Credit as a Public Utility: the Key to Monetary Reform - Part 1

By: Richard_C_Cook

We live in an era of deregulation, where economists and politicians speak of “the market,” not government, as the appropriate vehicle for economic decisions. President Ronald Reagan said in his 1981 inaugural address, “Government is not a solution to our problem, government is the problem.”

This attitude has defined the U.S. approach since then, including the Clinton years, when even a Democratic administration cut the size of the federal bureaucracy and tried to reduce its impact. The laissez-faire attitude has continued under President George W. Bush, though resistance is appearing from the Democratic majority elected to Congress in 2006 with respect to selected issues such as the high cost of student loans.

But if market-based economics is so wonderful, why do we have stagnating employee incomes, rapidly increasing control of wealth by the very rich, a middle class in decline, growing poverty, collapse of our manufacturing job base, a bursting housing bubble, resurgent commodity inflation, soaring but shaky stock prices, a trillion dollar war in the Middle East financed by runaway deficit spending, and capital markets dominated by predatory equity and hedge funds? Why and how has “the market” done so much damage to the many while enriching the few?

On top of everything else is the exponential growth of debt. American households today are deeper in debt than at any time in history. So is the federal government. So are state and local governments. So is business. The only ones not in debt are the financial institutions and their controllers to whom everyone else owes money. Maybe this is what is really meant by “the market.”

Total U.S. societal debt has been reliably estimated at $48 trillion dollars and growing. If we assume, on the low side, that the cost of this debt is six percent interest per year, that's about $3 trillion per year in interest payments alone. This is equivalent to almost a quarter of the entire U.S. gross domestic product. It doesn't even count the repayment of the principle on the loans where repayment reduces the available purchasing power, thus making new loans constantly necessary.

Debt is an albatross around the neck of every citizen and resident, every man, woman, and child. Things have become worse since 2005 when Congress passed a much more onerous bankruptcy law at the urging of the financial industry. Some types of debt, such as student loans and taxes, can never be forgiven.

And as the debt ripples through the economy it makes everything else more expensive and turns individual financial problems into crises. It affects people's health, keeps them up at night with worry, and even drives many to alcohol, legal or illegal drugs, or even suicide. Worldwide, economic stresses and the need to constantly work harder and find new sources of income just to survive contribute to tension among nations and increase the chances of war or terrorism.

Is this really the legacy of the most highly developed and productive economy in the history of the world? Hasn't something gone terribly wrong?

CREDIT AS A PUBLIC UTILITY

In other recent reports the author has analyzed the structural causes whereby a developed economy like that of the U.S. fails to generate sufficient purchasing power through wages, salaries, and dividends to balance the cumulative prices of goods and services. In order to compensate, nations have historically attempted to generate trade surpluses to boost their income earnings, often resulting in international rivalries and war.

Over the last several decades, the U.S., with its chronic negative trade balance, has compensated for the gap between purchasing power and prices with debt of all types and in all sectors of the economy, both private and public. One effect of this general debt policy has been “dollar hegemony,” whereby the dollars sent abroad to purchase products from countries like China come back in investment by the Chinese and other governments in the Treasury bonds that float the federal budget deficit.

In his reports, the author has proposed a series of monetary reform initiatives that are based on the idea that credit, properly conceived, should be viewed as a public utility like water or electricity, not the exclusive private domain of the financial industry. Given the high degree of interest by readers in these ideas, the author has concluded that a more in-depth explanation of credit is needed.

In particular, the author wishes to show that the concept of credit as a public utility is not a new idea. In fact it is inherent in the notion of a republic, a commonwealth of citizens, under which the U.S. was founded, as well as other forms of government throughout history. What is really anomalous is not the idea that credit should be viewed as a public, not a private heritage, but that the notion of the private ownership of credit to be allocated under “market” conditions ever should have gained so much credence in the first place.

OVERVIEW OF THE HISTORY OF CREDIT FROM ANCIENT TIMES THROUGH THE BANK OF ENGLAND

The free market ideology current in the U.S. and, increasingly, in other Western nations which today are losing touch with their former social democratic history, is the most extreme expression of private vs. public control of community life anywhere in the world in the last 6,000 years.

From the beginning, the societies which grew up in what we know as the cradles of civilization had communally regulated economies, especially those of a proto-urban nature in regions such as Mesopotamia, Egypt, India, and China. The same was true in the case of the Hebrew society of Palestine as well as other tribal cultures.

Among the most pressing concerns of all human societies has been to balance the rights of the individual with the needs of the community. The two have not always been seen in opposition as they tend to be today.

Individuals need the protection of a nurturing social environment, especially when they are young and when they are old. Communities, on the other hand, flourish through the contributions of strong, capable, and mature people.

The idea that is current today of the individual and community in conflict is a sign of an unbalanced paradigm. Thus we have in our own time two extreme views. One is that individuals should be able to do just about anything they want and that society is a hindrance. This is the mind-set that has fostered free-market capitalist economics. The other is that the individual should be totally subservient to the group as in state communism.

Curiously, though, neither ideology upholds the same ideals for all members of the culture. Free-market capitalists see nothing wrong if a handful of oligarchs hold everyone else in thrall to debt. The commissars of communism find it perfectly natural if their position in the party grants them privileges the rank-and-file will never attain. So both systems are rife with brutality, oppression, and hypocrisy.

Societies that wish to balance the needs of the individual with those of the community also foster a complex set of rules, laws, and customs to deal with the institution of property. Ancient religions usually saw land and other types of property as gifts of the Deity with men acting in a stewardship role.

Within the framework of this qualification, private ownership of property has been recognized as normal and natural by most cultures. The fact that no single individual can totally possess tangible goods is shown by the fact that property often outlives its owner. Thus laws of inheritance usually come into play.

Concepts of private property were also applied to money once it was invented and became current in commerce and trade. The rights of the community were recognized through the establishment of public institutions such as temples or royal palaces, supported in some measure through systems of taxation or revenues from the ownership of farmland or workshops. Both private and public parties thus took part in economic life and the exchange of money for goods and services.

A problem arose, however, when lending became involved, for all but the most rudimentary economic systems realized that a system of credit where money was borrowed and then repaid was needed to allow trade to function smoothly. According to economic historian Dr. Michael Hudson, lending was thus born from economic necessity. It also served to moderate the ups and downs of agriculture due to variations in weather by loans being extended to farmers in lean years with repayment being required when conditions improved.

Usually anyone who had money was allowed to lend, whether private individuals, kings and nobles, or priests. Interest rates were fixed by law and lasted unchanged for centuries. The recipients of lending were mainly the merchants and farmers. Failure to repay could have dire consequences, with the debtor or his family members being taken into bondage until the loan was repaid.

The harshness of such a system was ameliorated by periodic forgiveness of certain types of debts. In the case of commercial vs. agricultural lending, forfeiture of property was common. The power of the creditor was greatest when interest was compounded, which was the norm, causing the debtor's burden to grow exponentially over time. 

In the ancient Near East these practices passed from Mesopotamia to the Hebrews, the Greeks and Romans, and other cultures. But the problem of fair and equitable lending was never really solved. The Hebrew culture frowned on lending at usury, defined as charging interest. Still, lending often took place, though among the Hebrews debts were also periodically forgiven.

In Athens, Aristotle railed against compound interest, repelled by the idea that money, a sterile substance, should be allowed to multiply while its owner did nothing to enhance its productivity except to exact payment for its use from someone else.

Aristotle wrote: “The most hated sort [of wealth getting], and with the greatest reason, is usury, which makes a gain out of money itself and not from the natural object of it. For money was intended to be used in exchange but not to increase at interest. And this term interest [tokos], which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Whereof of all modes of getting wealth, this is the most unnatural.”

Aristotle and the intellectuals of the classical age who agreed with him were the exception. Cato even likened usury to murder. But none of the ancient cultures really solved the problem that an effective source of financial credit was needed for economic progress and to moderate the natural fluctuations of economic conditions.

Over time, both the Greek and Roman cultures became thoroughly debt-ridden, leading to extreme stratification of social classes, endemic debt slavery, and eventual economic collapse. In fact, Hudson identifies the enormous “overhang” of debt as the principal cause of the fall of the Roman Empire and the start of the Dark Ages. 

Next came the Christian era. It seemed that in prohibiting the practice of lending at interest, the Christians had learned a lesson which the Greeks and Romans had not. The Catholic Church outlawed money lending throughout the Middle Ages, though it was still a commercial necessity. So it was taken up by the Jews who had been excluded from most other professions. The Church prohibitions faded after the Reformation, though Martin Luther warned in dire terms against the unfairness of compound interest.

In the Islamic world, lending at interest was forbidden by the Koran. Yet a flourishing urban civilization developed in many regions through a complex commercial code whereby trade capital became available that allowed the provider to share in the profits but also in the risks of the enterprise.

It was in Italy that both modern banking and paper money were born. The Italian bankers of the Renaissance were the foremost financiers of Europe, providing liquidity for commerce but also lending large sums to kings and princes to pay for their wars. This experience showed both the good and bad sides of credit. The Medici bankers of Florence gained a reputation for enlightened stewardship where lending supported the growth both of trade and the arts of civilization. The bankers of Genoa, by contrast, were seen as greedy and cruel speculators.

The period also saw the half-legendary birth of what came to be known as fractional reserve banking, one of the most dubious innovations in history. Money at the time was viewed as a commodity—gold, silver, collectively called specie, or other substances of value. Notes redeemable in specie were printed and circulated to meet commercial needs. But a new era opened when the bankers began to issue notes in excess of their specie reserve.

The bankers were required by the laws of the municipalities to redeem their notes with gold or silver on demand. If they could not, the punishment could be execution. The value of the notes depended on the reputation of the banker along with prevailing economic conditions. But with the use of notes spread across geographical regions, through the intermediation of money brokers, trade could expand virtually without limit. This led to rapid expansion of industry and agriculture which produced the goods offered in trade.

The fractional reserve system was institutionalized on a national scale with the founding of the Bank of England in 1694. While the notes issued by the bank were ostensibly redeemable in gold, much of the collateral was in debt instruments issued by the king's treasury. England had become Great Britain and used vast sums of credit issued on a fractional reserve basis to finance its colonial wars, but only by creating a debt so monstrous that only the interest could be paid, never the principal. This was what was meant by calling it a “funded” debt.

The system was extremely ambiguous, with no clear answer as to whose money it really was—the government's whose debt instruments collateralized the system, or the private financiers who owned the bank's stock, held its gold reserve, lent the bank notes as currency, and lived off the interest payments received from the national treasury and bank customers.

Naturally it was in the government's interest to do anything it could to inflate the currency, so as to pay the interest due in installments of lesser value, even though such inflation worked against the population which had to accept the paper money when offered in trade. This made the fractional reserve system inherently corrupt and caused the government—and the financiers who propped it up—to become the monetary enemy of its own people.

By Richard C. Cook
http:// www.richardccook.com

Copyright 2007 Richard C. Cook
Richard C. Cook is a former federal government analyst who was one of the key figures in the investigation of the space shuttle Challenger disaster. He is author of the book - Challenger Revealed: An Insider's Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age is Richard C. Cook's personal story of how he disrupted the cover-ups surrounding the Challenger disaster.

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