Plan to End the Worldwide Financial CRISIS
is not a guarantee of happiness! But it
can help solve many problems that affect our quality of life. These include the provision of job
opportunities, adequate health care, public education at a cost that ordinary
people can afford, the safety and efficiency of our public infrastructure, our
ability to live in reasonable comfort when we retire, and the elimination of
poverty in the midst of plenty. So if
money is necessary to accomplish all of these things it is absolutely essential
to understand what it is and where it comes from.
What Is Money?
different things have served as money from time-to-time throughout history, the
most common being gold, silver, copper and iron coins. These were predominant until the volume of
world commerce outpaced their usefulness as a convenient means of payment. They had to be supplemented by paper money
which was much more convenient and easy to handle. Paper then gave way to electronic money - a mere
computer entry, that, like paper, has no intrinsic value. What they all have in common is that they
were accepted as claims on available goods and services and for the discharge
views on balanced budgets are deeply influenced by our personal
experience. If we are spending more than
we earn we have two choices. We can
spend less, or we can get a second or third job, if possible, to balance our
budgets. Borrowing to meet the shortfall
can be a temporary expedient but it is not a solution because the debt load
will soon catch up with us and make our situation even worse.
and provinces face similar problems.
When they have deficits they can reduce services or raise taxes. Often they avoid this painful choice by
borrowing. This is a way to postpone the
pain until the debt load is so high, and the interest costs so high, that
as we are by these examples, it is not surprising that we believe that federal
governments are similarly restricted.
But that is not the case. Their
situation is unique. They have the power
to create money to balance their budgets and, by extension, to come to the
relief of provinces, cities and individual taxpayers. They have the power to solve myriad problems,
but they don't exercise that power for the common good. That is the trillion-dollar tragedy!
Owns the Patent to Create Money?
tradition it was the prerogative of the monarch, who was sovereign. As their absolute power was eroded or relinquished,
however, the successor republics and constitutional monarchies inherited the
prerogatives of the crown. They now have
the right to exercise sovereignty on behalf of the people. But they don't do it - except to an
insignificant extent. Why not?
is not an easy question to answer, however, because the problem goes back
several centuries, at least, and is seldom talked about in polite circles. Sovereign governments, as a matter of
expediency, licenced privately-owned corporations to create money for public
and private uses. These institutions
(banks) were allowed to take deposits, of course, and to lend these funds, at
interest. They were also permitted to
create or manufacture money in what became known as the "partial reserve system
of banking." They consistently lent more
than they had in their vaults, and got away with it because only a few
depositors came in to collect their cash at any one time.
scam had been legitimized when the Bank of England was chartered to help King
William finance his war. Rich people
subscribed £1,200,000 in gold and silver, as capital, to found the
bank, which then was lent to the government at 8 percent. To show his appreciation, the King allowed
the bank to print £1,200,000 in banknotes and lend them at high interest
rates. In effect, the bank was allowed
to lend the same money twice - once to the government and once to the people.
the years, due to the avarice of the banks and the complicity of politicians,
that ratio has increased dramatically.
In the early days of the 20th century, federally chartered
U.S. banks were required to keep gold reserves of 25 percent. That means they were allowed to lend the same
money four times. For many years Canadian
banks were required to maintain a cash reserve of 8 percent. That means they were allowed to lend the same
money 12½ times.
recently, thanks to Milton Friedman's irrational flip-flop from being a
proponent of 100% cash reserves to the opposite extreme of zero reserves, and
the adoption of his ideas by the major central banks of the world in 1974,
multiples have increased dramatically - in some cases to as much as 20 to 1 or
more. Banks only keep enough cash to
meet day-to-day demands for those few customers who go in and request it. Consequently, the existing world financial
system is a total fraud - one gargantuan Ponzi scheme. This Ponzi scheme is alarmingly simple. The banks lend the same money to several people
or institutions at the same time and collect interest on it from each. What the banks really lend, however, is their
credit, and what they take back in compensation for that privilege is debt that
must be repaid with interest.
system works this way. Suppose that you
want to borrow $35,000 to buy a new car.
You visit your friendly banker and ask for a loan. He or she will ask
you for collateral - some stocks, bonds, a second mortgage on your house or
cottage or, if you are unable to supply any of these, the co-signature of a
well-to-do friend or relative. When the collateral requirement is satisfied you
will be asked to sign a note for the principal amount with an agreed rate of
the paperwork is complete, and the note signed, your banker will make an entry on the
bank's computer and, presto, a $35,000 credit will appear in your account which
you can use to buy your car. The important point is that seconds earlier that
"money" did not exist. It was created out of thin air - so to speak.
banking equation is a kind of double-entry bookkeeping where your note becomes
an asset on the bank's books, and the new money that was deposited to your
account is a liability. The profit for the bank comes from the difference
between the low rate of interest, if any, you would be paid on your deposit if
you didn't spend the borrowed money immediately, and the much higher rate you
would be obliged to pay on your note - the technical term is "the spread."
some point, however, you have to pay off your note, and any interest
owing. And not only you, but everyone
else who has borrowed "money" from banks - including governments. Anyone who defaults is in big trouble. Individuals who default will have the assets
they pledged as collateral seized by the bank.
A government that is in danger of defaulting, may be forced to borrow
from the International Monetary Fund, which will then tell that government how
to run its affairs including cutting back on services and selling off public
assets to the international vulture capitalists.
reality, then, the banks have turned the world into one humongous pawn
shop. You hock your stocks, bonds,
house, business, rich mother-in-law or country and the bank(s) will give you a
loan based on the value of the collateral.
world system where almost all the money is created as debt is a perpetual
disaster in the making. It is like a
giant balloon that the banks pump full of debt.
The balloon gets larger and larger until the debt load becomes too heavy
to carry, and then it is like a balloon with a pin stuck in it. The system crashes and hundreds of thousands
or sometimes millions of innocent people lose their jobs, homes, farms and
businesses unnecessarily. Experience
proves that any monetary system based almost exclusively on debt creation is totally
insane. The total world debt, mathematically,
is always tending toward infinity - and there is no possible way of paying it
off. The real money (legal tender) to do
so doesn't exist. And the real economy
that depends on cash to grow, shifts into low gear whenever the supply of
credit money dries up.
surprisingly, there have been 25 recessions and depressions in the United
States in the last 125 years. In several
cases, including the Great Depression of the 1930s and the current Great
Recession, the evidence indicates that the meltdown was anticipated by a few
insiders who helped trigger the catastrophe.
collateral damage from the recent meltdown has been staggering. The U.S. Bureau of Labor estimated that 8.4
million jobs were lost in the U.S. alone.
Most countries experienced comparable dramatic losses. The reduction in asset values worldwide has
been estimated at $20-trillion U.S. dollars, yet not a single one of the
culprits is in jail. You would think
that someone would have had the decency to launch a class action for at least
$10-trillion against every individual and every organization that contributed
to the catastrophe in any way. The
system is a shambles and must be fixed.
of the most absurd aspects of the present system is that the banks don't even
pay royalties for the use of the people's patent. Even more ridiculous, if governments find
themselves in deficit - even if the deficit is due to a recession triggered by
the banking system - they have to go cap-in-hand and borrow the shortfall and
pay market rates of interest on the loans or bonds. These are invariably higher than the rates
private banks pay to the people's bank, the Bank of Canada, when they are short
of cash and have to borrow overnight or short-term to balance their books.
is Worth Addressing a Few Often-Asked Questions
Q. If the system is broken beyond repair who
is going to rebuild it from the ground up?
A. Only governments, supported by
parliaments, legislatures and congresses can do it. They are responsible for tolerating the
system that got us into the present hopeless mess, and they are the only ones
with the power to set it right.
In many ways the situation now is as
bad or worse than it was in the Great Depression. In 1929, U.S. federal debt was only
$17-billion, equal to about 16% of GDP.
In 2010 the debt was $15-trillion, roughly 100% of GDP.
So instead of saving all of their
sympathy for the bankers and bond dealers, governments should think about the
other 99% of the population for a change - the middle-class that is fast disappearing;
the poor who are getting even poorer relatively; the unemployed who are
desperate for jobs; the debt-encumbered graduating students who have little to
look forward to; and untold numbers of people who are going to die because
international medical aid is being scaled back as a budget-cutting
measure. So here is one tired old
protestor's free advice to governments as to how they could put a human face
into economics. The solution is
The Canadian Solution
1. The government of Canada should print
fifteen non-transferable, non-convertible, non-redeemable $10-billion nominal
value Canada share certificates.
2. Simultaneously the Justice Department
should be asked for a legal opinion as to whether the share certificates
qualify as collateral under Section 38 of the Bank of Canada Act. If this takes more than 48 hours, legislation
should be introduced to amend the Act to specify their eligibility.
3. That step accomplished, the government
should present the share certificates to the Bank of Canada that would
forthwith book the certificates as assets against the liability of the cash
created, and then deposit $150-billion in the government's bank accounts as
directed. The federal government should
immediately transfer $75-billion to the various provinces and territories in
amounts proportional to their population, with the understanding that they
would help the municipalities, as appropriate, so there would be no need to cut
back on police or fire services, close museums and sell valuable assets.
4. The above might be adequate to get Canada
out of the slump, but if not, a second major infusion of debt-free money might
be required until unemployment is reduced by half and the GDP growth rates
reach 3½% or 4% annually, minimum.
5. Concurrently with the above, the federal
government must introduce amendments to the Bank Act to reinstate cash reserves
against deposits and to give the Governor in Council (the federal government)
the power to set the level of cash reserves from time-to-time. Their elimination in the early 1990s cost the
Canadian people billions in lost seigniorage, i.e. the profit from printing the
cash. The legislation should allow the
Governor in Council to delegate to the Bank of Canada its power to establish
the level of cash reserves provided the increase is not less than 5% per annum
until 34% cash reserves have been established in 7 years or less.
What Would Make the
Every job that was saved from the axe
at one of the three levels of government and every new job created in the arts,
medicine, education, the construction and infrastructure, and so on would mean
an increase in the real goods and services available to the economy. And each new job created has a multiplier
effect. The process would be exactly the
same as from bank-created money with one absolutely essential difference - the
money would not have to be paid back with interest! In addition, each job saved and each one
created would mean someone paying taxes who would not otherwise be in a
position to do so. So governments at all
levels would be beneficiaries. Business,
too, would benefit. Each additional
person employed would be a potential market for the goods and services that
they provide. So it's a win-win
Aims of the Game
Q. What are the short and long term
A. The first, and most urgent, is to end the
recession/depression, first in Canada and then in the rest of the world. The infusion of $10-trillion initially,
worldwide, and more if necessary, of what might be called government-created,
debt-free money (GCM) will accomplish that.
second objective is to put some semblance of morality into the system and stop
privately-owned banks from lending the same money so many times to different
people. So I am proposing that bank
leverages be reduced from their present high levels. (In Canada the Bank Act allows the banks to
own assets up to 20 times their capital) to 2 to 1, where interest-bearing
assets could not be greater than two times the cash in their vaults or on
deposit with the central banks. This
could be achieved in seven years or less by federal governments creating enough
GCM to keep their economies growing while at the same time buying back about
1/3 of their outstanding debt.
banks have achieved 34% cash reserves, the money-creation function would be
shared between government and the private banks 34% GCM, 66% BCM.
biggest achievement of the whole process, however, would be the democratization
of the so-called democracies. At the present
time there is not one country in the western world that is master of its own
destiny - not Canada, not the United States, not Germany and certainly not any
of the countries that are mentioned in the daily news. They are all under the control of the
international banking cartel, both financially and politically. It's time for the sham to end and for
electors to gain control.
Would this be
Q. Is government-created money inflationary?
A. No more so than bank-created money. It is the total quantity of money in
circulation that determines prices, not who prints it. There should actually be less inflation with
cash reserve requirements under government control than there has been with the
current capital (in)adequacy system.
Principle with Prudence
Q. If GCM is such a good thing, why shouldn't
governments create all of the money?
A. I have never been able to convince myself
that it is the preferred solution. It
would mean that the banks would have to have one dollar in their vaults, or on
deposit with the central bank, for every dollar they lent out. This was the solution that Milton Friedman
favoured all his life but that he finally abandoned because he concluded it was
I agree that it is politically
impossible, but I have never been able to convince myself that it is the best
solution even if it were possible. To be
blunt, I don't trust politicians with that much power! It is the kind of absolute power that would
inevitably lead to corruption. We have
already seen the kind of chaos that the bankers have created by abusing their
virtually unlimited power. They are
directly responsible for both the Great Depression and the current Great
Recession. We would not want to see a
system where very different but similarly corrupting practices would evolve.
My reservations apply both to the
principle of 100% reserves and the potentially negative consequences of its
implementation. If banks were suddenly
required to convert from near zero cash reserves to 100% they would have to
call the majority of their loans and bring on the worst depression the world
has ever seen. That is a result that can
and must be avoided.
The criteria for any worthwhile reform
must include a fast, smooth transition to full employment and the transfer of
the ultimate power over interest rates and the rates of growth of the money
supply, from unelected, unaccountable bankers to representatives of the people
who, in theory at least, should operate the system in the interests of their
This is not just an academic
issue. It means that the whole notion of
"capital adequacy" has to be abandoned.
There is no such thing as "capital adequacy" because it is just a benchmark,
someone's best guess as to a line that might reduce the number of bank
insolvencies when the next meltdown occurs.
leverage of 2 to 1 would still leave the banks with sufficient capacity to
finance commercial and industrial development, as well as increased
consumption. It would deprive them,
however, of their ability to engage in all of the risky gambling games they
have developed in the last few decades.
No money for hedge funds, no money for exotic derivatives, no money for
margin purchases of stocks and bonds, etc.
It would be back to basics.
The seemingly miraculous flipside is
that the 34% annual creation of new money by governments would allow them to
balance budgets at all levels, federal, state and municipal, with reasonable
tax levels - certainly lower than they are at present. This ability to get by with lower taxes would
be augmented by the fact that very significant amounts of existing debt would
be monetized over the period of time banks were allowed to achieve their 34%
cash reserve levels. With an approximate
reduction of sovereign debts by one-third worldwide, the interest components of
taxes should be dramatically reduced.
This could be augmented if government budgets included provision for
perhaps a 1% or 2% a year reduction in outstanding debt as part of their new
new system would be one of checks and balances where governments would be key
players in the rate of expansion of their economies, and business cycles, as we
have known them, would become a thing of the past. The banking industry would survive as
profitable businesses that would be good investments for anyone, including
individuals and retirement funds. More
good news is that most of the people working in the industry, with the
exception of the rogue traders and others who have caused so much trouble,
would preserve their jobs.
Q. Why Canada first?
A. Because it is the easiest. We own the Bank of Canada outright which is
the bedrock of a new and sustainable system.
So even if the governor of the Bank were inclined to say no to the
government's request, he could be over-ruled by the Minister of Finance. In case of dispute the minister can send the
governor a letter instructing him to take the essential action. The letter then has to be published in the
Canada Gazette so the people can decide which one is working in their
interests. The government has a majority
in both the Commons and Senate so the whole process of getting Canada back on
track could be accomplished in a matter of weeks, or even less if the government
really pushed it.
These problems are universal in nature
and affect the whole western world.
These Canadian solutions could be adapted to other countries.
The United Kingdom nationalized the
Bank of England in 1974 so it, at least in theory, should be able to act
The United States faces a more
formidable set of obstacles, including the immense power of Wall Street. Consequently, action required there could
A law making it a criminal offense for any bank or other financial
institution to give, or offer to give, any cash or other benefit to anyone
holding political office or any candidate for potential office.
The Federal Reserve System has to be nationalized. Contrary to public belief, it is owned by
member banks and often acts in their best interests at the expense of the
Because those steps would take time, the Treasury Department should
immediately issue $1½-trillion in Treasury Notes (comparable to the greenbacks
issued by Abraham Lincoln) and share the proceeds with the financially-starved
states. Once the FED has been converted
to, or replaced by, a Central Bank of the United States it could follow the
The Euro zone is even more complicated
because sovereign governments have given up the right to print their own
money. So to maintain the euro, which
would be good for the world, and be egg-in-the-face for the two pillars of the
international cartel, Wall Street and the City of London (the square-mile in
London that claims it is not subject to British law), it would have to change
the Lisbon Treaty to give the European Central Bank the right to print money
for the member states in proportion to their population. At the same time they would have to
democratize the ECB, a tough process but one that is absolutely essential when
compared to the alternatives!
Q. Why hasn't the G20 group of world leaders
come up with something positive along these lines?
A. One can only assume that none of the 20
leaders has specialized knowledge of how the monetary system works. This is not surprising in light of the fact
that only about one person in every hundred does. Consequently they have to rely on their
advisers who are nearly all bankers or economists. The former have a vested interest. They have had the financial playing field all
to themselves for generations. The new
rules they are now recommending for their industry are more cosmetic than
Orthodox economists, with a few rare
exceptions, have closed minds. They have
known that the "balanced budget" approach adopted in the 1930s only succeeded
in extending the misery for years. They
had 70 years to design a system that would be a firewall against a recurrence,
yet with the rarest of exceptions there has been no effort to do so. So today they are recommending the same
approach that was taken in the 1930s with the same disastrous
consequences. That tells the story. No one seems to have stumbled on to the fact
that what is needed is a massive infusive of debt-free or at least
interest-free money to dilute the ocean of debt and provide the aggregate
demand necessary to provide the millions of unemployed with jobs and renewed
hope. It was Einstein who said, "The
definition of insanity is doing the same thing over and over again the
expecting different results." That is
what governments on the advice of their chief economists are doing today.
A medical analogy proves the
point. In the mid-19th
century a Hungarian doctor, Ignaz Semmelweis, was working in a hospital in
Vienna. He became deeply distressed by
the high number of women who were dying from childbed fever. One day inspiration struck and he was sure he
knew the reason why. So he wrote a paper
on it and showed it to his medical colleagues.
The doctors were incensed. We are
university graduates, they exclaimed, and you are not going to insult our
intelligence with your simplistic solutions.
They took away his license to practice and drummed him out of the
Almost two decades passed before first
Louis Pasteur and the British scientist Joseph Lister, authenticated
Semmelweis' discovery. The problem was
that doctors had not been washing their hands when going from cadavers to live
patients and from one patient to another.
So for almost 20 years hundreds of women died unnecessarily because the
educated doctors of the day were too stubborn to consider the possibility they
could be wrong. Today we see history
being repeated in the field of economics
The Stakes are Too High
The stakes in the world today are so
high that they are virtually incalculable!
Many of the earth's seven billion inhabitants will die unnecessarily
from starvation or lack of medical treatment - problems that could be greatly
alleviated by money and a more general application of the Golden Rule between
rich people and poor people, and between rich countries and poor countries.
profound is the absolute necessity for all humanity to cooperate in arresting
global warming before it is too late. We
probably have 10 years to convert every car, truck, airplane and home from
reliance on fossil fuels to clean energy.
It is a monumental task but could be done with a mobilization comparable
to fighting a war for survival - which it is for people living in many
however, even the necessity for immediate action is not on the political radar
now, and won't be as long as nation states are more concerned about deficits
and debts than they are about the welfare of their people and the future
habitability of the planet which is our common heritage.
entire financial landscape could be changed in a very short period of
time. All that is necessary is for
nation states individually and the euro block collectively to exercise their
legitimate powers as they have a profound moral obligation to do. A miracle is possible.
Hugo said: "Nothing is more powerful than an idea whose time has come." That time is now.
defence minister Hellyer is author of A
Miracle in Waiting: Economics That Make Sense and Light at the End of the Tunnel: A Survival Plan for the Human Species. All profits from the sale of these two books
will be donated to UNICEF.
For a list of recommended books and essays on the
urgent subject of monetary reform visit www.victoryfortheworld.net or my