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Saturday, September 04, 2010

Bankrolling the World into Chaos

by Michael Rowbotham

Prosperity (January 2000)

It is time to ask searching questions about the near total reliance of modern economies upon banking. Getting the right answers can sometimes be difficult. But not asking the right questions in the first place can be a disaster. The industrialised economies are trying desperately to break the cycle of boom and bust and the Asian Tigers are counting what is left after the crash. But no-one is pointing out that modern economies are rendered inherently unstable by a financial system based almost entirely upon lending.

The exposure of industrialised nations to the banking system is no less great than that of the poorer nations, and the risk of collapse just as possible. The debts registered against the wealthy nations and their citizens speak for themselves. In the UK outstanding mortgage debts total GBP 420 billion, commercial debts GBP 380 billion and the National Debt stands at GBP 400 billion. In the USA, mortgages currently in excess of $4.2 trillion and a national debt of $5 trillion make one wonder why the wealthier a nation becomes, the more its financial accounts deteriorate.

The answer to this conundrum is easy. Under the current financial system, debt is used to create money. Bank of England statistics show that a staggering 97% of the entire UK money stock consists of bank money created by the action of lending to borrowers. Government created currency the notes and coins (MO) at three per cent of the money stock, is now so trivial that the entire economy functions on money created by bank lending. Globally, over ninety per cent of all money is created by the banking system.

The ability of lending institutions to create a vast circulating money stock of bank credit is well understood by economists. In most peoples' minds, money is still the stuff you jingle in your pocket. However, most money today consists simply of numbers relayed between bank accounts via computer systems, and created out of thin air every time a loan is made.

The problem with a bank-based money supply is this: When a bank makes a loan, a debt is created as well as a credit. So with the GBP 680 billion of bank credit now lubricating the UK economy goes GBP 680 billion of debt in the form of mortgages, overdrafts, commercial loans and other debts.

A clear political as well as an economic question arises: is it proper to rely so heavily upon debt to create the nation's medium of exchange?

Of course, the citizens of Malaysia, South Korea and Indonesia have not just been having difficulties with the monthly mortgage. Their entire future has been rewritten. After decades of struggle to raise per capita income above the poverty level to a half-decent standard of living, the financial carpet has been suddenly and cruelly pulled from under their feet. Forced to accept massive dollar loans from the IMF and commercial banks, with their currency degraded and now the plaything of international dealers, their commercial assets are now being picked up for a song by foreign investors. The Koreans are already talking about a "lost generation".

The Asian crisis reminds the world of the capacity of a bank-based money supply to lead to complete economic collapse. The industrialised nations have not experienced this for many decades. But, we too are suffering from the debt-based financial system. The massive mortgages carried by Western citizens, and the earnings pressure and wage dependency these create, is a form of constant oppression. Should we allow our lives to be so dominated by debt and banking policy, and the stock market manipulation of international capital flows?

What are the Money Supply Alternatives?

Monetary reform has an ancient pedigree, as applicable to the advanced industrial nations as to the Third World. Bishop Berkeley asked in the early 18th century "whether or not it be a mighty privilege for a man to create a hundred pounds with the stroke of a pen?"

In the 1930s, during the Depression days of poverty amidst plenty, the financial system brought the economies of the world to a virtual standstill. Then, the public took to the streets in support of monetary reformers such as Douglas, Orage, Soddy and Kitson. The monetary reformers were ignored and Keynsian deficit financing was adopted, that is the world chose debt.

In the 1980s, the Economic Research Council, under Sir Arthur Bryant, advocated that the UK government should take on the responsibility for the issuance of money, thereby obviating the need for a national debt and reducing the burden of money creation placed upon commerce and the general population. Bryan Gould, shortly before he left for New Zealand, displayed his monetary reform credentials when he declared, in the New Statesman (19 February 1993):

Why shouldn't a socially aware and economically responsible government create credit where it is appropriate ... in order to ensure investment is made and at the same time strike a great blow for the democratic control of the economy?

Government-created credit, like the coins and notes they issue, would be created as a debt-free input into the economy, spent into circulation via public services, and contribute to a stable, circulating money stock. The monetary reformers have history on their side. In the 1950s and 1960s, the money stock consisted of about 75% bank created money and 25% cash currency, created debt-free. Inflation was lower, growth more stable and debts markedly smaller in comparison to average incomes, and related to GDP. Why should the declining use of cash mean that the difference is made up by bank created money and the debt it entails? Just because the economy needs less cash doesn't mean it needs more debt.

This question was raised by Lord Sudeley in the House of Lords in May 1998. He asked whether the government intended to take any measure to compensate for the loss of debt- and interest- free money caused by the declining use of cash. The official reply, contained in a statement of masterly evasion and opacity, was "No".

The government issuance of money has always been dismissed as inflationary. But this need not be the case. If sensible restrictions were placed on banks and building societies, the government-issued money supply would be compensated for by curtailing the production of new bank lending. For instance, there could be a limit, and gradual reduction, in the number of times a person is allowed to multiply their annual income as the basis of a mortgage. Since house mortgages support over sixty per cent of the money stock, this could make a dramatic contribution to preventing monetary inflation as well as putting a break on the relentless rise in house prices, which benefits no-one. It would also mean that, over the years, house buying would became a competition based on money people have got, rather than at present, money they haven't got. An entirely new economic agenda is possible, and radically different fiscal conditions would prevail in an economy based on solvency rather than debt. Although this offers a range of government and commercial policy options that amount almost to an economic revolution, it is a reform that can be undertaken gradually, building up the liquidity in an economy and monitoring the effects over a number of years, effectively reversing the recent drift towards ever greater debt.

All national economies are now so financially vulnerable that they are constantly taken to the cleaners by powerful multinationals and heavily exposed to the callous and destructive actions of predatory speculation. More liquidity and solvency would afford protection to the real, productive economy, rather than making the source of true wealth subject to the vagaries of finance.

In the end, this has to be part of the answer. And as Bryan Gould points out, the questions addressed are fundamental political issues, not just a matter of economics. Why should a nation's people and its commerce drift ever deeper into debt simply to create their medium of exchange? Why should a government - the one institution with the constitutional authority to create money - delegate this responsibility and power entirely to banks, and thereby oblige the nation to run on debt? These are the questions we should ask as we watch the crisis in Asia deepen and spread, perhaps along with a query as to the sanity of the bulk of our economists, who see no connection between the spiralling debt problems of the world and the way money is currently created.


Please print out, photocopy and distribute these articles. Also copy and paste them to emails, and circulate widely, and please include all the essential contact information below. Thank you.

Essential Further Reading:

Prosperity: Freedom from Debt Slavery - is a four-page quarterly Journal which campaigns for publicly-created debt-free money. Prosperity is edited and published by Alistair McConnachie and a four-issue subscription is available for GBP 10 payable to Prosperity at 268 Bath Street, Glasgow, Scotland, UK, G2 4JR. Tel: 0141 332 2214; Fax: 0141 353 6900, Email: All back-issues are still available. The forty-page Report, Clarifying our Money Reform Proposals, launched at the 2006 Bromsgrove Conference, is available for GBP 10 payable to prosperity and is essential reading for beginners.

The Grip of Death: A study of modern money, debt slavery and destructive economics by Michael Rowbotham (Jon Carpenter Publishing, 1998), Goodbye America! Globalisation, debt and the dollar empire by Michael Rowbotham (Jon Carpenter Publishing, 2000), and Creating New Money: A monetary reform for the information age by Joseph Huber and James Robertson (New Economics Foundation, 2000) are all available from Prosperity.

Bill Totten


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