Criticism of fractional-reserve banking: Difference between revisions
Content deleted Content added
Reverting possible vandalism by Special:Contributions/69.138.16.202 to version by Karmaisking. False positive? report it. Thanks, User:ClueBot. (136878) (Bot) |
Revert -- false positive on countervandalism bot |
||
| Line 1: | Line 1: | ||
{{Totally-disputed|date=December 2007}}{{unbalanced |
{{Totally-disputed|date=December 2007}}{{unbalanced}} |
||
'''Debt-based monetary system''' is a political term used by critics of the Federal Reserve, based upon [[heterodox economics]], such as that of the [[Austrian school]]. The term is not in use among economists. |
|||
==An Explanation of the Term== |
|||
This form of money is called "debt-based" because as a ''condition of its creation'' it must be paid back at some time in the future.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> |
|||
The term implies that the [[Federal Reserve]] and its member banks steal wealth from the public through printing money which is then loaned to the public at interest (see [[New World Order (conspiracy theory)]]). The term is based largely upon the [[heterodox economics]] of the [[Austrian school]]. Some invoke the [[Austrian Business Cycle Theory]]<ref>{{cite book |last= Rothbard |first= Murray |title= What Has Government Done to Our Money? | year= 1980 | url=http://www.mises.org/money.asp}}</ref> to argue that the business cycle is caused by artificial government expansions and contractions of the money supply. <ref>{{cite web | last =Grignon | first =Paul | title =Money as Debt | url=http://video.google.com/videoplay?docid=-9050474362583451279 | accessdate = December 29, 2007}}</ref> The usage of the word "debt" may be misleading, as the term is used to describe an overall loss in public wealth stemming from over-expansion of the money supply (see [[inflation]]). This is distinguished from all forms of [[debt]], including [[public debt]]. |
|||
Although [[debt money]] is a form of [[fiat currency]] (because it is not backed by a real asset such as [[gold]] or [[silver]]), it can be distinguished from "true" [[fiat currency]] in that it is intrinsically "temporary" money, requiring its eventual repayment as a condition of its creation.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> |
|||
==Conventional economic analysis== |
|||
Conventional economic analysis does not generally use the terminology "debt-based money." The link between the currency regime (for example, fiat currency or precious-metal backed currencies) and the banking regime (fractional reserve or full reserve banking) is not seen as fixed, however (virtually all banking systems worldwide operate on some form of fractional reserve banking).{{Fact|date=December 2007}} Neither is the insight that banks "create money by extending loans" considered new, and the subject is covered in most introductory economics textbooks and many popular reference works.<ref>See, for example, [http://books.google.com/books?id=krc-Tf9JfY0C&pg=PA134&dq=economics+fractional+reserve+banking&sig=sg6LSwy7a43Lufkzm_j11wWfiaw#PPA133,M1 Peter Kennedy, Macroeconomic Essentials: Understanding Economics in the News, p. 133] "The key thing to recognize is that banks create money by extending loans."</ref> |
|||
Banks will also hold "reserves" (cash or other liquid assets) to meet the demands of depositors on their own, in some fraction of total depositors, to avoid potentially damaging liquidity shortages, [[bank run]]s or even ultimately bankruptcy.{{Fact|date=December 2007}} Government regulation of minimum reserve amounts is, in this sense, a form of consumer (depositor) protection.{{Fact|date=December 2007}} |
|||
Traditional economics sees fractional reserve banking as a mechanism for ''transmission'' of monetary policy: reserves and other limits upon the banking sector's ability to "create money" are usually controlled by the government or central bank.{{Fact|date=December 2007}} According to this approach, the monetary authorities use the pricing mechanism (via various monetary policy instruments) to adjust the quantity of money in circulation and protect depositors and the integrity of the financial system.{{Fact|date=December 2007}} The use of these tools is adjusted according to the nature of the banking system's propensity to create money by lending.{{Fact|date=December 2007}} |
|||
The weaknesses of the nature of fiat currency (and the capacity of the banking system to create money) and the relationship to the business cycle (including booms, busts and credit cycles) are widely recognized.{{Fact|date=December 2007}} In particular, the possibility that governments or central banks will create too much money (either directly or through the banking system) is a frequent topic of academic, economic and political commentary.{{Fact|date=December 2007}} Conventional economic analysis differs primarily in that it does not hold that the more extreme predictions of certain monetary reformers (regarding, for example, the inevitability of "debasement of the currency" or periodic crises) are necessarily true; they do not, however, exclude the possibility of such events due to exogenous events or poor management of monetary, fiscal and financial policy.{{Fact|date=December 2007}} The negative effects of inflation are also frequently and widely addressed in conventional macroeconomic and monetary analysis.{{Fact|date=December 2007}} |
|||
According to this (conventional) analysis, "debt-based money" is a heterodox economic theory that, although it may differ little in analysis of the basic structure, is largely irrelevant, and the main issues are addressed in various schools of economic thought.{{Fact|date=December 2007}} Economists generally address the issue of choice of monetary regime (such as fiat currency) and banking policy as entirely separate issues, since fractional reserve banking dominates most economic systems; the level of banking reserves and other regulatory measures are simply ''instruments'' of monetary policy.{{Fact|date=December 2007}} Differences in terminology (debt money, for example) do not represent, from the "mainstream" perspective, new analysis, and the more extreme conclusions about the "inevitable" negative impacts of so-called debt-based money and "fraud" perpetrated by banking circles upon the public are considered akin to [[conspiracy theory|conspiracy theories]].{{Fact|date=December 2007}} The subject of debt-based money (as distinct from traditional monetary policy) is absent from reputable academic economic publications, and is largely relegated to fringe status.{{Fact|date=December 2007}} |
|||
It should be noted that various other schools of monetary thought (including other "monetarists" such as the [[Austrian School]]) do not necessarily ascribe to, for example, the conclusion that full-reserve banking is an issue; some explicitly advocate for "free banking" (with no required reserves at all).{{Fact|date=December 2007}} Some have referred to the concept of monetary policy with full-reserve banking as "nonsense" (that is, a contradiction in terms).{{Fact|date=December 2007}} More detailed analyses argue that full-reserve banking would impose similar costs of price adjustments in reaction to growth (through a ''reduction'' in the overall price level) as would inflation, and hence offer no inherent advantages over fiat currencies and fractional reserve banking.{{Fact|date=December 2007}} |
|||
==Basic debate== |
|||
The debt-based monetary system is a departure from traditional monetary systems, which were backed by gold deposits or the [[gold standard]], or other precious metals. Because of this departure, it is the subject of continuing political and economic debate.<ref>{{cite book |last= Cox |first= Jim |title= The Concise Guide to Economics |url= http://www.conciseguidetoeconomics.com/ |edition= 2nd edition |origdate= 1995 |accessdate= 2007-12-15 |year= 1997 |publisher= Savannah-Pikeville Press |isbn= 1-57087-292-9 |chapter= The Gold Standard |chapterurl= http://www.conciseguidetoeconomics.com/book/goldStandard/ }}</ref> <ref>[http://www.projects.ex.ac.uk/RDavies/arian/amser/chrono15.html A History of Money from Ancient Times to the Present Day by Glyn Davies, rev. ed. Cardiff: University of Wales Press, 1996. ISBN 0 7083 1351 5]</ref> |
|||
Some argue that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> |
|||
Others argue that there is in fact no mathematical necessity for the money supply in a debt-based system to grow, since the interest portion of loan payments is not taken out of circulation, but goes into the lender’s account, where it can be spent back into circulation and eventually be used to pay off some loan principal.{{Fact|date=December 2007}} Given that the total debt-based money supply is exactly equal to the total principal outstanding on all loans, there is always enough money in circulation to meet loan payments for the current [[amortization]] period, except for the case of nearly all loans in existence coming due at the same time, with no other outstanding loans large enough to cover the interest portions of the final payments (generally a tiny fraction of the final payment).{{Fact|date=December 2007}} These monetary economists argue that the money supply could (at least theoretically) be stable and yet not cause widespread insolvency in the broader economy. This would however require the delicate balancing of the maturing of some loans with the issuance of new debt to compensate for the diminution in the [[money supply]] caused by the repayment of those maturing loans.{{Fact|date=December 2007}} |
|||
==Basic nature of system== |
|||
{{Citecheck|date=December 2007}}{{peacock}} |
|||
Regardless whether there is a necessity for the [[money supply]] to grow [[exponential]]ly in a debt-based system, it is not seriously disputed that when a bank loan is repaid, the money is extinguished, in a reverse process by which the money was originally created, “Money is created when loans are issued and debts incurred, money is extinguished when loans are repaid” ''John B. Henderson, Senior Specialist in Price Economics, Congressional Research Service of the Library of Congress''. |
|||
On January 24, 1939, ''Robert H. Hemphill, Credit Manager of the Federal Reserve in Atlanta'' stated: |
|||
"We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit.' If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. [The banking problem] is the most important subject intelligent persons can investigate and reflect upon.”<ref>{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 |pages= 5 }}</ref> |
|||
The economic, environmental and social effects arising from a [[central government]]'s concessional granting of the legal power to create [[money]] through [[fractional reserve banking]] techniques to the [[private bank]]s of the world has been subject to much heated political debate for well over two centuries.<ref>{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref> <ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> <ref>[http://news.goldseek.com/GoldSeek/1192819378.php The Forgotten War]</ref> |
|||
In contrast to [[debt money]], "true" [[fiat currency]] is issued by the [[government]] debt-free as no requirement for its eventual return is made as a condition of its creation. [[Fiat currency]] (such as notes and coins) can circulate perpetually in the economy as "stable" or even [[sound money]] (if backed by [[gold]] or [[silver]]) and although not as stable as [[hard currency]], government-issued notes and coins do not have the same effects of debt-based money described below.<ref>[http://www.entrewave.com/freebooks/docs/a_pdfs/gnhm.pdf Honest Money]</ref> It should be noted however that [[fiat currency]] can be a source of [[hyperinflation]] if its production is not controlled, as the government has the potential to issue unlimited amounts of fiat currency - ''provided'' it is accepted as "money" by the [[private bank]]ing system (which may or may not occur depending on the political relationship at the time between the [[Treasury]] and the [[private bank]]ing system). It should also be noted that due to the [[exponential growth]] of debt-based money, "true" [[fiat currency]] (notes and coins in circulation) now account for a tiny fraction of the total M3 [[money supply]] in all developed, debt-based [[capitalist]] economies (M0 generally being less than 10% of the total M2 [[money supply]] in most developed economies).<ref>[http://www.dollardaze.org/blog/?post_id=00216 Global Money Supply Ratios]</ref> <ref>[http://www.moneyweek.com/file/5138/m3-0212.html Why the Money Supply Made News]</ref> |
|||
Similarly, [[gold]], [[silver]] and other [[precious metals]] have in the past been used as a form of debt-free [[money]] and their introduction into the economy is not debt-based as no future repayment is required as a condition of their introduction into the [[money supply]]. Because of the difficulty in increasing the supply of [[precious metals]] quickly, some [[monetary reform]]ers believe a return to the [[gold standard]], or a similar system of "hard" or "real" asset-backed currency, is the only way to stabilize the growth of the money supply. These [[monetary reform]]ers often refer to the [[gold standard]] as "sound money" or "honest money". |
|||
==Economic and political criticisms== |
|||
{{limited}}{{lopsided}}{{Citecheck|date=December 2007}} |
|||
Some believe that "if unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny".<ref>[http://www.house.gov/paul/congrec/congrec2003/cr090503.htm Paper [[Ron Paul]], Paper Money and Tyranny, Speech in U.S. House of Representative, September 5, 2003]</ref> |
|||
Some economists (particularly the [[Austrian School]]) and political commentators (particularly [[Libertarian]] thinkers such as [[Murray Rothbard]]) believe that a debt-based monetary system amounts to a subtle form of monetary "[[fraud]]" in that it creates real money (and therefore real wealth) "out of nothing" through the use of [[fractional reserve banking]] techniques.<ref>[http://www.mises.org/rothbard/moneyback.asp Taking Money Back, by Murray Rothbard]</ref> |
|||
Some [[monetary reform]]ers (such as [[Michael Rowbotham]] and [http://www.webofdebt.com/ Ellen Hodgson Brown]) also argue that this system of [[money supply]] is perverse and inherently "anti-[[democratic]]", and inevitably creates an inflationary [[exponential growth]] bias in the economy which causes gross [[over-consumption]] and is unnecessary, [[Natural environment|environment]]ally damaging and unstable. They argue that the already indebted are forced to induce new [[consumers]] to spend and go into debt so that existing loans can be repaid with this new debt-created money. If this is not achieved, the result is [[foreclosure]] for those businesses that do not successfully induce new consumers to go into debt for their benefit - and, more broadly, [[insolvency]] in the banking system and economic collapse due to the sudden contraction in the growth of the [[money supply]].<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> <ref>[http://www.iimagazine.com/article.aspx?articleID=1234345 Ponzi Nation]</ref> |
|||
Mark Anielski as well as some political thinkers such as [[Michael Rowbotham]] and some economists (such as the [[Keynesian]] monetary economist [[Hyman Minsky]]) argue that this system of money supply has all the essential characteristics of a [[pyramid scheme]], where the newly indebted, who have have control at the top, find themselves compelled to induce others into debt to enable them to pay off their own debts.<ref> {{Citation| first=Mark | last=Anielski| coauthors=| contribution=Fertile Obfuscation: Making Money Whilst Eroding Living Capital| title=34th Annual Conference of the Canadian Economics Association| publisher=Redefining Progress| place=San Francisco, CA| pages=41-2| year=2000| contribution-url=http://www.lin.ca/resource/html/arpa02/PC1-FertileObfuscation.pdf| format=PDF| accessdate=2007-12-17 }}</ref> |
|||
It is therefore argued by a number of [[monetary reform]]ers that [[fractional reserve banking]] and the associated [[exponential growth]] of [[debt money]] in the economy "forces" the economy towards indebted [[consumerism]].<ref>{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref> |
|||
[[Michael Rowbotham]] argues that a major negative side-effect of the debt-based monetary system is its effect on [[agriculture]]. As [[Michael Rowbotham]] claims, [[residential development]] produces one of the greatest continuous injections of [[debt money]] into the economy. Therefore, significant super-normal profits can be generated by re-zoning agricultural land and replacing it with low-density [[housing]].<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> |
|||
If Michael Rowbotham's analysis is correct, this will lead to the destruction of fertile [[arable land]], as this land is progressively re-zoned for speculative new residential development. He also predicts that the global supply of fertile [[arable land]] will decline, leading to a broad decline in the quality and nutritional value of agricultural produce and, eventually, a dramatic increase in the prices of many "soft" commodities - which could then lead to actual food shortages for poorer segments of the world population.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> <ref>[http://www.wsws.org/articles/2007/dec2007/food-d22.shtml Naomi Spencer, World Socialist Website, "Severe food shortages, price spikes threaten world population", 22 December 2007]</ref> Coincidentally, the prices of many "soft commodities" such as [[wheat]] "skyrocketed" in 2007.<ref>[http://www.abc.net.au/insidebusiness/content/2007/s2038551.htm Price of wheat is skyrocketing]</ref> <ref>[http://www.ap-foodtechnology.com/news/ng.asp?n=79268-deloitte-commodities-skim Ahmed ElAmin, Asia-Pacific Food Technology, "Commodity prices continue to skyrocket", 28 August, 2007]</ref> |
|||
If for any reason the monetary system broke down, urban populations (nominally "rich" but poor in terms of direct access to [[food supply]]) could find basic foodstuffs increasingly expensive, ultimately resulting in food security becoming a major public policy issue.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> <ref>[http://www.wsws.org/articles/2007/dec2007/food-d22.shtml Severe food shortages, price spikes threaten world population]</ref> |
|||
===Effects on economic health=== |
|||
{{Weasel|date=December 2007}} |
|||
According to some, given that the solvency of the [[fractional reserve banking]] system requires a continual stream of new debtors, some left-leaning [[monetary reform]]ers also consider the waging of aggressive [[war]]s and modern [[imperialism]] as an ''essential'' component in the survival of any debt-based economic system.<ref> Trocki, Carl. ''Opium, Empire and the Global Political Economy'', Cornell University Press, Ithaca, 1990</ref> <ref>[http://www.marketoracle.co.uk/Article323.html U.S. Dollar will Crash, by Mike Whitney]</ref> |
|||
More broadly, many [[monetary reform]]ers believe that [[debt money]] has created all the features of an [[economic bubble]], with structural instability in financial markets, which produces waves of booms and bust due to the "bubble-like" credit cycle.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> <ref>[http://www.iimagazine.com/article.aspx?articleID=1234345 Ponzi Nation]</ref> |
|||
The "cyclical" side-effect of debt-based money purportedly means that those caught at the end of any [[business cycle]] (or those caught in economies with declining productivity, low population growth or aging populations) suffer most financially, as the contraction in the growth of credit slows the economy just as these newly indebted businesses and consumers find they have been left out of the growth cycle in debt creation.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> <ref>[http://www.iimagazine.com/article.aspx?articleID=1234345 Ponzi Nation]</ref> |
|||
[[Michael Rowbotham]], in his book ''The Grip of Death'', argues that the prevalence of debt-based money in the modern economy is concentrating real wealth in the hands of private banks through a form of "monetary [[fraud]]," as the populace is forced into [[debt]] simply to own a home and educate their children.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> |
|||
In countries with slowing [[economic growth]] with a debt-based monetary system, there is predicted to be a concentration of wealth in the [[financial services]] sector, accompanied by sporadic "bubble-like" financial crises, with periods of [[hyperinflation]] in asset markets and [[deflation]] in the consumable goods market as [[consumers]] search for cheaper [[consumer goods]].<ref>[http://www.marketoracle.co.uk/Article2587.html Dollar Devaluation is Annihilating the Middle Class!]</ref> |
|||
===Political and legal solutions=== |
|||
{{Citecheck|date=December 2007}} |
|||
[[Bankruptcy]] laws differ to a small degree in different jurisdictions but in all developed economies unpaid debt results in legal penalties, property confiscation on behalf of the creditor and income [[sequestration]]. Although in [[Christian]], [[Jewish]] and [[Muslim]] religious practice there have been traditions of [[debt relief]] or laws against [[usury]], in no modern Western jurisdiction are any debts periodically forgiven or cancelled in recognition of the inherent impossibility of repaying debts in circumstances where the debt-based monetary cycle has inevitably resulted in too little new [[debt money]] being injected into the [[money supply]] to pay for the currently outstanding debts. |
|||
On a national level, if the issuance of [[government bonds]] becomes unsustainable, sovereign [[bankruptcy]] can occur - and has occurred many times in history.<ref>[http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1263&context=blr Sovereign Bankruptcy]</ref> [[Sovereign debt]] crises due to the inability of nations to pay interest on [[government bonds]] have occurred in [[third world]] countries as a result of high levels of unsustainable [[third world debt]]. The [[Latin American debt crisis]] is an example of sovereign debt levels becoming unsustainable, resulting in a [[currency crisis]] and economic collapse, as [[interest rates]] rise precipitously due to the inability of the national government to attract financiers to purchase new [[government bonds]] to inject new [[debt money]] into the ailing economy. |
|||
At such times, it is the responsibility of the [[IMF]] to come in as a kind of supranational [[central bank]] to mediate between the national government and international financiers. The role of the [[IMF]] as [[central bank]] to the world has similar responsibilities and risks inherent in [[central bank]]ing which are described below in relation to the role of the [[Federal Reserve]]. If the [[IMF]] repeatedly intervenes to save financiers from loss when sovereign bankruptcy occurs, this has a tendency to induce [[moral hazard]] and can encourage the financing of reckless government spending and borrowing.<ref>[http://www.rgemonitor.com/41 IMF Reform and International Lender of Last Resort, RGE Monitor]</ref> |
|||
==Policy Implications== |
|||
===Inherent problems with system=== |
|||
{{Unencyclopedic}} |
|||
{{Weasel|date=December 2007}}{{Citecheck|date=December 2007}} |
|||
Some [[monetary reform]]ers predict that there will be an increased incidence of financial crises in the developed world, as economic and [[population growth]] inevitably slows and as the success of [[laissez-faire]] economic political policies result in a reduction in redistributive [[tax]] policies which, combined with the debt-legacy of the [[welfare state]], allows an intense and unsustainable concentration of wealth and political power in the financial services sector. |
|||
Some [[monetary reform]]ers (in particular, [http://www.webofdebt.com/ Helen Hodgson Brown] in her 2007 book, ''Web of Debt'') argue that by necessity the promotion of the [[pyramid scheme]] inherent in [[private bank]]ing ''must'' be conducted by a tiny, secretive, ever-watchful minority because, unlike, for example, labor-intensive [[agriculture]], which is self-sustaining, banking is not. If the majority of the populace were bankers nothing would be produced other than [[debt]] and [[inflation]] (and very detailed [[insolvency]] laws). Historically, [[usury]] has therefore often been criticized as ''inherently'' parasitic and non-self-sustaining.<ref>[http://video.google.com/videoplay?docid=-9050474362583451279 Money As Debt]</ref> <ref>{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref> |
|||
Some [[monetary reform]]ers argue that, given the parasitic nature of [[usury]], it is vital that the indebted "victims" who must sink deeper into [[debt]] for the system to survive do so voluntarily and willingly and are not made aware of the consequences of purchasing consumables with [[debt money]]. Some politicians and others have highlighted the fact that mainstream media organizations appear to downplay or minimize the seriousness of deficit spending by government and debt-sourced spending of all kinds.<ref>[http://www.senate.gov/~budget/democratic/statements/2005/fs_reconciliationfloorstmt102005.pdf Speech by Senator Kent Conrad (D-ND) on October 20, 2005 regarding the "misleading" reporting of deficit spending by the mainstream media]</ref> The terms "[[debt]]" and "[[usury]]" are now virtually extinct, with "[[debt]]" being replaced by its [[antonym]], "[[credit]]"; the cycle in "[[debt]] creation" is referred to euphemistically as the "[[credit cycle]]"; a shrinking of "[[debt money]]" as a "[[credit crunch]]" or "[[credit squeeze]]"; and the unsustainable growth in [[debt]] and the associated growth of derivatives that live off [[debt]] during the upward phase of the [[debt money]] cycle as "[[innovation]]" in financial markets.<ref>[http://www.nytimes.com/2007/12/03/opinion/03krugman.html?em&ex=1196917200&en=ac60abcdbd977d07&ei=5087%0A Innovating Our Way to Financial Crisis, by Paul Krugman]</ref> |
|||
Some [[monetary reform]]ers see the prevalence of the debt-based monetary system ultimately resulting in a political [[crisis]], between the vast majority of dispossessed who have had any accumulated net wealth periodically "stolen" during periods of "[[credit crunch]]" (and find themselves in permanent inter-generational [[debt]], being forced to work involuntarily in the money-economy simply to house themselves and survive in the debt-based economy), and a tiny minority of inter-generational, super-rich elites connected close to the font of the [[money supply]] (being the [[private banking]] sector), who will strongly resist calls for redistributive economic policies by using all of their financial strength and [[lobbying]] power in an attempt to entrench and sustain their artificially [[privilege]]d status. Given that the profession of this [[privilege]]d minority is to produce nothing other than [[debt]] and [[inflation]], and given that they face being rendered impotent if the power to print debt-free [[money]] was returned to [[government]], it is to be expected that those associated and aligned with the [[private banking]] interests will use any means necessary to preserve their power, as they have no other skill other than the issuance and distribution of [[debt money]].<ref>[http://news.goldseek.com/GoldSeek/1192819378.php The Forgotten War]</ref> |
|||
Some [[monetary reform]]ers believe that this [[privilege]]d minority also always seek special government protection for the banking sector to protect it from financial [[insolvency]] when the debt-based financial system inevitably experiences periodic collapses due to the "bubble-like" nature of the growth in the [[money supply]]. This is referred to in some circles as "[[systemic risk]]" in the financial sector, as banks inevitably face periods of actual or near [[insolvency]] due to the mismatching of the high [[exponential growth]] in [[debt money]] and slower growth in the real economy.<ref>[http://www.federalreserve.gov/newsevents/speech/mishkin20070928a.htm Systemic Risk and the International Lender of Last Resort, by Federic S. Mishkin]</ref> During these periods there are sporadic collapses in the value of inflated assets, resulting in a sudden collapse in the demand for new [[debt money]], and an associated contraction in the growth of the [[money supply]]. |
|||
===Types of downturns=== |
|||
There are two main kinds of [[debt money]] contraction that can cause a collapse in the value of inflated assets. |
|||
A "[[credit squeeze]]" occurs where new [[debt money]] is difficult to access without a high [[credit rating]]. At such times marginal borrowers, or those who have borrowed at the end of any debt-induced asset bubble, get "squeezed" out of further borrowing and a contraction in the growth of new [[debt money]] occurs, triggering a slow down in the growth of inflated assets. Those assets can then be "harvested" by the [[private banks]] through widespread [[foreclosure]] or [[bankruptcy]] and re-sold to those with the money to buy the distressed assets.<ref>[http://www.marketoracle.co.uk/Article2882.html Market Fundamentalism, by Richard C. Cook]</ref> |
|||
A "[[credit crunch]]" occurs where new [[debt money]] is not available at any [[interest rate]] - even for those with previously acceptable [[credit rating]]s - due to widespread [[insolvency]] in the banking system. At such times, it is the banking system itself that is [[insolvent]] and other financial institutions (including overseas financiers) become reluctant to lend to the domestic banking system, resulting in the domestic banking system being unable to issue loans even to credit worthy borrowers.<ref>[http://www.prudentbear.com/index.php?option=com_content&view=article&id=4748&Itemid=58 Credit Crunch, by Satyajit Das]</ref> |
|||
At any stage during the downward spiral of a "[[credit crunch]]", the [[central bank]] in a modern economy can try to save the system from complete economic [[meltdown]] by purchasing (either indefinitely or temporarily) the failed debts of the [[private bank]]s.<ref>[http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2007/12/19/ccom119.xml ECB's mind-numbing cash injection]</ref> However, doing so results in cash being transferred to the [[private banks]] in exchange for [[bad debt]], thereby violating the general economic precept to avoid [[moral hazard]] and effectively makes liquid the failed lending decisions of the [[private bank]]s.<ref>[http://www.rgemonitor.com/blog/roubini/228924/ Privitizing Profits and Socializing Losses, by Nouriel Roubini]</ref> In the U.S. banking system this is called "opening the Fed discount window", where the [[Federal Reserve]] temporarily purchases the failed investment portfolios of distressed [[private bank]]s in exchange for cash, thereby allowing them to escape liability for mistaken lending practices that have resulted in these portfolios losing value as the borrowers default on their loan payments and are made [[bankrupt]]. However, this rescue measure may only delay, rather than avoid, the realization of losses in the banking system, as the central bank cannot "force" new borrowing into the system to inject new [[debt money]] into the [[money supply]]. Somebody has to be a [[counterparty]] to borrow the [[debt money]] that is being offered. If all market participants realize a "[[bubble]]" has formed in asset markets, there will be few (or no) buyers for new [[debt money]], as no one wants to borrow to buy inflated assets no one else will buy. Money markets can therefore remain illiquid even with intense [[central bank]] support. |
|||
And banks can go bust anyway, even with intense [[central bank]] support, if the issue is not one of liquidity, but one of solvency.<ref>[http://www.ft.com/cms/s/0/233ae764-abef-11dc-82f0-0000779fd2ac.html Central Banks have No Plan]</ref> <ref>[http://www.rgemonitor.com/blog/roubini/233120 Central Banks get desperate]</ref> |
|||
===Pushing on a string=== |
|||
Some monetary economists describe the opening of the Fed discount window after the bursting of an asset bubble as "pushing on a piece of string", as this measure does not solve the key problem - creating new [[credit]] (or [[debt money]]) to keep up the growth in the [[money supply]] and maintain the required level of liquidity in credit markets.<ref>[http://www.mises.org/story/2695 Don't Discount the Fed Discount Window]</ref> <ref>[http://www.federalreserve.gov/Pubs/FEDS/2004/200401/200401pap.pdf Monetary Policy in Deflation: The Liquidity Trap in History and Practice]</ref> |
|||
To encourage fresh borrowing, [[central bank]]s generally combine these rescue measures with an [[interest rate]] cut to encourage more new borrowing to allow the existing (failed) debts to be [[liquidate]]d at or close to their original value. When [[Alan Greenspan]] repeatedly resorted to this tactic to revive illiquid [[money market]]s this became known in the market as the "[[Greenspan put]]", as the effect of these repeated reductions in [[interest rate]]s was similar to a [[put option]] in the [[stockmarket]], insuring [[bank]]s' lending mistakes would be covered up by the [[Federal Reserve]].<ref>[http://www.iie.com/publications/wp/02-1.pdf Moral Hazard and the "Greenspan Put"]</ref> |
|||
===Inequities in system=== |
|||
Aside from the [[moral hazard]] issue, the key risk with this tactic (cutting [[interest rate]]s to encourage new [[debt money]] creation) is that the [[central bank]] exposes the financial system to a [[currency crisis]], as the growth in the [[money supply]] spirals out of control due to the need to save the [[bank]]s from themselves.<ref>[http://www.swlearning.com/economics/hall/hall-lieb2e-upd/ppt_lecture/exchange_rate_macro_policy.ppt Exchange Rates and Macroeconomic Policy]</ref> <ref>[http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6VGT-41WBFRG-1&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=4e89075114dcdb58b503172ff1801bd2 Central Bank Intervention]</ref> <ref>[http://www.federalreserve.gov/newsevents/speech/mishkin20071026a.htm Financial Instability and the Federal Reserve as a Liquidity Provider, by Frederic S. Mishkin]</ref> |
|||
For these reasons, a collapse in the confidence of the [[solvency]] of the banking system is one of the most complex and difficult policy issues any [[government]] can face. |
|||
In such crises of confidence, a [[central bank]] may choose to save the current players in the banking sector by printing money and inflating its way out of the crisis, thereby debasing the value of the domestic [[currency]]. |
|||
This is referred to by some [[monetary reform]]ers and [[economist]]s as "[[Socialism]] for the rich and [[Capitalism]] for the poor", as many indebted [[consumers]] will still lose their [[house]]s and be declared [[bankrupt]] regardless whether or not the [[central bank]] intervenes to save marginal lenders who have been made [[insolvent]] through their mis-timing of the [[credit cycle]].<ref>[http://www.rgemonitor.com/blog/roubini/228924/ Privatizing Profits and Socializing Losses, by Nouriel Roubini]</ref> <ref>[http://prudentbear.com/index.php?option=com_content&view=article&id=4841&Itemid=58 Regulatory Debauchery by Satyajit Das]</ref> Future generations of innocent taxpayers may ultimately finance any [[bail out]] of reckless lenders, as the money used to fund any [[bail out]] will be funds diverted from the general revenue of the central government.<ref>[http://www.ft.com/cms/s/0/f4cf8426-654d-11dc-bf89-0000779fd2ac.html A run on the bank]</ref> |
|||
Many central bankers still refer to [[Walter Bagehot]]'s 1873 commentary on monetary crises, ''Lombard Street'', in an attempt to gain insights into the way in which central bankers should revive illiquid banking systems. [[Walter Bagehot]]'s exhortation to "lend freely" at times of monetary crisis to lift the system into liquidity and encourage new debt creation may work temporarily, but in circumstances where fundamental changes are occurring in the underlying economy (for example, where demographic changes - such as an aging population - result in too few new indebted consumers, or where extreme inequality results in the inability of impoverished workers to either qualify for, or be encouraged to, borrow) this will only result in a delay in (and perhaps exacerbation of) the collapse of any debt-created "bubble". |
|||
A prime example of the fatal effects of combining aging demographics with reckless bank lending can be found in the case of the [[Japanese asset price bubble]].<ref>[http://www.economist.com/displaystory.cfm?story_id=10286992 The Japanese and American Bubbles: Been There, Done Some of That]</ref> Once the downward spiral of a financial implosion begins, it is almost impossible to stop if there are no new indebted "victims" to replace those that have either retired, or died. |
|||
===Potential societal impact=== |
|||
{{Citecheck|date=December 2007}} |
|||
Some more extreme [[monetary reform]]ers and [[conspiracy theorists]] anticipate the declaration of [[martial law]] and the imposition of [[fascist]]-style restrictions on [[civil rights]] and [[freedom of speech]] by the political [[Establishment]] to physically protect it from [[anarchy]] or military [[coup]] when the [[bubble]] of [[debt]] completely bursts, either through a precipitous [[currency crisis]] or debt-created [[depression]].<ref>[http://www.house.gov/paul/congrec/congrec2007/cr120507h.htm New security legislation threats freedoms]</ref> Some [[conspiracy theorists]] also anticipate the forced elimination - by any means necessary - of any actual or potential competing [[currencies]] or voluntary mediums of exchange that could threaten the viability or legitimacy of the [[monopoly]] [[currency]], which could include the compulsory confiscation of all privately-owned [[gold]] ([[gold]] being the ultimate reserve [[currency]], still used by [[central banks]] as a universally accepted medium of exchange for the settlement of international [[debt]]s).<ref>[http://news.goldseek.com/GoldSeek/1196605589.php America's Trade Debts Lead to a Likely Gold Confiscation]</ref> <ref>[http://www.libertydollar.org/ld/legal/raid.htm FBI Raids Liberty Dollar]</ref> <ref>[http://www.lewrockwell.com/rothbard/solution.html The Solution]</ref> <ref>[http://prudentinvestor.blogspot.com/2007/09/us-mint-suspends-gold-coin-sales-due-to.html US Mint Suspends Gold Coin Sales]</ref> <ref>[http://www.swissamerica.com/article.php?art=06-2004/200406140537f.txt Why a Gold Standard Now?]</ref> |
|||
There have been many monetary crises throughout history and prior to widespread [[anarchy]] or [[revolution]], in the late stages of volatile, heavily indebted [[laissez faire]] [[capitalism]], there are a number of warning signs of impending [[chaos]] caused by a complete breakdown of trust in the debt-based [[monetary system]]. Just prior to the complete collapse of the [[pyramid scheme]] of public and private [[debt]], the economic system tends to feed on itself, and in the past, where debt-created [[depression]]s or periods of [[hyperinflation]] have occurred in [[Europe]], the [[U.S.]] and [[China]], there has been a sustained spike in predatory economic behavior, as the heavily indebted central government and producers are forced to find more extreme (previously considered unethical) methods to extract any remaining wealth from increasingly desperate and impoverished [[consumers]], who are either unwilling or unable to go into further [[debt]] without forceful coercion.<ref>{{cite book |last= Widdig |first= Bernd |title= Culture and Inflation in Weimar Germany |url= http://books.google.com/books/ucpress?id=kvKAATycUzIC |accessdate= 2007-12-16 |year= 2001 |publisher= University of California |
|||
Press |isbn= 0520222903 }}</ref> [[Long-term]] investment and sustained [[capital investment]] are almost impossible in this environment because the "measuring stick" of [[return on investment]] (the real value of [[money]]) is so uncertain at times of debt-induced [[credit crunch]], [[depression]] or [[hyperinflation]]. |
|||
As potential new [[borrower]]s cannot be found to buy depreciating heavily indebted assets, and international financiers reduce lending as they experience losses on pre-existing loans either through asset or currency [[depreciation]], some analysts predict that the [[monetary system]] will seize up due to a [[deflationary]] [[depression]] or sustained period of [[stagflation]]ary [[hyperinflation]], resulting in a "final and total catastrophe of our fiat monetary system."<ref>[http://www.goldensextant.com/SavingtheSystem.html Fiat's Reprieve, by Robert K. Landis]</ref> |
|||
This has often occurred after a failed [[aggressive war]], as international financiers realize the heavily indebted [[government]] they funded will not gain the [[resources]] it planned to seize as a result of the waging of [[aggressive war]]. When this pay-off does not materialize, the government is left with the [[debt]] of war without the ability to offset this [[government debt]] through the imposition of [[reparations]] on the defeated [[nation]] and the acquisition of the defeated state's [[resources]]. This occurred to [[Germany]] after the [[First World War]] and [[Japan]] after the [[Second World War]].<ref>{{cite book |last= Widdig |first= Bernd |title= Culture and Inflation in Weimar Germany |url= http://books.google.com/books/ucpress?id=kvKAATycUzIC |accessdate= 2007-12-16 |year= 2001 |publisher= University of California |
|||
Press |isbn= 0520222903 }}</ref> |
|||
Whatever the trigger, the key warning sign of any impending monetary crisis and economic [[anarchy]] is a sudden [[currency crisis]] or [[bank run]].<ref>[http://www.businesshistorybooks.com/Panics.htm History of Bank Runs (with references attached)]</ref> Early warning signs that the [[private banks]] themselves are aware of an impending breakdown in the [[solvency]] of the [[financial system]] would be: a spike in the prices for [[oil]] (which is an internationally accepted, inherently limited, store of value, and therefore can act as a modern form of [[hard currency]], oil sometimes being referred to as "black gold"), [[gold]] and other inherently limited [[natural resources]] essential for non-discretionary industrial production; a spike in the [[futures contract]]s for "non-perishable" agricultural [[commodities]] such as [[sugar]], [[coffee]], [[wheat]], [[soybean]]s and [[rice]], as investors realize the debt-based monetary system has squeezed supplies of [[arable land]]; a sudden flight of money to [[Treasury bills]]; and/or a sudden spike in the [[interest rate]] differential between short-term [[Treasury bills]] and asset-backed corporate paper (or a sudden spike in the [[LIBOR]] rate in [[London]]).{{Fact|date=December 2007}}<ref>[http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/03/cnrates103.xml&CMP=ILC-mostviewedbox Pleas for rate cut as interbank loans dive]</ref> |
|||
Shortly thereafter, some [[monetary reform]]ers predict that there would be desperate, but ultimately futile [[central bank]] intervention, a [[currency crisis]], a panic run on a number of marginal, [[insolvent]] [[banks]] and [[hedge funds]] as investors try to get [[cash]] out to invest in inherently limited, non-perishable, in-demand commodities such as [[oil]] and [[gold]] (and undeveloped agricultural and industrial [[land]] in areas of the world with strong [[economic growth]]), followed by a [[recession]] or [[depression]] in the broader heavily indebted economy as the [[money supply]] contracts.<ref>[http://www.newyorkfed.org/research/staff_reports/sr291.pdf Hedge Funds, Financial Intermediation and Systemic Risk]</ref> |
|||
===Potential solutions=== |
|||
{{Weasel|date=December 2007}} |
|||
Critics assert that, <!-- please note, this is the phrase needed in order to retain these sections. --> |
|||
although time is the only real remedy for monetary crises, as it allows re-inflation of the markets through the gradual injection of new [[debt money]] into the system, time is something financiers and investors are least likely to want to give up when faced with not getting their [[money]] out of the imploding investment [[bubble]]. In extreme cases [[bank]]s could set up "independent" corporate investment vehicles to buy the assets associated with the [[bad debt]], thereby allowing [[borrower]]s to liquidate their investments and allow time for the markets to re-inflate, however the holding costs involved in this measure would be extremely high and would not guarantee that the losses could be averted if no new gullible investors could be found to offload these distressed assets. More fundamentally, these short-term "parachutes" used after bubbles burst do not save ordinary borrowers from [[foreclosure]] and [[bankruptcy]], nor do they address the pernicious long-term dysfunctional aspects of [[fractional reserve banking]] described above. These problems are temporarily averted, only to be dealt with yet again by the next generation of indebted governments and peoples. |
|||
Given these repeated financial crises arising from the debt-based monetary system, many [[monetary reform]]ers predict that there will inevitably be a return to the [[gold standard]], a fundamental change in the way money is produced and distributed (with a return to the prevalence of government-issued debt-free [[fiat currency]] and/or [[free banking]]) - or a complete financial "[[meltdown]]" as fewer young people in developed economies can be found who are willing to go into debt in sufficient magnitude to pay off the debts that have already been accumulated. As extreme inequality increases, [[foreclosure]]s mount and financial crises repeatedly erupt, these [[monetary reform]]ers believe a political crisis will eventually result in calls for fundamental [[monetary reform]]. |
|||
These on-going, worsening, [[debt]]-created crises in the economy and society (and the unsustainable damage to the [[Natural environment|environment]] caused by debt-created [[overconsumption]]) could turn monetary and economic policies either to the extreme left or to the extreme right, as there are a number of competing solutions to the debt-based monetary "problem". |
|||
==Proposals by economic reformers== |
|||
===Libertarians=== |
|||
{{Citecheck|date=December 2007}} |
|||
[[Libertarians]] plan a return to genuine [[free markets]], [[small government]] and [[sound money]] backed by a [[gold standard]] or [[silver standard]], as originally contemplated by the [[Founding Fathers]] in the [[U.S. Constitution]]. Most [[Libertarians]] would eliminate all income taxes and encourage private [[Charity (practice)|charity]] to provide social services. Some [[Libertarians]] would also support experimentation with [[free banking]] or [[full-reserve banking]], recognizing that when [[fractional reserve banking]] is combined with the [[gold standard]] a deflationary bias (and the systematic transfer of real wealth to the banking system) is normally inevitable. Those [[Libertarians]] who support [[full reserve banking]] would strongly support more flexible and forgiving [[bankruptcy]] laws in a [[fractional reserve banking]] environment, recognizing that no [[stigma]] should be attached to [[bankruptcy]] given the anti-[[Libertarian]] "unjust acquisition" of real wealth implicit in [[fractional reserve banking]].{{Fact|date=December 2007}} |
|||
Regarding the current accumulation of [[government bonds]] and private debt, there is an arguable case that the creation of the [[Federal Reserve]] under the [[Federal Reserve Act]] of 1913 was unconstitutional and some [[Libertarians]] consider that at least some of this accumulated debt should be canceled or forgiven prior to a return to the [[gold standard]] in recognition of its fundamental illegitimacy. Arguably this would be supported by the "just acquisition" [[jurisprudence]] of [[Libertarian]] legal philosopher [[Robert Nozick]].{{Fact|date=December 2007}} |
|||
Leaving aside the legality of the [[Federal Reserve Act]], it is commonly accepted by market-oriented [[economist]]s that any policy where the [[central bank]] repeatedly provides [[bail out]]s to failed [[banks]] and reduces [[interest rate]]s to encourage new (speculative) borrowing will risk chronic "[[moral hazard]]" and is a key factor in emboldening reckless lenders to inflate assets with excessive [[debt]], thereby creating an environment conducive to the creation of financial [[bubbles]] and speculative excess in financial markets.<ref>[http://www.theaustralian.news.com.au/story/0,25197,22435413-643,00.html Fed should not save the banks]</ref> |
|||
Many [[Libertarians]] derisively refer to [[bail out]]s of the [[private bank]]ing system by the [[Federal Reserve]] and the associated reductions in [[interest rate]]s to encourage more borrowing as "[[Socialism]] in reverse". For many [[Libertarian]]s this simply encourages more speculative [[debt]] creation by the [[private bank]]ing system, and brings the economic system ever closer to monetary [[tyranny]].{{Fact|date=December 2007}} |
|||
[[Libertarians]] would go further than regulating or cautioning the [[Federal Reserve]] to avoid repeated [[bail out]]s of failed banks - they support repeal of the [[Federal Reserve Act]] of 1913 and the elimination of the [[Federal Reserve]] itself, thereby removing this artificial [[insurance]] policy for the [[private bank]]s, ensuring that they face the full consequences of poor lending decisions with the real prospect of being wiped out by [[bankruptcy]].{{Fact|date=December 2007}} If the [[Federal Reserve Act]] was repealed, depositors would also have to be on guard to ensure their [[bank]] was not lending recklessly, thereby ensuring more conservative lending practices. This would however present the real prospect of old-fashioned "runs" on the banking system after any period of speculative excess.{{Fact|date=December 2007}} |
|||
===Authors, analysts and alternatives=== |
|||
[[Michael Rowbotham]] also seeks the cancellation of "unjust" debts (such as [[third world debt]]), but would also support the re-introduction of strongly redistributive tax policies involving higher financial transaction taxes (such as a [[Tobin tax]]), [[land tax]]es and [[inheritance tax]]es, and, crucially and most importantly, a [[social security]] [[safety net]] involving a guaranteed minimum debt-free income (sourced from government-issued [[debt-free money]]) for all citizens in the debt-based economy. Under this proposal, every adult citizen would be given a livable debt-free income (for example, $30,000 per annum, adjusted for inflation), transferred electronically into their [[bank account]], simply by virtue of their [[citizen]]ship. They could then use this debt-free money to pay off their [[mortgage]]s or to live, debt-free, without being compelled to work as a "wage slave" in the market economy if they chose not to. The government would finance these payments simply by ordering the [[private bank]]s to accept their electronic instructions as legal tender. It would therefore not result in the expansion of [[government debt]]. |
|||
Instead of [[money]] being created "indirectly" and "furtively" at the point of [[loan]] creation by the [[private bank]]ing system, it would be created directly and openly by the democratically elected government and issued to its [[citizen]]ry by way of instruction to the [[private bank]]ing system. |
|||
[[Michael Rowbotham]] argues in his book, ''The Grip of Death'', that this would ''not'' be [[inflation]]ary (or at least would not be as inflationary or as dysfunctional as the present system). This would also reduce [[overconsumption]] and the associated [[Natural environment|environment]]al damage associated with debt-based [[consumerism]]. It would also give individuals the free time to engage once again in non-marketable [[religious]], [[artistic]] and [[recreation]]al activities if they chose to do so.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> |
|||
[http://www.webofdebt.com/ Ellen Hodgson Brown], in her 2007 book, ''Web of Debt'', also supports the issuance of debt-free fiat currency by the central government, in a manner similar to that proposed by [[Michael Rowbotham]].<ref>{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref> |
|||
Ex-U.S. Treasury Department analyst Richard C. Cook also supports the issuance of debt-free [[money]] and zero-interest [[credit]] by the central government and has provided a detailed blueprint of monetary reform recommendations to transition to a debt-free money supply.<ref>[http://www.marketoracle.co.uk/Article2882.html Market Fundamentalism, by Richard C. Cook]</ref> |
|||
It is to be expected that these proposals might be opposed by [[private bank]] officials; reformers say this is because the proposals would reduce the banks' control over the [[money supply]], dissipating this key decision-making power away from its current base. It would also be likely to reduce [[economic growth]], dramatically increase the cost of [[labor]] and, potentially, simply increase asset price inflation as individuals used the additional income simply to bid up the cost of [[housing]]. However, this proposal would undoubtedly address the problem of [[inequality]] inherent in a debt-based monetary system and reduce the devastating impact of personal [[bankruptcy]] and allow individual citizens to quickly recover from financial hardship. It would also ensure that this [[social security]] measure (and government spending in general) would not have to be paid for by future generations from future streams of [[income tax]]. |
|||
Many left-leaning [[social democrats]] would also support the taxing of the banking system and the enforcement of strongly redistributive income and [[land tax]]es to ensure the financially dispossessed are "replenished" with income. They would also support a [[social security]] [[safety net]] involving the provision of unemployment benefits and government-supplied free medical care, education and other essential services and [[public goods]]. It is to be expected however that, without the issuance of debt-free [[fiat currency]], this system would result in the persistent, exponential, accumulation of [[government debt]], financed by the [[private banking]] system by the issuance of [[government bonds]]. If not properly managed, this could result in a progressively higher tax burden and may result in higher [[interest rates]] in the long term, as financiers require higher [[interest rates]] to lend to the increasingly indebted central government. Without the issuance of [[debt-free money]] these policies can be self-defeating, with the net result simply being that a larger stream of guaranteed income goes to the [[private bank]]ing system via the issuance of interest-bearing [[government bonds]] (which are purchased by the [[private banks]] "out of nothing" through [[fractional reserve banking]] techniques). This [[government debt]] must then be financed in perpetuity by compulsorily acquired [[tax]]es from future generations. |
|||
It could be argued that the early success of extreme right-wing [[fascism]] in [[Nazi Germany]] and [[Italy]] in the period after [[World War I]] was a response to the economic chaos created by the debt-based monetary system in early 20th century [[Europe]]. Some of the economic policies introduced by [[Hitler]] and [[Mussolini]] were in direct response to the economic collapse and social [[anarchy]] caused by soaring government and personal debt levels in both countries in the post-[[Versailles Treaty]] era, and (indirectly) arose from the writings of [[Silvio Gesell]] and others on the nature of the problems associated with a debt-based [[monetary system]]. Although many [[historian]]s justifiably criticize many of the non-economic policies of the [[fascist]] governments of [[Germany]] and [[Italy]] during this period, it cannot seriously be disputed that the [[economics of fascism]] provided a degree of [[prosperity]] to the populace, and that the economic policies that were implemented during this period by these [[fascist]] governments succeeded in their stated objective of restoring economic and social order during the pre-[[World War II]] era. |
|||
Similarly it could be argued that [[socialism]] and [[communism]] were movements inspired by the inequalities caused by the intense (and in [[Karl Marx]]'s view unsustainable) concentrations of monetary wealth, power and influence inherent in the practice of [[fractional reserve banking]] in a [[laissez-faire]], [[free market]] [[capitalist]] environment (particularly when [[fractional reserve banking]] is combined with a [[gold standard]] or other [[hard currency]] [[monetary system]]). |
|||
The [[communist]]/[[socialist]] solution to the problem of [[fractional reserve banking]] is simple: wholesale repudiation of [[government debt]] resulting in complete debt [[default]]; forced [[expropriation]] of [[land]] and wealth from the [[upper classes]] to the dispossessed and needy [[working classes]]; [[nationalization]] of the [[private banks]] (which has required armed [[coup]]s by the [[military]] in some past [[revolution]]s); and the return of the banking function from a dominant, speculative to a subordinate, administrative institution, where the banking system is reduced to a subservient arm of the centralized [[Leviathan]]. In this system, government-owned banks are directed by government policy; often provide different kinds of loans to different industry sectors at different interest rates depending on the perceived "needs" of the economy and the community; normally have a significant proportion of [[non-performing loan]]s due to weak or non-existent [[bankruptcy]] laws; and periodically "forgive" failed debts in recognition of the impossibility of some businesses in paying this debt money back. |
|||
It is to be expected that the [[profitability]] of the government-owned banking system would be more stable - but dramatically lower - than that in a debt-based [[capitalist]] economy. It is also to be expected that a significantly higher misallocation of resources could occur in this system, where lending decisions are "infected" by political considerations and are not made on the basis of expected [[return on investment]]. The risk of [[corruption]] in the banking system is also expected to be higher where there is no separation between the political and monetary systems in an economy. Market-oriented [[monetary reform]]ers and [[neo-classical]] economists therefore do not support [[nationalization]] of the [[private banking]] system. |
|||
It should be noted that partial [[nationalization]] of the [[private bank]]ing system would only be temporary, as any remaining [[private banks]] could still engage in unlimited [[fractional reserve banking]] and facilitate the eventual acquisition and control of any strategic assets in a partially socialized economic system. It is to be expected that in the absence of complete [[nationalization]] of the banking system, the [[private bank]]ing system would eventually dominate the financial system in any nominally [[socialist]] society. |
|||
==Conclusion== |
|||
In summary, many [[monetary reform]]ers and critics of modern debt-based monetary systems (which have been "unhinged" from the [[gold standard]] since the [[Nixon]] era) assert these recently-developed debt-based systems will erode the economic rights and stability of much of society, due to [[private bank]]s' inherently speculative [[fractional reserve banking]] activities, in which they have recourse to [[central bank]]s to provide [[bail out]]s as lenders of last resort.<ref>{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref> |
|||
Some of the reasons these critics cite include [[laissez-faire]] economic policies, which they say increase the marketization and commodification of human activity, and strictly enforced [[bankruptcy]] laws, which permit the periodic transfer of assets from failed [[bankrupt]] investors to the [[private banks]] and their associates. They also assert that debt-based systems cause [[Natural environment|environment]]ally damaging over-consumption and the systematic and irredeemable destruction of fertile [[arable land]] through the periodic issuance of over-extended debt financing for housing, which leads to [[urban sprawl]] which encroaches on [[arable land]]. |
|||
== See also == |
== See also == |
||
* [[ |
* [[Fractional-reserve banking]] |
||
* [[ |
* [[Fiat currency]] |
||
* [[Credit crunch]] |
|||
* [[Credit squeeze]] |
|||
* [[Debt]] |
|||
* [[Debt-free money]] |
|||
* [[Debt money]] |
|||
* [[Free banking]] |
* [[Free banking]] |
||
* [[ |
* [[Gold standard]] |
||
* [[Hyman Minsky]] |
|||
* [[Libertarianism]] |
|||
* [[LIBOR]] |
|||
* [[Michael Rowbotham]] |
|||
* [[Murray Rothbard]] |
|||
* [[Robert Nozick]] |
|||
* [[Ron Paul]] |
|||
* [[Silvio Gesell]] |
|||
* [[Socialism]] |
|||
* [[Social Democrats]] |
|||
* [[Soft currency]] |
|||
* [[Treasury bills]] |
|||
* [[Usury]] |
|||
==References== |
==References== |
||
| Line 221: | Line 16: | ||
==External links== |
==External links== |
||
*[http://www.relfe.com/plus_5_.html I want the Earth Plus 5%] |
*[http://www.relfe.com/plus_5_.html I want the Earth Plus 5%] |
||
*[http://video.google.com/videoplay?docid=-9050474362583451279 Money As Debt ( |
*[http://video.google.com/videoplay?docid=-9050474362583451279 Money As Debt (video)] |
||
*[http://libertariannation.org/b/money.htm Money and Banking] |
*[http://libertariannation.org/b/money.htm Money and Banking] |
||
*[http://www.webofdebt.com/ Web of Debt] |
*[http://www.webofdebt.com/ Web of Debt] |
||
*[http://www.prudentbear.com/ PrudentBear.com] |
|||
*[http://www.marketoracle.co.uk/ Market Oracle] |
|||
*[http://www.rgemonitor.com/index.php RGE Monitor] |
|||
*[http://www.financialarmageddon.com/ Financial Armageddon] |
*[http://www.financialarmageddon.com/ Financial Armageddon] |
||
*[http://elainemeinelsupkis.typepad.com/money_matters/ Money Matters] |
*[http://elainemeinelsupkis.typepad.com/money_matters/ Money Matters] |
||
[[Category:Monetary economics]] |
[[Category:Monetary economics]] |
||
[[Category:Monetary reform| ]] |
[[Category:Monetary reform| ]] |
||
[[Category:Finance]] |
|||
[[Category:Heterodox economics]] |
[[Category:Heterodox economics]] |
||
Revision as of 13:17, 29 December 2007
 | This article may be unbalanced toward certain viewpoints. |
Debt-based monetary system is a political term used by critics of the Federal Reserve, based upon heterodox economics, such as that of the Austrian school. The term is not in use among economists.
An Explanation of the Term
The term implies that the Federal Reserve and its member banks steal wealth from the public through printing money which is then loaned to the public at interest (see New World Order (conspiracy theory)). The term is based largely upon the heterodox economics of the Austrian school. Some invoke the Austrian Business Cycle Theory[1] to argue that the business cycle is caused by artificial government expansions and contractions of the money supply. [2] The usage of the word "debt" may be misleading, as the term is used to describe an overall loss in public wealth stemming from over-expansion of the money supply (see inflation). This is distinguished from all forms of debt, including public debt.
See also
References
- ^ Rothbard, Murray (1980). What Has Government Done to Our Money?.
- ^ Grignon, Paul. "Money as Debt". Retrieved December 29, 2007.