This little vignette written by Don Werkheiser remains one of the best concise explanations of inflation I’ve ever seen. It was published in the spring 1982 edition of Green Revolution, the journal of the School of Living a non-profit organization with which I was associated throughout the 1980s and into the early 1990s. The story helps to elucidate the nature of the dysfunctional political money system that has plagued the world for hundreds of years, but in its brevity and simplicity neglects to mention another feature of the money system that adds to our misery; that is the fact that the “Mayor” and his friends do more than spend counterfeit money into circulation, they have also established “banks” and require that other people who need money to do business must borrow their pseudo-money into circulation and pay interest on it. That enables the bankers to extract even more wealth from the rest of the people while creating an unending and unsustainable expansion of debt. I have articulated that “debt-growth imperative” in my paper titled, the Usury Conjecture.
An Honest Money Would Stop Inflation by Don Werkheiser
A rural village has no money. All trade is by barter. A farmer comes to town and deposits 10 bushels of corn with a man who has a store room. This operator gives the farmer 10 receipts, each redeemable in a bushel of corn. But the farmer asks for receipts in smaller denominations. The storekeeper gives him 40 receipts for 40 pecks. The farmer trades ten of these corn-receipts for other products; they are each accepted at the value of a peck of corn. That acceptance constitutes the issue of corn notes as money.
Such receipts are generalized credit instruments. They refer to stored corn, but not to any specific peck of corn. When the seller wants a peck of corn the receipt is redeemed. Otherwise it is spent again, and ownership of a peck of corn is conveyed to the next seller. The next day the farmer returns to town and spends 10 corn notes (each of one peck of corn in value) for his wife’s birthday present. Now the farmer has doubled the money supply in circulation, but there is no inflation; there are redeemable goods back of them.
What then is inflation? We must understand “money” and the storekeeper’s actions.
The store room owner noticed that the corn notes were accepted in trade. So he made 40 more “peck-receipts” looking just like corn-receipts and then he spent them into circulation. That is inflation–counterfeit receipts passed as valid receipts. Assume that the counterfeit receipts were accepted at face value. In that case, the counterfeiter effected a robbery of commodities equal in value to 40 packs of corn, while those who accepted them received receipts which measured the extent to which they had been robbed. So long as confidence lasts, the game would continue and receipts could be spent. New sellers would be holding empty receipts. The game would collapse when all the corn in the warehouse was redeemed, and holders of the 40 counterfeit receipts found no one who would take them in trade.
Worse could happen if the counterfeiter had the skills of a politician. If, when confronted by angry holders of his counterfeit receipts he declared himself a benefactor of the community–and showed that the original issue by the farmer was too limited, and that his own issues stimulated industry and trade (he would not mention that the farmers issue was redeemable while his own was not). He noted that most people did not want corn; they wanted a medium of trade that they could use to speed up trade. More to come.
They were told: “If the game stopped then, the holders would be losers, but if they continued, they could all buy what they wanted. In fact if they elected him Mayor he would declare pseudo-corn-notes to be legal tender, and he’d also begin a program of public works. Soon everyone would be rich.” An ignorant public agreed.
Elected Mayor, the counterfeiter issue another stock of corn-notes called “pecks” and declared them to be worth a peck of corn in the market (but not anywhere redeemable). On each note was a picture of a peck-basket, but what it contained was not specified. Just a peck of value.
The “pecks” circulated and trade increased. Then a strange thing happened. The Mayor and his agents could outbid everybody for produce and services. They also controlled the printing presses for printing “pecks.” Prices were bid up on the things the Mayor’s group approved. Workers and businessman migrated into those industries for wages and profit. The stock of other things became short. Everyone couldn’t buy what they wanted. People threatened to recall the Mayor if he didn’t improve things. So he issued more “pecks” and then more and more.
The more money people had, the less they could buy. Only the Mayor and his friends had enough — rather too much — money. They gave expensive parties, bought votes, hired police and soldiers; and gave everyone a vested interest in continuing the game, through welfare, social security, profitable contracts, and “peck-funded” jobs.
Confusion resulted. It is evident there are two kinds of money: honest redeemable money and inflatable unredeemable money. These keep our economy teetering between “prosperity” and “depression.” Have we any proof that those in charge of our money system intend to create an honest system? That would break their power. A sound alternative is for people to operate their own money system. American and world history have produced workable patterns; some are underway today.
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Take note that the story does not mention any need for gold or silver backing for money to be honest. As E.C. Riegel makes plain in his book, Private Enterprise Money, “When businessmen resolve to set up a money system, they agree to hold in trust for each other goods and services that are pledged against the drafts which they have issued in the form of money. These values — that are held in trust by all for any who may present a money draft therefore — constitute a vast pool, not housed at one place, but scattered throughout the trading sphere. This vast pool of goods and services is the basis or backing for the outstanding money supply. “Reserves” and metal hoards are but window dressing. Only that which is purchasable is back of money.”
In light of the current surge in the rates of inflation in countries around the world, the dominant political monetary regime is once again being called into question. Perhaps this time there will be sufficient interest and concern about its dysfunctional and destructive nature to induce a significant surge toward the adoption of the sorts of private currency and exchange systems that we have been articulating and advocating for more than 40 years.
The Library on this website contains a number of references relating to the politics of money. Among these are Dr. Carroll Quigley’s book, Tragedy and Hope: A History of the World in Our Time (1966), and Cleon Skousen’s review of that book titled, The Naked Capitalist (1970).
Tragedy and Hope outlines in great detail the plans of the elite class of international bankers and their minions to create a New World Order under their absolute control. In my books and presentations I have often repeated this quote from Quigley’s book:
“…the powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank, in the hands of men like Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve Bank, Charles Rist of the Bank of France, and Hjalmar Schacht of the Reichsbank, sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.”
The Cold War was just a facade to give the appearance of division while the banking elite proceeded with their agenda in both camps. In Chapter 5 of The Naked Capitalist Skousen says:
Dr. Quigley bluntly confesses that the International Bankers who had set out to remake the world were perfectly confident that they could use their money to acquire the cooperation and eventual control of the Communist-Socialist conspiratorial groups. In fact, John Ruskin of Oxford had persuaded the original Rhodes-Milner Round Table Groups that the way to federate the world was along socialistic lines, i.e., by having all property, industry, agriculture, communications, transportation, education and political affairs in the hands of a small cadre of financially controlled political leaders who would organize the world and its peoples in a way which would compel everyone to do what was good for the new, world-society.
It may seem somewhat contradictory that the very people whom Marx identified as the epitome of “Capitalism” should be conspiring with the followers of Marx to overthrow traditional Capitalism and replace it with Socialism. But the record supports the Quigley contention that this is precisely what has been happening. The reason is rather simple.
Power from any source tends to create an appetite for additional power. Power coming from wealth tends to create an appetite for political power and visa versa. It was almost inevitable that the super-rich would one day aspire to control not only their own wealth, but the wealth of the whole world. To achieve this, they were perfectly willing to feed the ambitions of the power-hungry political conspirators who were committed to the overthrow of all existing governments and the establishments of a central world-wide dictatorship along socialist lines.
That may have seemed fantastic at the time but it is blatantly obvious today to everyone except those who cling desperately to their belief in the benevolence of the relative few who control money, finance, politics and virtually every other system and institution around the world. If you want an up-to-date assessment of the geopolitical situation, watch this panel discussion Interrogating Cold War 2.0,featuring Patrick Wood, Iain Davis, Catherine Austin Fitts, and Kit Knightly, who discuss “the nature of the East-West dichotomy and whether the rise of Eurasia and the fall of the West were engineered by certain factions of global elites and for what purpose.”
Now is the time for “we the people” to decide whether we will docilely follow the “masters” into their feudalist New World Order, or take responsibility to work together to build a new society of peace, justice and liberty for all based on the establishment of systems and structures that serve the common good instead of the further concentration of power and wealth. You can get an idea of how we might proceed in the realm of money and finance by reading this Draft Manifesto of Monetary and Financial Rights and Liberties.
This article was excerpted from my June, 2022 Newsletter which you can view in its entirety at my Mailchimp site. You can also sign up there to receive future newsletter editions.
Reconnecting the Monetary Economy to the Real Economy Money is the “hole” that is defined by the “doughnut” of real goods and services; it is the nothing that serves only to account for that which is available in the real economy. When pseudo-money can be created by fiat, apart from anything of real value, confusion and madness ensue. — T. H. Greco, Jr.
I’ve been arguing for more than 40 years that the global system of money, banking, and finance is fatally flawed, and now its condition has become acute. Since 2008 it has been on life support. The connections between the monetary economy and the real economy have long been tenuous, but in recent years have been severed to the point of non-existence. When banks and governments can create quasi-money out of nothing without any real value basis and allocate it selectively to advance political agendas, you know the end is near. The last vestiges of budgetary restraint on federal government spending have been eliminated along with any concern about what people really need and want. The results have been the ever-increasing centralization of power at the federal level, central planning of the economy, worsening price inflation, declining purchasing power of fiat money, increasing corporate ownership of real assets, especially residential real estate, zero or negative returns on people’s savings, and increasing disparities of income and wealth. The only way this system can be perpetuated is by the complete elimination of any semblance of democratic government. As E. C. Riegel observed almost 80 years ago: “Society is in the twilight of a passing day. The state now undertakes to finance the economy, and, since a free economy is manifestly impossible where the state assumes the responsibility of supplying the money circulation, the politician is compelled to choose between fascism and communism.” – Private Enterprise Money
“Quantitative easing,” bank bailouts, and central bank purchases of securities from the debt and equity markets have been desperate, last gasp measures to try to save the dysfunctional and destructive system. At first the inflation was confined mainly to financial assets, particularly corporate stocks, as central banks intervened in the markets on the buying side. Then, with the massive bailouts and handouts that were doled out during 2020 and 2021, and the accompany lockdowns and forced closures of small businesses, price inflation shifted over to real estate prices, residential rents, commodities, and consumer goods and services. The system is doomed and must eventually give way to new, more sustainable and equitable systems of exchange and finance. Though barely noticeable, that process has been underway for some time at the micro level of communities and small businesses, but changing circumstances are now stimulating major changes at the macro level of national governments and global trade.
The connection between the real economy and the money economy must be inherent in any sustainable system of money and finance. The creation of sound exchange media (money) requires that money be spent into circulation by trusted producers of real valuable goods and services that are in the market and available to be delivered in the near-term. Money then is a mere place holder for real economic value; it is a credible promise that will be accepted as a form of payment.
The Banker’s Last Gasp and the Great Monetary Reset
While the past several decades have seen the emergence of many successful approaches to decentralizing the control of credit through private currencies and independent commercial credit clearing circles, economic and financial corporatization and globalization have proceeded to place ever tighter control into the hands of an elite class who have used their money power as a weapon of war. The Breton Woods monetary agreement established toward the end of World War II made the US dollar the world’s reserve currency and allowed the US and its western European allies to dominate and control the machinery of money and finance. But with the breakdown of that agreement and the increasing application of financial and economic sanctions we now see that some countries, notably China and Russia, are taking independent action to protect their own economies and security interests.
Another sobering thesis is being articulated by Dr. Tim Morgan at his website Surplus Energy Economics, in which he argues that, “the economy is an energy system, not a financial one,” and that “The concept of limits is replacing the paradigm of ‘infinite growth,’” and “What lies ahead is a process of adjustment – we might call it realignment – to the new reality of an economy in which the scope for expansion is constrained by limits, both to energy value and to environmental tolerance.” Morgan’s economic model, which he calls SEEDS [Surplus Energy Economics Data System], is based on the idea that continual economic growth has been possible only through the availability of the surplus energy that comes from fossil fuels. But that surplus (energy out minus energy in) is continuing to decline. For the moment, I will leave it to the reader to ponder what the implications of that might be.
This shift toward commodity backed national currencies, while not a total solution to the money problem, is a positive step toward reconnecting the means of payment to real economic value. I expect that it will eventually lead to the emergence of a new standard of value against which the value of currencies can be objectively measured. That standard will not be gold, as it was in the past, but a wide assortment, or “market basket,” of useful commodities like the one I’ve been proposing for the past 40+ years. History shows that, as exchange systems evolve, credit instruments become the primary payment media because their quantity is able to expand and contract in step with actual supplies of goods and services. Then, the commodities serve only as the measure of value and unit of account to quantify credit. Just as happened in the past with gold, I expect the commodities in a standard “basket” will serve as a new measure of value, but payments will be made using credit instruments and the credit clearing process, with perhaps, occasional settlement of residual account balances by the transfer of actual commodities. As I’ve repeatedly explained elsewhere, it is crucial that these credit instruments (currencies) be spent into circulation interest-free and on the basis of an adequate real value foundation.
In this article (available on my website or on Medium), I describe the growth imperative that is the fatal flaw inherent in the global central banking, interest-based, debt-money system; I summarize the observations that have led me to conclude that it is utterly destructive and must ultimately be replaced; and I call upon systems analysts to create realistic models of the system to prove the conjecture beyond any reasonable doubt.
This is the Usury Conjecture in a nutshell: The central banking, interest-based, debt money system that is dominant around the world today is neither stable, nor sustainable, nor fair. The creation of money based on bank lending with interest creates an imperative for debt to grow exponentially with the passage of time. That debt-growth imperative drives artificial economic growth as borrowers compete with one another to acquire enough money from the always insufficient pool of money to service their “loans.”
When I first began my intensive inquiry into money, banking, and finance more than 40 years ago, it did not take long for me to discover the essential nature of money, where it comes from and how it is created, allocated, circulated, mismanaged and abused. I was astonished that this system had been allowed to become such a dominant force that has wreaked enormous devastation upon the world over such a long period of time despite many attempts to reform it. One champion of monetary reform was Congressman Wright Patman who, as chairman of the Committee on Banking and Currency of the US House of Representatives during the 1960s, sought to educate the public about the money and banking system through the publication of the committee report titled, A Primer on Money, and a shorter extract titled, MONEY FACTS – 169 Questions and Answers on Money. These reports were produced and distributed through the Government Printing Office and were important in my early research. You won’t find any mention of them on Wikipedia, but if you want to cut through the fog of obfuscation and learn how the system really works they can be accessed through my website.
Addendum of Tuesday, June 28, 2022:
One of my correspondents recently asked if the interest that banks charge when they create money by making loans causes inflation. Perhaps this response will help to clarify the picture of our current monetary and economic predicament, and add some precision to my usury conjecture.
First of all let me make clear that, while the money needed to pay the interest on a particular loan is not created when the loan is made, the banks must create sufficient money (by making additional loans) to enable the aggregate money supply to stay ahead of loan principal repayments, otherwise the money supply will contract and cause economic depression (defaults, business failures, unemployment, etc.). Thus, the creation of money by banks on the basis of interest-bearing loans biases the entire system towards deflation (too little money), as I described in my Usury Conjecture document, https://beyondmoney.net/2022/06/03/the-usury-conjecture-on-the-centralized-interest-based-debt-money-system/.
To compensate for that, banks push hard to induce private borrowers (corporations and individuals) to take on additional debt. But there is a limit to their willingness to borrow more and to their ability to repay, therefore the national government steps in to play the role of “borrower of last resort.” From the banks’ perspective that is ideal because when a bank lends to the government (by buying government bonds, notes, or bills) it gets a guaranteed return and takes no risk of default. Politicians are all too willing to go into debt to dole out money to their corporate patrons (especially weapons and drugs makers) who fund their election campaigns, and to curry favor with the voters by throwing a few crumbs their way. The government therefore goes way beyond borrowing the amount needed to keep the money supply sufficiently pumped up to avoid deflation, and thus creates inflation by funding many things that are pure waste from a consumption and environmental standpoint. So, does interest on bank loans cause inflation? No, not directly, but indirectly as I’ve just explained.
As economist Milton Friedman has famously said, “Inflation is always and everywhere a monetary phenomenon,” and on that point, I agree with him. It’s not just the amount of money that causes inflation; it’s the basis upon which the money is issued. Price inflation is mainly caused by money debasement, which is the creation of money on an improper basis. An improper basis is any loan that is not made to enable the sale of goods and services that are readily available in the market in the near term. Thus, improper money creation is based on loans that are made to finance speculation, or to finance long term capital improvements that create consumer goods only in the far distant future, or to purchase debt instruments of the government. None of those put additional goods or services into the market for purchase in the near term; therefore you have “more money chasing the same amount of goods and services,” or money being put into circulation faster than goods and services are being produced.
It is possible for some price inflation to be caused by reductions in supplies, but that is usually limited to particular products. However, in today’s global economy there are various factors that are affecting supplies more generally, so that has become a contributing cause of the inflation that is being experienced at this time.
The Usury Conjecture on the centralized, interest-based, debt-money system Revised June 2, 2022 Thomas H. Greco, Jr.
The Usury Conjecture in a nutshell The central banking, interest-based, debt money system that is dominant around the world today is neither stable, nor sustainable, nor fair. The creation of money based on bank lending with interest creates an imperative for debt to grow exponentially with the passage of time. That debt-growth imperative drives artificial economic growth as borrowers compete with one another to acquire enough money from the always insufficient pool of money to service their “loans.”
When I first began my intensive inquiry into money, banking, and finance more than 40 years ago, it did not take long for me to discover the essential nature of money, where it comes from and how it is created, allocated, circulated, mismanaged and abused. I was astonished that this system has been allowed to become such a dominant force in the world, that it has wreaked such enormous devastation upon the world, and that it has been allowed to go on for such a long period of time. What has led me to those conclusions has been thoroughly documented in my many books, articles, and web posts.
I have long wondered why there seem to have been no serious attempts to model the monetary system that predominates today throughout the world. Then, in November 2011, I again met up with a well known economist at a conference in Michigan where we were both presenters. In his presentation he reported having conducted such a simulation in which the results showed an equilibrium state being reached. I was dubious about his conclusions but in the context of the conference there was not sufficient opportunity to raise pertinent questions or to discuss them in any depth. I later wrote to him with my questions and asked him to respond to my assertion that some of his underlying assumptions about the system that he used in his simulation might not have been realistic. That was the beginning of my attempts to more fully articulate my “usury conjecture” which over the subsequent years has gone through several revisions. I think my arguments are sufficiently well developed at this point to be useful to others in understanding the system and in designing realistic simulations and mathematical models that are able to reveal its inherent flaws.
In my critique, I did not say that his model was “wrong,” only that some of the underlying assumptions were unrealistic and his model too limited to adequately describe the system as it presently exists. Here are the points that need to be considered:
Free banking. He stated at the beginning of his presentation that his model was a simulation of the monetary system as it existed during the “free banking” era in the United States around the mid-eighteen hundreds. But we no longer live in that world, money and banking have undergone a great many changes since that time and the free banking model does not describe today’s reality. Among the very significant changes have been:
The centralization of credit allocation power in the hands of a few huge banking companies. During the free banking era, that power was greatly decentralized, there was much more competition among banks and their asset portfolios consisted mainly of loans to businesses in the bank’s own geographic region, and much less in US government bonds or loans to massive diversified corporations which did not exist at that time.
The imposition of forced circulation (by means of legal tender laws) of a unitary national currency under the Federal Reserve System that ultimately decoupled the currency from any objective measure of value (like a fixed weight of gold or silver). During the “free banking” era, each bank issued its own “brand” of bank note denominated in dollars.
The gradual elimination of the redeemability of currency for specie (gold or silver) obliterated the objective measure of value, disconnected the money economy from the real economy, and opened the door for extreme monopolization of credit and the abusive inflation of the currency.
What happens to a bank’s interest income? As I understood his presentation, he made the assumption that the banks spend all of their interest income back into the economy, but that is clearly not the case. While a portion of a bank’s revenues are used to pay employees, and cover other expenses like equipment and facilities, it seems that most of the bank’s interest income is added to capital or re-enters the economy, not as consumption spending but in the form of additional loans or as reserves deposited with the central bank that enable further loans to be made, or as payouts to bank owners who, rather than spending it on consumption, use it themselves to lend it out, adding a secondary layer of debt and interest to the economy which creates a further shortage of money available for debt repayment. All of that requires a further expansion of lending (debt) by the banks to keep the money supply expanding enough to prevent too many defaults and subsequent bankruptcies, unemployment and economic depression.
Savings and investment. What does the bank do with peoples’ savings? In his reported simulation he did not describe the accounting entries that accompany the deposit of peoples’ savings, but savings and investment are two sides of the same coin. A bank, in its role as depository (as opposed to its primary role as “bank of issue”), reallocates surplus money (savings) from those who wish to save to those who need to use it now for capital formation (expansion of production capacity), or to spend on consumer goods when there are lulls in their income streams (consumer finance). The interest banks charge on these loans far exceeds the cost of providing the service and the interest they pay to savers, which creates further imbalances in income and wealth distributions.
Debt repayment. Repayment of principal on loans naturally results in the extinction of that amount of money. As old loans are repaid, new loans must be made to keep the money supply from shrinking which would cause additional defaults and economic stagnation or depression. New loans may or may not be sufficient to compensate and maintain the money supply. There must be both banks that are willing to lend and companies and people that are willing and able to borrower, but when the private sector had taken on as much debt as it can bear, government becomes the “borrower of last resort” in order to maintain or increase the money supply.
The role of a central bank. The central banks in countries around the world may or may not be a nominal part of the government. In the US, the Federal Reserve is an independent entity owned by banking corporations that pursue their own interests. There developed long ago, with the founding of the Bank of England, a collusive arrangement between banking and government. On the government side, the agreement enables perpetual deficit spending; on the banking side, the agreement enables the emergence of a banking cartel that enjoys the privilege of lending the peoples’ own credit back to them and charging interest for it. The advertised role of a central bank is to limit inflation and promote full employment. In actuality, the role of a central bank is to enableinflation sufficient to support government budget deficits while protecting and preserving the bankers’ privilege to milk the productive economy and enlarge their own wealth and political power.
Basis of issue. Besides the need to be free of interest, money needs to be issued on a proper value basis. There have been volumes written about this point, but sound principles of commercial banking have been discarded over the years because the perpetuation of the flawed system requires it, and because those who control the machinery of money use their power to promote their own narrow interests of wealth and power. Thus, some loans that banks make are legitimate while most are not. Banks should create new money to enable the production and sale of goods that are in the market or soon to arrive there. They should not make loans for speculative purposes or to monetize government debts as they commonly do today.[i] Thus, we have a stream of legalized counterfeit that dilutes the purchasing power of all the legitimate money in circulation. This currency inflation leads to price inflation, which amounts to a “hidden tax” that disproportionately harms the middle class who have substantial amounts of savings invested either directly or in pension funds which they do not control, and this “tax” hurts low income people who need to spend the bulk of their income just to survive.
The economy. Economists and politicians speak about THE economy as if it was a unitary whole, but there are actually many economies depending on geography, social and economic class, and there are the public sector and the private sector. There may be prosperity in some sectors, while others experience recession. Distinction is commonly made between the private and the public sectors, but it is essential to also distinguish between the small and medium sized enterprises (SMEs) and entrepreneurs on one hand, and the large corporate megaliths on the other. In recent decades, banks have gotten ever larger and their lending has been directed mainly toward central governments and large corporations, while at the same time the productive small and medium sized enterprises that are the backbone of every local economy have been starved of the credit they need to finance their operations. By acting in this way, banks limit or eliminate the risks they take. In the case of lending to central government (by buying its bonds and notes), banks enjoy a guaranteed return with no risk at all. During the pandemic years the bulk of the government stimulus money went to large corporations while many small independent local enterprises were forced to close and were never able to reopen.
“Cash” held by the banks. It is misleading to say that banks are sitting on a lot of cash instead of lending it out. In fact that “cash” has been lent out to the public sector (government) in the form of treasury bills, notes, and bonds, or to the central bank which holds it as “reserves” and on which the banks receive interest.
It seems obvious that the present global money system contains inherent in it a debt-growth imperative because of the interest burden that is attached to the bank loans that form the basis for money creation. I believe that any model that purports to simulate the actual present system of money and banking must account for most of the banks’ interest income as capital which is then loaned into circulation rather than spent, and if that were the case it would show that there can be no steady state but an endless growth in debt which leads to a general growth imperative and destruction of the Earth’s ecosystem as the real economy tries to expand in step with the overall debt.
That is in fact what the empirical data suggests. Any theory in opposition to the usury conjecture must provide an alternative explanation of why the total debt in the world continues to grow exponentially at a much faster rate than population or any measure of growth in the real economy as is show in the following charts.
Figure 1 the Institute of International Finance
Finally, the inherent inequity of this money system is obvious and is becoming ever more extreme year by year. The increasing inequalities in income and wealth are not natural phenomena; they are artifacts of the system architecture and management. Mere policy tweaks cannot correct that. The creation of money as interest-bearing debt by a banking cartel pumps virtually all of the benefits of productivity increases into the hands of the top level bankers and their minions whom we naively trust to operate the system in the interests of the common good.
History is replete with stories of collapse of societies resulting from exponential growth of debts and extreme inequalities among the various classes of the population. I have long argued that since money throughout the world today is based on “loans” made by banks at interest, the exponential growth of debt is required to keep the system going. That is clearly evident in the empirical evidence of debt growth over the past 100 years and especially since 1971 when the last link of money to anything real was severed by President Nixon’s announcement that US dollars would no longer be redeemable for gold.
The global economy is a complex adaptive system, but collapse happens when a system fails to adapt in an effective way. Jubilee or periodic resets have been common throughout history going back before Biblical times. Economist Michael Hudson has had much to say about that in his various writings especially in his latest book, …and forgive them their debts. I have been arguing for “debt triage” and a long term shift of finance away from interest-bearing debt financing and toward shared equity financing but because of the concentration of political power in the hands of the vested interests, and the general lack of understanding and concern about the flaws inherent in the present systems, I see little likelihood that these measures will be implemented soon enough to avoid major economic disruptions and social and political turmoil. That leaves innovative private and community initiatives as the most promising approach to avoiding disaster.
I have taken a functional approach to solving the problems that are inherent in the present global system of money, banking and finance and argued that the supposed functions of money–means of exchange, savings medium, and measure of value, are in fact distinct from one another and must be handled separately. The exchange function which is the essential function of money should be mediated by the use of interest-free short-term credit allocated to producers in proportion to the value of goods and services they are ready, willing and able to sell within the next few months. The savings function and the investment function on the other hand are two sides of the same coin and should be provided for by the temporary assignment of savers’ funds to enterprises that will use them to expand production capacity or develop new capacity. The measure of value function needs to be provided by defining a standard of value and unit of account in terms of some selected commodity or group of commodities.
I have described numerous alternative structures and systems to serve the exchange function, including private, local, and community currencies, and decentralized credit clearing networks of buyers and sellers and have cited numerous historical and current examples. I’ve also described financing arrangements that shift the capital formation function from interest-based debt financing to shared-equity financing that shares both the rewards and the risks of business investment. These are the actions that I am confident have the ability to prevent the disastrous collapse of civilization while enabling the necessary transformation to a peaceful, healthy and regenerative society. All of this has been thoroughly articulated in my books, The End of Money and the Future of Civilization, Money: Understanding and Creating Alternatives to Legal Tender(excerpted here), and in my various articles, presentations, and interviews which can be accessed at https://beyondmoney.net/.
Addendum of Tuesday, June 28, 2022:
One of my correspondents recently asked if the interest that banks charge when they create money by making loans causes inflation. Perhaps this response will help to clarify the picture of our current monetary and economic predicament, and add some precision to my usury conjecture.
First of all let me make clear that, while the money needed to pay the interest on a particular loan is not created when the loan is made, the banks must create sufficient money (by making additional loans) to enable the aggregate money supply to stay ahead of loan principal repayments, otherwise the money supply will contract and cause economic depression (defaults, business failures, unemployment, etc.). Thus, the creation of money by banks on the basis of interest-bearing loans biases the entire system towards deflation (too little money), as I described in my Usury Conjecture document, https://beyondmoney.net/2022/06/03/the-usury-conjecture-on-the-centralized-interest-based-debt-money-system/.
To compensate for that, banks push hard to induce private borrowers (corporations and individuals) to take on additional debt. But there is a limit to their willingness to borrow more and to their ability to repay, therefore the national government steps in to play the role of “borrower of last resort.” From the banks’ perspective that is ideal because when a bank lends to the government (by buying government bonds, notes, or bills) it gets a guaranteed return and takes no risk of default. Politicians are all too willing to go into debt to dole out money to their corporate patrons (especially weapons and drugs makers) who fund their election campaigns, and to curry favor with the voters by throwing a few crumbs their way. The government therefore goes way beyond borrowing the amount needed to keep the money supply sufficiently pumped up to avoid deflation, and thus creates inflation by funding many things that are pure waste from a consumption and environmental standpoint. So, does interest on bank loans cause inflation? No, not directly, but indirectly as I’ve just explained.
As economist Milton Friedman has famously said, “Inflation is always and everywhere a monetary phenomenon,” and on that point, I agree with him. It’s not just the amount of money that causes inflation; it’s the basis upon which the money is issued. Price inflation is mainly caused by money debasement, which is the creation of money on an improper basis. An improper basis is any loan that is not made to enable the sale of goods and services that are readily available in the market in the near term. Thus, improper money creation is based on loans that are made to finance speculation, or to finance long term capital improvements that create consumer goods only in the far distant future, or to purchase debt instruments of the government. None of those put additional goods or services into the market for purchase in the near term; therefore you have “more money chasing the same amount of goods and services,” or money being put into circulation faster than goods and services are being produced.
It is possible for some price inflation to be caused by reductions in supplies, but that is usually limited to particular products. However, in today’s global economy there are various factors that are affecting supplies more generally, so that has become a contributing cause of the inflation that is being experienced at this time.
In Ellen’s October 10 podcast, on which I was the featured guest, I argue that our best hope for escaping the tyranny of the global banking cartel lies in creating a decentralized network of exchange in which credit is locally controlled and allocated based on personal relationships and the productive capacity of community economies (starting at 27:25). This episode begins with a report by David Jette of the California Public Banking Alliance on the landmark public banking legislation that was recently passed into law in California. David describes what this act enables and the long and arduous process of getting it passed.
In this recent interview below, Dr. Paul Craig Roberts describes the “house of cards” that is today’s global regime of money, banking and finance. Since the financial crisis of 2008, the major central banks around the world—the Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan—have all been active in the securities markets, buying huge amounts of government and corporate bonds and shares of private companies, a process that is euphemistically called “quantitative easing.”
As Roberts points out, these actions are being taken to support the big banks. I agree, but it goes much deeper than that. The underlying objective is to preserve the global interest-based debt-money system which requires continual expansion if debt, an inherent systemic flaw which I call the “debt growth imperative.” The result of these market manipulations, of course, has been the inflation of market bubbles in bonds, stocks, and real estate, and the massive transfer of wealth into the hands of a small segment of the population.
Roberts does not mention it, but the recurrent waves of tax cuts for the rich likewise seem to be designed to keep these market bubbles pumped up. The wealthy class, for the most part, does not spend these windfall gains, they invest them in, you guessed it, bonds, stocks and real estate. If tax cuts were to go mainly to the lower and middle classes, what would they do with the money? They would surely spend much of it, which would stimulate consumption of consumer goods and restore the real economy, but much of it would go toward reducing the massive amounts of debt that these people carry and make it unnecessary for them to borrow even more. A system that requires perpetual expansion of debt cannot tolerate that. Now, do you understand?
This video featuring Dr. Paul Craig Roberts is a “must view.” Roberts, who was Assistant Secretary of the Treasury for Economic Policy under Ronald Reagan, explains very clearly how Greece was lured into its present predicament and made a “colony of the EU.”
If the Greek economy is to be rebuilt and some measure of Greek independence restored, ways must be found to create domestic liquidity independent of the global banking system . Domestic currencies might be issued by the national government or by regional governments, or liquidity could be created by private enterprises in the form of private currencies or credit clearing exchanges. I’ve explained in detail how this can be done in my article, 50 Ways to Leave the Euro.
Looking beyond Greece, Roberts speaks about inflation and unemployment and the true state of the U.S. economy, as well as U.S. foreign policy and the causes of the current geopolitical crisis.
The statistics offered by the government and the FED are not to be trusted. We’ve long known that the Consumer Price Index (CPI) is manipulated in ways that are intended to mask the increases in the true cost of living for the average American. The same is true of the unemployment numbers. Amidst all the happy talk of economic recovery, wages (in real terms) continue to decline and debts continue to mount up. Charles Hugh Smith in his recent post, What If We’re in a Depression But Don’t Know It?, provides some eye-opening charts and convincing narrative that makes it plain that economic depression is the current reality for all but the top 5%.
But it’s not only the U.S. that is in trouble, the depression is worldwide. The financial crisis of 2007-2008 was only the beginning of what some call “the great unraveling” There are any number of commentators that provide further arguments on that score, including Thom Hartmann (The Crash of 2016) and Gerald Celente.
But no one besides myself is pointing out the underlying cause of all these problems. It is the monopolization of credit by a banking cartel, in collusion with top government officials, that creates money based on interest-bearing debt, a formula that centralizes power and concentrates wealth in the hands of what Hartmann calls economic royalists.
By their control of the monetary machinery they are able to lavishly fund weapons, war, and the global corporatocracy, while making money scarce for everyone else. Further, this system is not sustainable because the interest burden causes debts to grow continually with the passage of time. Central governments have assumed the role of “borrower of last resort,” to keep the money supply pumped up and the banks from failing. This cancer has metastasized and the end is near. –t.h.g.
This is a question I answered more than a quarter century ago in Part I of my book, Money and Debt: A Solution to the Global Crisis. It is a question that gets scant attention from politicians and economists who are willing to speak only about the need for perpetual economic growth and keeping the government debt at “manageable” levels, never asking why government debt is necessary or how it might be eliminated.
When I first undertook to answer this question, the debt crisis was already well underway and global in scope. Since then the situation has become more critical with debt levels reaching astronomical levels.
What I said in 1990 began with this:
The whole world today seems to be awash in a sea of debt which threatens to drown us all. Many Third World countries, despite their huge increases in production for export, are unable to pay even the interest due on their accumulated indebtedness to Western banks and governments. In the U. S., the levels of both public (government) and private debt are increasing at alarming rates. The Federal budget deficits of recent years far exceed anything thought possible just a decade ago. Why is this happening and why is it a problem? In order to understand that, one must first understand some financial facts of life.
Here are the essential points of my argument:
Almost all of the money in every country is created by commercial banks when they make loans either to the private sector or to governments (by purchasing government bonds, notes, etc.),
Money is extinguished when loan principal is repaid,
The interest that banks charge on these loans causes the amount owed to grow as time passes,
Causing the aggregate amount owed to banks to always exceed the supply of money in circulation,
Requiring that banks make additional loans to keep the supply of money in circulation from falling behind the amounts needed for existing loans to be “serviced” (repayment of part of the principal plus the interest due) in order to avoid a cascade of defaults and economic depression,
And that this “debt imperative” that is built into the global money system is the driver of the economic “growth imperative” that results in superfluous economic output and its attendant depletion of physical resources, despoliation of the environment, increasing disparities in income and wealth distribution, and many other problems that plague modern civilization.
That physical limits to economic output on a finite planet make this money system unsustainable over the long term.
That there are practical limits to the amount of debt that the private sector is able or willing to incur.
That chronic government budget deficits are therefore a political expedient that is necessary to keep this flawed system from collapsing as governments assume the role of “borrower of last resort.”
That politicians are quite willing that governments play this role since it gives them the power to take much more value out of the economy than the revenues available by means of overt taxation.
That bankers, for their part, by monopolizing the allocation of credit in the economy and charging interest on it, are able to enrich themselves and exercise tremendous power over the political process making a sham of democratic government.
The empirical evidence strongly supports my analysis. You only need to look at charts showing the growth of debt over time to see it growing at an accelerating rate (geometrically), a pattern that reflects the compound interest function that is an inherent feature of our global political money system.
Here is another great interview of Dr. Paul Craig Roberts, former Assistant Secretary of the Treasury in the Reagan administration. I think even the interviewer, Greg Hunter had some scales removed from his eyes. Dr. Roberts is one of the few commentators today who see what is really going on and is willing to tell about it.
Beyond Money 