Money creation ex nihilo by private banks “is theft“

Lars Schall talked with James Turk, the founder of GoldMoney, about his new book, “Money and Liberty“.

By Lars Schall

James Turk studied International Economics at George Washington University before starting work at Chase Manhattan (now J.P. Morgan Chase). Further career stations were at RTB, Inc., a private investment and trading company; the commodity department of the Abu Dhabi Investment Authority in the United Arab Emirates; Greenfield Associates, which specialized in investment research and trading advice for hedge funds, commodity traders and investment managers; and Lion Resource Management Ltd., a London-based firm which advised funds that invested in the equities of companies involved in the mining and exploration of precious metals. In 2001, Turk launched GoldMoney, a patented digital gold currency that allows the instant transfer of gold, silver and platinum between user holdings. GoldMoney is the largest digital gold currency in the world. For more information visit: https://www.goldmoney.com/. In late 2021, he published the book, “Money and Liberty — In the Pursuit of Happiness & The Theory of Natural Money“ (Wood Lane Books).

Lars Schall: James, what motivated you to sit down at a table for hours, days, and weeks, in order to write your new book, „Money and Liberty“?

James Turk: I decided to turn it into a book after starting to write about it for my two sons and three grandchildren. I want them to benefit from my five decades of experience in international finance, and particularly, for them to have this written record about my view on the critical link between money and liberty. I am concerned for their sake because the world is less free today than when I was growing up in the 1950s. That is because governments have exerted ever greater control over economic activity and the circulating currency, which is increasingly being turned into a political tool domestically and a weapon internationally. Governments are doing this to perpetuate a monetary system that favours demagogues appeasing tax-eaters over those in the citizenry who are taxpayers. It is not surprising to see all these stark conflicts today between different groups touting various political ideologies. It is a reflection that the monetary system is broken. People are looking for solutions to repair it, but today’s system of currency and banking cannot be fixed. It is built on a faulty premise that the system must ‘inflate or die’, but central banks cannot inflate forever because currencies eventually collapse. Attempts to continue inflating a broken system means there will be more regimentation, financial repression, and less freedom to act. The dire situation in Venezuela is a good illustration of that progression from freedom to tyranny, from bad currency to a collapsed currency. Increasing inflation and more regimentation will be dominant forces affecting everyone’s life in 2022.

LS: In your new book you state that one has to consider that money is different from currency. Please explain.

JT: The word “currency” only came into being when banks began forming in the seventeenth century. This new word made it clear that banks were issuing something entirely different from the gold and silver their clients deposited for safety in a vault, instead of leaving their precious metal in their home. Banks transformed the precious metals into paper currency and bookkeeping entries that came with risks not found in money. National currencies are not money, but only a money-substitute circulating in place of money, which of course is gold.

LS: So, as far as you are concerned, these words by J.P. Morgan from 1912 are true even today, namely: „[Credit] is an evidence of banking, but it [credit] is not the money itself. Money is gold, and nothing else.“

JT: Yes, exactly. Currencies arise from bank balance sheets. That is what J.P. Morgan was explaining in his testimony to the American Congress in 1912 when he said that credit is not money. A currency is a liability of the bank that issues the currency, and that is the “credit” to which he was referring. The value of a currency is based on bank promises, and these are the source of the risks inherent in all national currencies. We know from monetary history that sometimes promises are broken, with banking panics and financial crises as the result.

Money has four functions, not just the three generally accepted today. The fourth function of money is beyond the capacity of national currencies to deliver because they are not a tangible asset. Currencies cause banking panics and financial crises. Currencies and too much bank credit were the cause of the Great Depression, not gold nor the Gold Standard. People should not believe what they may read in statist textbooks or hear from statist economists promoting more government intervention in the economy and everyone’s life. It just takes some reading and research to learn the truth.

LS: In your book, you deal with the fact that private banks create money ex nihilo. What is wrong with such a system – beyond the fact that financial crises in general are credit crises caused by the private financial system? (1)

JT: It is theft. Banks steal everyone’s most precious asset, which is each person’s time on earth. We spend our time working to earn purchasing power. Then banks use accounting to create currency ‘out of thin air’, which debases our earned purchasing power, stealing the time we spent to earn it. That theft explains why writers in the Age of Enlightenment, including the framers of the American Constitution, understood currency debasement to be a crime against humanity. So the US Mint Act of 1792 made debasement of currency punishable by death, yet today central banks make currency debasement of 2% per annum or more a stated policy. What is worse, they then try to claim they are doing a good thing.

Do you remember when Ben Bernanke was Fed chairman, and he said the Federal Reserve could drop dollars from helicopters to increase the quantity of currency? For sake of an example, assume he doubled the quantity of dollars overnight. You now have twice as many dollars competing for the available goods and services, which did not double overnight. So their prices rise in what we today call inflation. Most people generally accept inflation as if it were an inevitable infliction – but inflation is not inevitable. It is man-made, or to be more precise, it is bank-made. There is no inflation when using natural money, which of course is gold as J.P. Morgan told everyone in 1912 and no one questioned or doubted him. People back then understood money, but that wisdom was widely lost in the twentieth century because governments abandoned the Gold Standard.

Not only is creating currency ex nihilo theft, it is also fraudulent. There is a difference between the earned purchasing power (EPP) achieved by spending one’s time to create something of value and the phantom purchasing power (PPP) conjured up through bank accounting. For example, earning €50,000 during the course of a year from hard work is fundamentally different from €50,000 conjured up ‘out of thin air’ in seconds with bank accounting. Yet national currencies do not convey this difference between EPP and PPP. Governments have passed laws claiming that all currency is identical, no matter the source of the purchasing power the currency conveys. The fraud arises because banks and governments financially benefit from this deception.

Looking at it fundamentally, humanity advances from labour diligently applied to a task that creates value in the form of useful goods and services. These in turn provide the basis for commerce through human interaction, regardless whether farming food, building homes, manufacturing cars, or mining gold, which as I explain in “Money and Liberty” is natural money.

LS: Is it of interest that the commercial banks in the U.S., which create new money via double-entry book keeping, are members respectively owners of the 12 regional Federal Reserve Banks?

JT: I favour private ownership of all property because secure property rights are the basis of a free market-oriented society, which is the structure that has enabled humanity to advance over the millennia and raise our standard of living. However, I object to the Federal Reserve System for two reasons. I already explained how it steals peoples’ time. Second, it is a cartel preventing new technologies from improving the way payments are made in commerce. The banks and the federal government protecting their cartel are Luddites because they are fighting new technology to protect their existing business and the high fees their cartel can extract. Central bankers and the governments protecting them are resisting new technology and advancements in communication, which is what money is all about. Money communicates purchasing power from payer to payee. Bank currency does that too, but only with financial repression and the loss of liberty from regimentation as well as all of the problems, risks, and costs of national currencies.

LS: The currency expert Bernard Lietaer told me once that the “fundamental purpose“ of central banks “is to protect the monopoly of the currency in favor of the banking system and having one single currency. …(T)hat’s their real role.“ (2) Do you agree?

JT: It is indeed one role, but not the main one. I’ll use the banking cartel in America as an example. It is protected by the US federal government because the cartel members serve the federal government’s interests by making sure it has all the dollars that politicians want to spend. That is why central banks exist, except for the Bundesbank. Its independence is derived from the Part 3 of the Bundesbank Act which says: “the Deutsche Bundesbank shall be independent of and not subject to instructions from the Federal Government.” But everything changed with the euro and the transfer of currency creation power to the ECB.

When the Bundesbank managed the Dmark, it followed the law and was not under political control. The Bundesbank’s managers did not have to turn German government debt into Dmark currency, with the consequence that the German government lived within its budget. Compare that to what is happening with the euro and the ECB, which is blowing out its balance sheet by buying debts and paying for it with newly created euro currency. No one should be surprised by the surge in euro inflation, which is likely to get worse because the ECB’s managers are under control of the EU’s politicians, the exact opposite of what the Bundesbank Act prevented from happening.

LS: Do we need central banks?

JT: No, we don’t. America did not have a central bank from 1836 to 1913, which was a period of unprecedented economic growth only temporarily interrupted by a bloody war between the North and South, which I think shows that a central bank is not needed. What’s more $20.67 could be exchanged for an ounce of gold anytime from the end of the America’s War for Independence up until 1913 and the creation of the Federal Reserve. Since then Americans have suffered from the theft of their earned purchasing power from more than a century of dollar debasement as measured by gold, which today is near $1800.

LS: What would you do to solve our systemic financial problems? What kind of role would gold play in your proposal?

JT: America could lead the change by going back to the Constitutional dollar, which is 11.368 grains of fine gold. It would then stop the theft of earned purchasing power and the fraud of phantom purchasing power. There is no need for the Federal Reserve, which brings up an interesting point for which few people are aware. What we call a US dollar is actually a Federal Reserve dollar, a F$. All F$s are a liability of the Federal Reserve, which is a corporation owned by banks. The risk of holding F$s needs to be considered given that the federal government’s debt is denominated in F$s. If we keep in mind that the federal government defaulted on its debt in 1933 and again in 1971 and has broken other promises too, one begins to understand the risks of holding F$s. The Federal Reserve is leveraged 212-times, with F$8,716 billion of liabilities and only F$41 billion of capital. So if the Federal Reserve went bankrupt, the value of the F$ would plummet and the federal government’s F$30 trillion of debt would return to the ‘thin air’ of bank accounting from where it came. Contemplating an event like that highlights the risk of financial assets and the importance of true wealth, which of course is tangible assets, whether farmland, timberland, a house, gold, silver, etc.

LS: You argue in your book that there is a link between money and liberty. What is the connection?

JT: Money is gold, and its link to liberty is inextricable because liberty is dependent upon political honest money that only gold can provide. Look at it this way. Governments need purchasing power to have political power. Following Marxist precepts, the communist Mao Zedong said that political power comes from the barrel of a gun, but governments cannot create bullets out of thin air. So they work with the bank cartel to create phantom purchasing power out of thin air fraudulently conveyed though currency that governments then borrow to get the purchasing power they need to buy bullets. Gold cannot be created out of thin air. So when gold alone is a country’s money, its limited quantity throttles government spending. One of the points I explore in “Money and Liberty” is a speech given in 1948 by Howard Buffett, the father of Wall Street legend Warren Buffett. The elder Buffett makes the point that there is liberty when citizens control their government, but tyranny when government controls the citizens. Two things are needed for citizens to have control of their government – voting and gold as the country’s money, just as the framers of the American Constitution envisioned and enshrined in that venerable document.

LS: Coming back to gold, the physical possession of gold means to have an asset with no counterparty risk. Germany stores about 49 percent of its gold reserves in New York City and in London. The Bundesbank said they want to leave it there, after it repatriated some overseas gold holdings in order to prepare for a „currency crisis“ if it occurs. (3) Conversely, this means that only half of the total of around 3,300 tons of gold is located on German soil – and is therefore not subject to any counterparty risk. The Russian Federation stores 100 percent of its gold reserves at home (2/3 in Moscow, 1/3 in St. Petersburg). Accordingly, Russia may still possess less gold than Germany, with just under 2,300 tons, all in all; nevertheless, all of that gold is free of counterparty risk. What are your thoughts on this?

JT: There are several reasons the Bundesbank should store all of its gold in Germany. Their stated reason for not doing so – to be prepared for a „currency crisis“ – ignores some basic facts. To prepare for a currency crisis, the euro would be replaced by a return of the Dmark, which is still legal tender in Germany. I think the pre-euro managers of the Bundesbank probably understood that the euro would eventually fall under political control and collapse from inflation, which would bring about the return of the Dmark. But to be effective in a currency crisis, the Dmark would need as much gold backing as possible, so that gold should be in Frankfurt, not New York, London, or anywhere else. The US federal government has US defaulted twice on its promises to redeem dollars for gold, so what if it chooses not to return Germany’s gold? What’s more, the original reasons the gold was stored outside of Germany are not valid because gold is no longer used for payment in international transactions. There is no reason whatsoever for the Bundesbank to store any gold outside of Germany.

LS: One last question, where can readers find “Money and Liberty: In the Pursuit of Happiness & The Theory of Natural Money”?

JT: It available on Amazon.

LS: Thank you for this interview, James!

JT: Thank you, Lars.

Notes:

(1) Cf. Richard Vague: A Brief History of Doom – Two Hundred Years of Financial Crises. University of Pennsylvania Press, 2021.

(2) Cf. https://www.youtube.com/watch?v=ykvRceBQRl8.

(3) Cf. Germany Repatriating Gold From NY, Paris “In Case Of A Currency Crisis“. Forbes, January 16, 2013.

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