The World is exchanging goods and services by various national means of exchange. We are using those same means of exchange as a vehicle for savings. We are denominating credit contracts in any one of various national means of exchange. The predominant means of exchange is the US dollar.

However, a means of exchange voluntarily accepted as such, by those who participate in exchanging goods and services, by those who use it as a vehicle for savings and by those who denominate credit contracts in it, is not per se money.

Money must, sine qua non, function not only as a means of exchange, but also as a means of payment.

The world, as of February 2007, does not possess a means of payment. In economic terms, payment is the exchange of something for something. In today’s world, when units of what is called money are tendered in payment of a purchase, or in settlement of a balance after an exchange, or in settlement of debt, there has been in reality and economically no such payment. We are in these cases using the term “payment” merely as a legal convention and a leftover from a previous era, when payment did in fact exist and govern all economic activities.

Money, properly speaking, must be definable! The dollar cannot be defined: so said Alan Greenspan himself, the Pope of Central Bankers, in reference to the dollar, which is the reserve currency of the world and which “backs” all other currencies. When something is not definable, it has no physical existence. A thing that has no physical existence is imaginary. An imaginary thing such as money is today, is as different from real, actual money, as an imaginary loaf of bread is different from a loaf of bread in one’s hand.

A money payment must involve a tendering of tangible money, gold or silver, or of a credit instrument which is recognized as entitling the owner to the undoubted right to immediate redemption of that instrument, in gold or silver.

Humanity is unaware of the stupendously important fact that it lives in a world without money. This lack of awareness is perhaps the most singular feature of our contemporary world, upon which historians – if the world does survive this episode and produce historians at some future date – will remark with amazement: “How was it possible that billions of humans could delude themselves into acting as if what they used for payments, credit contracts and savings, was actually money?”

About 1997 I began to look for data concerning the amount of “reserves”, excluding gold, held by the world’s Central Banks. In other words, the amount of imaginary money they were holding, otherwise called “paper money”. In 1997, those “reserves” totaled $1,300,000,000,000 ($1.3 Trillion) dollars. Not all those “reserves” are dollars, but most of them are.

Back then, not many people were paying attention to that datum. Since then, it has received increasing attention, which is not surprising, for the “reserves” are piling up and showing numbers that are clearly “going ballistic”. As of January 2007, world Central Bank “reserves” were hitting $5 trillion dollars, an increase of 385% in ten years. The last increase of $1 Trillion only took five months, from August 2006 to January 2007. (“Bloomberg”)

Before 1971, Central Bank reserves were mainly gold, plus component of foreign exchange redeemable in gold. Reserves could only grow very slowly. Imbalances in trade were shunned because the settlement of deficits had to be made in gold or dollars exchangeable for gold. International trade was stable. Imports could not affect the economies of importing countries as much as they do today, with “globalization”. Therefore, local productive activities were stable. Jobs were generated through reinvestment in productive activities.

The present situation is chaotic, because the creation of reserves of fictitious, imaginary “money” originates mainly in Dollars which are spewed forth by the out-of-control US economy, plus other fictitious moneys like the Euro born in the European Union, the Yen born in Japan, the Pound born in the UK, all of which are held by other countries as “reserves”.

Since today “money” is imaginary, fictitious, imports no longer have any limit, for it actually costs nothing to “pay” when “money” is imaginary. Thus, “globalization” based on the unlimited creation of fictitious money is a totally false globalization unsupported by economic facts.

The more important Central Banks are becoming skittish about the enormous amounts of “reserves” which they are accumulating. The Central Bankers are bureaucrats, but they are sensing that these enormous holdings are rather worrisome; however they do not know what to do about them. The fact is, they have been had. Their “reserves” are simply numerical and lack any substance. They are imaginary and as useless as castles in the air, unless they can manage to get rid of them by passing them on to some unsuspecting seller of tangible goods.

China is now going around the world – especially Africa – looking for opportunities to buy raw materials (a Chinese delegation will be present at the First International Mining Forum in Mexico, the middle of March). For the same reason, the Central Banks that subscribed the Washington Agreement (to sell no more than a certain amount of gold each year) have since 2006 lost their former appetite for gold sales and they are not covering their allotted sales quotas. It appears that they have finally realized that the reserves that are actually worth something are the gold reserves, and not the “foreign currency” bond holdings which they were so eager to hold because they “provided earnings”.

However, if they start to unload their imaginary holdings, the exchange value of the holdings will begin to fall. So they are in a dilemma, a choice between two distasteful alternatives: “Shall we hold on to the imaginary money and wait and see what happens, or shall we begin to unload it and risk collapsing the value of the larger part remaining with us?”

Up till now, the Central Bankers have been doing what bureaucrats usually do when they are faced with a difficult choice: nothing. They are waiting to see what happens.

More than half of the world’s Central Bank “reserves” are held by the Central Banks of China, Japan, South Korea and Southeast Asia. These Central Banks ended up with these huge “reserves” because they accepted a means of exchange - which was no more than imaginary money, digits on computer discs - as if it was payment. In other words, they believed a fairy tale, like the one where Jack trades his cow for a handful of colored beans.

So, we are living in a fairy tale world, where money is not money at all. Alas, reality cannot be fooled by means of fairy tales. How shall we fare, when the dream has vanished into thin air and the last fool has had to recognize the difference between a payment and a fairy tale?

© 2007 Hugo Salinas Price
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Hugo Salinas Price
Mexican Civic Association Pro Silver, A.C.
Mexico City, Mexico
www.plata.com.mx
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