Revolution or Evolution?

Clive Menzies, who’s been involved in the investment management industry for over 30 years, argues that monetary reform is inevitable if we want to survive.

The Corporation of London may be quaffing champagne having evicted OccupyLSX, but they, and the rest of the 1%, need to recognise the growing threat of revolution rolling across the globe.

Jared Diamond’s ‘Collapse’ shows past civilisations that collapsed were ruled by rarified elites which adopted selfish, short term policies for their own ends. Meanwhile their people suffered hardship, famine, and repression. Sound familiar?

We all need to understand the fundamental root cause of economic turmoil and other global problems – a key part of which is the global banking and monetary system. Its increasing dysfunction is provoking growing civil unrest, but a concerted effort to radically reform money and banking could avoid revolution and consequent bloodshed.

THE MECHANICS OF THE GLOBAL BANKING AND MONETARY SYSTEM

Fractional reserve lending allows banks to generate exceptional returns on capital by lending many times their reserves. In addition, loans are spent and paid into the closed loop banking system as customer deposits. These deposits are reduced by the reserve fraction but are then added to the reserves against which even more money is lent. The mechanics of this process are comprehensively addressed in Murray N Rothbard’s ‘Mystery of Banking’ and the 45 minute video, ‘Money as Debt’.

Central banks are managed for the benefit of banks – which are privately owned and controlled by narrow interests. For example, the US Federal Reserve Board (Fed) is owned by banks and so government appointees to the Fed are typically bankers or their proxies. This model is replicated across the globe and, although the Bank of England was nationalised in 1946, it remains firmly under banking control and influence. That bankers have control of the money supply, and our economic system, grants banking interests influence in politics, media and public institutions.

In the corporate world, discovering ‘who owns what’ is difficult because ownership is obscured by nominee holdings and trusts. However, a recent study in New Scientist analysed over 40,000 transnational corporations and discovered that 40% of their economic activity is controlled by 147 ‘super entities’ on the basis of publicly available information. 45 of the top 50 are financial companies, many of which are banks. In his book, ‘Treasure Islands’, Nicholas Shaxson describes how tax havens are exploited to hide ownership and add to banks’ wealth and power.

CONSEQUENCES OF THE GLOBAL, DEBT-BASED, MONETARY SYSTEM

The dire consequences of the banking and monetary system become clear as debt accelerates beyond the ability to pay. Margrit Kennedy identified major flaws back in 1995 in ‘Interest and Inflation Free Money’ and discovered, during the period from 1968 to 1989 while government income and wages in Germany rose ‘only’ 400%, the interest paid by the government rose 1360%.

Everyone pays for interest – even if they haven’t borrowed any money. Kennedy analysed German data from over 20 years ago and found 50% of prices paid, on average, for goods and services went to pay off interest and compound interest. She also found that this monetary system automatically transfers wealth from those with too little money to those who have more than enough. The poorest 80% of the population paid far more in interest than they received in government services, and what they paid went to the top 10% of society – with the top 0.01% getting the lion’s share.

GROWING MARKETS, GROWING DEBT

The overriding obsession of politicians and commentators in the West is a return to economic growth – however, few of them understand the consequences of such growth. GDP growth of 3% per annum is considered desirable for developed economies. This is exponential growth – at 3%, our economy would have to double every 24 years which means cutting down twice as many trees, extracting finite resources at double the rate today and throwing twice as much away. Clearly this is unsustainable.

In nature, animals and plants enjoy rapid initial growth until maturity but then growth becomes qualitative. A child grows rapidly to around the age of 20, when physical growth ceases and intellect, wisdom and experience develop thereafter. Exponential growth in nature is otherwise evident in viruses and disease such as cancer. Our debt-based monetary and banking system is the cancer at the heart of our civilisation – manifesting itself in greed, inequality, conflict, suppression of individual freedom, fear and poverty. The current debt spiral is out of control and collapse of the economic system is imminent, threatening to take our civilisation with it.

As debt is money, the money supply also expands exponentially, albeit with occasional credit squeezes which precipitate recession or depression – we’ve got that in the pipeline, but on a much wider and deeper scale than the great depression of 1929. Expansion of the money supply beyond that required for trade, investment and consumption, is inflationary. Double the money supply and over time, irrespective of other factors, the price of goods and services will double. And of course, the hardest hit by inflation are invariably the poor.

So we face conflicting choices. Either we reduce debt, to avoid being punished by the markets and to lower interest costs, or we increase debt to bail-out weaker countries which threaten the economic stability of the rest. We could also issue more debt on top of this to stimulate growth. However as is becoming increasingly obvious the debt is already unaffordable – and will become more so as interest rates rise.

THE ROAD TO EVOLUTION

If there is no salvation within the current monetary and economic paradigm, how can societal breakdown and revolution be avoided? We clearly need an alternative, interest free monetary system. We must abandon all our preconceptions and think from first principles. What is money? It is a convenient medium of exchange which provides many advantages over barter. Money in itself has no value. It should be a representation of the value of goods and services between parties to a transaction. Holding money should not benefit those who have a surplus unless it is spent productively in the economy. Interest free money will ensure this and avoid exploitation by banking interests.

We urgently need a national monetary authority to issue and regulate the money supply, independent of banks and democratically accountable, but not to the government of the day – too much temptation to inflate the money supply to achieve a ‘feel good’ factor in advance of an election. Only sufficient money would be created to service the real economy. Shortages would be rectified by addition to the money supply, surpluses removed by way of taxation.

I won’t pretend the transition to interest and inflation free money would be simple or painless, but in time it would rectify many problems. And yes, I mean total abolition of interest – because interest will always allow those with more money than they need to exploit those who don’t have enough. Money created on behalf of the government would be spent into existence, creating value.  Interest would not be payable nor would the money need to be repaid.  For example, to fund the construction of a bridge, the money would be created which would go to the workers and suppliers and then flow around the economy.

With the abolition of the two fundamental flaws of fractional reserve banking and interest, an honest monetary system could be created where money reverts to its proper purpose, a medium of exchange. It would have no inherent value in and of itself but would be spent into existence to create infrastructure, provision of public services and private sector economic activity. By adopting radical monetary reform we can evolve into a fairer, freer, happier world fit for all – including those currently quaffing champagne.

Clive Menzies has run banking and finance workshops at TCU and the Bank of Ideas.