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by Michael Rowbotham

As the Asian financial crisis deepens, it is surely time to ask searching questionsBR 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 and credit.

The exposure of the industrialised nations to banking is no less great than that of the poorer nations, and the risk of a fiscal collapse just as possible. The debts registered against the wealthy nations and their citizens speak for themselves. In the UK outstanding mortgage debts total £420 billion, commercial debts £380 billion and the National Debt stands at £400 billion. As for the United States, 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 seem to deteriorate. PBank of England statistics show that a staggering 97% of the entire UK money stock consists of bank credit...

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 credit, created by the action of lending to borrowers. Government created currency, at 3% of the money stock, is now so trivial that the entire economy functions on money created by bank lending. Globally, over 90% of all money is now created by the process of fractional reserve banking.

The general public may be mystified at the idea of money being created by banks. But the ability of lending institutions to create a vast circulating money stock of bank credit is well understood by economists. The confusion arises because, in most peoples' minds, money is still the stuff you jingle in your pockets, or fold into your wallet. However, most money today consists simply of numbers - credit relayed between bank accounts via computer systems, and created almost out of thin air every time a loan is made.

The problem with a bank-based money supply is an obvious one. When a bank makes a loan, a debt is created as well as a credit. So with the £680 billion of bank credit now lubricating the UK economy goes £680 billion of debt in the form of mortgages, overdrafts, commercial loans and other debts. And the numbers of mortgaged homeowners and heavily indebted businesses are increasing alarmingly.

According to the Building Societies Association, the total of mortgaged properties in the UK rose from 3 million to 11 million over the last 35 years, whilst the amounts outstanding per house increased from 1.1 times the average wage to twice the average annual wage. A clear political as well as an economic question arises: is it proper to rely so heavily upon housing 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. The entire future has been rewritten for these countries and their peoples. 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'. One hasn't the heart to ask whether this is a reference to the current generation that tried to create wealth, or the next generation that will have to work doubly hard to recreate it. The other developing nations of the world, so often encouraged to look to the Tiger economies of the East for their economic inspiration and growth model, have seen their idols thrust back down to join them.

The Asian crisis reminds the world of the capacity of a bank-based money supply to lead to complete economic collapse something the industrialised nations have not experienced for many decades. But the massive mortgages carried by Western citizens and the earnings pressure and wage dependency these create are a form of constant oppression. We too are suffering from the debt-based financial system, although in a different way. Should we allow our lives to be so dominated by credit, debt and banking policy, and the stock market inflation of leveraged 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 Berkley asked as long ago as 1763 "whether or not it be a mighty privilege for a man to create a hundred pounds with the stroke of a pen?" Abraham Lincoln claimed that the government had not only a right, but a duty to create a nation's currency.

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 ie the world chose debt.

Why shouldn't a socially aware and economically responsible government create credit where it is appropriate... ?

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 the UK for New Zealand, displayed his monetary reform credentials when he declared, in the New Statesman, "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?"

The point about government created credit is, like the coins and notes they issue, this would be created as a debt-free input into the economy, spent into circulation via public services, and contributing 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 credit and 25% cash currency, created debt-free under the M0 principle'. 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 credit and the debt it entails? Just because the economy needs less cash doesn't mean it needs more debt.

This very question was raised by Lord Sudeley in the House of Lords last month. 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 credit. 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 60% 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? P These are the questions we ought to be asking 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 seem to see no connection between the spiralling debt problems of the world and the way money is currently created.

Michael Rowbotham 18.6.98

The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics by Michael Rowbotham. With endorsements from Bryan Gould, Professor Herman Daly, David Korten, Right Reverend Peter Selby etc. Published June 1998 by Jon Carpenter Publishing. For full review and ordering details click here.


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