MONEY, DEBT AND UNPEACE A discussion paper Where does money come from?  Who makes it?   What exactly is it anyway, and what is its connection with peace? The notes and coins we regard as “cash” in our pockets have a different source from the money in our bank accounts.  Modern banknotes and coins have been manufactured by the government and sold at face value to the banks which then issue them to us.  This sort of money now represents only about 3% of the total money in circulation. All the other money in circulation, 97% of the total, has been created by private banks.  Literally created, simply by writing numbers in books.  When individuals or businesses borrow money, the bank creates new money while, at the same time, creating an equivalent amount of debt.  Neither money nor debt has any reality beyond being just abstract numbers yet both significantly affect the real behaviour of people.  People in debt are forced to compete to earn the means to make their payments.  Since debt is generally unpleasant, there is an incentive to minimise it.  The mechanism for creating debt at the same time as money therefore also contains within it the reason why money itself is always in short supply. Recognising that it is money that is scarce, not goods or services, is key to understanding the financial system we live with and the effects it has on our behaviour and on peace. Even money in the accounts of the government, over and above what has come from taxpayers, is created in the same way.  The Bank of England, a private institution, is the government’s banker.  When the government needs extra money, it borrows it from the bank, just like you or I.  It doesn’t create money itself as it could perfectly legitimately do, it borrows it.   The Bank of England creates the money the government needs and an equivalent amount of national debt at the same time.  The government then spends the money into the economy.  But there is something different about this kind of money.  It is the government which is carrying the burden of the debt which created it, not individuals or businesses.  By running a budget deficit, the government is, in effect, injecting debt-free money into the economy, at least as far as those who receive it are concerned.  This increases the money available in the economy and creates conditions of prosperity.  It is paradoxical, but we are prosperous only because we have increased our debts and hence our supply of money.  Chronic indebtedness is a necessary feature of a modern economy based on money creation by private banks.  A necessary result of this is increasingly fierce competitive behaviour to obtain sufficient money to make the payments on the increasing debt.  The only way that, collectively, the interest on debts can be paid is if the economy as a whole grows.  Governments need economic growth in order to increase tax revenues by enough to service their growing national debts.  It is no surprise, therefore, that all our conventional political parties emphasise the need for economic growth.  Without it, the whole financial edifice will collapse.  With this driving imperative, what chance do environmental lobbyists have of influencing governments when they point to the unsustainability of economic growth?   Governments are forced by the financial system to do only what can be done without interfering with business-as-usual.  The financial system renders them incapable of tackling the big issues of our time such as global warming. The pressure to service debts also forces businesses to cut costs in every possible way. It is profit, not need, that determines what gets made or done.  Making an item cheaply and in huge numbers is more important than making a quality item which will last forever.  The compulsion of debt demands it.  Businesses have to transport goods over larger and larger distances to maintain their economies of scale.  It is business use of our roads which has grown so much in recent years which creates the congestion we all suffer from.  The prime reason for this frantic activity is the need to compete to earn the means to repay debt.  It is all colossally inefficient in any but financial terms. About 10% of the workforce has been estimated to be capable of producing all the material goods we actually need, just as all the food can be produced by 3%.  The increased productivity of recent years has not, however, been reflected in reduced working hours or years.  The financial system requires growth which makes us work harder and harder, often at jobs that are pointless in any real sense.  This compulsion is reinforced by the “protestant work ethic” which encourages us to believe that working hard is morally proper.  Now the government is saying that, to earn our pensions, we will have to work still longer.  It is not too strong a word to describe our present situation, driven by debt, as lunacy.  We are debt-slaves. There is a direct link between unpeaceful behaviour at all levels and the economic compulsion to make enough money to repay debts.  In any competition, there are losers.  People starve, not because there is not enough food for them, but because they have no numbers written in books called money.  The international debt system gives poor people good reason to feel a real sense of injustice which creates the potential for violence.  The rich are also driven by debt to behave unpeacefully.  Companies seeking to make profits are deep in debt, whether to shareholders or to banks.  The compulsion to invade other people’s markets because of debt is directly related to military action in support of economic interests.  The compulsion of debt is so strong that any government action to regulate the damage caused by economic activity is circumvented.  Once people get into this compulsive money-competing way of behaving, it is very hard for them to imagine that there is an alternative. The answer to this compulsion, driven by debt, is to find a way to create enough money for all our needs without creating debt at the same time:  and to ensure that people have enough money to live at a basic level without having to compete to earn it. Creating enough money to do everything that everyone in the whole world needs, is not complicated.  It is just a matter of who writes the numbers in the books.  Private banks create money by writing numbers in books.  Governments can quite legitimately do the same but with the crucial difference that, when governments do it, there is no debt attached.  The UK government could, if it wished, change the present law and write whatever numbers it wants into its account at the Bank of England.  The other banks could then buy that money at face value to lend to us, just as they do with banknotes.  The government can spend the money it has created as it does now but also via a much simplified social security system which would include everyone.  If it’s only money we are short of, then we can very easily create some more to meet our needs. The response to poor public service need never be “we can’t afford it”.  All this sounds completely counter-intuitive.  We are so used to money being scarce that it is hard to envision a world where there is no shortage of money.  The usual counter-argument is that having too much money chasing too few goods results in inflation.  Clearly, we need a system to prevent governments producing, for political advantage, more (or less) money than the economy demonstrates that it needs.  There are a variety of technical methods for doing this, as well as for delegating the task of determining the quantity to an independent body.  The other side of the argument, of there being “too few goods”, is simply not correct in the modern world.  The opposite is quite clearly the case – there are too many unsold goods in the world, goods which people are desperately trying to convert into money.  Manufacturing enough goods is easy for us and any shortage is quickly rectified if there is money to pay for them.  A much more convincing argument is that it is debt, not money itself, which is closely allied to inflation and also to the ups and downs of economic cycles. The major benefit for peace of a stable, debt-free money supply to every individual is that it undermines the basis of competitive behaviour.  If I have enough money to live on at a basic level without having to work, I may still choose to work to earn more money.  Whether I do so will depend on my individual circumstances and the values I hold, rather than having the decision forced on me by economic necessity.  Money is, of course, not the only reason why people choose to work but the level of the basic income can be adjusted up or down to encourage more, or less, people to take up the option of work so that sufficient people are available to meet real needs. Under such a system, it will not be profitability which determines whether a job gets done but the worth-whileness of the job.  This is social change at a very deep level.  It will create a pressure to make less goods with built-in obsolescence and more goods which, potentially, can last forever and be repaired.  Many more jobs will be based in the local community rather than for large corporations.  Developing countries will be able to grow their own food for their own people rather than cash crops for export.  The effect of providing a stable, unearned income and releasing the burden of debt cannot be overestimated.  A stable, debt-free money supply means that it will become possible to reduce economic activity without the economic collapse which would occur through money being withdrawn from the economy under the present system.  Currencies themselves will become much more localised and attuned to local needs.  The reason for the existence of large multinational corporations will cease if individual countries become independent in money supply.  Localisation of economic activity will reduce greenhouse gas emissions and go a long way to reduce traffic congestion without building new roads. All of this adds up to a less competitive world.  It will be a world of reduced economic activity, more fairly shared, and more cooperative. There will be less reason to compete for money or for natural resources.  If people feel less driven by debt to act in ways which are anti-social or anti-environmental, the world has a much better prospect of becoming peaceful.  What is so impossible about that? Trevor Marney 11 July 2006   comments to the writer are welcome via our email address at: nfpb(at)gn.apc.org