The Fiscal Flaw

Debt Created Credit, Its Aspects And Effects

Words by Graham Ferguson

The intention of this paper is to bring to your notice the one flaw in the structure of our financial system which is constantly overlooked as being a vital influence in social, environmental and economic problems.

This fault is as disastrous to the global society and its economy as a crack in a wheel would be to a Very Fast Train! Ultimately, they will both end up running off the rails.

The fact that money begins its life cycle as a debt, means that all money in existence is on loan. Its very existence is dependent upon a borrower. First the system requires that the borrower, whether nation, company or individual, be in a position where it can adequately service the loan. If the applicant is successful the money finds its way into circulation, mainly as wages and salaries. The borrower’s aim is to recoup costs, which includes the interest repayments, plus make a profit. The producer hopes to do this from a global market-place where the money in circulation at any one time is already less than the amount put in as wages, and less than the original cost of production.

Since new money can only come into existence as a loan, by that definition, it can no longer exist when repaid. It cancels itself out of existence. Money in circulation represents an interest bearing loan. It can not be representative of true wealth ie, product or service. Its status is debt. Borrowed money, already in circulation, can be re-lent ad-nauseam, but this brings no new money into being. Not one new cent is created. Likewise no amount of production or trade, local or international, will create one cent of new money. Unless new money is continually borrowed, the amount in circulation on a global scale can only diminish, because of capital repayments and the payment of accruing interest .

For a thorough understanding of the fault in the present financial system I wish to make it quite clear that new money lent by banks, with a charter to do so, is created at the granting of the loan. It had not existed before that and can no longer exist after the debt is repaid. If all debts were repaid there would be NO money in circulation. Money is a product. Immediately upon creation it becomes a commodity that may only be used at a rental fee (the interest). It bears no relationship whatsoever to the true physical wealth (the service and productive capabilities) of any nation whether it be socialist, communist or capitalist. Thus no nation may prosper but at the expense of its competitors. This system makes competitors of us all, while its implicit requirement for survival is the elimination of one’s competitors!

Human Nature?

My thesis is that the present system requires that society act in ways contrary to the way our innate common sense and our sense of right and wrong would dictate. Industry’s overdraft borrowing’s, for a cycle of production, are channelled into circulation through wages and salaries. Interest begins to accumulate immediately the overdraft is drawn upon. The payment of this interest leaves a deficit in the amount in circulation ‘in the market place’ even if no immediate capital repayments are required.. As a result, the local market, has a constant money (purchasing power) deficit and is thus unable to purchase in full, its own product.

This artificially restrictive situation of scarcity in the local market, occasions the need for every nation to compete on the world market (the reason why most countries must export). This is an arena in which a finite number of countries are expected to sell to each other more than they buy from each other. The implications for conflict here are many and obvious. This arbitrary, scarcity provoked, artificial and unnecessary situation has no merit whatever. Instead of resulting in the vainly hoped for and much needed, cooperative spirit, we have competition, the need for which resides only in the realms of the fantasy world produced by the debt created credit system.

If, as is the case at present, society devoutly believes in and has absolute faith in the efficacy of the money system and blames the nature of people for the mess it’s in, then it is creating its own reality out of a contemporary myth. To me, the consequences of this so called ‘reality’ may well be the long dark tunnel of another dark-age. A tunnel that human society has unfortunately, already entered and the light that it imagines is at the end, may well be the end.

An understanding of the symptoms at present afflicting society and its environs and some research into a method of creating an equitable financial system, is crucial to the successful resolution of these existing problems.

The present question of worldwide degeneration in our social structure, and the tearing of the environmental fabric that protects and nurtures us all, is of such magnitude that it deserves to be addressed with urgency and objectivity. I see it then, initially as a question for science research methodology and only secondly as a moral question. I present several observations and examples of social and economic transactions that could only be legitimised by a flawed and inimical economic system, with eventual fatal consequences.

I often hear and read that the human being is inherently greedy and aggressive. As a consequence, war and conflict is seen as the inevitable result of ‘human nature’.

Is violence, greed and general bastardry, hate and prejudice a dominant and intrinsically unalterable feature of human nature? Is the exploitation not only of other humans but also of our biosphere, all that can be expected of the human being? If so, then to what purpose are the humanities, the social sciences, the religious and spiritual leaders of past and present, preaching ‘humanity’, tolerance, enlightenment, spirituality etc.?

My contention here is that if the structure of our financial system were such that tolerance, compassion, cooperation and concern for others were the atributes required for economic success, then these desirable qualities would in fact be eagerly embraced by our much maligned species. Have the spiritual philosophers and humanitarian leaders of history including Gandhi and Jesus Christ, shown a complete lack of understanding of ‘human nature’? Many descriptions of humanity’s inhumane nature are presented to avoid a search for, or the investigation of, an alternative solution to social problems.

In my opinion a valid criticism of human nature would be our partiality for using the scapegoat of our so-called inherent shortcomings when faced with an unpalatable situation in which we feel a little intellectually challenged. We tend to blame our nature in order to avoid further examination or change.

The Genesis Of Modern Conflict

I endeavour to show that the present antisocial behaviour of many corporations, governments, small business and individuals, are merely unfortunate survival mechanisms, and that the exploitative methods of their ‘mode of operation’ are made necessary by a harsh and impoverishing economic system, a financial structure that is impoverishing of the physical being and shrivelling of the spirit.

Question not, whether humanity is capable of achieving and maintaining an enlightened civilisation but rather, is it possible to create the social infrastructure necessary to the achievement of such a society? At present, people are forced into conflict, on an individual as well as a group basis. We are all compelled to compete instead of cooperate (to the detriment of the world as a whole) in a manic struggle for survival, under an economic system that renders ineffective those very attributes that we generally ascribe to notions of a civil, world society.

There is an assumption that scarcity is a fundamental principal in economics. In terms of the environmentally sustainable, no rational physical scarcity actually exists as yet, though even that eventuality may be waiting in the wings

The need for conflict and competition is a fantasy and an anachronism in the modern world. These outmoded practices are perpetuated by the absolutely unnecessary, artificial scarcity of finance. It is restrictive and divisionary. Finance is probably the only resource over which we may have complete and absolute control. Yet the method used in the issuing and creation of finance, is given over to a structural flaw in the system that renders it most detrimental to human aspirations.

The method we use to produce new money, has become somewhat of a sacred ritual that places it beyond question. As unthinkable as questioning the Bible in the middle-ages! It would seem that to criticise our present method of creating money, is to commit the unpardonable. It is as though the structure of the financial system were sacrosanct and to question its fallibility, an unthinkable heresy. A heresy that only the uninformed would commit.

The world at present, accepts the false premise that to be secure money must first be borrowed. The interest paid on all loans worldwide must leave a shortfall of purchasing power in the world market place, resulting in restricted access not only to necessary money but also to everything we produce or are capable of producing. This wilfully created scarcity factor leads to restricted access to goods and services on a massive scale. Since our instinct for self preservation in the short term is so powerful, we are left in a chronic state of crisis where the competitive struggle for economic survival demands exploitation of all resources at all levels. (The rationale for western civilisation's heavy emphasis on promoting the competitive spirit in general and in education specifically may well derive from, or be a direct cultural effect of the 'scarcity factor'.)

A popular misconception is that money is a reflection of real wealth or productivity. The fact is that debt-money reflects nothing but its self. I reiterate that the prevailing arbitrary and artificial finance, is a product that bears no relationship whatsoever to the human need for environmental or ecological sustainability. It creates an economic climate where social, professional, psychological and physical survival requires and dictates the employment of dangerous exploitative human behavioural responses. These reactions have long been mistakenly attributed to a supposedly inherent human bias toward mindless rapacious greed, instead of to our most basic instinct, self preservation.

Under this inimical system, the population is driven, to compete tooth and nail with each other in order just to survive. The ridiculous but popular concept of 'the law of the jungle’ puts us in continual conflict not only with each other but also with nature. Contemplate for a moment the very evident anomaly that exists within the framework of our civil, social and economic infrastructure. Is it not odd that in an overwhelming proportion of the world’s sociological problems there is always one ever present component,(a shortage of funds) glaringly obvious when pointed out, yet consistently overlooked as a possible root cause? Overlooked in favour of gleefully laying the blame for the problems facing society, on a human conspiracy or on human nature; seen as uncaring, selfish, exploitative etc.

While ever this underlying anomaly remains unrecognised, uninvestigated and unexamined, it will obviously not be rectified and will continue as the factor behind most social, economic and environmental iniquities and injustices. This particular factor requires absolute obedience to its dictates. Leaving us no alternative but to contest mightily with each other in order to survive financially and economically, therefore to survive in a literal sense making people appendages of production instead of the object of it.

Limited Finance

The financial restriction involved, is the one factor constantly in short supply in any worthwhile human endeavour, it makes impossible many types of achievements of which humankind is capable. As yet the world suffers no shortage of physical resources with which to feed, to clothe, to house its inhabitants if this were attempted in a truly sustainable manner. My point is, the physical limits of world finite resources is not the problem under review here. An understanding of the cause of why we must exploit finite resources is what is under review and is vital to any solution.

There is but one basic scarcity. The problem of the chronic shortage of finance world wide is of paramount importance in the resolution of present environmental problems.

There is no shortage of teachers or academic staff, or of materials, renewable or otherwise, for school or university buildings or of people with skills to build them. Research and development suffers but one basic shortage, finance. There is no shortage of materials or skills to fully equip and staff the required facilities. Exactly the same finding will result from an examination of the fully sustainable physical resources that apply to the creation or maintenance of other institutions, organisations, industries, whether government or otherwise.

I must address the mistaken belief that there is plenty of money 'out there' and that it is ‘tied up’ in armaments, or in advertising or in the Swiss bank accounts of corrupt dictators etc. Money for arms and advertising is spent on the wages, salaries and dividends of the people who produce and service these items going straight into circulation. Banks lend the funds that are deposited with them, back into circulation. However there are never enough available funds to satisfy the needs of a sustainable society.

The flaw in the system ensures that there is always a shortfall, a gap between the cost of production and the purchasing power available in the market place. Another of the inviolate requirements of this present system is its demand for continuous economic growth, which if looked at objectively will be seen as another absurdity and impossibility. Nothing in nature expands forever exponentially. Already we are nearing the limits of some of the world’s finite resources due to overuse, overpopulation and wasteful overproduction.

Our ecosystem’s natural protector, the ozone layer, is already stretched to the limit, just as our ever expanding national and international indebtedness, our debts on which interest must be paid, is reaching the limit of our ability to service.

Taxation is an ever increasing burden on governments and taxpayers. Taxes go toward interest payments on government borrowing’s, servicing the ever increasing debt. The Australian Government's expenditure depends on a continuous round of borrowing’s via the Reserve Bank by tendering Treasury Bonds as collateral, these are recoverable when the loan is repaid.

Science's Warnings

Since Rachel Carson’s warnings in 1962 there have been only token gestures and a little lip service on the part of industry and governments. In spite of all the talk-fests at so called summits, virtually nothing of consequence has eventuated that might stop global warming, reverse the thinning of the ozone layer, halt the degrading exploitation of the world's oceans and few remaining old-growth and rainforests. The reason is because all this would be too costly. In other words there is not enough available money. This is clearly the direct result of the structural fault and as such requires immediate attention for rectification.

That which restricts financially restricts physically, restricts in almost every aspect of life. An all encompassing, effective resource and environment management, becomes an impossibility.

Industry's ability to maintain and sustain actual resources is reduced by scarce finance, to a mere tokenism. Nations must baulk at the financial cost to industry of cutting greenhouse and ozone depleting emissions. If finance were geared to human capabilities there would be no problem with putting into place the recommendations from the reports of the various 'sustainability summits'.

Without Prejudice, Without Question!

We accept this ever present shortage of funds without questioning the financial structure’s method of producing money. How is it possible that the question, ‘ why is there not enough money’ is never asked, is never really investigated? Have we conditioned ourselves to believe that capitalists are too greedy, communists not greedy enough and socialists too generous? Do we therefore wallow in a welter of circularity’s and confusions, unable to see beyond the blaming of ‘human nature’?

Consider the plight of hospitals, aged care, medicare or any other social welfare facility. The same finding will result; not enough money for those facilities that one would expect of a civilised society. The present financial system is diametrically opposed to such a civilised society. Does anyone really assume that there is not enough resource in labour or in materials, or machinery, skills or desire to build and maintain adequate social facilities on a sustainable basis?

Can we honestly believe that sustainable roadways, cycleways, public transport systems, can’t be constructed throughout the nation if the funding scarcity factor is removed? What is the factor involved in the fundamental economic rationalists' obsession with downsizing? Do these people experience a lack of equipment or other facilities? Does a government or an industry lack an understanding of the hardship, heartache and psychological damage they cause their redundant workforce? I would suggest not.

Downsizing is done in the public and private sector in order that these organisations might survive financially. Certainly some organisations have gone overboard and achieved enormous profits but this can be regarded as a buffer against the ‘boom and bust’ roller coaster ride that is synonymous with modern economics. The boom is short lived and the bust is very long.

More On Competition

Under the present system, true competition is anathema to business, real competition must be eliminated or business goes under. Amalgamations, takeovers, multinationals and the construction of massive corporations are a survival mechanism and their formation is the direct result of the existing necessity to eliminate competition. The rationale is "to beat your competition you must become bigger (amalgamate) and/or more powerful".

Unfortunately, the necessity to eliminate competition in business, plus the need to become ever more ‘efficient’, thrusts industry into conflict with the worker. If you would ponder the aetiology of modern social conflict please consider the flaw in the system, the same flaw that has occasioned the need for World Government and the ‘unconscious corporate civilisation’ of John Ralston Saul. A method for removing the fly in the ointment needs urgent examination and in my opinion, judicious action.

The worker is compelled to compete for jobs made scarce because of necessary ‘fund slashing’ which requires that workers be replaced by technology, or made redundant by making one worker do the work of two. Organisations become so lean and mean that they become positively anorexic. Workers compelled to compete with each other in the ever shrinking job market, are by definition in conflict. This is no more in the best interests of the workers than it is to the businesses. Workers form union organisations as protection in their conflict with employers. Businesses become cartels, corporations etc. as protection against business competitors and from worker’s claims through unions, for better wages and workplace conditions.

A cohesive society on a global scale would obviously require cooperation. Instead we get conflict. The world is a battle field of groups and individuals, competing for scarce finance that by the very nature of its creation must forever be in short supply, forever less than is required to even minimally supply humanity’s needs on a worldwide (monetarily and environmentally) sustainable basis.

Workers' unions worldwide are seen ‘correctly’ by business as an impediment to their profitability which translates into ‘their financial viability,’ their very survival. Therefore in the eyes of business, unions must be emasculated, corrupted or otherwise eliminated. (Business has not yet considered the ridiculous and ever present ‘shortage of funds’ as a problem that should be examined and eliminated!)

I ask that we consider the situation where people must struggle to eliminate competitors within a system dictating that we become ever more competitive, would this not create conflict and confusion? Society has been educated by the demands of a financial structure to become evermore competitive in order to control any opposition. This spurious situation of course needs a world government to control. Culturally, the effect of this is that competition is seen as not only legitimate but that it is an imperative for survival. Even so, economic survival for even the most competitive of industries, always remains problematic. Hence industry's constant state of paranoia. ‘More efficient’ means less workers - less wages - less borrowing’s - less money in circulation - less access to the products of industry but more poverty.

As stated earlier, all producing nations, whether developing or otherwise, are faced with the need to compete on the world market, because of the shortage of purchasing power in their local market place. This puts all exporting countries into direct conflict and in the preposterous position of each having to export to the other, more than they import from each other, within a finite number of markets! The ‘wisdom’ of this situation is never questioned, never examined. The solution according to conventional economic thought is that we must compete harder.

This means, produce more at less cost at home (with all its implications of hardship) and at the same time produce as much as possible offshore. This cost cutting also places the blame for polluting the environment on the third world nation instead. A perceived bonus under the present system.

This artificially induced worldwide conflict produces the ludicrous situation of groups of nations forming trading blocks for protection. In reality the need for protection is a fiction that need not be.

There is no rational requirement for money to be created as a debt. Methods will have to be put in place to get new money into circulation without creating the stigma of debt. The governments of Australia and The United States of America are empowered by their respective constitutions to do so. For a start, all government expenditure could legally be paid for (money put into circulation) without the creation of debt. This task presents no great difficulty for economics in itself, though the implementation of any new method may be onerous, as the few and very powerful who have learned to manipulate the system for their own 'benefit', (while destroying their environment) may pose an immense impediment to any change.

I believe there is an acceptable and effective method with potential for success in overcoming this problem. A first step would be to begin the gradual process of educating the population in the understanding of the present flawed system till a critical mass worldwide can safely demand a change to credit created finance, instead of the present finance, created as debt.

Debt created credit is a contradiction in terms.

Cyber citizen, I presume that there are facilities at your disposal that would be adequate for investigating, to your own satisfaction, the flaw in the structure of our economics system, I trust that the above summary of the present situation in the world of finance has aroused your personal interest.

I would love to hear your response, how ever brief, to my concerns in this matter.

Yours sincerely,

Graham Ferguson