Part III — Follow The Money · Lesson 43 · Follow The Money

The unit of account

Banking's deepest and least-understood power

Consider the levers of power that banking institutions hold, collectively, to determine the unit of account. It is the right place to focus, because it is the deepest and the least discussed. The construction proceeds carefully.

Recall the three functions of money (Vol. I; the treatise). The "unit of account" function sounds like the boring one — it's just the measuring stick, the thing we quote prices in. But consider what it means to control the measuring stick. Every debt, every contract, every salary, every savings balance, every price in the economy is denominated in that unit. The issuer of the unit therefore sits at the center of every economic relationship in the society, whether or not they are a party to it.

Three powers that flow from controlling the unit

Seigniorage — the profit of issuance. Whoever creates the money captures the difference between the cost of creating it and its value. For physical cash this is literal (a $100 bill costs cents to print). For bank-created deposit money it is subtler but real: the banking system, in aggregate, earns the spread on money it brings into existence by lending. Control of issuance is a permanent, low-visibility revenue stream extracted from everyone who uses the unit.

Debasement — silently changing the yardstick. Because all debts are fixed in the unit, the issuer can transfer wealth between debtors and creditors simply by changing the unit's value. Inflate the unit and every borrower's real burden shrinks while every saver's real holdings shrink too — a vast, invisible transfer that no legislature votes on (Vol. I and the Inflation instrument). Roman emperors did it by clipping the silver content of coins; modern systems do it through monetary expansion. The mechanism is 2,000 years old; only the technology changed.

Definitional power — deciding what counts as money at all. The deepest layer. The authorities decide what is legal tender, what banks must accept, what counts as a reserve, which forms of money are "real." When a government declares that only its currency may settle taxes (the chartalist insight), it manufactures permanent demand for its unit. When regulators decide a stablecoin or a foreign currency or gold is or isn't acceptable for settlement, they are exercising the power to define the boundaries of money itself.

Annual monetary expansion7%

$100k debt, real burden in 10 yrs

$50,835

debtor wins — burden shrinks 49%

$100k saved, real value in 10 yrs

$50,835

saver loses — value shrinks 49%

Who benefits

Borrowers & the issuer

at the expense of savers

At a moderate rate the transfer becomes substantial over a decade — a saver in cash loses a third or more of their purchasing power, while anyone who borrowed to buy hard assets wins. This is the regime that quietly rewards leverage and punishes prudence.

Why this can be catastrophic when misunderstood

The matter of how untapped and misunderstood power can be catastrophic for a country and the world is a serious one. The unit-of-account power is exactly such a case, in two directions.

Catastrophe by abuse: A state that fully grasps this power and yields to the temptation can loot its entire population silently. It need not tax visibly or seize property; it can simply expand the unit and let inflation transfer real resources from everyone holding the currency to whoever receives the new money first. The next lesson — hyperinflation — is the record of what happens when this is pushed to the extreme. Entire middle classes have been wiped out in months, their lifetime savings rendered worthless, without a single soldier or tax collector appearing at the door.

Catastrophe by neglect: Equally dangerous is a society that does NOT understand this power and therefore cannot govern it. If citizens do not grasp that the unit can be debased, they cannot demand the institutions and constraints that prevent it. The power gets exercised regardless — by central banks, by the banking system, by whoever controls issuance — but with no informed public to check it. The misunderstanding is itself the vulnerability. A population that does not know the yardstick can be shortened cannot notice when it is.

The collective dimension: Individually, no bank controls the unit. But the banking system as a collective, together with the central bank that backstops it, effectively does — by jointly creating most of the money supply through lending, by jointly determining what serves as settlement, and by jointly being too important to fail (next lesson). This collective power over the unit of account is real, it is largely invisible to the public, and it is exercised continuously. It is not a conspiracy; it is the emergent property of a system in which money is created by lending and the lenders are systemically protected. Recognizing it is the precondition to governing it.

The lesson in summary

Controlling the unit everyone measures value in confers three deep powers: seigniorage (profit of issuance), debasement (silently changing the yardstick to transfer wealth), and definitional power (deciding what counts as money). The banking system and central bank exercise this collectively and largely invisibly. It is catastrophic both when abused — silent confiscation of a population's savings — and when neglected, because a public that does not understand the power cannot demand the constraints that govern it.