Ad Fontes

Politics, Theology and Christian Humanism

Money as Debt

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Money as DebtI’m a fan of Paul Grignon’s animated films Money as Debt. They are pieces of advocacy for monetary reform, a tough issue that needs plenty of explanation. Almost any type of reform would be easier than this — electoral, political, social, ethical reform — which is perhaps an indicator of how important it is. Grignon’s new film, Money as Debt II: Promises Unleashed, introduces a light focus on bank bailouts, and it takes the educational message of the first film and develops a call for monetary reform.

The two films describe how around 95% of the money supply is bank credit, or debt money. This money is created by banks in the form of loans and mortgages. The loan isn’t taken from so-called ‘deposit money’ and given to the borrower, but created from nothing by the bank as a promise to pay. This promise to pay is considered to be money and may be exchanged for a house, car or for whatever we took out the loan. The first problem then is that the money supply is overwhelmingly in hands of private banks, generally unaccountable to governments. The second is that if a large proportion of the money supply is created by banks as the principal of loans, there is very little other money available from which to pay interest on these loans — it is almost as if the monetary system is designed to bring all money into the possession of banks and, no matter how diligent borrowers are, some will always default on loan repayments. To keep the economy working there is a demand that new loans are always taken out so that more money is introduced to pay off the interest on old loans. The treadmill never stops, demanding exponential growth and creating constant inflation. Problem number three is that natural resources, and the total global value that is derived from them, are finite, meaning that real economic growth can only occur with the discovery of new resources, greater efficiencies or redirecting the resources from another local economy (that old chestnut: imperialism is theft). Thus, a system that demands exponential growth in order to function is also demanding environmental destruction and the impoverishment of the poorer regions of the world.

The first film describes in detail the concept of fractional reserve banking, which is a theoretical limit on the amount of credit money that banks can create, being a legally defined multiple of the amount of fiat currency held on deposit by a bank with the central bank. However, amount required in reserve for a given ceiling on credit creation has gradually reduced to nothing or next to nothing in modern banking.

The full version of the second film can be watched on Vimeo (but I am unable to embed it here). The second film begins by exploding the myth that our bank deposits are our money, whereas, in fact, we have exchanged money for the bank’s promise to pay. We loan the bank money, and our bank balance represents a promise by the bank to repay the loan. Then the film develops this concept for loans, in which a bank creates a promise to pay that circulates as money, a promise that it will hardly ever have to honour, and often secured against goods to which the borrower does not yet have title, and the bank sits back and watches the principal plus interest roll in — money from and for nothing.

The film briefly touches on the ‘casino economy’, the banking playground created not for any natural need, but to meet the needs of bankers to do something with their money.  The daily transactions on the money markets exceed that of annual global trade. This massive global gambling exercise wouldn’t be so worrying if it were not for the fact that banks’ real-world assets, our pensions and personal and corporate investments, depend on the outcome of the games.

Then there is discussion of how the so-called ‘business cycle’, boom and bust, is created by a monetary system in which loans and repayments cease to be evenly spread and begin come into phase with each other. Thus, the dream of an economy free from boom and bust depends on a reform of a monetary system, eliminating the relending or hoarding of interest repayments.

The recent bank bailouts were made to stave off the fear of economic breakdown if banks are seen not to be able to back their promises. After all, destruction of our monetary system wouldn’t bring freedom for the poor, but plunge many more into deeper poverty. Governments were forced to prop up the very institutions that cause economic instability. One thing that Paul Grignon believes should be in any reform package is public ownership of money creation, taking away from banks the ability to create credit money. Governments spend a substantial proportion of public money on the maintenance of bank loans. Eliminating these payments and allowing governments to create their own credit would bring greater public economic flexibility. Taxes would no longer be needed to fund government spending, but to reduce the money supply in order to control inflation. Governments would create sufficient credit to invest in infrastructure, education and healthcare, much of which would produce direct growth of value in society.

It is sad to think that our present government has bought into the lie that banks are wealth creators, whereas they are simply money creators (and money for nothing too), which can be used to create wealth, but the more money created the less likely it is to bear real value. The ownership of some major commercial banks by the UK government and the humiliation of banking in public opinion brings a real opportunity for monetary reform. However, none of the major parties are advocating any kind of reform that will bring about a long-term improvement. Our monetary system expands the wealth gap and encourages environmental destruction — it’s all in the arithmetic, and has been given the social and legal acceptability of a few centuries of rich white men running things. There must be fundamental change.

Author: Gareth Hughes

A priest of the Church of England, who is Chaplain of Hertford College, Oxford, and doing Syriac research at Oxford University.

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