Unsustainability of Debt-Based Money

Introduction

As discussed in chapters 1 and 2, most money nowadays is fiat, and is not sufficiently robust against inflationary political pressures to provide a solid basis for the world economy. However, there is another important reason why the current system is coming to the end of its usefulness, due to a fundamental flaw in the money systems used in most countries today, which has been introduced by stealth over the last few centuries. In the history of paper money discussed above, a major role was played by banks, which are the descendants of the “money-lenders” of an earlier era. As well understood nowadays, though not at the time, a major feature of money-lenders’ business was systematic fraud, nowadays euphemized as “fractional reserve banking”, which enables banks to literally create money – formerly the exclusive preserve of governments. This has grown and spread to the extent that nowadays nearly all money is created not by governments for the benefit of the public, as was done through most of history, but by banks as interest-bearing debts to themselves.

3.1 Money Creation By Private Banks

Part of traditional money-lenders’ business was to store customers’ gold and provide them with signed notes stating how much gold they possessed, which were more convenient for making business payments than carrying physical gold. They also lent their gold to other customers, by lending them similar notes to use for payments, charging them a rate of interest. In doing this, gold merchants learned that they could use the same gold to back several times as much in paper notes as they actually possessed in gold – thereby earning several times more in interest payments – provided that they could always repay any customer who wanted to take their gold back. At a time when well-run farms and other businesses could grow their output by 2-3% per year, bankers could earn about 10 times this on their capital, perhaps 30% per year. This led to the unjust and socially destructive enrichment of financiers over productive industries which has continued over the centuries to the present day.

This theft of the wealth of the population was not widely understood by its victims – nor by anyone else. A famous phrase describing this process of stealing a tiny amount from everyone is “Death by a thousand cuts”: each little cut is insufficiently important for people to take steps to counteract, but if allowed to continue they cumulatively become fatal to the successful functioning of the economy, whereby those who work productively should become rich, not those who dishonestly manipulate the money supply. This would be equivalent to a situation in a large company in which the accountants write fraudulent accounts that make the accounting department ever richer, while all other employees’ salaries decline.

An early example of the popular discontent caused by the injustice of unbridled money-lending fraud was the preparation in 1215 of the historic British treaty known as “Magna Carta”. Although the historic document, which the local rulers in Britain forced then King John to sign, covered many issues, two of its clauses were to the effect that a debt to a money-lender must not continue to burden a debtor’s widow or their children after the debtor’s death.

Today, the profit that a bank earns by creating a “bank deposit” when it authorises a new loan to a customer is similar to earlier money-lenders’ practice of lending several times more paper money than they had gold, which enabled them to enrich themselves at the expense of the communities and markets within which they operated. Nowadays this practice by banks is dignified with the name “fractional reserve banking”, which enables banks to receive the profits from creating money “out of thin air”.