World Economic Crisis -- root cause and solution

By Robert P Minz I.F.S.(Retd.)

[Robert P Minz retired from the Indian Forest Service. After his retirement he worked
as a National Level Monitor in the Rural Development Department, Ministry of Rural
Development, Government of India. He was also appointed as a member of the
Central Guarantee Council , NREGA]

Today, advanced countries such as USA, UK, Japan and Germany are facing an acute
financial crisis. Banks are collapsing, production is going down, unemployment is
rising and the purchasing power of their people has plummeted. Leaders of these
countries are alarmed by these disturbing events and they are adopting various
measures such as cutting interest rates sanctioning huge multi-billion dollar packages
to bolster the economy but nothing encouraging seems to be happening. Frankly the
economists and the political leaders are confused and panicky. Unfortunately, they do
not realize that the situation that they are slipping into is the direct outcome of the
monetary system that all the capitalist countries have adopted.

The capitalist countries rely on the circulation of fiat money (currency that has no
intrinsic value—paper currency/book-keeping money). This in itself is not harmful;
what is damaging is that the circulation of money is done through banks. Somehow
the impression has been built up, probably by the bankers, that banks are an
indispensable medium for storing, accounting and circulating money. This is one of
the biggest fallacies in the economic system. Actually banks are the medium through
which the rich and politically powerful have taken control of the people, because
whoever controls money controls the people. The other fallacy is that the fiat money
printed by the government and book-keeping money created by the banks is essential
for trade and commerce. But both these fallacies are believed by the people to be true
for historical reasons. For generations people have been using paper money and now
they have come to think that these bits of paper have some intrinsic value prompting
them to hoard, steal and squabble over them. Banks, too, have acquired an almost
reverential image as the repository of all government funds out of which the bankers
so generously lend money to the people.

To get our economic perspective right we must again assert that the printed money or
fiat money is nothing but bundles of IOU’s on paper that only promise to pay you the
amount of money stated as their denomination. Also the banks do not so generously
lend you out of their coffers but create the money as a bunch of figures that appear on
your bank pass-book. These figures then circulate as figures written on cheques,
demand drafts and other such instruments traveling from one account to another. Thus
the banks create and circulate this book-keeping money that is many times more than
the actual amount of funds actually available with them. In short the ‘money’ so
generously ‘lent’ by bankers to borrowers does not actually exist but it is created out
of thin air by a mere flick of the pen. But the bankers pretend that they are actually
lending you real money by not only asking for some back up mortgage of real
property but they top it up by asking you to return not only the principal amount ‘lent’
but also the ‘interest’ for the privilege of using the ‘money’ that they have ‘lent’.
Unfortunately, over the centuries we have become so accustomed to thinking that the
banker is lending out of his own funds that we feel obliged to pay interest on the
money lent and we never question this practice. It is this interest charged by the banks
that is responsible for creating all the economic problems facing the people such as
poverty, increasing gap between the rich and the poor, drug trafficking, smuggling,
pollution, over-exploitation of natural resources and environmental damage resulting
in global warming. No wonder lending money with interest, or usury, is prohibited in
the Bible.

But how can charging interest by bankers do so much damage? Good question, but it
is difficult to relate interest and its harmful effects because we do not actually see the
cause and effect together. The reason is that the money system has been woven into
such an intricate web that it is difficult to unravel and trace the cause and the effect.
An action taken in one place may result in a reaction taking place elsewhere,
separated both in time and space. Therefore, to understand the cause and effect we
may need to construct a simple model of the economic system. Let us imagine that
there are only five persons on an island. One of them is a banker. Let us imagine that
the lone banker for the very first time lends Rs.100/- notes to each of the other four
persons on the island. The total amount lent is Rs.400/-. Now the banker tells them to
pay an annual interest of 10%. So at the end of one year the four persons are expected
to return not only the principal amount, Rs.400/-, but an additional amount of Rs.40/-
as interest. Thus the total amount to be returned to the banker is Rs.440/-. When the
banker lent the money there was only Rs.400/- in circulation on the island, so where
would the additional Rs.40/- come from? The borrowers soon realize this but the
banker insists that they need not return the principal now but they should pay him
only the interest. So, they pay Rs.40/- as interest out of the Rs.400/-. They are now
left with Rs.360/- but they owe Rs.400/- to the banker so the borrowers are Rs.40/-
short i.e. in debt by an amount equal to the interest. As the years go by the interest
payments further deplete their money and increase their debt. In ten years time their
entire money would be used up in paying only the interest and they would still have to
pay back the principal of Rs.400/-. Now the banker can lay claim to their property to
satisfy his debt.

In real life this does not happen uniformly over that length of time. What actually
happens is that one or two of the borrowers may increase their production sufficiently
to be able to pay back their interest out of the payments received for the products
bought by the remaining persons. But this payment is made only out of the money that
is with the buyers. Although one or two might be able to pay back the interest out of
the money earned the others have to pay back interest out of the money remaining
with them after purchasing the goods. They are therefore, left with much less money
and run into higher debt much faster. While one or two might do well it will be at the
expense of the others who would be driven into bankruptcy faster because the money
supply created by the banks will always be insufficient to pay back the interest for the
simple reason that the money to pay the interest is never created but it is drawn out of
the money already in circulation as loans.

In this type of monetary system, which exists today the rich would continue to grow
richer for some time but a stage would come when there would not be sufficient
money around to enable them to sell their products and profits start falling; it is then
that their production has to be cut, labour has to be laid off and they stop borrowing
from the banks. People have to withdraw their deposits from the banks to meet their
expenses. The banks then collapse. This is what we are seeing happening in the world
today. Inevitably and predictably recession has set in.

The banks are so paranoid about interest that they are least bothered how and where
the money is utilized so long as they get their interest payments in time. Borrowers,
therefore, take up only those businesses that are lucrative regardless of how socially
or environmentally damaging those businesses might be. The banker is least
concerned where and for what purpose it is used so long as he gets his interest and
principal in time. The banker also tends to prefer lending to people who are already
rich and is wary about lending to poor people. This aids in widening the gap between
the rich and the poor. Thus the banks are a mindless force that has no social
responsibility and merely creates a mirage of rapid progress leaving behind it a wake
of social inequality, inflation, destruction of resources, bribery crime and corruption.

Can we do without banks? Yes we can. We must destroy the myth that banks are
indispensable for rapid economic growth. In this age and time when information
technology has advanced so much we can recast our monetary system taking into our
own hands the control of money. Long ago when precious metal coins were used as
money the coins performed the function of repository of true value i.e. they possessed
intrinsic value (unlike our paper currency). Also they acted as a measure for
comparison of the value of different goods. They were also used for accounting.
Precious metal coins have been replaced by items of lesser value such as base metals
and paper so that thy can be produced in a larger quantity and now they have little or
no value of their own but they merely represent some higher value that would be paid
in exchange by the authority issuing the money. Such money is called fiat money. The
presumption is always that the sums represented by all the fiat money issued is
available with the authority for redemption. But the tendency of the authority is to
issue more fiat money than it is capable of redeeming. In fact this is what happens
when the government prints more paper money than it can redeem or when the banks
lend book-keeping money that is many times more than the actual money in their
possession. This causes inflation i.e. rise in price as opposed to rise in value. This may
encourage economic activity without causing great harm but the interest factor
introduced by banks does the actual damage. So, we can still use book-keeping money
without the interest factor and do away with paper currency. And since the money lent
actually does not exist why do we need the bank? Can’t we create book-keeping
money ourselves? This is what the local exchange trading systems (LETS) do.
Whenever a person decides to buy something he borrows money from the system,
which is recorded as a negative value in his account, and the seller’s account is
incremented by an equal positive value, and the transaction is complete. The negative
value in the buyer’s account indicates that he owes that amount to the system but
without interest. In future transactions he can neutralize the negative value by selling
goods or services to another person. This monetary system is inflation proof because
the money in circulation remains constant and money can be borrowed freely by
anyone. This system does not cause inequality in society because money is no longer
scarce.

A web-based international community-exchange network has been developed by Mr.

Tim Jenkins in South Africa, which operates like core banking through the internet.
Here zero balance accounts can be opened by individuals and organizations and
trading can be done in the manner described in the preceding paragraph. The website
is http:// www.community-exchange.org

To tide over the present world economic crisis this is the best option available. The
only problem is that it works best where the IT sector is well advanced and computers
and internet services are easily available. But the system can be adapted to rural areas
that do not have such facilities by batch-processing in suitable intervals—say weekly.
Alternatively a complementary paper currency can be introduced in such backward
areas.

The Community Exchange Network is the first and only global network of
complementary currency exchanges. The breakdown of exchanges by country is as
follows:

• Argentina (1)
• Australia (30)
• Canada (3)
• China (1)
• India (4)
• International (2)
• Italy (1)
• New Zealand (20)
• Norway (1)
• South Africa (22)
• Spain (2)
• Sweden (1)
• United Kingdom (1)
• United States of America (15)
• Vanuatu (4)
• Zimbabwe (1)

Number of countries: 16
Number of exchanges: 109
(As of 11th June 2009 the number of countries has risen to 17 and the number of
exchanges has risen to 128)

More articles by same author: http://rpminz.tripod.com/articles.htm

Great place to sell your ideas: http://www.coolideas.in
 No Cash? No Problem!
Get interest free credit and start spending.
Log onto
www.community-exchange.org
and open your zero balance account.
(Click Join, select India then Jharkhand, Fill form and click submit)

True Political Freedom comes from Economic Freedom