Originally published February 16 2009
The Still Unsolved Problem of the Economy
by Arian Forrest Nevin, J.D.
(NaturalNews) This is not the first time a recession or a depression has occurred. It is an event that happens again and again, a recurring problem, which has yet to be solved. It is unlikely Congress will be able to solve this problem on its own. Senator Byron Dorgan recently admitted that Congress does not understand what is wrong economically nor how to fix the problem, "[N]one of us have been here before. And nobody in the country really understands what is the right medicine to fix what is wrong with this economy." Actually, the workings of the economy are not so mysterious that none can hope to understand.
Congress and the Federal Reserve have undertaken a flurry of actions, but they have yet to do anything effective to make the economic situation better. They continue to put together various so-called stimulus packages which will not solve the problem. Their use of the crude medical analogy of "stimulus" demonstrates their ignorance. The economy is not suffering from a lack of stimulus. It does not need the economic equivalent of a sudden jolt of electricity or an injection of steroids to continue. This is like using drugs to mask symptoms, while ignoring the root cause. What the economic system needs is fundamental reform. There is no magic pill solution.
In the 1920`s, before the Great Depression, Nobel Prize winning scientist Fredrick Soddy said about economic crises, "if we do not understand how the existing system works and wherein it fails, we are likely to make it worse rather than better." So let us start with one aspect of how the existing system works, where it fails, and what needs to change to solve our economic problem: the money system.
Almost all money is created by banks rather than by the government. Bankers admit that banks create money. As the Chairman of the Associated Banks of New Zealand, H.W. Whyte, said in his evidence before the New Zealand Monetary Commission, "The banks do create money. They have been doing it for a long time, but they didn`t quite realize it, and they did not admit it. Very few did. You will find it in all sorts of documents, financial textbooks, etc. But in the intervening years, and we all must be perfectly frank about these things, there has been a development of thought, until today I doubt very much whether you would get many prominent bankers to attempt to deny that banks create credit."
Commercial banks create money simply through making entries in the bank`s database. Most money exists solely as entries in such databases. The central bank, The Federal Reserve, in addition to the above method, can also create money through the additional mechanism of printing money, which it loans to the government and to commercial banks. Thus money exists both as paper and coins and as electronic entries in computers.
It is impossible to maintain the framework of the current money system and at the same time solve our economic problems. A new money system is integral to any solution. Here is why: As it stands now, money exists primarily for the purpose of creating interest yielding debts to banks. The primary purpose of the current money system, which is integral to our economy, is to provide interest income to banks. Money should be issued solely by the government to facilitate the optimal functioning of our economy. At present, money is issued by banks to maximize their profits.
A closely related issue is inflation. Inflation is the gradual theft over time of the value of everyone`s money through the creation of new money. Banks create new money to loan; this dilutes the value of all presently existing money. It is impossible to eliminate inflation so long as money is created for the purpose of creating debts. Because of interest payments, more money must be repaid to banks than was initially loaned by banks. Where does this additional money come from? The only way this additional money comes into existence is when banks loan ever more and more money over time, thereby creating the additional money needed to pay the interest. This practice constantly increases the total quantity of money in existence. Another way of stating this is people, corporations, and the government must necessarily go ever deeper and deeper into debt for banks to create and loan new money. All so that interest payments can be made. The inch and the meter never change, shorter one day and longer the next, neither should the value of money. The value of money should remain constant over time so the people are not robbed.
We are constantly inundated with propaganda decrying how irresponsible Americans are to be so in debt. This is to blame the victim. Every major government in the world is massively in debt. The National Debt of America is much greater in amount than the debt of the entire third-world combined. Almost everyone is in debt. College students, home owners, corporations, along with the government are all in debt. Why is there universal indebtedness? People simply accept this situation as a fact of life. The cause is not questioned. But, the cause is simple. The money system requires it to be so.
Because money is created by banks for the purpose of lending it at interest, rather than created by the government for the common good, everyone must be in debt in order for money to exist at all. Whenever a loan from a bank is paid back, the bank destroys an amount of money equivalent to the amount of the original loan and keeps the interest payments. The electronic money banks create is all temporary money, though there is always a certain amount of it in existence. Their money creation is like a yo-yo. Money goes out with loans, and money comes back when the loans are repaid. The simplest example is a credit card. The moment a person makes a $100 purchase with a credit card, a bank creates $100 of electronic money that did not exist before. When that same person pays back the $100 several days later, the bank destroys $100 of electronic money. The money created by the bank only exists until the debt is repaid. Of course, because there are so many entities in debt, there is a certain amount of money permanently in existence. But banks are constantly creating and destroying money. It is a normal everyday affair. Most people do not realize it is ongoing.
Money only comes into existence when people borrow from banks. Money is destroyed by banks when people pay back loans. If nobody owed money to banks, then we would not have any money. Therefore, though it is possible for individuals to eliminate their debt, it is completely impossible for the whole of the nation to ever get out of debt as long as the money system remains as it is.
Who owes the debt to banks can be shifted around. Half the populace can owe money to banks, while the other half owes nothing, but it is impossible for everyone to get out of debt. Individuals can get out of debt, but everyone cannot be out of debt at the same time. Eliminating all bank loans, by paying off all debt, would eliminate almost all money. Some have to be in debt to banks in order for the money banks create to exist. Of course there is no reason that the creation of money need be tied to loans by banks. In an honest money system, the government would simply create money for the common good and spend it rather than lend it. The fact that banks create money today is solely the result of a historical accident and not the result of a conscious choice.
The government and Federal Reserve have announced a one-trillion dollar plan to "boost lending." Another way of stating the aim of this plan is: The government is trying to "boost indebtedness." Every money loan by a bank also creates debt. The government`s solution to our economic problem is for everyone, including the government, to go even deeper into debt. While in the short-term this may help, because people will have more money from loans, in the long-term our problem is only growing, because we are sinking deeper and deeper into debt. We need to get out of debt, not go deeper into debt.
We are liable to make the situation worse if we don`t understand how the existing system works and how it fails. The economic system works basically the same the world over. Everywhere banks function as debt and money factories. The system fails in that we have a private money monopoly and not a national money system. The government is only making our situation worse by creating more debt for all of us through its "stimulus packages." All of this "stimulus" and bailout money comes from increasing the National Debt and the amount of additional debt will soon total well over a trillion dollars. One trillion is a thousand billions. What we really need is to get out of debt. The only way to do this is to start with an honest money system.
Soddy also said, "There is nothing left now for us but to get ever deeper and deeper into debt to the banking system in order to provide the increasing amounts of money the nation requires for its expansion and growth. An honest money system is the only alternative." An honest money system is one wherein the government, not banks, create money, and the value of money remains constant over time. What money is worth today is what it will be worth tomorrow. Any government program to fix the economy that does not include the elimination of money creation by banks with the creation of money by the government instead, cannot possibly work in the long-term. How can going deeper and deeper into debt solve the economic crisis? An honest money system is part and parcel to an effective economic solution. This is not the first time a recession has occurred nor will it be the last until the sovereignty of the people is taken back from banks.
If you always do what you`ve always done, you`ll always get what you`ve always gotten. What we have the world over now is debt. Through our passive consent, we all contribute to this monstrous monetary injustice. We have nothing to lose except debt. We have everything to gain from an honest money system.
Wealth, Virtual Wealth, and Debt: The Solution of the Economic Paradox, Frederick Soddy, 1926.
National Economy: The Way to Abundance, Arian Forrest Nevin, 2008.
A Matter of Life or Debt, Eric De Mare, 1983.
About the authorArian Forrest Nevin, J.D. is the author of National Economy: The Way to Abundance. National Economy presents an immediate solution the worldwide economic crisis. National Economy is the study of how a nation, rather than an individual, can be made wealthy. It explains how all manufacturing that has moved to other countries and all jobs that have been outsourced can be returned to America, how real wages can be dramatically increased, and how, at the same time, the people can have more leisure.
His website is http://www.nationaleconomy.net
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