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June 22, 2012

Real Monetary Reform

By Steven Lesh

This article began as a quest to understand the reasons for the U.S. invasion of Iraq in 2003. None of the official explanations made sense. Even the "No Blood for Oil" slogan and related Peak Oil theory were still missing something - an explanation for the stubborn refusal of U.S. and other Western governments to come to terms with history and the requirements for civilization's survival.


The search for simple answers, saviors and scapegoats has dominated modern reform movements. For Marxists, the working class was supposed to throw off its chains and usher in Paradise. For Thorstein Veblen and Technocracy, engineers would become so horrified with the insults to their "instinct of workmanship" committed as Big Money's hired men, they would seize control of the economy's machinery, substituting efficiency in satisfying real human needs for the conspicuous consumption, waste and preparations for war that determine what is produced. And now for the most popular branches of the resurgent monetary reform movement, the solution to the world's problems is simply printing more money.

All of these movements start with some insight into causes of urgent social problems. In the case of Marxism, it was capitalists and their abuses of workers, rooted in capitalists' control of the means of production. In the case of Veblen and the Technocrats it was the increasing abuse and sabotage of possibilities of modern technology, with the rigid subordination of technological development to making ever more money for those who already had too much. In the case of monetary reformers it is the abuse of the nation's monetary and financial systems -- systems now all but irrelevant to their historic purpose of financing the efficient creation and distribution of real wealth.

Most monetary reformers would agree that the abuse of money begins with the creation and control of a nation's money supply by private parties. If the general public were asked who should profit from the creation of a nation's money, it would most likely say 'government', not private parties. In fact, most people probably think this is already the case - that it is the government and not private banks or shadow banks (i.e. unregulated private entities performing banking functions) that create or 'print' money. Anything else, so popular thinking goes, would be counterfeiting and there are laws against that.

But reality is starkly different. Almost all the world's money is created by private parties - as debt, as nothing more than an accounting entry in a financial ledger.  Apologists for our current monetary system would no doubt argue there is a difference between money and credit. But when a depositor or the recipient of a loan can ask a bank to supply real, printed money - legal tender - up to the amount of an account balance, any technical differences are irrelevant. Up the food chain, when wealthy investors or their agents -- hedge funds, the too-big-to-fail banks and large corporations - can transfer the responsibility for their debts to the public through bailouts and no-recourse loans from central bank lenders-of-last-resort like the U.S. Federal Reserve, there is no real difference between the debt they create and physical money, the legal tender, governments actually print.

The economist Hyman Minsky wrote

"In principle, any unit (i.e. anyone, S.L.) can create money.   The problem is getting it accepted."
With their ability to buy governments hold the real Main Street economy hostage by threatening to starve it of money, Wall Street and its banks have no problem getting their money 'accepted'.  

Interestingly, most monetary reformers never get beyond criticizing the deleterious impacts of the system of privately-created money on money's ability to perform two of its most important functions - serving as a medium of exchange and a store of value. The biggest problem with the existing system of money created as debt is that when the ability of a debtor to repay or at least pay interest on a debt disappears, so does the money. It isn't trillions of dollars in physical wealth that vanishes; it is trillions of dollars of debt. So much 'money' disappears that there is no longer enough to distribute wealth that already exists, let alone finance the development of new urgently needed technologies like renewable energy or to repair and replace public infrastructure .

Applying a temporary fix to this problem of self-destructing money is about as far as most monetary reformers seem willing to go. Their usual approach to a money shortage is not fundamentally different than that of the "banksters' whom they love to revile - just create more money out of nothing, as much as it takes to feed the people and fund all kinds of noble endeavors.

Behind this approach is a belief that the Money Power's control of governments world-wide is so pervasive a monetary system that does what it is supposed to do - and no more - is an impossible dream. Instead, these reformers advocate schemes which attempt to beat that Power at its own game - debt creation. They talk about 'leveraging' assets still in the public domain and using the credit so derived to fund real, urgently needed wealth creation - supposedly the function our present monetary, banking and financial systems. Or in the case of local currency advocates, they suggest opting out altogether, or at least in part, of the existing nation-state political order .

They can be forgiven their pessimism. According to Nobel Prize-winning chemist Frederick Soddy:

The only essential quality of money is that it should be accepted everywhere without question as legal tender in exchange for wealth at a constant average price, which does not change from century to century, and this quality it has never yet possessed (emphasis added, S.L.) The physically impossible quality which in our own time has been grafted upon it is that it should bear interest. *2

Had the debt bombs - "the financial weapons of mass destruction" created by Wall Street's financial engineers - not exploded in 2008, a few more years may have remained for the monetary system that has been responsible for periods of profound and unnecessary economic hardship, waste and war for more than a century; a system that has avoided bankruptcy, even on its own terms, only through all kinds of 'creative accounting'; a system that, increasingly, can survive its own profligacy only by imposing 'austerity' on the populations it nominally serves.

But since 2008, to paraphrase former British Prime Minister Margaret Thatcher, "There is no (longer any) alternative" to real monetary reform. Money created as debt by private sector bankers HAS to pay interest -- or produce a nominal profit to pay that interest on the 'other people's money' Wall Street's financial engineers use for leverage, i.e. to create more debt -- to 'print' money. The illusion of money's inherent productivity, its ability to produce more money, must be preserved at all costs. The goal of this system is not the one-time gains associated with 'counterfeiting' money, though with the blessing of financial rating agencies like Standard and Poors those gains can be achieved on steroids by selling the products of the financial engineers at their discounted present value.

The driving force of our current monetary system is the recurrent stream of interest or profit associated with the debt it creates. Soddy explains:

Experience showed it was "safe" (for the banks) to owe their depositors, and be owed by themselves and their debtors, some ten times the existing money in tangible form as notes and coins, and on account of this purely empirical and superficial phenomenon, the bankers were able to make some 80% to 90% of the total money extant in the country bear them perennial interest, in absolute contradiction to the fundamental nature of money as essentially a debt of wealth owed the owner of the money by the community, in which it is accepted as legal tender, on demand. The owner goes without the wealth owing him purely to suit his own personal convenience, in order to be able to get it back as and when he wants it and so has no claim whatever to be paid interest, which is essentially a payment for the giving up of money either for a specified period before repayment, or to others to risk in some remunerative venture out of which a profit is expected to be made. So that nowadays in superficial monetary thought it has become almost natural to regard the bearing of interest as appertaining to money itself, rather than to the surrendering of money for nothing immediate but for future gain, which is a totally different thing.*3

As long as this fundamental confusion of wealth and debt remains - as long as enough money can be created to maintain the illusion that money is wealth and not debt, no more probing questions are asked. But it is crucial to ask ourselves such questions as:

1. What is the purpose of economic activity? Is it just to produce a monetary profit so the interest on banker-created money as debt can be paid? Or is it to produce real wealth, things that people need, as efficiently as possible -- to produce real wealth and no more?

2. if money really is debt, if it is compensation for delaying immediate consumption of wealth to which to holder of money would otherwise presumably have been entitled, should / can that debt, contrary to the laws of thermodynamics - i.e. to the universal law of entropy, the fact that "wealth rots" - be allowed to live and grow forever as it is passed from generation to generation?

3. if the whole purpose of the Industrial Revolution was to replace human labor in the production of material wealth with machinery powered by inanimate energy and money from employment is the only means most of those people have for obtaining what they need to live, what are we going to do with the people so displaced?

It is this last question which most urgently needs to be answered. For most of the last century, the answer has been economic sabotage, waste and war. For those lucky enough to still be employed or to have some other access to money, these have been the only acceptable solutions to maintaining a social and economic order which allows them to continue accumulating money, to continue accumulating obligations of future generations to supply themselves or their posterity with real wealth should they ever need or want to finally consume it, i.e. to continue accumulating debt.

It is either the height of ignorance or the depth of cynicism to tell the unemployed - after more than a century of assaults on the labor market by mechanization, automation and now off-shoring -- they should 'get a job'.   It is the height of irrationality to develop the potential to produce almost unlimited wealth and then deny the people an economy nominally serves the means to purchase that wealth.  

It is pointless self-deception to pretend that debts which can't be repaid somehow will be - debts that have been compounding since the beginning of the Industrial Revolution; debts Wall Street's bankers and financial engineers have taken to preposterous new heights with their 'creative accounting' and financial engineering.   In an interview discussing a purported effort to "help the economy" Dr. Michael Hudson - someone who ought to know - observed:

It's not to help the economy at all. That's the really important thing. When they say the economy, they mean--the Fed means its constituency: the banks. And the banks' product is debt. And that's what they're trying to produce. *4

  In another interview, Hudson-- explains "Wall Street's product is debt, and it makes its money off debt." *5    And as he never tires of repeating, "Debts that can't be paid, won't be." *6   It is just a question of HOW they won't be.

Since 2008 the governments in the United States and other (once) developed nations have spent trillions of dollars and more than four years attempting to maintain the fiction their banks and financiers have been creating wealth and not debt.   Advances in science and technology, once focused on genuine wealth creation, are more and more focused on military coercion, on maintaining a global "Empire of Debt"*7 based upon exponentially increasing sums of money-denominated government debt.     Is this really the best use a civilization can make of the gifts bestowed by its science and technology? Is the purpose of life for a fortunate few to continue acquiring yet more money, more debt, more claims on the lives, labor and wealth of the living and of generations yet unborn?  

Or is, as the psychologist Carl Jung suggests ""the sole purpose of human existence is to kindle a light in the darkness of mere being."*8? If so what, if anything, should society reasonably expect in return from those who want little more than the opportunity to fulfill that purpose?

1-       Hyman Minsky, (1986 / 2008), "Stabilizing an Unstable Economy", (McGraw-Hill), p. 49,

2-       Frederick Soddy, "THE INVERSION OF SCIENCE and a Scheme of Scientific Reformation", LONDON HENDERSON, 66 CHARING CROSS ROAD, 1924, p. 16.

3-         Frederick Soddy, "Money Reform as a preliminary to All Reform", Address to the Birmingham Paint, Varnish & Lacquer Club, January 12th, 1950. p. 7.

4-       Michael Hudson, "New $600B Fed Stimulus Fuels Fears of US Currency War", click here

5-       Michael Hudson, click here

6-       Michael Hudson,

7-       The title of a book by Will Bonner and Addison Wiggin

8-       John Kozy, "The History of Knowledge: Darkness in the Academy",

Authors Bio:
Steven Lesh is a retired software engineer with a life-long interest in economics and history and an undergraduate degree in the latter.