Bill Totten's Weblog

Thursday, September 09, 2010

The Negative Consequences of the Debt-Based Money System

by Richard Greaves

Prosperity (November 2001)

1) Goods and Services Are Much More Expensive

The cost of borrowing by producers, manufacturers, transporters, and retailers all has to be added to the price of the final product.

2) Consumers Have Much Less Money to Spend

They are burdened by the cost of mortgages, overdrafts, credit cards, personal loans and as a result of 1 and 2 above ...

3) There is a Surplus of Goods and Services

... because the population can't afford to buy up all the goods and services being produced. This in turn creates ...

4) Cut Throat Competition

Businesses try to cut prices and costs to grab a share of this limited purchasing power in the economy, as illustrated by:

(i) Wages being held down as much as possible.

(ii) Shedding of jobs.

Both of these reduce people's spending power even more.

(iii) Retailers importing cheap products from abroad where wages are much lower.

(iv) Production of cheaper goods that don't last as long.

(v) Protection of the environment a low priority.

(vi) Mergers and take-overs - corporations get bigger and bigger, driven to search out new markets.

(vii) Big companies shifting production to poorer countries which have cheap non-unionised labour and the least stringent safety and environmental laws or ...

(viii) Demanding large government subsidies and tax free incentives as the price for setting up new production or not relocating abroad.

5) Inflation

- This is guaranteed because producers constantly have to borrow more, and must add the cost of that increased borrowing to the price of the goods produced.

- Why is it that when the bankers hike their prices (that is, put up interest rates) this is supposed to reduce inflation?

- It doesn't. It's just that there's a delay in industry putting up prices.

- Initially, industry is forced to hold or even reduce its prices with its profits down, or even sustain losses, in a desperate bid to sell its products in an economy where the money available for spending has been reduced, because of higher interest payments being made to the banks.

- Inflation may be held in check or even reduced temporarily, but eventually industry must put its prices up in order to recover these higher costs.

- This most readily happens when interest rates come down, more people borrow, and money supply and consumer spending increases. Inflation then races ahead.

- The fact that - in a debt based economy - levels of borrowing (money creation) have to keep on rising, and thereby adding to the overall burden of interest payments, guarantees that inflation will be present as long as we have an economy based on an increasing burden of debt.

6) Negative Effects on International Trade

- Surplus goods in the national economy have to be disposed of somehow. The obvious way to do this is to try to export them!

- The absurdity is that every nation is trying to do this, because of the same fundamental problem at home.

- This creates frenzied competition in world markets and masses of near identical goods madly criss-crossing the globe in search of an outlet.

- Instead of international trade being based on reciprocal mutually beneficial arrangements where nations supply each others' genuine needs and wants, the whole thing becomes a cut-throat competition to grab market share in order to stay solvent in a debt based economy.

- Big corporations demand unrestricted access to every nation's market - so called "free" trade.

- The European Union "single market", the North American Free Trade Agreement and the World Trade Organisation are the best examples of the drive to open up all national markets.

Exporting is good for a nation's economy because when exported goods are paid for, this brings money into the exporting nation's economy free of debt.

- The money to pay for them was borrowed from banks in the importing nation.

- That money is lost to the importing nation's economy, but the debt that created that money still has to be repaid by the importer out of the remaining money in the importing nation's economy.

- If a nation can become a big net exporter, for a time its economy will boom with all the debt-free money coming in - a trade surplus will exist.

Importing is not so good for a nation's economy because if some nations are building up trade surpluses in this way, others must be net importers and building up trade deficits.

- Ultimately, those with big deficits can no longer afford to import, since so much money is sucked out of their economies leaving a proportionally increasing burden of debt behind.

7) Third World Debt

- The International Monetary Fund (IMF) was set up to provide an international reserve of money supposedly to help nations with big deficits.

- In practice it makes matters worse. A nation with a big deficit has to seek a bail out from the IMF.

- But this comes in the form of a loan, repayable with interest.

- Like loans from a commercial bank, IMF loans are money created out of nothing, based on a cash reserve pool, which is provided by western nations who go into debt to provide it (see "National Debt" below).

- The nation with the deficit goes even more heavily into debt.

- It will however be able to carry on trading and importing goods from the wealthier nations.

- As a result, much of this borrowed IMF loan money flows into the economies of wealthier Western nations.

- However, the repayment obligation, including the interest payments, remains with the debtor nation.

- This is the horror of third world debt - the poorest nations borrow money to bolster the money supply of the richer nations. In order to secure income to pay the loan and interest, and redress the trade balance, these poorest nations must export whatever they can produce.

- Thus they exploit every possible resource - stripping forests for timber, mining, giving over their best agricultural land to providing luxury foodstuffs for the West, rather than providing for local needs.

- Today, for nations in Africa, Central and South America and elsewhere, the revenue from their exports does not even meet the interest payments on these IMF loans (and other loans from Western banks).

- The sums paid in interest over the years far exceed the amounts of the original loans themselves.

- The result is a desperate shortage of money in their economies - resulting in cutbacks in necessities such as basic health and education programmes.

- Grinding poverty exists in nations with a great wealth of natural resources.

- Structural Adjustment Programmes - these are now attached to IMF loans and include conditions that recipient countries will reduce or remove tariff barriers and "open up their markets to foreign competition" - in other words take surplus goods off another country that can't be sold at home.

8) War

- War means enormous increases in national debt and enormous profits for the banks.

- Massive government borrowing and money creation by banks is required to fund a war effort.

- Financiers and bankers have covertly funded both sides in both World Wars and many other conflicts before and since.

- Having profited from war, leaving nations with massive debts and more beholden than ever to them, the banks then fund reconstruction.

9) National Debt

- British national debt now stands around GBP 400 billion - the annual interest on that debt is around GBP 25 to 30 billion. The government can only pay it by taxing the population as a whole, so we pay! National debt is up from GBP 26 billion in 1960 and GBP 90 billion in 1980.

- Successive governments have borrowed this money into existence over the years.

- Instead of creating it themselves and spending it into the economy on public services and projects, boosting the economy and providing jobs, they get banks to create it for them and then borrow it at interest. And we pay it back in our taxes!

- It all started in 1694 when King William needed money to fight a war against France. He borrowed GBP 1.2 million from a group of London bankers and goldsmiths.

- In return for the loan, they were incorporated by royal charter as the "Bank of England" which became the government's banker. Interest at eight per cent was payable on the loan and taxes were imposed on a whole range of goods to pay the interest.

- This marked the birth of national debt. Ever since then, the world over, governments have borrowed money from banks and taxed the population to pay the interest.

How the Government Borrows Money

- When governments borrow money, in return they issue to the lender, exchequer or treasury bonds (otherwise known as government stocks or securities).

- These are basically IOU's - promises by government to repay the loan by a particular date, and to pay interest.

- They are taken up by banks, but also by individuals with money to spare, including wealthy ones in the banking fraternity and, in more recent years, pension and other investment funds.

- When government securities are taken up by banks, this is money creation, out of nothing, at the stroke of a pen.

- Banks are creating money as loans, out of nothing, by lending it into existence to the government in very much the same way as they do to individuals and companies.

- The government now has new money in the form of loans to spend on its requirements, such as public services.

- If this money were not borrowed into existence in this way, there would be less economic activity as a result.

- Under this system national debt is money issued to the government and, as such, has become a vital part of the total money supply of any modern nation.

- The government constantly tells us that "there isn't enough money", because it knows that the cost of borrowing money this way has to be passed on to the taxpayer.

- Instead, it sells off state assets and now gets the private sector to fund public services instead.

The Constant Increase in National Debt

- In the same way that under the present system, industry and individuals must keep borrowing more and more to enable interest payments to be kept up on their existing loans, so government must constantly borrow more and more to keep up interest payments on its existing loans.

- Furthermore, when a particular government stock is due for repayment, the government simply borrows more by issuing new government stocks.

- And it's we who pay for it in our taxes!

An Alternative - Phasing Out the National Debt

If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good.

-- Thomas Edison, The New York Times (December 06 1921)

- Government could stop borrowing money at interest, and start creating it itself by spending it, debt free, into the economy on public projects and services, at the same time creating jobs and stimulating the economy.

- It already does this to a limited extent - the amount it receives from banks when it sells cash to them is added to the public purse and is available for spending on public services and projects.

- For a start we could, at least, fund the interest payments on the National Debt by government created debt-free money, instead of by taxation - as advocated by James Gibb Stuart in his book The Money Bomb (available for GBP 5 payable to Prosperity, at the address below).

A Democratic Imperative

Seeking to redistribute what money there is by taxing the rich to pay for services for the less well off does nothing to solve the problem of the overall shortage of money in the economy caused by the debt based money supply - a problem which most socialists have yet to recognise.

The nation's economy is our economy. We create the real wealth through our ingenuity, enterprise and hard work. The current banking system operates as a massive drain on that public wealth as well as concentrating power and control in the hands of a tiny, private minority.

Money is the means of facilitating the exchange of goods and services.

There is nothing wrong with creating it out of nothing, because this is the only way to provide the means of exchange.

What is wrong is that the right to do this has been allowed to pass to private interests who create it as loans for private profit.

Can we not ultimately incorporate the humanitarian principles of a fair distribution of wealth that underlies socialism with the dynamic benefits of a free enterprise economy that lies at the heart of capitalism?

For as long as the power to create money is in the hands of private interests who do it for profit and control, we can never say that we live in a democracy.


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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