UNDERPINNINGS 2.0
An Update 55 Years Too Late
In Video Diagram #3 we observed the remarkable “auto-pilot” mechanism by which the Reserve Banking System causes fiat money to be issued, as necessary, to monetize the profit-making initiatives that Private Enterprise (in aggregate and without political consideration or debate) chooses to pursue.
If everything we required as an economic society could be provided by this mechanism, that would be the end of the story.
There is, however, a crucial category of goods and services we need—often desperately need—for our collective well-being that the profit-making Reserve Banking mechanism utterly fails to provide for: Goods and services that CANNOT generate financial profits!
Specifically, we are speaking here of things for which there is no “paying customer” at all—think of toxic waste cleanups or fighting wildfires—or things which cannot be produced at a profit-making price that most people can afford to pay—think of modern medical care or affordable housing.
These kinds of initiatives do not—and cannot—generate fiat money within the Reserve Banking System for the simple reason that private banks cannot issue loans that are not projected to generate financial profits. And without bank loans there are no new claims on Reserves which might cause the FED to issue new fiat dollar Reserves. No matter how desperately they are needed, the Reserve Banking mechanism is “blind” to not-profit-making initiatives (NPMs).
To generate funds to pay for NPM goods and services, another fiat money mechanism comes into play—and it is here that our misunderstandings run rampant down a rabbit-hole of self-inflicted misery:
Our pre-1971, hard-currency, go-to narrative tells us the government must pay for NPMs by collecting taxes, or by BORROWING dollars from the profits of Private Enterprise—and this belief creates a nightmare of political warfare: One side proposes to appropriate currency for an NPM initiative because it is needed—and the other side exclaims “How Are You Going To Pay For It?” because taxes are already too high and the national debt is unsustainable! The result is a stalemate in which virtually nothing gets accomplished at all—and our collective well-being suffers the consequences.
What we’ll now observe in VIDEO-DIAGRAM #4, however, is that the accidental miracle of 1971 rendered all this posturing, conflict, and stalemate obsolete.