If we look at the news, we see that the majority of issues are related to money, whether it's the rising cost of living, the lack of housing, or even the destruction of the environment and the squandering of the planet's resources (by planned obsolescence, for example). It is for these reasons that the previous article concludes that until society regains its authority to create money without interest, instead of borrowing it at interest from private banks, no other reform can be achieved.
In Canada, some would say that the government, on behalf of society, already creates its own money with Bank of Canada notes. The reality is that banknotes and coins issued by the Bank of Canada only come into circulation — and therefore into the hands of the public — if they are loaned out by commercial banks, at interest. Moreover, banknotes and coins, or "cash", represents less than five percent of the money in the country. The other kind of money, representing more than 95 percent, is created by the banks and exists in electronic form in bank accounts and bank cards. The country's official currency, issued by the Bank of Canada, now plays only a negligible role in the economy, since the figures (credit) loaned by the commercial banks are accepted by everyone as if they were paper money.
The basic problem with the current financial system, as Louis Even explained in The Money Myth Exploded, and in his article The Biggest Thief (see page 4), is that money is created in the form of debt. For example, suppose the bank lends you $100 at 6 percent interest. The bank creates $100, but you are expected to pay back $106.
If some people manage to pay $106 when they only received $100, it is because they took $6 out of the money put into circulation by other people's loans. For some to be able to pay their loans, others will declare bankruptcy. It is only a matter of time before all borrowers, without exception, will find themselves unable to pay the banker, whatever the interest rate charged.
All the money in the country is put into circulation in the form of loans, and must be returned to the bank with interest. Every day in our country, thousands of loans are issued by the bank and thousands of payments are made. Each loan increases the amount of money in circulation, and each payment reduces the total in circulation. When the loan is fully paid, because of the interest charged on it, more money has to be returned to the bank than was originally loaned.
In the current financial system, money does not remain in circulation permanently. For example, if you represent money as water in a bathtub, the interest owing is like a leak or hole in the tub and you have to always add new loans to replenish and maintain the same level of money.
Some will advise that if you don't want to get into debt, then don't borrow. But the fact is that if no one borrowed money from the bank, there would be no water in the bathtub, so to speak. It is a no-win situation: either go into perpetual debt, or live without money and eventually starve.
The fact is that it is not the banker who gives money its value, it is the country's productivity and potential that has value. The banker produces absolutely nothing; all he does is create figures that enable the country to use its own productive capacity, its own wealth. Without the production of all the country's citizens, the banker's figures are worth absolutely nothing. So the government, on behalf of society, can very well create these figures itself, representing the production of society, without going through the private banks, and without going into debt.
Graham Towers was Governor of the Bank of Canada from 1935 to 1954, when he appeared before the Parliamentary Committee on Banking and Commerce in April 1939. He was asked:
"Will you tell me why a government with the power to create money should give that power away to a private monopoly and then borrow that which Parliament can create itself, back at interest, to the point of national bankruptcy?"
Towers' answer: "If Parliament wants to change the form of operating the banking system, that is certainly within the power of Parliament."
Some will say that there could be a danger of the government abusing this power and issuing too much money, which could lead to inflation, and that it would therefore be preferable to leave this power to the bankers, so as to protect it from the whims of politicians.
To this we reply that money issued by the government would be no more inflationary than money issued by the banks. It would be the same figures based on the same production in the country. The only difference is that the government would not go into debt or pay interest to obtain these figures.
On the contrary, the first cause of inflation is precisely the money created in the form of debt by the banks. The obligation on companies and governments to pay interest on loans, and return more money to the bank than they borrowed, forces the inflation of both prices and taxes.
How is the Bank of Canada currently fighting inflation? It is raising interest rates! For the economists in charge of the Bank of Canada, inflation means there is too much money in circulation and so, according to their reasoning, interest rates need to increase to make borrowing less enticing and thus reduce the amount of money in the economy. But, as we shall see later, Economic Democracy proposes a much more effective, and less painful, tool for fighting inflation.
Of course, if the Canadian government started creating or printing money according to the whims of politicians and without any correlation to production, we would have inflation, and money would lose its value. But this is not at all what Economic Democracy proposes.
Economic Democracy proposes that money be created by society. We would restore money to its correct role and function. The volume of money would represent productive capacity and be represented by honest and accurate accounting.
The government would appoint accountants and form an independent body which would function as a National Credit Office. In Canada, the Bank of Canada could very well perform this role. The National Credit Office would be responsible for drawing up fair accounts in which money would simply be the reflection and exact financial expression of economic realities. Production would be expressed as an asset, and consumption as a liability. As we cannot consume more than we produce, liabilities could never exceed assets, and indebtedness would be impossible.
This is how it would work: new money would be issued by the National Credit Office at the rate of new production, and withdrawn from circulation at the rate of consumption of that production [Louis Even's booklet, An Efficient Financial System, explains this mechanism in detail]. There would be no danger of having more money than products as there would be a constant balance between money and products. Money would maintain its value and inflation would be impossible. Money would not be issued according to the whims of the government, since the National Credit Office would issue money according to the facts of production and consumption.
The best way to prevent prices from rising is to lower them. Economic Democracy proposes a mechanism for lowering prices, called "compensated discounting". This mechanism would enable consumers to buy all the available production with the purchasing power in their possession by discounting the price of products by a certain percentage, so that the total price of all products would be equivalent to the total purchasing power available to consumers. The discount would be paid to the merchant by the National Credit Office. This would be a much more effective mechanism than the one currently used by the Bank of Canada to combat inflation.
If the government created its own money according to society's needs, it would automatically be able to pay for everything it is able to produce, and would no longer need to borrow from financial institutions abroad or here at home. So, when it comes to a new project, the government would not ask: "Do we have the money?" but "Do we have the materials and workers to carry it out?" If so, the money would be issued. The Canadian population would live within its real physical means and its productive potential.
In other words, everything that is physically possible would be made financially possible. Strictly speaking, there would no longer be any financial problems; the only limit would be the country's productive capacity. The government could finance all the developments and social programs that the population demanded and that were physically feasible.
Constitutionally, there is nothing to prevent the Canadian government from implementing this financial reform immediately. It is the sovereign government that must be responsible for the country's monetary policy, not private companies whose objective is profit rather than the common good. On July 27, 1961, Louis Rasminski, who was Governor of the Bank of Canada from 1961 to 1973, issued the following statement to the government:
"If the Government disapproves of the monetary policy being carried out by the Bank [of Canada], it has the right and the responsibility to direct the Bank as to the policy which the Bank is to carry out... and the Bank should have the duty to comply with these instructions."
Current governments are perfectly aware of the iniquity of the creation of money by private companies, but they dare not confront this power, for lack of support from the people. The only thing missing is the education of the people, to show them the falsity, absurdity and injustice of the current financial system and the existence of the remedy known as Economic Democracy. This is what the Pilgrims of St. Michael strive to do.
Alain Pilote has been the editor of the English edition of MICHAEL for several years. Twice a year we organize a week of study of the social doctrine of the Church and its application and Mr. Pilote is the instructor during these sessions.
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