From the standpoint of common sense is not clear why a country with vast natural resources, strong manufacturing capabilities, and extensive human creative potential has been at an economic dead end, where planets and factories have stopped working despite a real demand for goods and services.

The Nobel laureate in economics Milton Friedman has come to the unequivocal conclusion that a well-conducted monetary policy is the determining factor for the development of the economy. And if that economy does not grow efficiently, then the cause must be sought in mistaken notions of monetary policy, or the ineffectiveness of the current financial system.

The current crisis clearly shows that the capabilities of the real economy have moved beyond the capacity of the existing monetary system as it is regulated. The present day financial system has come about because of the imbalance between supply and demand. New financial instruments have not yet been created in the economy to restore this balance.

If the system is responsible for all-too-frequent and ever-worsening scales of disruption, then equally the internal mechanism of the system itself gives rise to serious miscalcul-ations, and not only in financial-economic sectors but also in the political system of social organization. It is obvious that the modern state system is complicit, therefore, in the coming about of the current economic crisis. There is also the prospect of a social crisis due to significant flaws in organizational state structure.

Let us not forget the essential dynamism of the economic cycle itself. The economy grows as a living organism. And with its development there always comes a time when existing rules, which hitherto have created the necessary incentives for economic development, become a brake, leading to decline. An optimum political system would respond to such "clinical" changes in the economic field in a timely fashion.

Russia has been in the process of building a budget surplus in recent years (up to 3.8 trillion roubles). Unfortunately, this money has not gone into the modernization of the economy, about one-third has been invested in the securities of Western countries, that is – it has been exported to other countries. As a result of the crisis, all these securities have become worthless in the space of just few weeks. Moreover, there exists an excessive budget surplus as a result of the excessive tax burden on real business and people.

A brief look at any set of accounts of any business in Russia, will demonstrate the fact that the government takes more than 40% of business profits. Thus, on one hand, a shrinking payroll reduces the purchasing power of the population, while on the other hand such taxation reduces the competitive ability of companies to produce goods. Moreover, there is no stimulation of Russia’s export market. These economic conditions have forced the business community through a kind of mediation, namely "concord".

Central bank policy has been to strengthen the rouble artific-ially. Significantly, the official inflation rate of the national currency is 4-5 times higher than the rate of inflation in Western countries, which has stimulated the export earnings of the country (see the magazine "Money» № 6 of 16.02.2009g., N. Petrakov, http://www.kommersant.ru/doc.aspx?DocsID=1113254). Russia's economy is a sick patient, whom the doctor (financiers) continuously bled while saying - "Wait, soon you will feel better. The steady loss of blood means that the patient has no strength to move.

Cash flows are the lifeblood of the economy. In recent decades we have witnessed a fundamental change in the very essence of money, yet the principles of movement and distribution of cash flows have remained unchanged. Radical changes have been in the money supply. Modern money is no longer providing the Gold Standard.

In order to see clearly what this means in practice, let us digress back into the past. Paper money was originally constituted as treasury bonds, which corresponded to the real value of material resources in the possession of the Treasury. These were money bills - expressed in numeric form equivalent to wealth as measured against gold. The state treasury would accumulate a certain reserve of precious metals and to ease the traffic (or exchange)of money, would then produce more or fewer of bills as appropriate, but with the proviso that paper money could always be exchanged for it’s value in precious metals.

An important corollary to the advent of paper money may be seen in the unique opportunity for fraud among financiers – as money could always be printed beyond the volume of gold reserves. This may be done on the understanding that not everybody at any given time will want to rush to exchange banknotes for gold. The alchemical desire to turn paper into gold was never manifest because the paper money provided by the bank came in the form of interest-bearing debt. People felt it to be fair because in fact the interest-bearing debt passed on valuable metal, the owner of which, ultimately, was the creditor.

The modern financial system of money is not backed by precious metals, or any other property. It is considered that the volume of modern money is tied to the gross national product (GNP). Does this mean that money is generated by GNP? Clearly not for the reason that GNP does not belong to the central banks issuing of national currency. Nor does GNP does belong to the Federal Reserve System (FRS), which produces the world's major currency - U.S. dollars.

The Federal Reserve is a privately owned structure, consisting of 12 private joint-stock banks, each of whom has the right to issue money. There are state reserves with each backing up the other. Their autonomy means there is no legal obligation on the part of the Fed to seek the approval of the President or heads of other state structures as to the endorsement of decisions made by the main shareholders.

Conventional wisdom has it that the underlying principles of modern day lending institutions are as fraudulent as their predecessors under the old gold standard, namely by issuing unsecured money bills and asking for ‘real wealth’ remuneration.

Those who know banking, can rightly say that the Fed makes monetary emission against securities, which are mainly - are U.S. Treasury bonds. Consequently U.S. Dollar secured public debt. But the Treasury does not participate in the exchange of bonds for real wealth, they exchange them for non-cash dollars (numbers on the computer). In addition, in late 2003, the U.S. adopted a law stipulating that as collateral to issued by the Fed dollars can be any assets of the Federal Reserve Bank - the same dollars, for example. And if you bring in the Federal Reserve Bank money and ask for payment, then Bank simply exchange your money for smaller denomination banknotes (http://malchish.org/index.php?option=com_content&task=view&id=308&Itemid=31).

The Fed releases bank notes everyday, totalling approximately 635 million dollars. The price of printing one bill is about 6 cents. The private banks that make up the Federal Reserve, provide credit money at low interest to the State and other banks for this purpose. Commercial banks, in turn, transfer credits from their mark-up. This amounts to business as wealth is created through money supply in real values (GNP).

The assumption that money generated through the borrowing of money from investors is not borne out by the empirical evidence given that the bulk of the U.S. population lives in a debt (the debt of American consumers at the end of March 2009 was 124% of their disposable income). Moreover, 80% of the population of Russia generally lives below the poverty line.

In fact, these two economies are adding to the debt as the creditor demands of the debtor the debt portion of GNP. That is, the lender gives the debtor a numerical equivalent that the former has no material entitlement to – he owns the right to issue money, the printing press and its products. Paper costs less than 6 cents per dollar bill as we have seen.

Creditors do not demand of debtors money as real material collateral when the loan is in the latter’s bank. As soon as the bank gives credit, however, this pledges security on the sum extended to the debtor. Thus it appears that the Fed prints money to loan out, which is secured by the tangible values of the debtor. Banks require the debtor to pay not only interest on the loan itself but for work on the issue and maintenance of money. This would happen in due course were the banking institutions themselves to own assets of real material value (as was the case on the gold standard).

For purposes of further clarity, the situation can be considered through an analogous example of a desert island not marked on any map. Let’s suppose we found the wreckage of the ship off the coast of an uninhabited island. A certain number of people have survived the wreckage and have landed on the island. Among them is a banker with a bag of paper money, who advises members of the newly populated island to take money on the loan on condition that it is returned in full amount plus interest. The banker’s purpose, perhaps, would be to establish on the island a civilized system of exchange involving money. People realize quickly that the banker has only paper money, and is trying to capture all the natural resources of the island as well as to exploit the labour of his fellow survivors. This would cause a rebellion, the paper money would be burnt and the once civilized survivors of the ship wreck would resort to bartering like savages. If the banker had been more cautious, he would have acted differently.

It so happens that similarly the current financial system led by the Fed, prints money and conducts business and makes debtors of people and state institutions. But the current system does not cause rebellion still less disturbance within society simply because of stereotypical notions of money as security pegged to real material assets.

People continue to think that if money can buy real goods, it means that money is somehow secured if not against gold, then GNP. ItIt does not take into account the obvious fact that the financial sector is responsible for the emission (release) of money, which does not produce real value, and that GNP is not a public commodity. However, as a result of the abandonment of the gold standard, banking institutions have lost the ethical and moral right to conduct business as their practices no longer correspond to the spirit of the moral laws governing society.

Here it is appropriate to recall the statement by U.S. President Jefferson, the author of the Declaration of Independence: "If the American people ever allow banks to control issuance of their currency, first by inflation, then deflation, the banks and corporations...will deprive the people of all property.... I sincerely believe that banking institutions are more dangerous to liberty than standing armies."

The impetus for the global financial crisis was not created by default on loans as a result of the fall in income. Most people have only one source of income - wages. The more loans taken out by citizens, the more they will have to return from their earn-ings resulting in less disposable income for consumer products.

Although the credit system is basically designed to promote consumer activity, this very activity also promotes a corre-sponding increase in the level of production but only in the short term. In the long term, following a surge in consumption (artificially created by financial institutions for lending money), there is a decline in demand which leads to a reduction in output and then a reduction in the level of employment.

After losing the only source of income (wages or salary), people stop paying for credit, which dramatically reduces consumer spending. Commercial banks, working with potential borrowers in this situation are forced to adopt more stringent and more selective lending policies, which in turn lead to a yet further decline in demand, which leads to reductions in production. This is a familiar picture, which we can see once again as a result of the prevailing financial system.

The manufacturing sector of the economy, engaged in the product-ion of goods tries to survive in times of crisis by turning to credit institutions, which gives the sector money. This fails to lead to innovation and restructuring. Next, in the event of bankruptcy, the bankers take possession of manufacturing facilities. The state, in order to avoid social upheaval is forced to increase spending on social programs as well as to increase the budget deficit. It then falls into debt to the Fed or central banks. The entire burden of these additional costs in the form of inflationary tax is distributed to all holders of the national currency (the population).

The dollar is the "anchor currency" for many countries including Russia. This means that the national currency of many countries is pegged against the U.S. dollar. Therefore, the crisis, initi-ated in America, has spread to the entire world economy. There has been a variety of games with lending rates but these has proven to be incapable of salvaging the situation, indeed the have driven world markets to a standstill situation in which interest will be offered to credit the money in the long run, which offers few solutions in the short term. To overcome the crisis the very principles of the financial mechanism relating to the overall system of the distribution of money must be addressed.

Some economists propose handing over the Fed to the state. It would amount to little difference, however, as to who prints the money. Theoretically Gross National Product belongs to neither the state or the Federal Reserve. GNP may be appropriated by the state when non-market principles of privatization (appropriate-ion) are applied. Such economic principles have proved to be ineffective in practice, however. The ineffectiveness of command economies and totalitarian policies lead to the disintegration of the socialist camp (see "The Road to Serfdom" Hayek).

As for today's national central banks, on the one hand they are engaged in the financing of state budget expenditures in excess of tax revenue (for the debtor - the government has always an infallible right to issue to the central bank). On the other hand, the central banks are a tool for the underpinning of the entire cartel of commercial banks, which are now in all but name bankrupt. Their continued existence is only possible through unrestricted grants by central banks, which have recourse to the printing presses. The resultant inflation is invoiced to the population as tax.

All modern banking systems are implicated in the securing of profit from private ownership through the nationalization of banking losses (i.e.through the inflationary burden on society).

In the nineteenth century, at the time of the gold standard, the same economic cycle held, i.e. periods of sharp decline in economic activity. Then periods of reduced production and lower wages, which were painful but quickly passed over. In our time we have superimposed the same economic cycle but with an un-limited emission capacity for central banks and the Fed. This has resulted in a new phenomenon - "smoothed recession", which leads to economic stagnation.

A return to the Gold Standard has been discussed in many circles. It is a forgotten fact, however, that the Gold Standard has never been an insurance against economic crisis. The U.S. became an economic superpower just after gold was removed from circulation within the country. In addition, the current level of development and technological progress has reached such proportions that re-entering the Gold Standard would be meaning-less. All the gold in the world to come to light in the foresee-able future will not be worth as much as the production capac-ities for goods and services within the modern economic machine.

This would be the case with any single substantive standard. You can certainly try to artificially raise the cost by several orders of gold (or any other metal) but who will buy it then? People are unwilling to pay any more for something than its real value. As soon as the total value of goods and other assets exceed the value of the world's reserve, gold (or any other met-al) it becomes a weight that hangs on the neck of the economy and prevents it from developing further.

In order to at least partially (to 20% for example) ensure the cash component of the global money supply, the price of Gold would have to be artificially increased 10-fold. But partial reservation will not be able to serve as a sufficient check on credit expansion. Yet the phenomenon of economic cycles, which lead to crisis situations, is marked by such partial backup (see "Price and production" and "Pure Theory of Capital, Hayek).

As previous experience suggests, to prevent uncontrolled monetary emission, it is necessary to introduce a financial system with "Monetary Authority", which can have a significant positive effect even in the case of one hundred percent redundancy of the monetary base (see "On some issues of banking and the monetary system," Boris Lwin http: / / libertarium.ru / libertarium / l_pt_bankmyth). With the existing global stockpiles of gold - about 28 000 tonnes, and with the amount of global money supply - about 25 trillion in dollar terms, we would need to increase artificially the price of gold 36 times!

In this case, gold would cease to play a part in manufacturing (the true basis of the economy). At this price, it will replace other, cheaper materials, and bring about a 100% “golden para-dox", where all the physical qualities of valuable metals so appreciated and revered by people, would, by the same people, be left unmined and unused while remaining the sole backup tool for the financial system.

It must not be forgotten that for financial growth in annual GDP, there would need to be an equivalent level of annual gold output. Annual GDP growth would be artificially restricted by the gold-mining industry. Despite gold being a rare exhaustible natural resource the finite volume of gold production that can be produced by the mining sector would inevitably limit the growth of GDP. This is nothing less than a dead-end option.

Since the 1950s the Gold Standard has rightly begun to be treated as an anachronism. Obviously, this has meant that since then GDP growth is no longer dependent on the tapping of human creative potential (and relevant technological advances), but on production volumes of rather scarce natural resources – this is somewhat irrational.

The accelerated pace of global economic development, among other things, has been due to the mutual integration of the economies of different countries, which may now be described as an inter-national economic community. The dominant currency, the U.S. dollar, is the anchor for many countries integrated into the global market. The obligations of the central banks of these countries (the monetary base in the national currency) are re-served as U.S. dollars, having replaced the gold reserve. This has come about thanks to the undisputed success of America in the development of their economy and its sound investment policy in relation to other countries in the world market.

 

As a result, the international economic community has formed the view that the United States is the most reliable and progressive economic system, and the economic prospects of other countries are closely linked with heavy investments from America. More-over, when applied as a reserve currency, the U.S. dollar promotes fuller integration with world trade, thus the countries of this economic community have increasingly be able to take ad-vantage of the international division of labour as well as make and better use of their respective natural resources.

 

It is a logical course of action as long as the economies of the world market do not develop so much so that the total monetary value produced by and at real values are not exceeded counter-part values inside the American economy. This would be a situ-ation similar to the problem of the Gold Standard where the money of one country was impossible to assess against the total cost of products manufactured by other countries. As with the Fed printing money and the pumping of it into the American economy, any turning back of the clock is unlikely.

 

Confidence in U.S. dollars under such circumstances can only decrease. This raises the question of how to modernize world currencies. Who prints the money is of no importance, nor is the matter of whether or not a world currency is organized along the lines of the U.S. dollar. A more pressing consideration should how the flow of a global currency might come under the control all the countries - participants of the global market. If the global currency is to be the United States dollar, then the U.S. will need to introduce a new currency system within its borders.

 

To maintain the financial stability in each of the participating countries, the global economic community should be subject to an exchange control in which all of the obligations of the central bank’s monetary base are fully covered by reserves of the world currency. This would mean the central bank losing its right to regulate the exchange rate with its functions reduced to the exchange of national currencies for international business and vice versa. The high degree of redundancy of the national monetary base currency of the world would severely limit the freedom of the central bank and virtually eliminate the massive domestic public debt.

 

Any such community stitched together by mutual economic obligat-ions will then have much less control over domestic money creation, which would lead to real inflation and inflationary bubbles implicit in so unsound a financial practice.

American financiers have long understood the unique property of investment money – commensurate with real material values in the process of turnover. In fact, investment money once forwarded has not yet been seen to harvest natural resources nor has it embodied the creative potential of people or gauged the level of effective demand. In the presence of these factors, in order to start the process of creating real value in the financial system, we should issue an appropriate amount of money and distribute it in the form of loans among real businesses as well as consumers.

In order to see this clearly, it is necessary to look at the process of investment in more detail. During the days of the Gold Standard, investment created ‘value-added’ (the margin of the mark up against the price of the cost of production, in a word: cheating). It is in essence a question of re-investment. Businesses accumulate a surplus of money received in the form of profit (capital) and invest it in the development of production, as it sees fit. i.e. Investors initially have always been buyers of products. If you (the consumer) bought some goods and paid the investor an amount greater than its cost - it means you have helped a businessman in the formation of capital. But if the businessman spends this capital to expand production, then you have taken part in investment.

If the product were worth much less than the demand for it, then the margin of the cost would be high and the businessman will see a direct benefit in expanding production. When the market is saturated with merchandise, margins decrease in relation to the cost and production expands further, making production no longer profitable. When the market is oversaturated, buyers of goods are only willing to pay for them at the sum of a product’s cost – or even less. The manufacturer suffers losses and curtails or ceases production. Thus, consumer demand regulates market supply. In this situation, the process of capital accumulation from further investment tends to be slow. It is important to note that this refers to the effective demand as it relates to money supply in the economy.

The real flow of investment money (from a financial point of view) has been subject to at least two restrictions, the first, as has already been suggested, is the Gold Standard. Large-scale investments of money from the banking structure was not possible since the volume of paper currency was had always been pegged to gold reserves. This hampered the flow of effective demand and held down the level of wages. The level of demand for the prod-ucts depended not on the number of people wishing to buy them, but on those most willing to pay. With the rejection of the Gold Standard, the flow of investment money began to grow rapidly. This fact led to rapid growth and technological progress in the postwar years.

The only financial obstacle to further increases in investment, as well as for further progress in the economy, amounts to the second limitation: that of effective demand. If logic dictates the removal of the first limitation, moral and ethical issues emerge with the subsequent and necessary removal of the second. This is, of course, due to the strict dependence of the level of effective demand at the level of wages. Wage and salary levels must be maintained to ensure buying power among the population, which will grow in parallel with the growth of productive capacity resulting from technological progress. To shore up consumer buying power, additional sources of income have to be extended to ordinary people. This cannot be done without chang-ing the existing financial system of cash-flow distribution.

Investment targets (money intended for the creation and development of production) has only a small part to play in any society, mostly by businessmen, who are paid to participate in business processes which have surplus funds not needed for their consumption by way of operating costs(capital). The bulk of the population (employees) is not capable of doing the same because of a lack of investment resources to create a supplementary sources of income. The entire income of the overwhelming majority of citizens is merely compensation for work undertaken. Yet this very majority is also the main consumer of the entire mass of products. The businessman for strictly personal consump-tion does not require 1000 washing machines, televisions, refrigerators, vacuum cleaners and other such things. But it is he who has a surplus of money - capital, which is directed into investment (the creation or expansion of production). Of course, this creates additional jobs, but with modern high-tech modes of production, the number of jobs, even (theoretically) with high wages, can only increase slightly the total purchasing power of the population. While newly established production modes or expanded production is able to flood the market with additional volumes of production, all retail prices, then, outweigh the very marginal increase in purchasing power accruing from the creation of new jobs.

The very logic of technological progress suggests that over time there is the inevitable full automation of production processes. Imagine a factory, which employs several dozen people capable of delivering several hundred thousand other people with products but no investment opportunity. Accordingly, additional sources of income as well as the results of technical progress, will inevitably lead to a reduction in the number of jobs. This is the main factor of instability within the economic system, causing, as it does, an imbalance between supply and demand.

If we trace the history of the modern economy, it must be noted that the U.S. began to emerge as the global economic superpower from the time they began to pursue an ambitious investment policy, first in Europe and later in Asian countries. The expansion was possible(with the help of the monetary emission) only as a result of President Roosevelt’s consolidation of the position of the Fed, by removing gold from circulation inside the country (in 1971 all currencies had withdrawn from the Gold Standard).

American financiers have since understood this as the most effective use of investment money as a tool for business development and profit. Why wait for the value added accumul-ation of capital when this sum does not include the cost of production? We can say in broad terms that investment money is not consistent with the value of extracted natural resources and has not yet embodied the creative potential of people. In-vestment funds can simply print and sell - to pour money into the economy as a cheap loan.

To boost the economy, American financiers have been the first to apply the principle – using monetary instruments - of anticip-atory investment and growth through consumption. Massive and long term investment policies in the global market in (credit) dollars from other countries has allowed American businesses to acquire raw materials and energy resources, materials and cutting-edge technologies. All this, indeed, while real business is building new production facilities and creating new products at home accounted for in paper money.

Due to the growing demand for new, more efficient technologies, there has been increased investment in applied science, tech-nical innovation, education, etc. Technological advance has happened at an unprecedented rate in the U.S.A., facilitating an expansion of investment and new technologies in the world market. In this the United States condemned itself to widespread competition in relation to their own national products.

Real business in a tough competitive struggle where various ways are always being sought to reduce internal costs. This has introduced near-full automation of production (i.e. applied technology replacing workers). Wherever labour is sought, employers keep looking for cheaper and cheaper manpower. To this end, production facilities are often constructed outside the U.S. and other developed countries. All of these factors, ultimately, cannot but lead to increased unemployment and a drop in the level of effective demand. Crises in the economy arise from the imbalance between the capacities of production and consumption possibilities, where the total value of production exceeds the combined incomes of the general population (this refers to employees, rather than representatives of the business). With the current economic system it can only be a matter of time before the main focus of business interests is not business itself but crisis management policies.

Convinced that monetarism was not doing its job to regulate the economy, Western governments turned to the teachings of the famous economist John Maynard Keynes. According to Keynesian theory, there is an inverse relationship between inflation and unemployment (the Phillips curve). In order to provide employment and economic growth, the state must carry out its regulatory role through fiscal policy and monetary infusions from the state budget to the ailing industries.

But later, in practice it became clear that the replacement of market regulation by macroeconomic governance only provided a short-term positive effect. Between 1973 and 1975 there was an explosive global economic crisis, which was accompanied by a simultaneous increase in inflation and unemployment(there was no predictions to be found for this in the teachings of Keynes).

As a result of these processes, global economic thinking turned again to the principles of monetary policy, under which, banking institutions are the leading instrument for managing the eco-nomy, where exchanges in the money market are suppose to trans-late into exchanges in the market for goods and services. A this point the financial sector began to work on the production and distribution of credit money, not only for the purpose of investment in the production but also as a stimulus to purchasing power of consumers.

In 1990 all the leading economists and monetarists argued that in was incumbent upon the banking system to create a "new economy", which would rid societies of the boom-bust economic cycles which act against national interests. The financial sector of the economy was to use mainstream credit vis-à-vis rates for refinancing. This invention had nothing to do with secured securities but was rather a game divorced from the actual provision of securities.

Of course, the leaders of the financial world were well aware that monetary policies of this order lead to crisis. But to abandon such business in the face of crisis is not something that those who stand to benefit would ever want to consider: exchanging nominal ‘paper’ face values for real values would deprive the super rich of their hegemony. We should not forget that the process of crisis contributes to the rapid enrichment of financial management structures. Following the Wall Street Crash of 1929, the biggest tycoons of the day (the Rothschilds, Rockefellers, Morgans, Kennedys, etc.) expanded their fortunes. For example, the estate of Joseph Kennedy increased by 25-fold from 1929 to 1935 As James Garfield the 20 th U.S. President said: "Whoever controls the money supply of the country, is a complete master of its industry and commerce .... When you understand how easy the whole economic system ... is controlled by several influential people, you will not need to explain where the causes of depression and inflation are to be found."

Fierce competition with a limited level of effective demand inevitably leads to a decrease in the profitability of real business. Its representatives then have to switch to speculation and speculation in securities. In addition artificial monopolies come about when the big players squeeze their competitors out of the market with the help of "friendly" acquisitions and corpor-ate raids. These monopolies stop the market economy from working as price monopolies emerge. For example, stock exchange specul-ation, has seen the price of oil rise 6-fold since the beginning of this century. The economy has become degraded by super-speculation leading to inflationary financial bubbles.

Nevertheless, we have much to thank the existing financial system for. After all, it has demonstrated a unique ability to generate money equating to real values in the process of turnover. When the printing of money is not backed by tangible property in the form banknotes and, instead, assigned to real business and people, it creates new material wealth in the corresponding virtual value in printed notes. The current system can be regarded as a stepping-stone towards a less imperfect and harmonious economic model.

The imperfection of the current system is a vicious cycle of the distribution of money. The most salient fact about money as an instrument is that it is found within financial institutions which also happen to own printing presses. Even if we leave aside the moral and ethical aspects of this problem and focus on the technical points, we see that a systematic failure occurs at consumer level.

Extended intervals between the provision of credit will inevit-ably lead to a lower level of effective demand among the popul-ation. If consumers are not provided with cash resources of the nominal (price) volume produced by the real values, there is overproduction, a crisis of production, and business switches to the construction of artificial monopolies – the aforementioned game of finance and inflationary bubbles.

In this instance real business is unable to meet the challenge of building the necessary aggregate wage levels at the aggregate value of its output. As it contradicts the main survival strat-egy of modern business, which has become the maximization of profit. Due to technological advances, manufacturing processes have reached a level of automation, where "productivity" has little to do with the number of employees. The degree of automation is often found to be in inverse proportion of productivity to the skills and qualifications of work staff.

To date, the economy has not developed mechanisms capable of ensuring a stable synchronized system, aligning the level of nominal supply with the level of nominal demand without running into inflation. All known mechanisms lead to crisis and stagflation in the development of economies and societies.

The uniqueness of today's economic situation is the fact that all previous methods to combat crises have not been able to provide a permanent positive outcome. A return to the Gold Standard is not even a consideration. It belongs to the past. The introduction of a "Monetary Authority", by means of a one hundred percent reserve on national currency is not realistic either, as leading economic powers are unlikely to subscribe to a unity authority despite having the same problems in their respective financial sectors as each other.

Moreover, the anchor currency would amount to the same thing sooner or later as happened with the Gold Standard. The total real value of countries where the U.S. dollar is the anchor currency has also seen the development of their productive capacities exceeding the GNP of the United States. In this situation, the credibility of the U.S. dollar on international markets will certainly decrease, no matter how strong the American economy.

From this history we see that all banking institutions or public entities, unlike wholly business concerns, are unable to regul-ate economic processes properly, and can do nothing to oppose the development of crisis situations. The obvious regulators would be those for whom this economy actually exists - the people, but the population lacks the necessary and effective economic levers. Unless the interests of ordinary people serve business and not the other way around, it is only in this case that everything will fall into place.

The way out is seen in the introduction of a fundamentally new system of money distribution as well as the division of cash flows that reflect the nature of investment and consumption. Money, in terms of resource provision, is divided into two fundamentally different categories. GDP reflects the material properties relating consumer spending, while the investment of money expresses the essence of potential production capacity, which can be created whenever natural resources and human creative potential are present. The credit banking system would be ethically run and legally obliged to issue loans from money from its own mint insuring that the population will be provided with regular and constant investment, and consumer cash flow.

For business representatives and government officials, this statement would seem wild and improbable, as they may have to abandon the main objective of the entire business community - to maximize profits. But if the financial system does not provide the population with purchasing power, which will depend not only on wages, but also real opportunities for the manufacturing sector, the economy will not be able to develop further.

The modern economy is in an absurd situation. With all the tech-nological, industrial and raw material resources to meet the needs of society, the state is unable to exploit them for the reason that the tactical task of business development and technology, with a concomitant effect on profit, has become a strategic goal at state-level. At the same time, the real strategic goal of economic development - namely, the material well-being, harmonious spiritual, moral and intellectual development of civil society, has been subsumed at the state level by demagogy. A society of human values has been replaced by a state which values the purely material, which boils down to one basic impulse - maximizing profit.

To repeat once again: business is a tool for the solving of tactical problems relating to technology development. Modern business practices, however, have turned the situation on its head. At the cutting edge of society we find business develop-ment serving the interests of business alone and the interests of society are pushed downward. It is a widely held but mistaken belief that society will grow automatically when the development of business and various business technologies are given reign to create the consumer/citizen - the population in such a position is perceived as a tool - or an environment in which business can maximize profit.

The state system in reality is set so that companies serve the economy as an end in itself. Thus, the economy is closed in on itself. With the current financial model, there has been a mega-provision of funds to this end, which has disrupted the world order, resulting in the economy losing its core identity. The consumer/citizen within the business-oriented state has provoked others to counter-consumer attitudes towards the state and the civic values therein.

As noticed by many leading politicians and public figures, it is not only a crisis of the financial-economic system, but also a crisis of, or rather the collapse of, the existing system of values in the world.

Restoring order of things can only be possible once there has been a change of priority - the economy should serve society, not vice versa. The situation can be changed if the views of civil society in the political system will exceed to a much higher level of importance. It is this adjustment of the political system that is necessary if we want to break the impasse (see "The imbalance of political forces» http://roial11.livejournal.com/ from 27.01.2009).

A sycophantic media and an anaesthetized civil society naively coexist under an illusion of leadership – the "good uncle" who is so wise and noble, that will help solve their problems. Meanwhile, people who have got power in their hands are in essence no different from any anyone else. Everyone is subject to external manipulation in the sense that he/she can be deceived, intimidated or seduced into buying. And the temptation of personal power is often a determining factor in the conduct of business.

The world economic crisis occurring as a result of speculation, organized by the current financial system is direct proof of this assertion. The only way to change the order of society and the state is to redistribute power by deferring to civil society. Decisions taken by authorities should come about as an expression of the will of citizens. There needs to be a practical and transparent system for the interaction of government, business and civil society.

In fact, we have all the prerequisites for the birth of a new, improved socio-economic system in which economic progress and prosperity of society will thrive. This will depend not on the amount of natural resources and not on the volume of gold reserves, but the quality of the creative potential of people. One is impatient for the rapid development of such a formation in which the vital interest of all members of society is such a pre-existing financial and economic system. One must create new and better conditions in the economy that will ensure and promote the development of society as progressive, it is necessary for us all.

We all know that financial opportunity is the real lever for the government. In other words - the power is in the hands of those who have in their hands the right to issue money. This has been plainly stated by the founder of the world's banking dynasty, Mayer Amschel Rothschild: "Give me the right to issue and contr-ol the money of the country, and I care not who makes its laws!"

If the initial impetus for the creation and cash flow were not in the banking sector, but in the hands of citizens, then society will get its hands on the levers of economic control. Nowadays it is quite possible technically to organize this with the help of electronic monetary systems (see "A new model of the economy» http://roial11.livejournal.com/ from 15.01.2009). Electronic money is potentially much more powerful, flexible and yet a fully valid payment instrument Real (electronic) money in this instance differs from paper money as the computer differs from the typewriter.

First - electronic money in fact money is not money at all - it is only numbers (marks) that turn into real money only when transferred from the electronic purse of the individual as held by the bank. Therefore, an individual cannot without the help of the bank, cash e-money in order to make purchases.

Secondly - electronic money can be divided into any number of narrow lines (streams) for payment purposes. It can be redeemed only on investment, only for consumption (purchase of goods and services), as well as insurance, education, paying for housing and communal services, etc.

The formation of electronic purses does not require hugely expensive arrangements to create electronic wallets with narrow specialization as opposed to the creation of real money.

Such fundamentally important specializations for electronic money can be illustrated with the help of Irving Fisher's equation for an unknown period in a given society:

(I + R) V = PY, where:
(I + R) - the total mass of money, which consists of investment

money (I) and from consumer money (R);

V - velocity of money;
P - price level;
Y - number of exchanged goods (real output).

Fisher's equation reflects the fact that a correlation is almost always possible between communal means of payment and commodity-ies as the flow of money always prime-pumps the flow of goods. With this equation the function of the economy can be clearly seen. If the money supply grows, then the stable rate of turnover (V), the price (P), and output (Y) are all affected. Yet if growth is too rapid in the consumer component of broad money (R), and exceeds the growth rate of GDP - prices rise and inflation, latent or open, grows leading to an increase in the investment component (I), increasing the volume of production.

This equation also shows why it is important to create the necessary leverage to regulate the economy by dividing the cash flows of investment and consumption. Sharing real wealth is possible only by means of electronic money. Investment money from the electronic purse cannot be spent on finished goods or services. It can only be transferred to the bank under a target investment project to build or develop a specific company that produces goods people want. This money cannot be used in currency exchanges and for speculation in securities, which might lead to an inflationary financial bubble.

Commercial banks as of course receive information on customers through electronic media, which in turn is tied to the central bank and the money supply. To satisfied client/customer demands a great deal of paper money is needed. With the investment of money commercial banks will be able to finance real businesses, which will share profits with investors - the citizens. That is, the investment money will be profitable not only to banking institutions, but also the population as it fuels effective demand. At the same time representatives of real businesses will not be at the mercy of investment funds. They will be indebted to contractors for specific activities and materials. If the bank considers the relevant orders sound, it will transfer money to the accounts of contractors.

Thus, arranging financing and burning cash for the creation of new production will come not from the banking institutions but from future users - citizens who, accordingly, will make the products that exactly meet demand. This will benefit all stake-holders, real business will receive the necessary investment funds for production development and the banking system will guarantee repayment of loans. Citizens will have additional sources of income besides their core business, thereby increase-ing the level of purchasing power and the impetus for further economic development will be in place. In addition, citizens will have in their hands the levers of control over cash flows and, by extension, economic processes. Ultimately, they will guide the investment of cash flows for the production of precisely the kind of products and services that are needed.

As noted earlier, investment money does not initially correspond to extracted natural resources and yet-to-be-embodied human creative potential. That is, such categories are not given to precise calculation. Natural resources can be counted only very roughly and under a great deal of assumptions. Human creative potential cannot be calculated in general terms. Further natural resources relating to the planet cannot be expected, whereas human creative potential is developed constantly, not only quantitatively (the number of people with higher education), but also qualitatively (the former multiplied by the effectiveness of implemented innovations).

The marriage of natural resources with the creative potential of people can create value in terms of consumer demand, which may exceed the value created earlier. For example, you can create a typewriter, which can be superseded by the creation of a computer, you can replicate a library, with paper hectares of forest, and then you can record an entire library of digital media and put it in his pocket. Calculations as to money needed, then, should take into account the growth rate of technical progress in previous periods.

In accordance with the "monetary rule" described by Milton Friedman, monetary growth, stimulating economic development, should run smoothly and continuously from month to month. And the growth rate of the consumer component of the money supply must match the growth rate of real GNP. Therefore, electronic money must come in electronic wallets to citizens in equal monthly amounts over the annual period. And the amount of these revenues should be tied to the level of GDP growth achieved during the previous year, multiplied by a factor of accelerated technological progress, which primes the development of human creative potential. To ensure the predictability of the velocity of money, it would be necessary to introduce a mechanism zeroing electronic wallets at the end of each month. If electronic money is transferred beyond a month to the bank, it must be burned.

In addition to investment with electronic purses, there must be consumer wallets, each separated by a narrow specific purpose, i.e. wallets created to pay for medical or pension insurance to pay for education or to pay for utilities. Initially, in the form of electronic receipts, cash flows pertaining to social security will come directly and individually from the very people who are the interested parties, and commercial banks will remove them from their electronic purses and instead offer to pay financial institutions, serving the state budget. This system of the distribution of cash flows would be much more transparent and integrated than the current one. Only under such a system can corruption be removed from the very circumstances that allow it to thrive.

People will be clearer about how much to budget and what to budget on. They will be more able to assess the efficacy of state tax policy. In the social sphere, with the help of electronic payment systems, we will all move towards a market economy, because people will have a real opportunity to choose the insurance companies, educational institutions, medical institutions, service organizations, which best serve their interests.

It goes without saying that an e-money system would unify and simplify through digitalization the existing tax system that retains most of the hallmarks of nineteenth century complexity and awkwardness in terms of accounting and fiscal rigour.

From a psychological point of view, such a system would remove unnecessary tensions within society, because it will relieve people of their basic fear – being left without a livelihood. A person in modern society depends entirely on money. If he receives no cash income, he can really only live in an old people's home, in hospital or in prison. Often a person in a particular area simply has no choice. To feed himself and his family he should do what makes money regardless of whether what he does to this end serves the common good or not.

There is a widespread myth that additional revenue sources will lead to people stopping work in essential fields. In fact, this assertion contradicts the very essence of human nature, which always strives for self-realization. Freed from this age-old fear – being left without a livelihood, people will be more careful and deliberate in their choice of career. This would be a blessing for all mankind, and promote economic development, because every person can realize themselves in the area in which he has a vocational bent. Only in this case he will be able to open his creative potential and derive satisfaction from his work. Such an attitude to work amounts to the most effective, efficient making it more highly demanded than another other in today's world. Everyone knows that a person is essentially a creator just as they know the world around us has the natural resources that are potentially useful for human purposes. Thus a person has creative potential through which natural resources are transformed into tangible values beneficial to all. Under the current economic system, however, creative human potential is dampened. Creativity is implicit in the broad sense, not only in the liberal arts but also in all other areas of human activity.

By implementing new economic policies that focus on human val-ues, creativity, human potential, stimulated by cash resources, we will escape to a freedom we would only want to use maximally. This could give us the momentum, hitherto missing, for economic development, enabling society to move to a higher level and harmonious developments that will see the man who would use a computer to hammer in a nail as a relic of the past.

Of course the modernization of the financial and economic system should aim to increase the welfare of civil society and at one and the same time work in parallel with the modernization of general education both in the provision through the system itself and the outcome for the self-same members of a modernized civil society. This needs to happen at secondary and tertiary level and well at mature student level. All such education must be based on a wide ranging human value system relating to the development of personal creative potential. As we all know, creative processes are not able to develop efficiently when people are reliant solely on material incentives.

The bestselling authors Marci Shimoff and Carol Kline in their book "About happiness" have given particular attention to this (www.HappyForNoReason.com). It provides a range of individual techniques, training and practical advice on creative, constructive personal development. It also encourages a rethink of the fundamentally outdated thinking patterns that lead people nowhere.

To date, no natural resource has equalled the material value, measured against reserve money, with which to evaluate the totality of humanity as a creator of products and services. The only such value, which is not fully material, is man himself, who has the creative potential to transform natural resources into valuables for himself and others.

The economy is becoming increasingly less dependent on the amount of natural resources and the quality of the creative potential of people. It is time to abandon the principle reserve money of any single substantive standard. The new electronic system of currency, divided into investment and consumption flows would bind the amount of money to the very people who would invest it.

People have focused on purely economic priorities under the existing system of values (where the population is a tool for business development). This presupposes that money is no more than a provision. In fact, if we expand the system of values towards human priorities (i.e. consider the economy as a means to ensure the viability and development of people) we would then be able to generate cash resources for ourselves. This will allow people to create the necessary economic conditions for the development of their creative potential, which is now limited to financial institutions, focusing only on their own profit.

The question as to where to get all this money is a purely technical one. Central banks owned by the state can always make the necessary monetary arrangements. In the case of the United States, from the commercial financial structure itself. The Fed should not receive money as loans, but pay tax for the right to issue and sell when unsecured against any Gold Standard. Such taxes would be fairer than taxes collected from real businesses, which participate in the distribution of the income to the state budget. However, all interested parties - financial, government and public organizations – must work together for mutual control over inflation.

 

Tax revenue collected from businesses for the state budget should be allocated severally to specific social and consumer electronic purses. Under this system, the distribution of all the so-called "free" social guarantees for the population, would guarantee payment. Banks will regularly deduct money directly from the electronic purse of each individual citizen registered at the address of his institution. Sometimes an institution (for example a school) would be subsidized from the state budget (with subsequent presentation for payment (repayment) to the Treasury. Only under such a financial scheme will people be able to effectively monitor, control and participate directly in the allocation of tax revenues. And in this case only would it be reasonable to introduce a progressive tax system that depends on the profitability of each company, benefiting all stakeholders. Highly profitable companies would be able to increase production volumes because such a tax system would be extended to the con-sumer electronic purse, increasing the buying power of people at large.

Meanwhile, technological progress will not lead to the pheno-menon of artificial overproduction of goods but guarantee the solvency of demand. As the automation of production increases profitability, additional tax revenues will be transferred to the consumer electronic purse and increase the level of effect-ive demand. The growth of output and consumption will take on a synchronous nature thus overcoming the current paradox in the economy where people stand up to their necks in water and plead thirst.

The model of the nuclear family has changed. A couple with an average of three children is no longer the case. One parent - one child scenarios have led to reductions in fertility. The fear of being left without a livelihood and a lack of confidence in the future push couples towards the one-child model.

In a modern high-tech industrial infrastructure we can guar-antee virtually every citizen an acceptable standard of living as a birthright. The one obstacle is the current financial system of money distribution. An acceptable quality of life is not a problem that should worry modern man. However, there are manifold tasks ahead of him as to the creating of an educated and harmonious populous free from fears and phobias. Distortions generated by the current economic system do not target the interests of ordinary people. Instead they reduce us all to seekers of that singular Holy Grail – profit.