By Alistair McConnachie
The April 2000 issue of Prosperity explained that the financial system of all nations is “debt-based”, meaning that the process of going into debt is relied upon almost exclusively to create and supply money to their economies. Almost the entire money stock is supported in circulation by vast debts in four main sectors:
1- Private debts e.g. mortgages, loans, overdrafts, credit-purchases
2- Industrial and commercial debts
3- Government “national” debts
4- International, or “Third World” debt
Prosperity is dedicated to the proposition that the State should create a supply of debt-free money which should be spent, not lent, into the economy, either to fund public projects, or as repayment for outstanding National Debt, or in ways which place it directly in the hands of the public, such as a Basic Income.
HOW GOVERNMENTS CREATE MONEY FOR NATIONAL NEEDS
Every year the government fails to collect enough money in taxes to pay for all its spending requirements. Therefore it has to “borrow” the money. The amount required is known as the Public Sector Borrowing Requirement. The National Debt is the total still outstanding on all past years’ borrowing requirements.
The government “borrows” the money this way: It prints and sells “gilt edged securities”, also known as stocks, bonds and Treasury bills. These are simply pieces of paper which promise an additional return to the buyer, sometime in the future.
The securities are auctioned several times a year to meet the shortage of government revenue as it arises. They are bought by insurance companies, pension funds, trust funds, and banks.
The government takes the money it has raised by these sales, and spends it on its public projects.
When the non-banking sector (insurance, pension and trust funds) buy government securities, then saved money is being recycled back into the economy through government spending.
However, when banks buy government securities, then entirely new money – which has been created out of nothing by the banks specifically for these purchases – is spent into the economy by the government.
These securities are becoming due, or “maturing” regularly. Servicing these securities is known as “paying the interest on the National Debt.” The government has to find the money to repay them in full.
Of course, the government does not have the money to repay them – that is why it had to sell securities in the first place.
Therefore, how does it repay them? Answer: It raises the money to repay the previous securities by selling even more securities and by putting up taxes even further!
That is to say: The government is raising money it doesn’t have, by printing bits of paper and selling them to banks, which buy them with money they don’t have either, but which they create out of nothing! The government then expects us, through our taxes, to pay back the banks with the real money that we’ve worked for!
The obvious question arises: Why doesn’t the government simply just create the money in the first place? Why does the government indebt the population to the private banking system?
Why doesn’t the government – via a State institution – just print a £1000 note, instead of a £1000 security? That way, instead of borrowing the money from the banking system, and forcing us to pay it back in our taxes, it could simply create the money itself, spend it into society and not need to ask for it back.
THE PROSPERITY PROPOSAL
We insist that if the government can issue a security for any amount, then it can issue the same amount of money directly, without recourse to any banks.
” … It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people.” (The New York Times, December 6, 1921 issue (“Ford Sees Wealth In Muscle Shoals”. See Prosperity, September 2000.)
DEBT REPAYMENTS GREATER THAN THE EDUCATION BUDGET
On the ITV programme Ask the Prime Minister on 12 December 2000, when asked why he had not spent more on public services, like the NHS, earlier in Labour’s term, the Prime Minister insisted he had been determined to ease massive National Debt repayments — larger “than the whole of the school system”.
However, so long as government money is only available in the present debt-financed manner, then all he can hope to do is limit the rate of growth of the National Debt. It’s always going to grow, and swallow up more and more taxes – which could be better spent.
He sought to justify his position by saying, “You go straight in the door, and they hand you a piece of paper that tells you what the economic facts are.” Here we havethe democratically elected Prime Minister admitting that he is restrained in such vital decisions by what “they” tell him!
Our task is to find a way to repay the existing National Debt and fund new public spending, without always having to borrow from the private banking system, and without raising taxes.
THE ANSWER IS GOVERNMENT CREATED DEBT-FREE MONEY
Former Economics Spokesman for the Labour Party, Bryan Gould, referred to funding the National Debt in this manner when he wrote his essay “Jobs for all the boys – and girls: The Choice for Labour” produced by his Full Employment Forum (undated, but circa 1993): “It may also be sensible – in the precise circumstances at present – to ‘monetise’ part of the debt, that is, to finance it through government-created credit, rather than through borrowing or taxation. However, shocking this may seem to monetarist opinion, it is hard to see why private sector banks should have a monopoly over credit creation, or why credit creation by the government for the purpose of investment should be inherently more objectionable than credit creation in the private sector which largely goes on consumption.”
AT WHAT RATE SHOULD THIS BE DONE?
Our first priority is to get the economists and the politicians accepting that this is a feasible and proper policy option. Once this becomes a widespread topic of economic and political debate, then the appropriate means will be easily determined.
However, Mike Rowbotham has already suggested one method in The Grip of Death (Chapter 16). As he explains, the net growth in government borrowing per year is represented by the monetary statistic referred to as the “M4 lending counterpart.” By creating debt-free money at the rate at which the M4 lending counterpart is increasing, the growth in debt would be matched by an input of debt-free money. Thus, the increase in debt would be countered and future repayments of this borrowing supported.
The UK M4 lending counterpart is increasing by approximately 10% annually and rose by £60 billion from February 1996 to February 1997. The government, through its state authority, would create a fund of £60 billion of debt-free money. A fund of £60 billion is enough to fund major improvements in public services.
As each year goes by, government created debt-free money is distributed and circulates in society in proportion to the M4 lending counterpart. Eventually the M4 lending counterpart will decrease, as the need for government borrowing decreases.
In time, levels of private indebtedness will also decrease since private indebtedness is often a function of national indebtedness.
A WINNING POLICY
“This authority should spend, not lend, a supply of money into circulation on the basis of proven need. This will reduce the overall burden of debt in society, break reliance upon the banking system for the supply of money, and open potential for limitless change.”
Once we get the principle popularly established that the government, via a State institution, can and should create money, then we are on the road to a democratic economic system.
All it takes is a political party to realise it can reduce the National Debt, increase funding on public services, and lower taxes – all at the same time. If that’s not a winning policy, what is!
Postscript: Since this article was written in 2001, there have been huge strides forward in the monetary reform movement in the UK, including a proposed draft Parliamentary Bill entitled, “The Bank of England (Creation of Currency) Bill”, which advances hugely upon the above proposal. It can be found here and can be purchased in hard copy at the link directly below.