OUR ECONOMY RELIES on DEBT to FUNCTION
The decision of governments throughout the world - following the British model - not to monetise their country's wealth themselves, but to force private citizens into debt if they want to exchange goods and services with each other, needs to be re-examined.
I used to think that all money apart from the national debt was authorised by the government free of charge.
However, only the small amount issued as notes and coins is supplied by the government as a debt-free input into the economy.
This is wholly inadequate.
In order to exchange goods and services commercially, we either have to barter, or use money. By 1997,1:680 billion was in circulation in the UK - though we had debts of £780 billion.
Of this £680 billion, only £25 billion - 3% - had been created as notes and coins by the government, and bought by the banks for use in small transactions.
This £25 billion was the only permanent money stock.
Where did the other £655 billion come from?
Before the war, most money was "borrowed" into existence by businesses wishing to invest. Since the war, the main burden of debt has shifted to private individuals, and in particular to the increasing numbers of people taking out larger and larger mortgages - and now increasingly remortgaging their property, as unrestrained bank lending allows prices to inflate, and the newly "wealthy" tap into their "equity".
Say you want to borrow £100,000 or so to buy a house. You go to the bank, and, if they reckon you're a good risk, they give you the OK, and that's it. The figure of £100,000 is entered electronically into your bank account, and £100,000 of new money has been created. No other account is debited. But, with that £100,000 of brand new money, £100,000 of debt has also been created, which you are responsible for repaying at interest.
JK Galbraith described this process as "a method so simple the mind is repelled".
Since you borrowed the money to buy something, this new money will immediately be paid into somebody else's bank account, to play its part in the functioning of the economy.
It is now indistinguishable from any other money going the rounds. But it did not exist before you "borrowed" it, and it has been created, pound for pound, in tandem with an equal quantity of debt.
The result of this system is that someone, somewhere in the UK is responsible for repaying all but 3% of the money in circulation - that is, the availability of this money for spending is limited by the imperative of paying it back.
Once paid into an account, money "borrowed" into existence in this way also serves to boost total bank reserves, enabling the enormous balloon of "credit" to continue.
Moreover, this money actually belongs to the lending institutions which created it, rather than to the nation.
CONSTANT GROWTH NEEDED TO PAY BACK DEBTS
We are constantly being lectured about our improvidence, and the iniquity of spending more than we earn, yet the sad fact is that our present financial system depends on a sufficient number of people going into sufficient debt to keep the rest of us in money.
If people stop borrowing, and try to repay their loans, less money will be created than is constantly being withdrawn from circulation, and there will be a recession.
In fact, because of the need to repay past borrowing, the economy must be constantly expanding, to keep an adequate stock of money available.
Hence the obsession with growth.
This also explains the cut-throat competition for exports: a trade surplus brings money into the UK which has been created by people in other countries going into debt.
Since we aren't responsible for paying it back, this boosts our money supply without simultaneously making fresh demands upon it.
As Nobel Laureate Frederick Soddy wrote: "Fatal to democracy has been its failure to provide any proper authority and mechanism for the making and issue of money, as and when it is required, to keep pace with the growth of its wealth".
PRIVATE AND COMMERCIAL DEBT CAUSES INFLATION
Incidentally, all the indications are that it is private and commercial debt, rather than national debts, which cause inflation. Between 1960 and 1994, Britain was the only country in the world which reduced its deficit relative to GDP. The average throughout the world was an increase in the national debt from 25% of GDP to 76% of GDP.
Germany's deficit, for instance, was 17% of GDP in 1960, but by 1997 had risen to 64%, yet Germany's wellsupported economy boomed, while inflation never went higher than 7%. Meanwhile, we reduced our deficit from 105% of GDP in 1960 to 52% of GDP in 1997 - one of the lowest national debts of any developed nation in the world - while seeing our industries destroyed, and suffering at times from double-digit inflation.
The reason seems to be that, in an economy which relies on debt to create its money supply, national debts are the only debts which do not push up prices or reduce disposable incomes, because they need never be paid back.
They are simply rolled over and increased each year - the government annually borrowing enough money into existence to pay the interest, plus extra for current spending.
So countries like Germany and Japan, which routinely used generous deficits to inject massive sums of purchasing power into their economies, saw their industries thrive and their infrastructure improve, while we, scrimping on the national debt, and relying increasingly on private indebtedness to put money into circulation, saw the value of both the pound and our industries decline.
Perhaps the absence of a traditionally lavish, and increasing, national debt under the EU's "growth and stability pact" is as relevant as inappropriate interest rates to Germany's present pain.
We must reform our financial system by ensuring a stable money stock of publicly-created debt-free money. More about this in The Grip of Death by Mike Rowbotham.
- from Prosperity, May 2005