[R-G] [BillTottenWeblog] The Negative Consequences of the Debt-Based Money System

[Bill Totten]

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: contactus at ProsperityUK.com http://www.ProsperityUK.com
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.

http://www.prosperityuk.com/prosperity/articles/negcon.html


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