Two Loaves


Recently, I’ve been trying to zero in on a peculiar set of ingredients that seem to be baked into our economic pie―and which are depriving that pie of a sustenance we, as a collective society, need it to provide. The peculiar ingredients have to do with our monetary system. Specifically, the fact that we―whether intentionally or by happenstance―have put in place and operate a money system that seamlessly creates dollars, as necessary, for profit-making enterprise, but specifically does NOT create dollars for not-for-profit ventures.

To illustrate, let’s imagine that I use a dollar that I already have to pay for a bag of flour. Using my labor and artisan skill, I turn the bag of flour into a loaf of bread. I then sell the loaf of bread for three dollars. It’s possible the person who buys the loaf of bread will pay for it with three dollars he already has. It’s also possible, however, that he already possesses only one dollar, and has to borrow the other two from a bank. The bank, as we now know, doesn’t make this loan by removing two dollars from its deposits, but rather by depositing two new “bank” dollars (think of them as placeholders for real dollars) in the borrowers account.

The borrower of the two dollars writes me a check for the loaf of bread. I deposit the check in my bank account, adding three dollars to it. Two of them, however, are the “bank” dollars created by my buyer’s bank. For my bank to be made good, these two “bank” dollars from the other bank have to be replaced with two real dollars. This is done by a grand “clearing” process which takes place at the end of every business day at the U.S. central bank, the Federal Reserve. For the “clearing” to occur, there have to be enough real dollars to make good every check written on another bank throughout the entire monetary system. It is not an option for some of the checks not to be made good because “there aren’t enough dollars” in the system.

But we can see by what has transpired that the two additional dollars I received by making and selling my loaf of bread―my profit―are dollars which did not exist in the system at the beginning of the day, before I made and sold my loaf. When the final tally of the “clearing” is made at the Federal Reserve, for all the checks to be made good, there are going to have to be at least two real dollars MORE in the system than there were the day before. But this problem is transparently and instantaneously solved by the Federal Reserve: it simply creates, electronically out of thin air, the two additional dollars needed to complete the day’s “clearing.”

Thus, the monetary system automatically creates the dollars necessary to cover my two dollars profit. And my two dollars profit gives me a dollar of income AND enables me to buy another bag of flour and bake another loaf of bread. So this is truly a great system!

But now let’s imagine that I spend my dollar (that I already have) to buy a bag of flour, and that I use my labor and artisan skills to transform that flour into a loaf of bread―but this time I give it away to a homeless person. The “functional” result of the venture is the same: somebody who needs it gets a loaf of bread to eat. But the monetary system doesn’t create any money, I get no income for my effort and, most important, I get no replacement dollar to buy another bag of flour with. I’m out of business. If I want to make another loaf to give to another homeless person, the dollar for that bag of flour will have to come from somewhere in the existing money supply. (The money system, as we insist on operating it, cannot “create” the dollar because a bank will not lend me a dollar for a non-profit venture because the bank needs to make a profit on its loan.)

In aggregate, then, the money system we’ve established and operate so efficiently only creates money, as it’s needed, to cover the profits of profit-seeking ventures. No money is created for ventures which do not make profits. This dynamic is doubled down on by the fact that we also operate with the institutional insistence that the sovereign government, if it decides to undertake something for the collective good, must pay for for that collective good with “tax dollars”―which are dollars previously created in the profit-earning system.

There are two things peculiar about this. First is the implied premise that profit-seeking ventures are inherently good, while not-for-profit ventures are merely optional “niceties” that we can pay for on the side, so to speak. The second is our insistent belief that the money system we have cannot rationally be managed in any other way.

With regard to the first peculiarity, it is easy to see that profit-seeking ventures often do great harm, even though they may generate great profit (and cause a lot of dollars to be created). The coal-mining industry is a perfect example, having generated profits for generations but, as we now discover, has left huge swaths of our landscapes and watersheds destroyed and unusable by either man or nature and, in the process, has raised the CO2 levels of the atmosphere to the point of destabilizing our climate.

With regard to the second peculiarity, it would SEEM to be the most rational thing imaginable to pay now-out-of-work coal miners (and a lot of others as well) to recover and restore the destroyed landscapes and watersheds―to make them productive again for the needs of man and nature. This could easily be accomplished, for example, by setting up a “National Not-For-Profit Workforce” and giving it an account at the Federal Reserve. The FED would then credit the account with “keystroke” dollars, as needed, to pay for the work.

But we cannot imagine that we could do such a thing. We imagine that money cannot be created this way (in spite of the fact that we have everyday proof that it can)―that money, for some unexplained reason, has to be created ONLY for profit generation rather than the simple doing of useful work. The extreme absurdity of this can be found where the profit-generating venture produces, in fact, nothing whatsoever of real use or value―the derivatives gambling of the financial industry comes to mind―while the not-for-profit venture produces something of extraordinary utility: a shelter for homeless mothers and children, for example.

The result is that our economic pie only provides a limited sustenance (except for those who have a disproportionate slice of it). Many of the things we truly need―clean air and water, free health-care and education, affordable housing, reliably secure retirement years―the pie does not provide. For those kinds of things, we must instead rely solely on what the profit-seeking ventures decide it is worth their while to sell us. Alternatively, we must rely on the charity of the super-rich. But the only dollars our charitable foundations have are the dollars which have already been created for profit-seeking enterprises. In other words, we NEED two kinds of loaves. The question we must answer is why we only allow ourselves to create dollars to bake one of them?

21 Responses to Two Loaves

  1. Never forget one fact. Every successful bank loan removes some money from the economy and adds none. Another fact, that money removed by the bank is replaced either by the Fed buying national debt from the economy or sovereign spending by the government or by banks lending more the next time around which produces an exponential increase in loans. Look at historical loan data and you will see that an exponential rise in loans is a fact. I am not an expert on clearing house operations but I do not think money is created in the clearing process. It is only, I assume, a bookkeeping operation.

    • Charles Layne,
      The kind of facts you describe are exactly what I’d like to forget because they do not help us to understand anything but, instead, obfuscate reality. Speaking of the “Fed buying national debt” reinforces the myth that the U.S. sovereign government has a national debt that it must someday repay. It does not. It is merely holding U.S. dollars in the “savings accounts” of its U.S. treasury bonds—and paying interest on those savings accounts, which it does (and can continue to do indefinitely) by electronic keystrokes. Trying to explain the real potential benefits of modern fiat money by explaining the intricately complex and ill-named operations of the monetary system, as it’s currently managed, only makes it harder for collective society to perceive it is getting stiffed.

      • Howard Switzer

        Yes, J.D. as any physician will tell you treating the symptom just masks the disease. We need to make the disease clear to most of everyone, don’t we? Do we need two loaves, or do we just need to change ownership of the loaf from private to public so that it is shared more responsibly? (If the private system is left in place it will work to get that currency out of circulation as has happened before with the Greenbacks.) Then we can bake a loaf large enough to satisfy the needs of people and planet. Money should be a public utility not something issued for private gain, same with water and air, healthcare and education and infrastructure. To allow this mess to continue seems irresponsible. We’re not broke, its time for some political medicine, time for some democracy, I think, not a private sovereignty of elites, those at the top of that thin beanstalk we see in the wealth distribution graph.

  2. How do I see the comments without making one myself?

  3. I found this exposition really helpful. Thanks

  4. Maxwell Downham

    The moral of the story seems to be that as long as we won’t help the injured Samaritan
    by the roadside unless there’s a profit to be made from the gesture, we’ll keep on track
    on our voyage to Hell. It’s not much of an ambition for the most intelligent species on the planet.
    All the unintelligent ones don’t have this trouble.

  5. Greg Hamilton

    ” … by setting up a “National Not-For-Profit Workforce” and giving it an account at the Federal Reserve. The FED would then credit the account with “keystroke” dollars, as needed, to pay for the work.”
    While we’re at it, let’s get the fox community to agree to look after our chickens for us while we’re away on holiday.

    • The Wall Street foxes are already doing a fine job! Have been for quite a while now. The chickens seem to be having a bit of difficulty tho.

  6. QUOTE Frederick Soddy, (The Role Of Money-1932),
    “… every monetary system must at long last conform, if it is to fulfil its proper role
    as the distributive mechanism of society. To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government.”

    • The nail was hit on the head in the year of my birth! It was a timely publication too, in the year the WWI vets marched on DC for their bonuses and FDR closing all banks.

  7. “I do not think money is created in the clearing process. It is only, I assume, a bookkeeping operation.”

    I think if you look into the matter you will find that ALL money is merely a bookkeeping operation.

  8. John Zelnicker

    J.D. – Thank you for a new economic perspective, :), on the effects of money creation in our current system. I had never given any thought to the difference in money creation for non-profit businesses. However, it seems that a Job Guarantee (JG) could provide the missing parts of the pie. Some of the proposals I have seen would use local non-profit groups to determine which jobs are needed and how many. The groups would have to be paid for their time and effort. If they also administer the JG at the local level, they should be paid for that in addition. The jobs on offer would be whatever was needed locally which could include repairing the destroyed local landscape, building housing for the homeless, etc. A well-designed JG would provide all those jobs that private enterprise won’t offer because they can’t make a profit from them. New sovereign spending would pay for it all.

  9. Curt J Sampson

    Wouldn’t the Works Progress Administration in the U.S. in the late 1930s be an example of your “National Not-For-Profit Workforce”? It would be interesting to see your analysis of that.

  10. Blue Pilgrim

    In the first case, one can say that wealth is created by the baker, but once the buyer eats the bread that wealth is gone. Maybe he is a carpenter and a staircase was made, transforming the bread-wealth into stair-wealth, or maybe he is a banker and only used his time to punch dollars into a computer, or a bomb builder whose work is just blown up.

    In any case, wealth exists within a time frame — maybe short or maybe long — but most of it won’t be part of depreciation tables, or accurately reflected, or accounted for within the lengthy chain of all the system transactions it is involved in. A homeless person, having some energy after eating bread, may spend his day collecting ‘trash’ from the streets to bring to a recycling, earning a few pennies but also cleaning up the city creating more real value than the banker at the computer – or perhaps do any number of vaious useful things).

    The abstract accounting is very far removed from reality, and dollar might be the abstract measurement of any number of different activities which vary widely in things valued and usable by people. It’s something like taking inventory in a superstore and finding at the end that one has a total of 43,000 ‘items’ on the shelves without specifying what they are — some are toasters, some are pencils, and some are buggy whips, or whatever. One might try to improve the usefulness of the total by assigning sales price to each, but without knowing that half your inventory is buggy whips even that is quite misleading. So then you must link all of it with expected sales figures and how fast each item will sell, and go on with even more abstract numbers, with maybe increased uncertainty or correlation with what you really want to know: what sort of future and security can be anticipated.

    Maybe it would take a powerful computer system to keep track of all the complexity. Or maybe we can find some other method, such as starting off with ‘what is good for people and the world’. I do think that much of what is considered profitable seems not to be good for anyone except the few who are getting a lot more dollars.

  11. Ray LaPan-Love

    Some smart and creative thinking here, J.D., as I have suggested before though, most altruistic idealism is a difficult fit here in the USA. To begin with, there is no shortage of wealth, or cash, or money to lend. There are of course distribution issues and those are historically stubborn but cyclical. But the system as it stands is not defective or lacking in productive potential. Your baker for example, after giving away his product, or after not making a profit for whatever reason, ‘he’, or some other baker, must then borrow, and so… the system is primed either way.

    However, where direct sovereign spending could really do some good, is in an effort to provide things where things are truly needed. The US could for example subsidize poor nations that need better sanitation plants, and that could stop urban sewage and waste run-off from creating dead-zones in the oceans. Or maybe hundreds of thousands of jobs could be created in Africa to protect endangered species, and so on. And of course the jobs created world-wide could boost US exports. This all done too as a way to give back some of the benefits derived from being the reserve-currency nation.

    This is more however…. than just a charitable crusade. The very serious problems that come with vast and rapid flows of fiat currency, and the additional QE and etc, are the issues inherent to excess liquidity (bubbles), and currency instability ramifications. So, of course, too much money, or ‘value’, in the wrong place at the wrong time can be… even more damaging than too little money. It most likely follows then, that before the world is ready for a much needed shift toward more altruistic and fair goals, and to accept the prerequisite keyboard money to pay for those shifts, that wealth distribution problems on the global level must be sorted out first. But, naturally, we rarely even talk of such things.

  12. Howard Switzer

    The NEED Act, which is seldom mentioned here, would implement the Chicago Plan with improvements which would set us on the path of creating an Economics of Care to replace he current Economics of Greed. Money created for personal gain is usury and creates the economics of greed with all the purchased protections (schools and media) for their system of wealth extraction and government control, as Madison pointed out,
    “every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.” You should all know this so lets not deny it, we need a public money system, creating the Economics of Care, and we need to ban private money creation. Of course we fear the government, those who control policy, not you or I, have been sure to make it scary as hell but the only way to change it is to change it which requires massive resistance in the non-violent field of electoral politics. Yes, we all know the entire system is rigged but if we don’t fix it it will destroy us all. You can ignore the 6th extinction for only so long before it is… so long. The movements for monetary reform are done with theory, its time for hard science. The movements for monetary reform will continue to grow as awareness increases. Dennis Kucinich said last week that it does not matter who wins this election for they will be a one-term president becasue there is a (monetary reform) wave coming that will sweep the current system away. I support that vision. We can change the distribution of wealth by banning the monetary system that creates poverty systematically. Yes it is a big political project barely underway but what other choice do we have? Death in slavery or life in freedom is the choice.

    • Ezra Pound told us it would happen many years ago. He opined that people generally learning how money systems work would change the social and economic order like the changes brought about by people generally becoming literate.

  13. This money system that you describe is called the “bankers school’ money system.
    It is based on the borrowing-lending of all money coming into existence, and the pass-fail for access to ALL of the money that is created is fondly described as ‘creditworthiness’, something which makes sense from only the ‘lenders’ point of view…. and not the ‘community’s ‘ …… being a ‘bankers’ money system.
    No, the ostensibly-described ‘endogenous’ money system has no entry level for not-profits, although non-profits is an inadequate description.
    Giant Member cooperatives operate on a business model called non-profit, although they generate net income that again, ostensibly, gets re-distributed to its Members.
    The fact that the cooperative business model generates net income that covers debt service means they can, indeed, have access to bank lending, being creditworthy in their ‘operations’.
    Although access can be had even for ‘community-minded’ efforts, the cost for doing so is much higher, as there is much more ‘risk’ associated with a lower-end loan than to the financiers who are more ‘credit -worthy’ (at the top).
    It’s the hand they dealt ya .