# Follow the Money ## Metadata * Author: [Ruben Alvarado and Natalie Peters](https://www.amazon.com/Ruben-Alvarado/e/B002BLLDCK/ref=dp_byline_cont_ebooks_1) * ASIN: B00B9GA72K * ISBN: 1482350289 * Reference: https://www.amazon.com/dp/B00B9GA72K * [Kindle link](kindle://book?action=open&asin=B00B9GA72K) ## Highlights Under the regime of coinage, the state and the mint establish valuation by imputing value to the coins they mint, which will always exceed the market value of the material used (otherwise the coins would be melted back down into <32>bullion). The state can only do this as long as it can maintain the legal order in which a fiduciary currency can function. Hence, fiduciary currency is a function of the legal order and cannot exist without it. — location: [435](kindle://book?action=open&asin=B00B9GA72K&location=435) ^ref-42620 --- Polanyi's analysis lends equal credence to an alternative explanation: the market economy had been hitched to a faulty monetary mechanism. When that failed, it dragged the market economy down with it. — location: [1820](kindle://book?action=open&asin=B00B9GA72K&location=1820) ^ref-43519 --- How can the money supply expand and contract in accordance with the rhythms of the broader economy, if it is fixed to a quantity of things that in the nature of the case never expands and contracts accordingly? — location: [1886](kindle://book?action=open&asin=B00B9GA72K&location=1886) ^ref-32577 --- Steuart's great achievement was to liberate money issue from a commodity base by realizing that the essence of banking was the creation of credit on the basis of, and as a representation of, property - any kind of property, defined as a marketable asset. — location: [1891](kindle://book?action=open&asin=B00B9GA72K&location=1891) ^ref-17595 --- It was the collateral that provided the value against which money was issued. — location: [1898](kindle://book?action=open&asin=B00B9GA72K&location=1898) ^ref-41916 --- The Scottish banking system was erected upon this basis, and subsequently produced the spectacular growth shown by the Scottish economy in the 18th century. Noting this, Steuart tendered some sage advice: "To [the Scottish banks of private credit] the improvement of this country is entirely owing; and until they are generally established in other countries of Europe, <152>where trade and industry are little known, it will be very difficult to set these great engines to work." (238) — location: [1938](kindle://book?action=open&asin=B00B9GA72K&location=1938) ^ref-17052 --- What is striking is that nowhere does Steuart make convertibility into specie a defining characteristic of these banks. For Steuart, these banks did not extend credit on the supposition that every issue was backed by specie deposit. They extended credit simply on the basis of good securities, thus qualifying property encumbered as collateral; and in the case of the Bank of England, specie is also required to maintain the balance of payments with foreign countries. In effect, Steuart was waving the specie-based money supply good-bye. — location: [1953](kindle://book?action=open&asin=B00B9GA72K&location=1953) ^ref-58741 --- In English eyes, banks were a problem. Attempts to establish them, on the basis of Steuartian principles of solid property, were met with Parliamentary legislation banning them altogether, a rather odd procedure considering that they were allowed, at least in restricted fashion, in the mother country as well as in Scotland. But the underlying rationale is clear: the colonies needed to be kept in a dependent condition. — location: [1998](kindle://book?action=open&asin=B00B9GA72K&location=1998) ^ref-16285 --- a second Currency Act, this one in 1764, mandating that "no act, order, resolution, or vote of assembly, in any of his Majesty's colonies or plantations in America, shall be made, for creating or issuing any paper bills, or bills of credit of any kind or denomination whatsoever." (247) — location: [2005](kindle://book?action=open&asin=B00B9GA72K&location=2005) ^ref-11050 --- many colonists were no more enamored of paper money than were the English. (248) But these seem mainly to have been those - plantation owners and merchants - with direct connection to English merchants. This explains the aversion to both paper money <157>and banks by such figures as Thomas Jefferson, who couched that aversion in high-sounding moralizing about the virtues of thrift, avoidance of debt, and honest money. — location: [2011](kindle://book?action=open&asin=B00B9GA72K&location=2011) ^ref-61868 --- "That a paper currency, issued to an excessive amount, by thirteen sparsely settled colonies, in a state of rebellion, under a revolutionary government possessing only a shadow of authority, against the most powerful nation on the earth, should have circulated at all, is one of the most remarkable facts connected with the Revolution, and is to be accounted for only by the patriotism of those engaged in that memorable struggle.… It circulated for over a year at par with silver, and in 1778, three years after the first emission, it depreciated only to $1.75 for $1." (251) — location: [2024](kindle://book?action=open&asin=B00B9GA72K&location=2024) ^ref-36978 --- The new nation would be built on the principles enunciated by James Steuart, whereby banks of circulation, generating credit on the basis of good securities - melting property into symbolical money - provided the liquidity needed by a burgeoning economy impatient of the artificial restrictions imposed by a rigid metallic-currency requirement. — location: [2036](kindle://book?action=open&asin=B00B9GA72K&location=2036) ^ref-35571 --- The parallelism is not pure coincidence. The initial step - ending convertibility and adopting a paper standard - was a reaction in both countries to the financial pressures of war. As in the United States, Britain's decision to return to a specie standard reflected the desire to have a "sound money" and the outrage of the financial community, holders of government bonds, and some economists at the inflation produced by the departure from a specie standard. Though Britain's choice of gold instead of silver for this purpose was something of an accident, it was a major reason why the United States made the same choice roughly 60 years later. (262) — location: [2125](kindle://book?action=open&asin=B00B9GA72K&location=2125) ^ref-56750 Similar trends in monetary system of Britain &amp; the US but 60 years apart. --- For its part, monetarism (central-bank created money supply) maintains the fractional-reserve banking system but replaces specie with central-bank-issued money, called "hot money" or "high-powered money." Because the rest of the banking system has to hold some dictated level of reserves in the form of this "hot money," monetarists consider it to have some sort of metaphysical quality lacking in deposits created by other banks, even though in essence there is no difference between the two. Monetarists believe that by manipulating the "quantity" of "hot money" they can expand and contract the money supply. The only problem is that the "broader" money supply does not oblige them by expanding and contracting accordingly. The current situation of low prices and low economic activity despite central banks' fevered attempts to generate inflation is an indication that monetarism does not quite fit the facts. — location: [2200](kindle://book?action=open&asin=B00B9GA72K&location=2200) ^ref-19733 --- "When the uninitiated first learn that the number of dollars which note holders and depositors have the right to draw out of a bank exceeds the number of dollars in the bank, they are apt to jump to the conclusion that there is nothing behind the notes or deposit liabilities. Yet behind all these obligations there is always, in the case of a solvent bank, full value; if not actual dollars, at any rate, dollars' worth of property." — location: [2218](kindle://book?action=open&asin=B00B9GA72K&location=2218) ^ref-14512 --- "The bank finds itself with liabilities which exceed its cash assets; but this excess of liabilities is balanced by the possession of other assets than cash. These other assets of the bank are the liabilities of business men. These liabilities are in turn supported by the assets of the business men. If we continue to follow up the chain of liabilities and assets, we shall find the ultimate basis of the bank's liabilities in the concrete tangible wealth of the world." — location: [2226](kindle://book?action=open&asin=B00B9GA72K&location=2226) ^ref-32076 --- Through banking, he who possesses wealth difficult to exchange can create a circulating medium based upon that wealth. He has only to give his note, for which, of course, his property is liable, get in return the right to draw, and lo! his comparatively unexchangeable wealth becomes liquid currency. To put it crudely, deposit banking is a device for coining into dollars land, stoves, and other wealth not otherwise generally exchangeable. (269) — location: [2235](kindle://book?action=open&asin=B00B9GA72K&location=2235) ^ref-30455 It is not just current wealth but also expected future wealth discounted to the present. --- "Essentially, therefore, the business of a bank is a form of suretyship - the guaranteeing of its borrowers' solvency - an underwriting of the credit of its customers. The bank transfers its customers' prospective future paying power into present funds. It is for this reason that the contract takes the form of a money loan and the premium the guise of an interest payment." (275) — location: [2284](kindle://book?action=open&asin=B00B9GA72K&location=2284) ^ref-13040 --- cash actually plays a subordinate role in the total circulation, being used mainly as reserve to meet artificial requirements. This, in turn, is a legacy of the days of specie convertibility, a vestige of the time when "central" banks - actually, monopoly bullion brokers - controlled the money supply through management of the specie base. — location: [2299](kindle://book?action=open&asin=B00B9GA72K&location=2299) ^ref-36313 --- Money generated through the agency of banks is money issued in terms of an appraisal of future opportunity, not past accumulation - a fundamental difference. — location: [2324](kindle://book?action=open&asin=B00B9GA72K&location=2324) ^ref-55423 --- Such a situation is moving towards its inexorable climax at the moment of writing (Autumn 2012), with the great difference that each of the member nations - which as of now are still semi-sovereign nations - has its own welfare-state apparatus shielding its citizenry from the ravages of the fixed-exchange rate regime. But this very regime stands in the way of the kind of adjustment a fixed-exchange rate regime requires, namely, wage declines within a deflationary environment. — location: [2410](kindle://book?action=open&asin=B00B9GA72K&location=2410) ^ref-59379 --- The scholars who have done the most to restore this connecting link to economic theory in our day are the German trio of Heinsohn, Steiger, and Stadermann. — location: [2448](kindle://book?action=open&asin=B00B9GA72K&location=2448) ^ref-62747 ---