Top-Down Fiat Money Authorization and Creation
As noted earlier, the creation and issuance of authority fiat money is available only to a money creation authority. This authority may be a unitary private authority banking system, a private group of banks and bankers, or a government authority.
With an understanding of the role of the user community and its community accounts, money is now authorized and created as follows:
Parallel to the first step in mutual money creation, instead of a buyer and a seller in the user community agreeing on and authorizing a money creation transaction, a money creation authority takes the place of the mutual buyer and mutual seller in the user community, taking to itself the power to make this decision . The authority unilaterally authorizes the creation of money numbers. This is done with no commitment for reciprocal trade in goods or services with the user community, and without the permission, even knowledge, of the user (the seller). This sub-unit of the larger money community has unilaterally taken over the process of money authorization.
In the second step, parallel to the second step of mutual money creation, the authority also unilaterally takes over the decision making power normally held by the user community in creating the money numbers, giving itself a credit, balanced by a debit which it may or may not carry in its books. The authority takes for itself the credit from this transaction without considering where the debit truly lies.
However based on the mediating function of the user community market in all money transactions effecting it, the authority's credit is functionally a credit for the authority, balanced by a debit levied against the user community asset-liability account. It is a loan or tax, (Bernard Lietaer considered it a tax) from the users to its authority subgroup.
This use of the user community asset-liability account is taken by, and only available to, money creators, by law, custom, hubris and/or simple lack of knowledge. It must be again emphasized that this action is taken by the money creation authority without the user community knowing what has happened.
The debit is placed in the user community asset-liability account, just like a loan agreed upon by us users. Because the existence and importance of the community accounts is currently unacknowledged and externalized, the resulting negative balance of the user community asset-liability account can be overlooked and ignored. In fact authority money 'creation' consists of an unauthorized and unacknowledged loan from the users to the money creator.
The reality of this situation only appears when the system breaks down completely, usually through uncontrolled inflation. At that point we users loose our money and may loose property. We also loose any organized money system to trade with.
Double-Entry Details of Authority Fiat Money Creation
The user community's asset-liability account is debited in the amount of the loan. This debit is balanced by a credit in the money creator community's equity account. If there is only one creator in this community, it remains there. If there are multiple creators, in another transaction, a debit is placed in the money creation community equity account balanced by a credit in the individual money creator's equity account transferring the credit to the individual money creator.
Again, this is a loan from the money user community to the money creation authority; a charge levied by the authority and done without the user community's knowledge or permission. This transaction is made possible by not acknowledging and/or externalizing the role of the user community in all money transactions.
As far as it goes, Richard Werner's definitive analysis of the current process of bank authority money creation follows the same argument as we make here. What in the popular explanation is labeled a "client deposit" Werner exposes as "fictitious".
This fictitious borrower deposit, seen in the context of the importance of the community of users, and our asset-liability account, in the newly understood money creation/use process, is seen functionally as a loan from the user community to the money creator. In current banking practice the fictitious borrower's deposit is held as a liability of the borrower on the books of the bank.
This fictitious borrower deposit in the current explanation of money creation in reality involves the authority becoming an uninvited proxy for the user community in originating a loan from our community asset-liability account to the authority's equity account.
This use of the community asset-liability account is an invention of authority created money. The authority has in practice taken unto itself a monopoly on the creation of fiat money, and creating it as a debt of the user community without trading any goods or services in exchange .
The negative balance in the user community asset-liability account is now equal to the money that has been 'created' by the authority in addition to any commitments the community has itself made for its own use, using money already created by the authority, shifted from its current account to its asset/liability account as noted in the description of mutual money.
Classes of Money Authorities
A note is necessary here to distinguish between small saver/investor/money managers, and large saver/investor/money managers and money creators, all of whom are de facto members of the money authority community. Small savers are attempting to save for their older years, using interest to multiply their savings.
In authority-based economies, unlike in mutual economies, the political economy does not provide any, or adequate, money/services to retirees and others who are not in a position to provide for ourselves.
Our only alternative for security is to accumulate savings in the authority-based market economy in which either we work at something that pays in the market, or we have little or no money to even cover daily expenses as we age or become unable to work.
Without free health care and and adequate personal income, seniors and others who cannot work in the economy to support ourselves are left out of the economy.
Small saver savings are largely spent in the user community in the saver's later years. Excesses are left for our descendants for similar use.
Large investors, on the other hand, are saving and accumulating much greater sums than they will ever need for their later years. To the extent that they have accumulated a very large sum of money, they therefore have greater power over the economy than small savers. They, along with the money creators, are major money authorities, as they have sufficient resources to determine whether projects, wants and needs of private parties, and to some extent even the government, will be funded.
While there is a gray area in the distinction between small savers and large savers, the distinction is relevant.
In the next two chapters of this series, we will describe the authority money-issuance process. The next chapter will describe bank-created money. The following chapter will discuss government-created money