by Michael Rowbotham
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 £420 billion, commercial
debts £380 billion and the National Debt stands at £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 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 created by the
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
£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.
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 18th 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, ie. the world chose
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 (19 Feb.93) :
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 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?
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.