by Michael Rowbotham
September 2001
from 'Goodbye America' by Michael Rowbotham
from
Prosperity Website
Whenever Third World debt cancellation is
discussed, it is automatically assumed that somebody, somewhere has to
suffer a loss. Either banks must cover the losses, taxes must be raised or
Western governments must foot the bill.
In fact, Third World debts could be cancelled with little or no cost to
anyone. Indeed, cancellation would be not only the simplest process
imaginable, but to the general advantage of the world economy. All that is
involved is a bit of creative accountancy - something at which the West has
shown itself highly adept when this has suited its political purpose.
To appreciate this, it is essential to recall that the dominant form of
money in the modern economy, bank credit, is entirely numerical. It is an
abstract entity with no physical existence whatsoever, created in parallel
with debt. Debt cancellation is therefore largely a matter of numerical
accountancy. This is emphasized by the fact that only one factor prevents
the immediate cancellation of all Third World debts - the accountancy rules
of commercial banks.
Third World debt bonds form part of the assets of commercial banks, and all
banks are obliged to maintain parity between their assets and liabilities
(deposits).
If commercial banks cancel or write off Third World debt bonds, their total
assets fall. Under the rules of banking, the banks are then obliged to
restore their level of assets to the point where they equal their
liabilities, usually by transferring an equivalent sum from their reserves.
In other words, when debts are cancelled,
normally banks suffer the loss.
There are two options for overcoming this
accountancy blockage. They involve acknowledging that debt-cancellation is
both desirable and possible, and adapting bank accountancy accordingly.
-
The first option is to remove the
obligation on banks to maintain parity between assets and
liabilities, or, to be more precise, to allow banks to hold reduced
levels of assets equivalent to the Third World debt bonds they
cancel.
Thus, if a commercial bank held $10
billion worth of developing country debt bonds, after cancellation
it would be permitted in perpetuity to have a $10 billion dollar
deficit in its assets. This is a simple matter of record-keeping.
-
The second option, and in accountancy
terms probably the more satisfactory (although it amounts to the
same policy), is to cancel the debt bonds, yet permit banks to
retain them for purposes of accountancy The debts would be cancelled
so far as the developing nations were concerned, but still valid for
the purposes of a bank’s accounts. The bonds would then be held as
permanent, non-negotiable assets, at face value [pp.135-136] …
The cancellation of international debts,
or their conversion to national debts [pp.140-143], is the
sine
qua non if Third World nations are to discover a path away from
poverty and decline and towards more socially and culturally benign
futures. The acknowledged need is for Third World countries to
develop their agricultural and industrial infrastructure for their
own domestic consumption and direct less effort towards export-led
growth.
To the extent that international debts
remain, the export imperative remains.
The Third World cannot be said to be in material
debt to the industrialized nations. The developing nations are in financial
debt to international banks.
But whilst not actually in material debt to the
industrialized nations, because these bank debts are denominated in dollars,
they are forced to behave as if they were in debt to the West, seeking a
perpetual export surplus [p.145].
(Also see below, "How Third World Debt is
Created".)
How Third World Debt is Created
How Private, Commercial, National And
International Money Is Created
abridged from the works of Michael Rowbotham
April 2000
from
Prosperity Website
The financial system currently adopted by all nations is often described as
"debt based", since the process of going into debt is relied upon almost
exclusively to create and supply money to their economies.
By the action of lending to borrowers,
commercial banks create credit and advance this to industry, consumers and
governments. This "bank credit" circulates in the broader economy until such
time as the loan is repaid. Such "bank credit" now forms 96% of the money
stock in most industrial nations, with a mere 4% the notes and coins created
by government, and free from a parallel debt.
Thus, almost the entire money stock is supported in circulation by vast
debts in four main sectors...
-
Private debts e.g. mortgages, loans,
overdrafts, credit-purchases
-
Industrial and commercial debts
-
Government "national" debts
-
International, including Third World
debt
The supply of money is a direct product of
borrowing, and debt maintains this money in circulation. Modern debt is, in
aggregate, quite unrepayable. Furthermore, difficulty is experienced in the
repayment of individual debts in all four sectors.
The Drive Behind Globalization, 1998,
pp 3-4.
Money is created in each of these four areas....
How BANKS CREATE MONEY for PRIVATE & COMMERCIAL
Needs
If a bank makes a loan, nothing is lent, for the simple reason that there is
nothing of substance to lend.
The bank makes what it terms a loan against the
amount of money deposited with it at that time. This is all done with the
utmost ease. The bank has simply to agree that a person may take out a loan
of, say, £5,000. The person taking out the loan can then spend £5,000 and
hey presto...! £5,000 of new number-money has been created.
No one with a bank account is sent a letter
telling them that the money in their account is temporarily unavailable,
because it has been lent to someone else. None of the original accounts in
the bank has been touched, reduced or affected.
Nobody else's spending power has been reduced,
but £5,000 of new spending power has been created; £5,000 of new
number-money enters the economy at the stroke of a bank managers pen, but
£5,000 of debt has also been created.
Thus, whoever takes out the loan will then make purchases and payments to
other people, who will pay that new money into their bank accounts. Result:
more bank deposits!
As soon as the loan in the example above is
spent, £5,000 will find its way into the bank account of a car dealer or DIY
store; £5,000 of apparently new money. This is money which has supposedly
been loaned but the banking system doesn't distinguish this fact. It simply
registers a new deposit, and regards it as new money. Total deposits in the
banking system have therefore increased by £5,000.
This is the boomerang effect of a bank loan by
which a loan rapidly creates an equivalent amount of new bank deposits in
the banking system. This effect was neatly summarized in a statement by
Graham Towers, former Governor of the Central Bank of Canada...
"Each and every time a bank makes a loan,
new bank credit is created - new deposits - brand new money."
The new money will provide the banking system
with the collateral for more lending.
This is the bolstering effect of a
bank loan. As the total money held by banks and building societies becomes
swollen by loans returning as new deposits this provides them with the basis
for further loans.
Perhaps the best description of this process of money creation was provided
by H.D. Macleod:
"When it is said that a great London joint
stock bank has perhaps £50,000,000 of deposits, it is almost universally
believed that it has £50,000,000 of actual money to lend out as it is
erroneously called... It is a complete and utter delusion. These
deposits are not deposits in cash at all, they are nothing but an
enormous superstructure of credit."
The Grip of Death, Jon Carpenter
Publishing, 1998, pp. 11-13.
How BANKS CREATE MONEY for NATIONAL Needs
A country's national debt is completely separate from, and additional to,
the level of private and commercial debt directly associated with the money
supply.
The United Kingdom national debt in 1998 stands
at approximately £380 billion. If the private and commercial debt of £780
billion and the national debt are added together, the total indebtedness
associated with the UK financial system stands at some £1160 billion, which
dwarfs the total money stock of £640 billion!
How did this condition of
overall negative equity come about?
This excessive indebtedness - which is a blatant
misrepresentation of the real state of economic wealth enjoyed by the nation
- is a position shared by all the developed nations.
The national debt is actually composed of thousands of pieces of paper
called stocks, bonds and treasury bills. These stocks and bills, known as
gilt-edged securities, or
gilts, are essentially elaborate forms of
government
IOU. These IOUs are issued because each year the government fails
to collect enough in taxes to cover the costs of its public services and
other spending - and it borrows money to cover this shortfall.
All
government budgets overshoot by many billions of pounds, dollars or
deutschmarks annually.
This leads to what is called the borrowing
requirement for that budget year. A country's national debt is therefore the
total still outstanding on all past years' borrowing requirements; thus the
UK national debt consists of £380 billion of these gilt edged IOUs, in the
form of outstanding treasury bills and stocks.
The method of issuing these IOUs and administering the national debt is
quite simple. In order to obtain money to cover its annual spending
shortfall, an appropriate number of government stocks and bills are drawn up
by the Treasury.
These are then sold in fact they are auctioned
off in the money markets to the highest bidder. This is done throughout the
year to meet the shortage of revenue as it arises, and the announcements, in
the form of government advertisements, can be seen regularly in the
financial press. These stocks and bills are bought because they promise to
repay a larger sum of money at some future date, and are sold at a price
that promises a good return to whoever buys them.
They are usually denominated in considerable
sums of £1,000 or more per bond and are bought by insurance companies,
pension funds, banks and trust funds... anywhere that money accumulates as
savings.
By selling these stocks, the government obtains
the additional money it needs for the public sector, making up the annual
shortfall in what it can gather by taxation.
As these government stocks mature and become due for payment, the government
has to find the money promised on those stocks, and pay it to the financial
institutions that bought them. But governments are unable to pay this money
owing on their past stock issues. Indeed, each government is confronted by
the current year's annual shortfall in taxation receipts.
The whole reason for the government issuing
stock in the first place was because it could not cover its expenditure
through taxation, and this annual shortfall is constant. There is no way a
government can pay the money it owes.
How then can the government pay up on its
maturing stock? It has underwritten promises it cannot keep.
What happens is that the government obtains the
money to meet the payments due on maturing national debt stocks by selling
more government stock to the financial institutions - promising even more
money in the future. The government draws up enough new stock to cover the
repayments due on the old stock, sells this, and uses the money to pay off
the old stock.
Of course, when this new stock matures it too
has to be paid off from the sale of yet more stock. The government manages
to pay off the national debt, and not pay it, at one and the same time...
There is a pretence that this is not the true arrangement, since repayment
of national debt stocks is actually accounted as coming from taxation, not
from the sale of more bonds. But this repayment from taxation creates such a
massive shortage in government revenues that can only be made up by the sale
of more bonds so the net effect is that repayment is constantly deferred by
the sale of further government bonds.
This is what is referred to as interest on the
national debt although it is not really interest in the conventional banking
sense, but a constant rescheduling of a completely un-repayable debt. This
deferral is not, however, the end of the story....
At the same time as deferring and re-mortgaging the existing level of
national debt, the government has to sell yet more stock to cover the amount
by which taxation falls below what is needed to support its public services.
The national debt therefore escalates,
increasing by the amount required to re-mortgage the past national debt,
plus the shortfall in revenues to fund the public sector.
In 1960, the UK national debt was £26
billion; by 1980 it had risen to £90 billion. The national debt in 1998
stands at nearly £380 billion, and is likely to reach a trillion pounds
within the next 20-25 years. In America, the national debt in 1960 stood
at $240 billion; by 1997 it had reached the level of $5,000 billion, or
$5 trillion!
It should also be remembered that the money held by pension funds and
insurance companies, or whoever buys the government stocks, is money
that had to be borrowed into existence in the first place. In other
words, by this process, governments borrow money which has already been
borrowed into existence, and they thus create a second massive
institutional debt in respect of money which already has a debt behind
it!
Adding the national debt to the total of
private debt places a country and its people in a position of overall
negative equity, owing far more on paper than the amount of money that
exists in the economy.
The Grip of Death, pp. 96-98.
So, in summary: Governments draw up official treasury bonds, and these
are auctioned on the money markets. The bonds are bought by both the
banking and non-banking sectors. When the non-banking sector (pension
and insurance funds etc) purchases the bonds, saved monies are recycled
into the economy through government spending.
When the banking sector buys government
bonds, banks and lending institutions create credit: There is an
increase in the money stock. This money is spent into the economy
through government spending.
Creative Accountancy, 1998, p. 29.
How COINS and NOTES are CREATED
The significant point about coins and notes
money created by the government is that this money is created
debt-free, and spent into the economy by the government.
This is a vital consideration, and it is
therefore important to appreciate precisely how this injection of
debt-free money is managed. Coins and notes are minted and printed by
the government at no cost, apart from that of materials. Of course,
governments have no particular need of these coins and notes; banks are
the institutions requiring a supply of cash.
The government therefore sells the coins and
notes that it creates to banks, who pay by cheque, and the government
acquires the face value of those coins and notes in number-money. The
sum of money which the government obtains, and which is debt-free so far
as the government is concerned, is then added to whatever taxation
revenue has been raised to fund the public sector.
Thus, coins and notes are created by the
government, and an amount equivalent to the face value of those coins
and notes is spent into the economy as a direct, debt-free input.
The Grip of Death, p. 14.
How INTERNATIONAL or Third-World DEBT is CREATED
The financial position of even the wealthiest nations is one of acute
financial pressure, with massive private and national debt, and budgetary
difficulty dominating the economy.
How can the wealthy nations, from a position of
such perpetual monetary shortage and insolvency, lend money to the
developing nations? The answer is that they do not.
The money advanced to Third World nations is not
money loaned from the wealthy nations. These sums consist almost entirely of
monies that have been created, via the commercial banking mechanism,
specifically for the purpose of the loan concerned. In other words, the same
debt-based, banking process used to supply money to national economies is
also employed for the creation and supply of funds to debtor nations.
Thus, these monies are not owed by debtor
countries to the developed nations, but to private, commercial banks.
The WORLD BANK
Holding only a nominal reserve
contributed by the wealthy members,
the World Bank raises large quantities of
money by drawing up bonds and selling these to commercial banks on the money
markets of the world.
Thus, the World Bank does not itself create the
money it advances to Third World nations, but sells bonds to commercial
banks which, in purchasing these bonds, create money for the purpose. The
World Bank therefore functions along the lines of a country's national debt.
Just as with the government bonds of a country's national debt, when a
commercial bank makes a purchase of World Bank money-bonds, the commercial
bank creates additional bank credit.
In essence, the World Bank acts as broker for
commercial banks, who are the actual money-creation agents and who hold
World Bank bonds in lieu of monies they create in parallel with debts
registered against Third World nations.
Although these loans may be denominated in
pounds, dollars or Francs, such loans advanced under the World Bank have no
connection with respective national economies, and in no sense represent
monies loaned by these nations, nor debts owed to them by developing
nations.
The debts are owed to private, commercial banks
(via the World Bank) in respect of money they have created through the
purchase of debt bonds.
The INTERNATIONAL MONETARY FUND
The IMF presents itself as a
financial pool an international reserve of money, built up with
contributions, known as quotas, from subscribing nations - that is, most
nations of the world. However, credit creation accompanies almost every
aspect of IMF funding...
Twenty-five percent of each nation's IMF quota is paid in the form of gold,
the remainder in the nations own currency. The 25% gold quota is the only
component of IMF lending capacity that does not, in some way, constitute
additional money created in parallel with debt.
The 75% of a nation's quota payable in national currency is invariably
funded by the government concerned through the sale of bonds, thus adding to
that nation's national debt. Therefore
the IMF, whilst not itself creating credit,
places monetary demands on member countries for quotas that can only be
funded via each country's national deficit. This involves the sale of
government bonds to commercial banks, leading to money creation by those
banks.
This source of revenue forms the main fund of
IMF monies available to developing nations.
Since the monetary demands on the IMF are constantly increasing, due to
rising demand for Third World loans, the quota demands by the IMF have
reached the point where (so-called) creditor nations such as America and
Britain are reluctant to undertake yet more bond issues and further national
debt to supply these funds.
So, in recent years the IMF has begun to
circumvent the restrictions of its overall quota. By co-operating directly
with commercial banks to organize more substantial loans than it can fund
from its own quota resources, the IMF administers loan packages made up in
part from its own quotas and in part from commercial sources.
For example, of the $56 billion loan advanced
under the IMF to South Korea in the wake of the Asian crisis, only $20
billion was contributed by the Fund; the remaining $36 billion was arranged
by direct co-operation with international commercial banks, which created
money for the purpose.
The total funds of the IMF were substantially increased and its function and
status as a money-creation agency clarified when, in 1979, the IMF
instituted Special Drawing Rights (SDRs).
These SDRs were created, and intended to serve,
as an additional international currency. Although these SDRs are credited to
each nations account with the IMF, if a nation borrows these SDRs (defined
in dollars) it must repay this amount, or pay interest on the loan. Whilst
SDRs are described as amounts credited to a nation, no money or credit of
any kind is put into nations accounts.
SDRs are actually a credit-facility just like a
bank overdraft if they are borrowed, they must be repaid. Thus, the IMF is
now creating and issuing money in the form of a new international currency,
created in parallel with debt, under a system essentially the same as that
of a bank... the IMF reserve being the original pool of quota funds.
In summary, of the $2,200 billion currently outstanding as Third World or
developing country debt, the vast majority represents money created by
commercial banks in parallel with debt.
In no sense do the loans advanced by the World
Bank and IMF constitute monies owed to the creditor nations of the
World Bank and
IMF.
The World Bank co-operates directly with
commercial banks in the creation and supply of money in parallel with
debt. The IMF also negotiates directly with commercial banks to arrange
combined IMF/commercial loan packages.
As for those sums loaned by the IMF from the total quotas supplied by
member nations, these sums also do not constitute monies owed to
'creditor' nations. The monies subscribed as quotas were initially
created by commercial banks through the agency of national debts.
Therefore both the contributing nation and
the borrowing Third World nation carry a burden of debt associated with
these sums. Both quotas and loans are owed, ultimately, to commercial
banks.
The Invalidity of Third World
Debt, 1998, pp.14-17.
(Also see on top "Third
World Debt Can Be Cancelled").