THE DEBT PROBLEM
By Martin Hattersley
It is hardly necessary for me to dwell in depth on the extent of the
world’s debt problem. Internationally, and particularly as it affects
the nations of the third and fourth worlds, it appears as a crushing
burden. On the one hand, it imposes poverty and austerity on the
already low living standards of the world’s poorest nations. On the
other, it threatens the stability of the developed world’s moneylending
institutions, faced with possible write offs of loans to nations such
as Mexico, Brazil or Peru, that they presently carry as assets on their
balance sheets.
Nationally, we see it in the inability of leaders of nations
such as the United States and Canada, elected on specific platforms of
reduction of the national debt, to carry out their promises. On the one
hand, the burden of national debt interest consumes an ever increasing
proportion of tax revenues – Canada now pays more in interest on her
National Debt each year, than was the total amount of that debt less
than twenty years ago in 1968. On the other hand, political ruin and
economic devastation face the government that has the courage to try
and bring a growing deficit under control: the price is the unpopular
one of reduced government programs, higher taxes, and a slowdown in the
economy that can itself make deficit reduction counter-productive, as
tax revenues fall.
At the business level, the burden of debt is expressed in
unsound debt-equity ratios, followed often enough by failure.
Businesses cannot afford to pay a fixed return on borrowed capital in
the ups and downs of profit in a fluctuating market. The farm debt
crisis is an extreme example: default not only leads to loss of a
family investment and way of life, with all the heartache that this
involves, but it is a threat also to the lending institution.
Foreclosure makes property values plunge, and with them, the security
of all other loans based on real estate. Coming as I do from Alberta,
where prosperity has met a sudden reversal with the collapse of the oil
boom, my own experience has been of a Province where we have had the
first two bank collapses in Canada since 1923, two other banks have
been taken over by foreign interests to prevent collapse, one third of
the Province’s Credit Unions have been placed under trusteeship, the
four major second mortgage lending institutions have gone out of
business, and the amalgamations and terminations of trust companies
come so frequently that it is impossible to keep up – all in a Province
of only just over 2 million population. This without mention of the
danger caused to Canada’s Big Five Banks – among the hundred largest in
the world – gravely threatened by the billions owed by Dome Petroleum
Ltd., as well as some very shaky overseas investments, which may never
be repaid.
At the personal level, and speaking now as a lawyer with a
practice that involves a considerable amount of looking into the actual
budgets of citizens of my Province, the aspect that concerns me most is
the increasing degree to which the budget of the typical wage earner
has been spent even before it is earned. Money is earmarked for
payments on the house, on the car, on the furniture, on credit cards:
furniture is sold on the promise of `no payments and no interest until
next year.’ A month’s unemployment – the disability or pregnancy of the
second breadwinner of the family – and the whole ramshackle structure
of personal finance buckles like a house of cards. Again, the personal
and social costs, and the costs in suicide, broken families and badly
cared for children, are enormous.
Indeed, from the macro to the micro ends of the economic
spectrum, from great nations to the ordinary citizen, nothing seems
more flimsy, more likely to collapse, nothing is the cause of more
unease, than this system of debts piled one on top of another, that
threaten to tumble down from the wall like Humpty Dumpty, and
“All the King’s horses and all the King’s men
Couldn’t put Humpty Dumpty together again.”
THE CAUSE
There is no particular difficulty in identifying the cause of the
incredible permeation of debt through all levels of the economy. It is
the direct result of the almost universal adoption of bank credit as
the exchange medium of the civilized world.
The history of the United States contains so much material on
monetary issues – the issue of paper money by the Colonies before the
War of Independence: the Constitutional Power given Congress to `coin
money and regulate the value thereof’: the fight of Andrew Jackson to
prevent the renewal of the charter of the Bank of the United States:
Lincoln’s issue of Greenbacks to finance the North in the Civil War:
Bryan’s campaign on the monetization of silver, and in 1913, the
adoption of the Federal Reserve system – that it is surprising that
this issue is so little discussed at a time when the performance of the
monetary system leaves so much to be desired.
Banking is essentially a way of making a small volume of gold,
or other `official’ money, do the work of a much larger quantity, which
depositors assume to exist to be withdrawn on demand, but in fact does
not exist at all. This causes an increase in the effective amount of
the circulating medium in an economy. A bank holds a small reserve of
`official’ money, of whatever variety it may be, with which to back the
likely demands for cash of those who have made deposits with it. The
balance of its deposits are lent out – the promises to repay cash of
those who have taken credit at interest from the bank cover the
liability of the Bank to its depositors, who have the right to demand
cash in exchange for their deposit balances. In this way, perhaps five
cents of gold or state issued money can be the basis on which a whole
dollar of new bank credit is created. Money, which once consisted of
precious metal, or at least, tokens issued by government authority, has
now become information in the Bank’s computer, with no solid existence
at all. The bulk of the nation’s money supply is no longer coined by
Congress, or any monetary authority: it is created when governments,
investors, businesses or consumers apply to the Banks for credit, and
this credit is granted in exchange for the borrower’s promise to repay.
There are two particular results from this technique of money
creation. The first, is instability in the economy. Gross National
Product – the value of all the production in an economy – is closely
related to the total credit supply. Even a small increase in the credit
supply, therefore, leads to `boom’ conditions of high demand, high
profit, and rising prices: the very conditions that make a fine
scenario for even more bank lending, and even more demand, profit and
inflation. The reverse is also true – even a small decrease in credit
supply will lead to business conditions where profit disappears, output
is restricted to keep up prices, and employment and standards of living
decline. Such a downturn in the business cycle makes bank lending
unsafe and unattractive. It therefore accentuates the very problem
caused by the credit contraction in the first place.
The second problem arises from the first. A bank loan is in
theory the advance of some depositor’s money. Since the bank has no
authority to print new money, it must always cover its promise to pay
cash on demand – its deposit liabilities – with the promise of some
other party to pay cash to itself. It is therefore impossible to expand
the money supply of an economy through the banking process, without the
simultaneous expansion of debt.
Put these two factors together, and the world is in a `Catch
22′ situation. If we strive to reduce debt, we can only do it by
repaying bank credit. To repay bank credit causes a shrinkage in the
economy’s overall money supply. A shrinkage in the economy’s overall
money supply leads to falling prices, an even greater fall in profits,
business failure, a smaller Gross National Product, unemployment,
stagnation and poverty. Not to repay bank credit leads to an ever
increasing debt and interest load, and the danger of runaway inflation,
with loss of the value of savings and of the monetary unit. Around the
world, we see nations struggling with a choice of fate similar to that
of being hanged or boiled in oil. Wretched borrowers that they are -
who shall deliver them from an economy headed to destruction either
way?
THE UNRECORDED ASSET
At this point in my argument, it would be very easy either
- To launch into a tirade against an alleged international conspiracy
of Bankers, planning to become the alternate government of the world,
or - To enter into a passionate plea for a return to the Gold standard.
I promise to do neither. My experience of bankers is that
the best of them are cautious and worried men, eternally treading the
line between their overhead, the return they pay on their customers’
deposits, and the interest they can earn on what they lend, with side
concerns on the subject of bad loans that may have to be written off
the balance sheet, the needs of their shareholders for dividends, and
the danger of a run on their cash if they lose public confidence. Such
a balancing act is not a guaranteed way to make a fortune, as our own
local failures show. There is no secret way whereby, through pegged
interest rates, compulsory loans, or other devices, the business of
Banking can be transformed into a cure all for the economy. Similarly,
a return to gold is simply archaic. The deflation that it would
involve, the effect it would have in limiting the ability of the
economy to run at full potential, and the undeserved rewards it would
give to speculators, make such a reform a completely unattractive
backward step.
What is possible, at this stage in the twentieth century, is to
develop a better understanding of the nature of money, and furnish the
world with a system, or systems, which will provide an economy with a
sufficient supply of a medium of exchange, without at the same time
creating debt, and with a mechanism that controls quantity in order to
make the money supply balance the ability of the economy to produce,
without creating inflation.
Let’s go back to some very basic concepts on the nature and
working of money. The reason for money is to facilitate exchange. The
need for exchange comes because people have different skills, interests
and abilities, and can contribute a greater input, both in quality and
quantity, into the world’s store of wealth by providing a large
quantity of specialized production, rather than looking after
themselves with small quantities of a very large number of items. A
good system of exchange means that we can all put the products of
our special talents `into the pot’ – or `onto the market’ – and take
out of the pot the products of the special skills of others, that we
could not match ourselves. To facilitate this, those of us who
contribute land, labour or capital to the productive process are also
used to contributing real wealth quite some time before our reward, in
the form of a pay, dividend or rent check, is received by us. We are
also used, once such checks have been received, to holding the money
they represent for some time more before we spend it, so that we don’t
run out of money before our next pay check arrives.
It takes between four and seven months, in fact, for the average dollar
that we receive in our pay packet to be spent by us, and go through all
the processes of the economy to appear in a pay packet once again.
Contributors to the economy, therefore, advance a permanent `float’ of
real wealth onto the market of some six months value of the nation’s
total production. Their entitlement to draw on this float is contained
in their employers’ liability for unpaid wages, and the money tokens
they themselves hold which give the right to buy real wealth with them
by spending them. The total value of all the real wealth that people
contribute to the economy at any time, in exchange for forms of
monetary credit rather than products having `real’ value, is therefore
approximately six months Gross National Product, and this is the value
of the Public Credit, which gives value to the total money supply of
the economy in the same amount. It is in effect a loan of real wealth
by producers to the community as a whole, in exchange for the value of
tokens held by those producers which help them get what they really
want and need when spent in the process of exchange.
The United States has had a long tradition of making use of
State fiat money to provide its monetary units, but this has fallen
into disuse in recent years. One reason, no doubt, has been the
difficulty of preventing abuse by the State, which has sometimes
printed excessive quantities of scrip, so that the dollar became, in
the words of history, “not worth a Continental”. Another, certainly,
has been the difficulty of controlling the manufacture of credit based
on the State fiat money by the Banking system, which would make any
restraint by the State in credit issue impotent to prevent inflation
through further credit creation by Banks.
SOLUTIONS
The technique that I suggest be adopted to deal with these problems is the following:
- Establish the amount of the Public Credit as a statistical figure,
certified on a monthly basis by a National Statistical Office to the
Treasury. - Any deposit taking institution which promises to pay its
depositors on demand sums totalling in excess of its actual holdings of
legal tender money shall be deemed to have borrowed the difference from
the Treasury, and shall be charged interest, payable to the Treasury,
on the amount of this excess. Promising to pay money on demand to the
public without this coverage would be deemed an act of bankruptcy by
the institution, and a criminal offence. - The Treasury shall be authorized to issue notes against the
remainder of the Public Credit – a primary use of which, of course,
could be the repurchase for cancellation of large quantities of the
public debt.
CONCLUSIONS
The great enemy of sanity in monetary policy is what one U.S. President
lucidly referred to as “downright ignorance of the nature of coin,
currency and credit.” Essentially, we today base the backing for our
economy’s credit supply not on the Public Credit, but on the mortgaging
of all kinds of assets, including not least the nation’s power to tax,
so as to make it possible for a bank to repay money it has not got if
ever there were to be a run on its deposits. If we put the asset of the
Public Credit on the economy’s balance sheet to balance our money
supply, this mortgage of other assets can be discharged.
No longer will we need to be a nation buying everything “on
time”. Armed with paid for homes, cars and furnishings, with lower
taxes, and hopefully with investments and savings as well, the
individual citizen will have economic power as never before. One
interesting consequence of reform will be that, with the load of debt,
and taxation to pay debt, removed from the citizen’s monthly budget,
wage rates could very easily fall, to be competitive with those nations
whose cheap wages are such a threat to our employment and our
prosperity at the present time. The real standard of living of the
average citizen, however, helped by more investment income and less
debt, will still likely be higher.
The time has come for reform and change: it is already starting
to take place, whether we are ready for it or not. In my part of the
world, the `underground economy’ is setting up “Local Exchange Trading
Systems”. People invent “green dollars” with which they run their own
local credit systems, under which credit can be obtained at no interest
cost from participating members. The home computer and the telephone
answering machine put such techniques within the reach of millions. Non
banking institutions, such as American Express, Trust Companies and
Credit Unions, are all getting into the checking business, and creating
credit in the same manner as do Banks. Islamic `sharia’ banking
provides a deposit taking machinery where risk is assumed by the
depositor, making in theory at any rate, a failure proof bank. In many
ways indeed, our current banking system is facing competition which
will force it to rethink its position. The fictions on which our
current banking system is based no longer are credible. The
possibilities of a global banking failure are serious enough to make it
worth while on everyone’s part finding out how to devise a stable, debt
free and failure proof alternate system.
We should also be concerned at a danger in all these
experimental approaches. It is that they are subject to no central
credit controlling authority with power to limit the number of monetary
tokens issued on the strength of the public credit. The consequence is
the threat of dilution of the value of the dollar, and exploitation of
the public which has put its faith in new and questionable monetary
tokens. We have to guard against a new kind of counterfeiting taking
all value from our dollar. That is why I suggest that a statistical and
objective enquiry into new monetary techniques is an urgent necessity.
The present world payments system, both internally and
externally, is going to become more and more unstable until a radical
underpinning of its foundations is achieved. What I have suggested here
is one possible solution. Our debts are the result of the way we keep
our books. There is no particular reason why we have to keep them the
way we do. As we get nearer and nearer to the twenty first century, and
as the information processing tools we can use become of higher and
higher quality, the time has come for originality and creativity. Let’s
allow them to break through!
