Reforming fiat money
Fiat money need not generate a debt dynamic
600 words
The topic of money creation has become a focus of interest in the alternative media. The narrative which is most often recited is a disavowal or condemnation of fiat money and its propensity to create ever more debt.
I do not believe that anyone has produced a thorough-going understanding of the nature of money, or of its contested connection with debt. I have tried at https://klasseverantwortung.com/english/money.html, but my account is a work-in-progress and therefore not comprehensive.
My own provisional position is that, in principle, fiat money is fine when in the hands of small banks and bankers of sound moral character (reference Glasgow in the late 19th century). The problems have arisen from big banks and bad bankers, but even more so from the failure of central banks to set the right rules for money creation by fiat.
The following argument, which I shall contest, is made, here in the phrasing of Clare Wills Harrison via Conscientious Currency clarewillsharrison+digital-id-and-currency-watch@substack.com
« A £100 loan to person A creates £100 of money in circulation (as bank credit). However, the loan carries £10 of interest, which is not created at the moment of lending. To obtain the £10, someone must borrow new money, meaning new debt must be created to service the interest on the original debt. »
« This simplified example highlights a structural truth: the system depends on ongoing credit creation to remain liquid. In reality, interest is paid out of existing money stock as it circulates, but if credit growth slows while interest obligations remain, defaults and contraction become likely. This is the dynamic emphasised by economists such as Richard Werner, Steve Keen, Michael Hudson, and others. »
BUT: There is no inherent reason for new money in excess of the fiat hundred pounds to be created. It would be enough for ten pounds to be deducted immediately from the fiat hundred pounds so that the borrower receives only ninety.
Most importantly, it would also be possible for the central bank to forbid fiat banks from charging interest and therefore break the dynamic of ever increasing overall debt. The central bank would also need to be subject to this restriction.
This need not — and there should not — be a prohibition on all interest charges, only on banks charging interest on fiat money.
If I lend you a hundred pounds cash (=not fiat) I would and should be able to charge interest, which would be paid from the benefit the provision of capital has enabled. This transaction does not constitute an increase in the amount of money.
It would still be profitable for ordinary banks to do business by creating fiat money.
Already today, if you purchase securities (i.e. a holding in a corporation) for one hundred pounds cash, the amount actually going to the corporation will be less than one hundred pounds because commission is paid. Your holding on the ledger will be, say, ninety-five pounds.
To re-iterate: popularly, the argument is made that that there is a “structural truth,” such that fiat money requires the continual creation of debt outside of the grand total of money (sterling, US dollar…) at the time of lending and that therefore a dynamic is set in motion whereby the debt (for example, the national debt) can never be repaid.
This is partly true, but the problem can be easily remedied — or could be, if those running the central banks were not disingenuous, exploitative and colluding with their allies in the devolved banks.