Transforming our Money System – 3

By John BristowComments Off on Transforming our Money System – 3

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Implications of Problems with the Money System                        What are the implications of centralisation and the effects of the collusive arrangements between governments, central banks and private investment banks?

The government extends its spending power beyond current tax revenues, and can give business to favoured suppliers; private banks have monopolised credit supply and can charge interest (actually in the form of usury) and exorbitant fees. This collusion has been called a “vicious alliance” (Riegel). Sometimes the government has more power, at others the private investment banks. Governments increased regulation following the Great Depression and then over the last 30 years until the financial crisis of 2008, financial institutions have gained freedom under the banner of free trade and belief and trust in the market. Either way it results in an undemocratic centralised, almost unseen, control. Money today is created by banks through credit, loans with interest creating debt, not by mining, trading or plundering gold and silver, what Greco calls “debt money”. The money system embodies a “debt imperative” that results in a “growth imperative”, an increase in economic output, to pay it off (c.f the video on u-tube “money as debt”). The compound interest governing debts results in the exponential, accelerating growth of debt. Over the past 20 years public and private debt in the US has quadrupled. This growth imperative leads to destruction of the environment, to greater difference between rich and poor and to inflation and economic instability, with more extreme booms and busts. Growth itself can be beneficial but growth of this kind and at this cost, Greco argues, is destructive. Greco sees the money system as a root cause of these current world problems.

There is the risk that the system runs out of control rather than maintaining a more stable equilibrium between forces for growth and decline.

The supply of money to repay the loans plus compound interest can only be maintained by the banks making loans to others.

Capital wealth becomes concentrated in larger organisations that are driven to expand and dominate the market, gaining power that cannot be restrained by national governments alone, often increasing their economic wealth at the cost of other forms of wealth or capital (natural, social, human).

To repay loans wealth is transferred from debtors to lenders, and we all pay the cost of interest in the price of what we buy. Poorer people are net-debtors. Richer people, net-lenders, are able to live off the returns of capital rather than relying entirely on earnings from their labour.

Money as credit can be misallocated by banks to (1) governments for weapons or their favoured corporate suppliers, or for those in receipt of subsidies or (2) those with collateral in the form of inflated land values or of real estate to build more hotels, resorts or up market residential property – creating a lack of affordable housing.

Financial and economic transactions are more impersonal and ethics are more easily separated from economics, removing constraints on the charging of interest. Financial markets have become increasingly deregulated too.

One of the key effects of the current system is ongoing inflation. How does inflation come about? It is not just supply and demand – except where there is a single commodity that is a basic input to all production, like oil and its derivatives. Then all prices are affected by its price (and so the risk of not managing the depletion of oil resources and increasing costs of extracting it). When there is “too much money chasing too few goods” there is inflation. So how does “too much money” come about? Apart from counterfeiters, who issues money and on what basis? Issuance is under the control of central and commercial banks and central governments.

 As the Yale economist I. Fisher observed in 1928: “the extreme variability of money (its purchasing power) is chiefly man-made due to government finance (especially war finance) as well as to banking policies and legislation…..When a government cannot make both ends meet it pays its bills by manufacturing the money needed.” (The Money Illusion p177). This is made possible as people are enforced to accept it due to its legal tender status (unless they revolt – as in times of hyperinflation). This is inflationary where the money exceeds expected short term tax revenues. An extreme example of this was the German government after the first world war who created money to pay for war reparations as it could not do this as a weak government taxing a weak economy – resulting in hyperinflation. More recently Ron Paul has reminded the US Congress of this. Central banks create the money (“out of thin air”) to buy government bonds (loans to the government) and add to its supply, an expenditure that does not put additional goods and services into the market, and then the new money goes into the banking systems reserves which in turn enables banks to lend many times that amount. This is what the Fed calls “high powered money”. The inflation created by loans to the government has been called the “hidden tax” mainly on savers (see essay by E.C.Riegel on Breaking the English Tradition on website above).

Commercial banks can also issue money through loans. When these loans do not put goods and services into the market immediately or in the near future, they cause inflation.

Banks can either lend out money in the deposit accounts of savers to be used for consumption or investment in production capacity. They can also issue money in the short term to enable the delivery of goods and services. But often banking policies do not make a clear distinction between lending out depositors funds and lending new money. Loans to take goods out of the market (consumption) or finance the future are inflationary if they do not put more goods and services into the market, and loans to buy government bonds or to finance speculation can be inflationary when they exceed savers’ time deposits.

The core purpose and function of money is as a credit instrument for reciprocal exchange representing a claim against current and future production. Currency is accepted back as payment for goods and services. Currency buys goods and services, and goods and services buy currency: the issuing and redemption of money in a cycle of reciprocity based on trust in the currency – which can be eroded by excessive inflation. Any kind of issuance of money that expands the total supply of money without a matching expansion of goods and services available in the market is inflationary. This way of creating money adds no value to the economy.

 Where the currency is hyperinflated there are examples of private currencies until a new currency is established. These are issued against the guaranteed, non-speculative supply of core goods and services – utilities, transport (see Zander – railway on the reinventing money website), or in other concrete, physical terms such as gold units. This is self-regulating as the acceptance of the currency is voluntary, and issuers seek to avoid their currency being discounted.

 Inflation makes it necessary for savers to have some interest on their deposits. Interest is defined as compensation for loss (as distinct from usury which is a higher rate of interest).

 There is a risk of increasing oscillation in economies between recession and growth as oil and energy prices and food prices rise.

Economics, Money System
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