Before money was debt. Now it’s possible to create debt without creating money — and do it fast.

I’d just point out, too, that “over here” (ie in Finland) there can be no possibility of monetary reform for quite another reason than those you have cited (public ignorance, no indigenous tradition of debating such issues, etc). Namely, Finland’s membership of the European monetary system whereby its people and their own government forfeited any independent decision-making power in this matter for the sake of a political project conceived in Paris, Berlin, Brussels, and a few other capitals – aimed at “ever-closer union” – viz the single European currency.

That currency – like all others in use under the global monetary system we now have – is entirely debt-based. Hence the agonies now being undergone by the Greek people, as well as the much more modest cutbacks we also see in Finland, Spain, Portugal and (even!) Italy, Germany and France.

However, isn’t there a countervailing risk of being too cavalier about how this system would need to be policed? Great rigour would be required, I suggest. The threats are of two kinds:- outright fraud, and guile (short of fraud) – and the first is (with sufficient forethought) probably easier to deal with than the second.

History demonstrates that the capacity of human ingenuity to circumvent mere “accounting rules” is (literally) boundless and also – even worse – that regulatory mechanisms (indeed all human institutions) have an inherent tendency to become corrupted over time as vested interests continually probe for and exploit weaknesses. There’s no definitive answer to this, except “eternal vigilance”. I just think one ought to be a little less unguarded, that’s all.

I agree that changing the system is hard to do but it is the only option at the moment – it’s only a matter of time. The battle now is to get the authorities to make the required changes (which can be found at BankofEnglandAct.co.uk) before the next major collapse (which won’t be far off).

The campaign will be launching very shortly (register at Call4Reform.org) so there’s be a lot of things we can do very shortly.

There’s already support for this in higher places that you might imagine, and some very influential people are taking an interest, so this is going to be a huge topic over the next few years (or months!).

Ben

1. Housing – between 1997 and 2007 the average house price rose from £55,000 to £185,000. This rise in prices was almost all fuelled by the increase in the money supply by banks creating money when they make loans (about £612 billion between 2004 and 2007 alone, for example). So, by being able to create money and pump it into the housing market, the banking system has been able to increase average house prices by £130,000. This means that any student has to borrow an extra £130,000 in principal to buy a house. The interest repaid on a mortgage is comfortably 150% of the amount has been borrowed. So, the house price inflation will cost the average first time buyer £130,000 + £195,000 (in interest) = £325,000.

2. The cost of interest on the entire money supply. The current money supply is £2,200 billion. Because all that was created as debt, interest must be paid on the interest on £2,200 billion – say this is an average of 5% a year, that’s £110billion per year. That interest is paid by companies, mortgage holders, and individuals who have debt (remember that someone has to hold the debt in order for there to be any money in the economy). If you’re debt free, you’ll still be paying some of that interest through the price of goods and services that you buy in the shop (since the company has to pay interest on its own debts). So let’s do £110bn divided by 45 million (the electorate i.e. everyone over the age of 16) = £2,444 per year. Multiply by a working lifetime of 45 years = £109,980.

3. Taxes – when the Bank of England creates new bank notes, the Treasury gets the profit. When banks create money, the banks get the profit. As they created £1.2 trillion between 2000 and 2009, then that logically implies that the public had to be taxed by £1.2 trillion to cover that lost revenue. That would work out at £26,670 per adult in the UK over those ten years alone.

The £480,000 figures is a bit of a headline figure, but it’s probably an understatement of the real costs.

So I am wondering what could we do that might be less radical that would also help? For example it struck me that when the FSA was proposing that mortgage limits of 3.5 times salary might be legally imposed, it struck me that that would have a dramatic effect on house prices and they would have to come down or remain unsold. But guess what the proposal disappeared without trace soon after it was mentioned and we all know why!
I am personally involved with trying to get more land into public ownership (for housing and food) via community land trusts: I see this as part of the idea of a parallel economy which might allow people to live decent and comparatively debt free lives…..

What can we each do ourselves (apart from trying to avoid bank led debt) that might help? Changing the macro economic system is just such a hard thing to do……

Really important campaign and I shall promote it through Schumacher North.

I heard about this through an email that was forwarded to me – in this you state that the average person reading the email will have to pay the banks £480,000 in interest (if I have understood correctly). Can you tell me where you got this figure from?

Regards and best wishes,
David Midgley
Schumacher North