When some people come to appraise fractional and full reserve banking they come to the conclusion that credit money is a necessary part of the economy. Since in a debt based monetary system businesses and individuals rely so much on credit to function credit money can be seen as a necessary part of the system, not the cause of our sea of debts. What businesses and individuals actually need to function and flourish is capital, not credit.
One thing is clear, if full reserve banking was implemented, there would be less credit money used to lubricate the economy. It is often assumed that this will lead to a permanent depression, where there is perpetually insufficient money for the economy to function.
Of course to imagine this is really to imagine that the Bank of England ceases to fulfil its NEW FUNCTION. If there is across the board depression in a debt-free money system, then the Bank of England will combat this by creating new money for the government account. This can facilitate tax breaks and direct government employment, until there is no more depression.
The real change in such a debt-free money economy will be in the price structure, the relative prices of different elements in the economy. In order to picture this we can make the quite reasonable assumption that a debt affects prices in much the same direct way that a tax does. In the case of purchases we see today which are funded largely by debt, we might say that their price is inflated beyond its natural value in order to service this debt.
Let us break down the economy into the following areas and consider how much each purchase is typically funded by loaned money:
|Economic Sector||Level of Debt Funding|
|Food and Clothing (other household essentials)||Very little|
|Business infrastructure (non consumables)||Frequently|
|Housing, business premises (rents and mortgage payments)||Almost always|
|Finance||Almost by definition|
You can see that generally the larger the price of something in the economy the more its finance is based on debt. Maybe I must also defend my position on wages a little. Wages are not quite the same as other large expenses and are not primarily funded by borrowing. This is because a business which needs to perpetually borrow money to finance its employee’s salaries is on the way to bankruptcy.
So what does this imply about the relative prices in a debt free money economy? Well of course the absolute price of anything depends primarily on the amount of money which is in circulation. For simplicity we might assume that prices in the part of the economy with little debt will hold their value and that prices in the part of the economy with high debt levels will fall as they no longer need to pay the loan tax. So we might reasonably assume that housing, transport, infrastructure and finance will become cheaper while food, clothing, wages and even luxuries would be expected to hold their prices. This would obviously be of benefit to people who can not presently afford to get onto the property ladder. People who struggle to put food on their table and pay their rent at the same time. We can see that this economy generally benefits the majority on lower and lower middle incomes, groups of people who are more dependent on debt and have limited disposable income in today’s economy.
It is one of the principals of life that you can’t get something for nothing so which area of the economy is losing out in this change? It should be fairly obvious that the area of the economy which will shrink in terms of total turn over will be the finance industry. There will be less debt and therefore less income going into this sector of the economy. In order to survive in this business environment the banking sector will need to be more competitive in its margins. This would most likely increase the number of players in the finance community as it is generally thought that some large institutions have not been paying enough attention to their huge portfolios of loans and could tighten up a great deal in the prudence of their lending.
Of course we can also expect there to be another significant change in the economy. Both during and following the transition to debt free money we can expect that the government will be able to pay back some or most of the debt on its books today. It should be possible for the government to repay a lot of this debt using the new money it receives directly and interest free from the Bank of England. Because the government gets this new stimulus directly there will be NO NEED for public sector cuts or tax increases in order to repay the debt.
As it stands the UK government owes around 33,021 pounds per capita (i.e. per person) and this costs every household in the country around 2,120 pounds per year, just to pay the interest. This is roughly the size of the increase in national household income which the government could issue today if this debt had been repaid.
So what we can see then is an economy where the participants get more of the fruits of their labour. In this economy more people will own their own homes outright. It will be an economy where the government owns up to it’s spending and doesn’t accumulate debts against future generations. Maybe more importantly the economy will be stable and dependable.
Who wouldn’t want such an economic foundation for their society?