A Challenge to Banking
[Back to contents page]
SECTION TWO - Honest Money
Applied on a world-wide basis, the conversion of debt to
equity and the printing of notes and coins to repay government
debt, can also resolve the international debt problem. From
the perspective of individual nations with foreign debts,
it offers a practical means for liquidating their foreign
debts without the domestic political and economic sacrifices
now being demanded.
Meeting foreign debts
Non-government foreign debts can be met by share issue, in
the same fashion as non-government domestic debts. Government
foreign debt can be met in the same way as government domestic
debt. New notes and coins can be printed to the value of the
foreign currency owed by the government at the exchange rate
prevailing immediately prior to the payment. It can then be
given to foreign creditors as payment in full.
In some cases, this would lead to a substantial proportion
of a nation's money supply being in foreign hands. Consider,
for instance, the money- supply of the following countries
from my 1985 study (as of June/July 1985; presuming no banks
hold government debt):
Currencies in billions (bn)
|Current Money supply
|US dollar equivalent
|New money supply
Had each of the above nations converted their total government
debt at that time and at those rates, each would have experienced
a growth in its total money supply. The United Kingdom would
have experienced the least growth. The United States and South
Africa would have each found its money supply to have exceeded
three times its previous size, Mexico would have found its
money supply almost quadrupled, and Brazil's would have increased
six and a half times. But there it would end: there would
be no further increase. Holders of each currency would look
forward then to a stabilising influence rather than the current
continued diminution of the level of exchange value.
[Top of the page]
Effects on domestic money supply
With the exception of the United States, the amount of money
in each domestic market-place initially would have doubled.
One third of the total South African money supply, half of
that of Mexico and two thirds of that of Brazil would be held
in foreign hands. This money would only find its way back
into its domestic market-place when it was used by its foreign
owners to purchase products exported from, or to travel within,
its country of origin.
If Brazil, Mexico and South Africa were each to provide a
framework for foreign investment that was attractive, external
holders of each currency would wish to invest in those countries.
The increased level of economic activity provided by these
investments would bring an increase in the demand for money.
The increase in demand for money would help to offset its
loss of exchange value caused by the return of foreign-held
units. Repayment of debt by this method would then trigger
a substantial investment boom in each country.
Of this group of countries, the United States alone would
immediately experience a substantial increase in domestic
money supply: by a factor of three. Therefore the exchange
value of the dollar could be expected to be reduced by two
thirds and prices and wages could be expected to treble very
Yet the American dollar would also gain enormous strength
if a world-wide programme of conversion were to be undertaken.
Eurodollars do not appear in the above figures. They are dollars
which have been permanently removed from the American market-place,
lodged in non-American banks and in non-American debt instruments.
Through a process of lending and re-lending, the number of
such dollars has multiplied to a sum many times the US domestic
money supply. The potential for these Eurodollars to return
to the United States now poses a major threat to the domestic
value of the US dollar.
In a world-wide conversion programme, however, Eurodollars
would be converted to shares or other currencies. Eurodollar
loans to borrowers in the private sector would be converted
to shares. Eurodollar loans to governments would be converted
to the currency of the particular borrowing government. Eurodollars
would disappear. The threat which now hovers over the US dollar
would no longer exist.
The figures above portray the maximum possible increase in
the money supply of these nations. In fact, the increases
could be significantly less. To the extent that nationalised
industries and other government-owned assets can be converted
to shares, the amount of paper money required to repay government
debt will decrease. To the extent that banks have lent to
government, the newly minted notes and coins would be used
to repay depositors and would not, therefore, represent an
increase in the money supply.
Converting from debt to equity can have
many positive benefits, to conclude we look at these
benefits and how to ensure they follow conversion.
[Back to contents page]
[Top of this page] [Download
Honest Money in PDF Format]