Bretton Woods Conference, 1944

The problem with complex systems is that once they reach steadiness, they become too difficult to control and too risky to change. And in terms of complexity, the modern financial system depicts the most illustrative yet horrific portrait.

The focal concept around which the whole system orbits is money: the bridge that allows people to exchange value while relieving them from the burden of direct bartering. Yet, despite its crucial role in the daily routines of every individual, most of people have a wrong understanding of its nature.

Many think that money is linked somehow to the value of gold. That’s not true. The link between money and gold has been removed gradually from the beginning of the 20th century to 1971 when US President Nixon ended the Dollar’s convertibility to gold.

Money is nowadays an abstract concept. In England, for example, cash represents less than 3% of the total money supply. 97% of the “money” in circulation is created by banks in the form of loans. It’s a virtual value created from thin air by typing it into their software systems.

This money creation process obeys to the fractional reserve banking system. Against the preconceived idea, when banks offer loans, they’re not limited to the amount of deposits made by their customers. Actually, for a $1000 in deposit, they can lend $8000 more. This new money has no physical existence. It’s just instantly defined on a financial software. Anyone who is not familiar with the concept would find it absurd and unfair. Yet, it’s real. It’s the hardcore magic of the modern financial system.

Behind the commercial banks stands the central bank. According to the modern financial dogma, it has to be independent and is not allowed to provide new money nor direct loans to government. During the financial crisis of 2008, banks’ balance sheets collapsed under the weight of the devalued assets and the junky securities. Then, central banks, especially the European Central Bank and the Federal Reserve, came to the rescue by pumping fresh new virtual money into banks. The money, hundreds of billions of dollars, was channeled through buying a large volume of bonds and mortgage-backed securities.

From where came that money? Nowhere. It had just been typed into a financial software system. Technically, what was the status of the banks? Bankrupt. Where did the banks use that fresh money? In a new cycle of junky investments, real estate, risky assets and fat bonuses. Was it possible to channel the new money directly into government’s budget? No.

However, in such difficult socioeconomic circumstances, those hundreds of billions could have been used by governments to launch new leveraging infrastructure projects. They could have been used to fund hundreds of thousands of startups. But the modern financial system doesn’t allow that. Furthermore, letting bankrupt banks collapse was too risky. They were too big to fail. The whole system is too complex to be adjusted or modified.

In the middle of the crisis, the gold standard came back as a trendy reform proposal. Unfortunately it’s far from reality. Gold, as all other precious materials, is subject to market gambling. Its value can be easily manipulated, as happened few years ago. New mines are also subject to hiding or even burning as a way to manipulate market values. Furthermore, new technologies allow scientists to fabricate artificial precious metals in laboratories; such as the diamonds used in quantum computers. So, the idea of linking again money to gold doesn’t make a lot of sense.

The Bretton Woods economic system established after WWII following Keynesian paradigms and the adjustments done after the 1970s crisis, following Hayek’s guidelines, are hitting the wall. Finished. Economists must dare to challenge the system with inventive solutions. Scientists have created astonishing wonders during the 20th century, from probing the early universe to summarizing particles’ world in a single equation. Economists must adopt similar ambitions to challenge the current so complex bankocratic system.

Fractional reserve, independent central banking and the very concept of private banking are not a fatality. If they’re too complex to be reformed, human minds are able to replace them with new inventive paradigms that can allow humanity to progress at the same pace of its scientific achievements.