The last several posts have discussed the need to reform the money system. The 2012 report from the EU Chapter of the Club of Rome entitled Money and Sustainability: The Missing Link made it clear that we have no chance of building a sustainable global civilization without monetary reform, because the current money system has insufficient resiliency and is certain to lead to economic collapse around the world as those in charge repeatedly make matters worse by reinforcing the systemic flaws in the system.
Thomas Greco in The End of Money and the Future of Civilization (2009) issues the same warning when he says: “It appears that the fate of the world, and everyone in it, is now to be determined [unless something changes] by a very small group of individuals who have the power to decide for all of us without consulting any of us.” He goes on to say that “most of our political, economic and religious leaders seem to be taking us in the wrong direction,” but that we still have some “wiggle room” to engage in dissent. He sees that “civilization is at a critical juncture where circumstances require that each of us take greater responsibility—not only for ourselves and our close communities, but also for the common good.”
Of course, interpreting how to act in support of the common good has always been a problem for human societies. No doubt most of the “very small group of individuals” who Thomas Greco believes are leading us into perdition would claim they are acting in the common good as they manage things to ensure their own self-interest is not unduly compromised.
The other prominent reformist whose work I have been referencing, James Robertson, comes at it from another angle: the need to fix a broken system.
The Broken System
“Impartial visitors from another planet,” says Robertson, “would stand aghast at how we create and manage our national money supply. You can imagine them saying to one another: ‘These people must be absolutely crazy!’ To us they might say, more tactfully, ‘We wouldn’t start from here, if we were you’.”
“If we were now starting from scratch to arrange how money should be supplied to a democratic society,” Robertson goes on to say, “nobody in their right mind would dream of setting it up as it is right now.” What they would not dream of doing is creating the money supply by giving private banks the authority to create money out of thin air and put it in their customers’ bank accounts as a loan on which they are obliged to pay interest. In this way roughly 97% of the money circulating in the economy passes into the bank accounts of other customers as we use the original loans to do our business, all the while paying interest to the bank as we also repay the capital.
“When customers repay their loans to their banks, the banks write off the money and return it to the nothing from which they had originally created it. But the money that has been paid on it as interest remains in existence as the property of the banks. This makes it continually necessary for enough money to be lent into existence to replace both what was originally lent but has now been written off plus what has gone into the banks as interest on it. Otherwise there will not be enough money in circulation to support the non-financial activities of the economy.”
The long and the short of it is that the economy must grow continually and the economy must continually expand (economic growth) to keep up. Moreover, because this arrangement requires people and businesses to continually take out loans from the bank, it automatically causes rising indebtedness in societies.
“You don’t have to be the proverbial rocket scientist—or even a professional economist or statistician,” says Robertson, “ to figure out who, apart from the banks themselves, will benefit most from increasing indebtedness in society and who will suffer most. In general, those who benefit most will be people and businesses with enough spare money to lend or invest it and get back more money for doing so. Those who suffer most will be those who have to borrow money at interest, and so pay more in order to meet the needs of themselves and their families. In short, the present way of providing the money supply systematically works to increase poverty and widen the gap between rich and poor.”
Robertson then goes on to point out that in addition to creating economic and social inequality, the current system, because it requires growth in debt and growth in economic production, “has the general effect of making us earn our living by extracting and wasting more of the Earth’s resources than would otherwise be needed.”
Robertson makes a final point about the problem of allowing the banks to be the prime source of money creation. This essentially allows the banks to decide how the money they create will be used on its first entry into circulation, which leads to problems like excessive lending for speculative purposes (like land and buildings), and ignoring projects that have a high long-term value to society (like preventive health and public services).
Fixing the Broken System
Not surprisingly, given his concerns about the private banks’ role in creating money and putting it into circulation, Robertson’s first recommendation on how to fix the broken system is to take that role away from the banks and put it somewhere else. He says the need to do so has become even more urgent following the worldwide financial crisis of 2007-2009, as indebtedness increases and the banks become richer and richer from all of the interest paid on the debts. In addition, central banks, like the Bank of England in the UK, the Federal Reserve Bank in the USA, and the European Central Bank in the Eurozone, continue to pour massive amounts of money into commercial banks in the process that has become known as “quantitative easing.” The hope is that the banks will relend that money out, but that has all the problems already described above.
Enough already, says Robertson. Don’t put that new money into the banks, but put it directly into circulation in the real economy, for example via a Citizen’s Income. (More on that later).
The key point to understand about Robertson’s approach to reform is that all countries with national currencies (and the Eurozone in Europe) have national banks whose role in the financial system has been diminished to issuing banknotes and coins and providing regulatory functions, while the overwhelmingly large component of the supply of public money is provided by the private banks in the form of bank-account money mainly held and transmitted electronically.
Governments should transfer to these nationalized central banks, says Robertson, the responsibility for creating almost the entirety of the money supply. “Having created the money, the central bank will give it to the government to spend it into circulation on public purposes under standard and democratic budgetary procedures. The second part of the reform would prohibit anyone else, including commercial banks, from creating bank-account money out of thin air, just as forging metal coins and counterfeiting banknotes are criminal offences.”
Essentially, what Robertson is recommending is nationalization of the money supply—and I can already sense the blood pressure rising of readers who have less than a stellar view of the ability of governments to undertake such a mission. However, Robertson asserts that this would merely treat banks like all other private businesses without giving them a free gift of unlimited potential to make money off private citizens and businesses. “Anyone who genuinely accepts the virtues of a free market economy subject to rules fairly laid down and enforced by democratic governments in the public interest, should support it,” says Robertson. Moreover, taxpayers would get a break because the money previously created by the commercial banks as debt would now be created by the central bank free of debt and added to public revenue, “either to reduce otherwise necessary taxes or to be spent into circulation on public purposes.”
Robertson goes on to discuss, mainly from the context of the UK, details involved in the kind of transition he is proposing. He concludes with the issues that have become so publicly sensitive in the aftermath of the 2007-2009 crisis, namely that some banks are “too big to fail” and have to be bailed out by government (and taxpayers) while the bankers give themselves huge bonuses. Robertson asserts that his recommendations would “remove our self-inflicted dependence on big banks” and would “liberate us to develop a more democratic, decentralized money system.”
“The obvious way to reduce our public and private debts is to stop having all our money created as debt,” says Robertson. “It’s a ‘no-brainer.’ So why don’t we get them to stop it?”
A Comprehensive Approach to Monetary Reform
James Robertson’s approach to monetary reform entails a comprehensive rethinking, not only of the way money is created and put into circulation as described above, but also how money should be collected by government as taxes, and finally how money might be paid directly to citizens as a “Citizen’s Income” in order to keep the economy running without the booms and busts that are part and parcel of the current financial system.
I do not have space here to render an adequate summary of Robertson’s proposals, and I encourage readers who want to know more to read his book Future Money: Breakdown or Breakthrough. (Bibliographical details appear on the References page of this blog). In the following paragraphs I will briefly summarize the main features of what he is proposing.
I have already covered Robertson’s proposal for nationalization of the money supply. Now I will turn to taxation. With regard to taxes, his main point is that they should be reduced and eventually abolished on value-added, incomes and profits, which penalize useful work and enterprise. In their place taxes or charges should be placed on things and activities that subtract value from common resources. In particular, he would tax land values that drive up the price of housing and fuel speculative activity that adds no real benefit to people in the real economy. In addition, he would tax the use or right to use other common (mainly environmental) resources and take into account the capacity of the environment to absorb pollution and waste.
A Citizen’s Income
Not the least controversial aspect of Robertson’s proposal is to introduce a Citizen’s Income—“a tax-free income paid to every man, woman and child as a right of citizenship. The additional costs will be met by reducing the costs of interest on government debt, of perverse subsidies [to farming and agricultural sectors, and to fossil-fuel extraction and other ecologically damaging activities], of contracting out the provision of public infrastructural services to the commercial business and financial sector, and of public sector inefficiency and waste.”
The idea of a citizen’s income has been around for a long time. I know that work was done on the concept in the USA and Canada in the 1960s under the label of a “guaranteed annual income,” and I am sure it has an equally long history in Europe. As far as I know, no country has as yet embraced the idea, but perhaps with the increasing need now for monetary reform, the timing might be right. Robertson certainly thinks so and sums it up succinctly:
“The controversial assumption has been that there is no way of funding a Citizen’s Income except by taxing people’s other incomes highly, and it might have to be at a rate as high as 70%. For many years that has been seen as ruling out a Citizen’s Income. Like many other objections to otherwise desirable proposals, the assumption is due to inability or unwillingness to think outside a narrow box.
“There is actually no problem. The extra money needed on top of what is now spent on the pensions, allowances, benefits, tax reliefs and tax credits that a citizen’s Income will replace can easily be found from within the three sources above—new revenue from monetary reform, taxing values subtracted from common resources, and savings from existing spending.”
International Monetary Reform
Having described how the money system should be reformed at the national level, Robertson devotes a chapter of his book to international monetary reform, making the point that “we face the threat of a combined collapse of the interconnected ecological systems on which human civilization and our economic and social systems depend. . . [so] we must reform the whole money system that generates the money values that motivate us all to live in the ways we now do.” In sum, what this means “is that we need to develop the way the money system works at the international level to provide us with a genuinely international currency [not the US dollar, which is a national currency masquerading as an international currency] and to introduce efficient systems of international taxation and public spending—and we should do so as a matter of urgency.”
Local Money Systems and Community Currencies
For Robertson reforms of the money system would not be complete without the re-invigoration of local currencies that would exist in parallel with the national currency. This is the approach to reform most favoured by the Club of Rome report referred to earlier and by Thomas Greco, the other major writer on this topic that I am reviewing. I will deal in detail with their approaches in the next post.
While Robertson is a strong advocate for local currencies, he makes the point that until “national reforms [along the lines he has described] are carried through, the scope for enlarging the role of the local economy and local currencies will inevitably be limited. Once that stifling force is removed, local people will be able to direct their energies more freely to promote local people-centred, green development, and with more enthusiastic support from their local government agencies than is possible under existing conditions.
“In short, the dominating power of big money must be reduced in order to liberate the essential role of local economies and local money in people-centred conserving development.”
For Robertson and other reformers who think like him, big business, big money and big government impose a huge burden of ecological, social and economic costs on society. In particular, they create a system that virtually guarantees cyclical high rates of unemployment as busts increasingly become more common than booms and people become victims in a system over which they have no control.
“The problem of unemployment,” says Robertson, “will probably only be resolved when that top-down approach is seen as complementary—and subservient—to the aim of encouraging increasing numbers of self-motivated people to undertake worthwhile paid or unpaid work for themselves.” This comment needs to be understood in conjunction with what he has argued earlier for a Citizen’s Income that would provide a base from which work is carried out.
To understand the scope of the reforms that Robertson is advocating you have to see them within a framework rather different from what we are presently accustomed to. He makes this clear with respect to work when he goes on to say: “The transition to a society based on ownwork rather than conventional employment will include more self-employment, job-sharing, part-time work, work in small businesses, local co-operatives, community enterprises, and so on. Local governments should be persuaded to remove whatever obstacles they now impose on those and give them what encouragement they can.”
Robertson’s final thought clearly expresses a value system of cooperative responsibility: “The people of the world really are all in this together—most of us, anyway. We will need to adjust our minds to greater freedom to control the nature of our work, our family life, our leisure and the balance between them—and to the greater social responsibility that will come with it. If we do that, most of us will almost certainly be able to provide ourselves and our families and neighbours with better opportunities for a good quality of life than if we don’t.”
In this post I have summarized the approach advocated by James Robertson’s to reform of the money system. He has been working on these issues without a lot to show for it for a very long time in his native country, the United Kingdom; but he now seems more optimistic than ever that things are going to change in the direction he is proposing of a nationalized money system. His optimism comes mainly from his conviction that things are now deteriorating so rapidly on the economic front that governments will be forced to act. He alludes in several places in his book that the British Prime Minister, David Cameron, is sympathetic to this way of thinking.
In his Newsletter of October 2012 Robertson sounds almost ecstatic that “a conspiracy of silence” to not discuss monetary reform in the public media is breaking down (at least in Britain) as he cites articles from the Daily Telegraph and the Financial Times. Most significantly, he refers to an August 2012 report from the International Monetary Fund (IMF) that “provides dynamite of the most constructive kind.” The article is entitled “The Chicago Plan Revisited” referring to a proposal on monetary reform that goes back to the 1930s at the height of the Great Depression, which recommended that private banks should not be allowed to issue loans unless they were backed 100% by the banks’ own reserves. This is called 100% reserve backing. It would essentially prohibit, as Robertson recommends, private banks from creating money out of thin air in the form of debt placed in a customer’s account. The IMF research supports the benefits of this kind of reform, and though it does not represent IMF policy, Robertson is heartened that this kind of discussion is now surfacing in such prestigious economic circles.
But other reformers are not as convinced as Robertson that the government should take over the control of the money supply, because it would be replacing one monopoly with another, when what we really need is an ecology of alternative currencies running in parallel with the national currency.
We shall consider this approach in detail in the next post.