Considering that the authorities focused on the ‘credit crunch’ as the biggest problem in the recent financial crisis, the idea of significantly reducing the amount of available credit (lending) raises alarm bells for many people.
However, most of these concerns stem from an incomplete understanding of how the monetary system works. The reality is that our dependence on credit is not a natural aspect of the economy – it is a direct result of allowing banks to create the nation’s money as debt. When over 97% of the existing money supply is created as debt, and is therefore earning interest, it creates inflation (especially in housing) that necessitates people borrowing more simply to survive.
[first]”At the moment, credit is our only source of money – debt-free money will end our dependency on debt.”[/first]
Indeed, the current system provides too much credit – a system that provides less credit is much more likely to lead to a steady and stable economy, rather than the stop-go economy that we’ve had for the last few decades.
Before we explain why a reduction in credit (lending) will not be a problem after the reform, we need to clear up a few misconceptions about ‘credit’, ‘debt’ and ‘lending’.
CREDIT = DEBT
The term ‘credit’ is used misleadingly. ‘Credit’ has positive associations – everyone wants a good credit rating, and your salary appears in your bank account under the ‘credit’ column. But in the case of ‘getting credit flowing again’, bank ‘credit’ means ‘debt’. If we say that businesses depend on access to credit, we are saying that their financial situation is poor enough that they urgently need to go into debt. This poor financial health is not the natural state of affairs – it is a symptom of a monetary system where all new money is created by the banks. (Of course, very new businesses and businesses which are expanding rapidly will need access to credit/debt.)
WE ARE DEPENDENT ON CREDIT/DEBT BECAUSE OUR MONEY SUPPLY IS DEBT
The absolute dependence on ‘credit’, and the fact that the economy grinds to a halt whenever credit dries up, is used to point to the importance of credit in a modern economy. In reality, it points to a chronic shortage of debt-free money in the economy. By definition, if the economy needs ‘credit’ to continue functioning, we are dependent on debt.
Under the existing banking system, the only way the public can get money is to borrow it from banks. Consequently, if banks don’t lend, the economy doesn’t have a money supply. This is the main cause of our dependence on debt/credit.
While economists argue that easy access to credit is essential to a well-functioning economy, in reality, dependence on credit is a symptom of a malfunctioning economy and a malfunctioning money supply. The debt-based monetary system actually creates the need for companies and households to access credit (debt). In other words, we are all so far in debt because we allow our money to be created as debt.
The answer to our debt-dependency is not more debt (despite political leaders shouting “We must get banks lending again!”) but newly created, debt-free money, which can help to pay down debts and reduce our debt-dependency.
AS DEBT-FREE MONEY PAYS DOWN DEBT, WE WILL HAVE LESS NEED FOR CREDIT
As we create and inject debt-free money into the economy, via tax cuts, tax rebates and government spending or direct payments to citizens, this will allow individuals and companies to gradually pay down their own debts and start to increase their savings. With greater savings, people will have less dependence on debt, and therefore access to credit (debt) becomes less critical to the health of the economy.
This newly created debt-free money provides a stronger stimulus than debt-based money created by the banks over time, since there is no need to repay the money. As a result, the economy should improve, and people will be better able to pay off their existing debts, pay down mortgages, and improve their financial position. With lower taxes and a more buoyant economy, the need to go into debt will fall and apply to fewer people. In other words, the demand for credit will fall in tandem with the availability of credit.
If there are any shortfalls in the amount of credit available these can be met by the Money Creation Committee choosing to create more money (if all the other economic indicators also point to the need for more money), or by lending money directly to banks on the condition that this money goes into ‘productive’ lending – funding businesses rather than speculating on financial markets, for example.
MODERNISING MONEY gives a more detailed explanation of these reforms and also covers the transition process between the current and reformed monetary systems. It covers the economic, social and ecological consequences of the current monetary system and explains how the reforms would address these issues. You can get a copy here.