This Dark Age

A manual for life in the modern world.

By Daniel Schwindt

This Dark Age is now available in paperback on Amazon. The print version is MUCH cleaner than this online version, which is largely unedited and has fallen by the wayside as the project has grown. If you’ve appreciated my writing, please consider leaving a review on the relevant paperback volumes. The print edition also includes new sections (Military History, War Psychology, Dogmatic Theology).

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“Money must serve, not rule!”[1] But money cannot be kept in its place, and indeed money will always rule, if its nature and purpose is misunderstood or if it becomes a tool for the exclusive use and manipulation of a specific class.

In our experience a great deal of the disagreement regarding monetary policy stems from misconceptions, confusions, and a general lack of knowledge concerning the nature of money itself. When faced with the question, “What is money?” it seems that most of us have dealt with it, as a concept, for so long that we take its nature as something commonsense; but if we stop to consider it in any detail, we realize that we have no idea how our money system actually functions. Thus, at the risk of digressing too far from our subject, we will attempt a brief description of money and its behavior under the present system.

i. The nature and purpose of money. Money is not wealth, but rather it represents wealth. It is a unit of account used in trade which represents a claim on the circulating wealth in the economy. All money is therefore fiat currency, which means that it is created “out of nothing” and established by social agreement.

What establishes a currency as “official” is the fact that it is declared legal tender and accepted by the government for the payment of taxes. This ensures that money will always retain at least some value. This also hints at the method of regulation of the money supply: when the government needs the money supply to shrink, it can tax the money out of existence—when the money supply needs to grow, the government can simply “spend” new money into the economy. This creates a “dynamic” and adjustable money supply.

A dynamic money supply is an essential component of a stable economy for the simple reason that economies are subject to constant fluctuations. A simplistic example may suffice:

Imagine that in some village the only product on the market is wheat, and that the harvest one year is 1,000 bushels. The community adopts a paper currency and prints $1,000 dollars. In this situation, $1.00 amounts to a claim on 1 bushel of wheat. This is the value of that dollar. But the next year a farmer develops a new method of crop rotation or fertilization and the village produces 2,000 bushels of wheat. This means that the economy doubled in size. In this situation, if the money supply remains at $1,000, the value of the currency will double, leading to unfortunate results in terms of savings and outstanding loans. That’s why, if the village economists are paying attention, they will simply spend another $1,000 into the economy, perhaps on infrastructure or education. The money supply will then grow in proportion with economy. By ensuring that the money supply mirrors the market, the market will remain stable. If, on the other hand, the village economists had adopted gold or some other commodity-money, they would suffer chaos since the quantity of gold is not adjustable but is tied directly to supply. Under a “gold standard” the value of the currency would not be able to adjust itself in accordance with the market, and values would be thrown askew. In short, the economy would become subject to the vicissitudes of inflation and deflation.

This is why, even if it sounds counter-intuitive, the quantity of money must be capable of shrinking or expanding, because the economy itself is always shrinking or expanding—more so as markets become larger and more complex. This is why attempts to adopt static (or mostly static) commodities as official currency—gold, for instance—are doomed to failure. These commodities can be monopolized or scarce. The supply then falls out of sync with the market as a whole, at which point the value of the money rises or falls without any necessary connection to the needs of the market. Money’s only purpose is to facilitate trade, and under these conditions it will instead disrupt it. The market itself will become subject to the supply of gold, or whatever commodity happens to be in use as currency.

ii. Money as a commodity. As we said above, money is not meant to be traded: it is meant to facilitate trade. This means it is not something manufactured for a market, even though it has no meaning apart from the market. That there is such a thing as a “money market” is itself a sign of dysfunction. When money comes to be treated as a commodity—when we come to believe we can “put our money to work” for us—we are left with a situation where those with an accumulation of money also have a virtual accumulation of goods which they are encouraged to “sell” at a price in order to make a profit. Individual’s begin to “rent out” their money, just as you’d rent out a car and charging for its use. In other words, those who have money can loan it out and collect interest.

This is not the same as investment—for in investment it is assumed that one’s earnings will be proportional to the profits of the endeavor. If the endeavor turns out to be unprofitable then the investor gets no income. But when interest is collected on money without regard to the profits earned from its actual use, this is called usury, and has been condemned by everyone from Moses to Christ to the medieval Church, even if it has become the basis of the entire modern economy. The most significant problem with a system in which usury is normalized is that it automatically stacks the deck against the poor. If money makes money, then the more money you have, the more you will be in a position to make. Those with more will make more while those with less will make less, and this will create a perpetual disadvantage in the market toward those who are least in a position to bear that disadvantage. Likewise it will confer perpetual benefit on those which have least need of the advantage.

iii. The fractional reserve system. It is possible to go one step further, not only tolerating usury but adopting it as a basis for the money system itself. This is precisely what has occurred in the contemporary economy in the form of the fractional reserve system. Henry Ford found this system so absurd that he famously remarked that, were the American people to understand it, there would be a revolution before breakfast.

The method of this system is implied in the name: “fractional reserve banking.” Within this system a bank is only required to have on deposit a small fraction of what they loan, say 10%. For example, if you were to deposit $10,000 in the bank, the bank would be required to keep $1,000 “on reserve.” The bank could then create loans for the remaining $9,000. However, none of the original deposit is actually loaned out. This is why, when you go back to the bank, they will never reply: “Sorry, your money is on loan.” On the contrary, they simply “create” the new loan amount as a debit in the borrowers account. The $9,000 of created loan money now counts as a new deposit on the banks books, and so the bank now has $19,000 “on deposit,” even though the original deposit was only $10,000. In addition, this means that $900 of the imaginary money will be marked for the 10% reserve, and then the rest of the “deposit” can be used to create another loan for $8,100. Again, this “new money” is not subtracted from the deposits, but is instead created by a flick of the pen as a new debit in the bank’s books. Again and again, 10% of the new deposit will be marked for reserve and the rest used to create loans, and so on, until the original deposit of $10,000 is transformed by fractional reserve magic into $90,000. Almost all of this consists of purely imaginary loans on the bank’s books. And on all of this debt, created out of thin air, the bank collects interest.

This process, although we have simplified it somewhat for our purposes here, is how money is created in the modern economy. This means that the videos you watched in school that showed actual paper dollars rolling off of the presses in “the mint” actually do not at all represent the real process of money creation. Paper money only makes up about 3% of the money supply. The other 97% is created through fractional reserve banking, for the benefit of the banks, and on which these banks collect interest.

iv. Money as debt. The observant reader will have already realized that under such a system almost all circulating money is actually debt. The dollars you have in your bank account actually represent the balance of a loan that you or someone else took out at some point and which was itself based on nothing but a charter granted to a private bank.

Now this is, of course, quite in accordance with the concept of money as a thing created out of nothing (“fiat”), except that it has been perverted and rendered dysfunctional. In healthy cases the fiat currency is adjusted (increased or diminished) based on the requirements of the economy, while in the case of the fractional reserve system, the nation is placed in such a position as to be required to borrow the use of its own money…at interest to private banks. In such a system the banks own the money supply and the rest of the nation rents it.

Needless to say, this short-circuits the public purpose of an adjustable money supply and instead creates what is called a “perverse incentive” on the part of the banks to create as many loans as possible, because every new loan means new income in the form of interest. Not only does this destroy the stability of the money supply, but it also makes the risk of the credit market completely one-sided. Even if it looks at the outset like banks do take on risk since borrowers could always default, but the results of the 2008 collapse have proven that what actually happens in such systems is quite different. When borrowers default, the banks, being “too big to fail,” are simply bailed out by the State, which is to say, by the taxpayers. For the borrower it is a lose-lose, and for the banker it is a win-win. And at the root of the whole system is a validation of the same usurious principles that have been condemned through the millennia.

v. Possibilities. Keeping in view the fact that the Church does not deal in technical solutions, we must restrict ourselves to the presentation of the system as it is, and the brief mention of alternatives which seem to conform to the principles of reason and the Christian tradition. It is not our purpose here to argue in favor of any one solution, or to suggest such a technical preference on the part of the Church. While it seems quite clear that the fractional reserve system is incompatible with the doctrines of the Church, any suggestions above pertaining to what might be an appropriate solution should be taken as simplistic and offered merely for the purposes of contrast. That is to say, any real solution will be more complicated than the simple abolition of the fractional reserve system, although such an act would be a decent start.

[1] EG, 58.

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