A Challenge to Banking
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SECTION TWO - Honest Money
The question must now be asked - and it is a serious and
hard question: do we wish to change our current dishonest
banking and monetary system for an honest one?
If we do not, then this is no more than an academic exercise.
If we do, we can actually begin the process of seriously addressing
the problems of inflation, debt, unemployment and growing
government budget expenditure.
Of course, none of us is free to wave a magic wand and make
it all happen just as we wish. But, each of us is capable
of thinking the problem through, learning what needs to be
done, and influencing our political electees. Have you ever
noticed how, when enough people set the right example, their
The steps required to stop the creation of new units of money
by the banking system are fairly straightforward. Legislation
will have to be enacted which makes new loan agreements legally
unenforceable from the date of the Act. The Act will have
to deal with all existing law which offers protection to any
sort of lender, depositor or creditor. It will have to remove
any form of debt collection, any assistance to debt collectors
and any action against debtors - including bankruptcy - from
the police, the courts and all other areas of government authority,
except perhaps in matters of taxation, for debts incurred,
credit given or deposits made after the date of the Act.
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Option 1: allowing existing debt to continue
Under this option, there will be no change for debts already
in existence, credit already issued or deposits made prior
to the date of the Act. They will be enforceable under the
law applying at the time of the agreements into which the
The changes required in taxation rules will require a similar
approach. To put interest payments and dividend payments on
a level playing field, either dividend payments will have
to be allowed as a deduction before tax is calculated or interest
payments will have to be made from profits after tax. With
respect to existing debt, many companies are so dependent
upon debt finance that they would not be able to meet interest
payments from profits after tax. For them to survive, they
would have to continue to pay interest from income before
tax. Where existing debts are allowed to continue, therefore,
the tax rules, which existed immediately prior to the Act,
must continue to apply to debts incurred before the Act.
Following these changes, debt will no longer be an attractive
option and the money-lending activities of commercial banks
and the banking system as a whole will cease due to lack of
Existing debt will be repaid over time, as their various
maturities are reached, bringing home units of money which
have been removed from their domestic market-places by either
a time or a geographical factor. The real domestic money supply
will then become apparent and the process of accurately measuring
both its domestic and its international exchange value can
begin. But, this process cannot begin until all existing debt
is repaid. That could be a long time indeed.
For many, these changes will not be enough. They leave the
current extensive burden of debt in place. Businesses could
still be made bankrupt under the law covering existing debt.
Interest payments will still be required. Either could continue
to add to the growing roll of the unemployed.
The cost to taxpayers of interest on government debt is gigantic.
This is a cost about which many can ask valid questions. Why,
when the government is the only legally authorised creator
of money, do governments license others to create it and then
pay interest to those whom they have licensed on the new money
created? It is more normal for licensees to pay royalties
or fees of some sort to whoever grants the license. Banks
should be paying the governments fees. Governments should
not be paying interest. Elimination of interest payments from
government budgets can reduce them substantially.
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Option 2: converting all debt to equity
The conversion of all existing debt to equity will resolve
these additional concerns. Complete conversion is a more radical
and thorough solution. It will, of course, require a more
complex legislative package. The nature of the relevant legislation
will obviously vary from country to country. The purpose here
is merely to outline the essentials.
New legislation will be required to repeal all existing law
which offers protection to any sort of lenders, depositors
or creditors. It must also, except in the areas of taxation,
immediately remove from the jurisdiction of the police, all
courts and all other areas of government authority, any form
of debt collection, any assistance to debt collectors and
any action against debtors - including bankruptcy.
Simultaneously all existing debt must be converted to equity.
Conversion will be an enormous task. Title to the unpaid portion
of goods will need to revert to the seller or to the finance
house, depending on which had issued the credit. An exception
to this can only be allowed when both parties agree to retain
an investment as a debt - so long as each party acted in the
full knowledge that the debt will no longer be legally enforceable.
To resolve any bona-fide disputes which will naturally arise
from the above two acts, a system of special Courts of Equity
will need to be established, to which parties unable to agree
can appeal for arbitration or determination. These courts
can be self-financing, deriving their costs from fees set
as a predetermined portion of the disputed equity. Fees would
be paid proportionately by each contestant in a ratio determined
by the court. It will be in the interest of both parties to
settle before fees are imposed. Pressure would be on each
to find a basis for agreement and thus to avoid these costs.
The conversion of all debt to equity will raise questions
about the strength of the various claims on the actual cash
held by each bank. There will not be sufficient cash in any
bank to meet the claims of all its depositors. Claims will
have to be honoured in some order of priority. Current or
cheque account depositors who have lodged their money in the
bank for safekeeping, should have a preferential claim to
those who deposited their funds in interest-bearing accounts
for investment purposes. The latter would then find themselves
actually having to bear the risk of investment.
Unsatisfied deposits will have to be converted to shares
in the bank itself. Each bank is a borrower from its depositors.
So, each deposit remaining after the allocation of cash will
have a claim on a portion of the total remaining assets of
the bank. By issuing shares in lieu of cash, banks will become
giant holding companies, owned by both the banks' original
shareholders and their unsatisfied depositors, each in proportion
to their particular contribution.
Individuals in debt will have to issue shares in their assets
in lieu of debt. Companies in debt will have to issue shares
in themselves in lieu of debt. Lenders will thus become part-owners
of the assets which their loans helped to acquire. As a result,
individuals or existing shareholders may no longer be able
to retain full control of assets acquired through debt.
In the case of individuals, it may be that joint ownership
of an asset is established with one or more of the lenders
becoming entitled to exercise control over that portion of
the assets reasonably agreed to represent the unpaid loan
balance. If the asset was, for instance, a house, a fair rental
can be determined for its use, and the borrower will be required
to pay his new co-owner the appropriate portion of the rental.
Or, if agreed, the house may be sold. The borrower and the
lender will now each own a portion of the house. Each will
be entitled to his share of the proceeds of the sale.
In the case of a company, new shares will be issued to replace
debt. New shareholders will be entitled to exercise their
voting rights and control may shift to the new shareholders.
Governments are amongst the biggest borrowers. Converting
their debt to equity is a different matter. While governments
can issue shares in their tangible assets, they cannot issue
shares in themselves. They can, however, mint new notes and
coins in a quantity sufficient to equal the total of any government
debt remaining after the conversion of government owned tangible
assets to shares.
The actual physical printing of money is seen by many as
inflationary by definition. This is not necessarily the case.
Some printing of new notes is not inflationary. To the extent
that banks had loaned money to governments, the new money
created would simply return to the banks as tangible units
against which depositors could legally claim. The money supply
would then not increase. Its form would merely change. Depositor
claims without real substance behind them would become depositor
claims with substance behind them.
Repayment of government debt to lenders other than banks
by this method will simply give actual physical substance
to units of money removed from the market-place by a time
factor. Of course, once returned their presence will be felt.
But that would have happened anyway. When the debt had matured,
they would have been returned as demand deposits and their
presence would then have been felt. The worst that can be
claimed about minting new notes and coins to repay government
debt to other than banks, is that it will bring forward the
timing of inflation which was already in the pipeline and
due to occur at some future date.
We explore the consequences of the conversion from
a debt based system to an equity based system. The possible
changes in social and economic terms and how we would
have to re-assess the value of money, good and services.
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