Base Money

Modern society is full of complexities dressed in fancy jargon to make things look scientific and well thought out. However, things are at their base very much the same as things have always been. The myth of modernity is an illusion designed to make us feel comfortable with what is ultimately a precarious and unstable system. In particular, our current monetary system is perilously close to collapse, something that we can see in the explosive growth of base money.

To understand the significance of this, we first have to look through the fancy jargon of monetary theory. In truth, there's only money and credit, and money is gold, nothing else, as J.P. Morgan famously stated back in 1912. Hence, the dollars that we use as reserves today are not money. They are money substitutes. They act as money, but are in fact credit. Specifically, dollars are credit notes based on our trust in the US government as a tax collecting enterprise. If this trust is lost, all dollars lose their value, and we learn the hard way what J.P. Morgan told us. Only gold will retain its value. Dollars will not get us anything.

It further follows that money does not come in different flavours. There's only one type of money and that's gold. Everything else is currency. Base money in our current credit based system is in fact base currency. It's a special type of credit that can be issued only by central banks. Hence, it's possible to quadruple its supply in a matter of months. There's no special skills required. Base currency is issued through fiat. It's declared into existence.

Base money, on the other hand, would be a bank's gold holding on top of which it could issue credit notes. The credit notes could then circulate in the economy as currency while the money resides in the bank, and this is the system that we had when we were on the classic gold standard. Back in those days, only the naïve would take credit notes as being equal to gold. However, today there really isn't any difference between base currency and credit based on this base currency. It's all credit, and it can all one day evaporate into nothing if trust in the US government falters.

Furthermore, history tells us exactly what happens when base money is expanded so we can be fairly certain about the effect of the current expansion of base currency. Spain was once the world's most powerful nation, and one would have expected this to have continued due to its discovery of gold in the new world. With more money to spend, there should be more wealth. However, the opposite happened. Local industry shuttered, there was price inflation, and there was a massive wealth transfer from the average guy to the ruling elite. As Richard Cantillon put it in his book: Where money is created, industry dies.

The massive increase in base currency in the US will produce the same effect. Manufactured goods will be imported, the elite will get richer, and the middle class and poor will suffer. This process lasted hundreds of years in Spain, with Fascism under Franco as the low point. Hopefully, the US will fare better, even if their monetary experiment is far more insane than what the Spanish embarked upon in their heydays.

Sovereign

By Heritage Auctions for image, Mary Gillick for coin - Newman Numismatic Portal, Public Domain, Link