How Banks Create Money; Why We Can Never Get Out of Debt

by Peter Myers

Date June 15, 2003; update April 16, 2020.

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(1) Financing Sustainable Development, by John H. Hotson
(2) Banana Republic? No, Banana Colony, by Dr H. C. Coombs
(3) How money is created in Australia, by David Kidd
(4) Bankers compared to counterfeiters
(5) Bernard Lietaer, designer of the Euro currency system, endorses Hotson's argument
(6) Michael Hudson on Interest rates in Mesopotamia, Greece and Rome
(7) The Dollar Crisis: An interview with Richard Duncan
(8) How Greenbacks won the Civil War - Stephen Zarlenga, The Lost Science of Money
(9) Government Bonds - their role in money creation
(10) J. T. (Jack) Lang on the Gold Standard and the "Goods Standard"
(11) Bradbury Pounds (Treasury Notes) funded Britain in WWI, debt-free money

"the basic financial problem is a disproportionate growth of debt and interest on debt. This problem is caused by our fractional reserve banking system which creates almost all of "our" money supply as interest bearing debt to private banks. Once the problem is clearly stated the solution is also clear. We must create a larger fraction - perhaps all -- of our money supply debt and interest free. Only by so doing will it be possible to end and then reverse the disproportionate growth of debt and interest.

"... Money does not have to be a debt, nor does interest need to be paid to keep it in circulation. The commodity monies of old -- gold, silver, wine -- were not debts. Government or central bank currency is only nominally a debt--a promise to pay with an identical piece of paper.

"... Governments can spend, lend, or transfer money into circulation. They can lend at zero interest, or near zero interest. By wise use of these powers governments and the international community can end the debt slavery which is crippling the world economy."

- John Hotson (p. 16 in the following paper).

"Is there anything more crazy than that between 1797 and 1817, for example, the Bank of England [a private bank until 1947], whose notes only had credit thanks to the state, then got paid by the state, i.e., by the public, in the form of interest on government loans, for the power the state gave to it to transform those very notes from paper into money and then lend it to the state?"

- Karl Marx, quoted on p. 17 in the following paper.

John Hotson was Professor of Economics at the University of Waterloo, in Toronto. I was privileged to hear him deliver the following paper at the TOES summit in Sydney in 1993. He is the author of The COMER Papers.

The underlining in this article is Dr Hotson's; the bold emphasis has been added.

(1) Financing Sustainable Development, by John H. Hotson


As every environmentalist knows, over the last few centuries we humans have created an ecologically unsustainable industrial economy. Unless we radically reform our way of doing things and create a sustainable economic system we are doomed to suffer drastic changes. What most environmentalists--and indeed most economists--do not know is that over the last few centuries we humans have also created an economically unsustainable financial system. Unless we radically reform this financial system it will recurringly break down and thwart our efforts to heal the planet.

Our current financial system diverts us from our real problems to ask, "Where is the money going to come from?" This should be the least of our worries. As long as we have vast unmet human needs and idle human and nonhuman resources, and resources which can be diverted from wasteful activities such as the military, finance should never be allowed to stand in the way of doing what must be done. Could anything be more insane than for the human race to die out because we "couldn't afford" to save ourselves?

Agenda 21 {footnote 1}, prepared for last year's Earth Summit, or UNCED, by acknowledged U.N. experts on environment and development, concludes that the world community must spend about $625 billion a year over the next eight years if the Third World is to develop without destroying the environment. The Report states:

"A continution of present policies will lead to ... a worsening of poverty, hunger, ill health, illiteracy ... and growing threats to life on Earth."

The Report calls for increased aid flows of $125 billion a year from the developed countries, while the bulk of the effort, the remaining $500 billion a year, must come from the Third World's own resources. These numbers seem huge until we consider that $625 billion is only 4% of the Gross Planetary Product of some $16 trillion, and that it is less than 2/3 of the amount that the world still spends each year on armaments--even though the east block has collapsed and the "cold war" is over.

These numbers are also dwarfed by estimates that the United States alone is wasting $700 billion a year in unproduced output in the present depression--resources which could instead have been employed to clean up its own infrastructure, both public and private, both environmental and economic, while increasing its foreign aid toward the long agreed on goal of 0.7% of GNP. Finally, these numbers fade into insignificance when we consider what is at stake, which is

1. Agenda 21 & The UNCED Proceedings, N. A. Robinson, ed., Oceana, New York, 1992. The US $125 billion and S500 billion figures are given in Volume 2, p. 678.

{p. 2} nothing less than the long term survival of the human race.

Despite these widely acknowledged facts the response of the governments of the world-both of the rich and of the poor--have fallen far, far short of what Agenda 21 warns us we must do. Tragically, the world has "celebrated" the end, or at least the lessening, of the threat of nuclear war, by slipping into a Second Great Depression instead of getting to work on the great unfinished and pressing business of the human species--protecting the health, education, growth, and development of all the world's children, healing the wounded environment, rebuilding our cities and transportation systems and promoting the sustainable development of the world's forests, fisheries, farms, and industries.

Indeed, instead of the rich one-third of the world acting as a source of finance, an "engine for development" to the struggling two-thirds of the planet, the rich world has for more than a decade been a net financial drain on the "wretched of the earth." As UNICEF shows in The State of the World's Children 1992, Summary, our protectionism costs the Third World some $55 billion a year in lost exports, which is more than the total aid they receive. Declining terms of trade also cost the developing nations about $16 billion a year.

"But it is, above all, the weight of past debts which threatens future progress ... the developing world owes approximately $1,300 billion to the governments and banks of the industrialized nations and to international financial institutions. Each year, the repayment of capital and interest amounts to approximately $150 billion - roughly three times as much as the developing world receives in aid. As it is impossible to meet these interest charges in full, the amount unpaid is added to the total debt owed ... When all transactions are taken into account - the net effect is that the developing world is now transferring $40 to $50 billion a year to the industrialized world.

..."Debt is the new slavery that has shackled the African continent. Sub-Saharan Africa owes approximately $150 billion. Each year, it struggles to pay about one third of the interest which falls due; the rest is simply added to the rising mountain of debt under which the hopes of the subcontinent lie buried.

"The total inhumanity of what is now happening is reflected in the single fact that even the small proportion of the interest which Africa does manage to pay is absorbing a quarter of all its export earnings and costing the continent, each year, more than its total spending on the health and education of its people.

"Ten years of prevarication over this problem has already damaged not only the Africa of today but the Africa of tomorrow. While more than $10 billion a year in interest repayments is being sluiced out of that desperately poor continent, tens of millions of children are losing their one opportunity to grow normally, to go to school and become literate, and to acquire the skills necessary for their own and their countries' development in the years to come.

{p. 3} "As a gesture of repartion for exploittion in the past and prepration for new partnership in the future, Africa should now be absolved of most of its debts." {footnote 2}

Not only must most of Africa's debt be forgiven, but much of Latin America and East Asia's debt must be written down, and written off, if the "war to save the planet," and to provide the poor 2/3rds of the world population with a life of minimum health and decency, is to be won.

Much has been written concerning the "hot money capital flight" from the poor world by which the local elites have left the people of these countries with "odious debts" for loans from which they received no benefit. Creditors must be empowered to go after these "hot" funds to seek repayment and "disempowered" to hold up development by demanding repayment from the victimized residents of the Third World. Recognizing that the interest rates the rich have been demanding of the poor since the late 1970s are extortionately high, we should apply the excessive interest already paid to reduction of principal.

But even if the whole existing Third World debt were written off, this would not solve the financial crisis more than temporarily. For, as stated, we have an economically unsustainable financial system. The present world financial system is a fractional reserve, or "debt money" system in which nearly all money is borrowed into existence from private banks and only remains in existence as long as someone is willing and able to pay interest on it.


Why is the fractional reserve/debt money system unsustainable? With present institutions, prosperity, growth and ecological viability are not sustainable in the long run because of the excessive growth of debt and interest on debt relative to income with which to repay. Throughout recent centuries the following pattern has manifested itself: real output only grows in years in which aggregate demand grows, demand only grows when the money supply grows, the money supply only grows when debt grows. The longer output, demand, money supply, and debt grow the higher the rate of interest becomes and the more excessive the growth of interest and debt. This pattern presents itself internationally as well as nationally, as unpayable Third World interest must either be added to unpayable Third World debt in ever greater resort to "Ponzi finance," (borrowing to pay interest) or the leading banks of the world must be declared insolvent.

If, in the attempt to arrest the price inflation resulting from the excessive rate of debt formation, the monetary authorities raise the rate of interest still higher the result is a financial panic. The panic, or potential panic, then requires monetary authorities to reverse themselves to bail the system out through greatly increased bank reserves, while governments are required to increase the public debt. The resulting inflation and deficits have too often been seen as "the" problem for decision makers to focus upon, rather than upon the far greater challenges of

2. UNICEF, The State of the World's Children 1991. Summary, pp. 8-11

{p. 4} ecological breakdown, and the major changes humanity as a whole must make to achieve sustainable development.

A world in which "all money is debt, but not all debt is money" is unsustainable, as debt and interest on debt grows faster than income and money with which to pay debt. When a bank makes a loan to an individual, business, or government, the principal of the loan is created and added to the borrower's bank balance. However, the borrower has promised to repay the loan plus interest and no money was created with which to pay the interest. Therefore unless indebtedness continually grows it becomes impossible for all loans to be repaid as they come due.

Furthermore, during the life of a loan some of the money will be saved and relent by savings banks, insurance companies etc. These loans do not create money (chequing accounts) but they do create debt. Thus we use only one mechanism to create money (bank loans) but several mechanisms to create debt, making it inevitable that debt will grow faster than money with which to pay debt. This leads inevitably crash and debt repudiation depressions. The world is in such a depression at present, and has been since about 1980.


The shortcomings of our present debt money system can best be seen by setting forth the characteristics of a sustainable financial system and then contrasting these with the characteristics of our present system. Only after this is done will we be ready to consider alternatives.

A sustainable financial system is simply one which enables the real economy to be maintained decade after decade and century after century at its full employment potential without recurring inflation/over-indebtedness crises.

It is desirable, though not central to sustainability, that the system tend toward price stability rather than inflation. A tendency toward deflation is much more adverse to sustainability, as we shall see, than one toward inflation.

If an economy is to grow sustainably at its full employment potential it is necessary:

that demand grow as rapidly as supply.
that debt grow no more rapidly than does income.
that the price level not fall.
that the money supply grow about as rapidly as income.
that interest, as well as profit and wage income grow no more rapidly than does total income.
that the degree of inequality in the income distribution not cause the "rich to get richer and the poor to get poorer."that the mean interest rate equal the growth rate of per capita income.

{p. 5} Indeed, if we maintain that sustainability also implies price stability not inflation, the requirements are even more restrictive.

For a sustainable, stable price level system we must see to it that interest, profit and wage income grow no more rapidly than does real income.

Furthermore, in the long run, growth of human numbers and materials using output itself is unsustainable in a finite world. In a steady state world, full employment requires that either all savings be directly invested through equity, or that a positive interest rate be forbidden. Saving must be strictly limited to making good depreciation plus whatever capital "deepening" is possible.

Let us briefly illustrate each point in turn.

If an economy is to grow sustainably at its full employment potential it is necessary that demand row as rapidly as supply.

This is self evident. What is not self evident, however, is how this will occur in the "real world" where neither Say's Law, nor Walras' Law are operative. Nor is it sufficient for all "full employment savings" to be invested to make it occur. At most, the investment of full employment savings will enable real supply to grow, but since demand will grow less than proportionately; by Keynes' marginal propensity to consume of less than 1 or by Kalecki's markup pricing, output will stagnate and unemployment will rise unless demand is exogenously increased by new money creation. The growth of investment must be financed with new money, which was never anyone's income and thus never saved. {footnote 3} In our world banks create this new money as they make loans, much as "steel mills make steel," as Graham Towers, first Governor of the Bank of Canada, expressed it.

If an economy is to grow sustainably at its full employment potential it is necessary that debt grow no more rapidly than does income.

For debt to grow faster than income and wealth, and thus collateral to secure debt, is a formula for eventual breakdown at the individual or societal level. Particular difficulty occurs when income is falling in a cyclical downturn so that the debt/income ratio grows rapidly.

If an economy is to grow sustainably at its full employment potential it is necessary that the price level not fall.

If debt grows more slowly than does income it would be possible for an economy ultimately to achieve a debt free state. However, such an economy would also have a constantly

3. On this see Mario Seccreccia, "The Role of Saving and Finncial Acquisition in the Process of Capital Formation Under Policies of Austerity: The Case of Canada." Economies et Societies, Vol. 19 no. 8, August 1985.

{p. 6} falling money supply if it depended upon the banking system for its money. A system with a constantly falling ratio of money to real output would only be sustainable if the price level continually falls as well. Although economists love to write about, and even advocate, such an economy, such a state of affairs has probably never existed, nor could exist, without massive unemployment.

There are at least two reasons why falling prices and prosperity are incompatible.

1) As Marx showed long ago with his M - C - M' formulation, the very reason for being of every capitalist enterprise is to transform a given amount of money capital (M) into commodities (C) which can be sold for a larger amount of money (M'). The typical firm can only accomplish this feat if the price level is stable or rising. A firm which borrows a million dollars and transforms raw materials and manhours into commodities which must be sold for nine hundred thousand dollars, will not be in business very long, whatever is happening to its "productivity gains".

2. A falling price level cuts the share remaining for profit by raising the real rate of interest and the "rentier" share causing a fall in investment and a halt to the growth of income and employment.

If an economy is to grow sustainably at its full employment potential it is necessary that the money supply grow about as rapidly as income.

Much that was said above is applicable, but need not be repeated.

If an economy is to grow sustainably at its full emplovment potential it is necessary that interest, as well as profit and wage, income must grow no more rapidly than does total income.

For a few years, or even a few decades, interest, profit, and wages can grow disproportionately to each other. However, even the small interest share cannot grow more rapidly than does GNP for very long without "gobbling up" everything else and becoming equal to GNP itself. Most discussions of monetary and interest rate policy ignore the explosive implications of exponential growth of interest at a higher rate than income is growing, when it is our duty as social scientists to focus our attention here. More on this presently.

If an economy is to grow sustainably at its full employment potential it is necessary that the degree of inequality in the income distribution not cause the "rich to get richer and the poor to get poorer."

Clearly, an economy cannot grow sustainably unless the great bulk of the population share in the rise in per capita income. Otherwise effective demand for consumer goods will prove insufficient to justify further investment. Moreover, the political consensus necessary for social harmony will break down if economic gains go only to the few.

{p. 7} If an economy is to grow sustainably at its full emplovment potential it is necessary that mean interest rates equal the growth rate of per capita income.

This proposition follows from the requirements stated above of a constant debt/$GNP, and constnt interest income/$GNP ratio.

Provided that debt and real income grow at the same rate, i.e. a constant price level, a constant "rentier" share constrains the rate of interest to equal the gain in total factor productivity. Thus, if a country is able to keep real output per capita growing at 3 per cent per annum, the "natural" or sustainable, or constant shares, at constant prices, interest rate is also 3 per cent. {footnote 4} The natural rate can exceed the productivity gain only to the extent that debt grows more slowly than real output, while if debt grows faster than output, the natural rate must be less than the productivity gain. I believe we must rule out this last case as unrealistic and never to be observed in the "real world."

What happens when "market" rates of interest exceed "natural" rates depends greatly upon the rules governing the creation of money. In the ancient world of metallic monies and zero productivity gains, positive market rates quickly led to debt slavery of most debtors. This in turn led to social polarization and either revolution or government sanctioned forgiveness of debts. This is why all the ancient books of wisdom - the Bible, Koran, etc., denounced usury in a world with a zero natural rate.

In our present world of bank, or debt, money a tendency for the market rate of interest to rise above the natural rate can lead for a considerable time to an inflationary boom. The function of the inflation is to slow the growth of the rentier share by boosting the rate of increase of profit and wage incomes. The inflation will accelerate, however, if the money supply is wholly endogenous and uncontrolled, as each rise in wages and prices leads to a further rise in interest rates and money creation.

However, if for whatever reason, the rate of money creation is slowed so that the real rate of interest becomes insupportable, the economy will crash into debt liquidation depression. The cycle will tend to repeat itself as, after the liquidation stage, debts and interest rates will be much reduced.

For a sustainable, stable price level svstem we must see to it that interest, profit and wage income grow no more rapidly than does real income.

This conclusion is a mathematical necessity, an expansion of the definition of real income. Although for short periods of time, wages may increase faster (slower) than productivity gains and prices not rise, if interest, profits, or taxes are falling (rising). However, such share changes

4. See Luigi Psinetti, "The Rate of Interest and the Distribution of Income in Pure Labor Economy," Journal of Post Keynesian Economics, Winter 1980-1, III-2 pp. 170-82, for the development of this "natural rate" concept. See further his Structural Change and Economic Growth, (Cmhridge University Press, Cambridge, 1981).

{p. 8} cannot go very far without the economic system degenerating into a competitive struggle which will prove inflationary if "losing" income groups succeed even partially in restoring their share, and deeply depressionary if they cannot. Actually the wage share changes only slowly in advanced economies--a fact which has been much documented but inadequately explained.

The fact that growth must eventually cease in a finite world also means that debts must cease to grow: i.e. that annual repayments must equal new debts. The world must eventually cease using interest bearing debt as the means by which society's "savings" are transformed into "investment"--and/or replaced or supplemented by debt money created by banks. Debt finance of a portion of total spending in a world of zero growth necessarily entails growing debt which, in turn will cause debt repudiation and depression.


Our economy does not grow sustainbly at its full employment potential becuse demand does not grow as rapidly as supply.

Central to the Keynesian Revolution in macroeconomic theory is the thought that economic history can best be understood through the realization that Aggregate Demand is usually less than Aggregate Supply at full employment, so that full employment is seldom chieved, nor long maintained. Deficient demand is caused by the incentives to save, that is to refrain from spending on consumption, exceeding the incentives to add to the capital stock through investment and this, in turn, is becuse of high liquidity preference. Keynes maintained that "for decades or even centuries at a time" the rate of interest is too high to allow full employment. {footnote 5}

Keynes also recognized that a depressed economy could not resume growth, even if the propensity to invest should increase, or the propensity to save decreased [or increased], unless the money supply increased. He wrote:

"... if there is no change in the liquidity position, the public can save ex-ante and ex-post and ex-anything-else until they are blue in the face, without alleviating the problem in the least - unless, indeed, the result of their efforts is to lower the scale of activity... The banks hold the key position in the transition from a lower to a higher scale of activity. If they refuse to relax [i.e., provide new money] the growing congestion of the short-term loan market or the new issues market ... will inhibit the improvement, no matter how thrifty the public purpose to be out of their future income." {footnote 6}

5. J. M. Keynes, The General Theory, pp. 242, 324-5, 336, 340.

6. J, M. Keynes, "The Ex-Ante Theory of the Rate of Interest," Economic Journal, 47, 1937 pp 668-9.

{p. 9} Only in years when private demand is boosted by extraordinary public demands and rapid money supply growth, as happened in World War Two and its aftermath, Korea, and Vietnam have most of the world's economies run at their full potential, and even in the "peacetime" years since WWII demand has been much sustained by "military Keynesianism" or "Hitleromics", perhaps never so much as the late 1980s, with world military spending exceeding $1 trillion dollars. Now that the end of the cold war has led to some cutbacks in military spending, the result is spreading unemployment, rather than a smooth transition to sustainable development.

The central irrationality of the Great Depression years has reappeared in our times. In a depressed world of inadequate aggregate demand, each firm, industry, and nation attempts to save itself by competitive deflation. Some can "win" in this struggle by cutting their costs and boosting their efficiency the most. However, the more the winners win, the more the losers lose as this is a negative sum game. The world depression grows deeper and unemployment grows worse. The individualist philosophy undergirding neoclassical economics misunderstands and denies the existence of demand failures--thus causing the failure to persist.

Our economy does not grow sustainably at its full employment potential because debt tends to grow more rapidly than does income.

As our economy is presently constituted, the money supply can only grow as persons, businesses, and govemments increase their debts to the banks. Never in the 20th century, therefore, has the real output of the U.S. economy increased in which debts have not increased. The available statistics do not indicate a marked tendency for all debts public and private to increase more rapidly than does money, or current dollar, GNP until the 1980s as Figure 1 makes evident.

From 1918 to 1980, Outstanding Debt of U. S. NonFinancial Borrowers increased from about 100% of GNP to about 144% of GNP. The overall near stability of the ratio of total debt to total income, except for the Great Depression, and to a lesser extent, the World War Two era, was the net result of widely divergent growth trends of public and private debts. In all prosperous peacetime years private debts (households + non-financial business) increase far more rapidly than does real output, or even money value of output, while government debts grew more slowly than GNP until the 1980's waves of mergers with "junk bond" finance and Reaganomics caused both private and govemment debt to grow relative to GNP, and thus unsustainably, reaching 197% of GNP by 1992 {footnote 7}.

The "conservative" ideology maintains that the govemment should never borrow money in peacetime. It may be that the origin of this ideology lies in the subconscious realization that since the private sector in all normal years increases debt faster than it does income, the only hope for a constant Total Debt/GNP ratio lies in a constant fall in the public debt as a fraction

7. Economic Report of the President, various years 1970 to 1993. The Report no longer publishes a breakdown of the important debt series for Households and Business.

{p. 10} of GNP. But this ideology prolonged the Great Depression by postponing the "Keynesian" rescue until World War Two.

In the years of the Great Depression income fell, further boosting the private debt to GNP ratio, while the government debt grew relative to GNP. Finally, in World War Two private, and State and Local Government, debts shrank relative to GNP while Federal Government debt increased more rapidly than did GNP.

At the end of WWII Australia, Canada, the U.S., and indeed, all allied countries enjoyed, in Hyman Minsky's terminology a "robust" financial system. {footnote 8} This is because the private sector ended the war with unusually "clean" balance sheets, i.e. little debt and that at low interest rates, while as assets they held large, ultra safe, claims on the national government. The result, together with the pent up demand from the depression and war time decade and a half, was the longest boom in the history of Capitalism.

As time wore on, however, private debts continued to increase relative to income, and at ever higher interest rates, so that little by little the "robust" financial environment was transformed into the ever more "fragile" financial environment more typical of Capitalism. As the financial system became more and more fragile more and more borrowers were driven from "hedge" finance--where both principal and interest are paid off over the life of the loan, to "speculative" finance--where interest is paid, but the debt is renewed or "rolled over" at its due date, and finally to "Ponzi" finance--where unpaid and unpayable interest is added to the unpaid principal. Ponzi finance always ends in bankruptcy and debt repudiation, unless indulged in only very temporarily, as the borrower is acquiring no new assets with which to pay. It is just such a collapse which increasingly threatens the world system in the 1990s.

The tendency for debt to increase more rapidly than income and money with which to pay debt can also be seen in the Canadian statistics for the 1962 to 1992 period. (It is symptomatic of economists' neglect of this important matter that a longer series is not available.) From 1962 through 1992; real income (real GDP in 1986 dollars) in Canada grew from $190 billion to $574 billion, or from an index of 1 to 3, or 2 fold. Money GDP grew from $44 billion to $687 billion, or from an index of 1 to 16 as prices rose from 1 to 4.65. (What cost $1 in 1962 cost $4.65 in 1992.) However, total debt over the same period grew from $99.5 billion to $2.14 trillion, or about 21 fold (Thus for every $1 Canadians owed each other in 1962, they owe, or are owed $21 in 1992).

In contrast money with which to pay debt (Ml) grew only from $3.4 billion in 1962 to $44.4 billion in 1992, or from 1 to 13. However, M3 grew from $17 to $375.1 billion, or from 1 to 22, or about as fast as did total debt as Canadians increasingly financed with less liquid "near monies". Moreover, Canadians are considerably more in debt relative to their incomes than

8. Hymnan Minsky, Can 'It" Happen Again? Essays On Instability and Finance, Armonk, New York: M. E. Shrpe, 1982.

{p. 11} are their U.S. cousins. As Figure 1 shows {p. 21: john-hotson.jpg}, non-financial debt was less than 150% of U.S. GNP in 1962 and 197% of of GNP in 1992. Non financial debt in Canada was 232% of GNP in 1962 and 324% in 1992 {footnote 9}. Over the same 31 years interest on private debt (Interest and miscellaneous investment income) rose from $1.4 billion to $53 billion, or from 1 to 38, while intrest on public debts rose from $1.3 to $66 billion, or from 1 to 50. Clearly, such divergent trends cannot continue for much longer. Indeed, should interest continue to increse relaive to money GDP for another 30 years as it has for the past 30 years, by about the year 2020 it would become equal to GDP, an obviously impossible result.

Unfortunately, I lack a really long series on the same data for Australia. However, thanks to the labours of Dr. John Hermann, of the Economics Review Association, we have the following figures for the most rent period. From 1980 to 1992; real GDP (real GDP in 1985 dollars) increase from $186 billion to $243 billion or from an index of 1 to 1.3. Money GDP grew from $123 billion to $384 billion or from an index of 1 to 3.1, or 2.1 fold as prices rose from 1 to 2.4. (What cost $1.00 in 1980 cost $2.40 in 1992). However, total debt over the same period grew from $121 billion to $820 billion, or about 6.8 to 1 (Thus for every $l Australians owed each other and foreigners in 1980, they owed, or were owed, $6.87 in 1992.)

Moreover, as every informed Australian knnws, Australia's foreign debt exploded in the most recent years: from a net foreign debt of only $7 billion to $150 billion in 1992, from an index of 1 to 24.3 in little more than decade. Moreover, it is esimated that Austtalia's forceign debt reached $172 billion by June 1993 and my well top $180 billion by the end of 1993. It cannot be overstated that this is a matter of the gravest concern. Foreign debts, denominated in foreign monies, are a much greater danger than domestically held debts denominated in Ausralian dollars for the simple reason that your central bank cannot create foreign rnoney with which to pay.

Turning to the growth of money with which to pay debt, we see a somewhat more fvourable situation here than in the U.S. and Canada in that narrow money in Australia (currency plus demand deposits) grew more rapidly than broad money (which adds vanous time deposit "near monies"). Thus, "narrow" money grew from $49 billion in 1980 to $214 billion in l992, or from an index of 1 to 4.3; while "broad" nxney grew from $123 billion to $270 billion, or from to 1 to 3.5. International comparisons show that countries which maintin a high narrow money/GDP ratio enjoy consitently lower interest rates than counries which allow this ratio to sag.

However, the unsustainable pattern of debt growing faster than money with which to pay debt is also to be seen in the Australian figures. Thus total debt, as we have seen above grew from an index of 1 to 6.8, while narrow money was growing from 1 to 4.3 and broad money

9. GNP, Real GNP, Money and Price statistics from Bank of Canada Review, various months; Debt statistics from The National Balance Sheet Accounts, 1961-1984, and subsequent issues.

{p. 12} from 1 to 3.5. Assuming the figures are comparable, Australia's Debt/GDP ratio now lies between the U.S. and Canadian figures cited obove. Hoever, Austrlia's debt sitution was more favorable than either in 1980 being only .98 vs. 2.13 in 1992. As just stated, the most unfavorable aspect of Australia's sitution is the explosion of foreign borrowinq and debt.

In the 19th century the U.S. economy achieved growth, although not always with full employment, even in some years of falling prices {footnote 10}. However, in no year of this century in which the price level has fallen has U.S. real output grown significantly. In Canada the 2Oth century exceptions are 1927 and 1928, when prices fell and output increased. Thus economist who argue that "the economy would have righted itself" in the 1930's if only wages and prices were "fully flexible downward" because of the "real balance effect" could not be more wrong concerning our "debt money" economy.

To his credit, Irving Fisher saw more clearly. In his much neglected book, 100% Money, he showed that as prices fall real debt (nominal debt/relevant price index) increases even as the money supply shrinks. This can only lead to further distress and bankruptcy. He wrote:

"the very effort of individuals to lessen their burden of debt increases it, because of the mass effect (...) in swelling each dollar owed. Then we have the great paradox which seems to me to be the chief secret of ... great depressions: The more the debtors pay, the more they still owe in terms of real commodities. The more the econcmic boat tips the more it tends to tip. It is not tending to right itselt. It has tipped so far that it is capsizing." {footnote 11} (Emphasis his)

Indeed, the evidnence of the 1930s is that the economy responds to price level changes not according to the "Keynes" and "Pigou" effects taught in the textbooks, but in a "perverse" or "Senyek-Uogip" manner. Thus, from 1929 to l933, while the price level was falling, "IS" and "LM" functions were shifting to the 1eft and upward, while from 1933 to 1939, while prices were generally rising, these functions were shifting to the right and downward, or jus the opposite of what eonomists teach students. These "peverse" shifts still remain after allowance

10. The unusual situation of the United States in the late 19th century: the post Civil War deflation with a return to the gold standard, rapid industrialization together with massive immigration from low wage countries, etc., led to an important exception to this general rule. As Willim F. Hixson shows, "During a very intersting three decade period (1870-1900) the money supply of the USA was more than quadrupled... But prices did not quadruple. They declined to something like 7/lOths of the original level. For the 1870-1900 period the compound per annum growth rate oF the M2 money supply was 5.43 percent. Real output in the country grew at an annual rate only a little less. The civilian labor force increased from 12,930,000 to 29,070,000 without any really significant increase in the rate of unemployment. Yet, the general price level ... declined 1.10 percent per annum." Willim F. Hixson, "Noninflticary Money Supply Growth," Economic Reform, Vol. 5, 6, June 1993, p. 8.

10 {should be 11}. Fisher, 100% Money, Adelphi, New York, 1935, p. 111.

{p. 13} is made for changes in the money supply, and are readily accounted for by the real interest rate effect of changing price levels.

Our economy does not grow sustainably at its full employment potential except in years when the money supply grows about as rapidly as income.

Never in the 20th century has the real output of the U.S. economy grown significantly except in years in which the money supply grew. But there are a number of years in which the money supply and real output grew in which the price level did not increase. So a "quantity of money theory of real output" is more true than familiar "quantity of money theory of the price level." Thus should not economists drop the "neutral money" or "classical dichotomy" that "money does not matter for real things" as a relic from the past?

Our economy does not grow sustainably at its full employment potential because interest income tends to grow more rapidly than does total income.

Interest income fluctuates violently as a percentage of GNP whether measured as gross "Monetary Interest Paid" (MIP), Personal Interest Income (PII), or Net Interest (NI). M I P measures the gross interest payments made by the non-financial sector - ordinary business, households and government, to the financial sector, together with certain interest payments made within the non-financial, and within the financial, sectors. This series is not available in Canada. In the U.S. MIP rose from 11% of GNP in 1929 to more than 16% in 1932 as income fell faster than interest and debts, then fell to around 7% of GNP during the World War Two and early postwar years. Since then MIP has increased greatly relative to GNP, surpassing its 1932 percentage by the early 1970s, reaching an all time peak of 32% of GNP in 1981, then fluctuating between 30% and 32% of GNP in subsequent years. MIP in 1984 exceeded $1 trillion dollars for the first time and reached $1.792 trillion in 1991.

In recent decades PII has averaged less than one-half of MIP - the remainder of MIP appearing in GNP as wages and profits of the lending entities, or in the case of interest on government debt, being excluded as a "transfer payment." Interest paid by government and received by persons is included in PII but excluded from Net Interest (NI).

Net Interest fell drastically as a percentage of GNP during the depression and war period, from a peak of 8% in 1932 to less than 1% in the immediate postwar years. Since then it has increased again and hovers in the 6% to 8% of GNP range.

Should interest, however measured, have continued for another 40 years, to increase its share of GNP as it did from 1945 through about 1985 it would have become 100% of GNP--an obviously impossible result. Instead, some sort of "natural limit" seems to have been reached by the early 1980s. However, the increasing "stagflation" of the U.S. since the early 1970s suggest that economy cannot run smoothly with MIP much in excess of 15% of GNP, PII in excess of 6% of GNP, and NI above 4%.

{p. 14} As we have seen above, Keynes argued in The General Theory that the natural equilibrium of the economy as not at full employment, a la Say's Law, because "for decades or even centuries at a time" the rate of interest is too high to allow full employment. By extension we may posit that, with a fractional reserve banking systemand a central bank which favours rentier interests over all others, it is "natural" for the rentier share to rise too high for full employment, or even stability - thus leading to collapse and depression. {footnote 12}

What the ten fold rise in the net interest share, from 0.8 percent of GNP in 1946 to 8.6 percent in 1982, coupled with the rise in the wage share from 56.3 percent to 60.2 percent over the same period, did was to squeeze the profits out of U.S. capitalism. In 1946 "Enterprise Income" - the sum of corporate profits, farm and non farm unincorporated income - was 25.2 percent of GNP, but only 10.3 percent of GNP in 1982. Most of this decline is from the collapse of the share of unincorporated business, with farm proprietors' income falling from 7.0 percent of GP in 1946 to a mere 0.8 percent in 1982; and non-farm proprietors' income falling from 10.1 to 4.8 percent. However, corporate profits fell from 8.1 percent of GNP in 1946 to 4.7 percent in 1982 before recovering to 6.2 percent in 1983, 7.1 percent in 1984, 6.9 in 1985, 7.1 in 1986 and 6.1 in 1991.{footnote 13}

Our economy does not grow sustainably at its full employment potential because interest rates are not held roughly constant at the productivity gain.

Much that is relevant here has been stated above. Interest rates above the natural rate lead to inflation as well as unemployment. The conventional explanation that "High inflation causes high interest rates," is superficial and reverses causality. Fundamentally, high interest rates cause inflation by requiring the money supply to grow faster than goods can be produced if disaster is to be, at least, postponed. Further, as we shall see, if the supply of official money is limited by central bank action to restrict reserves, financial innovations can all too readily press high interest rate and therefore all the more inflationary "money substitutes" into service.

It is the nature of exponential growth that what at first seems unimportant, unalarming, and wholly sustainable eventually explodes. By the time we recognize the peril it may be too late. Indeed, Albert A. Bartlett, a professor of physics at the University of Colorado, maintains that, "The greatest shortcoming of the human race is man's inability to understand the exponential function." This failing leads us to construct institutions, such as fractional reserve banking with compound interest, or government borrowing from private banks, which set up wholly unsustainable patterns of growth. Paul Volcker did not understand the exponential implications when he tripled interest rates in 1979 until too late, as he later in part conceded.

12. This is then another way of making some of the points about over-indebtedness leding to debt liquidtion depression made by Fisher in Booms and Depressions, (Adelphi, New York, 1932); see also his, "The Debt-Defaltion Theory of Great Depressions," Econometrica, Vol. 1, No. 4, October, 1933.

13. Economic Report of the President, February 1970, 1993.

{p. 15} Michael J. Boskin, Chairman of the Council of Economic Advisors under President Bush recognized the peril of U.S. financial arrangements. He wrote:

Let D represent the debt-to-GNP ratio, d the deficit-(net of interest)-to GNP ratio, r the real interest rate, g growth of real GNP. Then, by definition,

Dt = dt + (rt - gt)dt

for a fiscal program with consltant d, and constant r and g, D will evolve toward an equilibrium D, (if g>r) of Dt = d/(g - r). The ratio of the federal government debt to GNP evolves through time depending upon this primary deficit and the relation between the real rate of interest and the growth rate. For example, if we start out with a positive national debt, and the real rate of interest paid on the national debt exceeds the growth rate, then the interest payments will grow more rapidly than the GNP, and if nothing else has changed, eventually the interest payments will consume all the budget, then all of GNP, then all of national wealth in an explosive pattern. {footnote 14}

Though Boskin applies his analysis merely to the U.S. federal debt, now some $4 trillion, his model applies to all debts in the U.S., now some $12 trillion. As we see in Figure 1, it is the private debts which have been growing "in an explosive pattern," the public debt growing relatively to GNP only since about 1978.

Our economy does not grow sustainablv at its full employment potential because the deree of inequality in the income distribution causes the "rich to get richer and the poor to get poorer."

It has been well documented that the average U.S. and Canadian worker has a lower real income now than in 1970, while at the same time the percentage of total income received by the top 10% has grown greatly. Indeed, by one calculation, three quarters of the total increase in GNP in the U.S. in the Reagan-Bush years was received by the top 1%--a mere 600,000 families. Only so long as the savings of the rich can be channelled into real investment, and these savings be sufficiently supplemented by new money borrowed into existence by the rich and the poor can full employment be achieved. The longer a "boom" continues, and the more the gains are received by the already well to do, the harder it becomes to find profitable outlets for further investment. Increased speculation in existing assets, and junk bond financed hostile take overs mark the final stage before a general depression.

14. Michel J. Boskin, "Concepts and Measures of Federal Deficits and Debt and Their Impact on Economic Activity," in The Economics of Public Debt, Kenneth J. Arrow and Michel J. Boskin, Eds, London, Mcmillan, 1988 pp. 80-2.


The public, private, and international debt crisis cannot be solved by raising taxes or cutting expenditures, or by any combination of these two, (although doubtless funds freed by the "peace dividend" need to be shifted to meeting real economic needs, and the fairness of the tax code can be much improved) because these contractionary moves will make the depression worse, perhaps even increasing the deficit and the rate at which debts grow. The solution involves a drastic cut in interest rates, an end to government borrowing from private money creators--i.e. private banks, and an expansionary monetary-fiscal-incomes progran to end the depression, resume growth, particularly in the third world, and clean up our environment.

It is essential to recognize that the basic financial problem is a disproportionate growth of debt and interest on debt. This problem is caused by our fractional reserve banking system which creates almost all of "our" money supply as interest bearing debt to private banks. Once the problem is clearly stated the solution is also clear. We must create a larger fraction-perhaps all--of our money supply debt an interest free. Only by so doing will it be possible to end and then reverse the disproportionate growth of debt and interest.

Money does not have to be a debt, nor does interest need to be paid to keep it in circulation. The commodity monies of old--gold, silver, wine--were not debts. Government or central bank currency is only nominally a debt--a promise to pay with an identical piece of paper.

Some "interest and debt free" money is circulating today. When a Federal Reserve Bank or the Bank of Canada decides it needs a new building it spends the necessary money into circulation. Also, most of the interest private banks receive on their loans is spent back into circulation interest and debt free as they pay their workers, phone bill, taxes, profits and so on. This mitigtes that familiar complaint of monetary reformers that when money is created by loan the principal is created but not the money necessary to pay the interest. Indeed, without this mitigation the "debt money system" would have failed completely long ago.

Banks can only lend money into circulation or spend it back into circulation as they pay their claimants. Governments can spend, lend, or transfer money into circulation. They can lend at zero interest, or near zero interest. By wise use of these powers governments and the international community can end the debt slavery which is crippling the world economy. By unwise use of these powers governments can, and have, caused much inflation and economic disruption. However, it is difficult to conceive of a system more unwise than our present one - where governments have largely given over to private interests the public function of money creation -- and then borrow the money back at perpetual interest!

{p. 17} Regarding this "quaint and curious custom" the great "leftist" economist Karl Marx once wrote:

"Is there anything more crazy than that between 1797 and 1817, for example, the Bank of England [a private bank until 1947], whose notes only had credit thanks to the state, then got paid by the state, i.e., by the public, in the form of interest on government loans, for the power the state gave to it to transform those very notes from paper into money and then lend it to the state?" {footnote 15}

The answer to Marx' question has to be, "Yes, there is something crazier--the fact that the world still uses pretty much the same system, even though it periodically breaks down. Indeed, under the Maastrcht treaty the EC countries are giving over their remaining sovereignty regarding money to an 'independent' central bank, which will clearly represent the interests of the private banks. Nor is that all: it is proposed by Harvard economist Richard D. Cooper that all nations subordinate themselves to a "World Bank of Issue."

Cooper advocates:

"..a radical alterative scheme for the next century: the creation of a common currency for all the industrial democracies, with a common monetary policy and a joint Bank of Issue to determine that monetary policy. Individual countries would be free to determine their fiscal policy actions, but those would be constrained by the need to borrow in the international capital market." {footnote 16}

The emphasis above is Professor Cooper's. However, I would have emphasized the last sentence of the quote, as it proposes nothing less that sovereign nations turn over creation of their own money supply to international bankers that they do not even control. The Bank of Issue would be ruled by a governing board,

"made up of representatives of national governments, whose votes would be weighted according to the share of the national GNP in the total gross product of the community of participating nations. The weighting could be altered at five-year intervals to allow for differences in growth rates. {footnote 17}

Unless great care is taken to provide democratic control, Cooper's proposed bank would merely perpetuate the domination of our world by bankers, rather than cure the irrationality of the debt money system. A system still so irrational, despite all the reforms since the Great Depression, as still to be the greatest peril to the economic system.

15 Karl Marx, Capital, Vol. III [1894] New York: Vintage-Random House 1981 pp. 675-6

16 Richard N. Cooper, "A Monetary System For The Future," Foreign Affairs, Vol 63, N. 1., Fall 1984, pp. 166-84.

17 Cooper p. 178.

{p. 18} As Henry C. Simons put it in 1948:

"If... capitalism and democracy are soon to be swept away... then commercial to banking will belong the uncertain glory of having precipitated the transition... Capitalism... can hardly survive the political rigors of another depression... [but] banking... seems certain to give us both bigger and better recessions hereafter.. .Given release from a preposterous financial structure, capitalism might endure indefinitely its other afflictions. {footnote 18}

Always remembering that the best of rules and institutions can be subverted and that it is particularly difficult to prevent that subversion in the case of money, I suggest the following rules as guides to financing sustainable development:

1. No sovereign government should ever, under any circumstances, borrow any money from any private bank.

Governments should target to balance their budgets at "full employment" or run small deficits which are financed by government money creation. If a slump occurs governments should finance all deficits at the central bank--or by issuing Treasury Money, such as the United States Note, and the Dominion Notes which were once Canada's main currency. If extraordinary expenditures must be made--say for a "war to save the planet," taxes should be supplemented by borrowing from the non bank public--who lend existing money--while the banks create new money every time they lend.

Private enterprise should borrow money from private banks at interest rates kept low by usury laws. Public enterprise should borrow money into existence from publicly owned banks. Ideally, the government should create all the money--as was advocated by Irving Fisher, Henry C Simons, and until recently by Milton Friedman. The private banks would obtain money to lend from savings accounts with penalties for early withdrawal. However, all sorts of compromises are possible. A great increase in the sustainability of the financial system would be achieved if the government created, say, half of the new money annually, rather than 2% to 5% as is presently the case in many countries. If the combination of private and public money creation results in "overheating," the private creation should be curbed by increased reserve requirements and credit controls to rein in speculative "bubbles."

2. No national or local government should borrow foreign money to finance domestic spending when there is excessive unemployment in the country. Foreign borrowing by the private sector should only be allowed to finance capital goods which cannot be produced efficiently locally, and when there is a good prospect that the loans can be repaid through increased exports.

18. Henry C. Simons, Economic Policy For A Free Society, Chicago, University of Chicago Press, 1948, pp. 56, 80.

{p. 19} Any country with excessive unemployment is attempting to "save" too much relative to its spending out of its potential full employment income. The cure is not foreign borrowing, but very low interest rates, central bank money creation and expansion of public and private spending. Such policies will result in some decline in the country's foreign exchange rate with consequent increase in employment and exports. If the increased domestic income causes imports to expand faster than exports (despite the increased cost of foreign goods) the solution lies in some import controls. This may prove necessary if the rest of the world remains depressed.

3. Governments, like businesses, should distinguish between "capital" and "current" expenditures, and when it is prudent to do so, finance capital improvements with money the government has created for itself.

Junior governments, which are denied the privilege of money creation, should have their capital expenditures financed by loans from the central bank or treasury at zero, or near zero, interest rates. The "Sovereignty Loan" movement now gaining support in the U.S., Canada, New Zealand, Australia and elsewhere is just such a plan.

4. Taxation and government regulations should be modified to favour equity finance over debt finance of private enterprise and to curb speculation.

One possible reform would be to put interest and dividend income on a "level playing field" by repealing the corporate profits tax, or even by giving more favourable tax treatment to equity financed companies. Governments should actively suppress speculative "bubbles" by preventing the creation of new money for this purpose and by taxing heavily those who frequently turn over their holdings of stocks, bonds, commodities, and currencies. Perhaps the "west" has something to learn from the "Islamic banking" movement by which all depositors become part owners of their banks and the banks, in turn, make equity investments in businesses.

5. Current, wholly inadequate, donor nation foreign aid programs must be replaced by an internationally administered "Marshall Plan" financed by money creation adequate to end the worst spects of world hunger and absolute poverty within a relatively few years, while healing the global environment.

We must reform the IMF and the World Bank, or replace them with more wisely constructed institutions which are empowered to grant the Third World the $125 billion a year in international money that Aenda 21 calls for, interest and debt free. This sum, with Financing appropriate safe guards to assure that it is spent wisely, should be allocated to Third World governments on the basis of their development plans and needs for imports, not according to their present wealth. These funds would not be "foreign aid" of any particular country, but rather a boost to the "effective demand" of the Third World for the First (Second and Third) World's goods. Countries would compete to earn this new international money exactly as they do to earn debt money today. The new money would enable indebted countries to pay off their international

{p. 20} bank debt--without the Ponzi Finance game by which interest on old debts is paid only by acquiring still larger new debts.

We moderns like to think we are more civilized than the ancient Romans who's most popular entertainment was to watch men kill each other in the arena, or Aztec priests who cut out the hearts of 20,000 captives one day "to improve the weather," or 19th century apologists for slavery. It is not so. For as UNICEF has shown, every year in which we fail to solve the debt crtsis causes the deaths of 500,000 young children--in a world that grows more food than it knows what to do with. Future ages will have as much trouble understanding why it took us so long to end the horror of debt slavery, as we have today in understanding why it took us so long to end the horror of debt slavery, as we have today in understanding why it took "four score and seven years" for the United States, "conceived in liberty and dedicated to the proposition that all men are created equal" to end the horror of American slavery.

Suggestions for Further Reading

On Financing Sustinable Development

Agenda 21 & The UNCED Proceedings, N. A. Robinson, ed., (Oceana, New York, 1992) Hrold Chorney, John Hotson and Mario Seccareccia, The Deficit Made Me Do It!, (Canadian Centre for Policy Alternatives, Ottawa, 1992)

On Third World Debt:

Patricia Adams, Odious Debts: Loose Lending, Corruption and the Third World's Environmental Legacy, (Energy Probe, Toronto, 1991) Susan George, A Fate Worse Than Debt: The World Financial Crisis & the Poor, (Crove Weidenfeld, New York 1990) UNICEF, The State of The World's Children, (UN, New York). All recent annual issues focus attention on the human costs of the debt crisis.

On Capital Flight and Hot Money flows:

R. T. Nylor, Hot Money, (McClennan & Stewart, Toronto, 1987)

On Monetry Reform:

Willim F. Hixson, A Matter of Interest: Reeamining Money, Debt, and Real Economic Growth, (Praeger, New York, 1991) James Gibb Sturt, Economics of the Green Renaissance, (Ossian, Glascow, 1992) Margret Thoren, Figuring Out The Fed: Answers to the most frequently asked questions about the Federal Reserve System, (Truth In Money, Inc., Chagrin Falls, Ohio, 1985) The COMER Papers, Vol 1. (University of Waterloo, 1987) Vol. 2, (UW 1992) Vol. 3, (UW 1993)

{p. 21} Figure 1

Outstanding Debt of U.S. NonFinancial Borrowers as a percentage of Gross National Product: john-hotson.jpg


(2) Banana Republic? No, Banana Colony, by Dr H. C. Coombs

During the 1950s and 60s, Dr Coombs was Governor of Australia's central bank (which is publicly-owned). Later, he was Chancellor of the Australian National University (ANU) in Canberra. The major complex of buildings in the research part of the university is named "the Coombs Building" after him.

Aboriginal people named him "Short Father" because of his efforts to help them get some control over their own destiny.

Paul Keating (Labor) was the deregulating and privatising Treasurer, later Prime Minister, known as "the lizard of Oz".

Banana Republic? No, Banana Colony, by Dr H. C. Coombs

The former Governor of the Reserve Bank Dr H. C. Coombs, who has been described as the Australian of the century, argues that Australia 's crisis will not go away until we regain our economic independence.

Australian Business Monthly, March, 1992

It is a pity that Paul Keating, in announcing the success of his challenge for the prime ministership, repudiated his earlier judgment that "this was a recession we had to have."

Like the utterances of all oracles, this statement was cryptic and its meaning obscure. But it at least conveyed the suggestion that the recession could be a consequence of what had gone before - that it derived from perhaps unwarranted assumptions and misguided judgments which, at least in part, underlay our government's earlier policies. It therefore could have been interpreted as expressing a willingness to think again.

Such an interpretation would have afforded more closely with Keating's earlier one-liner, that he feared Australia was on its way to becoming a "banana republic"; in other words, that he feared the Australian economy was becoming so burdened with debt to the outside world that it had lost the ownership and control of its own resources and industries and had beeome simply an instrument of the capital, the enterprise and the technology of its dominant imperial power. There was wisdom in that judgment.

{Keating used it to justify the deregulation and privatisation which brought this result about.  The public's worry over foreign debt was used as an excuse to further sell off Australian assets}

Unfortunately, Keating identified the destructive debt only as that arising from the government's borrowing. To his credit he acted forcefully to redirect fiscal policy to the reduction of that debt. But he ignored the need to reduce the greater burden on the economy imposed by payments abroad to which the private sector was increasingly committed.

Enterprises taken over by, or merged into, overseas interests are now committed to remit interest and dividends; to hire technological property from their principals; and to employ expensive consultants, accountants and others providing professional services from firms associated with those principals or with their Australian branches or subsidiaries. These commitments, like those of governments to overseas creditors, have to be met from the proceeds of the Australian economy's production or, increasingly, from the sale of the nation's assets.

Had the government acted as promptly to see that these commitments were repatriated and the relevant services provided by our own knowledge and skills and financed from our own savings as it had to bring government indebtedness under control, the dilemna now facing the economy would be less absolute.

That dilemma is classical. At present we are impaled on the horn of unemployment, flagging expenditure and investment. But if the government is too enthusiastic in its attempts to blunt that horn or to enable the economy to evade it, we may swing to face the horn of even greater deficits in the balance of our international payments, of increasing losses of our national assets and of rising levels of inflation.

But that is not all.

So far the businessmen, union and community leaders with whom the Prime Minister has chosen to consult seem to be interpreting the recession as just another minor hiccup in the flood of expenditure which essentially has been running strongly for the last 40 years. This flood had its origins in the colossal scientific and technological innovations stimulated by World War II and was financed largely by the vast accumulation of international purchasing capacity which the US derived from the obligations towards it incurred by its allies and enemies.

That international purchasing power has been used to help rebuild the war-damaged economies of Europe and Asia, to set in train the industrial colonisation of the third world and to impose a pattern of international trade specialisation on the world which is highly favourable to U.S interests and those of other industrialised and creditor nations.

But clearly that exercise in economic imperialism is flagging. The rate of innovation has slackened and the incentive to spend on research and development and on investment has slackened with it.

Furthermore, the very optimistic assumptions which underlay the attempt to industrialise the whole world now seem to have been mistaken. The physical world is in revolt against the progressive exhaustion of resources and rising pollution, and against population growth beyond the capacity of world agriculture to feed it, even after the Green Revolution.

In other words, it cannot be assumed that this recession is a temporary or limited phenomenon, or that the Australian economy can be kick-started into renewed consumer and investment spending, and so resume and maintain its confident progress.

We in Australia have substantially shared the optimistic assumptions of surging industrialisation and have acquiesced in the pattern of international trade specialisation which has gone along with it. Our economy, as well as the economies of other colonised countries, bears the marks of the effects.

As we come to look more closely at what our business and community leaders propose, I fear we will realise that those marks are evidence of structural defects in our economy, in its priorities, its allocation of resources, and its relevance to the world in which we will have to live.

But first let us look at the relationship between the threats embodied in the two horns of the dilemma to which I have referred: at how far it is possible to stimulate domestic expenditure without dangerous inflation or unacceptable deficits on our balance of payments.

It is easy to increase employment, but not without changing other aspeets of the economy. Employment is closely linked to levels of expenditure. Action can be taken to stimulate consumption expenditure, for instance, by increasing social security benefits, by tax concessions, by subsidies, or even by allowing Aborigines a modest share of the profits arising from the exploitation of the minerals and other resources of the lands we have stolen from them.

However pessimistic industry may be, there are urgent capital investment tasks appropriate to the public sector that are crying out for action: to reduce pollution, to restore the waterways, the forests, the beaches; to protect the ozone layer; to provide adequate, well-equipped schools, health and other facilities for all communities and their children.

The submissions to the groups recently studying the prospects for sustainable development especially those from the CSIRO the Australian Conservation foundation and other science-based "green" sources, have highlighted opportunities arising from resources and research results available in Australia. These could provide a more sustainable stimulus, comparable in effectiveness with that from which the imperialist expansion of the post-war world emerged. Action to increase expenditure on any of these would increase the incomes of those employed in the projects and lead to increased production of the goods and services on which those incomes could be spent.

But any action to increase domestic incomes and employment would bring us sharply on to the other horn of the dilemma: the effect of increased domestic spending on the balance ofour international payments and on the level of our prices and costs of production.

As employment increases, expenditure abroad increases also - partly because of consumers' choice of imported goods and services, but also because Australian industry incurs costs (directly or indirectly) in foreign currencies in the process of producing, financing, transporting and marketing their nominally Australian-made goods and services.

It is the increasing participation of non-Australian enterprise in the Australian economy which has brought closer and more sharply under notice the reality and imminence of this horn of the dilemma. Between 1969-70 and 1989-90 our total exenditure on imports of goods and services, debt servicing and other debits rose from $5.865 billion to $91.133 billion and on services and other debits from $2.304 billion to $40.342 billion.

We have, for decades, tended to ignore that part of this remarkable increase which was ircurred throuh the costs of Australian production. An important part of this increase is in the servicing of private sector debts, in the greater dividends and other shares in the profits of Australian-based enterprises, in payments for the use of foreign-owned technology, patents and the like, and in the hiring of foreign experts to design, organise, transport, advertise, market, deliver and service the goods and services produced by the Australian private sector.

Successive balance of payments problems arising, at least in part, from these growing costs have been deferred by fiscal and monetary policies including relatively high interest rates and progressive downward adjustments in the value of the Australian currency. This has encouraged the sale to non-Australian interests of the natural capital resources of the country and the ownership of profitable enterprises. It is hard to remember that when the gold value of the Australian dollar was fixed with the IMF at the time decimal currency was introduced, it was set at $US1.1. Such policies have not merely made it easier and cheaper for non-Australians to buy our goods and scrvices, but also to own the enterprises which produce them and the natural resources which they consume and often progressively exhaust.

In contemporary "Newspeak" this is referred to as "foreign investment" rather than a loss of capital, and is talked of as if it were the solution to our problems rather than merely their deferment. Recent trends in the foreign exchange market and in official responses to them indicate that the mind of the new Treasurer is running on similar lines. Decisions affecting our mineral and forestry resources suggest that the "new" government is even more determined to sell off what remains of the farm as rapidly as possibly - a certain recipe for the realisation of Keating's prophecy of our descent into "banana republic" status.

Much is currently being said about the "benefits" to farmers, mining companies and other exporters from the increased money incomes which they derive as a result of depreciation. Let it be clear that those benefits derive internally, from decreased real incomes of other Australians, especially consumers, wage and salary earners, pensioners and others who live on fixed incomes. Such income shifts may be justifiable components of economic policy, but the real advantage to the government of achieving them by exchange depreciation is that it does not have to justify them to Parliament, nor to suffer the electoral reaction of those who are on the losing end of the deal.

If one can judge by past experience, it should also be realised that some of the effects of these shifts are promptly offset or reversed: for example, by the highly organised or politically powerful, such as key unions or members of parliament. The stimulus to export production provided in this way can prove to be temporary and, therefore, to serve as a misleading guide to enterprises affected.

A glance at the economic history of acknowledged "banana republics" will show a long record of progressive exchange depreciation and inflation, followed by increasing domination of productive enterprises by foreign owners, combined with declining real domestic incomes and employment for the peasant and wage-dependent populations.

Is it a road we wish to travel?

If we wish to avoid it we must earnestly and promptly seek an alternative economic strategy from the one we have been following in |recent decades: one which will enable us to confront or evade both horns of the dilemma; which will halt the growth of our overseas indebtedness and commitments, private as well as public: which will enable us to begin to stop selling off the farm; to maintain, indeed increase, Australian ownership of the productive enterprises upon which our international and domestic income depends; which will progressively enable us to rely more adequately on our own savings, our own science and technology, our own skills, initiative and enterprise, and in due course to buy back some of those assets which have been passing into foreign hands.

But also, in the immediate future, we must find ways to restore domestic expenditure to levels which will revive employment opportunities and provide access to essential living standards for the Australian people.

These immediate objectives are vital and urgent, and their achievement requires that governments increase some levels of expenditure and accept an increase in their indebtedness, at least for the present. If this is not to call into question the practicability of these policies it is important that:

¥ The new expenditure should create jobs and productive opportunities in sustainable enterprises in a more independent Australian economy; and

¥ The new indebtedness should be internal, owed to Australian citizens and balanced by increased savings (including debt reduction) from personal and corporate incomes. The critical, and most difficult component of this recipe, is to achieve the higher level of savings.

I suggest, therefore, that Mr Keating's Economic Statement should announce a 10-year program to restore Australia's economic independence; to work towards more debt-free governments, households and enterprises, public and private; and to stimulate sustainable use of Australian labour, natural resources and human creativity.

Such a program should include plans to increase personal and corporate savings; to limit the depletion of exhaustible resources; to redirect development policy to give greater emphasis to regional and national self-sufficiency in meeting basic needs; to make better use of the natural resources of the continent; and to raise the level and use of Australian science-based technology. To these ends it is essential that the government and community has regular and significant access to information by which to assess the performance of corporations engaged in industry and commerce in Australia.

The adoption of such a program, with its emphasis on debt reduction, increased saving and Australian ownership, would minimise the risks of the economy being driven onto the second horn of the dilemma by a blow-out in our balance of payments. It would also help to reduce the threat of the third horn - a descent into the status of a "banana republic" - by promoting a significantly more independent economy, more regionalfy based both in its use of domestic resources and in its relationships with the rest of the world.


Mark Mansfield writes in Manufacturing Money

Dr Coombs, former Governor of the Reserve Bank of Australia said in the ES&A Research Address at Queensland University on 15 September 1954,

"Any given piece of expenditure can be financed from one of four sources:
New savings
Accumulated reserves
Money borrowed other than a bank
Money borrowed from a bank.

This last source differs from the first three because when money is lent by a bank it passes into the hands of the person who borrows it without anybody having less. Whenever a bank lends money there is therefore, an increase in the total amount of money available."

Dr Coombs, an advocate of Free Trade, persuaded Gough Whitlam to drop tariffs and boost imports. Whitlam commissioned a report by Coombs, which recommended removing the subsidies to Rural Australia (which kept the rural economy strong, and kept people living in rural areas), and using the money instead to create a Welfare System: australiana.html.

(3) How money is created in Australia, by David Kidd

How money is created in Australia

was at

is now at

... National Debt:

We've all heard of the Third World's debt crisis, of hopelessly poor nations unable to pay their debts, and of the human suffering and environmental consequences of their desperate predicament. But did you know that powerhouse of the world economy, the United States of America, is also in debt... to the extent of nearly US$20,000 for every man, woman and child in the entire USA? Or that after Mexico and Brazil Australia is, per head, the largest debtor nation on Earth?

According to figures obtained in mid 2001 from the CIA Factbook, these are the external debts of a few countries, a lot of them from the "First World":

Australia US$222 billion, Austria US$32 billion, Canada US$253 billion, China US$159 billion, France US$117 billion, Hong Kong US$48 billion, Israel US$18 billion, Italy US$45 billion, New Zealand US$53 billion, Russia US$199 billion, South Africa US$25 billion, Sweden US$66 billion, United Arab Emirates US$15 billion, United States of America US$862 billion.

The Factbook's figures vary from being a couple to several years old, but if so many countries, from the richest to the poorest, are all in debt the question needs to be asked... to whom is the money owed? The answer, apparently, is to private banks.

Banks are happy to make loans available because of the interest they earn from them, but how do they come to have so much money to lend? More even than the world's richest countries? ...

Definition of Money:

Money according to the Macquarie dictionary is "coins or certificates (such as banknotes etc.) generally accepted in payment of debts and transactions, or any article or substance similarly used". In the early days of Sydney, Australia, rum was frequently used as a form of money. In the modern world credit cards and cheques are generally accepted in payment of debts and transactions, so credit is a form of money.

Coins and Banknotes

In Australia, coins are made by the Commonwealth Government at its Royal Mint in Canberra and banknotes are printed in Melbourne by Note Printing Australia, a wholly owned subsidiary of the Reserve Bank of Australia which in turn is wholly owned by the Commonwealth Government. So it is fair to say that coins and banknotes are manufactured by the government. Provided the quantities made result in a total money supply in balance with the goods and services being generated throughout the country the manufacture of coins and banknotes will not cause inflation nor a shortage of money.

But statistics like those prepared by the Reserve Bank show that only about 5% of all money in Australia exists as coins and banknotes. So where does the other 95% of money come from?

Banks Create Money by Creating Credit:

Credit that can be accessed by credit card, overdraft cheque or bank loan represents nothing more than someone's promise to pay. Credit money exists only as numbers in bank computers. ...

Bankers Depression of the 1930s: ...

Australia suffered more in the 1930s than any other country with the exception of Canada and Germany. We had an unemployment rate that reached 30% and was 20% for a long period of time. National income fell by almost half. Capital dried up completely. Commodity prices fell by two thirds.

Bankers Quickly Created the Money for War:

Almost overnight, the same Bankers who had no money for housing, food and clothing, suddenly had millions to lend for Army barracks, uniforms, rations and weaponry. This was a remarkable reversal in policy by the Bankers. They simply began pumping millions upon millions of dollars back into the economy when war was imminent. The Great Depression ended because of the war! ...

Some Success Stories:

The Saracen Empire forbade interest on money 1,000 years ago and at that time its wealth outshone even Saxon Europe.

Mandarin China issued its own money, interest and debt free, and historians and collectors of art today consider those centuries to be China's time of greatest wealth, culture, and peace.

Germany financed its entire government and war operation from 1935 to 1945 without gold and without debt, and it took the whole Capitalist and Communist world to destroy the German power over Europe and bring Europe back under the heel of the bankers. ...

Australia's own government established Commonwealth Bank achieved some impressive successes while it was "the peoples' bank", before being crippled by later government decisions and eventually sold. At a time when private banks were demanding 6% interest for loans, the Commonwealth Bank financed Australia's first world war effort from 1914 to 1919 with a loan of $700,000,000 at an interest rate of a fraction of 1%, thus saving Australians some $12 million in bank charges. In 1916 it made funds available in London to purchase 15 cargo steamers to support Australia's growing export trade. Until 1924 the benefits conferred upon the people of Australia by their Bank flowed steadily on. It financed jam and fruit pools to the extent of $3 million, it found $8 million for Australian homes, while to local government bodies, for construction of roads, tramways, harbours, gasworks, electric power plants, etc., it lent $18.72 million. It paid $6.194 million to the Commonwealth Government between December, 1920 and June, 1923 - the profits of its Note Issue Department while by 1924 it had made on its other business a profit of $9 million, available for redemption of debt. The bank's independently-minded Governor, Sir Denison Miller, used the bank's credit power after the First World War to save Australians from the depression conditions being imposed in other countries. The Commonwealth became the first Australian Bank to to open an agency in New York, established mainly for public loans via the New York market. By 1931 amalgamations with other banks made the Commonwealth Bank the largest savings institution in Australia, capturing 60% of the nations savings.

The Commonwealth Bank was unable to save Australia from the depression of the 1930s because it had been effectively strangled in June, 1924, when the Bruce-Page Government brought in a Bill to amend the Commonwealth Bank Act by taking the control of the Commonwealth Bank out of the hands of its Governor, and placing it in the hands of a directorate consisting of the Governor of the Bank, the Secretary of the Treasury, and six persons actively engaged in agriculture, commerce, finance, and industry, to be appointed by the Governor-General (which in practice meant the Bruce-Page Government). The effect of the Bill was to place the Bank absolutely under the control of a body of men who might be bitterly opposed to any competition with private banking.

Such history of money does not even appear in the textbooks of public schools today.

We are not alone! ====

Manufacturing Money by Australian Mark Mansfield B.Ec.

... Ralph Hawtrey Assistant Under Secretary to the British Treasury in the 1930s wrote in 'Trade Depression and the Way Out', "When a bank lends, it creates money out of nothing." In his book the 'Art of Central Banking', Hawtrey went on to make it very clear what the implications of creating credit out of nothing meant, when he wrote, "When a bank lends, it creates credit. Against the advance which it enters amongst its assets, there is a deposit entered in its liabilities. But other lenders have not the mystical power of creating the means of payment out of nothing. What they lend must be money that they have acquired through their economic activities."

The Rt Hon Reginald McKenna, former Chancellor of the Exchequer addressing a meeting of the shareholders of the Midland Bank, 25 Jan 1924, as recorded in his book 'Post-War Banking', "I am afraid the ordinary citizen will not like to be told that the banks can, and do, create and destroy money. The amount of money in existence varies only with the action of the banks in increasing or decreasing deposits and bank purchases. We know how this is effected. Every loan, overdraft or bank purchase creates a deposit, and every repayment of a loan, overdraft or bank sale destroys a deposit."

Dr Coombs, former Governor of the Reserve Bank of Australia said in the ES & A Research Address at Queensland University on 15 September 1954, "Any given piece of expenditure can be financed from one of four sources: New savings Accumulated reserves Money borrowed other than a bank Money borrowed from a bank.

This last source differs from the first three because when money is lent by a bank it passes into the hands of the person who borrows it without anybody having less. Whenever a bank lends money there is therefore, an increase in the total amount of money available."

There is however a limit to the amount of credit banks create. This is governed not so much by the demand for money to facilitate commerce but what the banking system considers is necessary to maintain a stable financial system. As English economist Hartley Withers in his book 'International Finance' wrote: "A credit in the Bank of England's books is regarded by the financial community as 'cash' and this pleasant fiction has given the Bank the power of creating cash by the stroke of a pen and to any extent that it pleases, subject only to its own view as to what is prudent and sound business."

Any standard economics text explains the credit creation mechanism which banks perform. What they don't explain however, are the policy implications of what this means.

When Treasurer Costello ridiculed David Ettridge for saying the government could print money, he was speaking up for the status quo where banks have a monopoly on the creation of credit. Prime Minister Howard also blasted the One Nation proposal to lend $150m at 2% interest by a people's bank, saying " will have to find some mugs who will lend to the bank at 1% and I don't know many Australians who will do that."

But as Dr Coombs said, money can be made available by a bank to a borrower without anybody having any less. Because banks actually create new money when they lend it, depositors are not required to start the process.

I would have thought One Nation's proposal for a people's bank was an excellent beginning for breathing life back into Australian industry, farming and small business. Australia is deindustrialising. In 1961 27.5% of the work force was employed in manufacturing. By 1996, employment in manufacturing had more than halved to 12.9% of the work force. From 1965 to 1985, the share of manufacturing in national income fell by a massive 40%. This decline has occurred because interest rates in Australia have been comparatively higher than most of the Western world for a generation. It is not a level playing field when industry in developing countries operates at lower cost, not because of cheaper labour, but because it can get access to finance, the life blood of the economy, at 2-3% interest rates, compared to the 8% to 28% interest rates Australian firms have endured for the last 30 years.

From 1965 to 1985 the manufacturing share of national income grew by 75% in Indonesia, 80% in Taiwan, and 111% in Malaysia. These countries along with Thailand, the Philippines and China now have a proportionately larger manufacturing sector than Australia. Common sense tells us Australia's manufacturing sector should be way in front of these countries because of the abundance of raw materials which we possess.

Now either Howard & Costello are completely ignorant of the most basic banking function of credit creation, in which case they do not deserve to hold their offices for this reason alone, or for political reasons they are suppressing policies which could be used to strengthen Australia economically be utilising the power of creating credit on the right terms.

When money or financial credit is created, it is a symbol which monetises what could be called real credit. This is the ability of individuals, companies, governments or nations to use raw materials, technology and skilled labour to produce goods and services needed and demanded by the community.

This was ably stated by Sir Denison Miller, Governor of the Commonwealth Bank of Australia from its creation in 1912, to 1923, when he was quoted in the Australian Press on 7 July 1921 as saying,"The whole of the resources of Australia are at the back of this bank, and so strong as this continent is, so strong is the Commonwealth Bank. Whatever the Australian people can intelligently conceive in their minds and will loyally support, that can be done."

The Commonwealth Bank began in 1912 as a people's bank with a £10,000 (probably $1m in today's money) from the Commonwealth government. By the end of World War One in 1918, it had financed what in today's money would be $35,000m for Australia's war effort alone, the purchase of the Commonwealth Fleet of Steamers, the forerunner to the Australian National Shipping Line, the trans-Australia railway and growth in Australian industry when British banks and their Australian subsidiaries were running a deflationary policy.

The 1930s Depression focused people's minds as never before on money and banking. Financial poverty consigned millions of people around the world to material misery amidst the material plenty of the age. In many countries around the world enquiries into the financial system were set up to find solutions. In Australia the Commonwealth Royal Commission into Money and Banking reported in 1937. In section 504 of its report, which dealt with the creation of credit, the Commissioners wrote,"Because of this power, (i.e. credit creation) the Commonwealth Bank is able to increase the cash of the trading banks in the ways we have pointed out above.(The Commonwealth Bank at the time was Australia's central bank, like the Reserve Bank is today). Because of this power too, the Commonwealth Bank can increase the cash reserves of the trading banks; for example it can buy securities and other property, it can lend to governments or to others in a variety of ways, and it can even make money available to the Governments free of any charge."

When asked to explain the exact meaning of what making money available to government free of any charge meant, the Chairman of the Royal Commissioners, Justice Napier of the South Australian Supreme Court, issued a statement through Mr Harris of the Commonwealth Treasury, who was the Secretary of the Royal Commission, which read,"This statement means that the Commonwealth Bank can make money available to Governments or to others on such terms as it chooses - even by way of a loan without interest, or even without requiring either interest or repayment of the principal."

This long forgotten advice given by the Royal Commissioners is staggering when we think how the economy functions today. We are told by the financial establishment, the media and politicians that deregulation, rationalisation, and privatisation is necessary if Australia is to remain internationally competitive and service the huge burdens of personal, corporate and government debt.

The fundamental problem in the world's financial system is that all money is created as a debt to the banking system. Banks claim to own money which does not exist and lend it against the real credit of society as an interest bearing debt, permitting activities of the banks' choosing to be undertaken. This would be akin to the Electoral Commission, who print all the ballot papers for Australians to decide who we want to elect to govern us, said, because they print all the symbols with which Australia makes this decision, they own the symbols and can fill out all the ballot papers themselves. There would be uproar!

The trouble with interest is that it can never be paid off. If the banks demanded repayment of say the roughly $405,000m in Australia at the end of the financial year, at say an average interest rate of 5%, we would have to repay $425,000m. You can't do this if there is only $405,000m. Consequently, interest is continually compounded as a debt. This is a mathematical certainty. Money is a stock. It does not matter how many times it changes hands generating a flow of income as goods and services are exchanged. At any point in time, the capitalised value of debt and interest will always exceed the money supply. At the end of May 1998, the total value of lending by banks was $518,498m, while the money supply was $404,109m.

The whole economy then slaves away at the impossible task of trying to repay the ever increasing debt to the banking system. Prices and taxes must be continually inflated to pay an escalating interest burden. Family life, human personality and the environment are sacrificed for production, while production and consumption in their turn are sacrificed for monetary profit to pay debt.

When the government borrows money, it issues interest paying securities such as Commonwealth Bonds which it sells to the financial market and Treasury Notes which are bought by Reserve Bank. Treasury Notes in turn are purchased by the private banks from the Reserve Bank using credit they have created. The private banks then exchange Treasury Notes with the Reserve Bank whenever they require currency. Hence, even that fraction of the money supply which is currency is ultimately an interest bearing debt to the banking system.

The Reserve Bank is not so much the government's bank, but the banking industry's bank. Despite the window dressing of public ownership, it runs its own policy independent of government. Australian politicians of whatever party, like most of their counterparts around the world, pride themselves on saying the Reserve Bank is independent of government. What they are really saying, is that despite whatever rhetoric about the Reserve Bank serving the people of Australia, it is not accountable to its supposed shareholders, the Australian people.

Government could print money or create the necessary credit through the Reserve Bank at no interest cost for worthwhile public works. Instead it goes cap in hand to the banks issuing IOUs by Treasury Notes, Commonwealth Bonds and other securities to borrow money created by the banks out of nothing at interest, for which the long suffering taxpayer has to pay.

US President Abraham Lincoln was acutely aware of this dilemma facing government. When seeking finance for the North during the US Civil war, Lincoln rejected the usury of the banks who were prepared to finance the North at 24% to 36% interest. Instead Lincoln began printing 'greenbacks' which the US currency design has followed ever since. As quoted in Appleton Cyclopaedia Lincoln was moved to remark, "I have two enemies; the Southern army in front of me and the financial institutions in the rear. Of the two the one in the rear is my greatest foe." He also noted that, "The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government's greatest creative opportunity."

If government harnessed credit creation as it should, the phoney argument for privatising public assets like Telstra because government does not have the money to develop these assets disappears. Selling Telstra and other government business enterprises to redeem public debt is also nonsense. Privatising assets only transfers the burden of debt from government to another sector of the economy. Investors either borrow money or use savings which have ultimately been created as an interest bearing debt by the banking system. Importantly, no net reduction in debt occurs in the economy, unless foreigners purchase these assets, in which case the debt burden is transferred offshore.

We do not need foreign investment to develop Australia. We may need to buy technology and skilled labour from overseas, but we do not need foreign investment. Foreign investors cannot spend their $US, Japanese ¥, German DM or £ Sterling, in Australia, they can only spend $AUD. When foreign investors purchase assets in Australia, they need to buy $AUD. They purchase these dollars from Australian banks, or from banks in their own nation holding reserves of $AUD. In effect the banking system releases counterpart $AUD into the economy, on the signal of the foreigner investor. This is totally unnecessary. Why allow an Australian bank to introduce $100m into the economy to start a mine or factory for a foreign company, when $100m of new money could be created for an Australian company to do so.

Now after relating to you how banking operates in the economy, we should not be bitter about banks, nor toward the people who work in them. However, unless reform of our financial system is made, Australia will end up in the same strife as Africa, Latin America, Indonesia, Thailand, Korea, and Russia. The social fabric in these countries has been torn asunder by debt.

The prescriptions imposed on these countries by the International Monetary Fund and are criminal. It has lent more money, just so these countries can try and pay the interest bill on their debt. Note there is no talk of trying to repay the debt itself. This is like giving an alcoholic more drink to cure his drunkenness. The only solution is a complete write off, in an orderly manner of the international debts of these countries.

In Australia, growth in the money supply each year should be related to the total productive capacity of capital and consumer goods and services. There should be a scientific approach to creating and distributing money in the economy based on what is needed, rather than the arbitrary policies of the banking system. We need a national supply and demand account listing productive capacity against anticipated demand. This will indicate whether the money supply needs to be expanded or contracted. We need a national balance sheet listing assets and liabilities, which would include the money supply since it is a claim upon assets.

As we have significant numbers of unemployed and a huge proportion of the population living below the poverty line it is obvious our productive capacity exceeds demand at the moment. The Reserve Bank could be directed to costlessly expand the money supply according to what is indicated by the national accounts, at no inflationary cost by paying price subsidies to producers.

Before the establishment scream this distorts the market and makes producers inefficient, it is far less market distorting than sales taxes, which make the pockets of businesses and consumers inefficient by draining them of money. It also ignores the fact that this has been successfully done in Australia before. A universal price subsidy scheme to control inflation operated in Australia from 1943 to 1946. Businesses supplied evidence of their prices to government, and then discounted their prices in return for compensation from consolidated revenue. In effect, this was a sales tax in reverse.

The Reserve Bank could provide Federal State and local governments with their monetary for capital development, free of debt or interest. The debts of all government business enterprises could be refinanced by the Reserve Bank at an interest rate of 1% or less to cover the cost of administration. Governments would then be in a position to significantly cut taxes and charges across the board as the interest servicing costs funded by the taxpayer would dramatically decline.

In the tax election at the moment, the politicians are only offering various versions of ever increasing taxes. Whether or not we get a GST, there is bracket creep which slugs wage earners as they are pushed into higher income tax brackets when their pay increases, automatic inflation linked increases in petrol, tobacco and alcohol excise, and increases in sales tax and stamp duties as prices and asset values rise. The various tax packages are not aimed at reducing the level of taxation, but only at shifting the burden between groups of taxpayers.

Money is a symbol which determines how resources are mobilised and consumed. At the moment the whole of the real economy is held to ransom by those who create and distribute the symbols. Australia needs policies which grasp the reality that the economy exists to sustain individuals and families in a dignity befitting their development. Production should be subservient to this. Money and banking should be subservient to production. Anything else is arranging deck chairs on the Titanic. ====

Last Chance for the Lucky Country

... An Australian dollar that was once worth 2 USA dollars was worth 67 USA cents by the end of 1997, and falling. ...

The world abounds with poor countries that were once prosperous.

In the 1920s Argentina could compete with Australia for the title of richest country on Earth. By 1950, only 30 years later, it had become a "developing country" and its citizens tasted poverty and despair. Before World War 2, Britain was Europe's richest country: it is now one of the poorest. Centuries ago Portugal and Spain were the great explorers of the world, but by 1945 were regarded as "developing countries". ...

Meanwhile, smaller Sweden with half our population, builds and sells its own SAAB jet fighter that can take off and land on ordinary highways. The same country's Volvo car corporation exports to the world and at times pulls in 10% of Sweden's GNP . . . whilst we allow any profits from car making in Australia to be spirited away by foreign owned multinationals. And our "developing" neighbour, Indonesia, now makes its own military and passenger aircraft.

Profits for foreigners Debts and taxes for Australians

Of course, not all products are high technology ones. Like people anywhere, Australians need their bread, biscuits, lollies and drinks, some banking services, a bit of insurance, a few medicines, and so on. All these things are made or provided in Australia, by and large as a result of the efforts of Australian workers. But who controls those workers? Who, as owners, get most of the profits?

According to AUSTRADE, this is how much of our enterprise has been transferred to foreign interests:

Processed Food 95%, Motor Vehicles 100%, Pharmaceuticals 100%, Confectionery & Beverages 84%, Manufacturing 57%, Building Materials 88%, Mining 97%, Electrical 98%, Banking 86%, Chemicals 98%, Insurance 82%, Hotels 75%, Oil/Gas 92%. ...

Is tariff protection the answer?

A tariff is nothing more than a selective tax placed on a particular imported good. It makes the imported good more expensive, and in doing so enables the domestic producers of that good to sell their product at a higher price than they otherwise could.

Older Australians remember that back in the 1950s when the nation was still prosperous, Australian industry was strongly protected by tariffs. Several of Australia's minor political parties (One Nation, Australia First, and others) attract some support by advocating a return to tariff protection. They recall not only Australia's past, but the success of Japan since World War 2. Japan has been strongly protectionist of its industries when it thought advantageous, although not so much with tariffs as with other non-tariff barriers.

Opponents of tariff protection claim it breeds lazy, inefficient industries. This is undoubtedly true when a tariff is left in place for a prolonged time, without monitoring its level, value, and cost. Opponents of tariff protection claim tariffs increase the costs of business resources and so disadvantage non protected industries, making them less competitive internationally. The same could be said of most taxes. Opponents also point to international treaties (such as GATT) that Australia governments have signed (foolishly some would claim, and without reference to Australian citizens) which make a return to widespread tariff protection difficult if not impossible.

Economics literature suggests that in most cases a subsidy to industry is preferable to a tariff. Sweden has developed its own defence aircraft directly through government subsidies to defence industries. Opponents of tariff protection will sometimes admit that there is a good case for trade protection (subsidies) for defence industries as long as this is restricted to national defence, and is not wasted. Support for maintaining a manufacturing base in case of war is common.

Ironically, it is tariff protection that encourages foreign investment in an attempt by foreigners to jump trade barriers; the higher the tariff the more likely foreign investment becomes. Those who oppose uncontrolled foreign investment in Australia (as I do) must keep this irony in mind.

So what is the answer? My belief is that our government should be prepared to use a wide range of protective measures (tariffs, subsidies, quotas, inspection of imports, a tax on payments going out of the country, and anything else that will work) in a carefully controlled way to foster carefully selected industries to achieve specific objectives. Of the measures suggested, the one having most appeal to me is a subsidy, which can be directed to companies that are substantially Australian owned, and even to particular products if appropriate. In giving a subsidy to industry the government is in any case only returning some of the costs government itself imposes on industry in the form of taxes, excise duties, and compliance costs caused by government legislation and regulation.

Specific objectives might be to reduce temporary high unemployment; to establish a new industry that could benefit the economy; to retain a strategic industry that might otherwise be lost to cheaper imports (temporarily cheaper that is, considering only the dollar costs without the social ones). Australia's steel industry comes to mind. How is it that our biggest steel maker, BHP, is reducing steel making in Australia whilst Japan, with a higher wage structure than ours and using our raw materials, can continue?

Carefully selected industries would be only strategic ones or ones likely to be at least economically viable in the long term, and preferably the most profitable; they would include industries where we would appear to have some natural advantage (the steel industry comes to mind again); they would NOT include industries dominated in Australia by multinationals (which would not be here unless they were, perhaps secretly, making a profit already).

Careful control of protective measures would include continual monitoring of the costs and results of the protection, adjustment of the rate as appropriate, and perhaps eventual removal of the protection. All this would best be done not by politicians, but by independent, patriotic Australian analysts having skills in industry and economics, free from lobbying by vested interests.

Most of the problems with tariffs arise because they are not set sensibly. They are set by politicians of doubtful loyalty and knowledge of technology, influenced by lobbyists for vested interests, namely businesses seeking assistance. A cynic might ask how can tariffs be set sensibly? Governments such as Australia's almost seem to demand that special interests influence them to get what they want at the price of society. The same is as true for subsidies as it is for tariffs.

Which is why I stated above that identifying the answers related to industry policy is futile unless and until the fundamental problems with the Australian federal government are fixed.

Is foreign investment good for Australia?

I think the answer is "yes" if proposed investments are examined on a case by case basis, and only those which clearly benefit Australia are accepted. There are certainly win-win situations in which both the investor and the host country can benefit. But the answer is "no" to uncontrolled foreign investment, which in so many individual cases costs Australia more in the long run than any offsetting gain.

Malaysia's Dr. Mahathir has helped his country develop into one of Asia's so called "tiger economies" by encouraging foreign investment, but said in his famous speech after the Asian economic crash of late 1997: ". . . you should also appreciate that we of South East Asia at least, are now very scared about foreign capital. We thought they were helping to prosper us. We conducted roadshows to encourage them to invest in our share and financial markets. We will continue to do so. But we will have to be more circumspect."

In a stinging indictment of uncontrolled free trade and free market forces, he said:

"I mention all these because society must be protected from unscrupulous profiteers. I know I am taking a big risk to suggest it, but I am saying that currency trading is unnecessary, unproductive and immoral. It should be stopped. It should be made illegal. We don't need currency trading. We need to buy money only when we want to finance real trade. Otherwise we should not buy or sell currencies as we sell commodities."

The full text of Dr. Mahathir's speech is well worth reading.

Unscrupulous Profiteers

" . . .society must be protected from unscrupulous profiteers" says Prime Minister Mahathir, after describing several instances in which America has used government legislation to halt free enterprise practises that were seen to be against the interests of its society as a whole.

To me, this seems to be an important point often overlooked, and hardly ever mentioned, by Australia's supporters of free trade, MAI (Multinational Agreement on Investment), and economic rationalism. If those supporters choose to disregard David Kidd and Dr. Mahathir, they would probably also disregard the results of NAFTA, the North American Free Trade Agreement, as described in a letter signed by hundreds of dismayed citizens groups in the countries concerned. They would have to disregard the Pope of the Roman Catholic Church too, who in January 1998 warned Cubans against "the blind market forces" of global capitalism. "The wealthy grow ever wealthier, while the poor grow ever poorer" the Pope declared, to explosive applause in the Plaza of the Revolution. The Pope was speaking at the climax of a five-day visit to Cuba.

The free enterprise system provides great incentive to innovate and to work, leading to vigorous economies far more successful than others that the world has experimented with. But it also provides opportunities for the unscrupulous to enrich themselves without offering any benefit to society in return. In my view, eternal vigilance and decisive intervention is required of the Australian federal government if the excesses of profiteers are to be restrained so that the people of Australia may prosper. I don't believe it's been happening !

It goes without saying that I opposed any Australian involvement in the MAI, that proposed Multinational Agreement on Investment which would have ended any chance Australia may have of controlling its own industry policy. One of our politicians actively led the successful campaign against it, a position vindicated by the final report of the Australian Joint Standing Committee on Treaties after MAI negotiations had been abandoned - The MAI research by GWB provides more details.

Who was the one politician? Why, the same one all major political parties combined to oppose, the one ridiculed consistently by the mass media, Pauline Hanson. Does that suggest anything to you about the trustworthiness of the major political parties and mass media? ====

The Fatal Trap In The Global Economy

by Graham Ferguson and Michael Bond (Revised 4 April 2002)


Over the last 30 years, the global economy has led almost every country on Earth into escalating and irretrievable national debt. The global economy has unnecessarily inflicted unthinkable amounts of damage upon the human race and our planet in the process.

In 1971 the 'New World Order' began, when changes were made to the US national currency. In 1971 the US Federal Reserve Bank severed the link between its national currency and gold. Since 1971, US currency has been created by a new method, namely through bank loans. This new kind of US currency began destabilising other national currencies, forcing them to 'float' their currencies, that is, change to the US designed 'globalised' currency system

After the currencies were changed the illusion persisted that hard work and productivity still created money. This illusion is created because workers receive money in exchange for their labour or productivity. Money comes into our existence through our productivity, and thus it is easy to assume that is how money is created everywhere. Nothing is further from the truth. The reality is that hard work and productivity no longer have any direct link at all to creating money. Because of the way money is now created, money can no longer reflect the productivity of any industry or country.

This new 'global economy' is still trading on society's goodwill towards the old type of currency systems that no longer operate. Most people still think a dollar is a dollar, but the shift into the new economy that world governments have embraced since 1971 has turned national currencies into national death warrants.


Money now represents bank debt, not national wealth. When a country 'globalises' its economy as Australia did in December 1983, all new money that comes into circulation now does so as a debt to a bank. Money no longer comes into existence as the result of labour, production of goods or by mining gold. Nor does money come into circulation by banks lending out their customer's deposits. These are commonly believed but dangerous misconceptions. In the new global economy, money is now created only through bank loans. Now labour and production merely redistribute the money that is created by banks.

When banks grant a loan and a borrower's account is credited with an amount of money, that currency is created in the same instant. It is suddenly brought into being from nothing. The money did not exist before the moment the loan was granted. When that borrowed money is spent, it is then 'in circulation'.


When a debt is repaid, the loan and the dollars, euros, yen, etc that the loan created, all cease to exist. They are cancelled out. Other loans create more currency by the same process to replace it, and so on. The repaid money is not in the bank. It is no longer anywhere and it is certainly not in circulation. All debt repayments reduce the money in circulation by that amount.

In 'good times', as people pay off their debts, they are in fact drying up the amount of money flowing around in circulation. This creates a shortage of money and thus everyone in society must have less of it. Everybody tries to understand how they can be working so hard yet have so little cash in their pocket, and businesses lay off workers or go bankrupt.

The only way to replace currency in the present global economy is to take out another loan. This is why governments now "borrow their way out of debt". As there is no other source of money, a country's overall 'debt' must always remain unpayable and must continually grow as the economy 'grows'. This is why national debts have escalated in the last three decades.


The global economy has a designer-flaw built into it. Interest is the planned spanner in the works that sabotages the global economy by ensuring there can never be enough money in circulation for everyone to have sufficient. When each loan is repaid and disappears, it leaves a residual deficit of interest that accumulated from the loan.

This is the key point to understand. In order to pay that interest more currency must be found than, by definition, can ever possibly exist. Not enough money exists to pay off the interest after the debt itself has been cancelled out. The only way to get more money to pay the interest is to borrow more through another loan.

By the end of the second loan, the first loan's interest has been paid off, but now there is not enough left to even pay off the second loan, let alone pay its interest. A third loan must be made, and as this cycle is repeated, the amount of residual debt created by interest mounts up to impossible levels. It is as simple as 100 ? 110 = ?10. For every ten steps the economy now goes forward, it must take eleven steps backwards in the form of national debt.

A single loan never creates enough currency to enable it to be paid back with interest. No loan on Earth ever creates enough currency to pay back its capital and interest. All loans on Earth have created a global economy that can never have enough currency in existence to pay out the loans. This is by design, since 1971. The global economy is a pyramid sale, a planned time bomb, designed to reduce the world and the human race into a global catastrophe. The 'global economy' makes it inevitable that every national debt must eventually become large enough to cause national bankruptcy.


In the new global economy the word 'credit' has taken on a new and deceptive meaning. Most of society thinks of 'credit' in the old way. Consider making a purchase from a shopkeeper using two different methods of 'credit'.

In the first way, the shopkeeper gives you $100 worth of goods on credit. A year later you pay the shopkeeper $100, plus $10 interest and you are even. In the second way you get $100 of 'credit' from a bank (say by using a MasterCard), which you use to buy $100 worth of goods from the shopkeeper. A year later you pay back the bank $100, plus $10 interest and you are even.

The two methods of payment seem identical at first but there is a huge difference. When you get credit from a shopkeeper and you pay off the debt, the $110 of cash is still circulating in town. However, when you get credit from a bank and you pay the bank back the debt, only $90 of cash is left circulating in town. The $10 of interest had to come from the $100 that the MasterCard generated. There is nowhere else it could come from. The globalised economy is like a sleight of hand card trick.

The shopkeeper method of credit is real credit, that is, an extension of goods. The bank kind of 'credit' only represents an extension of a debt. Most people still think modern bank 'credit' is like the shopkeeper credit.

When the world changed over to the 'debt money' economy, it became impossible for wealth to accumulate as it could in the old economy, because now the money keeps disappearing from circulation as it is used. Wherever you see the word 'credit' concerning banks or finance, it can accurately be replaced by the word 'debt'.


In the current economic system, which is based upon the principle of 'not ever enough to go around', the players are forced to compete by grasping at the dollars that are left. The cruellest, meanest, most selfish and most dishonest players get the available money while the more decent members of society are eliminated altogether.

The surviving players who provide products and services to the marketplace are not the 'best of the best' sorted through competition in excellence. They are merely the players that fight hardest and dirtiest to get the insufficient dollars available. Consumer choices, prices and quality of goods are dictated by how much is left for actually making the product after the research and marketing wars are over.

The sociological effect of the Western run economy dictates that there be competition between every facet of society. The new way of creating money forces members of society into conflict and competition with each other against our better natures and judgement. This keeps society divided and unable to unite effectively on any issue.

When society is structured around the rule that there can never be enough to go around for everyone, its citizens live in an ongoing terror of not having enough personally. As a result, society seems to mostly consist of citizen against citizen. After a while people in a society like this would have no choice but to be convinced it was human nature to be viciously cruel and competitive. Most of the human conflict and environmental devastation in our modern world would disappear if the global economy ran to a policy, which made financially possible that which is physically possible.


In order for the global economy to stay viable it must continually expand. It was a necessity to 'develop' third world countries so that the markets of the first world countries could survive via economic expansion. Third world 'development' is simply the transferral of the unrepayable interest debt from the first to the third world, to benefit the first world at the expense of the third.

The third world 'development loans' were used to generate enough currency globally, to allow the first world to pay off its debts and interest. After the third world countries' environments and lifestyles have been irreparably ravaged, instead of prosperity they are left with unmanageable debts that can never be repaid.


It often comes as a surprise to learn that national governments do not own 'national' currencies. Even Federal Reserve Banks are privately owned corporations (despite their misleading names). Due to the changes that were introduced into the new global economy, multinational banks actually own and control 'national' currency now.

The person with whom legal custody of a commodity resides can be termed its owner. Before 1971, money represented an existing commodity, namely a chunk of gold stored in a bank.

All the money now brought into existence is borrowed by an individual, an industry or a nation from a bank somewhere. It was not given nor earned anywhere, it was loaned and it must be given back one day. Thus, whoever holds this borrowed money, only holds it in trust. Nobody really 'owns' money as they used to, and still think they do.

The bank that created the money against a debt is the ultimate owner of it, because a contract says the money must eventually be given back to that bank, which only 'loaned' it in the first place. You cannot lend what you do not own. Ironically, the banks only 'own' money while you hold it, because once the bank gets 'their' money back it vanishes.


At the end of each cycle of production, our present economy guarantees that there will always be more goods produced than can ever be sold. Governments regularly make up the inevitable shortfall of income to multinational industries as grants, bribes, subsidies, tax breaks and free infrastructure.

This extra funding for multinational industries artificially gives them the appearance of being profitable because they can afford to sell their goods for less than the goods really cost to produce. Nationally owned businesses cannot compete with multinationals on such a non-level playing field. If multinational industries worked to the same rules as the national businesses that are taxed to support them, the multinationals would go bankrupt. Global fishing and forestry industries illustrate this point well.

It usually comes as a surprise to realize that prosperity causes recession. In 'prosperous' times when society reduces its debt by paying off its loans, the amount of money in circulation dries up as a result. Shops may be over stocked with goods and people may want to buy them but they do not have money to do so. There may be many who want to employ people or become employed but without enough currency in circulation - nothing moves. The only way out of recession is to borrow more debt-dollars to circulate, which increases national debt further.

More than half the world goes without because of insufficient currency in circulation. 'Debt created' national currency restricts a population's ability to produce enough for themselves, even if there is a desperate national need for products or services.


In many people's minds the key to reducing national debt is to increase exports over imports, thus making a net profit to pay off debt. There are two flaws in this dangerous notion.

Firstly, if virtually every country on Earth is in debt, as they are, then how can trade ever balance the global economy? One nation's profit is another nation's loss. A group of bankrupts cannot balance their books by trading amongst themselves.

Secondly, imbalance of trade did not create national debt so it cannot solve national debt. National debt is created by the planned and unnecessary shortage of currency in circulation. Trade imbalances appear to be the cause of national debt, only because the shortfall created by interest payments always ensures that nations appear to have a negative trade balance long-term. This is why so much global trade produces so much global debt. The debt-dollar economy guts trade of the ability to ever create overall profit.

Blaming national debt on balance of trade keeps society focused upon the red herring of 'salvation through export', and conveniently keeps society ignorant, and looking elsewhere from, the real cause of their social poverty and environmental destruction. As export industries borrow more money to expand, they are, in reality, further strangling the very people they claim to be saving.

Over 50% of global export trade is reciprocal where exactly the same goods are exchanged between countries. How can a can of tomatoes be cheaper if we unnecessarily ship it across the world before putting it on the supermarket shelf? In the modern global economy, creating new export markets is simply a dishonest front for creating more loans. Exporting is not about making people's lives better, nor about balancing national debt. How can exporting, a system that creates more debt, ever be expected to get us out of debt?


The present global environmental destruction is directly related to the debt-dollar financial system. For over half a century scientists and research bodies worldwide have been warning of impending environmental disaster, and we are now beginning to suffer from the disasters we were warned about. Human society and Earth's biosphere are suffering from our monetary system. We usually dare not take into account the damage we inflict on society or the environment as we fight to survive in a rigged economy.

During the decade of the 1990's, debt-dollars demanded that the global economy grew at about 4.3% per year. At a growth rate of just 4% per year, in 100 years the global economy would be 50 times larger than today, and Earth is already falling apart from the demands of the present sized economy.

Watchdog and protest groups from local organizations right through to the international bodies such as Greenpeace continually petition socialist and conservative Governments to impose restrictions on waste discharge from government and corporate industry. They appeal for a curb on greenhouse gas emissions into the atmosphere and the dumping of toxins into waterways. On a daily basis naïve protesters fight the endless symptoms rather than address the root cause of all the problems: the new global economy.

Human greed is sold back to the protestors as being the underlying cause of the problems, but the problems caused by economic scarcity are really the underlying cause of the human fear and greed. In reality, the global environment is being raped by a world population that is crippled financially by nothing other than the new global method of creating money.

The cost of curbing and cleaning up greenhouse gas emissions and other industrial pollutants is financially impossible in the present global economy. The ability to clean up the environment, and the desire of society to do so are evident, but the scarcity of dollars means environmental care is an economic impossibility.


Creating money as a debt and thus as a rare commodity for which we must compete, has spawned a society that sees money as humanity's most essential commodity. People's first waking thought and daily preoccupation are now largely focused upon money as the most important consideration. The Western lifestyle has become obsessed with money as though money is the single key to all opportunity and happiness in life.

Banks can create financial expansion or contraction with a mere flick of the interest rates. As such, the banks control our economic, social and environmental fate. We may pay taxes to the Government, but it is the global financiers that dictate our future. For example, if citizens complain too much about the environment, the banks can 'punish' a nation. Keeping money supply low for a while will usually shift public concern from the environment to personal survival.

This subtle switch in creation and ownership of money is a new feature of the global economy. Before 1971 society could indeed create and own its own wealth. This new method of currency creation, which started in 1971 is a bid by banks to stealthfully take ownership of everything on Earth. It is currently only a matter of time before that is the case.


There can never be a workable political system while the present way of creating money remains. Now Governments must find ever more stringent ways to finance their responsibilities. Governments are forced to shed control of national property and services to multinationals, and sell the idea to the public as 'privatisation'. At the same time they must find new ways to raise their tax revenue from society. Governments bleat the Òshortage of fundsÓ excuse regularly when it comes to social issues or the environment. This implies to society that the problem is something to be solved by higher taxation, when the real problem is the monetary system.

There is no value in making changes to a form of Government that finds itself crippled by the present money system. Changes to capitalism and politics can be made ad nauseam but there will never be any positive effect socially or environmentally until the destructive nature of our money system is changed. It is time to ask, ÒWho do our politicians really work for?Ó We can see whom they obey and favour. People need to begin demanding answers to questions like,

ÒWhy do needed resources stand idle just because there is insufficient money to make use of them?Ó ÒWhy does so much human endeavour and output produce so much scarcity?Ó ÒWhy is the problem of national debt never seriously pursued or researched by national governments?Ó


Before the 1971 change over to a debt based currency system there was real wealth in existence held by private citizens. Since 1971 the 'debt-dollar' principle of creating currency has been mining this old-world wealth held by citizens and transferring it to banks. The deficit of currency in the new global economy is partly made up by feeding society's pre-1971 wealth into the black hole of the faulty economy.

Debt-dollars are steadily sending nationally owned businesses bankrupt. People and governments will continually be forced to 'sell the farm' until there are no farms left to sell. The present economy demands this. The present multinational agenda is to gain ownership of the entire Earth via the fatal trap in the new global economy. This is now taking place.

The US led global economy is the real face of global terrorism. Events like September 11, 2001 are merely desperate responses to that terrorism by nations that are themselves being terrorised by the faulty global economy. Note that the 'Twin Towers' of the World Trade Centre were a primary target on September 11. If society better understood the new 'debt-based' money system our Federal politicians keep us trapped within, the entire country would throw them all out of office and try them for treason.


If countries closed their borders to foreign finance and unnecessary foreign trade, and developed workable currencies and essential industries within their borders, they would soon have more goods available at a fraction of the price and at a fraction of the cost to the environment. It is a country's participation in the intentionally flawed global economy, which guarantees that the more a country produces, the more that country will be milked dry of the wealth of its production.

At present there is no shortage of any resource other than money, yet money is the only commodity over which we should have full and absolute control. Not only is this artificially induced dilemma redundant and repugnant in this age of plenty, it runs counter to most of humanity's yearning for a sustainable social and environmental world infrastructure. ...


(4) Bankers compared to counterfeiters

by Jean-Pierre Richard

In his November 1993 report, Canada's Auditor general calculated that of the $423 billion in net accumulated debt from Confederation to 1992, only $37 billion (8.75%) went on actual goods and services, all the rest (91%) consisted of interest charges. This should tell us how we all have become slaves.

A real solution is now having a phenomenal promotion throughout the world. The main facts on which it is based are now being supported and taught by top economists like, for example, Harold Chorney, Assoc. Professor of Political Economy at Concordia University, in Montreal, the late John Hotson, who was Professor of Economics at the University of Waterloo, and Mario Seccareccia, Assoc. Professor of Economics at the University of Ottawa, published a booklet in May of 96: "The Deficit Made Me Do It". In it they say: "When World War II ended, the national debt relative to the national income was more than twice as large as it is now. But was the country ruined? Did we have to declare national bankruptcy? Far from it! Instead, Canada's economy boomed, and the country prospered for most of the post war period.

"Why isn't the same thing happening today? Why was a much larger national debt shrugged off in 1945, while today's much smaller debt (as a percentage of GDP) is being used as an excuse to let the economy stagnate?

"The answer can be found at the Bank of Canada. During the war, and for 30 years afterward, the government could borrow what it needed at low rates of interest, because the government's own bank produced up to half of all the new money. That forced the private banks to deep their interest rates low, too.

"Since the mid-1970s, however, the Bank of Canada, with government consent, has been creating less and less of the new money, while letting the private banks create more and more. Today, "our" bank creates a mere 2% of each year's new money supply ... (p. 4, 5).

"... The conventional wisdom, however, is that inflation is the greatest threat to the economy and must be restrained by raising interest rates. This flies in the face of the commonsense observation that rising prices (inflation) are caused by raising costs, and that interest rates are costs. So raising them will raise prices, not lower them. (p. 8).

"... One of the most pervasive myths about the government deficit is that governments which spend more than they receive in revenue must borrow the difference, thus increasing the debt.

"In fact, a government can choose to create the needed additional money instead of borrowing it from the banks, the public, or foreigners." (p.9).

And to those who say that there are only two ways to control the deficit: one being to raise taxes, and the other to cut government spending, they say: "But, in fact, there is a third way: reduce the interest rate. The Bank of Canada can set the rate of interest at which it lends to the chartered banks at any number it chooses, and it can peg the rate on government bonds, too. This was evident during WW II When it set the rate on Treasury Bills at as little as 0.36%, and on longer term bonds at less than 2.5%." (p. 10).

Maurice Allais, Professor of Economics at the National School of Mining Engineering in Paris, France and the 1988 Nobel Prize Winner in Economics, had this to say, in his book "Les conditions monétaires d'une économie de marché" (The Monetary Conditions of a Market Economy, p. 2): "In essence, the present creation of money, out of nothing, by the banking system is, I do not hesitate to say it in order to make people clearly realize what is at stake here, similar to the creation of money by counterfeiters, so rightly condemned by law. In concrete terms, it leads to the same results."

And finally, let us quote Mackenzie King, while he was campaigning, in 1935, to become Prime Minister of Canada: "Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talk of the sovereignty of Parliament and of democracy is idle and futile."

So let us work to get the government of Canada to create all new money, cash and credit, by getting our municipal and town councils and all associations to pass a resolution to this effect. And let us circulate petitions on this issue among the general public. A model resolution and petition is available from us upon request, at no cost.


(5) Bernard Lietaer endorses Hotson's argument

Bernard Lietaer, designer of the Euro currency system, interviewed by YES! editor Sarah van Gelder:


Few people have worked in and on the money system in as many different capacities as Bernard Lietaer. He spent five years at the Central Bank in Belgium, where his first project was the design and implementation of the single European currency system. He was president of Belgium's Electronic Payment System, and has developed technologies for multinational corporations to use in managing multiple currency environments.

He has helped developing countries improve their hard currency earnings and taught international finance at the University of Louvain, in his native Belgium.

Bernard Lietaer was also the general manager and currency trader for one of the largest and most successful offshore currency funds.

He is currently a fellow at the Center for Sustainable Resources at the University of California at Berkeley.

YES! editor Sarah van Gelder talked to Bernard about the possibilities for a new kind of currency better suited to building community and sustainability. He can be reached to discuss this topic via an Internet conference at: http: // ____

SARAH: Why do you put so much hope into the development of alternative currencies?

BERNARD: Money is like an iron ring we've put through our noses. We've forgotten that we designed it, and it's now leading us around. I think it's time to figure out where we want to go - in my opinion toward sustainability and community - and then design a money system that gets us there.

SARAH: So you would say that the design of money is actually at the root of much else that happens, or doesn't happen, in society?

BERNARD: That's right. While economic textbooks claim that people and corporations are competing for markets and resources, I claim that in reality they are competing for money - using markets and resources to do so. So designing new money systems really amounts to redesigning the target that orients much human effort.

Furthermore, I believe that greed and competition are not a result of immutable human temperament; I have come to the conclusion that greed and fear of scarcity are in fact being continuously created and amplified as a direct result of the kind of money we are using.

For example, we can produce more than enough food to feed everybody, and there is definitely enough work for everybody in the world, but there is clearly not enough money to pay for it all. The scarcity is in our national currencies. In fact, the job of central banks is to create and maintain that currency scarcity. The direct consequence is that we have to fight with each other in order to survive.

Money is created when banks lend it into existence (see article by Thomas Greco on page 19). When a bank provides you with a $100,000 mortgage, it creates only the principal, which you spend and which then circulates in the economy. The bank expects you to pay back $200,000 over the next 20 years, but it doesn't create the second $100,000 - the interest. Instead, the bank sends you out into the tough world to battle against everybody else to bring back the second $100,000.

SARAH: So some people have to lose in order for others to win? Some have to default on their loan in order for others to get the money needed to pay off that interest?

BERNARD: That's right. All the banks are doing the same thing when they lend money into existence. That is why the decisions made by central banks, like the Federal Reserve in the US, are so important - increased interest costs automatically determine a larger proportion of necessary bankruptcies.

So when the bank verifies your "creditworthiness," it is really checking whether you are capable of competing and winning against other players - able to extract the second $100,000 that was never created. And if you fail in that game, you lose your house or whatever other collateral you had to put up.

SARAH: That also influences the unemployment rate.

BERNARD: It's certainly a major factor, but there's more to it. Information technologies increasingly allow us to attain very good economic growth without increases in employment. I believe we're seeing one of the last job-driven affluent periods in the US right now. As Jeremy Rifkin argues in his book, The End of Work, jobs are basically not going to be there anymore, even in "good times."

A study done by The International Metalworkers Federation in Geneva predicts that within the next 30 years, 2 or 3 percent of the world's population will be able to produce everything we need on the planet. Even if they're off by a factor of 10, we'd still have a question of what 80 percent of humanity will do.

My forecast is that local currencies will be a major tool for social design in the 21st century, if for no other reasons than employment. I don't claim that these local currencies will or should replace national currencies; that is why I call them "complementary" currencies. The national, competition-generating currencies will still have a role in the competitive global market. I believe, however, that complementary local currencies are a lot better suited to developing cooperative, local economies.

SARAH: And these local economies will provide a form of employment that won't be threatened with extinction?

BERNARD: As a first step, that is correct. For example, in France, there are now 300 local exchange networks, called Grain de Sel, literally "Grain of Salt." These systems - which arose exactly when and where the unemployment levels reached about 12 percent - facilitate exchanges of everything from rent to organic produce, but they do something else as well. Every fortnight in the Ariege, in southwestern France, there is a big party. People come to trade not only cheeses, fruits, and cakes as in the normal market days, but also hours of plumbing, haircuts, sailing or English lessons. Only local currencies accepted!

Local currency creates work, and I make a distinction between work and jobs. A job is what you do for a living; work is what you do because you like to do it. I expect jobs to increasingly become obsolete, but there is still an almost infinite amount of fascinating work to be done. ...


(6) Michael Hudson on Interest rates in Mesopotamia, Greece and Rome

Date: Fri, 19 Sep 2003 13:44:15 EDT From:

Dear Peter, How curious that you should emphasize Persian philosophy so highly (though I accept Mr. Livingston's ideas: gordon.html) while neglecting banking and finance. The Greek financial vocabulary itself was largely Syrian (i.e., "Phoenician,") as was the practice of charging interest, monetary weights and measures, and so forth. I summarize this economic priority and influence in

"Did the Phoenicians Introduce the Idea of Interest to Greece and Italy - And if So, When?" in Gunter Kopcke, ed., Greece Between East and West: 10th-8th Centuries BC (Berlin:1992): 128-143.

It is available on my website, {end}

If you can't find it there, try

6.1 How Interest Rates Were Set, 2500 BC - 1000 AD
6.2 Did the Phoenicians Introduce the Idea of Interest to Greece and Italy - and if so When?
6.3 It Shall Be a Jubilee Unto You
6.4 From Sacred Enclave to Temple to City
6.5 Music as an Analogy for Economic Order in Classical Antiquity

6.1 How Interest Rates Were Set, 2500 BC - 1000 AD

by Michael Hudson © (Peabody Museum, Harvard)

Published in: Journal of the Economic and Social History of the Orient 43 (Spring 2000):132-161

Más, tokos and fænus as metaphors for interest accruals*

* An earlier draft of this paper has benefited from comments by William Hallo, the late W. F. Leemans, Johannes Renger, Piotr Steinkeller, Cornelia Wunsch and Norman Yoffee. For the points on which I was unable to convince them, I take full responsibility.

ABSTRACT. The earliest interest rates in Mesopotamia, Greece and Rome were set not economically to reflect profit or productivity rates, but by the dictates of mathematical simplicity of calculation. The interest that was born calendrically did not take the form of young animals, but rather of the unit fraction, the smallest unit fraction in each of the above fractional systems: 1/60th in Mesopotamia, 1/10th in Greece, and 1/12th in Rome. The birth or calf/kid metaphor for interest thus referred to "baby fractions," not literally baby animals.

For economic historians, the Riddle of the Sphinx (if not the Holy Grail) has long been to explain how interest-bearing debts originated, and why interest rates differed from one society to the next. Interest rates are known to have been set in three primary civilizations at the outset of their commercial takeoff -- Bronze Age Sumer, classical Greece and Rome -- and to have remained remarkably stable over the course of each society. On an annualized basis, the rate for each new society was lower than that for its predecessor: 20 per cent for Mesopotamia, 10 per cent for Greece and 8 1/3 per cent for Rome. ...

6.2 Did the Phoenicians Introduce the Idea of Interest to Greece and Italy - and if so When?

by Michael Hudson, NYU ? IFA*

(from the Temples of Enterprise book in progress)

*Delivered at a symposium at the Institute of Fine Arts, New York University, March 15th-16th, 1990, this article was published in Gunter Kopcke and Isabelle Tokumaru, eds, Greece between East and West: 10-th ? 8th Centuries BC (Mainz: Verlag Phillip von Zabern, 1992).

This paper seeks to establish that interest-bearing debts were introduced to the Mediterranean lands from the Near East, most likely by Syrian ("Phoenician") merchants in the 8th century BC along with their better known innovations such as alphabetic writing. Contrary to what was believed until quite recently, such debts ? and for that matter, commercial and agrarian debts even without interest charges ? are by no means a spontaneous and universal innovation. No indications of commercial or agrarian debts have been found in Early Bronze Age Egypt, the Indus valley, or even in Ebla, much less in Mycenaean Greece. They are first documented in a particular part of the world ? Sumer ? in the third millennium, and can be traced diffusing from southern Mesopotamia upward along the Euphrates and westward into the Levant as part of the Sumerian commercial expansion. Originally documented as being owed to temple and palace collectors, interest-bearing debts became increasingly privatized as they became westernized.

This implies a diffusionist explanation of how interest-bearing debt came to be introduced into the Mediterranean lands. But diffusion usually involves change. As commercial and agrarian debt practices spread, they did so in new contexts, often without the public checks and balances that had been developed in southern Mesopotamia. For instance, the periodic royal debt cancellations found in Sumer, Babylonia and Assyria from 2400 to 1600 BC were not transmitted to Greece and Italy. As a result, debt-servitude tended to be irreversible, at least prior to Solon's seisachtheia in 594 BC. This made the debt problem more serious in the Mediterranean periphery to what had been the Bronze Age core. ...

6.3 It Shall Be a Jubilee Unto You

by Michael Hudson


... Rome was the first society not to cancel its debts. And we all know what happened to it. Classical historians such as Plutarch, Livy, and Diodorus attributed RomeÕs decline and fall to the fact that creditors got the entire economy in their debt, expropriated the land and public domain, and strangled the economy.

Michael Hudson is distinguished research professor of economics at the University of Missouri, Kansas City, and author of Super Imperialism: The Economic Strategy of American Empire (new edition forthcoming November 2002). This article is based on "Reconstructing the Origins of Interest-Bearing Debt and the Logic of Clean Slates," in Debt and Economic Renewal in the Ancient Near East, by Michael Hudson and Marc Van De Mieroop.

6.4 From Sacred Enclave to Temple to City

by Dr. Michael Hudson, ISLET © 1999

On the origins of cities as offshore banking centers - chapter 3 from my Urbanization volume, Urbanization and Land Ownership in the Ancient Near East (ed. with Baruch Levine) Cambridge, Mass.: Peabody Museum, Harvard University, 1999 ...

6.5 Music as an Analogy for Economic Order in Classical Antiquity

by Michael Hudson ©

in Jürgen Backhaus (ed.), Karl Bücher. Theory, History, Anthropology, Non-Market Economies (Marburg:Metropolis Verlag 2000): pp. 113-35

(page 11-15 of the manuscript uploaded here)

Music and economics each are abstract in their own way, and few people see much of a connection today. There is of course the "economics of music," but as Prof. Senn observes, music is a profession whose members are among the least economically motivated. Performing a musical work is so creative an act that amateurs do it without remuneration, and aspiring musicians sometimes even pay for the privilege of performing in major concert halls.

Not many people deem the Dismal Science to be aesthetic. Few economists practice it for their own creative enjoyment. Whereas music may be performed simply for the joy of it, economics subjects everything to the measuring rod of money, and deals on a mundane level only with that part of life that can be quantified in terms of prices and costs.

The term "harmony of interests" is of course well known, and Henry Carey wrote a book by this title, which inspired Friedrich Bastiat's "economic harmonies." The metaphor extends back at least to classical Greece. This essay sketches how musical principles were used as early analogues for economic relations and good social order. ...


(7) The Dollar Crisis: An interview with Richard Duncan

November 8, 2003 y&content_idx=27975

Richard Duncan is author of a new book called "The Dollar Crisis: Causes, Consequences, Cures < 962-8585640>."

In it, he argues that the Japanese bubble, the Asian Crisis and the U.S. bubble are related. In Mr. Duncan's view, problems have been building since the U.S. ditched the Bretton Woods system for what turned out to be a "dollar standard." As Richard will explain, the U.S. has benefited from the dollar standard because the U.S. is allowed to play by different rules. It appears, however, that we've overplayed our hand. But before we find out why Mr. Duncan thinks that a "dollar crisis" is inevitable, let's learn how we got here.

PRUDENTBEAR.COM: Before we find out where we are, can you help us find out where we've been by filling us in on Bretton Woods? For example, under Bretton Woods, what happens when a country imports more than it exports?

RICHARD DUNCAN: To see what has gone wrong with the global financial architecture, it's first necessary to understand that the global economy functions very differently today than it did before the Bretton Woods System collapsed in the early 1970s. Today, the United States' Current Account Deficit is 60 million Dollars... AN HOUR. A Million Dollars a minute, if you will. Or roughly 17 thousand Dollars a second. Let's call it HALF A TRILLION DOLLARS A YEAR.

That's the amount by which the United States is subsidizing the rest of the world's economy each year. AND, that's the amount by which the United States' net debt to the rest of the world is increasing each year. It's also the amount by which international reserves-and the Global Money Supply-are expanding each year since the increase in international reserves is more or less determined by the size of the annual US Current Account deficit.

Under the Gold Standard, or the quasi-gold standard Bretton Woods System, such an extraordinary surge in global liquidity would have been impossible.

There were automatic adjustment mechanisms inherent in the gold standard that made large, multi-year trade imbalances unsustainable. For instance, if England had a persistent trade deficit with France, England's gold would have been shipped to France. The expanded Monetary Base in France would have allowed an expansion of credit creation that would have resulted in rapid economic growth and, eventually, inflation.

The opposite would have occurred in England. England would have lost gold. Therefore its Monetary Base would have contracted, necessitating a contraction of credit. Credit contraction would have caused a recession and, as a result, falling prices.

After a few years, with prices in France rising and prices in England falling, the French would have begun to buy more English goods, while the English bought fewer French good, until equilibrium on the balance of trade was restored.

From the beginning of the Nation State up until the early 1970s, that is how international trade worked. And, it was within that framework that all the classical economic theory of the 18th and 19th Centuries was formulated.

Once Bretton Woods broke down, however, the self-adjustment mechanisms inherent in the gold standard ceased to function and the global economy began to operate in a way that would have been entirely inconceivable to Adam Smith or David Ricardo.

International Trade no longer had to balance. Deficits merely had to be financed. Consequently, trade imbalances exploded and the greatest global financial bonanza in history got under way.

PRUDENTBEAR.COM: So it would be impossible for the U.S. to have today's trade deficit under Bretton Woods?

RICHARD DUNCAN: Under the Gold Standard or the quasi-gold standard Bretton Woods system, the United States could not have run very large current account deficits over many years because those deficits would have depleted its gold reserves, causing credit to contract, driving the economy into recession and pushing prices down until Americans could no longer afford to buy any more foreign-made goods.

For example, according to IMF statistics, the market value of the United States' gold reserves is $83.3 billion. In 2001, the US trade deficit with China alone was $83 billion. Therefore, under a gold standard, the entire US gold reserves would have been depleted just to cover one year's current account deficit with China, wiping out all the base money of the United States.

In the post Bretton Woods world, the United States does not have to pay for its deficits with gold. It can pay with paper money or debt instruments instead-and there are technically no limits as to the amount of such credit instruments that the United States can create.

What this means is that the self adjustment mechanism inherent in the Gold Standard that prevented large and persistent trade imbalances ceased to function when Bretton Woods collapsed. While the surplus nations did experience economic overheating and hyper inflation in asset prices just as they would have under the Gold Standard, the deficit country, the United States, did not deflate because it didn't have to pay for its deficits out of a limited amount of gold reserves, but instead could finance those deficit by issuing more and more debt instruments...or simply by printing more Dollars. And that is exactly what it has been doing.

PRUDENTBEAR.COM: Okay, but with Bretton Woods now old school, let's talk about how the dollar standard works today. What's to stop us from importing all the goods we want?

RICHARD DUNCAN: In 1988, the US was still a net creditor nation. Now, its net debt to the rest of the world is roughly $3 trillion Dollars, give or take a couple hundred billion. That's approximately 30% of US GDP or 10% of world GDP.

Since the United States' current account deficit is now more than 5% of US GDP per annum, that means the United States' net debt to the rest of the world will rise to 35% of GDP by the end of 2004, 40% by the end of '05, 45% by the end of '06, and so on. Of course, this rise in net indebtedness as a percentage of GDP will be affected by the rate of GDP growth. But, it must not be forgotten that the GDP can contract as well as expand; and given the imbalances in the US economy a very painful recession is a more probable scenario than most would like to admit.

The problem with the rapid increase in US indebtedness is that the United States must be able to service the interest on that debt. And, already, here things have begun to turn tricky.

Foreign investors now own more than 40% of the US government's tradable debt, 26% of US corporate bonds, and 13% of US equities.

What's next? Already US consumers are up to their eyeballs in debt. Overly indebted US corporations are going bankrupt in droves. Which sector of the economy will be able to issue (and service) an additional $500 to $600 billion worth of debt every year-year after year-so long as the present extraordinary trade imbalances persist?

If new US Dollar debt instruments of this magnitude are not forthcoming, the surplus nations will have no choice but to convert their Dollar surpluses into their own currencies, causing them to skyrocket and the Dollar to plunge, thereby killing the export goose that laid the golden egg.

Fortunately for the near term outlook for the Dollar, the US government has once again begun running massive budget deficits. And, there's no doubt, that the US government can service the interest on its own debt. This year the US budget deficit is expected to exceed $500 billion. However, the Current Account deficit will be $600 or more. So even if the surplus nations buy all of the US government bond issues (which is unlikely for a number of reasons) that's still not enough to absorb all of their Dollar export earnings. They would still have to buy more than one hundred billion of other Dollar denominated assets each year.

Nonetheless, the re-emergence of very large government bond sales will provide a safe home for a good part of the Dollar export earnings of the surplus nations. Consequently, it will relieve some of the pressure on the Dollar, since the United States' trading partners will be able to park at least a significant portion of their Dollar earnings in US Treasuries, instead of being forced to choose between, one, investing them in over-indebted US corporations with questionable accounting standards or, two, throwing their economies into recession by converting their dollar earnings into their own currencies, and thereby causing them to appreciate sharply.

Still, this state of affairs cannot continue indefinitely. The United States cannot continue increasing its net indebtedness to the rest of the world at the rate of 5% of GDP per year. And, not even the US government can continue running $500 billion Dollar a year budget deficits forever.

PRUDENTBEAR.COM: What's wrong with a huge trade deficit? Haven't we been told that it's a sign that the U.S. offers the best investment opportunities in the world?

RICHARD DUNCAN: Some government officials and investment bankers frequently tell the public that the US Current Account deficit is caused by the eagerness of the Rest of the World to invest in the United States. They reason that the large US Financial Account surpluses resulting from foreign investment in the United States necessitates the large US Current Account deficits, given that the Financial Account and the Current Account must completely offset one another when added together.

It is hard to understand how such a ridiculous idea could be taken seriously. Americans buy more from the rest of the world than the rest of the world buys from the United States because the rest of the world uses very low cost labor to make goods at a much lower cost than American manufacturers can. This could not be more obvious. That is why the current account surpluses of Mexico, China, Thailand, and the rest of the Asia Crisis countries rose sharply following the devaluation of their currencies in the 1990s: their labor costs fell, making their products even more attractively priced to the US consumer. Is it conceivable that American consumers buy all the foreign made products in their homes and in their closets because other countries what to invest in the United States? Or is it because those imported products were 50% cheaper than similar goods made in the US? Wage rates in Chinese factories are $5 per day. Think about it.

In 2002, the United States ran a current account deficit of approximately $500 billion because the rest of the world can manufacture products more cheaply than the US can. Anyone who tries to persuade the public that the US Current Account deficit is caused by the desire of foreign investors to buy US assets should be laughed at if he actually believes that and ashamed of himself if he doesn't. These deficits have resulted in tremendous disequilibrium in the global economy. The public should not be mislead about their origin.

PRUDENTBEAR.COM: You argue that the dollar standard has global implications. Maybe we can understand what you mean by reviewing your explanation of Japanese bubble. What does a lack of constraints under the dollar standard have to do with the Japanese bubble?

RICHARD DUNCAN: By the early 1980s, the United States began buying much more from the rest of the world than the rest of the world bought from the United States. Obviously, this did wonders for the economies of those countries with large surpluses with the US.

As a result of those surpluses, the international reserves held by the United States' trading partners began to pile up. For example, Japan's international reserve rose from $3 billion in 1968 to $84 billion in 1989. Thailand's rose from $2 billion in 1984 to $38 billion in 1996.

In every instance, where international reserves expanded sharply, "Economic Miracles" occurred - for a while.

The economies of the surplus nations boomed for two reasons: The first and more obvious reason is that their exporters made terrific profits and employed large numbers of workers.

It is the second reason, however, that was the real spark that set off the economic boom, and it is this reason that is generally not understood.

It is as follows: when exporters brought their dollar earnings home, those dollars entered their domestic banking system and, being exogenous to the system, acted as high powered money.

The affect on the economy was just the same as if the central bank of that country had injected high powered money into the banking system: as those export earnings were deposited into commercial banks, they sparked off an explosion of credit creation. That is because when new deposits enter a banking system they are lent and relent multiple times given that commercial banks need only set aside a fraction of the credit extended as reserves.

Take Thailand as an example. Beginning in 1986, loan growth expanded by 25 to 30% a year for the next ten years. In a closed economy without foreign capital inflows, such rapid loan growth would have been impossible. The banks would have very quickly run out of deposits to lend, and the economy would have slowed down very much sooner.

In the event, however, with such large foreign capital inflows going into the banking system, the deposits never ran out, and the lending spree went on and on. By 1990 an asset bubble in property had developed. Every inch of Thailand had gone up in value from 4 to 10 times. Higher property prices provided more collateral backing for yet more loans.

A huge building boom began. A thousand high rise buildings were added to the skyline. All the building material industries quadrupled their capacity. Corporate profits surged and the stock market shot higher. Every industry had access to cheap credit; and every industry dramatically expanded capacity. The economy rocketed into double digit annual growth as everything turned to gold in an explosion of investment.

And, so it was in all the countries that rapidly built up large foreign exchange reserves: credit expansion surged, investment and economic growth accelerated at an extraordinary pace, and asset price bubbles began to form.

Think of Japan in the 1980s; Thailand and the other Asia Crisis Countries in the 1990s; and China today.

PRUDENTBEAR.COM: Why did the Asian miracle end?

RICHARD DUNCAN: The Asian miracle ended for the same reason the Japanese miracle of the 1980s ended and for the same reason that the current Chinese miracle will soon end. Those "miracle" were bubbles and bubbles always pop.

I lived in Thailand during the first half of the 1990s, so I can tell you from personal experience that economic bubbles are fun...until they pop.

Unfortunately, economic bubbles always do pop. And when they pop, they leave behind two serious problems.

First, they cause systemic banking crises that require governments to go deeply in debt to bailout the depositors of the failed banks. Economic bubbles always end in excess industrial capacity and/or unsustainably high asset prices. Banks fail because deflating asset prices and falling product prices make it impossible for over-stretched borrowers to repay their loans.

During the Bretton Woods era, systemic banking crises were practically unheard of. Since Bretton Woods broke down, however, they have occurred on a nearly pandemic scale. There have been at least 40 systemic banking crises around the world between 1980 and today.

The second problem economic bubbles leave behind when they pop is excess industrial capacity caused by the extraordinary expansion of credit during the boom years. The problem with excess capacity is that it causes Deflation.

Japan is suffering from Deflation. Hong Kong and Taiwan have deflation. Even China, where an economic bubble is still inflating, has been experiencing deflation off and on since 1998. The rest of the Asia Crisis Countries only avoided deflation by drastically devaluing their currencies and exporting deflation abroad. Think of the impact that the over expansion of Korea's semiconductor industry has had on global chip prices.

This, therefore, is the point I want to stress: trade imbalances of the magnitude experienced over the last 25 years cause unsustainable economic bubbles in the surplus countries which subsequently implode, leaving behind wrecked banking systems, heavily indebted governments, excess capacity and deflation.

PRUDENTBEAR.COM: Next in line was the United States bubble. Does that mean we can blame foreigners for our bubble trouble?

RICHARD DUNCAN: First, I think we should be very careful about assigning "blame" to anyone. This is a global problem that evolved over decades. There are simply too many variables to untangle all the cause and effect relationships that produced the extraordinary economic imbalances we are discussing. Rather than pointing fingers, global policy makers need to work together to find a solution to prevent the occurrence of a world wide economic crisis when the US current account deficit inevitably unwinds.

Having said that, it is true that the surplus countries played a role in fueling the New Paradigm Bubble in the United States during the late 1990s. At that time, the US government temporarily enjoyed a budget surplus (leaving aside the issue of the unfunded Social Security program).

That budget surplus was due to all the bubble tax revenues, mostly from capital gains taxes on stocks. During those years, 1998 to 2000, the government stopped selling new Treasury Bonds.

Yet that was also the period, following the currency devaluations of the 1990s, that the current account surpluses of the United States' trading partners expanded very sharply, hitting $400 billion by 2000. Since there were no new US treasury bonds for those countries to buy with their dollar surpluses, they bought agency debt (Fannie Mae and Freddie Mac) and corporate bonds instead. That sparked off the property boom in the US and also facilitated the incredible misallocation of corporate credit at that time. It is no coincidence that the peak of the US economic bubble occurred when there were no new treasury bonds being issued to absorb the growing dollar surpluses of the United States' trading partners. In large part, that bubble happened because the rapidly growing dollar stockpiles of the surplus countries had to be invested in other kinds of US dollar-denominated assets if they were to generate a positive return.

PRUDENTBEAR.COM: Now we have a dynamic where we buy goods from Asia and Asia takes those dollars and buys U.S. securities. Sounds good to me, what's the catch? What will make the next five years different from the last five?

RICHARD DUNCAN: This state of affairs cannot continue indefinitely. The United States cannot continue increasing its net indebtedness to the rest of the world at the rate of 5% of GDP per year. And, not even the US government can continue running $500 billion Dollar a year budget deficits forever.

That said, while this situation can't last indefinitely, it could persist for a number of more years. Not without costs, however. As we have already seen, the US Current Account deficits are causing an explosion of the global money supply which, in turn, has been responsible for the rise of a series of bubble economies that leave systemic banking crises and deflation behind when they inevitably implode.

In other words, the United States' Current Account deficit, by flooding the world with Dollar liquidity, is creating (in fact, has already created) a global credit bubble of enormous proportions. It is only a matter of time before something will have to give.

Either government finances will snap under the strain of bailing out failed banking systems, or deflationary pressure stemming from global excess capacity will undermine corporate profitability to such an extent that unemployment will soar, causing a backlash against free trade, or the rest of the world will eventually lose faith in the ability of the United States to finance its ever growing indebtedness and, in a panic, dump their US Dollar-denominated debt instruments, making it impossible to finance further deficits.

One way or the other, this global credit bubble will - like every credit bubble before it - come unwound, the Dollar will lose much of its value, and the US Current Account deficit will correct.

Unhappily, the correction of the US Current Account deficit will have extraordinarily damaging impact on the global economy. The world economy has grown dependent on exporting to the United States. At 500 billion Dollars, the US Current Account deficit is the equivalent of almost 2% of global GDP - and, that's before any multiplier effect is taken into consideration.

The inability of the United States to indefinitely expand its indebtedness to the rest of the world at the current rate of a Million Dollars a minute means that Asia's era of export led growth will soon be coming to a close.

If policy makers don't come up with a new source of global aggregate demand to replace that presently created by the US Current Account deficit then the global economy will not be able to avoid a severe and protracted deflationary slump.

What's more, the two principle economic policy tools of the 20th Century, Monetarism and Keynesian fiscal stimulus, are not up to the task at hand. This crisis has been caused by an explosion of the global money supply. It cannot be solved by simply printing more money - as many important and powerful people would have you believe. It might be possible to fight fire with fire, but no one has ever suggested that you can fight liquidity with liquidity.

Similarly, governments are already too heavily in debt, or soon will be, to provide the type of fiscal stimulus required to resolve this crisis. Since most governments have run large budget deficits through goods years and bad over the last several decades, they're no longer in the position to provide the type of stimulus that Keynes had in mind when he published The General Theory in 1936, which, by the way, was the last time the world experienced this kind of liquidity trap.

I tell you without exaggeration that developing a new source of global aggregate demand sufficiently large to replace the stimulus that up until now has been provided by the US Current Account deficit is the greatest challenge facing economic policy makers today.


(8) How Greenbacks won the Civil War - Stephen Zarlenga, The Lost Science of Money

Stephen A. Zarlenga, The Lost Science of Money, published in 2002 by the American Monetary Institute, Box 601, Valatie NY 12184;

{p. 454} THE WAR CRISlS

The split between North and South was a long time building and part of the reason was the banking and financial piracy by largely northeastern elements.

When Jackson and Van Buren battled the 2nd Bank of the U.S., it was southern votes that helped stop the Bank.' The South's view of the

{p. 455} North's financial theft found its strongest expression in the writings of a northerner - T. P. Kettle. Randall relates that:

"Kettle [assembled] statistics to show that the south was the great wealth producing section, while the north, like an economic leech sucked up the wealth of the south ..."

The southern planters would be paid for their cotton in bills of exchange drawn on England. However "The market for foreign bills of exchange was in New York [and] The Southerner was ... fully convinced of the prevalence of vicious [manipulated] speculation in cotton paper."

When the Civil War broke out in April, 1861 it was just a matter of time before all the banks would suspend their payments and it would once again be left to the Government to rescue the situation, this time with the Greenbacks.


In 1861 the national income was $4.3 billion per year or $140 per person. Government revenues were from customs fees and the sale of public lands. A very limited income tax was enacted for war expenses. It was a big question just how the war would be financed.

Lincoln had appointed Salmon P. Chase as Treasury Secretary but Chase was more of an anti-slavery leader than a financial expert. His early finance plan called for $381 million to fight the war, $80 million of it from taxes and $300 million from borrowing. However, there was only about $100 million of gold and silver in the country.

The borrowing was to be mostly through treasury notes. Chase proposed that the notes be interest bearing: 3.6% for small denominations, up to 7.3% for large ones. On July 17, 1861 Congress authorized borrowing of up to $250 million in the form of bonds or notes at the discretion of the Treasury Secretary. These interest bearing notes were not legal tender, but were receivable for all public dues, taxes, etc. The notes were redeemable in gold and circulated freely with banknotes and gold until December 28, 1861. On that date all the banks in the country suspended convertibility of their notes into coinage and the gold market was closed for two weeks.


Congressman E. G. Spaulding of Buffalo, New York, who was on he powerful House Ways and Means Committee, acting without the Treasury's support, introduced a bill in Congress to create legal tender money - the Greenbacks. Spaulding clearly understood money and banking:

"Gold and silver. by long practice, have become the legal money of

{p. 456} the world in all commercial transactions. The real intrinsic value of these metals is not as great as that fixed upon it by governments ... without the government stamp gold and silver would be simple commodities, depending for their value upon the demand for use in trade and manufacture ... Why then should we go into Wall Street, State Street, Chestnut Street, or any other street, begging for money? Their money is not as secure as Government money ... I am unwilling that this Govemment should be left in the hands of any class of men, bankers or moneylenders, however respectable or patriotic they may be. The Government is much stronger than any of them ... They issue only promises to pay"

Secretary Chase opposed the bill and held conferences with bankers to find alternatives. They had been working on a plan that would later become the National Banking System. Spaulding was for the new banking system but realized it would take more time to put it into effect and viewed the Greenbacks as a necessary first step.

In the debates that followed, Senator Howe of Wisconsin supported Spaulding's bill and attacked those pretending that the banks had sufficient gold and silver to lend to the government:

"The Government may be able to borrow from the banks, but the Government cannot borrow coinage of the banks. If it borrows anything of them, it must borrow, not their money, but their promises to pay money. Nothing is more certain than that ... We must rely mainly upon a paper circulation; and there is another thing equally certain, which is that the paper, whoever issues it, must be irredeemable. All paper currencies have been and ever will be irredeemable. It is a pleasant fiction to call them redeemable ... I would not expose that fiction only that the great emergency which is upon us seems to me to render it more than usually proper that the nation should begin to speak the truth to itself; to have done with shams, and to deal with realities."

The legal tender law was passed in the House by 93 to 59 on February 25, 1862. Previously, the treasury notes issued from 1812 and on were always later redeemable in metal. But the Greenbacks were not paper promises to pay "money" later. The Greenbacks were themselves the money. Since they were not borrowed, there was no interest payment on them and they did not add to the national debt.


Congress at first authorized the Treasury to issue $150 million non interest bearing Greenbacks. Fifty million dollars were to replace some Treasury notes outstanding. They were receivable for all dues and taxes

{p. 457} tothe U.S., except import duties, which still had to be paid in coin. The Greenbacks were payable for all claims against the U.S. except interest on bonds which was still payable in coin. The Greenbacks were declared a legal tender for all other debts, public and private.

On July 7, 1862 Chase reported the need for $150 million more Greenback notes, which Congress then authorized. In January, 1863 another $100 million were issued. In 1864 another $200 million of Greenbacks was authorized. On June 30th, 1864, Congress passed a law which limited the total Greenbacks to $400 million, plus another $50 million in fractional currency. This amount was never exceeded; although by that time $449,338,902 had already been issued, some being replacements for worn notes.


Bankers did not mobilize against the Greenbacks; they had to wait until the beneficial effects of the new currency rescued their own position and brought the nation through the war. Secretary Chase expressed a religious superstition of paper money:

"Legal tender notes must be the devil made manifest in paper; for no man can foresee what mischief they may do when they are once let loose."

That's reminiscent of the delegate to the Constitutional Convention who compared government bills of credit to "the mark of the beast."

Holders of Greenbacks could deposit them and receive 6% compound interest bearing bonds, redeemable after 5 years and payable after 20 years in greenbacks. Congress authorized $500 million of such bonds. While the interest on them was to be paid in coinage, the principal on nearly all of the bonds was to be paid in Greenbacks.


Lincoln said little good about the Greenbacks and they should not be viewed as his or the Republican's program. In his December 1862 annual message to Congress he said:

"The suspension of coinage payments by the banks soon after the Commencement of your last session, made large issues of United States notes unavoidable ... a return to [coinage] payments ... at the earliest period should ever be kept in view."

And urging the passage ot the National Banking Act on January 17, 1863 Lincoln told Congress:

"... A uniform currency, in which taxes, subscriptions to loans and all other ordinary public dues as well as private dues may he paid, is

{p. 458} indispensable. Such a currency can be furnished by banking associations. organized under a general act of congress."

Thus Lincoln supported the banker's privilege to create money. In the same speech, he apologized for additional issues of Greenbacks:

"I think it my duty to express my sincere regret that it has been found necessary to authorize so large an additional issue of U.S. Notes when this circulation and that of the suspended banks together have become already so redundant as to increase prices."


Yale University's Sumner viewed the Greenbacks cautiously:

{p. 459} "The question whether it is necessary to issue legal tender notes is a question not of law, but of political economy, and political economy emphatically declares that it never can be necessary."

Readers understand that our thesis is that money is mainly a question of law, not political economics. Sumner was not tor total abstinence from government paper issues but worried that:

"We have not yet learned how to do it."

He acknowledged an important fact:

"The people of the U.S. have a patriotic attachment to the greenback because they think that it saved the country."

The people's attitude did not come from the media of the day, which for the most part was against the currency. Sumner noted that:

"The era of paper money on which we entered has one peculiar feature, unprecedented, so far as I have been able to learn, in the history of paper money. Our paper money is ... fixed in amount ... The whole story which precedes goes to show that the value of a paper currency depends on its amount ... relative to the requirements of the country for the purpose of performing its exchanges."

Then Professor Sumner spoke a great truth of economics:

"For as the currency question is of first importance and we cannot solve it or escape it by ignoring it. We have got to face it and the best way to begin is not by wrangling about speculative opinions as to untried schemes but to go back to history and try to get hold of some firmly established principles."

Perhaps it was reading Sumner's last paragraph that inspired the young Alexander Del Mar, a mining engineer, and later head of the Governments Bureau of Statistics, to embark on a lifelong study of monetary history, which Sumner's "economists" continued to ignore. American political economists, like those in England, would function more as a priesthood protecting the bankers' interests than as a profession that should have been educating themselves and the public on money and banking.


Like Sumner, Harvard's Charles Bullock believed in commodity money of gold and silver. Yet his comments on the Greenbacks are mildly positive. First he detended them from blame for their initial 34% drop gainst gold. noting that by December, 1862 the Greenbacks had been steady against commodity prices. So the prepremium on gold did not indicate

{p. 460} a drop in the Greenback but a rise in gold. Bullock, unable to praise the Greenbacks directly, quoted others who did. First, Sydney George Fisher

"It was the duty and the prerogative of a government to supply a currency to the people. [The Greenbacks were] the best currency that ever a nation had."

And then Henry Carey:

"[The Greenback was] democratic in its tendencies ... the changes in prices that had occurred in 1862 were such as must have taken place anyway." Carey desired "a national system of circulation based entirely on the credit of the government with the people, and not liable to interference from abroad."

{end of quotes} - to buy the book:

The secret Zionism of the Freemasons and Rosicrucians: rosicrucian.html.

Nicholas Best on the link between Templars and Freemasons, and the Freemasons' role in the murder of the King during the French Revolution, as payback for the execution of Templar leader Jacques de Molay: correctness.html.

(9) Government Bonds - their role in money creation

The Money Masters: How International Bankers Gained Control of America

By Patrick S. J. Carmack & Bill Still

{p. 51} How does the Fed "create" money out of nothing? It is a four-step process. But first a word on bonds. Bonds are simply promises to pay - or government IOUs. People buy bonds to get a secure rate of interest. At the end of the term of the bond, the government repays the principal, plus interest (if not paid periodically), and the bond is destroyed. There are about 3.6 trillion dollars worth of these bonds at present. Now here is the Fed moneymaking process:

Step 1. The Fed Open Market Committee approves the purchase of U.S. Bonds on the open market.

Step 2. The bonds are purchased by the New York Fed Bank from whoever is offering them for sale on the open market.

Step 3. The Fed pays for the bonds with electronic credits to the seller's bank, which in turn credits the seller's bank account. These credits are based on nothing tangible. The Fed just creates them.

Step 4. The banks use these deposits as reserves. They can loan out ten times the amount of their reserves to new borrowers, all at interest.

In this way, a Fed purchase of, say a million dollars worth of bonds, gets turned into over 10 million dollars in bank deposits. The Fed, in effect, creates 10% of this totally new money and the banks create the other 90%. ...

To reduce the amount of money in the economy, the process is just reversed - the Fed sells bonds to the public, and money flows out ofthe purchaser's local bank. Loans must be reduced by ten times the amount of the sale. So a Fed sale of a million dollars in bonds, results in 10 million dollars less money in the economy.

{p. 78} Why can't politicians control the federal debt? Because all our money is created in parallel with an equivalent quantity of debt. Again, it's a debt-money system. Our money is created initially by the sale of U.S. Bonds. The public buys bonds, the banks buy bonds, foreigners buy bonds, and when the Fed wants to create more money in the system, it buys bonds but pays for them with brand new Federal Reserve Notes (or book entries) which it creates out of nothing. Then, whatever new money the Fed creates is multiplied by at least a factor of ten by the private banks, thanks to the fractional reserve principle. Actually, exceptions to the reserve ratios allow a much greater multiplier.

So, although the banks don't create currency, they do create checkbook money, or deposits, by making new loans. They even invest some of this created money. In fact, over one trillion dollars of this privately-created money has been used to purchase U.S. Bonds on the open market, which provides the banks with roughly 50 billion dollars in interest, risk free, each year, less the interest they pay some depositors. In this way, through fractional reserve lending, banks create far in excess of 90% of the money, and therefore cause over 90% of our inflation (approximately 97%).

{end} more at money-masters.html

(10) J. T. (Jack) Lang on the Gold Standard and the "Goods Standard"

Jack Lang was (Labor) Premier of New South Wales (the Australian state whose capital is Sydney) during the Great Depression. He tried to withhold debt payments to the bankers in London; for this, the Governor dismissed him.

The Turbulent Years: The Autobiography of J. T. Lang (Alpha Books, Sydney, 1970).

{p. 230} The one great step forward that I can see is the creation of a United States of Europe, with all the countries sinking part of their national identities and accepting membership of a Federation of United Europe. The problems should be little more difficult than those which confronted the Australian States when they considered the formation of the Commonwealth last century and they have much more experience on which to build. There, too, the jealousies and clashes between the States had to be reconciled, but it was done and interstate rivalries were eliminated successfully.

If Europe is united into a solid block of more than 250 million people there will be no need to fear the might of Russia any longer, particularly if the bonds of the special relationship with the United States are strengthened. ...

{p. 233} It was inconceivable that any attempt to divide Europe into two rival economic groups would endure long, so I was not surprised to find de Gaulle lose power in France and am satisfied that within a reasonably short period of time the Common Market will merge with the European Free Trade Association into a single economic unit without barriers and even, eventually, without frontiers.

That brings me to the subject that bedevils the thinking of the entire world, the question of international monetary exchange and the settlement of debts between nations and between individuals.

Prior to 1931, the world operated on what was known as the gold standard. In 1931 that collapsed because the available gold proved insufficient to meet the requirements of world trade and nations were unable to ship out sufficient gold to meet their debts.

Britain, then the world's leading nation and banker, went off the gold standard in September 1931, but because of its long experience and its prestige was able to maintain its supremacy in the world of trade and banking. Sterling was accepted as the most common form of currency for the settlement of international obligations. It maintained its position until the outbreak of the Second World War, when international markets became topsy turvy as huge loans had to be negotiated for military needs and most of the combatants had to rely on their own internal resources.

In the meantime, the United States of America was cornering the gold market and burying the accumulated supply in its vaults at Fort Knox. The Federal Reserve Bank of the United States of

{p. 234} America attempted to provide some stability by offering to buy and sell gold at a fixed price of $35 an ounce.

At the end of the war, the United States of America embarked on a policy of flooding Europe with dollars by way of rehabilitation loans to the defeated countries and vast grants by way of aid under the Marshall Plan. The result of this was that the dollar became the most accepted medium of international exchange, prescribed in contracts where sterling had previously been specified.

Britain, faced with a loss of markets, found that its imports were exceeding the value of its exports, partly because of loss of income from its colonial possessions and Dominions, so the Bank of England was unable to bridge the balance of payments, not having sufficient reserves in gold or dollars. It obtained temporary accommodation from other central banks; but eventually had to bow to the inevitable, and devalue sterling, in itself a form of repudiation.

France, under de Gaulle, opted for a retum to the gold standard and argued for an increase in the price of gold, but soon found that it had intemational problems of its own through dwindling reserves forcing the Bank of France, also, to ask others for additional credits to tide it over the various crises that lasted longer than expected.

Meanwhile, the dollar did not escape pressure. The gold stocks in Fort Knox dwindled as European countries cashed their dollar holdings in retum for gold and the United States of America, largely because of the huge cost of the Vietnam war, also had an adverse balance of payments and was forced to abandon the gold content quota of its currency.

The only two countries with any degree of monetary stability were West Germany and Italy, the defeated nations of the war. Both had rebuilt their economies with American capital and had favourable trade balances, so much so that there was pressure on West Germany to revalue the mark upwards.

In the background in all these monetary manoeuvres lurked the world's central bankers, often referred to as the "gnomes of Zurich". When they make an error of judgement the whole world suffers, as it suffered during the Great Depression.

Their only contribution to date has been the adoption of a two-tier system for fixing the price of gold. They decided that where gold is used for the settlement of international exchanges it should be bought and sold at the prevailing American price of $35 an ounce. Outside that the price is to remain free on the open market, so that under French pressure to buy it soared to a record price of $48 an ounce but has since declined to near the exchange price of $35.

Gold, sterling, the dollar and the franc, all having failed to prolde a satisfactory means for the settlement of international debts, what remains?

The world cannot be left at the mercy of the central bankers and their capacity to blunder. There have been some vague notions about creating Special Drawing Rights as a form of "paper gold" inside the machinery of the International Monetary Fund, but that can only work while the dollar and sterling are still available at the fixed price level.

It is my conccption that what the world needs is an entirely new means for the settlement of debts between nations. The gold standard, the sterling standard and the dollar standard have all failed to stand up to the strain of monetary crises. I firmly believe that what I proposed in 1931, the Goods Standards, is still the only valid solution.

lt was left to Khrushchev, then dictator of Russia, to provide the answer. During an official visit to India, he asked Nehru what his country needed most. Nehru replied that it badly needed a heavy industry, oil refineries and machinery for the production of consumer goods. Khrushchev replied that Russia could meet India's requirements by supplying it with the means of building its own steel mills, its oil refineries and the machine tools for industrial equipment. Nehru replied that that was all very fine, but India didn't have the money to pay for them. Khrushchev replied by telling him not to worry about the money. Russia would supply the machinery as well as the technicians to install it and accept payment in rupees from the Bank of India. So the deal was made on that basis.

It simply meant that Russia was establishing credits in India which it could use to buy Indian goods. It could buy raw materials from India and when the plant was established, the manufactured goods. If it could not place these in Russia, it could export them to the East European satellite countries. But Khrushchev had shown how international trade could be carried out without relying on gold, sterling, dollars or roubles. He realised that rupees were valid currency in India with which to buy Indian goods.


(11) Bradbury Pounds (Treasury Notes) funded Britain in WWI, debt-free money

Bankers, Bradburys, Carnage And Slaughter On The Western Front

A little known historical fact that will collapse even further the reputation of the City of London.


[...] The Great War And The Debt-free Bradbury Treasury Note:

Three weeks ago, as part of my ongoing research into the banking elite, I came across a fascinating book entitled The Financiers and the Nation by the Rt. Hon. Thomas Johnston, P.C., ex-Lord Privy Seal. It was written in 1934 and republished in 1994 by Ossian Publishers Ltd.

The text of this quite remarkable and rare book is available here.

In Chapter 6, entitled ŒUsury on the Great Warı, Iıve selected the following paragraphs which I believe are both shocking and self-explanatory:

"WHEN the whistle blew for the start of the Great War in August 1914 the Bank of England possessed only nine millions sterling of a gold reserve, and, as the Bank of England was the Bankers' Bank, this sum constituted the effective reserve of all the other Banking Institutions in Great Britain.

The bank managers at the outbreak of War were seriously afraid that the depositing public, in a panic, would demand the return of their money. And, inasmuch as the deposits and savings left in the hands of the bankers by the depositing public had very largely been sunk by the bankers in enterprises which, at the best, could not repay the borrowed capital quickly, and which in several and large-scale instances were likely to be submerged altogether in the stress of war and in the collapse of great areas of international trade, it followed that if there were a widespread panicky run upon the banks, the banks would be unable to pay and the whole credit system would collapse, to the ruin of millions of people.

Private enterprise banking thus being on the verge of collapse, the Government (Mr. Lloyd George at the time was Chancellor of the Exchequer) hurriedly declared a moratorium, i.e. it authorized the banks not to pay out (which in any event the banks could not do), and it extended the August Bank Holiday for another three days. During these three or four days when the banks and stock exchanges were closed, the bankers held anxious negotiation with the Chancellor of the Exchequer. And one of them has placed upon record the fact that 'he (Mr. George) did everything that we asked him to do.' When the banks reopened, the public discovered that, instead of getting their money back in gold, they were paid in a new legal tender of Treasury notes (the £1 notes in black and the 10s. notes in red colours). This new currency had been issued by the State, was backed by the credit of the State, and was issued to the banks to prevent the banks from utter collapse. The public cheerfully accepted the new notes; and nobody talked about inflation.

To return, however, to the early war period, no sooner had Mr. Lloyd George got the bankers out of their difficulties in the autumn of 1914 by the issue of the Treasury money, than they were round again at the Treasury door explaining forcibly that the State must, upon no account, issue any more money on this interest free basis; if the war was to be run, it must be run with borrowed money, money upon which interest must be paid, and they were the gentlemen who would see to the proper financing of a good, juicy War Loan at 31/2 per cent, interest, and to that last proposition the Treasury yielded. The War was not to be fought with interest-free money, and/or/with conscription of wealth; though it was to be fought with conscription of life. Many small businesses were to be closed and their proprietors sent overseas as redundant, and without any compensation for their losses, while Finance, as we shall see, was to be heavily and progressively remunerated.

{visit the above link to see the debt-free currency} {photo} Emergency Bradbury Treasury Notes (printed only on one side) {end}

The real values of the private bankers and the City of London have been exposed for all to see. Whilst hundreds of thousands of British soldiers were dying on the killing fields of Flanders and elsewhere doing what they saw as their patriotic duty, British bankers, safely out of danger and not sharing the appalling conditions on the Western Front, were only interested in one thing ­ how to make obscene profits from Britainıs desperate efforts to win the war. To say that the private bankers and the City of London have the morals of sewer rats is to be extremely unkind to our little rodent friends. But this is the clincher. As a direct result of the greed and treason of the British private bankers in preventing the continuance of the Bradbury Treasury Notes, Britainıs National Debt went up from £650 million in 1914 to a staggering £7,500 million in 1919.

And this is where it all gets particularly interesting. The following is an extract from the official and current HM Treasuryıs Debt Management Office website ... and it appears to be completely at odds with the account given by the Rt. Hon. Thomas Johnston. [...]

{visit the above link. There's lots more than I have included here}

The Money Masters: How International Bankers Gained Control of America - COMPLETE TEXT: money-masters.html .

Jack Lang on the Great Depression and Australia's publicly-owned Commonwealth Bank: Jack-Lang-Banking.html .

Dr H. C. Coombs on Central Banking, Wartime Finance, and Monetary Policy in Australia: coombs.html .

Michael Hudson on Tax Havens PLUS F. William Engdahl on the politics of the Gold Standard: tax-havens.html .

We are heading for a crunch; but such instabilities are used by the big financial speculators, to scoop the pool, as if the players were all in a casino. They have the inside knowledge; they choose the timing; and political events help determine who they side with and who they bring down.

They turned the tables on Japan Inc, late in the 1980s: asia.html.

In 1997, follwing ASEAN's refusal to bow to Western "human rights" pressure over Burma, Western bankers precipitated the "Asia Crisis" to bring down the "Tiger" economies: asia-crisis.html.

Will it happen that way again? Alternatively, will Japanese and/or Chinese players come out on top next time? Or will the entire Capitalist system fall?

Richard A. Werner is Professor and Chair of International Banking at the University of Southampton. His book Princes of the Yen is about the role of Japan's central bank in the "miracle" years and the recent "crisis" years. It is also about banking, and central banking, in all countries: werner-princes-yen.html.

Write to me at contact.html.