The debt-based economy: time for change?

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The bigger and more prosperous the nation, the more heavily mortgaged it seems to be. The United States is the most indebted nation on Earth: its combined national, private and commercial debt to the banking institutions is around $22 trillion - many times all the dollars in its economy. Virtually every nation is in a similar condition and the total world-wide debt to the lending institutions is many times greater than all the money in existence. The debts can never be paid off!

All new money is loaned into circulation as an interest1 bearing debt. Since this system only creates the principal and never the interest, the debt in always greater than the money supply.

The current banking system operates as a massive drain on public wealth as well as concentrating power and control into the hands of a tiny, private minority. One estimate (MoneyTalk$ on-line) has it that presently 250,000 are made very rich, whilst 150 million people are made very poor.

The cost of borrowing by producers, manufacturers, transporters and retailers has to be added to the price of the final product, which means that goods and services are much more expensive.

Consumers are burdened by the cost of mortgages, overdrafts, credit cards, personal loans as a result of the cost of goods and services and have much less money to spend as a result.

Because the population can't afford to buy up all the goods and services being produced, this produces intense (some would say cut-throat) competition amongst businesses. Businesses try to cut prices and costs to grab a share of the limited purchasing power in the economy. This results in:

  • wages being held down as much as possible and the shedding of jobs, which limit people's spending power even more;
  • retailers importing cheap products from abroad where wages are much lower;
  • big companies switch production to poorer countries with cheap non-unionised labour and lower safety standards and environmental laws;
  • the production of cheaper goods that don't last as long;
  • environmental protection is given a low priority;
  • companies demanding large government subsidies as the price for setting up new production or not relocating abroad.

Inflation, the negative effects on international trade, third world debt, the costs of war and national debts will be discussed later, however first it will be useful to look at the role of governments.

National debt

The UK National Debt2 is now more than £400 billion (the annual interest on that is around £25-30 billion!) and the USA, supposedly the world's richest nation has a National Debt of around $6,000,000,000,000. Information on the US National Debt can be found on US Debt Clock. One estimate puts the US National Debt at over $26 trillion at the end of 1990. See MoneyTalk$ on-line for details.

Most countries have a national debt. The size of which will depend on whether the country is a net exporter or a net importer.

One way that the national debt can be repaid is through taxes, so the population as a whole pays. Another way is by exporting goods and services, thereby bringing in debt-free money, whilst leaving the importing country with the corresponding debt. A third way would be to sell off national assets, however these may only be sold off once, so it is a temporary solution.

How governments borrow money

When governments borrow money, in return, they issue to the lender exchequer or treasury bonds otherwise known as government stocks or securities.

These are basically IOUs - promised to pay the loan by a particular date, and to pay interest. These are bought by banks and individuals with money to spare, (including wealthy ones in the banking world) and, in more recent years, by pension and other investment funds.

Banks, therefore are creating new money out of nothing, which government then spends on it's requirements, such as public services. This money has become a vital part of the money supply under this system.

We are constantly told by the government that 'there isn't enough money' because it knows that the cost of borrowing had to be passed on to the taxpayer. Therefore it sells off state assets and now gets the private sector to fund public services instead.


Inflation is guaranteed because producers constantly have to borrow more, and therefore increase the price of the goods produced.

We are told that when bankers put up their interest rates, it it supposed to reduce inflation. It doesn't. It just delays industry putting up prices. There may be a period of lower prices, however eventually they are raised to recover the higher costs.

When interest rates come down, people borrow more and consumer spending increases. What happens then is that inflation races ahead.

In a debt-based economy, levels of borrowing/money creation have to keep on rising. This adds to the burden of interest payments.

Negative effects on international trade

Exporting surplus goods is good for national economies as it brings debt-free money.

Every nation is trying to do this, because of the same fundamental problem at home. How absurd! This creates:

  • frenzied competition in world markets and masses of near-identical goods madly criss-crossing the globe in search of an outlet;
  • intense competition to grab market share, instead of nations making reciprocal mutually benecial arrangements to supply each others' genuine needs and wants;

Big corporations demanding unrestricted access to every nation's market (so-called 'free' trade). The European single market, the North American Free Trade Agreement and the World Trade Organisation are examples of the drive to open up all national markets.

If a nation can become a big net exporter, its economy will boom for a time will all the debt-free money coming in and a trade surplus will exist.

Importing is not so good for a nation's economy. Net importers build up trade deficits and those with big deficits can no longer afford to import, since so much money is sucked out of their economies, leaving a proportionally increasing burden of debt behind.

Advocates of the continued creation of debt argue that economic growth is worth the consequences of debt creation. See Debt: the wrong enemy - Growth: our forgotten friend.

Abandoning the gold standard

Until 1971, all debts could be damanded in gold. Gold was $35 an ounce and it was understood in international trade that you could take payment in securites - for example US Treasury Bonds - but you could also demand payment in gold.

Anybody could demand payment in gold. for example, a Third World country trading with the USA could demand payment in American gold. In closing the gold window, however, President Nixon wiped out the ability to demand gold in payment for a debt.

Gold may not have been perfect, however it meant at least that there was a certain discipline to international trade. It was internationally recognised that trading balances were related to a nation's reserves of gold.

Without gold, the US dollar has now become the world's reserve currency - meaning that it is the dollar which is used as the standard, the base, against which you equate all others. It is the dollar, rather than gold, which is now the 'discipline'.

The USA was now free to pay all its debts in US Treasury Bonds, which are simply 'promises to pay'. In issuing them as payment, the USA, quite literally got something for nothing. Hard goods for paper.

After 1971, the US finance establishment secured an agreement with producers of crude oil, following the trebling of the oil price, that payments to the Arab nations would be deposited in US banks.

This meant that the banks became awash with 'petrodollars', demanding interest and they had to find the money to pay the interest. They chose to find the interest by lending to the Third World. So these nations got the loans and their poverty-stricken populations got the debt.

Third world debt and the role of the International Monetary Fund

The mass of mankind has not been born with saddles on their backs, nor a favoured few booted and spurred ready to ride them legitimately.

Thomas Jefferson

The International Monetary Fund (IMF) was set up to provide an international reserve of money, supposedly to help nations with big deficits. In practice it makes things worse.

Nations with big deficits seek bail-outs from the IMF, which comes in the form of a loan, repayable with interest3.

Countries go into debt to provide the money for the loans4 and the nation with the debt goes even more deeply into debt. However, it will be able to carry on trading and importing goods from wealthier nations.

So the net result of this is that much of the borrowed IMF money flows into the economies of wealthier nations. This is the horror of third world debt - the poorest nations borrow money to bolster the money supply of the richer nations!

The result of this is that these poorer nations must export whatever they can produce to secure money to pay the loan and interest. Therefore they exploit every possible resource - stripping forests for timber, mining, giving over their best agricultural land for providing luxury foodstuffs for the West, rather than providing for local needs.

The irony of this is that for nations in Africa, Central and South America and elsehwere, the revenue from their exports does not even meet the interest payments on these IMF loans (and other loans from Western banks). Over the years, the interest paid far exceeds the amounts of the original loans.

This results in a desperate shortage of money in their economies, resulting in cutbacks in basic necessities such as health and education programmes. Grinding poverty exists in nations with a great wealth of natural resources.

Structural Adjustment Programmes, which are now attached to IMF loans, include conditions that recipient countries will reduce or remove tarrif barriers and 'open their markets to foreign competition' - in other words, take surplus goods off another country that can't be sold at home!

Any nation that resolved to settle its debts would have to transfer all the money in circulation in its economy into the accounts of the lending institutions. It would thereby plunge its people into poverty and bring its economy to a catastrophic standstill as money is removed from general circulation - and it would still wind up with a massive, unrepayable outstanding debt.

If we look at nations such as Argentina, Peru, Brazil, Mexico or Guatemala, we see that this is precisely what has happened. Money - spending power - leaves the home economy and winds up in the possession of international banking cartels. Massive internal shortages of money result, causing a steady decone of living standards, infrastructure, solvency and economic activity.


War is hugely profitable for the banks and leads to enormous increases in national debt. Governments borrow massive amounts of money from them to fund a war effort.

Financiers and bankers have covertly funded both sides in both World Ward and many other conflicts before and since.

Even when peace has been declared, banks fund reconstruction having left nations with massive debts and the nations thus become more indebted than ever.

What can governments do?

Government could stop borrowing money at interest and start creating it by itself by spending it - debt free into the economy on public projects and services, at the same time creating jobs and stimulating the economy.

Taxing the rich, whilst it is a popular option, really does nothing to solve the problem of overall shortage of money in the economy caused by the debt based money supply. Socialists take note!

James Gibb Stuart in his book 'The Money Bomb' advocates that government could as a first step, fund the interest payment on the National Debt, instead of by taxation.

As far as savings and pension funds are concerned, obviously
with governments no longer borrowing money there would be no further
investments in gilt edged securities for these funds, but as securities matured these could repaid using government created money as and when the redemption dates arose. More savings would be available for investment elsewhere such as productive industry etc. The other thing to bear in mind is that with our taxes no longer having to be used to pay interest on government borrowing there would be more available for spending on pensions themselves or even a national dividend.

Money is the means of facilitating the exchange of goods and services. There is nothing wrong with creating it out of nothing, because this is the only way to provide the means of exchange. What is wrong is that the right to do this has been allowed to pass to private interests who create it as loans for private profit.

Another set of proposals comes from the Simultaneous Policy Organisation who seek to break down the barriers to solving world problems. One of their suggestions is for nations to act in concert to re-regulate the banking systems, something which it would not be possible for a single nation to do. This is a highly ambitious aim, which if implemented could promote trust between nations and counteract the 'strangle-hold that globally mobile capital and corporations now exert over domestic national politics'.

The priority is to bring the money system under democratic control. That means we will need to shift the creation of money out of the hands of private individuals and institutions and into some form of democratic control. It will be necessary for money creation powers to be strictly controlled within a set of legal and constitutional parameters, and for these powers to be exercised by a democratically accountable state authority.

Can we not ultimately incorporate the humanitarian principles of a fair distribution of wealth that underlies socialism with the dynamic benefits of a free enterprise economy that lies at the heart of capitalism?

For as long as the power to create money is in the hands of private interests who do it for profit and control, we can never say that we live in a democracy.

What can we as individuals do?

Probably the most important thing you can do is to become informed of the issues, check your facts and share the information with others. There is growing pressure for change and you may wish to add your voice by joining a group or lobbying for change.

Awareness of third world debt has been raised in recent years by some high profile campaigning, such as that by the Jubilee Campaign, which has had the support of celebrities such as Sting, Bono and other high profile campaigners. The campaign aims to wipe out the debt of the countries who will never be able to pay off their debts under present conditions.

As with all issues where the crux of the matter is behavioural change, awareness of the issue is the first step. Motivation for change is often linked to self interest (or 'what's in it for me') as well as altruistic motives. Problems in far-off lands can sometimes seem beyond the influence of an individual, however, where the cause can be seen to be near to home, then action is possible.

Here are links to organisations concerned with the alleviation of debt:

Relevant BBC and h2g2 links


History of Free Trade

Questions and Answers: Atlantic Free Trade Zone - note what the poor countries have to say.

How the Public Sector Borrowing Requirement is calculated


This entry is based on an article by Richard Greaves and information from Prosperity UK is quoted with kind permission.

1A definition of interest from an Islamic thinker said 'Interest is the mechanism by means of which wealth is transferred from the poor who must borrow, to the rich who have money to lend'.2The UK national debt started back in 1694 when King William III needed money to fight a war against France and he borrowed £1.2 million at an interest rate of 8% per annum from a group of London bankers and goldsmiths. In return for this lean, they were incorporated by royal charter as the 'Bank of England', which became the government's banker. To pay back the loan, taxes were imposed on a whole range of goods.3You can compare this with bowworing money on a credit card. If you fail to pay off the interest each month, you will never pay off the balance!4See the section on 'National Debt'.

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