When you study economics they first thing they teach you is that Economics is a “positive” science and not a "normative" science. This makes economics unique, in that they tell you up-front that they are essentially hiding something (Since no other science holds to seeing a conflict between the positive and the normative).
An education in Economics also suppresses the American system of Political economy that was established in the US, by Franklin and Carey. This system of sovereign credit creation, support for local enterprise, negotiated fair trade policies and controls on government resulted in America becoming a prosperous nation. Friedrich List in Germany (1841) studied it and influenced the Germans to establish the core ideas of the American system resulting in Germany’s rise as an economic power. List argued that it was the government's responsibility to foster the "productive powers" of a nation and, once these were in place, then free trade could ensue, but not before.
The other critical factor that is purposely ignored in Economics is the money system's role in how a market functions and in the political economy. I am not aware of any Economics curriculum in a North America university that teaches alternate monetary systems (especially that of Pennsylvania under Benjamin Franklin) . My own experience involved going to the library and reading up on American History and then having to seek out the writing of the founding fathers, and Abraham Lincoln. The other source of key information was surprising, it was the writings of a Nobel prize winning chemist Dr. Frederick Soddy (Nobel in 1921)
"The "money power" which has been able to overshadow ostensibly responsible government is not the power of the merely ultra-rich but is nothing more or less than a new technique to destroy money by adding and withdrawing figures in bank ledgers, without the slightest concern for the interests of the community or the real role money ought to perform therein...
These recommendations were:
1) Abandon the gold standard
2) Allow international exchange rates to float
3) Use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends
4) Establish a Bureaus of Economic Statistics (including a consumer price index) in order to enable counter cyclical intervention
Interestingly all of these recommendations are now practiced.
His fifth recommendation, which remains outside the bounds of conventional wisdom was to stop banks from creating money and debt out of nothing.
Effectively what Soddy was proposing, was a 100% reserve requirements on demand deposits. This would begin to shrink what is "the enormous pyramid of debt that is precariously balanced atop the real economy, threatening to crash."
Banks would still exist, and would support themselves by charging fees for safekeeping, check clearing and all the other legitimate financial services they provide. They would still make loans and still be able to lend at interest "the real money of real depositors,". In effect people who forego consumption today by taking money out of their checking accounts and putting it in time deposits - CDs, passbook savings, RRSP's, 401 K's etc. In return, these savers receive a slightly larger claim on the real wealth of the community in the future.
In such a system, every increase in spending by borrowers would have to be matched by an act of saving or abstinence on the part of a depositor. This would re-establish a one-to-one correspondence between the real wealth of the community and the claims on that real wealth. (One would have to completely remove money creation power from financial institutions in that they would not be allowed to create subprime mortgage derivatives and other instruments of leveraged debt.) This effectively amounts to ending central banking, and returning money creation power back to governments. At this time only the state bank of Montana, engages in money creation. Minnesota is about to pass legislation enabling the state to fund a transit system directly rather than though Wall Street. The legislation is being sponsored by bankers.
If at this point such a major structural overhaul of the economy sounds hopelessly unrealistic, it is prudent to consider that in 1926 so did the abolition of the gold standard and the introduction of floating exchange rates. All of Soddy's work was built on the laws of Thermodynamics. If his analysis of their relevance to economic life is correct, we have to seriously look at re-thinking what is realistic.
"There is nothing left now for us but to get ever deeper and deeper into debt to the banking system in order to provide the increasing amounts of money the nation requires for its expansion and growth. Our money system is nothing better than a confidence trick....
"The "money power" which has been able to overshadow ostensibly responsible government is not the power of the merely ultra-rich but is nothing more or less than a new technique to destroy money by adding and withdrawing figures in bank ledgers, without the slightest concern for the interests of the community or the real role money ought to perform therein...
"to allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of government and, last, a rival power strong enough to ultimately overthrow all forms of government.
...An honest money system is the only alternative."
From his book : Wealth , Virtual Wealth and Debt (1926) ( a link is placed at the end of this article)
What is interesting about Soddy is that he made 5 policy recommendations which were taken at the time as evidence that his ideas were unworkable.
These recommendations were:
1) Abandon the gold standard
2) Allow international exchange rates to float
3) Use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends
4) Establish a Bureaus of Economic Statistics (including a consumer price index) in order to enable counter cyclical intervention
Interestingly all of these recommendations are now practiced.
His fifth recommendation, which remains outside the bounds of conventional wisdom was to stop banks from creating money and debt out of nothing.
Effectively what Soddy was proposing, was a 100% reserve requirements on demand deposits. This would begin to shrink what is "the enormous pyramid of debt that is precariously balanced atop the real economy, threatening to crash."
Banks would still exist, and would support themselves by charging fees for safekeeping, check clearing and all the other legitimate financial services they provide. They would still make loans and still be able to lend at interest "the real money of real depositors,". In effect people who forego consumption today by taking money out of their checking accounts and putting it in time deposits - CDs, passbook savings, RRSP's, 401 K's etc. In return, these savers receive a slightly larger claim on the real wealth of the community in the future.
In such a system, every increase in spending by borrowers would have to be matched by an act of saving or abstinence on the part of a depositor. This would re-establish a one-to-one correspondence between the real wealth of the community and the claims on that real wealth. (One would have to completely remove money creation power from financial institutions in that they would not be allowed to create subprime mortgage derivatives and other instruments of leveraged debt.) This effectively amounts to ending central banking, and returning money creation power back to governments. At this time only the state bank of Montana, engages in money creation. Minnesota is about to pass legislation enabling the state to fund a transit system directly rather than though Wall Street. The legislation is being sponsored by bankers.
If at this point such a major structural overhaul of the economy sounds hopelessly unrealistic, it is prudent to consider that in 1926 so did the abolition of the gold standard and the introduction of floating exchange rates. All of Soddy's work was built on the laws of Thermodynamics. If his analysis of their relevance to economic life is correct, we have to seriously look at re-thinking what is realistic.
This post outlines the root cause of the problem and what I believe is the only viable long term solution.
The next few articles will provide the background as to how I have reached this conclusion.
I would highly recommend the following web-page :
The Money Masters
Their video series has been posted on Youtube, and their new "Money as Debt II - Promises unleashed" is an excellent backgrounder on how the current system works.
Below are some links to books and DVD's that provide a very good picture of the real global power structure.
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