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The Emperor's Old Bills

March 25, 1999

The far-eastern financial crisis has spilled over into Russia, and is now threatening Latin America. The American economy is doubtless going to suffer from the same illness, and financial markets everywhere are jittery. I have decided, therefore, to set aside a couple of minutes to solve this problem. Enough is enough!

As a Monetary Realist, I have an advantage similar to that of the youngster in the fable of the Emperor's New Clothes. Blissfully unaware of what he was supposed to think, or what all the experts "knew," the lad in the story simply opened his eyes and looked at the facts: the Emperor was in his BVDs.

The facts regarding the worldwide economic problems are not too hard to discern: loans have been made which cannot be repaid. Bank assets are being destroyed, because those assets are the IOUs of the borrowers, and if the borrower goes belly-up, the "asset" goes down the drain. And the bank fails---until it can be reopened under another name, with new management.

We have written before about the necessity of the banking industry to appear like any other: overwhelm the assets with liabilities, and the business fails. Bank deposits, created from nothing by the banks, are its liabilities. The IOUs of the borrowers are the assets. Were banks to continue to lend despite the fact that repayments were not being made, the public might eventually awaken to the fact that banking is an incredible scam, totally unlike any other business. Were that perception to become widespread, there would be no more point in maintaining the illusion, and economic chaos would ensue until a sound system, based upon wealth, not "credit," was re-inaugurated. Nobody takes counterfeit if they know it is counterfeit, although immunity from prosecution for passing it (legal tender laws) surely helps.

The solution to the present crisis, therefore, requires secrecy. Here's how it would work: Asian banks (or Russian) would approach their biggest borrowers and quietly, and without fanfare, inform them that the terms of repayment have been changed. Even just a few yen or rubles per month would stave off foreclosure. The banks, in other words, would simply not allow the customers' IOUs to become worthless. Rather, without fanfare or publicity, they would do whatever was necessary to keep the account active, and the IOU, therefore, "good." Additional infusions of "credit" would be kept to a minimum, and austerity would be the word, at least for a while. The banks simply would not fail, balance sheet notwithstanding. No more preposterous, if you think of it, than the lending of imaginary money, which is accepted without question.

In other words, the banks would have to temporarily set aside the practice of appearing to be like other businesses. (Is that unfair? Why should banks be the only businesses that can declare their IOUs to be "money?") Hopefully, in the confusion and distress of the present crisis, no one would notice, and those who did would realize the advantage of keeping mum about it. After all, every business that closes means fewer goods available for purchase, and greater dependency upon imports, as well as fewer workers able to afford goods, whether domestic or imported: a vicious circle.

The "runs on the banks" which we have seen in the nightly news reports on the Russian economic crisis are simply silly. What does the bank have that people can run to? The government/banking axis should admit that the presses are incapable of keeping up with the demand for currency, and issue the public checks, instead. Depositors with any sense at all will realize that the authority which decides whether a given check is "good" or not is the bank; the bank's own checks will, therefore, inevitably, be "good." Customers who simply won't be satisfied with anything less than those beautifully engraved chits can be assured that, when supply once again matches demand, they can bring back their checks to the bank (if they have not already spent them) and reclaim their lovely, colorful rubles, or whatever.

It bears repeating: modern money is all psychology. Satisfy those people lined up at the bank, and the news programs will have nothing to show on the nightly business report. Keep the factories and plants going, and there won't be disconsolate workers milling about photogenically, to create suspicion and concern. Allow the bank's books to go slightly out of sync, at least for a while. It sure beats the alternatives. There can't be a banking crisis if nobody knows it!

When the youngster piped up with "The Emperor isn't wearing any clothes," the country could have been thrown into pandemonium. People might have demanded explanations; formed committees, urged the passage of laws. Closets could be searched for any signs of additional fraudulent clothes. Arrests might have been threatened, and martial law imposed. Or the Emperor could simply have ducked into some doorway until an aide brought him some clothes, and the matter hushed up. His propagandists could have referred to it as an "unfortunate rumor," circulated by his enemies (no doubt a vast conspiracy), and promised that greater care would be exercised in the future.

Why, in other words, create pandemonium about something which is imaginary, whether the Emperor's clothes, or modern money? Banks cannot, except to maintain the illusion of money as something valuable and real, fail. The time has come to set aside that illusion, although carefully and temporarily, without fanfare, so as not to diminish the public's confidence in the "money" they give their lives to obtain and save. It shouldn't be difficult. A public that believes that it has earned some thing when it is paid in credit, will believe anything. Why disillusion the public about the money, when the money itself is an illusion?

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