Monetary Reform

A critique…

Monetary Reformer (MR) talks about a new system of economics that is free of debt, but much of what I have read on the subject seems to have muddled and flawed assumptions. There are some very useful ideas in the topic though and I base my concept of Primary Credit on a central idea in Monetary Reform.

Some easy sources for MR are Money as Debt and The Ecology of Money, however for the best explanation I would suggest Robertson and Huber, Creating New Money.

Interest

One key tenet of MR is the claim that interest charged on loans fuels economic growth and creates a hole in the accounting system that can't be filled. MR claims that if I borrow £10, this creates £10 into the economy, yet I am asked to pay it back plus interest - perhaps a further £1. MR suggests that this £1 doesn't exist and therefore can never be repaid.

Actually what happens is that if I go to a bank and want to borrow £10, they lend me £11. They then charge me £1 for the loan and give me £10. The £1 interest therefore exists and will be spent by the employees when it appears in their wages or the shareholders if it becomes part of their dividend. Either way, the money enters the economy and can be earned by me to repay the £11 loan

There is plenty wrong with interest and there should be no need for it. However in a world where inflation devalues money on deposit, there is a desire to earn credit interest on it so that it keeps pace with inflation, similarly there is desire by banks to ensure that loans don't depreciate in value with inflation. Both scenarios mean that people lose. All that said, if inflation didn't happen, a single payment for a loan service is much better that the charge of compound interest, but the MR claims are simply wrong.

Cash as special

Some proponents of MR see cash as real money and electronic money, credit, as some evil created with no worth. The distinction between cash and electronic money is simply one of how it is spent and stored, rather than how they are created. Cash is created in the same manner as credit - through debt.

Cash is created in the same way with notes being printed and entering circulation backed by a debit in an account which is in turn backed by government securities. Whether money is created virtually as a figure in an account or as cash, it is balanced by a debit to an account. The Bank of England prints notes and puts an equivalent debit to its cash account, when high street banks need cash they debit their cash account and credit the BoE, the BoE credits its cash account (i.e. reducing the negative balance) and hands the cash to the high street bank. Cash is simply another form of credit which is created through, and backed, by debt.

When the cash is in your pocket, you have a note that says the Bank of England owes you some money - a debt.

Robertson and Huber don't make this error - they suggest electronic money is the same as cash and should become legal tender.

100% reserves

Some writers seem to have misunderstood fractional reserves…

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