Improving Our Monetary System
Creating Debt-Free Money
Here is a recent analysis circulated by the Share International media Service.
by Patricia PitchonOur debt-based financial systems are in crisis in both developing and developed countries. Even in the prosperous nations, the signs of malaise are becoming clearly visible: collapsing social structures, ever-increasing debt burdens, the rich becoming richer and the poor becoming poorer.
Almost all money now comes into being on the basis of debt: governments have yielded their sovereign powers by allowing central banks to create credit, to create money out of nothing as an interest-bearing loan. Banks loan more than they actually have, and the whole system depends on confidence in the system itself.
The important point here is that there is an artificial shortage of money. The other point is that governments, having ceded crucial powers to the private bankers, have enabled a small, unelected and unrepresentative minority to wield inordinate power and thereby to severely limit genuine democracy. Powerful bankers are neither representative of nor accountable to the people. Bankers decide who deserves loans, on what basis and for what purpose. This can and does distort important social policies, because bankers function according to the profit motive, not the ‘people’ motive.
Governments cannot collect sufficient taxes for their spending needs and to meet shortfalls they issue so-called securities, pieces of paper promising to pay at a later date. These take the form of stocks, bonds and Treasury bills. These are auctioned regularly and bought by pension funds, trust funds, insurance companies and banks. When they are bought by banks, new money is created by the banks out of nothing, specifically to buy securities, and when they become due (and the government has to fulfil its promise to pay), the government has no money and has to (a) sell more securities and (b) put up taxes again. This form of repayment is called ‘paying interest on the National Debt’.
People pay back real money
Among serious money reformers campaigning for the creation by governments of debt-free money, Alistair McChonnachie has pointed out that governments are raising money they do not have, printing pieces of paper which they sell to banks. The banks do not have the money either but create it out of nothing, while the government expects the people to pay the banks back with real money they have worked for, through their taxes. We could call this an ‘Alice in Wonderland’ system, with the people being fooled most of the time.
Interestingly, other systems are quite feasible, given the necessary political courage and will. McChonnachie quotes the American inventor Thomas Edison: “It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people.” (See The New York Times, 6 December 1921)
The counter-arguments for the creation by governments of debt-free money to finance basic social needs (ie education and healthcare, low cost housing, etc) are that it would be inflationary. But most serious money reformers understand that debt-free money needs to enter the financial system in gradual stages. They point out that it has been done before. For example, in 1945 at the end of World War II, the British government provided for half the nation’s financial needs through the creation of debt-free money (money that did not have to be repaid), allowing the private banking sector to finance private investment with the other half. Now, however, the British government provides only 3 per cent and the private banking sector 97 per cent of financing. Barry Turner points out that, in effect, the government borrows most of the public money from the private banking sector and the people pay taxes for the privilege. Balancing the equation between expenditure, taxation and debt means the government is kept artificially short of funds.
Richard Greaves, in an essay on the negative consequences of the debt-based money system, points out that the cost of borrowing (through repayment of loans with interest) increases the price of the final product. This means that goods and services are much more expensive but consumers have less to spend, which means there is a surplus of goods and services people cannot buy. This creates cut-throat competition, and businesses try to slash prices by keeping wages down, shedding jobs or relocating to poorer countries (conditional on cheap, non-union and therefore less protected labour, and absurd ‘tax free’ regimes for large companies that could easily afford to pay some taxes). This benefits neither the people nor their governments in the poorer countries, although there is no shortage of individuals in government positions demanding, and sometimes receiving, covert payments to facilitate deals.
Greaves points out that this situation is inflationary: producers constantly have to borrow more, and pass this on to consumers, for whom debt levels also rise. Banks raise interest rates to reduce inflation but ultimately fail: industry initially carries losses as it tries to restrain prices because consumers now have less to spend, but the cost is passed on as soon as interest rates are reduced again, and the whole cycle of borrowing and spending that ensues is also inflationary. In a debt-based system, levels of borrowing, levels of money creation have to keep on rising, adding to the burden of interest payments, and this guarantees that inflation will always be present as long as the debt burden increases. Thoughtful thinkers have pointed out than what we spend is less important that who creates the credit.
‘Third World’ debt is a key factor in the destruction of the environment, because in order to keep going and service their debts, developing countries have to exploit every possible resource in order to export and thereby create the necessary income. Famines occur because people cannot grow diverse local foods if much of the agricultural economy is given over to exportable luxury foodstuffs, and often when there is enough local produce, local people starve and die because they have no money to buy it. The abysmal cruelty of our current system means that the interest repayments alone far exceed the original sums loaned.
The desperate shortage of money in many developing economies means millions of potentially talented and capable people suffer acutely from lack of educational opportunities, poor housing, curable diseases and polluted environments. Meanwhile, the wealthy countries are busy trying to force open developing markets so they can export their own surpluses regardless of what the genuine local needs may be. This brutal push masquerades as free trade, while in wealthy countries hidden subsidies for a range of agricultural products such as sugar, corn and cotton ensure poor farmers in developing countries cannot compete. The substance of the disputes at the World Trade Organisation in Geneva has much to do with this situation.
Money reformers advocate a complete change of focus. Governments need to stop borrowing money at interest. They need to create debt-free money and to spend it, not lend it, within the economy on public projects and services. This would have the effect, Greaves points out, of creating jobs and stimulating the economy. The instrument could be a special state institution created for this purpose, with transparent, accountable aims. James Gibb Stuart, in his book The Money Bomb, maintains that interest on the national debt could be funded by government-created, debt-free money instead of by taxation.
Henry George’s Concept of Money and Its Application to 21st Century Monetary Reform
Foldvary: Monetary Geo-economics
Gross Domestic Product Explained Clearly
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