➡ Banks are essentially dealers in credit, not money. They loan out credit to customers, who then pay it back with interest. This interest is added to the bank’s funds. If the bank has more deposits than it can loan out, it lends the surplus to other banks. If it has less, it borrows from other banks. This process is simple and is the primary function of banking. The misconception that banks are dishonest in their credit dealings is incorrect; they simply formalize a process that anyone could do.

➡ The text discusses the evolution of banking, starting from the use of gold as payment to the creation of credit. Banks began offering credit to people who deposited gold, paying them a percentage of the credit’s value annually. This system expanded the amount of credit in the economy, which could be used for productive purposes, consumer spending, or financing the purchase of financial assets. However, the misuse of credit, such as using it to buy financial assets, can lead to financial bubbles. The text also explains how banking systems have improved over time, despite some mistakes, and how credit creation has contributed to economic and intellectual growth.

➡ The text discusses the problems in the banking system, particularly during the 1930s, when many banks failed due to bad debts and poor decisions by the government and the Federal Reserve. It also talks about the cycle of credit boom and bust, where banks lend money for production and consumption, leading to rising prices and eventually financial trouble. The text suggests that the ideal banking system would involve banks competing to speculate where to put loans, with unsuccessful banks failing and not getting bailed out. It criticizes the current system where banks are bailed out by central banks, leading to inflation, and suggests that governments should stop taxing savings and encouraging excess consumption.

➡ The article discusses the potential collapse of the centralized banking system and the impact it could have on the economy. It suggests that central banks may buy off commercial banks’ bad debts, which could undermine the purchasing power of the currency. The article also mentions the possibility of a return to a gold standard, with countries like Russia and China potentially leading the way. The author believes that this could lead to a new era in banking and finance.

➡ Alistair, a seasoned banker, shares his insights on the banking industry and the current precarious situation where credit isn’t backed by real money. He explains that dollars are technically a form of credit, not actual money, and warns that if credit isn’t tied to real, tangible money, it’s doomed. The speaker expresses gratitude to Alistair for his influence and wishes him success in his future financial endeavors. They agree to navigate the uncertain future of the monetary system together.

Or if I’ve got an account with a bar, I can say, oh, don’t worry, just put it on my account. We’ll square it up later. In other words, anyone creates credit. If someone does work in your house, then they will do the work, giving you credit for that work until such time as you pay for it. Everybody uses credit. And bank deposits of credit, bank transfers are all credit. Credit, currency is credit, everything is credit. And the idea that banks are dishonest using their credit is completely wrong. This is a perfectly normal human activity. It should be random.

And if governments didn’t get involved, it would be a lot more random than it is. Hey guys, Raf here from the End Game Investor and I’ve got a very exciting guest for me personally and probably for you too. It is the great Alistair McLeod. He is like, I would say, the. The banking elder of the community. The free, not free, the liberty and money community. Hard money, sound money. That camp, our camp. You know what our camp is. So if there’s any kind of question or fundamental question about banking, then people usually go to him. And this is what I’m doing now.

I recall it was maybe a month or two ago where I had said something that was controversial among the community. I’d said, like, Basel 3 is not going to fundamentally change the nature of how gold is accounted for as money. And it’s not going to suddenly make everybody stack gold. And people, some people got upset at that. So they went to you and they said, is Rafi right or is he wrong? What do you say, Alistair? And then from my understanding, I think you said I’m basically right, though maybe you had disagreed with some details or you clarified it.

So the same thing is happening now. What’s his name that. The banker that went on to. That went on? Tucker Carlson. Oh, yeah, what was his name? Yeah. Richard Werner. Yeah, Richard Werner. So he. He basically said the entire model of fractional reserve as our community tends to understand it because we are led philosophically by the Mises Institute. And L. Von Mises is a pillar of our community, especially philosophically and in terms of understanding banking. He basically said, that’s wrong. The way that we see banking as deposits being lended out in a fraction of them being being kept on a balance sheet and the rest being loaned out in a pyramidal structure.

That’s basically wrong. And then so everybody went to you again and asks Alistair, is that true? Is it right? What. What do we think? I don’t know. It’s like, you know, taking away a pillar of our understanding so came to you again. So that’s what I’m doing now. I want to know, not that I ever completely understood banking, but I imagine that fractional reserve is basically right, but apparently it isn’t. And banks, banks just create credit out of nothing, has nothing to do with deposits or it’s something like that. I could be off a little bit on that, on the description.

So I have three questions here that I wanted to ask you in successions. I’m going to put them all out now, so you’ll see what, what direction, how I would like you to explain this to people who just don’t understand it, including myself. So my first is, and by the way, we also have Phil Lowe here of the bitter draft to follow up on any questions after these questions are dealt with. So he will show up later in the interview, hopefully. And my first question is this, and there’s three here. So first, what is bank capital? What is an asset and how does one back the other? Like specific, concrete examples of how bank capital, whatever that is, backs an asset, whatever that is, and the process of that backing.

The second question is if banks create credit and they don’t lend out deposits, how does a bank run happen? What is happening in a bank run? Because we imagine it as deposits were lent out, therefore there are no more deposits and depositors want to take their money out and it isn’t there. It’s something like that, but it’s not exactly that. And how do, how, why do central banks ever have to bail out banks if commercial banks can just create what we call money? But what is actually credit out of nothing? And the third question that follows on that is what stops the process of credit creation besides the natural consequence of hyperinflation? Is it only regulations that stop it or is there some natural process outside of hyperinflation that does it? Right.

Well, you might have to remind me what the individual questions are as we go along. But basically I think the best approach I can adopt to this is to more or less take it from the beginning. The first thing you mentioned was the Austrian school’s view that fractional reserve banking is how banking actually works. That error goes all the way back to von Mises. I think it was 1912 work on the theory of credit and the exchanges, I think it was called, and you know, I had to look it up. But it seems that the way he put it was that banks take in deposits and then they lend them out and obviously they put aside some of the deposits, if you like, against the risk that there will be defaults.

That basically was the approach. And I think that’s really what many Austrian economists think. Now, I would give some cue dots to Austrian economists because they, they are the only economist or school of economics who really sort of think that banks are, if you like, no more than just intermediaries between, you know, sort of buyers and sellers and producers and consumers and whatever, whatever. But even the fractional reserve approach is actually completely wrong. I mean, you have to ask yourself if fractional reserve banking was true, how is it that bank credit expands? Because if it starts with a deposit, where does the deposit come from? Does it come out of a bank? You know, I mean, this is a chicken and the egg situation, if you see what I mean.

So that’s the first thing. The way in which banks actually create credit is they lend it into existence. I’ll just say one thing about their own. Their own capital. Obviously, if you’re going to go banking, there is a risk, if you like, that something is going to go wrong. So you’ve got to have some capital there’s. Which, if necessary, you can dip into to pay out your creditors, who will be in the main, your depositors. So what’s an example of that capital, Just to make it specific, just equity. I mean, equity, you know. So, you know, if you and I want to set up a bank, I’m just being very simplistic.

Forget the regulations. We want to set up a bank. So what we’ll do is we’ll go around some chums and say, well, would you like to chip in? You know, maybe sort of $10,000 each and that will give us the capital to start our bank. So we start with $100,000. We have got that on one side, we don’t use it. This is. It takes, I mean, it’ll appear on the balance sheet. On the one side you have got the liability to shareholders, which will be $100,000, and on the other side you’ve got cash. That’s the asset, if you like.

On the other side, cash being, you know, credit either in the form of notes or deposits at another bank or reserves at a central bank. So that, if you like, is the asset side of our balance sheet. Now, let’s say, let’s say someone comes along and says, rafi and Alistair, I want to set up a business. And I reckon that it’s going to take me, say, figure like a million dollars in order to get this, because I’ve got to build a factory, I’ve got to do this, got to do that. So you and I sit there, we look at the plans, and we think, terrific.

Question number one, what was your overall business plan? Business plan. This isn’t a business plan. It’s an escape plan. So is this a good thing or not? And presumably, this guy is going to be putting in some of his own money. So we’d like to see that. I mean, this is just standard stuff. So, you know, if we like it, let’s say we like it, and we say, okay, we will make a million dollars available to you. Sign on the dotted line here, and that’s the agreement. Okay. And as he goes out of the door, we shake this guy’s hand and say, the money’s now in your account, so you can draw it down.

Now, what has actually happened in terms of accounting is on the asset side of our balance sheet, we have created an asset in the form of this loan, which is an obligation from the guy who’s borrowing it from us for a million dollars. And on the other side of our balance sheet, because it’s all got a balance, we create a deposit. Now, it’s the deposit that he draws down, in effect. So when we say that the money’s now in your account, that’s actually what we mean. We don’t necessarily present our accounts to this guy who’s starting this new business quite in that format, but this is our own accounting.

Yeah. So that’s the way the process basically works. We haven’t used our money at all. Our money doesn’t come into it. That’s just sort of sitting on the side. Now, the purpose of your and my existence as a bank is we’re dealers in credit. We’re charging this guy, say, 10%, which means @ the end of the year, we’re going to have earned interest on that. We’ll just make a simple assumption of $100,000. Yeah, that gets added into the shareholders funds because we’re not paying any interest on the deposit. Now, let’s look at it practically from that starting point.

Obviously, the guy we’ve loaned money to is going to be drawing down on the account and paying it away to suppliers, to consultants, to whatever, whatever, whatever, some of which may bank with us, in which case, you know, it just comes back into a different account. But in most likelihood, most of the payments are going to go to other banks. So what we have got is, we’ve got then an imbalance, if you like, on our overnight position. We have to square that. And the way we square that basically is two ways. The first is those other banks will have the same thing happening to them.

And some of the money which. Some of the credit, some of the currency, some of the. Yeah, some of the deposits, if you like, that the other side of the loans they have made come our way because it’s been paid into our bank. So we go to other banks and we reconcile our positions. Now if after that we have got a surplus on our deposits, then we can lend out the surplus into the interbank market. If, on the other hand, we have got a deficiency on our deposits, then we have to go into the interbank market and borrow the difference.

Now it’s the interbank rate which effectively sets what we pay on incoming deposits, not the deposits which are the other side of the loans which we have made and so far have not been drawn down on, but deposits which we have to attract in order to balance the books, as it were. So we will run checking accounts, we will run deposit accounts and so on. So that’s the way it works. It’s actually very, very simple. I mean, the whole point about it is that you and I are dealers in credit. That is the primary function of banking.

All the other stuff’s just bells and whistles, but that is basically it. May I, may I defend Ludovan Mises honor here real quick? So I think the, from what I understand of Mises and, and the other Austrians, the way they would describe this was that an honest banking system should be, they should just be an intermediary. So when I have money, which is gold, and I put it in the bank and I want to earn some interest on it, I will find, you know, the bank will do the heavy work of finding people who want to borrow my gold and pay me back interest, and then they’ll take a cut.

And that’s, that’s the way it’s, that’s the way it should be. In an honest banking system. What the banks have figured out is that they, they can generate notes for the money that they don’t actually have. Now if, if you and I do that, if I write notes for money I don’t have, that’s, that’s called fraud. And I would be arrested and thrown in jail. But when a bank does it, it’s called fractional reserve banking, or in the modern sense, zero reserve banking. Because you’re right post Covid, there is no, there’s no requirement to store any, any savings whatsoever.

You could theoretically make a bank without the deposit, like the capital required. Right. There’s the way you describe credit generation in the modern sense, it’s absolutely Accurate. I could theoretically start the bank of Low and just start writing notes for people. There’s nothing stopping that. But, Phil, go ahead. Yeah, yeah, sorry. Okay. I think there’s a misunderstanding about money and credit. We go back to Roman law, which started in 450 BC when the 12 tables were written. And for the next thousand years, jurors ruled on Roman law and they came up with all sorts of rulings.

And these were incorporated into Justinian’s pandects in the 6th century. Now, Justinian’s pandects basically formed the common law basis for all the successor nations that came out of the Roman Empire and all their colonies and all their dominions. So that is the basis of it. Now, basically, what Roman law says is that you have got corporeal money, which is physical money, and final settlement, hence gold, silver, whatever, and then you have got incorporeal money, if you like, or means of settlement, which is something which actually just doesn’t exist in any physical form, and that is promises, promises, promises.

Exactly. The characteristics of credit is that for every credit there is an obligation. It’s two sides of the same coin, as it were. So, I mean, there’s nothing to stop me, let’s say, giving you credit. Let’s say you say, you know, we meet in a bar or something. You say, oh, I’ve left my wallet behind, you know, can you lend me 10 bucks? Yeah, I can lend you 10 bucks. Or if I’ve got an account with a bar, I can say, oh, don’t worry, just put it on my account. Well, you know, we’ll square it up later.

In other words, anyone creates credit. If someone does work in your house, then they will do the work, giving you credit for that work until such time as you pay for it. I mean, there will be presumably, agreement or an understanding that when the work is done to your satisfaction, then you will pay for it. You are giving the workman credit, if you like, for his work until settlement. All financial dealings, unless it’s absolutely, you know, settlement on the nail is simply credit, credit, credit, credit. You know, you go and something made two days settlement, that is credit.

Everything is credit. We never use money except in a last resort. And that is so rare as to be not true, because Gresham’s law applies to that apart from anything else. I mean, I would far rather take something which I can use and pass on. But if I started insisting on settlement in gold coin, nobody would deal with me. One, and B, would it be easy for me to pass on, to go and Buy things I want to the local supermarket. No, everybody uses credit. And bank deposits are credit. Bank transfers are all credit. Currency is credit, everything is credit.

The idea that banks are dishonest, using their credit is completely wrong. This is something. This is one of the myths, if you like, that the Austrian school has been perpetuating, because fundamentally, and we go back to mises in his 1912 tome, he got that wrong. Now, the extraordinary thing is that two pages on, he actually refers to a guy called Henry MacLeod, no relation of mine, incidentally, who was a barrister at law specializing in banking back in the 19th century and advised the UK government, you know, various committees and all the rest of it, on banking law.

He wrote books, one of which was the element of banking. Mises saw it, he referred to it, but did he actually understand, did he actually inquire into it and understand that credit is created, but basically bank loans are just created out thin air, just the same as, you know, I say, oh, don’t worry about that, you put it on my account and we’ll settle up later. It just. Anybody could do it. Banks do it. They do it in a formal sense. So then, Sorry, keep going. But like, the question that’s going on in my. In my mind now is that if so, then what is fundamentally wrong with the banking system today? And I’m sure there’s something.

If you’re saying it’s not frogging, what is it? Well, I think perhaps what is wrong with it is that it’s run by humans who get things rather wrong and they’re competitive and they do things which distort, if you like, interest rates and things like that. But that’s absolutely nothing compared to the distortions which are put in by a central bank. But anyway, we’ll come back to that particular point, the history of banking. I mean, the Romans invented banking, basically, but in its modern form, this started in this country in the middle of the 17th century, when, at the time of the Civil War, people wanted to move their gold out of their homes, out of their possession and put them in a secure place.

And this was a business which the goldsmiths in London, you know, they were asked to do it, so they did it. They then noticed that what was happening was that the receipts that they gave to possessors of gold, which they were holding in custody, were changing hands. In other words, instead of using gold as payment, the certificates themselves were being used as payment. So some bright spark then came up with the idea, well, look, we can’t do anything with this, really. But on the other Hand, what we can do is use our position to maybe create credit for people of worth.

So what they said was, look, you’ve deposited some gold with us. Now we’re holding this as custody. If you make that over to us, then we will give you a credit for it. And furthermore, we will pay you 6% of the value of that credit every year. Now this was a far better deal than just sitting on sterile gold, earning absolutely nothing really quite popular. Did they have the gold they said they had at this point in time? Yes. Yeah, they deposited. Okay, so it’s still an honest or gold based banking system at this time. It’s not, we haven’t entered the period where they’re issuing notes without the gold.

Okay. No, no, no, but I mean what they, what they, what they found was that they could grant other parties credit. Yeah. Based on the fact that they had gold. Now, if you understand the credit creation process I’ve just described, where I mean, you create a loan, say yielding 10%, you’re paying nothing on the other side, so you’ve got 10% clear. You’re not using your own money. You’ve just got, if you like, some backing for your operation. And it’s literally just that, then you can see how immensely profitable this is. So that allowed the goldsmiths to pay 6% to their depositors at that time.

And they also found that, you know, some depositors would want to take their money, their gold out early. I mean, this, we’re talking gold money as opposed to notes or whatever. Whatever. But in the main, they were quite happy to have it secured safely there and maybe sort of transfer the interest to other people rather than take delivery because the other people wouldn’t want to take physical gold. Now obviously when you do this, you’re expanding the quantity of credit in the economy. There are basically three ways in which this can be expanded. If you expand it for productive purposes, then that’s not inflationary because what you’re doing is you are encouraging the production of extra goods which basically tends to bring down the prices, increase the quality, produce new products, whatever.

If you lend it to consumers, then that is inflationary. Because obviously what you’re doing is you’re increasing the amount of spending in the economy. The third way in which this happens, and this is what we’re seeing at the moment, and everybody should note this very, very carefully, if you expand the amount of credit to finance the purchases of financial assets, then you create financial bubble. I won’t say any more on that, but you know, that is a very important Point when you look at the valuation of stocks and everything else, just bear in mind that the whole thing is being driven by credit.

So are you. Can I summarize what you’re saying? If I understood it correctly, you’re saying that the criminality or the problem with the banking system is not necessarily that they create credit out of nothing, but it’s what, it’s how the credit is created by, by buying financial assets in sort of a loop in on itself. Credit is used to buy credit. And that’s the problem. Yeah, absolutely. I mean it’s. When we say credit is, is, is used to buy credit, I mean you would go along to, let’s say your broker or someone like that and say, I’d like to buy stocks on margin.

The broker doesn’t actually act as a bank. What they will do is they will, you know, they will get, if you like the financing for the margin and use your stock as collateral with their bankers. And interestingly, I don’t know if you’ve noticed, but the level of margin credit in the United States is now over a trillion. This is, you know, on, I think it’s, I can’t remember, it’s one of the big regulators figures. Yeah, finra. Finra. Yeah, finra. Thank you, thank you, thank you. Yeah. So I mean that use of credit actually creates bubbles, if you like.

And going back to the early days of banking in the UK with goldsmiths and all the rest of it, I have no doubt that the South Sea bubble which we had in 1715, 1720 was fueled by bank credit. So, you know, we had all these, you know, it produced new problems. But this is a problem, if you like, which of, of the system which we should learn so that next time around we don’t make the same mistake again. But of course we tend to learn rather slowly. The systems weren’t perfect. They improved substantially in the 19th century.

But then we had an additional problem and that was that central banks were getting it wrong and they were mismanaging their attempts to manage the economy. The bank of England, for example, operated both as an issuer and as commercial bank in effect. And they tried to maintain relations on the commercial banking side and ignored the issuing side. The result was that after the 1844 Bank Charter Act, Peel’s Banking act, there were three occasions when it had to be suspended because the bank of England was running out of gold. And the bank of England, I mean, they all made all sorts of mistakes.

They learned the hard way, but they did learn and things stabilized and all the rest of it. Of course, the whole thing ended with the First World War. But this idea that banking is sinful or whatever is absolutely wrong. Let me give you another example. We had. The cash credit system was started in Scotland when the Royal bank of Scotland got its charter. Now, just going back a little bit, before the Royal bank of Scotland got its charter, there was a monopoly run by the bank of Scotland, similar name, but without the Royal. And that business basically was discounting bills.

Now, when the Royal bank of Scotland got its charter, there was not enough business for it in discounting bills. So what they did was they invented the cash credit system. And the way this worked was as follows. If you went along to the Royal bank of Scotland with two supporters of standing, you could borrow anything between £100 and £1,000 Scots from the Royal bank of Scotland, they would lend it to you. These two people who are called cautioners would have full access to your account and they would have the ability to stop you trading if they didn’t like what they saw.

This was credit created entirely out of thin air. The Scots at that time were basically, and I’m Scottish and proud of it, but basically a bunch of cattle rustlers. They were tribal. I mean, it was a very backward economy, extremely backward. When the cash credit system came in, it got a revolution in business in Scotland. And so progressive was it that we even had the Scottish Enlightenment, which is fascinating because if you think back to other periods in history when people had the leisure, the wealth, if you like, to sit down and think, as opposed to have to go out in the fields and till the soil, you know, like the ancient Greeks, the Romans and so on and so forth.

All this was done effectively on promises from someone else credit. And it’s absolutely fascinating because without the cash credit system, we wouldn’t have had Burns, we wouldn’t have had Hume, we wouldn’t have had this enormous revolution in thinking. And, you know, the amazing thing was it even survived the Jacobite rebellion in 1745. So, you know, don’t mock credit, don’t mock banks for creating credit. So, I mean, they’re human, just like the rest of us. And this is something which, you know, I argue with Austrian economists and, you know, I upset them by saying they don’t understand credit.

How do bank runs occur? In your question? Yeah. Why do people. If credit can be generated, then why do people run to the bank to get under, underneath the credit ladder? Well, very, very simply, there’s several ways in which a bank can come unstuck, but the two principal ones are Bad debts. If, let us say you lend money to businesses and all the rest of it and there is a downturn, a slump in the economy, then basically banks have to write off their loans. And if they haven’t got sufficient capital put aside, then obviously they become insolvent.

That’s one way. The other way is maturity mismatch. Because your depositors, which come in one way or the other onto your liability side of your balance sheet, they’re short term, they can take their money out at any one moment. But meanwhile, if you’ve gone and bought things which you can’t realize very quickly, then if there is, if financial conditions are such that there is a run on your. On your deposits, it may be someone, you know, someone thinking that your reputation isn’t as good as it should be, you know, and they think, well, we’ve got to get out of here, out of MacLeod and Rafi’s bank for safety or whatever, then that’s another problem.

So it’s those, you know, it’s basically maturity mismatch, if you like, and bad debts. And in the 1930s, all those banks went under, really, because they had farming loans. I mean, this was small one and two branch banks up and down the United States, farming communities, local communities and all the rest of it. And the Depression, which was made far worse by Hoover’s actions, the Fed’s actions as well, because the Fed was trying to. It was giving preference, if you like, in terms of help, support, whatever, to members of the Federal Reserve System. Any banks which weren’t they, again, to hell with them.

I mean, this was what was going on. It wasn’t basically the idea of banking, modern banking, credit creation and all the rest of it, that really accounted for so much of the problems. But it was the way in which the big power brokers, including the government itself, from the president downwards, made mistakes or deliberately destroyed things. And that’s something we have, you know, that I think is where the problem really is in our financial systems rather than banks. Now, having said that, banks compete. So again, we can actually draw on something interesting from the Austrians and particularly Hayek in, in his analysis.

I mean, there comes a point where, you know, let’s say banks after a slump feel that, you know, things are recovering. The people who they deal with as customers, who they respect, maybe company doctors and so on and so forth, they turn around and say, well, you know, I can see that now things are getting a bit better. There are lots of opportunities. I can buy these businesses while they’re damn cheap. They dirt cheap I can go out and buy them. I need finance to do it. Now you, as a banker, you trust these guys. So you say, okay, how much do you need? That’s fine.

So the economy gets going and then you get so confident as a banker, you think, I want market share in this industry here, which is going, you know, which looks like it’s got good prospects. So you cut the interest rates, because if you cut the interest rates below where they should be, whatever that is, then you’re going to have, if you like, a credit boom. So that is, if you like one of the stages in the cycle and then it gets to the point where, particularly where money has not been lent for production, but has been lent, let us say, for particularly assets and also to finance consumption, then what you get is you get prices rising.

And as prices start rising, the businessman’s calculations all start going wrong because he might have assumed that when his products come off the line, say in two years time, the value is going to be here. Whereas actually what’s happened is that prices have risen, his input prices have risen and all the rest of it, and he feels he can’t guarantee that he can match it, if you like, with his output. So he’s going to get into trouble. And as a banker, Raffi and I look at this, we’re aware of it and we think, you know, good leak, good grief, we’ve got to, you know, we’ve got a bit of a risk here.

So we start calling in loans. So the cycle then goes down. And so this is a perfectly normal human activity. It should be random. And if governments didn’t get involved, it would be a lot more random than it is. Governments get, you know, governments actually are responsible for the problems in the, in, in the monetary system, not commercial banks. I mean, yeah, I mean, obviously not totally, but if you want to place the blame anywhere, then it’s with governments, not the commercial banking system which creates credit for the good. And why on earth governments encourage excess consumption? This is Keynesian stuff.

I mean, that’s bad, that’s inflationary. It undermines the purchasing power of credit. So is, is this, what, is this what you’re saying? Just to put, put it in my own words, to see if I understood correctly, you’re saying that the, the problem in an ideal banking system, in your mind, we would have competing banks guessing about which industries to give to, to supply credit to. And the, the banks that choose correctly based on where the economy is going, just like any speculator, if they, if they win, they win money. If they lose. They lose out. They would.

The ideal banking system would be banks competing on speculating where to put loans and the, the bad ones fail and don’t get bailed out. And then they take their capital and give it to the depositors that, that deposit with them so the depositors don’t lose. Right. We don’t want, we don’t want their money on the hook, whatever they put in. And the problem now is central banks. Whenever a bank picks wrong or does something stupid, it gets bailed out and from there you have inflation. Is that what you’re saying? No, that’s not quite what I’m saying, Rafi.

What I’m saying is that left to their own devices, you would find that bankers will be a lot. Well, I mean, they’re always going to be responsible in terms of their own business. I mean, that you’ve got to accept because they are professionals, if you like. There may be a marginal argument. I’m wandering slightly from your point to go back to bank partnerships, which would actually limit the amount of credit expansion. But far better than that would be a system whereby people actually saved as opposed to went out and splashed it out on their credit cards, didn’t save.

And governments stopped taxing savings. I mean, you’ve already paid tax when you’ve earned it, when you’ve saved it, you should be able to hang onto it. But governments cannot resist the temptation A to meet, know to grab some of your savings and B, to encourage you to spend to make the economy look good. That is where the problem is as far as bankers themselves are concerned. They will always try and do the right thing because they are driven by profits. Now, whether it’s right or wrong to say we’re going to cut interest, you know, our lending rate to, let’s say, the AI industry or something like that, because we want to have a, you know, we want to have a foothold in that industry.

Whether that’s right or wrong is not for you or me or a government to say it’s up to the banker. I mean, if they all do it, the problem is you’ve got a cycle. You know, governments encourage this cycle. And it’s particularly Keynesian, as we all know. You know, the Keynesians say, well, what you’ve got to do is, you know, when banks are no longer the private sector is not expanding credit, then, you know, the government’s got to step in and it steps in to extend credit into the economy by running a budget deficit. And originally what Keynes said was that over the cycle it should Even up because when things recover, tax income increases and all the rest of it.

And so you’ve spent here and you’ve got it back here. So over the cycle you should be okay. But of course that’s not how governments work as we have seen. So you know, I mean really, you know, we had this slump in 1920, 21 I think it was, it lasted about 15 months. In those days the political class in America knew, look, don’t get involved, you just make it worse. So they just stood back, let it happen, you know, and all the sort of, you know, the businesses which had borrowed too much money went for their production, went bust.

It was a 15 month recession slump. But then it, you know, it, it, it got back onto tracks on its own accord because capital REIT was reallocated from the duffers to, you know, the good guys, the good entrepreneurs, the good businesses. But you know, it was when Hoover came along in 1929 that everything started going wrong. I mean silent cow said of Hoover who I think was his vice or business secretary, I think it was, that man is always giving me advice and it’s always wrong. That was Hoover. And you know, and that’s actually the origin of the problems we have in banking more than anything else.

Yes, we’ve had these slumps and what’s happened in this country in the past is that banks maybe have speculated, for example the Bering crisis back in, I think it was about the 1880s or thereabouts, they were investing in Argentinian and Brazilian railways and there was a slump out there and so bearings got wiped out. But the system came together the other banks and rescued it. The overend Gurney crisis is another example of stupidity. You’re always going to get this over end Gurney basically were very, very conservatively run and they didn’t do anything other than short term debt lending to the government, lending to what we would call a triple A borrowers and all the rest of it.

But then they had the sort of smart idea that they could make more money doing wider banking activities from which they had absolutely no experience at all. And they came unstuck. That was a big, big problem. But these things, I mean the idea of the central bank being lender of last resort, I mean we have now got ourselves into a situation where we’ve just kicked the can down the road, down the road, down the road. Where politically there’s now absolutely no option. But the problem really is the way in which we’ve evolved things with state control over our normal credit activities.

So this is a question that Phil wanted to ask to close off. But if I, Phil, if I, if I phrase it wrong, you know, just complete it for me. But what does the, what does the unraveling of the system because it has to unravel, what does the end of it look like? We’re talking about a run on the central bank. Does the dollar survive in any form? What takes over once this entire centralized banking system goes kaput? What is, what is life? I’m not talking about day to day life. Like you know, you wake up in the morning, you got to do this.

I’m talking about what is, what is the, what does the bank system look like after this whole catastrophe ends and we go to something new? What’s the transition? Yeah, basically there’s sort of two answers to your question. The one is what happens to assets which are collateral for the banking system. The other is how the central bank actually deals with things. And I think that probably what the central banks will do, the Fed for example, well, it will buy off commercial banks bad debts. Of course the great thing about central bank, they’ve done that before like two or three times already.

Yeah, yeah, well they just do it again. But the problem I think with that is that they end up undermining the purchasing power of the currency. So that I think is if you like going to mark the last phase of this fiat currency experiment which has been running 54 years. So I think that’s one aspect of it. I mean, bearing in mind that what a central bank can do is it can expand credit in exactly the same way. It’s a commercial bank, that’s what it does. And what it’ll do is it’ll buy bad debts off a commercial bank and credit the commercial bank’s reserve account with the central bank with the Fed with the full face value of those debts.

But because the Fed doesn’t have to mark to market, do we, you know, does this look bad? No, it doesn’t. We just don’t. You know, it basically keeps the banking system going, solvents, takes the bad debts out of it at the expense eventually. And how that materializes, of course, is the second question which I will try and answer. When I look at this current situation, it is an asset bubble far larger than the Roaring twenties, far, far larger. This is a credit bubble. And if you don’t understand that we’re in a credit bubble, just look at the debt side.

Are we in a debt bubble? I mean, undoubtedly, yes. The biggest debt bubble in history, Credit is the other side of that. And this credit is being fueled into financial asset values. This is like 29, but even bigger. On top of that, in 1929 we had the Smoot Hawley Tariff Act. Those two things together. The unwinding of the credit bubble plus Smoot Hawley tariffs drove the S and P or the Dow, however you like to measure it down over what, three years, from September 29 through to the middle of 32, down nearly 90%. And this was characterized with problems for the banks.

They found that and problems with the market because it created a cascading effect in the market because banks would have collateral securing their loans. As the value of the collateral sank below the value of the loans, they realized their collateral as much as they could by selling it into the market. So the whole thing sort of spiraled down. We’ve got the same thing today, but it’s worse. I mean, what Trump’s tariffs, I mean, we don’t know actually what the Trump, Trump’s tariffs are. He changes his mind every five minutes. But we can see that all this jumping around with tariffs and saying we’re going to threaten Switzerland with 50% tariffs, we’re going to hit the Chinese with 200.

I mean, all this sort of stuff, what it does is it creates a sort of uncertainty which leads to stockpiling of stuff in the United States which we saw with the last GDP figures. And at the same time it’s going to lead to massive dollar selling because the foreigners aren’t going to sit on roughly $40 trillion worth of dollars in financial and underlying financial assets when America is effectively cutting itself out of the global economy, much to the detriment of the global economy and the US economy itself. So I can see that we’re going to get the credit collapse which is going to be of the same sort of magnitude, probably more than 1929.

I’m worried about blank. Don’t you worry about blank. Let me worry about blank. Good fry. We’re worried about Planet Express. Don’t you worry about Planet Express? Let me worry about Blank. But the difference is that in 1929 we were on a gold standard which was eventually suspended in effect. I mean, you couldn’t exchange your gold at the Fed late 1933 onwards, and then you had the devaluation. So this time the currency will be in free fall real quick. This is my follow up question and I want to be respectful of your time. I know we’re running out here.

Do you think the banking system would work better if we had a redeemable gold as, as the root of it so on top of the credit point system you were talking about, if there was redeemable gold at the root, would, would the banking system work better in your, in your, in your opinion? Well, yeah, I mean, that sort of glides over. How do we get there, as it were. But we’re going to be forced. Basically, you know, we go back to Roman law. You’ve got corporeal money, which is gold or silver or even copper. This is actually tangible.

And then you’ve got something which actually doesn’t exist in any form called credit. The only way credit is settled is final settlement, is by taking gold. That is the final payment. The answer is that we have to go back to gold standards. My own view from looking at geopolitics is that Russia and China will go on to gold standards to protect their own currencies. And then we’re in a new era. You think they’re willing to sacrifice their own banking systems because that’s what’s going to happen? I think really it’s not a problem. It’s not a problem for them.

I mean, there will be problems, of course, but they’re gradually going in that direction. And I think that the banking system in China, for example, is being informed gradually by the people’s bank’s moves. I mean, they’re opening, or they promised to open SGE vaults in Hong Kong and also Saudi Arabia. It’s clear that the yuan is going to be the settlement currency for Shanghai Cooperation Organization, brics, the Global south, if they want to come into this, because this idea, I mean, they say, you know, we settle trade differences in our own currencies, yeah, fine. But you know, really that to me is not a sensible, long lasting situation.

And my guess is that a situation will evolve where settlement will be preferred, if you like, in Chinese yuan. And at that stage they’ve got to fix the yuan exchange rate for gold. It’s got to become exchangeable for gold. And that is the forward thinking in my view, of opening vaults outside China so that these settlements and exchanges can take place. All right, so this was fascinating because I think we have a slightly different view on where the bank system fits into this entire picture. But I think in the end we would both agree that credit and debt being two sides of the same coin, we’re in a credit bubble, we’re in a debt bubble.

Basically, wherever that ends, the Fed or whatever central bank is going to have to buy all the bad ones, put it on its balance sheet and then what I think is going to happen in Daniel oliver of Myr McCann’s conception is that the gold that is on the Fed’s balance sheet is going to, whether by statute or by market forces, equal or balance out the value of the bad debts on the Fed’s balance sheet. So either way, the purchasing power in gold, gold and silver and corporeal money will rise to match the falling purchasing power of the total market.

Crap of market crap market cap of credit available. So we’re talking about the same end game. We just have different ways of seeing it, different ways of structuring it in our brains and different terminologies. But I think essentially we agree on what the end is here. Any last, any final thoughts? And before, before that, just check out what the impetus for this interview was. Alistair McLeod’s latest article on his substack. There will be a link to that in the description below. He understands more about banking itself and how the, the industry works a lot more than I do.

I’m not a banker. Alistair has been a banker for many, many decades, I think. Or involved in the financial industry directly. I have not. I’m just a thinker. So, Alistair, how would you like to close this out? Well, I think there are lots and lots of lessons in this, apart from the misconception about what banking is, who to blame if you like, as things go wrong, it’s another thing. But I think probably the most important thing is to understand how precarious the situation has become with a situation where credit is not exchangeable for real money. And not only that, but do you believe economists when they say that dollars is money? No, it’s not.

I mean, we think of it, we think, you know, we think of dollars as money. But legally and technically and every way, you know, you should really be looking at this is that dollar is a form of credit because it appears on the Fed’s balance sheet as a liability to you and me. So that’s, that’s the way it is. All credit, everything is credit. And if credit isn’t anchored in its value to real money, real corporeal money with no counterparty risk whatsoever, then it’s doomed. And this is a process we’re beginning to go through. All right, look, thank you so much for coming on.

You are one of the. I told you this before we started recording. You are one of the core influences that got me into commentating on what I think is going on in the monetary system. Thank you for all your hard work. And I wish you, you know, immense success in all of your monetary and financial endeavors from here on out. And let’s get through the end game together. Wherever that leads us. I’m sure we’ll talk on the other side of it and. And probably before it hits. Well, thank you very much for your very kind words, Rafi.

And, yeah, I’m with you all the way. My bones. Oh, my God. His boneitis. My only regret is that I have bonitis.
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