By Michael Rowbotham (Jon Carpenter Publishing, 1998)
First chapter's available at www.cfoss.com
"..every country in the world suffers from a massive and constantly increasing national debt. Britain has a national debt that is fast approaching $600 billion. Canada's debt has reached $560 billion and Germany's now exceeds 500 billion deutschmarks. So are these poor countries? No more so than Japan with a debt equivalent to two trillion dollars or America with a national debt now in excess of five trillion dollars. Since the poorer nations are crippled by their indebtedness to international lending institutions and foreign banks, the overall picture is of a world suffering acute and ever worsening insolvency.
"But this is really quite illogical and absurd... The question almost asks itself. If all the nations of the world are in debt, who are they in debt to? Rationally, where there is a debtor, there should be someone else who is a creditor. If every nation is in debt, who, precisely, owes whom? In addition to the logical absurdity of all nations being simultaneously insolvent, such escalating national debts are a complete contradiction of the real and obvious wealth of these nations.
"It is actually not in the least surprising that nations are chronically in debt, governments have inadequate resources, public services are under-funded and people are beset by mortgages and overdrafts. The reason for all this monetary scarcity and insolvency is that the financial system used by all national economies worldwide is actually founded upon debt."
The author has given permission for circulation of this introductory chapter on the Internet.
"'The Grip of Death' is a literal translation of 'mortgage', when the owner of a house pledges his or her house to another with a handshake... unto death."
Chapter 1: The debt-based financial system
When a profession fails to deliver, people inevitably suffer. When that profession happens to be the study and practice of economics, the entire world suffers. The deluge of social and environmental problems brought on by humanity's endeavours to be 'economic' suggest that the economics profession is not just failing - its advice is proving mind-bogglingly destructive.
Our government officials, political economists and newspaper columnists appear intellectually content with the current arrangements, oblivious to the depth of the crisis that economics presents to the world. They still happily argue about the dangers of 'overheating' or needing to 'cool off ', as if an economy that functions along the lines of a domestic boiler or kitchen toaster provides an acceptable basis for co-ordinating human activity. They also appear perfectly satisfied to continue with 'business as usual', without questioning the most startling and contradictory statements issuing from the world of money and economics.
For example, every country in the world suffers from a massive and constantly increasing national debt. Britain has a national debt that is fast approaching ?400 billion. Canada's debt has reached $560 billion and Germany's now exceeds 500 billion deutschmarks. So are these poor countries? No more so than Japan with a debt equivalent to two trillion dollars or America with a national debt now in excess of five trillion dollars. Since the poorer nations are crippled by their indebtedness to international lending institutions and foreign banks, the overall picture is of a world suffering acute and ever worsening insolvency.
But this is really quite illogical and absurd... The question almost asks itself. If all the nations of the world are in debt, who are they in debt to? Rationally, where there is a debtor, there should be someone else who is a creditor. If every nation is in debt, who, precisely, owes whom? In addition to the logical absurdity of all nations being simultaneously insolvent, such escalating national debts are a complete contradiction of the real and obvious wealth of these nations. This is underlined by the fact that the nations which run the largest national debts are those with the most advanced economies. What can we say to the developing nations struggling under the burden of their debt, nations who have copied our economic institutions and aspire to a life free from poverty? 'Work hard, and one day your debt will be as small as America's - a mere five trillion dollars!'
These are not the only contradictory financial statements to go virtually unchallenged by the majority of economists. In addition to mounting national debts, the level of private debt shouldered by people and businesses is also escalating. The total of loans, mortgages, overdrafts and credit card purchases is massive and in Britain stands at some 780 billion pounds, 500 billion of which is borne by ordinary people. The Americans, supposedly the richest citizens ever to walk the face of the planet, are the most heavily indebted people of the world, carrying mortgage debts that currently total $4.2 trillion. They are said to go shopping with their credit cards bolstered. As with national debts, such escalating domestic debt is a complete contradiction of the wealth present in those nations.
Any realistic assessment of the situation must conclude that America, Britain and the many other developed nations possess fantastically wealthy economies. Such extensive personal debt is a complete misrepresentation of the true situation. What is more, nations are becoming more, not less wealthy all the time, as further technological advances compound their already enormous ability to produce. But where is the financial reflection of this development? And why is there no natural feedback of this real wealth in a decreased pressure to work and to produce? The financial reflection of wealth does not exist; in fact the financial system registers the complete opposite of wealth. There is only increasing debt subjecting our economies and those who work in them to increasingly intense financial pressure and monetary poverty.
Trust in money
It is assumed by everyone - and clearly by economists - that money is a neutral and accurate medium; that money does no more than reflect the economic facts. This trust is shown by the unquestioning acceptance, not just of unrealistic debts, but of a whole range of other monetary data. For example, America is currently expanding its already colossal output - but not to supply itself - simply driven by the need to obtain export revenues to improve its balance of payments. At the same time, many Third World nations are striving to develop a stronger export sector, again not producing goods for themselves, but to improve their balance of payments in order to fund debt repayments. Thus we have the bizarre situation in which the richest nation in the world is seeking to increase output simply to remain financially viable, whilst the poorest nations, who desperately need to improve their domestic agriculture and industrial infrastructure, are orienting their economies towards a glutted world market - all this being driven by monetary considerations. This again places economics, and financial economics in particular, quite simply in the realm of unreality.
It is not just in the macro-economic sphere that questionable monetary statements prevail. Every budget and every election is dominated by spending plans, spending cuts, savings made here, and accusations of money wasted there. 'The other party's spending plans don't add up' they all chorus. Scores of economists and political commentators then huddle round their calculators to check whether one party's promises have more financial credibility than the other's. With a triumphant shout, the claim is made that 'there isn't enough money'... So we can't do it. Money is trusted. Money is accepted as the final arbiter. Money is the overall economic truth; the limiting reality. And if there isn't enough money, well that's that...
But this perennial shortage of government funds, enshrined in the repetitive cry 'We haven't got the money', has got to be challenged. Money is a man-made device, and for an entire economy to be perpetually in the position of not being able to do what it wants, simply for lack of bits of paper with numbers on them, is strong evidence that the shortage of those bits of paper and numbers lacks all validity. Consider some of the decisions taken in pursuit of cuts in expenditure... The building is already there, the equipment is in place, the people that are employed there can be good at their jobs, providing a much valued service to local residents. And then along comes a 'Grey Suit' who tells us that the hospital, college, library, post office, coastguard station, research laboratory, swimming pool or whatever has to be closed for lack of money. But in what possible sense can we not afford what we already have, and which is already there?
A town can be in desperate need of a school, community centre, or repairs to its roads and drains. The raw materials may be lying idle in a builder's yard, people may be desperate for work, but there isn't enough money... so we can't do it. In what possible sense can we not afford to do what we plainly can, in physical terms, achieve? This situation is accepted because it is assumed that monetary statements are valid, and that a lack of money means a lack of something vital. But what is missing? If the lack of money were paralleled by a lack of manpower, raw materials, desire or demand, that would at least be rational. For any one person not to have enough money is rational; for an entire economy constantly not to have enough money, and thereby prevented from doing what it is clearly capable of doing, is absurd.
Money is trusted. Monetary statistics are trusted. No one refuses to pay their mortgage on the grounds that the monetary system is defective. No one complains to the government that the latest export drive for foreign currency is misdirected because our balance of trade figures are a misrepresentation. When ministers claim they cannot fund some service, no-one says, 'Your figures are irrelevant'. It is assumed by almost everyone that the financial figures provide an accurate statement of our affairs. If we are indeed so deeply in debt and on a daily knife edge of solvency, then surely we must all work harder. All the economists, politicians, businessmen and industrial experts agree, so we simply must cut expenditure, become more competitive, improve productivity, start new enterprises, create more jobs, export more to other countries. They are saying the same in America, France, Germany, Sweden, Canada, and Japan. Tragically, they are now saying the same in Sudan, Ethiopia, Madagascar, the Philippines, Sri Lanka.
This book challenges the widespread assumption that the monetary statements and statistics commonly used as the basis of economic decisions are valid. The general confidence in modern money and monetary judgements is utterly misplaced; the apparent neutrality of the present financial system is quite false. Modern money is not a neutral medium; indeed, the way in which money is currently created gives it a specific nature and serious bias. Modern money actually operates within its own detached and limited mathematical world. It projects its own version of 'the facts'; its own version of an economy; its own reality. It tells us what we can and cannot do; it tells us what we can and cannot afford. But these amount to demonstrably false, irrelevant and misleading statements.
The origin of debt
It is actually not in the least surprising that nations are chronically in debt, governments have inadequate resources, public services are under-funded and people are beset by mortgages and overdrafts. The reason for all this monetary scarcity and insolvency is that the financial system used by all national economies worldwide is actually founded upon debt. To be direct and precise, modern money is created in parallel with debt. The reason for the failure of economists to question patently invalid monetary data becomes clear - there is a total acceptance by them of the most extraordinary method for supplying money to the modern economy.
The creation and supply of money is now left almost entirely to banks and other lending institutions. Most people imagine that if they borrow from a bank, they are borrowing other people's money. In fact, when banks and building societies make any loan, they create new money. Money loaned by a bank is not a loan of pre-existent money; money loaned by a bank is additional money created. The stream of money generated by people, businesses and governments constantly borrowing from banks and other lending institutions is relied upon to supply the economy as a whole. Thus the supply of money depends upon people going into debt, and the level of debt within an economy is no more than a measure of the amount of money that has been created.
It is important to illustrate what this debt-based financial system actully means in practical and numerical terms. The March 1997 statistical release from the Bank of England shows that the total money stock in the United Kingdom currently stands at approximately ?680 billion. This is the total of all the money in existence in the economy; the coins, notes, bank and building society deposits of everyone - the rich, the poor, businesses, public and private corporations; the lot. The figure is the measurement of money known to economists and bankers as'M4'. To place this figure in context, M4 in 1963 stood at ?14 billion, in 1975 it was ?53 billion and by 1980 it had risen to ?2O5 billion.
If people are told that there is ?680 billion of money in the economy, and are then asked if they can guess how much of this money has been created by the government, they are likely to be puzzled. Why, all of it, surely? Surely a government is responsible for the currency of the nation? When people are told that the same statistical release from the Bank of England shows that the total of money created by the Treasury on behalf of the UK Government is a mere ?25 billion of notes and coins, they naturally ask where does the rest of the ?680 billion come from? What is the origin of the ?655 billion which has not been created by the government?
If they are then informed that this other ?655 billion - 97% of all money in the United Kingdom - has been created entirely by banks and building societies, and that they have created this staggering quantity of money out of nothing, most people are totally flummoxed. If you or I make money, this is called counter-feiting, and we are looking at the prospect of four walls, iron bars and a slim glimmer of daylight in twenty years time. If they then ask how private, commercial companies can create money, and are told that it is their mortgage, their personal loan and their overdraft which has led to the creation of this ?655 billion; that governments rely upon the majority of people going into debt simply to create money to supply the economy; that virtually every pound in existence, whether circulating or deposited in bank accounts, is matched by an equivalent pound of debt - if they are told this, people generally stop asking questions. They get that uncomfortable look in their eye. 'This guy is definitely right out of his tree...'
Through a barrier of doubt and suspicion, you might add that banks and building societies account 97% of the money in the economy as their own, temporarily 'on loan' to the economy; that the majority of mortgages are illegitimate and unnecessary and that each generation's debts exceed those of the previous generation; that bankruptcies and repossessions have to be seen in the light of an impossible scramble for inadequate money; that the creation of money as a debt is directly responsible for recurrent booms and slumps and generating the intense pressure for economic growth in the developed world, as well as causing the appalling debt of the Third World; and that these facts have been established by Royal Commissions and the system denounced repeatedly by leading economists, bankers and statesmen.
Most people, when they are told this, dismiss the claims utterly and in their minds clearly regard you as a politically disturbed person; a sad case of mental fixation, perhaps unable to cope with the demands and opportunities of the modem world. This is really quite understandable. The natural assumption is that there must be more to this matter. If banks and building societies do indeed create money, there must be a rationale behind the decision to leave the creation and supply of money to them. It defies belief that such an extraordinary arrangement should exist without there being good reasons behind it. But, as this book shows, there are no good reasons. Indeed, there is abundant evidence of the destructive effect of this method of supplying money to an economy. Relying upon banks and building societies to create money using their 'loan system', and allowing this to form the modern money supply, gives rise to a catalogue of economic trends which are wholly undesirable, and without mitigating circumstance.
All around us, the gross failure of modern economics screams out to be addressed. The towering indifference of those shining offices scraping the sky above the menacing ghettos of Brooklyn; the speculative channelling of billions of pounds of volatile international finance, which can leave a country prosperous one week and plunged into decline the next; the ludicrous production of cheap goods of poor durability, so that jobs are 'protected', and we can recycle the materials and make the goods all over again; the ridiculous export drives by which every country simultaneously attacks the economies of every other nation, under the pretence that such global free trade improves the general wellbeing; the staggering waste of a throwaway, quick-growth, all-new spiral of constant economic change; the outrageous financial debt which Third World countries have actually paid many times over, but which, due to interest, is now larger than ever before - a debt which forces those impoverished nations to compete to supply goods already in surplus; the cynical manipulation of human emotions into buying fashion-obsessed trivia; the burgeoning transport demands of escalating economic growth and centralisation, with identical goods crisscrossing the globe, regardless of environmental cost; the fact that despite the incredible productive capacity of the modern economy, people are obliged to work harder, with ever greater efficiency, forever forced to adapt and retrain or face a life of indignity and misery as one of the unemployed.
Both those in work and out must watch, as the world they know and understand changes almost in front of their eyes like some nightmarish Kafka-esque novel. This is the era of accelerating economic change. The benefits are highly dubious, and no-one even pretends that the economy is responding to what people actually want. The only justification offered for the changes is that this is 'the age of progress', and 'you can't stop progress', even if you are human and the progress you are discussing is supposed to be about people and the lives they might lead in the future. The world of economics has got mankind by the throat and everyone knows it, and no-one has a clue where we are going or why we are going there. But is this surprising? If a monetary system is invalid or flawed, then the entire economy is based on the mathematics of error, and must be riddled with the effects. If the financial system upon which our economies are built is defective, and yet monetary considerations dominate our economic decisions, should we be surprised if the results are less than satisfactory?
The major role played by bank credit, which forms over 95% of the money stock in most developed nations, suggests that it cannot but be implicated in these trends. This is further suggested by the way that banking has literally become the focal point of modern economic management, through manipulating interest rates. The stargazers of Whitehall and the Federal Reserve hold their councils, trying to tread the non-existent tightrope between growth and recession by debating quarter percentage-points of interest rates. Alan Greenspan, the Chairman of the Federal Reserve, engagingly describes his task in controlling the American economy through adjusting interest rates as a matter of 'taking the champagne away once the party has started'. Businessmen around the world hold their breath, measuring his every word, wondering what he will decide. There could be no greater indictment of contemporary financial economics than this; that a fluctuating financial digit on a single computer system in a single street in a single country should have the ability to dominate the economies of an entire planet.
The search for an alternative
The past thirty years are almost unique by comparison with the previous three centuries in the lack of attention that has been directed at debt and the financial system. Throughout the eighteenth century, there were repeated calls for reform. During the nineteenth century, excessive banking was held by many to be directly responsible for the waves of appalling poverty that swept Europe and America during a period of increasing industrialisation and agricultural development. In this century, during the depression of the 1930s, the financial system effectively seized up and brought virtual collapse to the economies of the world in an age which was, perhaps for the first time, obviously wealthy, and in which technology offered people real freedom as well as material prosperity. One observer judged that over 2,000 schemes for monetary reform were put forward at that time - all with a common theme in their outright rejection of the debt-based financial system as it then operated. The same system continues to this day, modified in small details, but unchanged in principle; and the recent financial crisis in Asia shows the potential for collapse still exists.
However the issue of economic volatility through booms, slumps, crises, and collapses has never been the sole point of criticism. It is the long-term trends that a debt-based financial system fosters which are most destructive. The most obvious of these is declining personal solvency. Mortgages support over 60% (?420 billion) of the money stock in the UK and over 70% ($4.2 trillion) in the US. Housing-debt statistics for the UK and the US show that there has been a dramatic decline in true home ownership as mortgages become higher and ever more widespread. There can be little question that relying upon housing debt to supply money to an economy lacks economic and political justification. However, taken in conjunction with the marked rise in commercial debt, mortgages have a knock-on effect. In an economy where the price of goods is elevated by commercial debt and consumer incomes are deeply eroded by mortgage debt, there is a persistent and subtle advantage given to low-quality, mass-produced goods, and growth is fostered in this direction. The persistent decline in product durability and the growth-culture of a rapacious consumer society can be directly traced to the debt-based financial system.
The financial system has also generated a serious distortion of agriculture. Excessive farming debt has driven out the most efficient producers - small/medium sized farms. Meanwhile, the relentless pursuit of farming and processing methods oriented towards a low-price market now involves the production of foodstuffs of poor nutritional value, inferior to that which the land can provide and inferior to that which consumers actually desire. The nature of growth within a debt economy affects not only the quality of output, but distribution and marketing. Intense competition for sales within a debt-based economy results in the use of transport as a competitive strategy by businesses. This has led to a progressive breakdown of local and regional supply networks, and marketing over ever-greater distances, leading to escalating commercial traffic demands. At the international level, trade is deeply affected by the debt-based financial system. The aggressive pursuit of maximum export revenues, rather than seeking a simple balance of trade, is entirely due to the fact that even the wealthiest nations operate from a position of gross insolvency. International trade has degenerated into a competition between nations to alleviate their indebtedness, rather than a process involving a mutually beneficial exchange of goods and services.
Endemic Third World debt is also directly attributable to the reliance upon debt and banking to supply money. The theoretical model of borrowing from the World Bank/IMF, investing in development and repaying loans from export revenues, is one of the great failures of contemporary economics. The persistent inability on the part of debtor nations to repay these loans suggests strongly that the nature of the indebtedness suffered by the Third World has absolutely no actual legitimacy or validity. Chapter 10 confirms this. The more one explores the broad impact of debt, the more apparent it becomes that bank-credit constitutes a dysfunctional form of money. An economy based almost entirely upon bank-credit and debt experiences an intense drive for growth, regardless of need or demand. Bank credit engenders financial dependence, injects instability and fosters growth-distortions, both within an economy and throughout the international arena.
Reform of the debt-based financial system is clearly not a minor issue. It is not a matter of fiddling around with taxes, incomes and allowances to make things apparently more equal, more efficient, or perhaps more straightforward. Changing the debt-based financial system involves gradually altering the very foundations upon which national and international economics is based. "Monetary reform is concerned with attempting to determine a new principle for the supply of money to an economy - the purpose being to create a supportive financial environment in which more constructive economic trends are allowed to emerge, and in which more benign systems of overall economic management become possible. In view of the rapacious onslaught on the environment, the waste of natural resources and the social and political friction caused by de-regulated commerce and capital flows, this is at once a promising, but a sobering prospect.