Money, Debt and the Subprime Crisis
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Last Modified: February 25, 2009 Issue: January 2008 |
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There is a short animated documentary called Money as Debt worth checking out. The video, which goes through a brief history of monetary and banking systems, raises a number of questions that relate to the US subprime crisis, not to mention the global financial system at large. Moving from a monetary system based on barter to one based on debt, the documentary highlights the increasing risk and perhaps inevitability of a major economic crisis. Of course, we’ve heard about scenarios such as this before, and how they were averted (for example, through the fall of the Bretton Woods system). But this video argues that it is the debt-based monetary system in general, originating with the Bank of England in 1694, that is flawed. While a number of prominent economists and politicians have pushed for a return to previous systems, such as the Gold Standard, these substitutes are not without critics of many stripes.
The documentary itself raises the possibility Local Exchange Trading Systems (or LETS), which are interest-free local credit networks that function on the basis of trading time spent on work. I won’t go into detail about it here, but you can read more.
Unfortunately, I’m not well-versed enough in the specificities of the monetary system to comment on the accuracy of the film’s claims. But I’ve included it below in case there are people who would like to comment on it. There are a number of questions from the video that I find interesting:
- Why do governments choose to borrow money from private banks at interest when the government could create all the interest-free money it needs, itself?
- Why create money as debt? Why not create money that circulates perpetually?
- How can a monetary system dependent on perpetually accelerating growth be used to build a sustainable economy?
- What needs to change to have a sustainable economy?
Needless to say, I don’t have any answers (yet). Check out the documentary below - it’s running time is 47 minutes.
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I will offer a tentative suggestion in response to the first question: “Why do governments choose to borrow money from private banks at interest when the government could create all the interest-free money it needs, itself?”
I don’t think governments have a choice. The first bonds were mutually beneficial agreements between the aristocratic leaders of the Italian city-states and their wealth citizens. The wealthy citizens lent the money needed to hire mercenaries to protect the cities and to expand the realms under their control. The government couldn’t simply print more money because this would have undermined the value of all the existing money which would have angered the wealthy members of the community. When you aren’t strong enough to pay for an army without turning to the wealth of others, then it is unlikely you want to piss-off your deep-pocketed allies. You could end up in a situation where your money is no longer considered viable and people refuse to use it. Metallic coins would be pulled out of the system because their ‘real’ value becomes more than their ‘nominal’ value. This, of course, would exacerbate the original problem, a lack of purchasing power.
Governments still can’t simply choose to do this. Every situation where a government has tried has been disastrous.
Honestly, it’s on of those questions that a considered examination of governmental fiscal and monetary policy exposes as naive. One of the interesting realities this raises, to me, is that governmental power has always been contingent on the tacit support of the wealthy.