Hello!
In my previous post I described how money is created by private banks in the act of making a loan. I admit my tone was critical – but actually, creating money as interest bearing debt is a brilliant idea – and the banks provide an essential service, for which they deserve a reasonable fee. My complaint is just that the current operation of the system allows the banks to make out like bandits, at a crippling cost to the rest of us.
To explain this, I want to talk about what money is, and what purpose it serves.
Firstly, if industry is the engine of an economy, money is the OIL that allows the parts to move smoothly with one another. Without money, goods and services cannot be exchanged; if there is not enough of this “oil” (not enough “liquidity”), the economy cannot move, and seizes up. On the other hand, flooding a broken engine with oil will cause the economy to “blow a gasket”.
Secondly, in a free market, money is a MOTIVATOR. It provides an incentive for people to produce something that they can sell.
Thirdly, in this way, if it is fairly distributed, money expresses the aggregate will of the people; it is the INVISBLE HAND that moves an economy towards producing things that people want.
Managing an economy boils down to making sure there is enough money, but not too much, and that it is fairly distributed. The most critical questions about a system of money are: how is it created; how is it destroyed; and how it is distributed?
What is money? Well it’s what we buy things with of course – but what things are money? Well, anything at all can be used as money; the only condition is that people agree to use it as such, but broadly speaking there are two main categories of things; COMMODITIES, such as gold, sea shells, or pieces of paper sporting pictures of the queen; and contracts, or DEBT. Our current system is built on a combination of the two. There is a small proportion of paper money (less than 5%), and a large amount of debt money in electronic accounts (more than 95%).
For much of recent Western history, commodities such as paper and gold have been used as money, and it is interesting to compare them. PAPER has the advantage that it can be created in unlimited quantity as required by Governments, who can then spend it on democratically assigned priorities, eg health, education, or (more commonly), war. The money can be forced to circulate, and be recycled, by insisting that people accumulate some paper, and pay it back to the Government as tax. Thus, with paper money the engine of the economy can never seize up – it is always easy to create as much money as you please. The disadvantage is that it is very tempting to create far too much; to flood the system. This results in huge inflation, and then the paper falls into disrepute – Zimbabwe, with it’s trillion dollar note, is just the most recent example (although in my view Zimbabwe didn’t fall – it was pushed).
The great advantage of gold is that it cannot be created – it can only be found, and it is very scarce, so hyper inflation cannot happen. The disadvantage is that now the supply of money cannot expand as the economy expands; there is not enough liquidity and the system seizes up. In particular, historically, gold has been sucked out of countries by international trade, leaving them high and dry. Also, historically, gold has been owned by it’s discoverer, which is not a very fair means of distribution. It is interesting that the discovery of gold in South America by the Conquistadors created an enormous economic boom in Spain and Portugal; gold is not useful in itself, but the huge injection of liquidity into an economy constrained by lack of money in circulation provided a means and incentive for people to make things.
So on the whole, commodities are not very satisfactory. But all the problems of creation, destruction, and distribution are solved by the masterstroke of using DEBT as money. With the proper safeguards, money-as-debt can be created in the quantity required, at the place required, given to the people who need it, and can be destroyed after use. And by charging interest, the amount of debt that people can take on, the amount of money in the system, can be limited, so as to avoid hyper inflation. Brilliant!
But allowing it to be created by PRIVATE BANKS means that the banks effectively impose a tax (interest) on this absolutely essential social service. It is like allowing a private company to impose a tax on the air we breathe. I read this week that the disgraced banking sector will hand out 100 BILLION in bonuses this year. That is bonuses, not profits. It does not include shareholder dividends. That is the entire budget of the NHS. Just think! If the banks were NATIONALISED, all this money would flow to the Government. The people who took the most money from the system would pay the most back. This would bring in so much money all other taxes could be completely abolished! There would still be a place for private companies to MANAGE money – provide cards, statements, accounts – and building societies could still exist to lend PRE-EXISTING money. But they could be regulated so that they were only able to charge a reasonable fee.
So to avoid paying tax – nationalise the right to create money as debt.
But this is not the only way in which the Government can get a grip on it’s money supply. In the next post I will look at Government debt.