Episode 3

Roadmap for Change



In this episode, we look at the options for how to change to a better system of money creation, to replace the current system. We look at two of the transitions methods and the benefits of each.


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Transcript of the show


Welcome to Money Myths Episode 3 – Roadmap for Change

My name is Brian Leslie and I'm the editor of Sustainable Economics magazine.

Before we get started, I have a few things to mention.

This is part three of the series. If you haven't seen the Series Introduction and parts 1 and 2, I would suggest that you watch them first as we aim to build the series on the basis that viewers have seen the episodes in order.

The other episodes are available through the rss feed or the site that you downloaded this episode from. They are also available through our web site (www.moneymyths.org.uk).

Please visit the site, where you will find information about the series, a list of episodes, links to further information and details of how to contact us to ask questions or make comments.

We very much appreciate getting your feedback and questions, which will be answered in later episodes. We will also be having a ‘Your Questions Answered’ episode at the end of the series and need your questions. On the site you will find our email addresses and a ‘viewer survey’.

There is a "Subscribe to the Series" link, to subscribe via iTunes or Miro to get all the episodes as they become available, as well as full transcripts of each show and any relevant links to other information.

Although we are not aiming to make a profit from this series, we do have expenses that have to be covered. You’ll find a "Donations" button, if you’d like to contribute.

We did have Google advertising in this space to cover the costs of running this site. However, it appears that Google don't like this site. They have closed my Google Adsense account with no proper reason given and banned me from ever having another account with them. All they told me is that it's due to "invalid click activity" and that they have decided that this "account poses a significant risk to our advertisers". Could this be bias on the part of Google or are Google giving in to pressure from the banks?

Although I am referring to the British Banking System for this series, the system in most countries is the same and has a similar history. I leave it up to you to substitute your own Central Bank, Government, Ruler, and so on.

One last thing: this is the last episode for this year, so we would like to take this opportunity to wish all our viewers ‘Seasonal Greetings’. We will be back in the New Year.

So on with part Three:

First, an update: I noted in the last episode that the total National Debt in the UK is now about £650 billion (That is 650 followed by 9 zeros). Since then, the government’s announced efforts to cope with the growing depression are forecast to increase it within a year or two the over £1 trillion! (That is 1 followed by 12 zeros)

As I said in the last episode, three things are needed to resolve the ‘credit crunch’ and cure the system:

1. The Government, ultimately, needs to remove the ability of the banks to create money.

2. There needs to be an independent, publicly accountable body set up to oversee the creation, and possible removal, of money from the system to ensure that there is enough, but not too much, money in circulation.

3. A mechanism is needed to oversee the transition from the current system.

On the first point, it is worth noting that this idea is far from new. For instance: in 1935 a prominent American economist, Irving Fisher, wrote a book called ‘100% Money’.

He ended his conclusion with: ‘If our bankers wish to retain the strictly banking function – loaning – which they can perform better than the Government, they should be ready to give back the strictly monetary function [creation of money] which they cannot perform as well as the Government.’

I outlined in the last episode how the government used to limit banks’ power to expand the money supply, by legally imposing and enforcing a ‘fractional reserve ratio’ on their lending powers, instead of using the ‘base rate’ of interest.

It is worth pointing out here, the fallacy behind the theory that raising interest rates will reduce inflation.

What in fact happens is that, when interest rates are raised, this, at first, deters borrowing, and so slows the economy, as less money is circulating, and desperate sellers cut their margins to boost sales.

This does temporarily ‘reduce inflation’ by lowering prices, at the cost of redundancies, growing unemployment, and failing businesses – which then causes the government to again reduce interest-rates, to boost spending.

Of course, high interest rates always benefit the lenders – the banks and the rich!

Meanwhile, the higher interest charges increase costs, so as soon as they can, firms start to raise their prices as far as they can, to recover their lost income; in other words, in the long run, these higher interest rates have increased inflation, which was not the aim!

This is reason enough to return to the alternative way to restrict banks’ power of money creation, by imposing and adjusting the reserve requirement.

One way to get to the final result of ending this power of the banks to create our money is to keep on raising the reserve required, over a period, while, at the same time compensating for the reducing amount of bank-credit in circulation.

This must be done by the government itself creating money and spending it into circulation as the banks’ reserve is raised, until the banks can no longer create any money, and so can only lend money already in existence.

Doing it this way could give time for adjustments to be made, and for developing new ways of determining just how much money is needed in the country.

The task of deciding how much money is needed should be given to an independent, publicly accountable body, set up to oversee the creation and possible removal of money from the system to ensure that there is enough but not too much money in circulation.

This body could be a reconstituted ‘Monetary Policy Committee’ of the Bank of England.

These changes would provide a transition mechanism for the period during which the money supply was transformed from being nearly all bank-debt based, to being entirely State-issued, debt-free.

The length of transition could be quite long, to allow adjustments to be worked out.

This is, in essence, the proposal advocated in a much-acclaimed book, The Grip of Death, by Michael Rowbotham, published in 1998.

However, the threats of ‘peak oil’ and climate change need urgent transformation of how the economy works, and so I favour an alternative.

This alternative proposal has been worked out in a booklet called ‘Creating New Money’, a .pdf of which will be found on the Money Myths web site under ‘Related Links’ or by a Google search.

It proposes that as from a set date, the banks would no longer be allowed to create new money. They would only be allowed to lend money that they currently hold in ‘savings accounts’ or from their own capital, or borrowed by them from other sources, including the central bank – the Bank of England.

When loans, made before the changeover date are repaid to the banks, the principal of the loans is cancelled out of existence (as already happens now). This removes the money from circulation.

To maintain the total amount of money in circulation, new money would then be created by the Central Bank for the government to spend into circulation.

All loans made after the date of the change would be from existing money, and so this money would not be cancelled out of existence when repaid.

This is explained further in my booklet, ‘Where’s the money to come from??’, which is available through the rss feed or from the Money Myths web site.

From this time on, it would be entirely by government creation-and-spending into the economy that new money would enter circulation.

This would give the government the opportunity to direct its spending where it is needed most: on renewable energy, organic farming, insulation of buildings, and so on, as well as compensation to the real victims of the ‘credit crunch’ – the general public, not the bank-shareholders!

Whichever method is adopted, the money the government creates would replace its ‘borrowing requirement’ in its annual budget, and cut the interest burden it imposes on taxpayers.

This ‘borrowing requirement’ is currently funded by sale of interest-bearing ‘bonds’ to banks and individuals.

There are many important things to be paid for from the budget. One major expense is the buying back of the bonds as they mature. What happens, at the present time, is that they are replaced by the issuing and selling of more bonds! In other words, more borrowing.

If instead they are bought back with new money of the government’s own creation, it would steadily reduce the outstanding ‘National Debt’, and so, the heavy interest burden it carries.

With this reform in place, as the outstanding loans are paid off, the money cancelled in this way will be replaced by government spending.

As this money enters circulation without creating debt, eventually there will be enough ‘debt-free’ money circulating. As much less debt will remain there will be much less need to borrow. People will in general be much more prosperous.

Ultimately, the Government will have to stop creating any more money until or unless things changed in such a way that society came to need more. Alternatively, if the need dropped, some would have to be withdrawn and cancelled out of existence.

Taxation would again become the main source of government revenue; but with the greater prosperity, it should be easily afforded.

However, the nature of taxation should change, for fairness, and for ecological and social stability.

This will be the subject of a later episode.

As noted already, along with the growing levels of debt, the current system of money creation causes several other problems, which I will now discuss:

First: A system that depends for its money supply on the willingness of individuals, governments or business to borrow doesn’t ensure that the money supply is matched to society’s needs. It also results in a cycle of booms and busts, as already noted.

When banks are confident that the economy is growing, they are happy to lend freely – until they get worried about the security of their loans. They then start calling them in, and refusing further loans. This is happening now. This starts a vicious circle: contraction of the money supply, causing business failures and unemployment, which then makes still less money available for purchases, causing more business failures, and so on.

In the past, something eventually reversed this process. In the 1930s, it was massive government spending, of money borrowed from banks, for the ‘New Deal’ in America and rearmament in Britain and Germany. With the less serious ‘slumps’ since, lowering of interest-rates has been used to make borrowing a more attractive idea.

Now, with the unprecedented growth of debts, this ‘solution’ can no longer work.

Second: Since banks can decide who they will lend to, and for what purpose, they have enormous power over both the economy and society.

Their decisions are based on their need for reliable repayment of the loans and interest, or the value of the collateral they can claim in the event of default. They do not worry about what is good for society. This makes lending for arms production much more attractive than for renewable energy, for example.

Third: Ever-growing levels of debt are the driving force for everlasting ‘economic growth’.

It is the reason for the policy since WW2, of ‘planned obsolescence’. The policy is to make goods that are deliberately short-lived. They are designed to fail or become ‘old-fashioned’, unrepairable or need overpriced major parts. In this way ‘economic growth’ could go on despite needs already being met. Otherwise the ‘money supply’ would collapse.

In order to achieve this continued growth manufacturers supply us with items that we don’t need, and ‘make’ us want them through extensive advertising campaigns. This is also grossly wasteful of resources, human and material, and gives rise to growing problems of disposal and pollution.

Fourth: It is a major cause of warfare!

In 1975 a top-secret US National Security Council document from 1950, NSC-68, was released and published in error.

It revealed that the purpose of military expansion was to reverse the economic slide that began with the end of World War Two. US GNP had declined by 20% and unemployment had risen from 700,000 to 4.7 million. Its exports were inadequate to ‘sustain the economy’, and ‘defence grants’ for the remilitarisation of Western Europe would generate exports into Europe.

As NSC-68 put it, ‘the United States and other free nations will within a period of a few years at most experience a decline in economic activity of serious proportions unless more positive governmental programs are developed.’

When, in 1950, the USA found itself with fast-rising unemployment despite the effects of the ‘Marshall Plan’ boosting exports to Europe during the post-war period, the Truman administration secretly chose to promote the ‘Communist Threat’ to justify its own escalation of military spending.

Instead of expansion of the military, it could have spent more on domestic needs: health, education, and infrastructure, etc. But this would not have been politically acceptable! Increasing taxes to pay the interest on this government borrowing would not have been acceptable.

However, when a population feels threatened it will accept increased spending on the military and the resulting tax rises.

Dependence on arms as export goods is a major factor in all modern wars.

Now, the ‘Communist Threat’ is replaced by the ‘War on Terror’!

Fifth: The debt-based money system causes inflation.

It raises the cost of everything! By increasing the supply of money it directly causes this. Also it has been estimated that, on average, almost half the price of everything is due to the hidden interest charges.

Sixth: As well as drawing money from the producers of wealth to the pockets of the wealthy gamblers, the foreign exchange speculation market, based on bank-created ‘credit’, seriously distorts the exchange rates.

This now involves over twenty times the amount of money used in the international trade in goods and services. This is part of the reason for the serious growth of ‘third world’ debt.

I will look at this further in another episode.

In the next episode I will be answering some of the questions that have been asked so far.

There is still time to submit any questions you might have by visiting the web site, where you’ll find the email address, on the contacts page.

We will not be producing the next episode until early 2009.

Over the holiday period I’ll be putting out an extra episode that is a talk I recorded for the American Monetary Institute conference in 2007. Although it is not part of this series, I think that you may find it interesting.

But, for now, I will leave you with this quote:

"There is nothing more difficult to execute, nor more dubious of success, nor more dangerous to administer, than to introduce a new order of things; for he who introduces it has all those who profit from the old order as his enemies, and he has only lukewarm allies in all those who might profit from the new. This lukewarmness partly stems from fear of their adversaries,.. and partly from the skepticism of men, who do not truly believe in new things unless they have actually had personal experience of them."

Machiavelli, The Prince, 1532.







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