Bretton Woods Monetary Institute & Festival

“The aim of the Bretton Woods Conference was the creation of a dynamic world community
in which the peoples of every nation will be able to realize their potentialities in peace.”

Henry Morgenthau, Chairman 1944 Bretton Woods Conference & United States Secretary of the Treasury.


Gold Room at Bretton Woods Hotel


Written and offered for your consideration by Richard Kotlarz
Contact Rich: phone #218-828-1366 or email:

THE SIX STAGES OF COPING (in a Debt-based System)

                  Stage #1 – “Let the market correct itself”

                  Stage #2 – “Borrow” More Money

                  Stage #3 – Call for the Government to “Balance Its Budget”

                  Stage #4 – Try for a “Positive Balance” in International Trade

                  Stage #5 – Allow a Limited Wave of “Bankruptcies”

                  Stage #6 – Restarting the Economy via “War” and “Sub-Prime Lending”E 

Summation of the Monetary Problem: 

Within the present system, money is “loaned” into existence through a private banking system with a compounding “interest” fee attached, but the money necessary to “pay back” this “interest” is not issued. Thus, the only way the economy can be maintained with an adequate money supply, while allowing the people to pay their bills and consume their own production, is to continually “borrow” ever-greater sums of money at a compounding rate from private banks. 

Unless this is changed as the operative principle by which money is created, issued and controlled, virtually all tangible assets in the nation will, in effect, be confiscated by the lenders through default. The social order will be destroyed, and the earth itself will be ruined.

The Six Stages of Coping: 

Within the present “debt”-based monetary system, there are essentially six ways by which the shortchanging of the market cycle caused by the “interest” charge attached to the creation of money are ostensibly addressed, or, more accurately, coped with. In practice these six stages tend to unfold in a general progression as follows:

Stage #1 – “Let the market correct itself”

This is “the solution” that is generally promoted actively in the “conservative” philosophies of “free market” ideologues. Allow the “business cycle” to “hit bottom”, so the rhetoric goes, and eventually it will “bounce back” — if, that is, the government can restrain itself from interfering. In reality, left to its own devices, the market will tend to go through a process that approximates the following:

When people have lost confidence in their economic prospects for their future, their tendency is to cash in the paper “assets” (stocks, bonds, title to their home or car) they are holding for whatever they can get, and then concentrate on paying their bills until times get better. 

As loans are paid off, the principal amounts remitted to the banks are extinguished on the banks’ books (i.e. the money goes out of existence), thereby reducing the money supply itself. This, in turn, causes a further reduction of economic activity. Over time, this results in a spiraling economic contraction.

This shrinking of the money supply is slowed when the prospect for “reinvesting” it (i.e. re-lending it out at interest) diminish to almost zero. That is, those “investors” who have bought “debt paper” (i.e. loan contracts), in order to receive the “interest” payments, start spending those payments before their money loses further value.

As people repay their bank loans, the principal part of the loan (as opposed to the interest) is not deposited, i.e. does not enter into circulation but is “extinguished,” with the push of a button on the computer. As a result, these would-be “investment” funds become an increasingly large portion of the money still in circulation. 

Eventually those holding these funds will feel the need to start using them for living expenses. These purchases will reintroduce pent-up money back into circulation, this time without an additional interest charge attached (since it is spent into circulation rather than loaned-with-interest). Still the contraction will go on, as there will be a further shrinkage of the monetary pool, as people hold onto their most essential properties (houses, cars, businesses or whatever) by continuing to make payments on the bank loans against them.

Federal Reserve banker John Exter predicted such a scenario when he warned: “the Fed is locked into this continuing credit expansion. It can’t stop. If ever bank lending slows . . . the game is up, and the scramble for liquidity starts.” and “The Fed will be powerless to stop a deflationary collapse once it starts.”

Indeed this “deflationary collapse” has evidently started with the 2008-9 economic crisis. There are some who say we should just let it go and allow the market to correct itself, even if that means enduring another Depression. After all, did we not have one in the ‘30’s, and did we not come out of it fit to fight WWII and emerge as a victorious superpower? 

There are many factors that are overlooked in such a statement, not the least of which is that the world has changed drastically since the decade of the ‘30’s. We live in an unprecedented era. Among other things, the farms, industries and fundamental skills upon which our nation subsisted during the last Depression have effectively atrophied. There is not much that remains in the way of subsistence capability. For practical purposes we in the “developed world” are no longer living on the land, and therefore there is no land to return to as a refuge for weathering another economic storm. Monetary collapse was horrific last time; it would be unthinkable now.

Stage #2 – “Borrow” More Money

The monetary market can be left to correct itself for only so long. Sooner or later someone, be they private individuals, corporate entities or government, must re-initiate the process of taking on more “debt”, or the money supply will drop to zero, literally. If the citizenry can’t be inspired to do it, then the government (primarily at the Federal level) will feel virtually forced to step in as the “borrower of last resort.” Theoretically, this is what the “bailout packages” have been all about. They are designed to inject “borrowed” money back into the economy to jolt it back into activity. The gambit seems to have stabilized the situation for now (or at least slowed the slide), but clearly it has not been a solution, as even this massive new “stimulus” has not had a big enough effect to get economic activity trending upward again.

There are a number of reasons why this is so, but much of it is rooted in the fact that confidence in future prospects within the present economic regime has been largely destroyed, even amongst bankers (which is why they are so reluctant now to lend even to each other). The ongoing ability and willingness on the part of the citizenry to take on ever greater amounts of “debt” is the very engine of the Federal Reserve monetary scheme, but the fantastic magnitude of the numbers associated with the latest “rescue packages” have effectively dampened any expectation that the effort will result in a new round of “economic growth.” When the plan for keeping the economic ship afloat has been reduced to “borrowing” ever greater amounts of money to pay off previously “borrowed” money, plus “interest” due, as opposed to issuing money based on real production, there is not much to encourage the citizenry to borrow more money. The last remaining engine of “debt”-money expansion, then, is abject necessity, as people resort to re-mortgaging their homes, laying down their credit cards, visiting payday lenders, or find other survival techniques to get money for gas, groceries and crucial bills.

Stage #3 – Call for the Government to “Balance Its Budget”

Caught between the prospects of a collapsing money supply and a galloping “indebtedness,” and lacking any effective consciousness of the monetary taproot of the economic problem, those in positions of social, political or economic leadership search for a more nuanced position by which they can wiggle through the present crisis. This results in endless pontificating in the public discourse about the need for government to finally “conduct itself like a business,” “cut its spending,” and “balance its budgets.” 

This is, effectively, a rhetorical tap dance that tries to straddle the opposing “necessities” of, on one hand, employers avoiding going hat-in-hand to the banking system for more funds (by firing people, thereby shrinking the economy), and/or on the other, for someone (government or private) to go to the banking system to take on enough new “debt” to re-prime the economic pump so those people can be hired back again; all while money is being lost from the monetary pool at a compounding rate due to the leakage caused by having to make “interest” payments on every dollar in circulation. This is the mother of all “Catch-22’s” because there is no conceivable nuance of taxing, spending and/or other policy parameters that can prevent an arrangement founded on the utter illogic of a veritable debt-pyramid-scheme (i.e. “Ponzi Scheme”) from failing. 

To think otherwise is to imagine that a one-hundred gallon tub can be made full with fifty gallons of water simply because one can get water to rise to the rim here and there by a fury of churning. So-called “public monetary policy” almost invariably constitutes essentially a fuss and froth of manipulation to mask the fundamental problem, but the basic parameters of the effort are wholly flawed and the so-called “debt” inexorably continues to mount. Still, generations of politicians, often with good intentions, whether Conservative or Liberal, keep trying.

Alas, life must go on, but no one wants to be the party to take on more debt, so behind virtually all personal, social and political contentions there lurks an effective agenda to clear one’s own debts and oblige someone else to take on the burden. The citizenry expects the government to take care of them through hard economic times (while “balancing its budget”, of course), while our public servants try (often sincerely, albeit amidst much rhetorical hand-wringing about having to “balance the budget”) to pass the onus back to the citizenry (the people need to “make sacrifices”). The corporate sector attempts to recoup enough liquidity to float its own financial ship by inflating the prices of its products, while common folk and consumer activists wax outraged at corporate greed. The mavens of finance, academia and media weigh in with their own expert obfuscations. Saturation advertising induces consumers to slide unmindfully into debt to maintain lifestyles, keep up with the Joneses, or even do one’s patriotic duty. For the most part, we don’t think about our affairs this way, but the engine of “debt” is always there subconsciously driving every fact of our lives, including how we think, how we feel and how we act. The consequences are all-consuming.

The long and short of the situation is that, within an economic regime financed by privately-issued “debt”-based money, with a compounding “interest” fee attached to its very creation, there is no conceivable combination of factors that could allow for the closing of the production-consumption loop in the private sector, the balancing of budgets in the public sector, and the prevention of the whole societal enterprise from sliding into irredeemable “debt” to those interests who control the creation, issuance and dispensation of the money (save by the altruistic deed of everyone who benefits from such an arrangement gifting their thus-gained surplus back to society so that the money stays in circulation and “indebtedness” does not snowball).

The upshot of all this, it seems, is that another way has to be found to find the money to simultaneously complete the private market cycle and balance government budgets. If the money can’t be found within the domestic economy, then perhaps it can be found outside of it.

Stage #4 – Try for a “Positive Balance” in International Trade 

The fourth stage in attempting to solve for the U.S. economic riddle is to try to earn the money lost through “interest” payments by achieving a positive balance-of-payments account with its “trading partners”; that is, by selling more to our international trading partners than we buy from them so we can keep the extra money. This notion overlooks the critical fact that the national currencies of every other nation on earth have the same fatal flaw as the U.S. dollar; that is, they are also created and issued via loans from private banks. This means that our foreign brethren also lack the ability to close their own domestic market cycles without resorting constantly to taking on more “debt”. The logic of their situation, then, compels them to take advantage of their trading partners, including the U.S. economy, to financially survive.

It is impossible, of course, for every nation on earth to beggar every other nation, and so in the domestic political life of each, recriminations inevitably ensue about the “unfairness” of foreign trading partners that does not allow one’s own folk to recoup their own just due. The impossibility of trade equity manifesting in a world where the trading order is structurally a less-than-zero sum game almost never seems to occur to anyone. 

The problem is tantamount to having a tub where one’s own liquidity is leaking out at a compounding rate, and then blaming everyone else, who, it happens, is experiencing the same problem, instead of finding and remedying the common reason for the respective leakages. Lacking such a coming to one’s senses, the de facto reality is that the seeming net “indebtedness” of the world to the extra-national private banking system, and now extra-national corporations, is, in the aggregate, being driven up virtually without regard for other factors. In the end, this is a lose- lose- lose- lose- lose-. . . scenario for all peoples.

None of these coping strategies are satisfactory as solutions. They may offer temporary relief here and there, but in the end only tend to compound the problems of the system. They are the very roads to unintended consequences.

Stage #5 – Allow a Limited Wave of “Bankruptcies” 

As the economy as a whole slides into unsupportable “debt”, there will inevitably come a time when a wave of bankruptcies will begin to occur. This will generally be followed by a spate of hand-wringing in the public discourse warning that this phenomenon poses a threat to the viability of the economy. There is an element of truth in this, in that the publicity surrounding such a wave of defaults will undermine confidence in the economy, thereby discouraging people from going to the banks to “borrow” more money. From a strictly monetary perspective, however, bankruptcies are the safety valve of the “debt”-based monetary system. This is the great unspoken secret of capitalism, and is why, at heart, the very persistence of ”capitalism” itself, as a phenomenon, depends on there being “winners” and “losers” (much like a casino). 

When someone who has taken out a bank loan goes bankrupt, most “debt” contracts against any money he has “borrowed” from a commercial bank and spent into circulation are generally canceled (there are exceptions), but the principal sum remains in circulation. This means that the amount of money in circulation remains unchanged by the bankruptcy, but the net size of the “debt” obligation it is obliged to support is reduced. As “interest” payments are made, this “debt” obligation, and more, will be incurred again, but the bankruptcy allows for a period of respite.

While a wave of bankruptcies can, in a manner of speaking, be accommodated, the numbers cannot be allowed to spiral out of control. This means that the officials who control monetary policy find themselves in the position of having to walk a line between causing the injection of more money, or less, into the economy. If it allows relatively more, the economy will revive and confidence, theoretically, will be restored, but at the price of taking on still more “debt”. If it opts for relatively less, the number of bankruptcies will be greater, but a measure of the “debt” load carried by the money supply will be reduced for now and into the future. Neither course, however, provides any real solution to the unworkable algorithm at the core of the monetization problem.

The issue of more or less money injection is not the only concern. It is inevitable that any policy adopted will affect the matter of which participants in the economy will be obliged to absorb the brunt of personal trauma that attends bankruptcy. In this ongoing economic crisis, it appears that policy makers have opted, for the most part, to bail out the fortunes of “Wall Street”, while letting “Main Street” take the hit. This has led, as might be expected, to much heated debate about both the moral equity and the economic veracity of the road taken. It should be noted that either way there would have been negative effects, and still no solution to the basic monetary dysfunction that caused the seeming inevitability of this desperate measure as an economic remedy to begin with.

Stage #6 – Restarting the Economy via “War” and “Sub-Prime Lending” 

While the pressure on the economy from so-called monetary “debt” can be relieved for a time by a wave of bankruptcies, ultimately the economy cannot be sustained by this phenomenon. Sooner or later the vanishing money supply must be replenished. This means that at some point someone must be willing to go back to the banking system and begin ”borrowing” money on a massive scale. This can be done either by individuals and corporations in the private sector, or by government at the public level. The question then becomes, how can the private and/or political will necessary to bring that about be mustered, given the factors enumerated above that work increasingly against such an occurrence?

Historically, the answer to such an impasse has been to find a war to get involved in. This is why in monetary history “war” has often been referred to as the “great engine of credit.” Its effect is to stir up the emotion of the citizenry to such a pitch that We-the-People are willing to forgo our qualms against going into excessive “debt” that tend to hold sway as a moderating influence in the coping stages enumerated above. When there is an enemy, real or imagined, that threatens the very existence of one’s family, nation and sacred way of life, worries about “debt” become, relatively-speaking, “trivial.”

These “wars” can take different forms. The most obvious is the “hot war”, which is a military contest with a foreign state. It can also be a “cold war” against a rival. Increasingly, it has manifested as a “simmering war” against an enemy who threatens our “domestic security”. These “wars” can also be social in their focus, such as in the “war on poverty”, “war on drugs”, “war on AIDS”, and so forth. Monetarily speaking, the particular nature of the “war” is secondary to the fact that it motivates the society to start “borrowing” money again.

In the past “war” as an agent of “debt” creation was the most common mode of overcoming “debt” phobia. Until the mid-twentieth century, the world still had geographically defined economic frontiers, and so “hot wars” were the way to go, but within an economic production and trading matrix that has gone global and become intimately interconnected, they do too much damage to the socio/political/economic house. In a nuclear age it has become reckless to pick fights between major states, but the hot-war technique can still be employed in a limited way if the perception of “the enemy” can be isolated to defenseless “rogue states,” or “terrorists” holed up in caves in some remote mountains.

Since WWII, “cold war” has been the stimulus of choice, but with the collapse of the Soviet Empire a new rival has had to be concocted. For America, the leading candidate for this role is, it seems, an emerging, but still “communist”, China. Yet the specter of a second “superpower” has not sufficiently coalesced to warrant the levels of military spending necessary to sustain the economy’s appetite for “debt” money, so a “simmering” war on a largely amorphous “terrorist threat” has stepped in as the military exigency of last resort.

On the domestic front, the social “wars” have been largely disparaged politically as “socialism” or “wasteful liberal spending”. This factor is making a bid to be revived with the proposed legislation for national health care, but that has not yet manifested. To be sure, much social spending continues in the form of Social Security, Medicare and “welfare payments”.

Since WWII another generator of “debt” has been spending on infrastructure. This has been spearheaded largely by government, as it sought to provide what the political establishment saw as necessary elements of the commons for a burgeoning nation. One item of note was the interstate highway system, a massive public work whose ripple effect caused a commensurate investment in private infrastructure around these city-connecting and city-center-bypassing corridors. There were also large investments by industry in updated productive capacities, though this factor was attenuated early on by the inexorable crumbling of the traditional “rustbelt” industries.

In the private economy the primary engine of money-creation has been consumer “debt.” Through the early part of the post-WWII period this factor revolved around the ballooning demand for consumer goods, fueled largely by need to outfit Baby Boomers and their parents during their migration to the suburbs, as expedited by the interstate highway system. As the decades progressed, the factor that came to the fore was the “housing bubble.” At length this boom could not be sustained, but the phenomenon had become such a crucial vehicle for ongoing “economic growth” (read “debt-money creation”) that we of this culture, buyers and financiers alike, did not know how to reign in the resulting orgy of speculation. The game was stretched beyond supportable limits with the sub-prime lending phenomenon.

It should be noted here that the “sub-prime lending crisis” did not bring down the economy. Rather it stretched out the pyramid scheme represented by the “fractional reserve” monetary regime by effectively sacrificing people as the price for “borrowing” more money into the economy to make compounding “interest” payments on old bank loans. When “unqualified borrowers” defaulted after a time on their payments, the money they failed to “pay back” remained in circulation, but the “debt” against the portion of the money supply it represented was lifted. From the perspective of the economy as a whole, this became “debt”-free money, and it continues to circulate to the benefit of everyone. Indeed, it may be fairly argued that without the net injection of funds unburdened by “interest” via “sub-prime lending” practices (however scurrilous), the crisis we are experiencing now in the economy would have precipitated years ago.

The bizarre reality of our current predicament is that, far from being the sources of financial “costs” that are bankrupting the nation, such economically dubious enterprises such as sub-prime lending and wars in the Middle East are not the reasons that we cannot, supposedly, afford domestically to build infrastructure, hire teachers and provide for universal health care. On the contrary, they have functioned as the cash-cows for the “financial liquidity” (i.e. currency) needed to keep the economy afloat so that the money necessary to pay for infrastructure, teachers and health care is available in circulation at all. None of this is to be construed to mean that enterprise that is inimical to human life, such as wars and mortgage swindles, are somehow necessary elements of economic survival. Rather, it is a telling indicator that, monetarily speaking, we as a nation have descended into such madness that such barbarous enterprises have come somehow to constitute the economics of last resort. 

One area where private citizens are still taking on a burgeoning “debt” is in student loans, but this source of cash too will soon get tapped out and remain as a crushing residual burden on the populace. The notion that student “debt” is somehow necessary to “pay for” education is a tragic delusion. Its real purpose (however unintentional) is, rather, to prop up the mathematical Ponzi scheme dubbed as the “Fractional Reserve Formula,” or “Mandrake Formula” that serves as the “foundation” of the private banking system by which our money supply is issued. Unfortunately, We-the-People are in a very real sense sacrificing the very lives, blood and futures of our children to satisfy this delusion.

In the meantime, the numbers associated with “debt” have reached such staggering proportions that, even with the military and social wars combined, it has grown to be inadequate for providing the margin of liquidity needed to float the economic ship. Ergo, there has arisen the “necessity” for “troubled assets” (essentially worthless paper) bailout programs. These have injected massive amounts of freshly “borrowed” money into the economy, but because they are so far removed from any real basis in new wealth creation that could justify them as collateral, confidence in the monetary system, including amongst bankers and others who work in finance, has been largely destroyed. In more rational economic times, these “toxic assets” would have been permitted to fail, thereby causing a lifting of a massive increment of the “debt” burden against the money supply. Had we as a nation exercised sufficient collective wit and courage to forebear this initiative, it would likely (the prospect is not certain, since the economy relies in the end on myriad human factors) have given the economy a new lease on life, but we as a culture (the problem is by no means only limited to bankers and politicians) have become so addicted to the illusion of “debt”-based financing as the basis for our “economic security” that we no longer have enough objective distance from the monetary problem that is ruining our lives to see it.

That is the bad news. The good news is that a solution to the monetary crisis is only a wake-up call away, assuming, of course, that we can rouse ourselves out of our individual and collective monetary comas.

Taking the Beam Out of One’s Own Eye

I would hasten to point out that the stages of monetary dysfunction as given above are a product of our culture, and not a function of any person or class of persons, appearances to the contrary notwithstanding. We are all, in our own ways and niches, parts of the problem and potential agents for the cure. The Biblical injunction to take the beam out of one’s own eye before attempting to remove the mote out of our brother’s eye has never been more apt. We need dialogue and understanding, not recrimination and confrontation, to deal with this all-pervasive social matter.

The Threefold Solution

There is a threefold solution to the economic conundrum, but it is one that has not yet been consciously tried in the world. To be sure, elements of it have found their way into the economic life from time to time, but for the most part such developments have been desultory, incomplete and unconscious. My intention for the rest of this treatise is to bring what is required to a clarity of consciousness. Before embarking on such a delineation, however, it is necessary to identify and name the three basic domains of economic life.

          (1) – The Cultural Economy

          (2) – The National Economy

          (3) – The Global Economy low

                                                                                                                         …. to be continued