Eight people now own more than half the world’s population. This terrible statistic lurks behind many of the world’s worst troubles. How has it come to be?
It might seem a great mystery, but it’s not. Of all the various factors that contribute to the inequality – corporate law, tax evasion, human greed, etcetera – the most significant is the way that debt is created. The subject isn’t ‘sexy’ like ‘weapons of mass destruction’ but it’s easy enough to understand – and in its effects, it truly is a weapon of mass destruction.
Today, banks and governments are able to create capital in huge amounts for people who already have money. They can do this because laws allow debt to be bought and sold. Once debt can be bought and sold, it becomes valuable. Once debt is valuable, value can be created out of nothing.
It is easy to demonstrate how value is created out of nothing when debt is a commodity. First, take a situation in which no value is created. Take two ordinary citizens: me and you perhaps. I lend you some money. I no longer have the money; you have it. I won’t have it again until you return it, whereupon you will no longer have it. No value has been created.
If, on the other hand, I lend money to a government or corporation, I get a ‘bond’ in return, equal in value to what I have lent. This ‘bond’ is negotiable: it is effectively money, tending to circulate among the wealthy and tied in a relation of value to the money used by everyone else. Value has been created – for those who lend.
When banks create money, the situation is simpler still. Banks create money by creating two equal-and-opposite debts which add up to nothing. They like to call this ‘making a loan’ even though what they are lending is debt – created out of nothing. One of these created debts is borrower-to-bank, the other is bank-to-borrower. The borrower will owe the bank until he, she or it gathers enough money and pays the bank back. The debt from the bank becomes money, passing from person to person as payments are made.
So two valuable debts have been created out of nothing. What the borrower owes is the bank’s asset; what the bank owes is the borrower’s asset – until he, she or it spends it..
Debt from banks is our money. When we pay money to someone, the bank owes that person instead. Banks never need actually pay out to their customers, because the debt stays as debt, moving from person to person until exactly the same amount is destroyed again when the loan is repaid.
This means the banking system can create as much money as it wants to, simply by saying ‘I owe you, and you owe me.’
Once upon a time, it was fantastically difficult for a ruling class to make money out of money. Gold and silver circulated and stayed in circulation: to make money out of it, the currency had to be called in, melted down, diluted with cheap metal and made back into coin. Only a few rulers – Henry VIII for instance – were outrageous enough to do this.
But now that debt can be bought and sold, money can be created out of nothing in stupendous amounts for people who already have lots, to buy up other people’s things: labour, land, assets.
Other people are impoverished by the quantities of money created for the rich. Money is only valuable in comparison with what everybody else has. If you have a hundred pounds and everyone else has one pound, you’re rich. If you have a hundred pounds and everyone else has a billion, you are poor. As prices rise and incomes are squeezed, the poor take on debts. Paying out on those debts carries them to dependence and destitution.
So, the system (and the laws which support it) carry on, creating money for the rich and impoverishing the poor. The system is allowed to continue because governments profit from it too – from national debts, which also profit those with money to spare. Lastly, to complete the unholy trinity, trillions of dollars/pounds are created in financial derivatives: they, too, consist of marketable debt. This unholy trinity is responsible for eight people coming to own more than the entire poorer half of the world’s population – and for many other dreadful things besides.
Most of what is written here used to be acknowledged.
National debts: In the words of the godfather of economics, Adam Smith: ‘The merchant or moneyed man makes money by lending money to government, and instead of diminishing, increases his trading capital.’ Montesquieu: ‘National debt takes the wealth of the state from those who work, and gives it to those who are idle.’ Hume: ‘The taxes, which are levy’d to pay the interests of these debts, are a check upon industry, heighten the price of labour, and are an oppression of the poorer sort.’
Bank-money: Tommaso Contarini, Venetian senator wrote that a banker ‘can accommodate his friends without the payment of money, merely by writing a brief entry of credit. The banker can satisfy his own desires for fine furniture and jewels by merely writing two lines in his books, and can buy estates or endow a child without any actual disbursement.’ Frank D. Graham, economist: ‘So far as the totality of bank promises becomes, and remains, part of the currency, the promises are never called and the bank is in the delightful position of living on the interest of what it owes.’
Today, deregulation has allowed the situation to become very bad indeed. These concerns should be more widely discussed. Solutions such as Positive Money’s Sovereign Money Creation are at hand: more public awareness would certainly spark the will to reform!
[sws_blue_box box_size=”630″] These are the personal views of the author, they don’t necessarily reflect the views of Positive Money; they are intended to stir up the debate. [/sws_blue_box]