To allow private institutions the right to charge interest for the use of money means to grant them the right to levy a tax. The price of money exceeds its value as a useful medium for exchange: the added value should pay for the cost of production and distribution of the money that facilitates transactions within the economy, just like government taxes should pay for the cost of the government bodies that ensure a proper functioning of the economy as a whole. It is important to realize that money is not a necessary means of exchange: it is a means of exchange whose use is required by government law – the only medium that must be accepted within an economy by all participants, and the only medium that will be accepted by government. This means that the charge for use of this medium is properly seen as a tax.
To allow this tax to be levied by private institutions has an advantage and could theoretically be beneficial to the economy: that market mechanisms determine the height of the tax rates for the use of money – the interest rates – helps stabilize the value of money as a means of exchange. If the price of money is determined, partly, by demand, this may limit inflation, as no more money should be in circulation than can be taxed – that is, bought and paid for.
This arrangement does, however, bear some disadvantages. For one, the taxes – the interest – benefit private institutions and not government. That is, it is unclear to which extent they serve a public purpose – to bear the costs for the medium of exchange – and to which extent they serve a private purpose – to benefit the institutions that levy the tax. Markets may, under certain conditions, be more or less easily manipulated from the supply side, thus driving up inflation anyway. For what is to stop the institutions that issue money from testing the limits to the amount of money that can be bought and paid for, at the highest possible price? The tax rates – the interest rates – then grow to greatly exceed the production costs of the money. And as relatively more money must be used to pay for the use of the money itself, proportionately less of that money can be used to buy goods. And so, the goods become more expensive relative to the amount of money that is in circulation.
But the inflation – the higher cost- and lower purchasing value of money – that ensues in this case does not benefit the public institutions – government – but the private institutions that foster these higher costs. And by requiring a single means of exchange by law to be used, government adds fuel to this development. As the single medium for economic transaction, money itself becomes a sought-after good, because the possession of money guarantees economic power as much as the possession of resources and goods, if not more – not to mention the ease with which it may be stored and transferred. This inevitably drives up the price of money far beyond its production costs, and awards the most economic power to the institutions that are chartered to issue it. Economic power, under any definition, means the ability to ensure that exchanges come out to your advantage, and to the disadvantage of your counterpart in the exchange. Great economic power means the ability to manipulate markets.
The production costs of coins and bank notes are very much higher than the production costs of bank credit. Coins and bank notes require natural resources and production facilities and much expertise to produce; bank credit requires a simple computer. Yet their value is the same. One unit in bank credit is perfectly exchangeable for one unit in coins. However, the interest rates – taxes – that are charged for the production of notes and coins are lower than the interest rates that are charged for bank credit! Notes and coins are bought from banks by governments at relatively reasonable rates, so that the taxes we pay for them could be relatively close to the production costs. But for bank credit, the sky is the limit – or rather, the readiness of any legal person to take the money at any quoted price. From this it may be clear that bank credit is highly inflated, if not – at this point – over-inflated to the point that the total earning capacity of all economic activity is no longer sufficient to yield the costs of its means of exchange. As more bank credit enters the money market, more and more money is needed to pay for the money itself.
Given that the total amount of money that is currently in circulation consists almost entirely out of bank credit, the 2008 credit crisis is easily explained: more money is sold than can be paid for, as the economy will always have a limited total earning capacity – limited by the number of participants, resources, outlets, etc. This problem is aggrevated by the fact that not all participants in the economy are equally profitable. This means that some participants earn more money than they need to buy – some only earn and buy no money at all. Due to this, it is possible for some participants to hoard money. This means that they acquire money that was bought- and must be paid for by other participants in the economy. They may even sell that money again to such participants, adding to the total cost of the money supply. The same money now must be paid for twice or more times over. Hoarding money also makes it scarce: to pay for the costs of money, less is available than was put into circulation, and this further inflates its price, causing the prices of goods and resources to inflate to compensate.
The inflated cost of money could be countered by governments allowing competing currencies as legal tender. This way, the price of money may be more contained by the market mechanisms of competition, thus countering inflation. It would remain, however, that the tax rates – the interest charged for the use of the money – are driven by the profit motive of private institutions and not by a public interest. As this is contrary to public interest, such an arrangement should perhaps not exist in democratically governed states at all.
Consider that the emission of a certain amount of credit at any single moment allows private institutions to levy a tax on that amount for many years, until, on top of that, the same amount should be returned to them, up to and over thirty years after the credit was issued, in the case of mortgage loans. This is why the purchase of money is called a loan: a same amount of the same stuff should be returned after an agreed period of time. The amount of money in circulation therefore equals a corresponding debt. From this, it may be clear that however much money is in circulation at any time, a multiple of that amount will accrue at the institutions that issued it. This means that the institutions that may issue money, representing only a small part of the total economy themselves, over time not only receive what is needed to bear the costs of the means of exchange for that economy, but also a multiple of those total means. Given the limited earning capacity in any economic system, this could never be in kind. When this limit is reached, credit defaults occur, and collateral may be collected. This is generally seen as a risk to the institutions that issue the money, and a justification for higher interest rates. But in light of current events – e.g. the current economic situation in Greece – it is perhaps more apt to speak of a strategic goal, rather than a risk.
After reaching the limits in earning capacity that the economy has, resources and goods will inevitably pass over to the institutions that levy the tax. At first, it may pass over to larger and larger competing participants in the economy, participants that are still able to bear their cost of capital. But as all money in circulation is due back to where it came from many times over, eventually, resources and goods should centralize, with a speed that is determined by the extent to which the cost of money is inflated. If those resources and goods would converge in democratic governing institutions, they remain under control of the collective of individual entities that constitute the total economic activity. If they do not, this collective will be deprived of both the resources and the goods that it uses and produces and that are needed to sustain its economy, to sustain itself.
This, to me, seems to be the central issue raised by the film Money As Debt. The current monetary system transfers control of the total economic system by default. And it doesn’t transfer control to government, but away from it, to a few private institutions, that may then have all means and proceeds of all economic activity at their disposal. Our monetary system, that is globally operative, achieves the very opposite of a free market. To many, this may be objectionable. Evidently not to the owners of those few private institutions that benefit, and maybe not to those who think they are dependent on such institutions, or to those who still thrive on the system as is. But the question whether this arrangement has been reached by accident, perhaps by short-sighted government policy, or by malignant design, does not bear on the question if this arrangement could be altered, or how this could be done, by the many that are burdened by it.
And so, the rousing nature of films such as Money As Debt may be rightly objected to, as it takes attention away from this central issue. For all the deception and manipulation that exists in media and politics – and we may include economical- and political science, as even there the fundamental nature of our monetary system is never thoroughly discussed – it is always the choice of any individual to accept what he is made to believe, or to reject it. Beliefs may always be scrutinized, as any theological dogma in history has been, and should be.
That certain people may be to blame for the existing status quo is quite inconsequential, as it is in the power of any individual to maintain that status quo, or to resist it, to act against it. Any individual may at any time stop to investigate any state of affairs, weigh its pros and cons, decide whether that state of affairs should be maintained or altered, and act accordingly. In fact, this may even be regarded as the core trait of humanity as a species, and its great evolutionary advantage over other species.
And so I can only hope that one day you may wake up to the realization that this also applies to you. You, too, are human, and you could at any time start to act the part. Scrutinize your beliefs, evaluate your assessments, and take action. If your roof is leaking, you would fix that, right? But if the proceeds of the economies of the world are leaking away to some private institutions you would do nothing? As if it didn’t affect you! Indeed, some people may at this time not feel that the current monetary system burdens them much. Some people may still feel that it benefits them. But that is a short-term perspective: as our monetary system progresses to inflate the cost of money, in the long run, all but the private institutions that issue the money are affected. Our medium for exchange is geared to transfer control of our economic activity, out of our hands and into the hands of a few private institutions, whose owners we do not know, nor do we know their intentions. This is not something that anyone is unaffected by. This determines what a future society will look like for our children, and for their children – that this is not up to you, but in the hands of a few anonymous and unapproachable individuals.
Or maybe you believe that you are not in a position to do something about this, or that you don’t know what you could do. Indeed, the inertia of men never ceases to amaze. But there are many things that you or anyone else could think of and implement right off the bat. How about, for a start, you stop using money so much. Much of what you do and what you ask others to do for you may be arranged without the use of such a costly medium for your transactions. Or how about we all stop working so much. There is no need for the economy to grow, except to remunerate its medium for exchange – that is, to pay for the exponentially increasing volumes and costs of all the money in circulation. The sooner this system is halted, the better for the progression of general welfare. Most of our current economic activity is parasitic anyway, undertaken only to create new outlets for its own sake.
But I don’t have to tell you this. The 2008 economic crisis has sparked numerous initiatives to counter the system that caused it. To decide which initiatives may be helpful and worth your while, you need only a little reflection, or perhaps to re-read the above. Ultimately, it is up to you.