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The Poker Game as Debt-Based Monetary System

This is as good as description of the money system as I have ever seen so I have posted it all here. Link to the Economic Stability for more of where that came from.

The Poker Game as Debt-Based Monetary System
by Peter Young

The defines a monetary system as the “set of mechanisms by which a government provides money (cash) in a country’s economy. It usually consists of a mint, central bank, and commercial banks.”

The monetary system of a whole country like the US, or a whole planet, is a difficult concept to grasp. My accountant who is far brighter than I in mathematical matters, remembers briefly studying money creation in grad school, and being mystified by it.

In order to develop an informed opinion about how our monetary system is working, one must juggle a plethora of dizzying concepts like: money supply, money velocity, foreign exchange, interest rates, inflation/deflation, debt levels, and GDP. Economics is like the Cosmos; it has no fixed point from which to gauge our bearings; everything moves all of the time.

In the face of such mystery, it is human to poke at the subject in myth or metaphor. In that tradition, I present a gross oversimplification of a monetary system that I think pretty much anyone can understand:

Seven friends want to play poker; they have a deck of cards but they don’t have any chips.

They could create their own money system, with toothpicks or matches, perhaps. As long as they trusted each other not to bring in extra, unauthorized toothpicks (counterfeits), such a system would work perfectly well to keep track of who won what from whom. But before they think of this, an eighth man shows up with a large collection of poker chips; we’ll call him Bill.

Bill offers to lend each poker player 100 chips for a year, but he needs one percent interest in return. Thinking “where else could I find chips at 1%,” each one agrees.

The men play poker all year long with the borrowed chips; they keep track of innumerable transactions. At the end of the year, three guys have more than a hundred chips, three have fewer than 100 chips, and one breaks even. Four of the seven cannot pay back their loans. They are in default, and if they had pledged any collateral to get the chips in the first place, they lose that.

It is possible that only one player would come up short; if he had lost only six of the hundred chips over the year, and each other player had netted one chip, then there would only be one “default”. But note that there is no way that the seven players can all pay their debts at the end of the year, not even if they agree to become comrades and share their winnings and losings at the end of the year, because the men owe Bill 707 chips and there are only 700 in existence. If they cooperate on that level, they all default.

This is as stark an example as I can come up with for this precept that I encounter over and over in the monetary reform literature; in a debt-based money system (like ours), the banks only create the money for the amount of the principal on the loan, not the money to pay the interest on the loan.

Look at what our debt-based micro-economy has pointed out so far, as well as some questions that it suggests:

A) Bankruptcy is inevitable at the end of the year.

It seems to me like the seven poker players gave away a lot of power to Bill for something they could have created themselves. What value did Bill contribute to the activities at the poker table other than providing an accounting system?

B) In a debt-based money system, if all debts are paid off, there will be no money.

We hear about how “the Fed and the banks create money out of thin air and loan it into existence,” which is true. (By the way I know of no more effective statement to ignite righteous indignation in the novice, and most of the old timers I met at the Conference haven’t let it go either.) What we hear less often is that the Fed and the banks “extinguish” the money they created as principal when the loan is paid off.

Create money, extinguish money? This is a place where many people, myself included, can glaze over and feel like we’re not smart enough. But I can understand these concepts on the level of the poker game. It means there was no money until Bill created it and figured out how to get it into circulation, and there was none (extinguished, or 7 chips less than extinguished) available after the men paid off their debts.

C) It is useful to ponder here what gave the chips their value. They are not silver coins with their own intrinsic value; they’re just ordinary plastic poker chips. Defenders of the debt-money system would say that the chips derive their value from the players promises to pay the money back in the future. But anyone who has played poker or Monopoly or any game with play money knows that the money derives its value from an agreement among the players that that is the system they are going to use to keep track of all the transactions.

D) Labor and resources are available, as is the desire to trade. All they lacked was a way to keep track of who wins or loses how much, in other words–an accounting system, or–a monetary system.

E) There is no reason to call Bill a bad guy. He suggested an arrangement, and the players agreed.

Now let’s leave the poker game with its clearly dysfunctional monetary system behind and turn our attention to the monetary system that really matters: ours. Having been in place for almost a hundred years now, it has some staying power. It is different from the poker game in some obvious and fundamental ways.

For one thing, in the real world, we don’t pay off all of our loans at the same time. Money that was created as principal on a loan due next year can be used to pay interest on any loan due today.

Another significant difference in the poker economy is that Bill does not play cards. In the real economy, banks participate in the economy; they build buildings and pay employees so the money they collect in interest can go back out into the economy where it can be recycled many times, making many interest payments. (Money paid as interest on loans is not extinguished.)

But the biggest reason this monetary system is still around is that our total amount of debt grows every year. Granted, the national debt has declined several times in history, most recently in the late 90’s, but the total debt of our whole society ( Total Credit Market Debt which is government + consumer + corporate debt) goes up every year.

To conclude the poker analogy for now, though, I go back to the question: what are the advantages of borrowing poker chips from Bill over the players just providing their own?

The U.S. Constitution is clear about who has the power to create our money: saying in Article 1, Section 8 that “the Congress will have power to … coin money (and) regulate the value thereof.” To be sure, it doesn’t expressly prohibit Congress from giving this power to a private entity like the Fed, and then borrowing it back at interest. That’s why, in 1913, Congress could give away its/our right to create money to the Fed and private banks, from whom we have borrowed it back with interest ever since.

As the Total Credit Market Debt chart shows, since 1950 nominal debt has not only grown every year, but it has also grown faster than the economy every year (it graphs the debt/GDP ratio). Since the economy is the only place we can get the money to service the debt, the toll that these payments take on society rises each year. Because a greater percentage of the economy is going to service debt, a smaller percentage is available to produce and maintain the things that really contribute to our quality of life. And bridges start collapsing.

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