A Monetary System for the New Millennium

The Debt Engine is a phrase to describe unrelenting, forever increasing private and government debt. The need to stay ahead of escalating debt fuels practically everything we do; it forces us out of bed in the morning to go to jobs that most of us despise. Corporations make all their decisions around first how to service their snowballing debt, and secondly around profit. Governments spend all their time worrying about how to meet their social agendas while at the same time service the increasing debt load of deficit spending.

As a motivating force, the Debt Engine now exceeds all others in the insane dash of the planet towards self destruction. Universal unrepayable debt creates a social environment in which certain types of behavior flourish and inhibits or destroys any tendency towards long term concerns and nourishment.

Unrepayable Debt is different than the everyday debt of normal life. Unrepayable Debt is an actual built in flaw of our present monetary system: The Fractional Reserve System. It benefits no-one except those intimately connected with the banking industry and in spite of its devastating repercussions, it is a flaw that can be fixed.

Everyone has some ideas about money, who controls it, where it comes from and how it operates. Some say the government prints it; others say hard work makes money, while others would guess that it's something to do with gold. They might also picture it as a vast pile with everyone competing for as much as they can get. Bankers sometimes inflame our passions by claiming that the government has grabbed all the money and there is none left for private industry.

It's all poppycock. Our money supply isn't created by the government; a brilliant idea doesn't make money and neither does hard work (unless you happen to be in the counterfeiting business.) Our money is a national accounting system of who owes what to whom, and it is a system that is owned and operated by the private banking industry.

There is no such thing as a static heap of money created by hard work and business cunning. Money flicks in and out of existence as credit and debit balances; the money supply swells and contracts continuously as loans are created and then destroyed. Money is simply a bookkeeping system; a man created device.

The man who invented the monetary system which we use today was a Scotsman, John Law, who lived during the 18th. century. He invented a new type of money to replace the old one of specie (the use of coins). In doing so he created the mechanism to finance the industrial revolution, and ultimately our modern technological world.

Much has been made of the astounding inventions of that era but what is often forgotten is that most of them would have never have seen the light of day without John Law and his invention: the Fractional Reserve Money System. Without it, there would have been no railroads, no Nissans or G.M.'s, nor would there have been any super highways to drive them on. There would have been no space shuttle, no Love Canal, no drift net fishing, no heart transplants and no Cruise missiles.

What John Law did with his invention of a new money system was enable the Industrial Revolution, with all of its good and bad aspects, to take place. Without him, the Revolution would have fizzled and died and with it, our technological world.

Here was the problem which John Law solved. In the early 1700's the newly industrializing nations of the world were in a perpetual state of economic crisis because their coinage system of money could not keep up with demand. Governments tried everything to increase the money supply. One trick was to make new coins much smaller than the old thereby getting more per ounce, but it was a stop gap measure at best.

To grasp the magnitude of the problem, try to imagine building just one modern skyscraper using only gold coins as finance. The industrialists of the Industrial Revolution were faced with a similar problem; how to build their factories, mills and railroads using only scarce gold coins.

John Law's solution was to create a national paper money supply; banknotes that would be officially recognized as "real money". The advantages were obvious. Paper money could be expanded indefinitely and was much cheaper than specie to make. To get and keep initial public confidence, Law suggested a fraction of gold be always kept on hand for the few people who wanted to redeem their notes.

Through a process of trial and error it was found that specie could support about ten times its value in paper money. That is, a bank which held $10 in gold could safely print and loan out about $100 in paper money. The gold held in reserve was obviously a mere fraction of the banknotes which it supported and so the system became known as the Fractional Reserve System. The private banking industry was chartered by government to create the new money supply of paper notes. Until earlier in this century, banks literally printed their own supply against their own gold reserves with their name on each note, and lent them out to the public and government. Now the federal government has taken on the printing job but the notes are still drawn on private banks.

In the 1930's the convertibility of bank notes was dropped but the Fractional Reserve System is alive and well today, albeit in a more sophisticated form. Cheques or credit cards have largely replaced paper money but the principle remains the same; the banking industry creates the money which government and society then borrows.

John Law's method of money creation is still the dynamo that powers our present world. By replacing specie with a simple national accounting system of credit and debit, he made money infinitely more flexible, able to be contracted or expanded to meet any situation.

However, using the Fractional Reserve System has not been a universally happy experience. It has a built in mechanical flaw that always keeps total national and private debt ahead of the money available to repay it. In fact the more a nation expands, the more it automatically goes into debt to the system over and above the money that it borrows.

To explain, imagine the first bank which prints and lends out $100. For its efforts it asks for the borrower to return $110 in one year; that is it asks for 10% interest. Unwittingly, or maybe wittingly, the bank has created a mathematically impossible situation. The only way in which the borrower can return 110 of the bank's notes is if the bank prints, and lends, $10 more...at 10% interest.

When presented with this scenario, there is often a tendency to think :"Ah, but the borrower can always make the extra $10 somewhere else, through hard work or a deal overseas." However, although we frequently inter change the two sayings, earning money is not the same as making it. Earnings are simply a transfer of money from one ownership to another and neither increase nor decrease the total money in existence. Making money actually does increase the nation's money supply but no-one can do that but the banking industry itself as laid down in its charter from the federal government.

The result of creating 100 and demanding 110 in return, is that the collective borrowers of a nation are forever chasing a phantom which can never be caught; the mythical $10 that were never created. The debt in fact is unrepayable. Each time $100 is created for the nation, the nation's overall indebtedness to the system is increased by $110.

The only solution at present is increased borrowing to cover the principle plus the interest of what has been borrowed. The business or government that cannot expand its borrowing every year is seized by its increasing debt load and dragged under.

Many economists are not unmindful of the problem but pass it off as irrelevant. They say that if the marketplace economy keeps expanding, thereby fuelling an increase in the total money supply, there is no problem with meeting interest payments on an increasing debt load. But under such circumstances, economic expansion is not a luxury but an imperative to stay ahead.

In John Law's day, the need to continuously expand to meet growing debt repayments was seen as a minor problem of no consequence. Today however we all know the planet cannot sustain unlimited growth. Even so, we are stuck with a monetary system that demands continuous expansion or face the chaos of total economic collapse.

The consequences of the Debt Engine are everywhere. Political and business leaders are sacrificing the planet to stay ahead of bankruptcy. Technology is not being used to create a sane and sustainable lifestyle for us all but is being channeled into the most narrow band of activity: the market place activity of "making" money. Just as governments are forced into ignoring vital social and environmental questions in their efforts to balance the books, so many corporations are putting to one side such things as resource depletion and the destruction of the ecosystem in their frantic efforts to remain economically alive.

But the situation is not completely bleak. Just as John Law found a way around the impasse of coinage, so there are solutions for the problem of unrepayable debt. Obviously the first thing to do is make sure that the ratio of credit to debt is always the same. Under the Fractional Reserve System, $100 credit is created and $110 debt is demanded in return; that is, there is always more debt than credit. This equation should be $100 credit equals $100 debt.

The mechanics of how to achieve this were proposed over one hundred and fifty years ago. It was proposed that the nation's money be created by two agencies: the banking industry and government.

Instead of taxes, government would be empowered to create money for its own expenses up to the balance the debt shortfall. Thus, if the banking industry created $100 in a year, the government would create $10 which it would use for its own expenses. Abraham Lincoln used this successfully when he created $500 million of "greenbacks" to fight the Civil War.

A government which creates its own money supply becomes independent and the most important result of freeing government from its present debtor relationship to the banking industry would be to make it more able to respond to social pressures for reform. A financially independent government would be able to pursue long term agendas for the betterment of society. For instance, a twin source of money creation could not only rapidly reduce taxes, but create additional funding for other initiatives. A government having the same right of issue as is now monopolized by the banking industry could fund vital job creating initiatives such as environmental repair and sustainable technology on a scale that is hard to imagine.

America has the resources to lead the world into a sustainable future. But it needs a monetary system which will allow for its resources to be mobilized towards a greater destiny than marketplace superiority. Such a new monetary system with all of its potential would require a dramatic upgrading of society's consciousness and understanding of money. We have to move from a simplistic belief in money having an intrinsic value of its own and see it as a bookkeeping system of the real wealth of our nations. Ultimately our money is not dependent on gold in Fort Knox but on the human and natural resources which it represents.

The world has passed beyond an age of scarcity and the challenge of the new era is not about solving problems of want, but dealing with abundance and how to use it to create a sustainable future. Above all we need the visionaries able to point the way.

In my forthcoming book Superproduction I try to address the potential which is now in our grasp. With computerization, robotics, advances in genetics and food growing, we have the potential to turn the planet into a sustainable ecosystem capable of supporting all. We have the technology to genuinely contemplate colonizing the solar system.

This is not a time to be saddled with an 18th century money system designed around the endless rape of the planet. John Law enabled humanity to scrabble out of scarcity but now his system is antiquated. Philosophically it is based on the robber baron mentality and technically it is flawed with Unrepayable Debt. As such it is unable to respond either to the abundance which it created or the problems which it spawned.

The Debt Engine has distorted the potential of the Industrial Revolution and forced us into a narrow focus of marketplace ethic. A new monetary system with enough government control to ensure funding of vital issues could unlock the creative potential of the entire nation. By redirecting the focus of our national economy, a new monetary system would enable men and women who can think in terms of abundance not only for themselves but how also to use it for the benefit of the entire planet. I know John Law would approve.

Roger Langrick

Economy

Some of the problems with our prevalent economic system as I understand it is this:

Money is created by banks. In part by central banks who can make up amounts and lend them out, mainly to central governments, but also to regular banks.

The worst problem is not that the central banks are mostly outside the control of any elected representatives of the population, even though that is certain cause for some suspicion and alarm. In some areas, such as the U.S., the central bank is a completely privately owned institution, owned by its member banks. The central bank of central banks, the Bank of International Settlements in Basel Switzerland, is also not controlled or owned by any government, but is a corporation with stocks. It is located on land that is not considered part of Switzerland or any other country, it is not answerable to any public body, and it does its business in secret.

However, the worst problem is that interest is being charged for the money that is lent out. It might well be a good idea to use fiat money, that is, money that doesn't have any inherent value, but is only valuable because we trust that it is. All currencies on the planet are, as far as I know, fiat money. However, the problem is the interest.

For example, the Federal Reserve Bank lends a billion dollars to the U.S. government. That money is created out of thin air. The Federal Reserve Bank doesn't particularly lend it out because it has accummulated produced value. It simply has been given the authority to invent the money. It gives the money to the government. The government spends it one what it thinks it needs to spend money on. The money is now due back from the tax payers. That is not in the first place a problem, since the money is out there in circulation.

But, the bank wants the money back with interest. And the ridiculous thing is that there is nowhere the money can come from except for by being lent out by banks.

The central bank is not the only one that can create money. Any bank can. Regular banks create money by being allowed to lend out a certain number of times more money than they have deposits for. For example, if there is 1 million in the bank, it can lend out 10 million, thereby creating 9 new millions.

Regular banks also charge interest. Meaning that, no matter how much they create, they always need MORE back.

Technically speaking, that is impossible. It only appears possible because there are enough banks around and the total economic transactions are complicated enough that it always seems like there is somewhere else the money can come from. But, if we add it all up, there isn't anywhere else it can come from.

People trust money to be valuable, so they use it as a medium of exchange. That drives the production of a lot of things, and it buys people a lot of things that they want. And, as long as the wheels keep spinning around, that seems OK.

However, the system can't lead to anything else but a higher and higher amount of money that is being owed to banks. That is, national debts increase, and personal debts increase, and a higher and higher percentage of the actual assets in the world are being owned by the banks as "security" for the debts.

All current money systems are based on debt. If all debts in the world were paid back there would be no money in existence. I repeat, NO money. However, that in itself is impossible in that there isn't enough money around to pay all the debts that are there, because of the accrued interest. It can only be a never-ending escalation, by the banks issuing more new loans so that people can pay the installments for the old loans.

That appears to work as long as there is never-ending expansion. As long as more and more stuff is being produced and people need more and more money, the system might keep working.

But, we are on a limited planet, with mostly limited resources. Certain activities can not be expanded indefinitely. There is for example a limited number of physical assets that the banks can get as security or as payment for the loans, and sooner or later they would all be owned by banks, and the escalation would stop.

And now, if we look around us, most people seem to have a perpetual scarcity of money. There somehow doesn't really seem to be enough to go around. However, our ongoing need to provide a livelyhood for ourselves and our families drive us to pursue more money anyway, and one way or another we get by. And we are too busy to notice that there is something fishy about this lack of money. There will always be somebody around who has a lot of it, so that we are reminded that this would be possible for us too. But we might not see that it wouldn't be possible for everybody in the current system.

The current system is built on scarcity. The system is driven by the idea that there isn't enough, and we have to compete for what is there.

It happens not to be true. If we add all the cummulative resources together and manage them well we could very well all live comfortably. It is just that the economic system tells us that we mostly don't own these resources, but they are just beyond our reach, and if we manage our credit well, we can keep being rewarded with nice stuff. Never mind that the bank owns our houses and our cars and the companies we work for, we can at least pretend that we own them for a while.

The weird thing is that most people don't know these things at all. Most people think that the national debt is a big problem, but they haven't really thought of who this money is owed to. Or how come almost all countries in the world can have such astronomic debts that we all have to work twice as hard just to pay off the interest to it. And all of this money is owed to somebody who didn't own any real value in the first place.

There are plenty of economic experts around who will provide very complicated explanations for what is wrong with the economy. There is too much unemployment or we buy too much stuff from Japan or something. Whereas the actual mechanics of the economic system are never mentioned.

I suppose that if a solution had to be found centrally it would be something along the lines of nationalizing all the central banks and canceling all the national debts, which never existed in the first place anyway. And then letting the governments issue money without interest. I'm sure there would be some major repercussions in that that I don't understand, but I'd say that sounds like an attractive solution just speaking from common sense.

If that doesn't happen I'd say the solution is in creating different schemes of economic interaction that aren't based on borrowed money that has to perpetually be paid back with more borrowed money.

A system is a set of relations that influence behavior. An economic system that were inherently viable could influence people to behave in generally more sane and enjoyable ways.

A system based on a fixed quantity of assets, such as gold, is problematic in that the amount of produced value is mostly increasing in the world. So, if there were only a fixed quantity of money, there still wouldn't be enough to buy everything.

I think what is needed is a system that allows money to be created in tune with value being produced. That is, at the same time as something that is perceived valuable is being created, an equivalent amount of money to pay for it needs to be brought into existence. And that money needs to be available for those who need and appreciate the created value. And there should be no future installments due based on that exchange.

Ultimately I don't think money will be needed at all. However, to get to a future where resouces are used and shared in a sensible way, we might need some intermediary systems that point in that direction.

How exactly to do that, I don't know. I do know that it is possible. I also know that isn't very likely to be done through the mechanics of the old system. You probably don't go to the bank and get a loan to finance a new money system. You just make your own system and start using it more and more.

- Flemming