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.