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The Fundamental Flaws of the Debt-based Economic System – Part 1

The economic system is a debt-based system driven by interest, and as long as that is the case, problems will persist. The so-called bankers, of course, do this by design as a means of control but that history is another topic. This article will examine the flaws conceptually. Some common criticisms will be addressed in Part 2.

1.1 The Necessity of a Tradable Proxy

Prior to the existence or in the absence of money, people traded directly by bartering with the goods they owned. Whilst there is nothing wrong with that in itself, coincident and complementary needs are required, since party A could only trade with party B if both had what the other needed at the same time.

Therefore, a tradable proxy is necessary. In the past, precious metals and/or alloys, which were perceived to have intrinsic value, were used. By mutual agreement, a certain weight of the precious metal was worth a certain weight or volume of a particular good.

Over time, comparatively more advanced societies used standardized coinage (in effect commodity money) controlled by the government.

Since precious metals were cumbersome to carry personally, as well as being difficult to transport and store, other means of trading were sought. It was not uncommon for precious metals to be stored at secure facilities, usually operated by goldsmiths or merchants for a fee. Thus, these goldsmiths and merchants were effectively the first private bankers, safekeeping precious metals which belonged to others.

As proof of the amount deposited, a receipt or a number of receipts was given to the depositor. These receipts were used in trade instead of the precious metals they represented, thus a precursor to paper money.

There is nothing wrong with using money as a tradable proxy in itself, whether it is in the form of precious metals or paper. As usual, injustices occur when people deliberately abuse the system that is in place.

1.2 Interest or Usury = Theft & Enslavement

Many would state that money is supposed to represent wealth. That is true enough but imprecise. Since wealth is generated, whether directly or indirectly, by human effort (work), it can be better stated as the following: Money is supposed to represent human effort.

Consider the following thought exercise as a crude illustration of why interest is wrong.

Assume the “banker”—use whatever term one wants to denote such an institution—creates and regulates money in a population of 10 individuals. Assume said banker is not included in the population.

In this example, the so-called banker creates and lends $100 to all 10 individuals who open and run businesses:

1: $100

2: $100

3: $100

4: $100

5: $100

6: $100

7: $100

8: $100

9: $100

10: $100

Pool Total: $1,000

If, for example, 5% interest is applied for a given term, then each individual must pay $105 at the end of the term.

1: $105

2: $105

3: $105

10: $105

Pool Total to be Paid: $1,050

The following observations are apparent:

1.2.1 – There is $1,000 in the population pool. By applying an interest rate of 5%, the amount to be collectively returned at the end of the term is $1,050—that is, $50 more than what is in the pool. This is impossible collectively even if some individuals can manage it. At least some individuals will foreclose, losing real assets. Thus, the banker can obtain (steal) the property of others without doing much work.

1.2.2 – If the interest rate increases, the amount to be returned also increases. This forces businesses to increase their prices so they can acquire the additional sum to pay their loans. Thus, the purchasing power of money decreases, known as inflation.

1.2.3 – Although a lower interest rate is relatively better than a higher interest rate, any amount of interest attached to money creation will perpetuate debt. As such, debt will never be reduced and, generally, neither will prices. This is why interest (or usury) is condemned by Judeo-Christian and even pagan Greek traditions. Interest is “unnatural” because the amount due to interest does not represent any human effort.

1.2.4 – If interest rates remain relatively high for long periods with borrowing parties unable to repay their loans, then more will be forced to foreclose. If this cycle is intense and prolonged, activity is further reduced, known as a depression, and will in turn cause more foreclosures. In short, this allows banks to gain more control.

1.2.5 – As the raising or lowering of interest rates also raises or lowers the cost of borrowing and the prices of goods and services from businesses that have borrowed, this artificially (unnaturally) reduces or increases human activity with its consequent artificial problems. Examples include suppressing population growth, car spaces that are too narrow, farmers destroying produce whilst part of the population are hungry simply because there is no (access to) money to facilitate trade, encouraging greed, and fomenting wars between nations. These are merely a few indicators that interest is unnatural. By the way, wars incur more debt and, regardless of the victor, post-war rebuilding also incurs more debt.

1.2.6 – Since individuals need to use their money to make purchases, it is impossible to return the initial capital of $100 in a timely manner even if no interest is applied. To put it differently, some work is paid for by money already in circulation, such as when one individual buys food from another. This is natural. See next point.

1.2.7 – Justice demands that borrowed capital be returned. Nonetheless, as work is done, the money which represents that needs to be retained within the population. Therefore, the amount returned is the capital minus the value added by human effort. For example, an individual might return $80 instead of $100 due to their work.

1.2.8 – As work is required, especially with population growth, money is necessary to represent that human effort. Therefore, over time, money creation corresponding to the work to be done is necessary—that is, new money injected into the population.

1.3 Fractional Reserve = Theft & Enslavement Multiplier

As mentioned before, paper receipts were used to represent the precious metals deposited. Depositors could use those receipts at any time to withdraw their precious metals.

It was obvious to a given goldsmith or merchant that all their clients (depositors) would not withdraw their precious metals at the time. Therefore, dishonest goldsmiths or merchants would circulate—that is, lend out—more receipts than the precious metals in their storage facility. This practice was the precursor to the fractional reserve that “creates” money at multiples of the cash reserves available.

The following observations are apparent:

1.3.1 – Any receipt over and above what is in storage represents nothing. And yet, over time, these goldsmiths or merchants could collect receipts which gives them access to precious metals which belonged to others. In short, they have gained these receipts based on the real work of the borrower with practically no work by them and little risk to themselves.

1.3.2 – Even without the fractional reserve, interest will still perpetuate debt; in this regard, interest is a more fundamental problem. The fractional reserve serves as a multiplier of debt, with or without interest.

Click here for Part 2.


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