Revolution or Evolution?

Posted 19th November 2011

We stand at an inflection point in history and western civilisation faces a critical choice: Revolution or Evolution.

Jared Diamond’s “Collapse” analyses factors which caused civilisations to collapse in the past.  The factors are relatively few (environmental challenges, external threats or loss of a supporting neighbour, internal disintegration etc.) but what distinguished civilisations which collapsed from those which survived, was the reaction to these threats.  Universally, those that collapsed were led by an elite which became increasingly remote from the majority and instituted selfish, short term policies to protect themselves from the perceived threats.  Meanwhile the populace suffered hardship, famine, and increased suppression.  Sound familiar? Recent, less acute examples, are the French, Russian Revolutions and the rise of China’s communist party (Stalin’s headcount of victims was some 30 million and Mao Tse Tung’s 35 million).

This is what we’re heading for and whether or not you are a short term beneficiary of the current economic system, it would be wise to understand the fundamental root cause of economic turmoil and other global problems.  The global banking and monetary system is fundamentally flawed and its increasing dysfunction is provoking dissent.  Wider understanding and concerted effort to address the fundamental cause of our ills could avoid revolution and the consequent bloodshed.

The mechanics of the global banking and monetary system

Fractional reserve banking and central banks (under the control or influence of private banks) underpin our debt based, monetary system.

Fractional reserve lending allows banks to generate exceptional returns on capital by being able to lend multiples of their reserves.  In addition, loans generated are 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 further multiples can be loaned. Fractional reserve lending inflates the money supply many times over.  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, in the main, owned by banks which in turn are privately owned and controlled by narrow banking interests.  Understanding who owns what is relatively difficult and the ownership trail is obscured by nominee holdings and trusts.  However, a recent study in NewScientist analysed over 40,000 Trans-National Corporations and discovered that 40% of their economic activity is controlled by 147 “super entities” on the basis of publicly available information.  The study didn’t seek to establish ultimate ownership of these because of the opacity of their listed share ownership.  Featured in the top 20 of these super entities are Barclays Bank, JP Morgan Chase and Goldman Sachs.  In terms of central bank control, the Federal Reserve Board is made up of representatives of the twelve regional Federal Reserve Banks (which are privately owned) and government appointees.  In so far as the Fed is owned by the banks, they exercise control over monetary policy and banking regulation.  The government appointees are typically alumni of the major banks or are so steeped in conventional economic thinking (as framed by banking interests) as to ensure that banks monopoly to issue and control the money supply is sustained.  In addition, the banks are regulating themselves.  This model is replicated across the globe and although the Bank of England was nationalised in 1946 it remains under banking control and influence (not least through an inability to challenge banks’ supremacy).

So by virtue of fractional reserve lending and their control of the central banks, banking interests control the economic system and consequently, everything else.  Their influence is dominant in politics, the media and public institutions not least because independent participants have little understanding of where ultimate power lies. As Amschel Rothschild said in 1838: ”Let me issue and control a Nation’s money and I care not who makes its laws”.

Consequences of the global, debt based, monetary system

The consequences of the banking and monetary system increasingly manifest themselves as the level of debt accelerates and are plain to see today. Even so Margrit Kennedy identified the major flaws back in 1995 in “Interest and Inflation Free Money“.  Her work was based on analysis of German data in the period before it was published.  It is evident that the problems she identified are even more acute today, as debt based finance has become more widespread, and worse in the Anglo Saxon economies which were characterised by greater inequality to start with.

She found around 50% of prices paid, on average, for goods and services was interest.  Furthermore, over the period from 1968 to 1989 while government income and wages rose “only” 400%, the interest payments of the government rose by 1,360%. A clear indication that the debt accelerates beyond the ability to pay.

The most damning of her findings was the way in which the system automatically transfers wealth from those with less money than they need to those who have more than they need.  It is built in to the monetary and banking system.  She found that in Germany (remember this is 20 years ago and Germany was much less unequal than the US or UK) the bottom 80% (by wealth) of the population paid more interest than they received and most of what they paid went to the top 10%.  The top 0.01% received 2000 times the top 10% on average.

But what of all the other consequences of this iniquitous system?

The overriding obsession of politicians and commentators in the West is a return to economic growth.  However, there is an absence of understanding of the consequences of economic growth.  Conventional wisdom accepts that 3% per annum growth in GDP is a sensible and desirable rate for developed economies.  In one’s mind this is visualised as linear growth but it is, in fact, exponential growth.  At this rate, 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.

Natural growth is characterised by rapid initial physical growth until maturity and 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 evident in viruses and disease such as cancer.  Our debt based monetary and banking system is the cancer at the heart of our civilisation.

This cancer manifests itself in greed, inequality, conflict, suppression of individual freedom, fear and poverty.  In the natural world once cancer enters the final incurable stage the result is inevitable, the host dies.  The current debt spiral is out of control and collapse of the economic system 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 which is what is in prospect today 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.  This is theft and adversely affects those at the bottom of the wealth scale more than anyone else.

The current economic paradoxes facing policy makers:

Reduce debt to avoid being punished by the markets and to lower interest costs

Increase debt to bailout weaker countries which threaten the economic stability of the rest

Restore economic growth but real jobs have been exported to low wage economies, robbing the system of consumers who are already in debt.

Issue more debt to stimulate growth but 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 need an alternative interest free monetary system.  We need to abandon all our preconceptions of money framed in the context of our experience since birth and centuries before and think from first principles. What is money? It is a convenient medium of exchange which provides many advantages over barter.  Money, of itself has no value.  It is (or should be) a representation of the value of goods and services between parties to a transaction. Unlike in our current system, the holding of money should not confer advantage upon those who have more money than they need unless it is spent productively in the economy.  An interest free currency will satisfy this requirement and avoid monetary manipulation by banking interests.

There are three principles to establish:

1. 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.

2. Abolition of fractional reserve banking to eliminate bank control over the money supply and consequent inflation.

3. Prohibition of interest (which rewards those with more money than they need and penalises those with less) – any relaxation of this principle will result in “mission creep” and over time the world will be back to where we are today.

Based on these principles an honest monetary system would be created where money reverts to its proper purpose, a medium of exchange. It should have no inherent value of itself but would only have value in use to create infrastructure, private sector economic activity and provision of public services.

Too many solutions being put forward are prescriptive on detail without establishing fundamental principles in the mistaken belief that achieving one or two out of the three above would set us on the road to a better solution. However, banking interests, historically, have been vary adept at subverting the best of intentions.

Step 1. Create awareness of the two fundamental flaws in our monetary system, namely 1. banking control over economic activity and everything which flows from it (central banks and fractional reserve lending are the culprits) and 2. Interest on money

Step 2. Establish and agree the three principles above

Step 3. Design and implement a new monetary system while accommodating the transition

Any attempt at half fixes will merely perpetuate the status quo until the system breaks. If we adopt radical monetary reform, we may end up with a system fit for millennia and evolve into a new age.



7 thoughts on “Revolution or Evolution?”

  1. Nice article Clive, the closest we have to a solution is Positive Money’s reform draft legislation. Its pragmatic, and well thought out but they don’t tackle the interest problem. Is this much mission creep unacceptable?

  2. Natasha, in my opinion yes. Banking interests have subverted all attempts in the past to curtail their power. Their origins are in money lending at interest, long before paper money and fractional reserve banking. As soon as interest is charged, hoarding money becomes profitable because money obtains a value in its own right.

    The principles outlined above are to establish money as a medium of exchange to create value. If holding money costs, it will be deployed in the economy. Interest free currencies circulate much faster whereas interest gives advantage to those who hoard money and restricts the flow of money for real economic activity. All the flow is from those who have too little to those who have more than enough.

    The need to act quickly tempts us to regard partial reform as better than nothing. However, irrespective of who’s in power, reform which threatens the banks’ position will fail. Politics, the media and public institutions are firmly under banking interests’ control.

    People need to understand that our politics, like our banking and monetary system are broken. If enough people understand the fundamental fraud of fractional reserve banking and the iniquities of interest, the will of the people will prevail and a better, fairer world become possible. An interest free monetary system, independent of banking control will liberate politics.

  3. I could be wrong. I thuoght the revolution started already, i.e. Ireland, Iceland, Arab spring, Greek, Spain, UK, TEA parties, and OWS. It is the process of democracy echos support not the violence. Remember the movie “National Treasure” If there is one thing I learn from the movie is this – “Government should be setup so no man should be afraid of another.” It is no longer true in many countries. Isn’t it? Just look at how protesters are treated. Since when guardians become dictators?! My 2 cents. JW, Vancouver.

  4. Milon, I would agree these are early signs of growing unrest but revolution? The uprisings in Tunisia and Egypt achieved some sort of transition but neither has yet to undergo a real change of rule. If the economic system collapses and food shortages spread, then real revolution becomes much more likely and as in the uprisings, the establishment will use all means to suppress rebellion. We have seen already the peaceful occupations being attacked without provocation.

  5. “The need to act quickly tempts us to regard partial reform as better than nothing. However, irrespective of who’s in power, reform which threatens the banks’ position will fail. Politics, the media and public institutions are firmly under banking interests’ control.

    People need to understand that our politics, like our banking and monetary system are broken. If enough people understand the fundamental fraud of fractional reserve banking and the iniquities of interest, the will of the people will prevail and a better, fairer world become possible. An interest free monetary system, independent of banking control will liberate politics.”

    Clive, these two paragraphs seem to contradict each other. Or do you mean that letting the banks continue creating credit but not charge interest will not provoke their full wrath?

  6. Janos, yes they do appear contradictory and require amplification. Partial reform through the current political system is unlikely to achieve much because of the banks’ domination of politics. However, if enough people understand where the power lies and the fundamental flaws in the banking system, then there may be the opportunity to change the politics leading to radical reform.

  7. “…if enough people understand…” yes, this is a necessary achievement but not sufficient. It is from understanding in sufficient and essential detail that solutions can become self evident.

    The basic problem is that there is no “proper money”, i.e. a circulating fund of currency, in the system, so people *have to borrow*. There is no scope for a fair contract between borrower and lender.
    A fair contract would be in the context of, for example, ” I am doing all right but want to start a business. I can save up and start my business in five years time, or I can borrow money now and get going straight away.

    Incidentally, the beauty of credit money (and here I may let in a contradiction) is that we do not divert existing money from its current course, but create something that acts as money without incurring any real costs–not even ink and paper–so any interest going into private pockets is just an unjustifiable tax on the borrower.

    My contention is that in the case of credit-money, created by private banks, interest is the “insult added to injury” and a red herring that diverts attention from the real fraud:

    Both Banks and De La Rue Plc issue something that works as money.
    But only banks are allowed to own what they create out of nothing. Banks have no legal claim to own the credit they issue because it is new—not someone else’s—money.

    The real question is who does, or should, own the credit created? In the case of Sterling Notes the Government owns the freshly printed notes not De La Rue Plc.
    The 1844 Banking Act should be extended to outlaw the Banks’ claim to own the credit-money and give right of legal ownership either to the borrower—in return for some minimal administration charge—or to an independent monetary authority.

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