there should be no problem with an increasing amount of money or debt as long as it increasing in harmony with other economic outputs such as houses, cars, or plates with food. In the long-run there will be a problem to produce an ever-increasing stream of those products, but that is an ecological problem and not a problem of the monetary system.

    Please feel free to come with other questions or if you are one of those questioning the current monetary system try to answer one or more of the questions above.