The following passage was written by me for Bill Still’s book No More National Debt. I thank Bill for his permission to reproduce it here, slightly edited for clarity.
To see more clearly the fundamental difference between the current system of debt-based, commercially issued money and our proposed system of debt-free, publicly issued money, many have found it useful to think initially on a smaller scale. The following thought experiment is a variation on the similarly illustrative stories told in Salvation Island by Louis Even and Holocaust Island by James Gibb Stuart.
Imagine a trading community which organizes its own medium of exchange by mutual agreement that certain authorized, but intrinsically worthless tokens should be used as money. For example, these tokens might be metal coins, hard-to-counterfeit pieces of paper or, if we assume the necessary technology, electronic digits within ultra-secure computer systems. The medium itself doesn’t really matter, so long as the money system functions conveniently, safely, transparently and honestly and enables efficient trade in real goods and services to flourish. Importantly, it should not be to the advantage of any special, privileged sector of the community, but should operate in a manner neutral to all economic participants.
As necessary and appropriate, the imagined community increases its money stock by collectively, that is publicly, creating and spending into circulation new tokens. This is the only way in which new money is created. Any suitable communal infrastructure project or public service provision (e.g. public roads, defence, education, health) that the community agrees upon can be funded using this new money. The creation of new money is carefully and transparently controlled by an accountable public body to be broadly in lockstep with the growth of real wealth, therefore systemic price inflation is not a problem.
Thus the trading community provides itself with an adequate and effective medium of exchange with which to conduct its business, to run its economy. No-one in particular gains financially from the existence of, or from the nature of, the money stock, the essential medium of exchange for the community. It is simply a shared utility, brought into being collectively, which thereafter circulates permanently for the benefit and convenience of all.
Of course, once in circulation, the money might then be lent and borrowed. However, its origination, its issuance, is not dependent upon it being borrowed into existence. It is issued debt-free by the people, for the people. Banks in this imagined community then act as true intermediaries between borrowers and lenders, bringing the parties together and facilitating arrangements between them. They have no power to increase or decrease the quantity of money in circulation – no power to make counterfeit money.
Now, imagine that one day someone, let’s call him Mr. Banker, offers to replace, like for like, all the trading community’s collectively issued and persistently circulating money-tokens with ones which henceforth he alone will provide. Somehow or other he convinces everyone that his money-tokens are preferable to those currently in use. The only difference is that he lends the money-tokens to members of the community, and charges each borrower interest. This system is called debt-based money, meaning that the money does not enter circulation – it does not exist – until someone borrows it into being at interest, in this case from Mr. Banker. Rather than provide itself with a permanently circulating, debt-free money supply, the community now effectively rents its currency from Mr. Banker.
The money stock is the same size as before and economic activity and trading within the community proceed as usual. The big change is that each money-token now comes into existence only if someone initially borrows it at interest from Mr. Banker. This is the exclusive way in which it enters circulation under his debt-based system. So, for each money-token now in use, someone, somewhere within the community, is paying interest on it to Mr. Banker.
What is the net effect of this new debt-based money system on the community as a whole? Real wealth production is the same, but Mr. Banker, who now exclusively and profitably issues and lends into circulation the community’s medium of exchange, is enjoying a large income from the interest he charges. He spends some of his profits and thus consumes a portion of the community’s production, hence the sum of everyone else’s consumption is correspondingly reduced, though they work and produce just as before. Also he accumulates wealth by retaining and investing some of his income. Thus under this system there is a built-in and continuous transfer of wealth from the money users to the specially licensed money issuer-lender, namely Mr. Banker. He exerts great influence over the economy by deciding who may borrow from him, how much they borrow and for what purposes, and his power and influence within the community grow inexorably. To justify this power he professes great expertise in the efficient allocation of money, and claims that his great income is well deserved because he facilitates and promotes real wealth creation as no-one else can. Not everyone is so sure and some think that he has merely annexed, monopolized and exploited an essential function previously performed by the people for themselves at almost no cost.
The money supply has been privatized, and consequently the governing body of the community, which before used to issue and spend into circulation the money supply for the public good, must now itself borrow at interest the difference between its tax revenue and its expenditure. The autonomy of the now deeply indebted community is severely compromised. It is now subject to the interests of its creditors. Over time, the public debt grows as politicians compete to bribe the gullible electorate with ever more extravagant spending commitments. And who should be consistently at the head of the queue to lend to the government but Mr. Banker? He knows that the government has the power to confiscate money from the economy through taxation, indefinitely into the future, so who better to lend to? Gradually his political influence increases and after a while it seems that the whole economy is being run mainly to service the debts owed to him, rather than primarily to provide the real goods and services that the people need. The financial tail is now most definitely wagging the productive dog.
Reality is of course far more complicated and sophisticated than this little scenario. But the principle is clear – any community or nation that cherishes and wishes to safeguard its sovereignty, its autonomy, must issue its own money, and control the quantity. The handover of these essential functions to profit-motivated private bankers entails that the people pay a heavy price for the existence of their medium of exchange, a convenience and utility that they could and should provide readily for themselves at negligible cost. Enormous political power is ceded to the vested interests of the money issuer-lenders, and the people’s self-determination is all but lost.
Just to drive home the fundamental choice of monetary system with an example on an even smaller scale, imagine a babysitting circle whose members use mutually agreed but intrinsically worthless tokens to pay each other for babysitting services. The obvious and cost-free way for the circle to issue the tokens is simply to allocate a suitable number of permanently circulating tokens to each member and then let ‘trade’ proceed. This would obviously work just fine, the tokens could even be lent and borrowed amongst the members if need arose. But now suppose that a couple within the circle comes up with the alternative system that they exclusively should issue the tokens and lend them to all the other members at interest. The system operates more or less as before, but the members notice that, for the bother of a bit of record keeping, the new token issuer-lenders receive back as interest all the tokens that they themselves could possibly need, plus they even accumulate an excess of tokens. By monopolizing the issuance of tokens, and by allowing them into circulation only as interest bearing loans, the couple has secured for themselves an easily earned ‘living’, not to mention an increasing store of ‘wealth’. They themselves have no need to do any actual babysitting and all their own needs are more than covered by the interest payments they receive from the other circle members. At this scale, the unnecessarily expensive and parasitic nature of a debt-based, commercially issued medium of exchange is glaringly obvious, and no self-respecting group of babysitters would fall for it. Unfortunately, the same cannot be said at the national level.