If the Solution Is So Simple, Why Is It Not Being Done?

Hi Positive Money UK,

I was wondering, if one of the solutions is to simply issue debt-free money, why is it not being done?! It’s been more than 2 years since the crisis hit!! Surely there must be at least a few intelligent people in positions of power in the government who know about this solution?

…this was a question that we’ve got recently (and it’s one we ask ourselves sometimes too).

The fact is that there is widespread misunderstanding of how the banking system really works in the first place. Most people assume (without having given it much thought) that it works in the way that we are suggesting it should. Many people would be surprised to learn that even among bankers, economists, and policymakers, there is no common understanding of how
new money is created. (In the UK there are currently only about 4-6 MPs out of 650 who truly understand how money is created by the banking sector)

As our research revealed, the most of the textbooks are very much out of date. They teach a model of banking that has not applied in the UK for a few decades, and unfortunately many policy makers and economists still work on this outdated model.

Then you can read from one of the most influential economists and one of the most influential opinion leaders Paul Krugman  in his recent article “Nobody understands debt” that:

Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

In other words he is saying that it is ok for the government to continue to borrow infinitely and we should pay the ever increasing costs of borrowing to private banks infinitely. And in order to have enough money available for paying of ever increasing taxes, we need to have ever increasing money supply (hence debased currency) and ever increasing prices.

His second statement is simply not true. We owe the money to the private banks, and although some of us may be shareholders of those banks, the majority of the nation is not.

So, if the most influential economists are constantly convincing everybody that to be always in debt is actually a good thing, perhaps there lies a big part of the answer to the above question.

There are other reasons, of course: the creation of new money and the allocation of purchasing power is highly profitable for the banking sector. And it is not in the interest of those powerful forces to disclose the true nature of our money and possible solutions. (More about the lobbying practices of banks in today’s article in The Independent.)

However we believe that the ignorance of people about the problem is much bigger obstacle than is the opposition of banks.

Luckily, more and more alternative economists are pushing forward a different view. Since those alternative economists (the ones who understand money) were usually those who saw the crisis coming before the event, they are becoming more and more influential. With any luck, a better understanding of money and debt might even reach parliament!