The Law On Money Creation: Why Governments and Central Banks World Over Are Afraid Of Cryptocurrencies Or Stablecoins

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Editor's Note: Article Updated. Find More Context On Facebook's Libra Here And Read More of Our Coverage On Crypto Here.

Mid 2019, Trump Slammed Cryptocurrencies, and Libra and praised the Dollar As World’s “Most Dominant Currency.”

After reading this, you will discover the truth about how money is created. In truth, you will realize that the creation of Fiat money (Government paper money) is not any different from President Trump’s claims that cryptocurrencies are created out of thin air.

Governments and commercial banks are scared of losing their power to create money out of this thin air.

Ever since President Trump’s predecessor Richard Nixon “temporarily” suspended the convertibility of the dollar into gold (gold standard), something that has long become permanent, the Americans lost the moral authority to claim that the dollar is backed by value.

There used to be a time when all major world currencies were pegged to the dollar because the dollar was redeemable in gold.

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This was possible because, after World War II, the U.S. had most of the world’s gold because everybody had bought from the U.S., so every country had to keep some dollars in reserve to redeem their currencies in Gold. This changed.

These days, the money supply of the dollar or any currency isn’t based on the amount of gold in reserve.

Governments the world over, including the U.S., increase money supply at will. Therefore, the money supply is increased out of thin air based on nothing.

Contrary to what you were taught in school, it is not only governments that create money out of thin air but commercial banks do so too.


READ MORE: Bank of Uganda Successfully Defends Crypto Ban


Most people think that Banks lend depositors’ money which is totally wrong. The figures banks type in our accounts when we are granted a loan are out of thin air too.

The only thing you offer in exchange is your mortgage security. There is nothing illegal about this (as I will explain later).

In the U.S., U.K & EU, they had something called a reserve ratio of 1:10, meaning, banks could only expand the money supply through granting of new loans up to 10 times the amount of real government-created money.

However, those countries abandoned this. They now lend money regardless of the reserve ratio. In other words, they just type numbers in an account whenever they grant a loan.

In Uganda, according to the Financial Institutions Act, 2004, and the Financial Institutions (Liquidity) Regulations, 2005 we have something called a liquidity ratio.

A liquidity ratio is deceptively similar to a reserve ratio but fundamentally different. A liquidity ratio requires banks to hold liquid assets equal to a certain percentage of their deposits.

For example, if a liquidity ratio is set at 10%, then it means a bank with 100 dollars in a customer’s account would need to hold 10 dollars of liquid assets.

Properly understood, liquid assets include cash, Central Bank reserves, and government bonds.

The liquidity ratio has no bearing on the limiting effect of the total amount of money that the banking sector can create as a whole but at least a reserve ratio does this better.

The Bank of Uganda liquidity ratio only acts as a speed limit to the amount of money supply that is created by commercial banks.

Even in Uganda, loans are created out of thin air. Banks neither lend their money nor part of their liquid assets. They just have to make sure they hold 20% liquid assets of all their bank deposits. This has the effect of increasing money supply in the economy.

When you ask some officials at the Bank of Uganda, they will tell you that banks don’t create money. They just create credit. This is erroneous. Any person well versed in bank operations will tell you that the key component of “credit” is that, it has something called “credit risk,” – the risk that a person or company that owes you money will not pay you back.

For a bank to prove that the numbers they enter into your account when you make a deposit are credit not money, they have to show some kind of credit risk attached to the deposit.

In a legal sense, the numbers banks enter into your account aren’t money. Any lawyer will tell you, that when you place your money in a bank as a deposit, you become a creditor to that bank. That money effectively becomes a liability to the bank.

The figures entered into your account are just a promise to pay from the bank. In fact, when auditors carry out an audit on the bank, they will classify all deposits as liabilities picked up by the bank.

However, in Uganda, we have a deposit protection fund and the U.K. has something like the Financial Services Compensation Scheme. These schemes promise to pay you a certain amount of your deposit money in case your bank goes bursts and loses all your money.

This, therefore, nullifies credit risk on your deposits. When the government guarantees these deposits, it effectively converts the risky credit of the bank into a risk-free form of money backed by taxpayers’ funds which government permits private banks to create out of nothing.

Therefore, Donald Trump’s claims that cryptocurrencies are created out of thin air aren’t only limited to cryptocurrencies but also Government created fiat money.

In fact, history has it that during wars, Governments printed money out of thin air in case they were broke.

So Trump should cut the *crap* on Cryptocurrencies. What does the U.S. Federal Reserve base on doing quantitative easing to increase money supply, if it doesn’t do so out of thin air too?

You should also remember that during Quantitative Easing (QE2), global food prices went up 60% and this created a humanitarian disaster for the 2 Billion people who live on less than 2 dollars a day. (Source: “Dollar crisis,” book by author Richard Duncan, former IMF & World Bank consultant).

When Nixon did away with the fact that you could convert the dollar to gold, it was just by accident – after almost 6000 years that humanity finally accepted money as an idea rather than a thing.

As John Law would say, money is just a medium by which things are exchanged not the value for which they are.

Personally, I see no problem with “Libra” – Facebook currency, as a medium of exchange on the network.

After all, even fiat government currencies have no innate value. Facebook’s libra, will be pegged to 8 major world currencies, unlike commercial banks and central banks that create money out of thin air.


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