[R-G] [BillTottenWeblog] Bankrolling the World into Chaos

[Bill Totten]

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 eighteenth 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 (February 19 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, edited and
published by Alistair McConnachie. 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
admcc at admcc.freeserve.co.uk  http://www.ProsperityUK.com
Or you can follow this link to our subscribe page:
http://www.prosperityuk.com/get_involved/subscribe/index.php

The Grip of Death: A study of modern money, debt slavery and destructive
economics by Michael Rowbotham [Jon Carpenter Publishing, 1998] and
Goodbye America! Globalisation, debt and the dollar empire by Michael
Rowbotham [Jon Carpenter Publishing, 2000] both available from the
address above.

http://www.prosperityuk.com/articles_and_reviews/articles/bankchaos.php


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