Share |

PrintPrintable version

What are the Main Problems with the Present Money System?


What are the Main Problems with the Present Money System?

Richard Douthwaite
18th January 2003
Source: Global Public Media

Most people don't realize that we are using a particular sort of money at the moment. We are using a debt-based money. That is, virtually all free money that is used in industrialized countries at the moment only exists because somebody has borrowed it. So, for example, if you have paid off all your debts, you don't owe anything on your house or your car, you don't owe anything to the bank and you've got a positive bank balance, then you have money because someone somewhere has borrowed that money and he's paying interest on it.

It's only the notes and coins that we use that we use that in fact are not debt-based. These are becoming a smaller and smaller part of the money system because we use credit cards, debit cards, cheques, automatic bank transfers these days. So a lot of money is becoming electronic. It's a book entry, an entry on a computer. And that money is all debt-based. The real snag with that sort of money is that if people lose confidence and don't want to borrow, and so the rate at which they're borrowing from the bank this year is below last year, then last year's loans and the previous year's loans are going to be steadily paid off and the money supply will shrink.

Now this means that it becomes very much more difficult to trade. The business people find that they have to spend a long time on the telephone, ringing up people who owe them money because other business people are spending a long time on the telephone ringing them saying, "Where's my cheque? My invoice is 60 days old and you haven't paid it yet."

The whole economy bogs down if there isn't enough money in circulation. Of course, if you are chasing money, you can't spend as much as you'd like; you can't buy from a supplier until you've paid his previous invoice. So this means that the amount of trading in the economy goes down and so people don't want to borrow because they're not up to their limits. Their business has excess capacity so the whole economy winds down.

This is in fact what's happening around the globe at the moment. The time will come in the United States and Canada very shortly when the only people who want to borrow and the people who are desperate that they are being pushed to pay their bills and the only place they could get the money is from the bank, but because they're desperate, the banks just won't want to lend to them.

And so the whole economy is very unstable. Every modern economy either booms or it's in bust. It's either threatening inflation because so much borrowing is going on or it's winding down and the government is trying to talk up the prospects so the people feel it's safe to carry on borrowing. It's a very unstable system.

But there's another major drawback to it, as well. If you create money this way, through the banking system, money is created not when somebody gets a loan, as lots of people who are interested in the money area think, it's when that loan is spent. The moment you write a cheque on your account, and somebody accepts that cheque from you, both his account goes up and you go into the loan facility that the bank has been given, that's the moment when the money's been created. You, in fact, created it the moment you wrote that cheque.

Now you have to pay interest, obviously, on that money. The old problem that worried people for generations is where is the interest to come from? And it means that more money has to be borrowed each year that was lent out the previous one just to cover the interest that has to go back to the bank. This means that the debt is going to tend to increase in the economy.

Now there are two ways that that can be handled. The economy could grow. That's alright, that's great if it does, because it means that the debt to income ratio throughout the economy can hopefully stay in balance. If you don't get growth, well, inflation is just as good, because that raises the level of income in money terms. It's money terms that you have to pay for debt backing. So either growth or inflation, or a combination of the two, is necessary in this system to prevent the debt growing and growing and growing, until, in fact, it's taking too much of people's income, the burden of debt becomes unsupportable and the system crashes and loans have to be written off. That's the ultimate bank policy mechanism.

And this is the great tragedy. This is the basic reason that I am interested in money. We have a system which either has to grow or inflate to prevent the economy collapsing. So if we are ever to build a sustainable world, a world in which it is possible for rich countries, like Ireland, like Canada, like the United States, to say we've grown enough, we're already consuming more than our fair share of our Earth's resources, we must stop so that resources can be freed up for countries where people genuinely have too little, we don't have to change the money system so that growth isn't required to keep money in circulation. This is the thing that creates an urgency for money reform, both at the national and international level.

  • Currently 2/5
  • 1
  • 2
  • 3
  • 4
  • 5
Rating: 2/5 (1 votes cast)

Health Supreme News

Powered by Movable Type 5.13-en

Receive updates

Subscribe to get updates of this site by email:

Enter your Email

Preview | Powered by FeedBlitz

Other sites of ours