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| '''Debt-based monetary system''' is a political term used by critics of the Federal Reserve, based upon ], such as that of the ]. The term is not in use among economists. | |||
| ==An Explanation of the Term== | |||
| This form of money is called "debt-based" because as a ''condition of its creation'' it must be paid back at some time in the future.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> | |||
| The term implies that the ] and its member banks steal wealth from the public through printing money which is then loaned to the public at interest. Often, this belief is integrated with the ] conspiracy theory to claim that international bankers as a whole are committing massive fraud. The term is based largely upon the ] of the ]. Some invoke the ]<ref>{{cite book |last= Rothbard |first= Murray |title= What Has Government Done to Our Money? | year= 1980 | url=http://www.mises.org/money.asp}}</ref> to argue that the business cycle is caused by artificial government expansions and contractions of the money supply. <ref>{{cite web | last =Grignon | first =Paul | title =Money as Debt | url=http://video.google.com/videoplay?docid=-9050474362583451279 | accessdate = December 29, 2007}}</ref> The usage of the word "debt" may be misleading, as the term is used to describe an overall loss in public wealth stemming from over-expansion of the money supply (see ]). This is distinguished from all forms of ], including ]. | |||
| Although ] is a form of ] (because it is not backed by a real asset such as ] or ]), it can be distinguished from "true" ] in that it is intrinsically "temporary" money, requiring its eventual repayment as a condition of its creation.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> | |||
| ==Conventional economic analysis== | |||
| Conventional economic analysis does not generally use the terminology "debt-based money." The link between the currency regime (for example, fiat currency or precious-metal backed currencies) and the banking regime (fractional reserve or full reserve banking) is not seen as fixed, however (virtually all banking systems worldwide operate on some form of fractional reserve banking).{{Fact|date=December 2007}} Neither is the insight that banks "create money by extending loans" considered new, and the subject is covered in most introductory economics textbooks and many popular reference works.<ref>See, for example, "The key thing to recognize is that banks create money by extending loans."</ref> | |||
| Banks will also hold "reserves" (cash or other liquid assets) to meet the demands of depositors on their own, in some fraction of total depositors, to avoid potentially damaging liquidity shortages, ]s or even ultimately bankruptcy.{{Fact|date=December 2007}} Government regulation of minimum reserve amounts is, in this sense, a form of consumer (depositor) protection.{{Fact|date=December 2007}} | |||
| Traditional economics sees fractional reserve banking as a mechanism for ''transmission'' of monetary policy: reserves and other limits upon the banking sector's ability to "create money" are usually controlled by the government or central bank.{{Fact|date=December 2007}} According to this approach, the monetary authorities use the pricing mechanism (via various monetary policy instruments) to adjust the quantity of money in circulation and protect depositors and the integrity of the financial system.{{Fact|date=December 2007}} The use of these tools is adjusted according to the nature of the banking system's propensity to create money by lending.{{Fact|date=December 2007}} | |||
| The weaknesses of the nature of fiat currency (and the capacity of the banking system to create money) and the relationship to the business cycle (including booms, busts and credit cycles) are widely recognized.{{Fact|date=December 2007}} In particular, the possibility that governments or central banks will create too much money (either directly or through the banking system) is a frequent topic of academic, economic and political commentary.{{Fact|date=December 2007}} Conventional economic analysis differs primarily in that it does not hold that the more extreme predictions of certain monetary reformers (regarding, for example, the inevitability of "debasement of the currency" or periodic crises) are necessarily true; they do not, however, exclude the possibility of such events due to exogenous events or poor management of monetary, fiscal and financial policy.{{Fact|date=December 2007}} The negative effects of inflation are also frequently and widely addressed in conventional macroeconomic and monetary analysis.{{Fact|date=December 2007}} | |||
| According to this (conventional) analysis, "debt-based money" is a heterodox economic theory that, although it may differ little in analysis of the basic structure, is largely irrelevant, and the main issues are addressed in various schools of economic thought.{{Fact|date=December 2007}} Economists generally address the issue of choice of monetary regime (such as fiat currency) and banking policy as entirely separate issues, since fractional reserve banking dominates most economic systems; the level of banking reserves and other regulatory measures are simply ''instruments'' of monetary policy.{{Fact|date=December 2007}} Differences in terminology (debt money, for example) do not represent, from the "mainstream" perspective, new analysis, and the more extreme conclusions about the "inevitable" negative impacts of so-called debt-based money and "fraud" perpetrated by banking circles upon the public are considered akin to ].{{Fact|date=December 2007}} The subject of debt-based money (as distinct from traditional monetary policy) is absent from reputable academic economic publications, and is largely relegated to fringe status.{{Fact|date=December 2007}} | |||
| It should be noted that various other schools of monetary thought (including other "monetarists" such as the ]) do not necessarily ascribe to, for example, the conclusion that full-reserve banking is an issue; some explicitly advocate for "free banking" (with no required reserves at all).{{Fact|date=December 2007}} Some have referred to the concept of monetary policy with full-reserve banking as "nonsense" (that is, a contradiction in terms).{{Fact|date=December 2007}} More detailed analyses argue that full-reserve banking would impose similar costs of price adjustments in reaction to growth (through a ''reduction'' in the overall price level) as would inflation, and hence offer no inherent advantages over fiat currencies and fractional reserve banking.{{Fact|date=December 2007}} | |||
| ==Basic debate== | |||
| The debt-based monetary system is a departure from traditional monetary systems, which were backed by gold deposits or the ], or other precious metals. Because of this departure, it is the subject of continuing political and economic debate.<ref>{{cite book |last= Cox |first= Jim |title= The Concise Guide to Economics |url= http://www.conciseguidetoeconomics.com/ |edition= 2nd edition |origdate= 1995 |accessdate= 2007-12-15 |year= 1997 |publisher= Savannah-Pikeville Press |isbn= 1-57087-292-9 |chapter= The Gold Standard |chapterurl= http://www.conciseguidetoeconomics.com/book/goldStandard/ }}</ref> <ref></ref> | |||
| Some argue that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> | |||
| Others argue that there is in fact no mathematical necessity for the money supply in a debt-based system to grow, since the interest portion of loan payments is not taken out of circulation, but goes into the lender’s account, where it can be spent back into circulation and eventually be used to pay off some loan principal.{{Fact|date=December 2007}} Given that the total debt-based money supply is exactly equal to the total principal outstanding on all loans, there is always enough money in circulation to meet loan payments for the current ] period, except for the case of nearly all loans in existence coming due at the same time, with no other outstanding loans large enough to cover the interest portions of the final payments (generally a tiny fraction of the final payment).{{Fact|date=December 2007}} These monetary economists argue that the money supply could (at least theoretically) be stable and yet not cause widespread insolvency in the broader economy. This would however require the delicate balancing of the maturing of some loans with the issuance of new debt to compensate for the diminution in the ] caused by the repayment of those maturing loans.{{Fact|date=December 2007}} | |||
| ==Basic nature of system== | |||
| {{Citecheck|date=December 2007}}{{peacock}} | |||
| Regardless whether there is a necessity for the ] to grow ]ly in a debt-based system, it is not seriously disputed that when a bank loan is repaid, the money is extinguished, in a reverse process by which the money was originally created, “Money is created when loans are issued and debts incurred, money is extinguished when loans are repaid” ''John B. Henderson, Senior Specialist in Price Economics, Congressional Research Service of the Library of Congress''. | |||
| On January 24, 1939, ''Robert H. Hemphill, Credit Manager of the Federal Reserve in Atlanta'' stated: | |||
| "We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit.' If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. is the most important subject intelligent persons can investigate and reflect upon.”<ref>{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 |pages= 5 }}</ref> | |||
| The economic, environmental and social effects arising from a ]'s concessional granting of the legal power to create ] through ] techniques to the ]s of the world has been subject to much heated political debate for well over two centuries.<ref>{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref> <ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> <ref></ref> | |||
| In contrast to ], "true" ] is issued by the ] debt-free as no requirement for its eventual return is made as a condition of its creation. ] (such as notes and coins) can circulate perpetually in the economy as "stable" or even ] (if backed by ] or ]) and although not as stable as ], government-issued notes and coins do not have the same effects of debt-based money described below.<ref></ref> It should be noted however that ] can be a source of ] if its production is not controlled, as the government has the potential to issue unlimited amounts of fiat currency - ''provided'' it is accepted as "money" by the ]ing system (which may or may not occur depending on the political relationship at the time between the ] and the ]ing system). It should also be noted that due to the ] of debt-based money, "true" ] (notes and coins in circulation) now account for a tiny fraction of the total M3 ] in all developed, debt-based ] economies (M0 generally being less than 10% of the total M2 ] in most developed economies).<ref></ref> <ref></ref> | |||
| Similarly, ], ] and other ] have in the past been used as a form of debt-free ] and their introduction into the economy is not debt-based as no future repayment is required as a condition of their introduction into the ]. Because of the difficulty in increasing the supply of ] quickly, some ]ers believe a return to the ], or a similar system of "hard" or "real" asset-backed currency, is the only way to stabilize the growth of the money supply. These ]ers often refer to the ] as "sound money" or "honest money". | |||
| ==Economic and political criticisms== | |||
| {{limited}}{{lopsided}}{{Citecheck|date=December 2007}} | |||
| Some believe that "if unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny".<ref>], Paper Money and Tyranny, Speech in U.S. House of Representative, September 5, 2003]</ref> | |||
| Some economists (particularly the ]) and political commentators (particularly ] thinkers such as ]) believe that a debt-based monetary system amounts to a subtle form of monetary "]" in that it creates real money (and therefore real wealth) "out of nothing" through the use of ] techniques.<ref></ref> | |||
| Some ]ers (such as ] and ) also argue that this system of ] is perverse and inherently "anti-]", and inevitably creates an inflationary ] bias in the economy which causes gross ] and is unnecessary, ]ally damaging and unstable. They argue that the already indebted are forced to induce new ] to spend and go into debt so that existing loans can be repaid with this new debt-created money. If this is not achieved, the result is ] for those businesses that do not successfully induce new consumers to go into debt for their benefit - and, more broadly, ] in the banking system and economic collapse due to the sudden contraction in the growth of the ].<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> <ref></ref> | |||
| Mark Anielski as well as some political thinkers such as ] and some economists (such as the ] monetary economist ]) argue that this system of money supply has all the essential characteristics of a ], where the newly indebted, who have have control at the top, find themselves compelled to induce others into debt to enable them to pay off their own debts.<ref> {{Citation| first=Mark | last=Anielski| coauthors=| contribution=Fertile Obfuscation: Making Money Whilst Eroding Living Capital| title=34th Annual Conference of the Canadian Economics Association| publisher=Redefining Progress| place=San Francisco, CA| pages=41-2| year=2000| contribution-url=http://www.lin.ca/resource/html/arpa02/PC1-FertileObfuscation.pdf| format=PDF| accessdate=2007-12-17 }}</ref> | |||
| It is therefore argued by a number of ]ers that ] and the associated ] of ] in the economy "forces" the economy towards indebted ].<ref>{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref> | |||
| ] argues that a major negative side-effect of the debt-based monetary system is its effect on ]. As ] claims, ] produces one of the greatest continuous injections of ] into the economy. Therefore, significant super-normal profits can be generated by re-zoning agricultural land and replacing it with low-density ].<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> | |||
| If Michael Rowbotham's analysis is correct, this will lead to the destruction of fertile ], as this land is progressively re-zoned for speculative new residential development. He also predicts that the global supply of fertile ] will decline, leading to a broad decline in the quality and nutritional value of agricultural produce and, eventually, a dramatic increase in the prices of many "soft" commodities - which could then lead to actual food shortages for poorer segments of the world population.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> <ref></ref> Coincidentally, the prices of many "soft commodities" such as ] "skyrocketed" in 2007.<ref></ref> <ref></ref> | |||
| If for any reason the monetary system broke down, urban populations (nominally "rich" but poor in terms of direct access to ]) could find basic foodstuffs increasingly expensive, ultimately resulting in food security becoming a major public policy issue.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> <ref></ref> | |||
| ===Effects on economic health=== | |||
| {{Weasel|date=December 2007}} | |||
| According to some, given that the solvency of the ] system requires a continual stream of new debtors, some left-leaning ]ers also consider the waging of aggressive ]s and modern ] as an ''essential'' component in the survival of any debt-based economic system.<ref> Trocki, Carl. ''Opium, Empire and the Global Political Economy'', Cornell University Press, Ithaca, 1990</ref> <ref></ref> | |||
| More broadly, many ]ers believe that ] has created all the features of an ], with structural instability in financial markets, which produces waves of booms and bust due to the "bubble-like" credit cycle.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> <ref></ref> | |||
| The "cyclical" side-effect of debt-based money purportedly means that those caught at the end of any ] (or those caught in economies with declining productivity, low population growth or aging populations) suffer most financially, as the contraction in the growth of credit slows the economy just as these newly indebted businesses and consumers find they have been left out of the growth cycle in debt creation.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> <ref></ref> | |||
| ], in his book ''The Grip of Death'', argues that the prevalence of debt-based money in the modern economy is concentrating real wealth in the hands of private banks through a form of "monetary ]," as the populace is forced into ] simply to own a home and educate their children.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> | |||
| In countries with slowing ] with a debt-based monetary system, there is predicted to be a concentration of wealth in the ] sector, accompanied by sporadic "bubble-like" financial crises, with periods of ] in asset markets and ] in the consumable goods market as ] search for cheaper ].<ref></ref> | |||
| ===Political and legal solutions=== | |||
| {{Citecheck|date=December 2007}} | |||
| ] laws differ to a small degree in different jurisdictions but in all developed economies unpaid debt results in legal penalties, property confiscation on behalf of the creditor and income ]. Although in ], ] and ] religious practice there have been traditions of ] or laws against ], in no modern Western jurisdiction are any debts periodically forgiven or cancelled in recognition of the inherent impossibility of repaying debts in circumstances where the debt-based monetary cycle has inevitably resulted in too little new ] being injected into the ] to pay for the currently outstanding debts. | |||
| On a national level, if the issuance of ] becomes unsustainable, sovereign ] can occur - and has occurred many times in history.<ref></ref> ] crises due to the inability of nations to pay interest on ] have occurred in ] countries as a result of high levels of unsustainable ]. The ] is an example of sovereign debt levels becoming unsustainable, resulting in a ] and economic collapse, as ] rise precipitously due to the inability of the national government to attract financiers to purchase new ] to inject new ] into the ailing economy. | |||
| At such times, it is the responsibility of the ] to come in as a kind of supranational ] to mediate between the national government and international financiers. The role of the ] as ] to the world has similar responsibilities and risks inherent in ]ing which are described below in relation to the role of the ]. If the ] repeatedly intervenes to save financiers from loss when sovereign bankruptcy occurs, this has a tendency to induce ] and can encourage the financing of reckless government spending and borrowing.<ref></ref> | |||
| ==Policy Implications== | |||
| ===Inherent problems with system=== | |||
| {{Unencyclopedic}} | |||
| {{Weasel|date=December 2007}}{{Citecheck|date=December 2007}} | |||
| Some ]ers predict that there will be an increased incidence of financial crises in the developed world, as economic and ] inevitably slows and as the success of ] economic political policies result in a reduction in redistributive ] policies which, combined with the debt-legacy of the ], allows an intense and unsustainable concentration of wealth and political power in the financial services sector. | |||
| Some ]ers (in particular, in her 2007 book, ''Web of Debt'') argue that by necessity the promotion of the ] inherent in ]ing ''must'' be conducted by a tiny, secretive, ever-watchful minority because, unlike, for example, labor-intensive ], which is self-sustaining, banking is not. If the majority of the populace were bankers nothing would be produced other than ] and ] (and very detailed ] laws). Historically, ] has therefore often been criticized as ''inherently'' parasitic and non-self-sustaining.<ref></ref> <ref>{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref> | |||
| Some ]ers argue that, given the parasitic nature of ], it is vital that the indebted "victims" who must sink deeper into ] for the system to survive do so voluntarily and willingly and are not made aware of the consequences of purchasing consumables with ]. Some politicians and others have highlighted the fact that mainstream media organizations appear to downplay or minimize the seriousness of deficit spending by government and debt-sourced spending of all kinds.<ref></ref> The terms "]" and "]" are now virtually extinct, with "]" being replaced by its ], "]"; the cycle in "] creation" is referred to euphemistically as the "]"; a shrinking of "]" as a "]" or "]"; and the unsustainable growth in ] and the associated growth of derivatives that live off ] during the upward phase of the ] cycle as "]" in financial markets.<ref></ref> | |||
| Some ]ers see the prevalence of the debt-based monetary system ultimately resulting in a political ], between the vast majority of dispossessed who have had any accumulated net wealth periodically "stolen" during periods of "]" (and find themselves in permanent inter-generational ], being forced to work involuntarily in the money-economy simply to house themselves and survive in the debt-based economy), and a tiny minority of inter-generational, super-rich elites connected close to the font of the ] (being the ] sector), who will strongly resist calls for redistributive economic policies by using all of their financial strength and ] power in an attempt to entrench and sustain their artificially ]d status. Given that the profession of this ]d minority is to produce nothing other than ] and ], and given that they face being rendered impotent if the power to print debt-free ] was returned to ], it is to be expected that those associated and aligned with the ] interests will use any means necessary to preserve their power, as they have no other skill other than the issuance and distribution of ].<ref></ref> | |||
| Some ]ers believe that this ]d minority also always seek special government protection for the banking sector to protect it from financial ] when the debt-based financial system inevitably experiences periodic collapses due to the "bubble-like" nature of the growth in the ]. This is referred to in some circles as "]" in the financial sector, as banks inevitably face periods of actual or near ] due to the mismatching of the high ] in ] and slower growth in the real economy.<ref></ref> During these periods there are sporadic collapses in the value of inflated assets, resulting in a sudden collapse in the demand for new ], and an associated contraction in the growth of the ]. | |||
| ===Types of downturns=== | |||
| There are two main kinds of ] contraction that can cause a collapse in the value of inflated assets. | |||
| A "]" occurs where new ] is difficult to access without a high ]. At such times marginal borrowers, or those who have borrowed at the end of any debt-induced asset bubble, get "squeezed" out of further borrowing and a contraction in the growth of new ] occurs, triggering a slow down in the growth of inflated assets. Those assets can then be "harvested" by the ] through widespread ] or ] and re-sold to those with the money to buy the distressed assets.<ref></ref> | |||
| A "]" occurs where new ] is not available at any ] - even for those with previously acceptable ]s - due to widespread ] in the banking system. At such times, it is the banking system itself that is ] and other financial institutions (including overseas financiers) become reluctant to lend to the domestic banking system, resulting in the domestic banking system being unable to issue loans even to credit worthy borrowers.<ref></ref> | |||
| At any stage during the downward spiral of a "]", the ] in a modern economy can try to save the system from complete economic ] by purchasing (either indefinitely or temporarily) the failed debts of the ]s.<ref></ref> However, doing so results in cash being transferred to the ] in exchange for ], thereby violating the general economic precept to avoid ] and effectively makes liquid the failed lending decisions of the ]s.<ref></ref> In the U.S. banking system this is called "opening the Fed discount window", where the ] temporarily purchases the failed investment portfolios of distressed ]s in exchange for cash, thereby allowing them to escape liability for mistaken lending practices that have resulted in these portfolios losing value as the borrowers default on their loan payments and are made ]. However, this rescue measure may only delay, rather than avoid, the realization of losses in the banking system, as the central bank cannot "force" new borrowing into the system to inject new ] into the ]. Somebody has to be a ] to borrow the ] that is being offered. If all market participants realize a "]" has formed in asset markets, there will be few (or no) buyers for new ], as no one wants to borrow to buy inflated assets no one else will buy. Money markets can therefore remain illiquid even with intense ] support. | |||
| And banks can go bust anyway, even with intense ] support, if the issue is not one of liquidity, but one of solvency.<ref></ref> <ref></ref> | |||
| ===Pushing on a string=== | |||
| Some monetary economists describe the opening of the Fed discount window after the bursting of an asset bubble as "pushing on a piece of string", as this measure does not solve the key problem - creating new ] (or ]) to keep up the growth in the ] and maintain the required level of liquidity in credit markets.<ref></ref> <ref></ref> | |||
| To encourage fresh borrowing, ]s generally combine these rescue measures with an ] cut to encourage more new borrowing to allow the existing (failed) debts to be ]d at or close to their original value. When ] repeatedly resorted to this tactic to revive illiquid ]s this became known in the market as the "]", as the effect of these repeated reductions in ]s was similar to a ] in the ], insuring ]s' lending mistakes would be covered up by the ].<ref></ref> | |||
| ===Inequities in system=== | |||
| Aside from the ] issue, the key risk with this tactic (cutting ]s to encourage new ] creation) is that the ] exposes the financial system to a ], as the growth in the ] spirals out of control due to the need to save the ]s from themselves.<ref></ref> <ref></ref> <ref></ref> | |||
| For these reasons, a collapse in the confidence of the ] of the banking system is one of the most complex and difficult policy issues any ] can face. | |||
| In such crises of confidence, a ] may choose to save the current players in the banking sector by printing money and inflating its way out of the crisis, thereby debasing the value of the domestic ]. | |||
| This is referred to by some ]ers and ]s as "] for the rich and ] for the poor", as many indebted ] will still lose their ]s and be declared ] regardless whether or not the ] intervenes to save marginal lenders who have been made ] through their mis-timing of the ].<ref></ref> <ref></ref> Future generations of innocent taxpayers may ultimately finance any ] of reckless lenders, as the money used to fund any ] will be funds diverted from the general revenue of the central government.<ref></ref> | |||
| Many central bankers still refer to ]'s 1873 commentary on monetary crises, ''Lombard Street'', in an attempt to gain insights into the way in which central bankers should revive illiquid banking systems. ]'s exhortation to "lend freely" at times of monetary crisis to lift the system into liquidity and encourage new debt creation may work temporarily, but in circumstances where fundamental changes are occurring in the underlying economy (for example, where demographic changes - such as an aging population - result in too few new indebted consumers, or where extreme inequality results in the inability of impoverished workers to either qualify for, or be encouraged to, borrow) this will only result in a delay in (and perhaps exacerbation of) the collapse of any debt-created "bubble". | |||
| A prime example of the fatal effects of combining aging demographics with reckless bank lending can be found in the case of the ].<ref></ref> Once the downward spiral of a financial implosion begins, it is almost impossible to stop if there are no new indebted "victims" to replace those that have either retired, or died. | |||
| ===Potential societal impact=== | |||
| {{Citecheck|date=December 2007}} | |||
| Some more extreme ]ers and ] anticipate the declaration of ] and the imposition of ]-style restrictions on ] and ] by the political ] to physically protect it from ] or military ] when the ] of ] completely bursts, either through a precipitous ] or debt-created ].<ref></ref> Some ] also anticipate the forced elimination - by any means necessary - of any actual or potential competing ] or voluntary mediums of exchange that could threaten the viability or legitimacy of the ] ], which could include the compulsory confiscation of all privately-owned ] (] being the ultimate reserve ], still used by ] as a universally accepted medium of exchange for the settlement of international ]s).<ref></ref> <ref></ref> <ref></ref> <ref></ref> <ref></ref> | |||
| There have been many monetary crises throughout history and prior to widespread ] or ], in the late stages of volatile, heavily indebted ] ], there are a number of warning signs of impending ] caused by a complete breakdown of trust in the debt-based ]. Just prior to the complete collapse of the ] of public and private ], the economic system tends to feed on itself, and in the past, where debt-created ]s or periods of ] have occurred in ], the ] and ], there has been a sustained spike in predatory economic behavior, as the heavily indebted central government and producers are forced to find more extreme (previously considered unethical) methods to extract any remaining wealth from increasingly desperate and impoverished ], who are either unwilling or unable to go into further ] without forceful coercion.<ref>{{cite book |last= Widdig |first= Bernd |title= Culture and Inflation in Weimar Germany |url= http://books.google.com/books/ucpress?id=kvKAATycUzIC |accessdate= 2007-12-16 |year= 2001 |publisher= University of California | |||
| Press |isbn= 0520222903 }}</ref> ] investment and sustained ] are almost impossible in this environment because the "measuring stick" of ] (the real value of ]) is so uncertain at times of debt-induced ], ] or ]. | |||
| As potential new ]s cannot be found to buy depreciating heavily indebted assets, and international financiers reduce lending as they experience losses on pre-existing loans either through asset or currency ], some analysts predict that the ] will seize up due to a ] ] or sustained period of ]ary ], resulting in a "final and total catastrophe of our fiat monetary system."<ref></ref> | |||
| This has often occurred after a failed ], as international financiers realize the heavily indebted ] they funded will not gain the ] it planned to seize as a result of the waging of ]. When this pay-off does not materialize, the government is left with the ] of war without the ability to offset this ] through the imposition of ] on the defeated ] and the acquisition of the defeated state's ]. This occurred to ] after the ] and ] after the ].<ref>{{cite book |last= Widdig |first= Bernd |title= Culture and Inflation in Weimar Germany |url= http://books.google.com/books/ucpress?id=kvKAATycUzIC |accessdate= 2007-12-16 |year= 2001 |publisher= University of California | |||
| Press |isbn= 0520222903 }}</ref> | |||
| Whatever the trigger, the key warning sign of any impending monetary crisis and economic ] is a sudden ] or ].<ref></ref> Early warning signs that the ] themselves are aware of an impending breakdown in the ] of the ] would be: a spike in the prices for ] (which is an internationally accepted, inherently limited, store of value, and therefore can act as a modern form of ], oil sometimes being referred to as "black gold"), ] and other inherently limited ] essential for non-discretionary industrial production; a spike in the ]s for "non-perishable" agricultural ] such as ], ], ], ]s and ], as investors realize the debt-based monetary system has squeezed supplies of ]; a sudden flight of money to ]; and/or a sudden spike in the ] differential between short-term ] and asset-backed corporate paper (or a sudden spike in the ] rate in ]).{{Fact|date=December 2007}}<ref></ref> | |||
| Shortly thereafter, some ]ers predict that there would be desperate, but ultimately futile ] intervention, a ], a panic run on a number of marginal, ] ] and ] as investors try to get ] out to invest in inherently limited, non-perishable, in-demand commodities such as ] and ] (and undeveloped agricultural and industrial ] in areas of the world with strong ]), followed by a ] or ] in the broader heavily indebted economy as the ] contracts.<ref></ref> | |||
| ===Potential solutions=== | |||
| {{Weasel|date=December 2007}} | |||
| Critics assert that, <!-- please note, this is the phrase needed in order to retain these sections. --> | |||
| although time is the only real remedy for monetary crises, as it allows re-inflation of the markets through the gradual injection of new ] into the system, time is something financiers and investors are least likely to want to give up when faced with not getting their ] out of the imploding investment ]. In extreme cases ]s could set up "independent" corporate investment vehicles to buy the assets associated with the ], thereby allowing ]s to liquidate their investments and allow time for the markets to re-inflate, however the holding costs involved in this measure would be extremely high and would not guarantee that the losses could be averted if no new gullible investors could be found to offload these distressed assets. More fundamentally, these short-term "parachutes" used after bubbles burst do not save ordinary borrowers from ] and ], nor do they address the pernicious long-term dysfunctional aspects of ] described above. These problems are temporarily averted, only to be dealt with yet again by the next generation of indebted governments and peoples. | |||
| Given these repeated financial crises arising from the debt-based monetary system, many ]ers predict that there will inevitably be a return to the ], a fundamental change in the way money is produced and distributed (with a return to the prevalence of government-issued debt-free ] and/or ]) - or a complete financial "]" as fewer young people in developed economies can be found who are willing to go into debt in sufficient magnitude to pay off the debts that have already been accumulated. As extreme inequality increases, ]s mount and financial crises repeatedly erupt, these ]ers believe a political crisis will eventually result in calls for fundamental ]. | |||
| These on-going, worsening, ]-created crises in the economy and society (and the unsustainable damage to the ] caused by debt-created ]) could turn monetary and economic policies either to the extreme left or to the extreme right, as there are a number of competing solutions to the debt-based monetary "problem". | |||
| ==Proposals by economic reformers== | |||
| ===Libertarians=== | |||
| {{Citecheck|date=December 2007}} | |||
| ] plan a return to genuine ], ] and ] backed by a ] or ], as originally contemplated by the ] in the ]. Most ] would eliminate all income taxes and encourage private ] to provide social services. Some ] would also support experimentation with ] or ], recognizing that when ] is combined with the ] a deflationary bias (and the systematic transfer of real wealth to the banking system) is normally inevitable. Those ] who support ] would strongly support more flexible and forgiving ] laws in a ] environment, recognizing that no ] should be attached to ] given the anti-] "unjust acquisition" of real wealth implicit in ].{{Fact|date=December 2007}} | |||
| Regarding the current accumulation of ] and private debt, there is an arguable case that the creation of the ] under the ] of 1913 was unconstitutional and some ] consider that at least some of this accumulated debt should be canceled or forgiven prior to a return to the ] in recognition of its fundamental illegitimacy. Arguably this would be supported by the "just acquisition" ] of ] legal philosopher ].{{Fact|date=December 2007}} | |||
| Leaving aside the legality of the ], it is commonly accepted by market-oriented ]s that any policy where the ] repeatedly provides ]s to failed ] and reduces ]s to encourage new (speculative) borrowing will risk chronic "]" and is a key factor in emboldening reckless lenders to inflate assets with excessive ], thereby creating an environment conducive to the creation of financial ] and speculative excess in financial markets.<ref></ref> | |||
| Many ] derisively refer to ]s of the ]ing system by the ] and the associated reductions in ]s to encourage more borrowing as "] in reverse". For many ]s this simply encourages more speculative ] creation by the ]ing system, and brings the economic system ever closer to monetary ].{{Fact|date=December 2007}} | |||
| ] would go further than regulating or cautioning the ] to avoid repeated ]s of failed banks - they support repeal of the ] of 1913 and the elimination of the ] itself, thereby removing this artificial ] policy for the ]s, ensuring that they face the full consequences of poor lending decisions with the real prospect of being wiped out by ].{{Fact|date=December 2007}} If the ] was repealed, depositors would also have to be on guard to ensure their ] was not lending recklessly, thereby ensuring more conservative lending practices. This would however present the real prospect of old-fashioned "runs" on the banking system after any period of speculative excess.{{Fact|date=December 2007}} | |||
| ===Authors, analysts and alternatives=== | |||
| ] also seeks the cancellation of "unjust" debts (such as ]), but would also support the re-introduction of strongly redistributive tax policies involving higher financial transaction taxes (such as a ]), ]es and ]es, and, crucially and most importantly, a ] ] involving a guaranteed minimum debt-free income (sourced from government-issued ]) for all citizens in the debt-based economy. Under this proposal, every adult citizen would be given a livable debt-free income (for example, $30,000 per annum, adjusted for inflation), transferred electronically into their ], simply by virtue of their ]ship. They could then use this debt-free money to pay off their ]s or to live, debt-free, without being compelled to work as a "wage slave" in the market economy if they chose not to. The government would finance these payments simply by ordering the ]s to accept their electronic instructions as legal tender. It would therefore not result in the expansion of ]. | |||
| Instead of ] being created "indirectly" and "furtively" at the point of ] creation by the ]ing system, it would be created directly and openly by the democratically elected government and issued to its ]ry by way of instruction to the ]ing system. | |||
| ] argues in his book, ''The Grip of Death'', that this would ''not'' be ]ary (or at least would not be as inflationary or as dysfunctional as the present system). This would also reduce ] and the associated ]al damage associated with debt-based ]. It would also give individuals the free time to engage once again in non-marketable ], ] and ]al activities if they chose to do so.<ref>{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> | |||
| , in her 2007 book, ''Web of Debt'', also supports the issuance of debt-free fiat currency by the central government, in a manner similar to that proposed by ].<ref>{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref> | |||
| Ex-U.S. Treasury Department analyst Richard C. Cook also supports the issuance of debt-free ] and zero-interest ] by the central government and has provided a detailed blueprint of monetary reform recommendations to transition to a debt-free money supply.<ref></ref> | |||
| It is to be expected that these proposals might be opposed by ] officials; reformers say this is because the proposals would reduce the banks' control over the ], dissipating this key decision-making power away from its current base. It would also be likely to reduce ], dramatically increase the cost of ] and, potentially, simply increase asset price inflation as individuals used the additional income simply to bid up the cost of ]. However, this proposal would undoubtedly address the problem of ] inherent in a debt-based monetary system and reduce the devastating impact of personal ] and allow individual citizens to quickly recover from financial hardship. It would also ensure that this ] measure (and government spending in general) would not have to be paid for by future generations from future streams of ]. | |||
| Many left-leaning ] would also support the taxing of the banking system and the enforcement of strongly redistributive income and ]es to ensure the financially dispossessed are "replenished" with income. They would also support a ] ] involving the provision of unemployment benefits and government-supplied free medical care, education and other essential services and ]. It is to be expected however that, without the issuance of debt-free ], this system would result in the persistent, exponential, accumulation of ], financed by the ] system by the issuance of ]. If not properly managed, this could result in a progressively higher tax burden and may result in higher ] in the long term, as financiers require higher ] to lend to the increasingly indebted central government. Without the issuance of ] these policies can be self-defeating, with the net result simply being that a larger stream of guaranteed income goes to the ]ing system via the issuance of interest-bearing ] (which are purchased by the ] "out of nothing" through ] techniques). This ] must then be financed in perpetuity by compulsorily acquired ]es from future generations. | |||
| It could be argued that the early success of extreme right-wing ] in ] and ] in the period after ] was a response to the economic chaos created by the debt-based monetary system in early 20th century ]. Some of the economic policies introduced by ] and ] were in direct response to the economic collapse and social ] caused by soaring government and personal debt levels in both countries in the post-] era, and (indirectly) arose from the writings of ] and others on the nature of the problems associated with a debt-based ]. Although many ]s justifiably criticize many of the non-economic policies of the ] governments of ] and ] during this period, it cannot seriously be disputed that the ] provided a degree of ] to the populace, and that the economic policies that were implemented during this period by these ] governments succeeded in their stated objective of restoring economic and social order during the pre-] era. | |||
| Similarly it could be argued that ] and ] were movements inspired by the inequalities caused by the intense (and in ]'s view unsustainable) concentrations of monetary wealth, power and influence inherent in the practice of ] in a ], ] ] environment (particularly when ] is combined with a ] or other ] ]). | |||
| The ]/] solution to the problem of ] is simple: wholesale repudiation of ] resulting in complete debt ]; forced ] of ] and wealth from the ] to the dispossessed and needy ]; ] of the ] (which has required armed ]s by the ] in some past ]s); and the return of the banking function from a dominant, speculative to a subordinate, administrative institution, where the banking system is reduced to a subservient arm of the centralized ]. In this system, government-owned banks are directed by government policy; often provide different kinds of loans to different industry sectors at different interest rates depending on the perceived "needs" of the economy and the community; normally have a significant proportion of ]s due to weak or non-existent ] laws; and periodically "forgive" failed debts in recognition of the impossibility of some businesses in paying this debt money back. | |||
| It is to be expected that the ] of the government-owned banking system would be more stable - but dramatically lower - than that in a debt-based ] economy. It is also to be expected that a significantly higher misallocation of resources could occur in this system, where lending decisions are "infected" by political considerations and are not made on the basis of expected ]. The risk of ] in the banking system is also expected to be higher where there is no separation between the political and monetary systems in an economy. Market-oriented ]ers and ] economists therefore do not support ] of the ] system. | |||
| It should be noted that partial ] of the ]ing system would only be temporary, as any remaining ] could still engage in unlimited ] and facilitate the eventual acquisition and control of any strategic assets in a partially socialized economic system. It is to be expected that in the absence of complete ] of the banking system, the ]ing system would eventually dominate the financial system in any nominally ] society. | |||
| ==Conclusion== | |||
| In summary, many ]ers and critics of modern debt-based monetary systems (which have been "unhinged" from the ] since the ] era) assert these recently-developed debt-based systems will erode the economic rights and stability of much of society, due to ]s' inherently speculative ] activities, in which they have recourse to ]s to provide ]s as lenders of last resort.<ref>{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref> | |||
| Some of the reasons these critics cite include ] economic policies, which they say increase the marketization and commodification of human activity, and strictly enforced ] laws, which permit the periodic transfer of assets from failed ] investors to the ] and their associates. They also assert that debt-based systems cause ]ally damaging over-consumption and the systematic and irredeemable destruction of fertile ] through the periodic issuance of over-extended debt financing for housing, which leads to ] which encroaches on ]. | |||
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Revision as of 18:46, 31 December 2007
 | This article may be unbalanced toward certain viewpoints. Please improve the article by adding information on neglected viewpoints, or discuss the issue on the talk page. |
Debt-based monetary system is a political term used by critics of the Federal Reserve, based upon heterodox economics, such as that of the Austrian school. The term is not in use among economists.
An Explanation of the Term
The term implies that the Federal Reserve and its member banks steal wealth from the public through printing money which is then loaned to the public at interest. Often, this belief is integrated with the New World Order conspiracy theory to claim that international bankers as a whole are committing massive fraud. The term is based largely upon the heterodox economics of the Austrian school. Some invoke the Austrian Business Cycle Theory to argue that the business cycle is caused by artificial government expansions and contractions of the money supply. The usage of the word "debt" may be misleading, as the term is used to describe an overall loss in public wealth stemming from over-expansion of the money supply (see inflation). This is distinguished from all forms of debt, including public debt.
See also
References
- Rothbard, Murray (1980). What Has Government Done to Our Money?.
- Grignon, Paul. "Money as Debt". Retrieved December 29, 2007.
External links
- I want the Earth Plus 5%
- Money As Debt (video)
- Money and Banking
- Web of Debt
- Financial Armageddon
- Money Matters