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Over the years I have been looking at many proposals for monetary reform. I have met many monetary reformers and of those the most influential in my work have been James Robertson and Ben Dyson. From the work of James Robertson and spending many hours with Ben Dyson I have copied a proposal below which I fully back. The proposal is taken from Ben Dyson’s website www.bendyson.com.

The following is a proposal for reform that can be implement in the UK (or US, with some adaptations). The purpose of each part of the reform is outlined below.

The reform is based on the excellent work done by James Robertson and Joseph Huber in their book Creating New Money (follow the link to download the book for free). I have extended this work as much as possible to provide a blueprint that the government can use to pass an Act of Parliament. I have also outlined some safeguards and ‘transition mechanisms’ that can be used to ensure that the transition from the existing (inherently unstable) system to the new, stable system is as smooth as possible.

I am ‘filling in the details’ as quickly as I can with limited time and resources (and the invaluable help of Jamie Walton of the American Monetary Institute and Mike Black). However, once the UK government realises that this reform is a much cheaper, more logical, and highly beneficial solution than anything that they have thought of to date, it would make sense for them to devote a team from the Treasury to further research.

Part A: Restoring The Exclusive Right To Create Money Back To The State

Until commercial banks are prevented from creating money, financial stability is impossible. Part A outlines the changes to the banking system that will need to be made in order to stop the creation of money by the commercial banking sector. It clarifies how banks will make loans (the process which is at the root of the current problems) and defines simple requirements that will make the banking sector infinitely more stable than it currently is.

Read Part A: Restoring The Exclusive Right To Create Money Back To The State

Part B: Mechanisms For Creating New Money

Money should be created for the benefit of the public – not for the benefit of privately owned companies. This is not a left-wing idea – just simple common sense. Part 2 explains how money will be created under the reformed system, by the Bank of England according to decisions made by the Monetary Policy Committee. It also ensures that politicians will have no influence over how much money is created, to prevent pre-election manipulation of the economy. It puts in safeguards that make inflation less likely than under the current system.

Read Part B: Mechanisms For Creating New Money

Part C: The Transition Process

Under the current system, commercial banks have effectively had the right to ‘print’ money* for the last 500 years. Allowing them to keep the proceeds of this money creation would be like the police, upon raiding a counterfeiting gang, confiscating the printing press but leaving behind all the money that they had forged. It would concentrate massive economic power in the hands of one small sector of society.

Part 3 outlines how we prevent banks receiving this windfall profit (of around £1.8 trillion over 30 years) and put the money that they created back into the use of the public. There is no vindictiveness in this reform - commercial banks will not be made to suffer, and they will still be able to earn interest on all the loans that they made before the date of reform.They will however be denied a massive windfall profit (which would otherwise be at the expense of the nation).

Economists may argue that this section will negatively impact on the banks’ future profits. This argument is no different to arguing that police raids negatively impact the future profits of counterfeiting gangs.

Read Part C: The Transition Process

* Money being numbers in an accounting system – not actual notes.

Part D: Mechanisms For Reducing Debt & Increasing Wealth

This part of the reform does allow the debt burden of the public to be ‘unwound’ and reduced – something which is nigh-on impossible under the current system. It also allows government debt to be gradually extinguished, freeing up £32-70 billion per annum to be spent on public services or tax reductions.

Read Part D: Mechanisms For Reducing Debt & Increasing Wealth

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As we speak I am in the midst of a road show presenting the causes, consequences and solutions of the financial crisis and the need for monetary reform across the UK (See upcoming events to attend one of these presentations). I have been presenting to audiences totalling about 2000 a month. After presenting to this many people you start to recognise some common themes in the questions that come up repeatedly that I would like to address in this post.

After my presentation where I demonstrate to the audience how 97% of our money supply is created privately through private debt loans and that money creation by banks is an expanding process in which money created by past loans is perpetually recycled, re-loaned, providing an endless supply of new money, building up into a vast infinitely ballooning total of money and debt that eventually renders unaffordable interest repayments I open up the floor to questions. Similar questions tend to arise at each presentation.

Initially most people are in shock that something as important as supplying money to our economy is not nationalised and that our economy mixes the two activities of providing a medium of exchange to our citizens and profit making lending together almost accidentally as we have not updated our monetary system to account for the fact that 97% of money is created electronically through loans and they have a few questions related to the mechanics of how this works.

Can we really question Economics?

After addressing these confusions I often get some questions as to why the government and senior staff at the Bank of England and the treasury have not done something about this. ‘Surely if there was any validity to our argument they would know’ they ask in disbelief. At this point I need to give them a brief history in economics and how current policy is run of assumptions about the multiplier effect (An economic theory which does not meet the facts), different theories of inflation and the history of Keynesianism and Monetarism in order to explain the rationale for current economic thought. For more on this you may wish to refer to my post ‘Why are we in a global financial crisis – The Problem with Orthodox Economic Theories’.

Is this a conspiracy?

At this point I might get a question from somebody who has watched a youtube video on the current system that presents the financial system alongside a full blown conspiracy theory, which claims that the financial system is being shielded from criticism and deliberately employed as a device for keeping people in a state of dependency, so as to advance a high-level political agenda. I then have to explain that most political figures clearly know nothing of the weakness of conventional economics as I experience every day when contacting such people.

You are telling me I shouldn’t be angry at the Banks?

Some ask ‘why, if you know what you know, are you actively involved in Investment Banking?’ By this I assume they mean that I am involved in some immoral practice to which I explain that the current anger directed towards bankers and greedy CEOs while valid is misguided and diverting the attention from the fact that banks have been propping up our economy. We are all in a battle for survival in a debt based economy. We have laid a foundation of unsustainable economics through our current monetary system which relies upon ever increasing debt by consumers, companies and government in order to supply the economy with the money it needs. I then explain that any re-financing by consumers (What the media and government like to refer to as spending beyond our means), companies (Investment Banks packaging loans together and selling them on as securitised products) and government (Bailing out companies that are over leveraged and up to their eye balls in debt as well as welfare expenditure by selling government securities on the money markets) are all activities that are essential under a debt-based unsustainable economy to prevent the most severe depression we have ever seen. What people don’t realise is that all this debt was inevitable and necessary in order to sustain the unsustainable for as long as we can and that in fact all this securitisation, mortgage debt and government debt is necessary to supply the economy with the money it needs to prevent a depression. If it had not occurred then our economy would have collapsed a long time ago. It was inevitable and necessary, so any anger directed at these activities is misguided and diverts our attention from the real cause of the financial crisis. The reason we are in a financial crisis and about to enter a depression is because of our monetary system, which can only be reformed at the top. We have been buying time through refinancing until we eventually reform our monetary system.

We need to nationalise our money supply NOT our banks. If we continue to be angry at banks, greed and CEOs excessive pensions and bonuses then we are doomed to remain in depression until our whole economy collapses. There is only one institution that can implement monetary reform and that is the government not the banks.

To Bailout or not to bailout?

The most common question that comes up time and time again after the initial questions is ’should we bailout the banks and companies or let them go bust?’ This is my favourite question that seems to divide the nation. The question is much more about identity then anything else. It is loaded with many previous thoughts and philosophies and is never as straight forward as the question first appears – the free market v. the welfare state and government intervention, the left wing v. the right wing, classical economics v. Keynesian economics, the conservative v. the labour, Capitalism v. socialism, Jim Rogers v. Gordon Brown, Ron Paul v. Barack Obama. Bail them out or let them go bust. My response – neither will work.

The philosophical question of the free market and the interventionalist approach is an old argument that dominates the political views of those world over. You are either for it or against it. You are either left or right. Politics in the modern day has become a sport. People build there whole identity around their political preference. Much like sport we adopt a political preference as we adopt a football team. We strive to be with a winning team. Our purpose is to be on the side of the winning team. All we want to do is win the game and will do anything to beat the opposition. We enjoy beating the losing team and when we play foul we find reasons and excuses to remain with the winning team, we find evidence to align with the actions of the winning team. When we are winning we wear our t-shirt with pride and feel like a champion. ‘I am a part of the winning team, you are not’. ‘I identify myself around that winning team and will find any reason to stick with my winning team’. ‘I don’t disagree with the winning team and I read papers that make me feel good about the winning team and point out everything bad about the competition’. There are striking similarities between picking your winning football team and your political preference. Most adopted it from their parents and have a dire need to prove other peoples preferences wrong.

As an economist I obviously have a preference but I wish not to disclose my preference as it takes attention away from the true cause of the financial crisis – our monetary system. You may wish to ask me this at one of my presentations and I will be happy to answer. As I watch the news, the financial channels and read the financial press the heated debate is whether to bail out or not.

Those who believe in the free market believe in as little intervention as possible and that the competitive forces of the free market have an ‘invisible hand’ where only the fittest survive and that any bank that has an unsustainable business model is an inefficient business that should be replaced by one more sustainable and more ready to meet consumers demands. The other side of the argument states that we should strive to reach full employment and create as many jobs as we can, if we let those banks go bust the knock on effects will be huge, people will lose their jobs and there will be a huge drop in demand, a recession and perhaps a depression. As a result we have no choice but for the government to step in and take on huge debts to prop up an inefficient, non-competitive business. The free marketers argue that whether you bail out or not the company has been unable to compete and any interference from the government gets in the way of a vital signal in the form of lost profits, signalling that the company is no longer meeting consumer demands. Those who believe in intervention say that the government must step in for the good of the public, imagine if your job was on the line and paint free marketers as ruthless and non-caring. These arguments go back and forth, getting more and more heated and those on the winning team feel very proud of themselves as they become right when the government continually intervene and goes against the free-marketers. The free marketers will take delight when this goes wrong, as it will. They can be a part of the winning team once again and have more evidence that the free market is the winning team to be on.

Well, I am here to tell you that they are all destined to be losers. Not because I agree or disagree with the free market theory, but that the assumptions of the economic model will not work in a debt based economy. Please don’t get me wrong, when I say a debt-based economy I am not against debt (You may wish to read my other posts for more details), debt is a valid and vital activity to be undertaken by private financial institutions. I am against mixing the two activities of providing society with a medium of exchange and profit making loan providence. Give the free market a nationalised money supply and we can see it in its true glory. These philosophies, however, will only work under a sustainable economy.

As explained in previous posts, under a debt-based economy, for our economy to grow and sustain we need more debt as almost our entire money supply is created through debt. The current position is that, while individuals, factory workers, businessmen, inventors, house builders, students, teachers and hosts of others work together to make available the wealth of a country, they are not able to exchange the goods and services that they make without borrowing money into existence. This borrowing in early 2009 is becoming increasingly hard to come by. In fact the only borrowing that is keeping our economy going is from the government through national debt. We cannot eat, sleep, take shelter or obtain clothing for ourselves and our families without borrowing-to-buy. Despite the fact that the goods are available, the industries are desperate to sell them, the people of our nation are only granted access to the products of the economy if sufficient and increasing numbers of us first go into debt.

If we bail out our banks and companies we are surviving only because the government is taking on more debt and injecting our economy with a vital supply of debt-based money. The interventionist bailout approach will run something as follows.

If we continue to intervene and bailout, the government could take on enough debt to successfully create another bubble until eventually interest repayments reach such a high level that companies (As they take on more debt to meet the lack of demand during this recession), consumers (As we start to enter the property market again and pay ever more money in interest repayments in another property bubble) and government (As they sell more bonds to finance the bailouts until the market for bonds disappears and they can no longer re-finance to pay interest on old bonds) all go bankrupt due to the lack of purchasing power discussed in prior posts.

People will start to realise that the government are already up to their eyeballs in debt and start to wonder how all this extra government money is going to be repaid. As corporate debt increases, the interest repayments increase and companies increase their prices to survive causing inflation. Consumers cut back spending as they are up to their eyeballs in debt and companies go bankrupt as demand falls. With more bankruptcies and unemployed the demands on government lead to more and more bond issues which eventually cannot be sold and inevitably default and go bankrupt. If the bailouts are successful or not, now or later this system cannot be sustained. This means that the bailout option will not work.

Well what about the free market approach? Under our current debt based economy only 3% of money is supplied to us through the government, and 97% through debt. A huge part of that money is supplied through government debt. If we left the market to its own devises and the government stopped taking on ever more debt, that money would have to come from somewhere else as a debt. There would be such a scarcity of money that we would enter a depression like we have never experienced before. Remember the government debt can never be settled without a depression, unless somebody else takes on more debt to make up for the shortage of money. Consumers and companies would have to take on sufficient amounts of debt to make up for the lack of debt the government is taking on and they of course would go bankrupt as the interest repayments become unsustainable. If the government committed to less intervention and settled its huge debts, then the government would only contribute the current 3% of government debt free money to the economy and consumer and corporate debt would have to take on debts equivalent to the 97% of money created through debt today just to sustain the current economic situation. To maintain growth this would have to increase forever. As this is unsustainable the economy would collapse as consumers and companies default on debt and the money supply shrinks. The free market option will end in the same result as the bailout option but sooner.

We have only one choice – monetary reform or monetary reform. We can take the bailout option now and reform money before the great crash or we can spend money into the economy debt free now and nationalise our money supply much like Abraham Lincoln did in the past. Unfortunately Abraham Lincoln was assassinated before he got to finish his work and implement a full monetary reform. So there it is, reform or collapse under a free market or a bailout/welfare state.

Will Conservative or Labout get us out of the financial crisis?

The next question that comes up time and time again is one of political preference, would we be better under labour or conservative, as conservative seem to be committed to less debt than labour? I would respond by letting people know that the squabble between left and right on taxation and spending priorities does not represent the full range of choices. As the conservative party attempt to win votes by campaigning ‘Gordon Browns debt’ and discuss the uncontrollable government debt, what they don’t realise is that labour or conservative, neither will work. This is why the debt has exponentially increased under both governments over the years. It is easy to point out that ‘Gordon Browns debt’ will make us broke in the future, but the reality is that this debt is a vital part of our money supply, take it away and there will be such a scarce supply of money that we will enter the worst depression ever. The national debt will not make us broke in the future, it will never be paid off, it will increase forever until we implement monetary reform. The current argument is invalid and the results under conservative or labour will be the same. Being on a winning team wont feel too good when we enter the depression!

The real political option is embraced by the creation and supply of money by government instead of private banks when we nationalise our money supply. This completely opens up the economic options of extra funding, increases the political choice of expenditure and offers the prospect of true welfare. This is not a left or right argument. Less or more spending can occur once we nationalise our money supply. How dare a government claim it cannot find the money to pay for this or that, but can afford to bailout banks in the name of welfare when they do not bother to create any money? The reality is they probably don’t know there is a third alternative, but now we are in a global financial crisis they will find out as we make way for a new paradigm called monetary reform. It is inevitable and will have to happen now or later.

Which is the winning team?

This is not about being on a winning team. It is no exaggeration to claim that the reform of the debt-based monetary supply system is the single most important area of reform confronting us in 2009. Reforming the monetary system is more important than war against poverty and starvation, more impotent than the movement to protect the environment, the struggle against pollution, the peace movement, the fight against drugs and racism, and the battle for social justice and welfare. Monetary reform is more important than all these other problems for the simple reason that the current monetary system is responsible, both directly and indirectly for creating, or at least contributing to them.

In my next post I will publish a more detailed proposal for monetary reform. Please leave your details so I can keep you up to date with this and feel free to leave comments below.

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Today, as I write, the new merged UK banking giant Lloyds has underestimated the loss that is about to be incurred as a result of the merger with HBOS. The banking giant has received a huge bailout selling more shares to the government and is on its way to being yet another private bank doomed to nationalisation.

On the television I hear no mention of why this might be apart from propaganda trying to make the public angry about the CEO’s who have taken too much bonus and ’caused’ all this mess. It is very easy to divert attention away from our unsustainable system by blaming the crisis on greed when you have every newspaper and television show focusing on greed as the cause.

We are in this mess because as mentioned in prior posts we are running our economy on economic theory that does not work. Orthodox economic theory refuses to recognise that almost all of the money in our economy is created as a debt through loans. This is what a banking licence permits you to do. We are in a global financial crisis as our economy thinks that the cause is greed and lack of regulation and the cure is to take on huge fiscal burdens, leading to the nationalisation of banks so we can implement further regulation.

Nobody discusses that our economy is built upon an unsustainable foundation that will inevitably lead to a financial crisis. We do NOT need to nationalise our banks we do need to nationalise our money supply. We are here not because of some conspiracy theory about the banks or excessive greed, we are here because of our philosophy of how we should run our economy and our theory of how we should control the amount of money in our economy.

There is a huge problem with orthodox economic theories – they don’t work in the real world and the global financial crisis is evidence of this. Economists must recognise the significance of the fact that almost all money in our economy has been created through debt, debt that can never be repaid without a complete depression, if we are to get anywhere near a solution and to reach sustainable economics. Economics must question the foundation of theories such as the multiplier and the quantity theory of money and start to look at the facts. This article discusses some of the problems with orthodox economics and how it has contributed to the current global financial crisis and our philosophy of more debt, more bailouts and more bubbles to turn around our economy.

To set the foundation on current thought, as we speak the government is in the midst of decreasing interest rates until we inevitably reach zero (Monetarism in order to stimulate consumer and corporate debt), bailouts and huge stimulus packages (Keynesian fiscal policy in order to increase the national debt) and the new one is quantitative easing (The Bank of England creating money out of thin air to buy government debt). All these policies are aimed at creating more debt, because the reality is – our economy needs more debt to sustain growth and prevent a depression under our current debt based economy – take away the debt and there is nothing because almost all of our money supply is created through debt – no debt, no money. As you all know I am not against debt, I am against mixing up debt with supplying money to our economy – a task that must be nationalised. Money is far too important not to be supplied through the public sector. This system is only justified through orthodox economic theories and our misunderstanding about how to supply money to our economy as discussed below.

Traditional Money Theory

Orthodox economics does not recognise the importance of almost all of the money in our economy being created as a debt to a bank. Under the current system if our economy wants more money, we need to create more debt. More debt means more interest to be repaid. More interest to be repaid means less purchasing power. Less purchasing power means more debt to survive and so on and the cycle continues. These facts need to be incorporated into economic theories of money.

The first thing to recognise in such a debt based system is that money borrowed is not money lent; it is money created. Economists know this, but fail to apply it throughout their discipline. At the heart of the economy is money, and at the heart of modern economies is a misunderstanding about money. This misunderstanding comes from some of the theories outlined below.

The Multiplier

The suggestion that banks create money was once regarded as pure fantasy by both bankers and economists, who insisted that banks merely lend money. However, modern economics textbooks are quite open about the process. The ability of banks to multiply the quantity of money beyond the amount originally deposited with them is given an accepted title – ‘the multiplier effect’.

In conventional theory, the multiplication of money is not seen as being open-ended. Money creation by banks and building societies is not seen as an expanding process in which money created by past loans is perpetually recycled, re-loaned, providing an endless supply of new money, building up into a vast infinitely ballooning total f money and debt. The entire system is supposed to be self-limiting, with controls and restrictions built into it. According to theory, it ought not be possible for an economy to operate on 97% bank-created credit as it is today. According to theory, the money supply ought not to have been able to inflate with no more than 3% contribution from the government. According to theory, such vast multiplication should not have been possible, but the theory does not meet the facts.

Rather than an infinitely expanding balloon, the system of money creation by banks and building societies is supposed to resemble a pyramid. It is sometimes referred to as the ‘pyramid of credit’. At the base of the pyramid is a firm foundation of true money, the coins and notes created by government. Above this is the narrowing pyramid of bank created credit, which, because of the legal restrictions on banking can only reach a certain height.

Chief among these legal restrictions is that known as the ‘liquidity ratio’. This is supposed to set a strict limit to the amount of money that banks can create via loans. For some years, the liquidity ratio was set at 10%. This meant that a bank could only issue loans equivalent to 90% of the money deposited with it at any one time, since it had to retain 10% of its deposits in liquid form, such as cash. The pyramid of credit is built up by stages, at each stage a smaller round of loans leading to a smaller number of new deposits.

At the first stage, only 90% of the original, true money could be loaned, and thus return to the banks as new deposits. Of this new, smaller set of deposits, again only 90% could be loaned, and thus return to the banks as a further set of new deposits. Each round of loans is built on 90% of the previous round, and in the end, after a series of even smaller loans, the final loan is a minute amount, and the pyramid of credit is complete. Once the pyramid of credit is complete, no more money can be created by lending, unless what the books refer to as ‘brand new, true money’ is introduced at the base. In other words, only when the government creates and supplies more coins and notes as debt-free cash can the system start again, building up a further pyramid of loans on the new money.

There is only one trouble with this theory. It doesn’t apply. The liquidity ratio was abandoned in 1981 as part of the deregulation of domestic and international finance. Banks are now legally allowed to lend and re-lend without the restriction of a liquidity ratio. In fact, for years, the banking system had found ways round the liquidity ratio by investing in short-term government securities, (Which are re-deposited in banks once spent and are actively a part of the money creation process) and it had long been functionally meaningless.

The other restriction traditionally supposed to act upon banking is that known as the asset / reserve ratio. It was a requirement on banks to have sufficient sums of their own money as a standby. The purpose was to make sure that the amount of money they possessed as a company – their own capital reserves – was adequate to cover any loans that might default and not be repaid. A reserve / asset ratio of 10% meant that if banks had made loans of £10,000,000, they must have £1,000,000 in their own company reserve. In the UK, a reserve of about 10% has generally been regarded as adequate, and was for many years a legal requirement. However, like the liquidity ratio, the reserve / asset requirement has been abandoned. Today, at the time of this writing, the only legal reserve / asset requirement on banks is that 0.5% of all their assets be logged with the Bank of England in the form of notes and coins. Financially, this is a total irrelevance. As a limitation on banking it is also meaningless, since the Treasury supplies notes and coins to commercial banks to meet the general demand, and this 0.5% simply becomes part of the overall demand for coins and notes!

The reserve / asset ratio has been replaced by the ‘capital adequacy’ ratio. Again, this is a requirement on banks to have sufficient capital of their own, and is set at 10% on international agreement. But there is no requirement that this 10% reserve be held in cash; indeed the bulk of the banks capital is held in the form of investments, especially government bonds. But whenever a bank purchases government bonds or any other investment using money from its capital reserves, the money enters the economy, and then registers as a new deposit. Instead of being a restriction on banking and money creation, the money supply process is actually sustained by such bank purchases from reserves.

Despite the fact that both the liquidity ratio and capital reserve have either been abandoned, or become totally meaningless or counterproductive restrictions, economics textbooks and banking theory still present money creation in the context of these supposed restrictions.

The last thing that is being suggested here is that a restoration of these controls is what is needed. As we speak the government is discussing more regulation as the solution for the global financial crisis. History has shown, there has hardly been a moment in history when the banking system has actually been under control, and this will never work, except to the disadvantage of the majority of the population, the banks themselves and the functioning of the economy. The point about the multiplier theory is that it has allowed economists to believe in and present the current system as one that operates under control, when it empirically does not.

Under this understanding most believe that bank credit only lasts for the duration of the loan, and upon repayment will be cancelled out of existence. This is not what actually happens at all! As any bank manager will confirm, when money is repaid into an overdrawn account, the bank cancels the debt, but the money is not cancelled or destroyed. The money is regarded as being every bit as real as a deposit; it is regarded by the bank as the repayment of money that they have lent. That money is held and accounted as an asset of that bank.

The fact that upon repayment, money that they have created is not destroyed, but is accounted as an asset of the bank, proves beyond dispute that when banks create money and issue it as a debt, they ultimately account that money as their own. The only factor which disguises their indisputable ownership of the money they create is the fact this returning money is usually rapidly re-loaned.

Borrowing in the modern economy almost always outpaces repayments, which is why the money supply escalates. This means that money returning as repayments usually does not accumulate in the banks own account, but is quickly re-loaned, along with more debt.

When borrowing is sluggish, during a recession as we are in today, some banks can be awash with money from past repayments in their own account. This surplus money can be used to boost the banks balance sheet as is badly needed today or can be used by the banks and building societies to make investments, purchasing stocks and bonds available on the world money markets, boosting their company reserves hugely, and placing beyond doubt whose money this is.

The point about repayments is that money is not destroyed, but is withdrawn from circulation. Thus the total of deposits held by the population is decreased. In this sense, a deposit has been destroyed, but not the money. Upon repayment of a loan, money returns to the bank or building society that created it. This money then only re-enters the wider economy if someone else takes out a loan, or if the bank spends the money on an investment. Either way, this money is accounted and treated as the banks own property. Therefore it is true to say that loans are temporary, but the money created by banks is permanent. Once created, it belongs to the banks, constantly returning to their ownership and control, with the repayment of each debt. This is how 97% of all money in our economy is created today and economic theories must recognise this if we are to reach the conclusion that we need to nationalise our money supply not our banks.

Monetarism

As the government does not directly control our money supply and the multiplier effect has ballooned out of control, the Bank of England uses monetary controls indirectly by controlling interest rates and the cost of borrowing. Another element in economic theory relating to banking and the money supply is the use of interest rates. Fluctuating interest rates are used both to influence the rate of bank lending, and as a policy intended to cover almost the entire realm of economic management. As we cannot control our money supply directly we must influence the money supply indirectly through interest rates. The school of thought from which this economic policy derives is the Chicago School, initiated by irving Fisher, and later championed by Milton Friedman. It is the ideology which completely dominates modern economic thought.

The philosophy is to give full rein to the free market, whilst attempting to guide the overall activity of the economy by managing the money supply. This a government does by lowering or raising interest rates through the monetary policy of the central bank. This alternatively encourages and discourages borrowing, thereby speeding up or slowing down the creation of money and the growth of the economy. Low interest rates encourage both industrial investment and consumer borrowing, leading to a growth in the money supply. High interest rates mean that new borrowers are deterred and the growth in the money supply is slowed. The fact that, by this method, people and businesses with outstanding debts can be suddenly hit with huge extra charges on their debts, simply as a management device to deter other borrowers, is an injustice quite lost in the almost religious conviction surrounding this ideology.

Just when the economy is getting going, investment is healthy, jobs are being created and production and prosperity are increasing, the economy is deemed to be overheating , and the great bogey, inflation, appears. And the only way that modern economics can think of to cope with a financial phenomenon over which all economists disagree – inflation – is to stamp on the entire money supply, throwing the entire economy into recession, bringing bankruptcy to millions.

This method of controlling banks, inflation and the money supply certainly works; it works in the way that a sledgehammer works at carving up a roast chicken. An economy dependent upon borrowing to supply money, strapped to a financial system in which both debt and the money supply are logically bound to escalate, is punished for the borrowing it has been forced to undertake. Many past borrowers are rendered bankrupt; homes are repossessed, businesses are ruined and millions are thrown out of work as the company sinks into recession. Until inflation and overheating are no longer deemed to be a danger, borrowing is discouraged and the economy becomes a stagnating sea of human misery. Of course, no sooner has this been done, than the problem is lack of demand, so we must reduce interest rates and wait for the consumer confidence and the positive investment climate to return. The business cycle begins all over again.

There could be no greater admission of the total and utter inadequacy of modern economics to understand and regulate the financial system than through the wholesale entrapment and subsequent crippling of the entire economy. If we think that this is better than controlling the money supply directly by nationalising our money supply then it is no wonder we are in a global financial crisis.

Inflation

Orthodox economics explains inflation as ‘too much money chasing too few goods’. Michael Rowbotham believes Inflation is not caused by too much money; it is caused by too much debt-money. He believes Inflation is entirely due to a lack of permanent stable money stock and our reliance upon bank credit to supply the majority of our money. The backlog of debt constantly feeds through into industrial costs, raising prices and depressing consumer spending power. It is this lack of purchasing power – the gap between prices and income -which Michael believes is the driving force behind inflation. His theory seems to be the most consistent with the real world facts too.

Inflation is nothing but the upwards drift of prices and wages in an economy where industry is desperately trying to recoup outlay and cover all the financial costs of production, whilst the consumer is desperately trying to bridge the gap between their income and the price of goods. Inflation is the result of the two sides of the economy – consumers and producers, wages and prices – being set at odds by the perpetual lack of purchasing power, and it is quite endemic under a debt based system

In economics inflation is attributed to the very opposite! Inflation is declared by most economists to be ‘too much money chasing too few goods’. In an economy based 97% upon money that has had to be borrowed into existence, when the total of debt is in excess of the entire money stock, when everyone is competing for what money exists to avoid further debt, when the money in circulation is required both as a medium of exchange and also required to repay the debt that created it, when a booming economy has been financed on the back of consumer borrowing and industrial borrowing for investment, when our everyday experience is that there is never enough money and when there is a superabundance of goods and services of all descriptions – quite honestly, does ‘ too much money chasing too few goods’ sound realistic? Quite honestly, which is the more likely? That inflation is due to excess money or the backlog of debt? Turning their back on debt and completely ignoring one half of the spiralling money supply process, economists deem inflation to be caused by ‘too much money’.

The idea that inflation is due to debt and excessive banking is not a novel suggestion, indeed it is contained in the very word ‘inflation’ which was originally applied to the expansion of money by banks beyond its true amount through the creation of additional credit. However, the suggestion that the action of banks in ‘inflating’ the currency could lead to price inflation has in recent years been completely swamped by a single theory of inflation – the Quantity Theory. This argues that if the quantity of money, or its speed of circulation, rises to the point where more money is available than is necessary for the purchase of goods currently available, then the prices of those goods will rise to absorb this ‘excess’. Inflation is thus seen as an automatic and inevitable result of any increase in the money supply above that needed for the purchase of goods. The quantity theory of inflation, which disregards completely the nature of money and the impact of debt on prices and incomes, is contradicted by almost every piece of evidence we have, whilst the role of debt in causing inflation is confirmed.

Over the centuries, there has been a constant complaint by ordinary people of poverty amidst plenty – not ‘too few goods’ but ‘not enough money’. There has also been a parallel complaint by industry of the difficulty of finding a market for their goods at prices that allowed them to stay in business. A difficulty in producing goods is never industry’s complaint. The difficulty is in selling goods, which strongly argues a lack of money, and in meeting costs, which strongly argues excessive debt. Inflation as ‘too much money chasing too few goods’ seems historically completely different to reality. But it does show a striking parallel with the increasing reliance upon bank debt-money.

If inflation were anything to do with ‘too few goods’ it ought to have died out decades ago with the choice of goods growing exponentially, not increased over the years.

As for ‘too much money’, how can this be said to apply? As we have seen, the average family and the average business is up to its eyeballs in debt of one kind or another mortgage, overdraft, credit cards and hire purchase. What is more, the level of personal and business debt has increased over the last fifty years, at precisely the time that inflation has become an annual feature. Add this to the fact the governments constantly complain of not enough money to spend on pensioners, hospitals, education or whatever.

The economist’s explanation of inflation is riddled with such contradictions and inconsistencies. None of it makes sense, and none of it explains why inflation is so persistent, despite all efforts to control it. In particular, there is a complete failure to account for the fierce price inflation that occurs during a period of economic boom when there is no question of ‘too few goods’. Why do prices soar during a boom? Why is competition deemed suddenly inoperative as a factor holding down prices, just when competitive growth is at its most intense?

The reason the prices rise once recovery is underway is that firms have been investing, and must repay the costs associated with this investment. The debt may be in the form of a bank loan, or it may be in the form of an obligation to pay dividends on a new share issue, but either way, new overheads have been incurred and these must be reflected in prices. The rapid price inflation during a boom is caused by firms charging the true financial cost of goods. Prices begin to reflect what firms actually have to charge in order to meet their costs. As prices rise, incomes get left behind and the lack of purchasing power in a debt economy starts to become apparent. This price rise and lack of purchasing power continues until no more debt can be sustained and we enter a financial crisis as people default on their debts.

Such an analysis also helps to explain the behaviour of prices during a prolonged recession. During a recession, the gap between prices and incomes that would be evident if firms charged the full price of goods is masked. Firms try to hold back costs and so keep prices low. But they cannot do this indefinitely. If a recession continues for a number of years, more and more firms are unable to defer costs, and slowly prices start to creep up to meet costs. The fact that such price increases are due to pasts costs incurred, and not current wage rises, is obvious, yet economists are totally stumped by the phenomenon of inflation during a prolonged recession, or ’stagflation’ as it is termed.

Almost all the instances of hyper-inflation have taken place in economies crippled by their debts. The South American and African countries where inflation has at times ranged between 100% and 500% per year were all, without exception, suffering at the times from huge debts to the IMF and World Bank upon which they had to make substantial annual repayments. The inflation in Germany during the 1920’s, which is often attributed to the German government running up an excessive government deficit, was equally associated with an explosion of debt.

The global financial crisis

As a result of this debt based system growth can only be sustained if we continuously take on more debt to supply the economy with the money it needs. However, the money the economy needs can never be achieved, as there is more debt than money, so we must continually re-finance in an endless spiral of debt. This debt incurs ever increasing interest charges and leads to price inflation as the only way to service past industrial debts.

In a situation where prices are rising relative to income, consumers have three options; either accept that their income buys less, press for higher wages, or borrow to buy. Of these, seeking higher wages was once seen as the ‘least-worst option’; however this simply produced the spiral of wage / price inflation of the 1970’s. A rise in wages can never close the gap between prices and incomes, since the gap is not due to the level of wages, but the effect of debt. All that a rise in wages achieves is to push up prices yet higher, the debt component of prices and the erosion of incomes by mortgages both remain.

Leading up to the financial crisis, people tended to regard ‘borrowing to buy’ as the least-worst option. Of course, all this borrowing meant lower disposable income in the future, whilst all industrial borrowing for investment will be represented in higher prices in the future. We are told that consumers have spent beyond their means and bankers have been greedy. The reality is consumers have re-financed to survive as banks have propped up the unsustainable system for as long as possible by increasing debt levels until the only borrower was those sub-prime borrowers who eventually defaulted. To blame this on consumers overspending and banks over lending is just an inevitable consequence of unsustainable economics and all they did was maintain debt to prop up the system for as long as possible. Now the government steps in and takes on the debt the economy needs to sustain the unsustainable.

This cycle is now over, we must nationalise our money supply not our banks and we need to move towards sustainable economics. Our current policies are all geared towards sustaining the unsustainable through increasing consumer and industrial borrowing (Lowering interest rates), increasing government borrowing (Fiscal stimulus and bailouts) and quantitative easing (Creating money out of thin air and loaning it to the government).

The mathematics of debt is uncompromising and the gap between prices and incomes in a debt economy cannot be concealed indefinitely by ever more debt-buying.

What we are experiencing now is a true deflation, involving falling prices and wages. The result is massive bankruptcies across the economy. This is hardly surprising since, with a general fall in both prices and incomes, the debt component of the price of goods is increased.

Concluding thoughts

To refer to bank credit creation as ‘the money supply’, as both government and economists do is completely misleading. The whole point is that, apart from the government’s trivial 3% contribution of coins and notes, there is no money supply. To call mortgages and loans ‘borrowing’ is also misleading. They are charter for the private creation of credit, charged at interest, and advanced against a person’s future income, allowing the purchase of goods already in existence, but for whose purchase insufficient money exists.

Also, the intermediate squabble between left and right on taxation and spending priorities does not represent the full range of choices. The real political option is embraced by the creation and supply of money by government instead of private banks when we nationalise our money supply. This completely opens up the economic options of extra funding, increases the political choice of expenditure and offers the prospect of true welfare. How dare a government claim it cannot find the money to pay for this or that when they do not bother to create any money?

A full understanding of the financial system provides a solution for so many micro and macroeconomic conundrums and financial contradictions that it can only be described as a revelation. The analysis and proposals for monetary reform offer a leap forward in economic understanding of quite breathtaking dimensions, and promises a revolution in the entire discipline. Academically, as well as in practical terms, to say this is exciting is an understatement.

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As you research this topic further, monetary reform is often presented alongside a full blown conspiracy theory, which claims that the financial system is being shielded from criticism and deliberately employed as a device for keeping people in a state of dependency, so as to advance a high-level political agenda. But this conspiracy theory is far from proven. Certainly, most political figures clearly know nothing of the weakness of conventional economics.

What dominates the world is not a conspiracy, it is a philosophy, a philosophy which tends to be held with unshakeable conviction by those employed in corporate business, high level government and supranational regulatory agencies. The philosophy that economic problems can best be solved, not by the people affected, but by experts.

This is the philosophy by which the personnel at the World Bank have crucified the economies of so many Third World countries by their gross interference. It is the belief that those with power can organise things better than anyone else and when things go wrong, the need is for yet more power. And it is a wholly false philosophy.

What currently dominates world politics is not a true conspiracy; it is a mistake. It is a conspiracy of error. We are witnessing the collective pursuit of an impossible political ideal and an enormous economic paradigm, built on a inadequate, misunderstood and almost unchallenged financial system. To cry conspiracy is easy; the far greater challenge is to tackle the vast numbers who are now convinced of the validity of conventional economics and the merits of more bailouts, more regulations and miss-guided anger, and attempt to persuade them that their economic and political practice is misguided. And for them to realise it is false, they need to be aware of the political alternatives. I remain optimistic with the recent events of the global financial crisis that economists and politicians alike are ready for a new paradigm, new beliefs and an entirely new system altogether. If monetary reform is to come out of the global financial crisis then we are on our way to a more prosperous, fair and sustainable society.

The nature of the economic dictatorship from which we suffer only becomes apparent when the financial system is fully understood and the alternatives are considered. This ignorance doubles the difficulty and makes it far harder to tackle them if there actually were a conscious conspiracy. One first has to convince people, who have achieved positions of power by accepting conventional economic dogmas, of the weaknesses of convectional economics. One then has to convince them that their policy, whether or not they are aware of it, is effectively tyrannical. Next one has to convince them of the vitality and workability of an alternative economic model. Finally one must persuade them to implement policies which are often in principle, the reverse of those they have for so long pursued, and which will involve them in a more subordinate role. This is no easy task, but if one good is to come from the pain caused by the global financial crisis, it is that they will certainly question there old paradigm and I have faith that if this message spreads the public will be able to support them in a new alternative that involves monetary reform for the good of us all in a new paradigm of sustainable economics.

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