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Criticisms of fractional reserve banking have been put forward from a variety of perspectives. Critics have included mainstream economists such as Irving Fisher,^[1] Frank Knight^[2] and Milton Friedman.^[3] However, few if any mainstream economists now endorse such views.^{[citation needed]} Within the economics profession, most criticisms are based upon non-mainstream economic theories such as those of the Austrian School. There are also critics from outside the economics profession, for example, author Michael Rowbotham, and libertarians who favor the free banking or full reserve banking systems.

Contents 1 Terminology 2 Typical criticisms 2.1 Non-mainstream views 3 Basic debate 4 Basic nature of system 5 Other economic and political criticisms 5.1 Effects on economic health 5.2 Effects on the environment 5.3 Inherent problems with the system 5.4 Types of downturns 5.5 Pushing on a string 5.6 Inequities in system 5.7 Potential societal impact 6 Potential solutions 6.1 Proposals for monetary reform 6.1.1 Libertarians and commodity money 6.1.2 Reform within fiat currency systems 6.2 Conclusion 7 See also 8 References 9 External links

[edit] Terminology

Critics of fractional reserve banking and the related fiat paper monetary system may refer to it by the term debt-based monetary system,^[4] or credit-based monetary system^[5] and may refer to the new money that is created in parallel with new debt as "debt money".^[6]

The term, "debt-based monetary system," and related terms, such as "debt money"^[7] are not used by conventional economists or academic mainstream economists. Mainstream economists often refer to "debt money" simply as credit, and distinguish clearly between types of money once it is created.^[8] The subject of debt-based money (as distinct from traditional monetary policy) is absent from most reputable established mainstream academic economic publications.^[9][10]

[edit] Typical criticisms

Mainstream economists do not dispute the idea that banks "create money by extending loans," and this basic concept is covered in most introductory economics textbooks and many popular reference works.^[11] However, critics of fractional reserve banking often focus on this mechanism, and frequently argue, as money creation requires loans from the banking system, that people are required to go into debt in order for any new money to be created; they theorize that this can debase the means of exchange. Critics find it problematic that banks "create money out of nothing."

Certain monetary reformers claim that a fractional-reserve based banking system is inherently destructive and inevitably generates debasement of the currency, extreme inequality or periodic crises; this view is not widely regarded by current mainstream thinkers, and the dire nature of the claim is considered by some to be akin to conspiracy theories.^[12][13]

Many debt-focused critics often link the alleged "negative" effects of fractional reserve banking with a government-enforced "paper" or "fiat currency", which they claim allows the practice of fractional reserve banking to continue without a "natural" limitation on the growth of the money supply, thereby causing inherently unsustainable "bubbles" in asset and capital markets that are vulnerable to speculation by highly leveraged hedge funds and other bank agents.^{[14][15][16][17][18][19][20]} Others simply view options (such as fiat currency and fractional-reserve banking) as mere instruments which can be utilized by monetary policy to help fine-tune the central bank's control over the growth in the money supply.^[21]

Another argument occasionally made by critics is that a nation should only have a "full reserve" banking system—a concept considered hypothetical by many economists. Virtually all banking systems worldwide operate on some form of fractional reserve banking (although the level of required bank reserves and the degree of regulatory constraints on banking differ greatly, with Iceland, Britain and the U.S. being examples of countries with low reserve requirements imposed by government).^[22][23]

[edit] Non-mainstream views

On considering economic thinkers outside of the mainstream, it should be noted that views on the topic of fractional reserve banking vary greatly. For example, there are individuals that reject the notion that fractional reserve banking is inherently destabilizing and that full-reserve banking is the appropriate solution; some schools explicitly advocate "free banking" with no required reserves at all (and no central bank to play the role of lender of last resort). Some have referred to the concept of monetary policy with full-reserve banking as "nonsense" (that is, a contradiction in terms).^{[citation needed]} Even within such groups as the Austrian school, at least one thinker has argued that full-reserve banking would impose similar costs of price adjustments in reaction to growth (through a reduction in the overall price level) as would inflation, and hence offer no inherent advantages over fiat currencies and fractional reserve banking.^[24]

[edit] Basic debate

In stark contrast to conventional economic analysis, some commentators focus on the combined use of fiat currency, fractional-reserve banking and central banking as a negative feature of modern monetary systems. These commentators use the term "debt-based monetary system" to refer to an economic system where money is created primarily through fractional-reserve banking techniques, using the banking system.^[4] This form of money is called "debt-based" because as a condition of its creation it must be paid back plus interest at some time in the future.

To some commentators, this implies that as the money supply and the economy grows, the general populace becomes increasingly indebted at the same time due to the idea that debt grows in parallel with money supply growth, and increasing interest payments (from either taxpayers or indebted consumers) are needed to pay bondholders as the money supply grows.^[15][20][25]

Some argue that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. To some, this implies that debt must grow exponentially in order for the monetary system to remain solvent.^[15][20]

Others argue that there is in fact no mathematical necessity for the money supply in a debt-based system to grow, since the interest portion of loan payments is not taken out of circulation, but goes into the lender’s account,^{[citation needed]} where it can be spent back into circulation and eventually be used to pay off some loan principal. The "exponential" growth of debt need not be a concern because if GDP growth is positive, GDP is also growing exponentially and the ratio of debt to GDP may improve.

[edit] Basic nature of system

The economic, environmental and social effects arising from money creation through fractional-reserve banking has been subject to much heated political debate for well over two centuries.^{[14][15][20][26]}

Critics claim that, in contrast to "debt money" (which is money created in parallel with the issuance of debt or credit), "true" fiat currency is issued by the Treasury of a central government debt-free, as no requirement for its eventual return is made as a condition of its creation.^[16][25] Government-issued debt-free fiat currency (such as debt-free notes and coins) can circulate perpetually in the economy as "stable" or even sound money (if backed by gold or silver) and although not as stable as hard currency, government-issued debt-free notes and coins (such as United States Notes and silver certificates) do not have the same effects of debt-based money described below.^[27] It should be noted however that fiat currency can be a source of hyperinflation if its production is not controlled, as the government has the potential to issue unlimited amounts of fiat currency - provided it is accepted as "money" by the private banking system. Notes and coins in circulation (being defined as M0) now account for a tiny fraction of the total M3 money supply in all developed, debt-based capitalist economies (M0 generally being less than 10% of the total M2 money supply in most developed economies).^[28][29]

Similarly, gold, silver and other precious metals have in the past been used as money. Because of the difficulty in increasing the supply of precious metals quickly, some monetary reformers believe a return to the gold standard, or a similar system of "hard" or "real" asset-backed currency, is the only way to stabilize the growth of the money supply. These monetary reformers often refer to the gold standard and silver standard as "sound money" or "honest money".

[edit] Other economic and political criticisms

In a 2003 statement to the U.S. House of Representatives, Ron Paul stated "if unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny".^[30]

Some economic thinkers (primarily members of the Austrian School) and political commentators believe that a debt-based monetary system amounts to a subtle form of monetary "fraud" in that it creates money "costlessly" through the use of fractional-reserve banking techniques.^[31]

Though Michael Rowbotham has no formal training in political science or economics, he is an active proponent of monetary reform, and argues that this system of money supply is perverse and inherently "anti-democratic", and creates inflationary exponential growth in the economy which leads to environmentally damaging and unstable over-consumption. Critics such as Rowbotham argue that the indebted are forced to induce new consumers to spend their way into debt so existing loans can be repaid with new debt-created money. Failure to achieve this goal results in foreclosure for those businesses and insolvency in the banking system that leads to economic collapse due to the sudden contraction of the money supply.^[15][32]

Mark Anielski as well as some political thinkers such as Rowbotham and some economists (such as Hyman Minsky) argue that this system of money supply has characteristics similar to a pyramid scheme, where the newly indebted are compelled to induce others into debt to pay off their own debts.^[33] It is therefore argued by a number of monetary reformers that fractional-reserve banking and the associated exponential growth of money in the economy "forces" the economy towards indebted consumerism.^[14]

Rowbotham argues that a major negative side-effect of the debt-based monetary system is its effect on agriculture, claiming that residential development produces one of the greatest continuous injections of debt money into the economy. Therefore, significant super-normal profits can be generated by re-zoning agricultural land and replacing it with low-density housing.^[15] If this is correct, this trend will lead to the destruction of fertile arable land, as this land is progressively re-zoned for speculative new residential development. Rowbotham also predicts that the global supply of fertile arable land will decline, leading to a broad decline in the quality and nutritional value of agricultural produce and, eventually, a dramatic increase in the prices of many "soft" commodities - which could then lead to actual food shortages for poorer segments of the world population.^[15][34]

If for any reason the monetary system broke down, urban populations (nominally "rich" but poor in terms of direct access to food supply) could find basic foodstuffs increasingly expensive, ultimately resulting in food security becoming a major public policy issue.^[15][35]

[edit] Effects on economic health

According to Michael Rowbotham the expansion of money through debt creates economic bubbles. This concentrates wealth in the hands of private banks as the populace is forced into debt simply to own a home and educate their children.^[15] Debt expansion leads to price appreciation of assets through speculation as the financial market becomes riskier. Edward Chancellor compares this type of market to a ponzi scheme.^[36]

The bust phase of this business cycle where "debt-based" money growth slows or contracts catches newly indebted businesses and consumers who are left out of the growth cycle.^[15][32]

[edit] Effects on the environment

There are also critics in the left-wing and environmentalist camps who contend fractional reserve banking (by creating a necessity for indefinite economic growth) leads to environmental destruction and depletion of natural resources.^[37][38]

[edit] Inherent problems with the system

Some monetary reformers predict that there will be an increased incidence of financial crises in the developed world, as economic and population growth inevitably slow and as the success of laissez-faire economic political policies result in a reduction in redistributive tax policies which, combined with the debt-legacy of the welfare state, allows an intense and unsustainable concentration of wealth and political power in the financial services sector.

Some monetary reformers argue that by necessity the promotion of the pyramid scheme inherent in private banking must be conducted by a tiny, secretive, ever-watchful minority because, unlike, for example, labor-intensive agriculture, which is self-sustaining, banking is not. If the majority of the populace were bankers nothing would be produced other than debt and inflation (and very detailed insolvency laws). Historically, usury has therefore often been criticized as inherently parasitic and non-self-sustaining.

Some monetary reformers argue that, given the parasitic nature of usury, it is vital that the indebted "victims" who must sink deeper into debt for the system to survive do so voluntarily and willingly and are not made aware of the consequences of purchasing consumables with debt money. Some politicians and others have highlighted the fact that mainstream media organizations appear to downplay or minimize the seriousness of deficit spending by government and debt-sourced spending of all kinds.^[39] The terms "debt" and "usury" are now virtually extinct, with "debt" being replaced by its antonym, "credit"; the cycle in "debt creation" is referred to euphemistically as the "credit cycle"; a shrinking of "debt money" as a "credit crunch" or "credit squeeze"; and the unsustainable growth in debt and the associated growth of derivatives that live off debt during the upward phase of the debt money cycle as "innovation" in financial markets.^[40]

Some monetary reformers see the prevalence of the debt-based monetary system ultimately resulting in a political crisis, between the vast majority of dispossessed who have had any accumulated net wealth periodically "stolen" during periods of "credit crunch" (and find themselves in permanent inter-generational debt, being forced to work involuntarily in the money-economy simply to house themselves and survive in the debt-based economy), and a tiny minority of inter-generational, super-rich elites connected close to the font of the money supply (being the private banking sector), who will strongly resist calls for redistributive economic policies by using all of their financial strength and lobbying power in an attempt to entrench and sustain their artificially privileged status. Given that the profession of this privileged minority is to produce nothing other than debt and inflation, and given that they face being rendered impotent if the power to print debt-free money was returned to government, it is to be expected that those associated and aligned with the private banking interests will use any means necessary to preserve their power, as they have no other skill besides the issuance and distribution of debt money.^[25]

Some monetary reformers believe that this privileged minority also always seek special government protection for the banking sector to protect it from financial insolvency when the debt-based financial system inevitably experiences periodic collapses due to the "bubble-like" nature of the growth in the money supply. This is referred to in some circles as "systemic risk" in the financial sector, as banks inevitably face periods of actual or near insolvency due to the mismatching of the high exponential growth in debt money and slower growth in the real economy.^[41] During these periods there are sporadic collapses in the value of inflated assets, resulting in a sudden collapse in the demand for new debt money, and an associated contraction in the growth of the money supply.

[edit] Types of downturns

There are two main kinds of debt money contraction that can cause a collapse in the value of inflated assets.

A "credit squeeze" occurs where new debt money is difficult to access without a high credit rating. At such times marginal borrowers, or those who have borrowed at the end of any debt-induced asset bubble, get "squeezed" out of further borrowing and a contraction in the growth of new debt money occurs, triggering a slow down in the growth of inflated assets. Those assets can then be "harvested" by the private banks through widespread foreclosure or bankruptcy and re-sold to those with the money to buy the distressed assets.^[42]

A "credit crunch" occurs where new debt money is not available at any interest rate - even for those with previously acceptable credit ratings - due to widespread insolvency in the banking system. At such times, it is the banking system itself that is insolvent and other financial institutions (including overseas financiers) become reluctant to lend to the domestic banking system, resulting in the domestic banking system being unable to issue loans even to credit worthy borrowers.^[43]

At any stage during the downward spiral of a "credit crunch", the central bank in a modern economy can try to save the system from complete economic meltdown by purchasing (either indefinitely or temporarily) the failed debts of the private banks.^[44] However, doing so results in cash being transferred to the private banks in exchange for bad debt, thereby violating the general economic precept to avoid moral hazard and effectively makes liquid the failed lending decisions of the private banks.^[45] In the U.S. banking system this is called "opening the Fed discount window", where the Federal Reserve temporarily purchases the failed investment portfolios of distressed private banks in exchange for cash, thereby allowing them to escape liability for mistaken lending practices that have resulted in these portfolios losing value as the borrowers default on their loan payments and are made bankrupt. However, this rescue measure may only delay, rather than avoid, the realization of losses in the banking system, as the central bank cannot "force" new borrowing into the system to inject new debt money into the money supply. Somebody has to be a counterparty to borrow the debt money that is being offered. If all market participants realize a "bubble" has formed in assets markets, there will be few (or no) buyers for new debt money, as no one wants to borrow to buy inflated assets no one else will buy. Money markets can therefore remain illiquid even with intense central bank support.

Furthermore, banks can go bust even with intense central bank support, if the issue is not one of liquidity, but one of solvency.^[46][47]

[edit] Pushing on a string

Some monetary economists describe the opening of the Fed discount window after the bursting of an asset bubble as "pushing on a piece of string", as this measure does not solve the key problem - creating new credit (or debt money) to keep up the growth in the money supply and maintain the required level of liquidity in credit markets.^[48][49]

To encourage fresh borrowing, central banks generally combine these rescue measures with an interest rate cut to encourage more new borrowing to allow the existing (failed) debts to be liquidated at or close to their original value. When Alan Greenspan repeatedly resorted to this tactic to revive illiquid money markets this became known in the market as the "Greenspan put", as the effect of these repeated reductions in interest rates was similar to a put option in the stockmarket, insuring banks' lending mistakes would be covered up by the Federal Reserve.^[50]

[edit] Inequities in system

Aside from the moral hazard issue, the key risk with this tactic (cutting interest rates to encourage new debt money creation) is that the central bank exposes the financial system to a currency crisis, as the growth in the money supply spirals out of control due to the need to save the banks from themselves.^[51][52][53]

For these reasons, a collapse in confidence in the solvency of the banking system is one of the most complex and difficult policy issues any government can face.

In such crises of confidence, a central bank may choose to save the current players in the banking sector by printing money and inflating its way out of the crisis, thereby debasing the value of the domestic currency.

This is referred to by some monetary reformers and economists as "socialism for the rich and capitalism for the poor", as many indebted consumers will still lose their houses and be declared bankrupt regardless whether or not the central bank intervenes to save marginal lenders who have been made insolvent through their mis-timing of the credit cycle.^[54][55] Future generations of innocent taxpayers may ultimately finance any bail out of reckless lenders, as the money used to fund any bail out will be funds diverted from the general revenue of the central government.^[56]

Many central bankers still refer to Walter Bagehot's 1873 commentary on monetary crises, Lombard Street, in an attempt to gain insights into the way in which central bankers should revive illiquid banking systems. Bagehot's exhortation to "lend freely" at times of monetary crisis to lift the system into liquidity and encourage new debt creation may work temporarily, but in circumstances where fundamental changes are occurring in the underlying economy (for example, where demographic changes - such as an aging population - result in too few new indebted consumers, or where extreme inequality results in the inability of impoverished workers to either qualify for loans or be encouraged to borrow) this will only result in a delay in (and perhaps exacerbation of) the collapse of any debt-created "bubble".

A prime example of the fatal effects of combining aging demographics with reckless bank lending can be found in the case of the Japanese asset price bubble.^[57] Once the downward spiral of a financial implosion begins, it is almost impossible to stop if there are no new indebted "victims" to replace those that have either retired, or died.

[edit] Potential societal impact

Some more extreme monetary reformers and conspiracy theorists anticipate the declaration of martial law and the imposition of fascist-style restrictions on civil rights and freedom of speech by the political Establishment to physically protect it from anarchy or military coup when the bubble of debt completely bursts, either through a precipitous currency crisis or debt-created depression.^[58] Some conspiracy theorists also anticipate the forced elimination - by any means necessary - of any actual or potential competing currencies or voluntary mediums of exchange that could threaten the viability or legitimacy of the monopoly currency, which could include the compulsory confiscation of all privately-owned gold (gold being the ultimate reserve currency, still used by central banks as a universally accepted medium of exchange for the settlement of international debts).^{[59][60][61][62][63]}

There have been many monetary crises throughout history and prior to widespread anarchy or revolution, in the late stages of volatile, heavily indebted laissez faire capitalism, there are a number of warning signs of impending chaos caused by a complete breakdown of trust in the debt-based monetary system. Just prior to the complete collapse of the pyramid scheme of public and private debt, the economic system tends to feed on itself, and in the past, where debt-created depressions or periods of hyperinflation have occurred in Europe, the U.S. and China, there has been a sustained spike in predatory economic behavior, as the heavily indebted central government and producers are forced to find more extreme (previously considered unethical) methods to extract any remaining wealth from increasingly desperate and impoverished consumers, who are either unwilling or unable to go into further debt without forceful coercion.^[64] Long-term investment and sustained capital investment are almost impossible in this environment because the "measuring stick" of return on investment (the real value of money) is so uncertain at times of debt-induced credit crunch, depression or hyperinflation.

As potential new borrowers cannot be found to buy depreciating heavily indebted assets, and international financiers reduce lending as they experience losses on pre-existing loans either through asset or currency depreciation, some analysts predict that the monetary system will seize up due to a deflationary depression or a sustained period of stagflationary hyperinflation resulting in a "final and total catastrophe of our fiat monetary system."^[65]

This has often occurred after a failed aggressive war, as international financiers realize the heavily indebted government they funded will not gain the resources it planned to seize as a result of the waging of the war. When this pay-off does not materialize, the government is left with the debt of war without the ability to offset this government debt through the imposition of reparations on the defeated nation and the acquisition of the defeated state's resources. This occurred to Germany after the First World War and Japan after the Second World War.^[64]

Whatever the trigger, the key warning sign of any impending monetary crisis and economic anarchy is a sudden currency crisis or bank run.^[66] Early warning signs that the private banks themselves are aware of an impending breakdown in the solvency of the financial system would be: a spike in the prices for oil (which is an internationally accepted, inherently limited, store of value, and therefore can act as a modern form of hard currency, oil sometimes being referred to as "black gold"), gold and other inherently limited natural resources essential for non-discretionary industrial production; a spike in the futures contracts for "non-perishable" agricultural commodities such as sugar, coffee, wheat, soybeans and rice, as investors realize the debt-based monetary system has squeezed supplies of arable land; a sudden flight of money to Treasury bills; and/or a sudden spike in the interest rate differential between short-term Treasury bills and asset-backed corporate paper (or a sudden spike in the LIBOR rate in London).^{[citation needed][67]}

Shortly thereafter, some monetary reformers predict that there would be desperate, but ultimately futile central bank intervention, a currency crisis, a panic run on a number of marginal, insolvent banks and hedge funds as investors try to get cash out to invest in inherently limited, non-perishable, in-demand commodities such as oil and gold (and undeveloped agricultural and industrial land in areas of the world with strong economic growth), followed by a recession or depression]] in the broader heavily indebted economy as the money supply contracts.^[68]

[edit] Potential solutions

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Critics assert that time is the only real remedy for monetary crises, as it allows re-inflation of the markets through the gradual injection of new debt money into the system, time is something financiers and investors are least likely to want to give up when faced with not getting their money out of the imploding investment bubbles. In extreme cases banks could set up "independent" corporate investment vehicles to buy the assets associated with the bad debt, thereby allowing borrowers to liquidate their investments and allow time for the markets to re-inflate, however the holding costs involved in this measure would be extremely high and would not guarantee that the losses could be averted if no new gullible investors could be found to offload these distressed assets. More fundamentally, these short-term "parachutes" used after bubbles burst do not save ordinary borrowers from foreclosure and bankruptcy, nor do they address the pernicious long-term dysfunctional aspects credited to fractional-reserve banking described above. These problems are temporarily averted, only to be dealt with yet again by the next generation of indebted governments and peoples.

Given these repeated financial crises arising from the debt-based monetary system, many monetary reformers predict that there will inevitably be a return to the gold standard, a fundamental change in the way money is produced and distributed (with a return to the prevalence of government-issued debt-free fiat currency and/or free banking) - or a complete financial "meltdown" as fewer young people in developed economies can be found who are willing to go into debt in sufficient magnitude to pay off the debts that have already been accumulated. As extreme inequality increases, foreclosures mount and financial crises repeatedly erupt, these monetary reformers believe a political crisis will eventually result in calls for fundamental monetary reform.

These on-going, worsening, debt-created crises in the economy and society (and the unsustainable damage to the environment caused by debt-created overconsumption) could turn monetary and economic policies either to the extreme left or to the extreme right, as there are a number of competing solutions to the debt-based monetary "problem".

[edit] Proposals for monetary reform

[edit] Libertarians and commodity money

Libertarians envision a society of free markets, small government and money backed by a gold standard or silver standard. Most Libertarians would eliminate all income taxes and encourage private charity to provide social services. Some Libertarians would also support experimentation with free banking or full-reserve banking, recognizing that when fractional-reserve banking is combined with the gold standard a deflationary bias (and the systematic transfer of real wealth to the banking system) is normally inevitable. Those Libertarians who support full reserve banking would strongly support more flexible and forgiving bankruptcy laws in a fractional reserve banking environment, recognizing that no stigma should be attached to bankruptcy given the anti-Libertarian "unjust acquisition" of real wealth implicit in both fractional reserve banking and taxation.^[69]

Regarding the current accumulation of government bonds and private debt, some Libertarians believe that the creation of the Federal Reserve under the Federal Reserve Act of 1913 was unconstitutional^{[citation needed]} and some Libertarians consider that at least some of this accumulated debt should be canceled or forgiven prior to a return to the gold standard in recognition of its fundamental illegitimacy.^[69] Arguably this would be supported by the "just acquisition" jurisprudence of legal philosopher Robert Nozick and Libertarian advocate Murray Rothbard.^[69]

It is commonly accepted by market-oriented economists^{[peacock term]} that any policy where the central bank repeatedly provides bailouts to failed banks and reduces interest rates to encourage new (speculative) borrowing will risk chronic "moral hazard"; some commentators believe this is a significant factor in emboldening reckless lenders to inflate assets with excessive debt, thereby creating an environment conducive to the creation of financial bubbles and speculative excess in financial markets.^{[70][71][unreliable source?]}

Many Libertarians refer to bail outs of the private banking system by the Federal Reserve and the associated reductions in interest rates to encourage more borrowing as "Socialism in reverse". For many Libertarians this simply encourages more speculative debt creation by the private banking system, and brings the fiat paper based system ever closer to monetary tyranny.^[30]

Libertarians would go further than regulating or cautioning the Federal Reserve to avoid repeated bail outs of failed banks - they support repeal of the Federal Reserve Act of 1913 and the elimination of the Federal Reserve itself, thereby removing this artificial insurance policy for the private banks, ensuring that they face the full consequences of poor lending decisions with the real prospect of being wiped out by bankruptcy.^[72] If the Federal Reserve Act was repealed, depositors would also have to be on guard to ensure their bank was not lending recklessly, thereby ensuring more conservative lending practices. This would however present the real prospect of old-fashioned "runs" on the banking system after any period of speculative excess.

[edit] Reform within fiat currency systems

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Michael Rowbotham also seeks the cancellation of "unjust" debts (such as third world debt), but would also support the re-introduction of strongly redistributive tax policies involving higher financial transaction taxes (such as a Tobin tax), land taxes and inheritance taxes, and, crucially and most importantly, a social security safety net involving a guaranteed minimum debt-free income (sourced from government-issued debt-free money independent of any central bank) for all citizens in the debt-based economy. Under this proposal, every adult citizen would be given a livable debt-free income (for example, $30,000 per annum, adjusted for inflation), transferred electronically into their bank account, simply by virtue of their citizenship. They could then use this debt-free money to pay off their mortgages or to live, debt-free, without being compelled to work as a wage slave in the market economy if they chose not to. The government would finance these payments simply by ordering the private banks to accept their electronic instructions as legal tender. It would therefore not result in the expansion of government debt.

Instead of money being created "indirectly" and "furtively" at the point of loan creation by the private banking system, it would be created directly and openly by the democratically elected government and issued to its citizenry by way of instruction to the private banking system.

Rowbotham argues in his book, The Grip of Death, that this would not be inflationary (or at least would not be as inflationary or as the present system which he believes to be dysfunctional). This would also reduce overconsumption and the associated environmental damage associated with debt-based consumerism. It would also give individuals the free time to engage once again in non-marketable religious, artistic and recreational activities if they chose to do so.^[15]

Ex-U.S. Treasury Department analyst Richard C. Cook also supports the issuance of debt-free money and zero-interest credit by the central government and has provided a detailed blueprint of monetary reform recommendations to transition to a debt-free money supply.^[42]

[edit] Conclusion

In summary, many monetary reformers and critics of modern debt-based monetary systems (which have been "unhinged" from the gold standard since the Nixon era) assert these recently-developed debt-based systems will erode the economic rights and stability of much of society, due to private banks' inherently speculative fractional-reserve banking activities, in which they have recourse to central banks to provide bail outs as lenders of last resort.^[14]

Some of the reasons these critics cite include laissez-faire economic policies, which they say increase the marketization and commodification of human activity, and strictly enforced bankruptcy laws, which permit the periodic transfer of assets from failed bankrupt investors to the private banks and their associates. They also assert that debt-based systems cause environmentally damaging over-consumption and the systematic and irredeemable destruction of fertile arable land through the periodic issuance of over-extended debt financing for housing, which leads to urban sprawl which encroaches on arable land.

[edit] See also

• Austrian Business Cycle Theory
• Credit money
• Credit crunch
• Criticism of debt
• Social Democrats
• Soft currency
• Hyman Minsky
• G. Edward Griffin
• Michael Rowbotham
• Ron Paul
• Silvio Gesell

[edit] References

[edit] External links

• Libertarian Nation Foundation - Money and Banking
• Fractional Reserve Banking as Economic Parasitism
• Monetary Reform websites
• James Robertson: Creating New Money: A Monetary Reform for the Information Age