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Proceedings of the 2002 International Conference on a Stable and Just Global Monetary System

International Islamic University Malaysia (2002)  

Seven Steps To Justice

¹Rodney Shakespeare  and   ²Peter Challen

(co-authors and co-presenters)

¹  11, Charman House, Hemans Estate, London, SW8 4SP, United Kingdom.

Tel: (UK) 020 7771 1107.

email: rodney.shakespeare1@btopenworld.com

²  21, Bousfield Road, London, SE14 5TP, United Kingdom.

Tel: (UK) 020 7207 0509.

email: peter@southwark.org.uk

 

Abstract.  With currencies no longer backed by gold, there is a need for a monetary system which:

·          addresses poverty

·          focuses on the real, productive, economy

·          enables societies and nations to control their own destiny

·          ends usury (interest).

At present, most new money (in the West, 97%; plus 3% coins and notes) is fiat electronic money created by the banking system and issued as interest-bearing loans.  Such money has an essentially fraudulent origin, tends to be inflationary, and can double or treble the cost of capital investment.

However, rather than the banking system issuing interest-bearing loans, a State’s central bank could issue interest-free loans if the loans are used for public capital investment or, (on the market principles of binary economics), used for private capital investment which creates new owners of capital.  These uses would back the currency with assets, break the grip of usury, and be patently non-inflationary.

Both Islam and Christianity will welcome the benefits including:

·          two basic incomes for all

·          capital ownership for all

·          support for small business

and, even though they may differ on the implications for democracy and women, they should work together in the areas where they clearly agree. 

Key Words:  Interest-free loans, justice, binary economics, basic income. 

 

1  Introduction 

There is an urgent need for a new stable, just, global monetary system which: 

·         addresses poverty and rich-poor divisions

·         focuses on the real, productive, economy

·         protects the environment

·         enables Islamic and other societies to control their own destiny

·         ends usury (interest). 

Such a system will appeal to all religions and although Islam and Christianity, for example, may differ on the implications for democracy and women, people of good faith should co-operate in the areas where they agree.

If it is to be widely adopted, the new system will need to be embodied in a new paradigm, or way of understanding reality.  That is because, at present, the conventional paradigm of neoclassical ‘free market’ finance capitalism dominates.  Indeed, unless there is a powerful challenge from a new paradigm, the existing neoclassical paradigm, deeply embedded in institutions and modes of thinking, will inevitably prevail.

In challenging the neoclassical paradigm it should be first understood that the ‘free market’ is not free.  It is unfree, inefficient and unfair – unfree because most people are in practice excluded from the acquisition of productive capital; inefficient because ample supply fails to generate adequate demand; and unfair because millions of people do not receive proper reward (and often no reward at all) as well as being excluded from the chance to have a second income arising from capital ownership. 

The unfree market, moreover, is fundamentally based on ever-escalating and unsustainable debt.  This happens because the issuance of virtually all new money is in the hands of a banking system which both creates the money supply and adds a requirement for interest.  Consequently, right the way round the world, individuals, corporations, governments and societies are up to their eyebrows in debt.

If the unfree market is to be successfully challenged, the new paradigm must comprehend three key matters: 

§         a new justice

§         a new monetary system

§         a new understanding of how wealth is created. 

Among other things, those matters are set out in this paper.

2  A new justice 

Justice is a set of universal principles defining right and wrong.  Its ultimate purpose is to elevate, under God, the dignity and sovereignty of humans. 

Justice is concerned with the structures of society.  It is not charity.  Although charity is within justice, charity offers only expedients and not long-term solutions.  Charity can never be a substitute for justice.

The main aspects of justice are social justice and economic justice together with ecological justice. 

2.1  Social justice 

Social justice guides us in the creation of social institutions.  Such institutions, if justly organized, provide what is good for people, both individually and in their associations with others. 

Social justice commands us to work with others to perfect our institutions as tools for personal and social development.  Also embodied in ecological justice, social justice requires us to maintain the environment because, without that maintenance, all else becomes nought. 

2.2  Economic justice

Economic justice involves individuals and the social order.  Like social justice, it is sensitive to ecological justice which is the root of the sustainability upon which the future of civilised life depends. 

Economic justice gives moral principles to be embodied in economic institutions.  These institutions determine how each person earns a living, enters into contracts, exchanges goods and services with others, and otherwise produces an independent material foundation for his or her economic sustenance.  The ultimate purpose of economic justice is to free each person to engage creatively in the unlimited work beyond economics – that of the mind and the spirit. 

Economic justice has three principles:

·         Participation 

This is an equal opportunity to participate in the economic process in order to make a living.  Such opportunity cannot be equal unless there is access to private property in productive assets as well as opportunity to engage in labor. 

The principle does not guarantee equal results, but requires that every person be guaranteed by society's institutions the equal right to make a productive contribution to the economy both through labor (as a worker) and through productive capital (as an owner). 

·         Distribution 

The principle of distribution says that individuals should receive from an economic system what they have productively put into it (via their labor or capital ownership).  It involves the sanctity of property and contracts in a truly free and open marketplace.  Through the distributional features of private property within a free and open marketplace, distributive justice becomes automatically linked to participative justice, and incomes become linked to productive contributions.  The principle of distributive justice is inextricably involved with the principle of participation and breaks down when all persons are not given equal opportunity to acquire and enjoy the fruits of income-producing property. 

·         Harmony 

The principle of harmony detects failure in implementing the principles of participation and distribution, and makes the corrections needed to restore a just and balanced economic order for all.  The principle is violated by unjust barriers to participation, by monopolies or by the use of property to harm or exploit others.  It opposes greed because greed leads to the exclusion and exploitation of others. 

The principle is also violated by environmental depredation since such depredation ultimately harms all. 

3  A new monetary system 

At the heart of the present monetary system lies something which is essentially a fraud.  It is fraudulent because there is a general obfuscation amounting to a deception; those who do the obfuscation obtain a benefit; and those who are deceived suffer a detriment.

The fraud happens because nowadays, whereas coins and notes (issued by the government) are about 3% of the new money supply, the remaining 97% is number money – figures on paper, or the figures of an account held in a computer.  Number money has various names – credit, credit money, bank money, debt money, cheque money or electronic money.  As mere figures, number money has no intrinsic value although it represents money and, to all intents and purposes, although it is not legal tender, it is money because it can be exchanged for banknotes and coins.  The question then arises – If number money is not gold or some such, where does it come from? 

3.1  Where does number money come from? 

From the bank, would seem the obvious answer: the bank is lending the money that other people have deposited in their bank accounts.  Except that it cannot be true that a bank always lends other people’s deposits because those deposits are always available to the depositors – and, if they were not, there would be a dickens of a row.

So the truth is generally that, when a borrower asks for money from a bank, the bank just creates the money – by pressing a computer button – and then enters the amount into the borrower’s account, at the same time adding a demand for interest.  This is credit money,[1] one of the several names for number money which is an abstract entity with no physical existence, created in parallel with debt.  

3.2  Multiplication of money 

However, the creation of money out of nothing does not stop with the creation of money for one person’s bank account.  When the money is removed from the account, it is spent and eventually returns to the banking system by being deposited in other people’s accounts.  At which point it is treated as a new deposit, a proportion of which can be directly lent.  Even more extraordinary when the lent (newly created) money is returned to the bank whence it came, the debt is cancelled but the money is not.[2]

The new deposits, moreover, are generally treated as a base of money from which many times more money can be created and lent – thus eventually resulting in more new deposits in the banking system allowing the process to be repeated.  So a bank starts with deposits that it lends but those deposits circulate round the banking system and are re-deposited by others.  The deposits are then lent again, deposited again and are used as a base for the creation of more money.  Thus an original sum of money has been multiplied, as if by magic, to many times (thirty or more) the original sum.  The trick, of course, is that the system treats the deposited money as genuine new deposits available themselves for further lending or for being used as the base for the creation of new money. 

Different authors give between $30,000 and $70,000 as the amount US banks can now create for each $1,000 deposited.  This is called the “multiplier effect”.  In theory, when the “liquidity ratio” of a bank is set at 10% (as it was for many years) it means that the bank can only issue loans equivalent to 90% of the money deposited with it at any one time.  So 90% of the original money can be loaned, but this then returns to the banking system as new deposits which allow the lending of 90% of those deposits and so on. 

The theory, however, is non-operative when there is no liquidity ratio, as now (it was abandoned in 1981).  Instead, there is supposed to be a reserve/asset (i.e. reserve/lending) ratio which today is only 0.5% (it was a prudent 30% in Victorian times) and so is virtually irrelevant. 

Which leaves today’s ‘capital adequacy’ ratio, set by international agreement at 10%, i.e., banks must have sufficient capital of their own.  This would be effective if the 10% requirement meant cash, but it does not – most of the banks’ capital takes the form of investments, particularly government bonds which are purchased by newly created money.  So the capital adequacy ratio in practice encourages money creation instead of restricting it.[3] 

In a letter to the authors of this paper, referring to money creation, the Governor of the Bank of England said: “The process cannot continue indefinitely, however, because each bank has to hold a minimum of capital against deposits in order to meet potential net withdrawals.” [4]  

Except that the Governor did not say that the actual minimum is, in practice, ineffective as a restraint and that, whether or not net withdrawals are made, the multiplication still goes on.  Thus, as JK Galbraith has said, money is created, by “a method so simple the mind is repelled”.  It is, moreover, one that is almost breathtaking in its audacity.[5] 

The Governor was then careful to add that the banking system cannot go on creating money limitlessly because the level of interest rates (set by the Bank of England) influences the rate of creation.  The level does influence the rate but that cannot hide the fact that the banking system creates money out of nothing and then, by imposing interest, claims ownership of the money as well.

What is more, governments raise money (apart from taxation) by borrowing from the banking system which, of course, creates the money to be lent.  It is therefore not surprising that the banking system creates 97% of the new money supply.[6] 

3.3  The effect of interest is compounded 

Having created the money, the bank adds interest.  Interest is usually shown as an annual percentage rate e.g. 10% per annum.  Part of that rate can be explained as a charge for administration costs: part, in theory, as a charge to pay for losses the bank sustains.[7] 

As is well known, the imposition of interest quickly results in ever-larger sums being repayable.  Interest is usually compound interest.  This means that if $100 is borrowed at 10% interest, then $100 plus $10 interest = $110 is repayable at the end of the year.  If, however, at the end of the year, nothing has been repaid, the interest becomes 10% on $110 i.e., $11.[8]  The effects on a house mortgage are considerable – typically, a borrower will eventually pay at least two to three times the amount that was originally borrowed.[9]  Moreover, the house itself is the collateral for the loan and, in the event of non-payment, can be sold to cover the loss.  Since the administrative cost of house mortgages in no way amounts to anywhere near the sums originally borrowed, a very large sum of money is returning to the financial system over and above the necessary costs of the system. 

Moreover, the addition of interest to the original sum borrowed has several consequences, two being:–

·         Because money is lent into existence, but the money to pay the interest is not, more money is owed than is in the system.

  • Bankruptcies become an inevitable part of the overall scheme of things.  Commercial bank lending is like musical chairs – somebody has to lose at each round because there is never enough money to repay the money lent and the interest on it.

3.4  Interest is paid even when we do not borrow 

Moreover, we pay interest all the time, even when not borrowing because:

  • Every price we pay contains an element, often a very large one, of interest. 

In examples taken from Aachen, Germany, interest on capital is 12% of the cost of rubbish collection; 38% of the cost of drinking water; 47% of the cost of sewage; and up to 77% of the cost of public housing.[10]  Remembering also that the prices a manufacturer pays to his suppliers include the suppliers’ borrowing costs (and so on with the suppliers’ suppliers) it has been estimated that such costs (principal and interest) amount on average to an amazing 50% of the price of goods and services.[11]

·         The payment of that interest does not affect everyone equally. 

There are huge differences between what people pay.  In Germany, 80% of the population pay out more than they receive: 10% receive twice as much as they pay.  This is one big reason why, in a hidden redistribution system, the rich get richer and the poor get poorer.

·         Interest is also a big factor in causing inflation. 

When money is borrowed, interest is added so the repayment is more than the original sum.  So more and more has to be borrowed thereby inflating the money supply – which explains why 97% of our new money supply is debt-based i.e. borrowed from the banking system, and repayable with interest

3.5  Why should a government have to pay interest? 

The present position is that 3% of the new money supply is created interest-free by the government as coins and banknotes with the remaining 97% being created by the banking system but with interest added.  This is an extraordinary situation because governments have an inherent power to create money without interest yet they have been bamboozled into giving the power away to a banking system that always adds interest!  All of which leads to the very important question – Why does a government, when it borrows from the banking system, have to pay interest?[12]  An administration charge, yes, but why interest?  If money is borrowed to pay for public capital spending such as low-rent public housing, it might be repaid over fifty or sixty years.  However, even if borrowed at the prime rate of interest (i.e. the lowest rates of interest), because of the imposition of interest, three to four times the original borrowing would eventually be paid back.  That is a colossal charge on the public purse.  Nobody denies the right of the banking system to cover its administrative expenses and have a reasonable profit.  A $100,000,000 governmental housing project, however, would pay back $300,000,000 or $400,000,000 when the risk is virtually nil (governments can raise taxes to pay off their debt) and the administrative cost is tiny.[13] 

So why does a government have to pay interest?  Indeed, moving up to a larger scale of things, right around the world governments borrow huge sums from the private banking system and have to repay billions, yes, billions and billions in various currencies.  Why? 

The only possible answer is that the banking system owns the money it has created and interest is the charge it chooses to make.  Whereon the truth is exposed – governments have allowed the most fundamental thing of all – the money supply – to be owned by a 97% banking system monopoly.  Essentially, in past times, kings and governments in need of money (in the form of metallic coin) borrowed from bankers who charged interest.[14]  Today, when money is not metal but is created merely by the push of a computer button, the banking system has ended up with a virtual monopoly power to create money and to add interest.  A power inherent to government on behalf of all – the power to decide on money matters – now lies with the banking system over which the government only has some influence (by deciding interest rates). 

3.6  A lying structure 

Here, then, is yet another aspect of the obfuscation – a banking system monopoly of something at the centre of society (the money supply) is not a fact that is likely to be shouted from the rooftops.  Indeed, it could be expected that every effort would be made to sideline enquiry, block questions and generally ensure that the truth never surfaces. 

However, now that the truth is out, the situation is as in the children’s story of The Emperor Who Had No Clothes – an untrue situation can be supported or believed by everyone, or certainly by all the powerful, until some innocent waif points to the obvious and undeniable, thereby, to the relief of most, collapsing a lying structure.  From the acknowledgement of the truth, moreover, the outlines of new policy soon become apparent.  

3.7  The new monetary system 

The basis of the new monetary system can now be seen: 

·         Since a government has an inherent, existing, power to issue its own money, it can increase the amount of new money that it issues.

·         The money can be interest-free. 

Whereon a supporter of the Western banking system can be expected to jump up and shout, “What about inflation?  You are proposing the printing of money as in Germany in 1923.”[15] 

3.8  Inflation and counter-inflation 

The response is simple – there can be no inflation if the money is made repayable (and so cancellable) and is used to create productive assets.  Put shortly, if the money is issued in the form of an interest-free loan for a productive asset and the loan is repaid, the money no longer circulates.  Indeed, since productive assets are, by definition, productive and the money has been repaid (and can then be cancelled), nothing is left except the productive asset.  Consequently, something extra has been gained and the money which created it has been withdrawn.  In general terms, such a situation can only be counter-inflationary.

Even more importantly the cost of the asset will, in general terms, be one half or even one third of what it would otherwise have been simply because no element of interest is involved. 

3.9  Interest-free loans for public capital assets 

All states have an inherent power to create money.  Equally, they all seem to have been bamboozled into believing that, when in need of money, they should let the banking system do the creation and pay it interest.  Not surprisingly, power is rapidly ebbing from states and national governments and is going to unseen financiers in the world’s financial centres.

However, the way is wide open for any state to create money for its own spending at no interest.  If the money is repayable, and is so repaid and cancelled, there cannot possibly be any inflationary effect.  There would, in particular, be no inflationary effect if the interest-free loan were to be spent on public capital works.  Repayment of the loan, of course, would come from taxes, but taxes much lower than they would otherwise have been.

At which point the supporter of the Western banking system may be expected to jump up (again!) shouting that state-issued interest-free loans will reduce the resources available for the private sector.  As everybody knows, he will add, the private sector is a much more efficient allocator of resources than the public one.

The supporter, however, is completely missing the point which is that there is always a large amount of public capital spending – things like low cost public housing, roads, fire stations, bridges, sewage systems and water works.  When that spending is made it should be done at the lowest possible cost i.e., without interest.  This in no way crowds out the private sector.  It only means that when public capital spending is done, it is done cheaply, instead of expensively.  Thus if the state issues $1,000,000 as an interest-free loan for public capital spending, only $1,000,000 needs to be repaid instead of perhaps $3,000,000 as at present (because of the interest which attaches to the loan).  Taxpayers will give a sigh of relief. 

3.10  Islamic view of the non-inflationary creation of money 

How would, Islam, for example, view the non-inflationary creation of money?  The authors of this paper have no expertise in Islamic matters but they have been informed that while there is the concept of an Islamic treasury (bete el mar), a publicly accountable body, it is not clear whether this body would have the power to create money. 

Moreover, the authors have also been informed that:

a)      some Islamic thinkers take the view that banks should not lend unless they have an equivalent of 100% of their own money held in reserve. 

b)      some Islamic thinkers wish that Islam should return to a monetary system based solely on gold and silver.

In respect of both a) and b) the Seven Steps proposal agrees that money should be directly related to assets and not cause inflation.  However, it also argues that there must an addressing of poverty and rich-poor divisions to fulfil the Conference aim of a just and stable global system. 

Furthermore, the authors have taken the informal advice of an eminent Islamic academic who thought that Islam could well allow the state to create interest-free loans if they are lent for patently beneficial, productive and non-inflationary purpose.  The eminent Islamic academic also pointed out that, in Islam, there were key requirements to keep in view including the need for: 

§         Resources to be mobilized into socially acceptable projects

§         Appropriate spending and participatory economic and financial instruments to be used

§         An extensively relational overview relating to participatory purpose to be kept in mind. 

 

Those requirements might well be expressed in, for example, Community Investment Corporations and the like.  

3.11  Community Investment Corporations 

Community Investment Corporations would be ideal financing vehicles for local infrastructure capital assets.  While their main finance would be state-created interest-free loans, they would also give ownership and control to the local community.  Indeed, it would also be possible to have citizen-owned leasing companies owning the assets.  In these ways it is possible to encourage to the maximum the initiatives and empowerment of citizens.

4  A new understanding of how wealth is created 

The proposal for the state to create and use interest-free loans for public capital investment in an inflation-free way is only too likely to seem impossible, or at least highly undesirable, to a conventional Western mind.  Yet many thinkers and monetary reformers now understand that interest-free loans for public capital investment are possible, and not just possible, but that they also relate to a much wider change of paradigm. 

4.1  Binary economics

Once it is understood that the state can issue interest-free loans for public capital investment, it becomes easily comprehensible that the same basic mechanism – interest-free loans – can also be used for private capital investment.  In both cases, public and private, repayable money without interest is used to create productive capital.  This is patently sensible for public capital investment and is even more sensible for private capital investment done on market terms, because such investment, by definition, pays for itself.  In practice, such private capital investment is not just non-inflationary but counter-inflationary.[16]  Yet – it might be asked – why should private capital investment have the benefit of interest-free money?  That’s allowing the rich to get richer.

Yes, indeed, but it would be a completely different matter if, on the principles of binary economics,[17] the interest-free loans were used to ensure that all individuals, over time, on market principles, should come to have a substantial independent income from their ownership of capital.  If all really did mean all – carers, retired, sick, unemployed, women, children and men – then poverty would be banished.  Moreover, the rich-poor gap would be properly addressed and, most importantly, the economic base that empowers individuals and deepens democracy would have been established.  

4.2  The binary reality check 

Much is new in binary economics but perhaps the most important thing is its view of who or what actually creates the wealth.  This is the binary reality check which starts by observing that the prevailing obsolete neoclassical paradigm can never answer a very important question - Why is it that, when sufficient productive capacity undoubtedly exists, billions of people throughout the world (and even whole strata within the developed economies) still remain in poverty?  The various conventional answers are always unsatisfactory not least because they never explain why the world is full of people who labor long and arduously but who still have poverty-stricken lives.

Indeed, every day, we are taught that we must work to earn our living.  The mantra is always jobs, jobs, jobs and understandably so because, in practice, jobs are at present the only way by which most people can earn a living.  However, the mantra ignores the facts that a lot of people cannot labor and that jobs are not always available.  Moreover, many jobs do not pay enough for a reasonable standard of living and, in many parts of the world, pay only a pittance; and, everywhere, jobs are insecure.  The mantra ignores these facts because society (and conventional neoclassical economics) says that jobs create the wealth.

Yet suppose it were true that it is not labor but rather productive capital that really does most of the work and creates most of the wealth.  Then, indeed, there would be a new situation in which all individuals would have to have at least some ownership of capital if they were to be genuinely economically productive. 

That said, most people probably still have some difficulty in re-thinking who or what creates the wealth.  Nevertheless, they could start to consider why the rich are rich and might then notice that the rich tend to own a very large amount of productive capital that produces a lot of valuable income.  They might also notice that in large parts of the world, millions of people labor ceaselessly every day yet they are, and always will be, in poverty because they own little or no capital.

Unfortunately, space does not permit the detailed binary analysis of who or what really does create the wealth although some idea can be gleaned by a consideration of the productive power of a machine, hydroelectric power station or technological process.  Suffice it to say that binary economics clearly establishes the significance of the productive contribution of capital to wealth creation and so it becomes a matter of the highest importance that everyone should have some ownership of productive capital.  (In contrast, conventional economics, concerned with keeping capital narrowly owned, says that it does not matter who owns the capital).

When everybody owns capital, moreover, a balanced growth becomes possible.  Binary economics states that the more broadly productive capital is acquired over time on market principles, and its income fully distributed to its new owners, the larger the economy will grow.  Binary economics gives a capital acquisition right, to every individual.  Operating on market principles, this right enables any individual to acquire efficient, income-generating capital assets.  The assets pay for themselves out of their earnings.[18] 

The neoclassical and binary views are in further opposition when jobs are considered.  The conventional paradigm alleges that jobs and welfare are enough for most people.  In contrast, the binary view, particularly in the face of technical advance, is that jobs and welfare can never be enough (not least because, even with jobs, many people remain in poverty).  Indeed, binary economists insist that there can be never be proper market efficiency, or substantial growth, or any hope of social and economic justice, without the ownership of productive capital extending widely throughout the population. 

4.3  ‘Binary’ means ‘composed of two’ 

Yet, at present, most people do not own substantial amounts of productive capital.  People (unless they are slaves) own their own labor but they certainly do not own the other big factor in production – capital.  ‘Binary’ means ‘composed of two’ and there are two factors in production – capital and labor. 

Thus there are only two ways of genuinely earning – either through owning capital and/or though owning your own labor.  The main object of binary economics is to ensure that all individuals have access to both ways of earning.  The result is the founding, on market principles, of a private property system which diffuses, rather than concentrates, capital ownership so that 100% of the population come to be substantial owners.  

4.4  Benefits of binary economics 

Among the beneficial consequences of that ownership are:–

§         A basic income for all.

§         The balancing of supply and demand.

§         A change in attitudes towards consumption.

§         A green growth.

Other obvious benefits include the provision of old age pensions; a huge reduction in the need for welfare benefit; an income for children, sufficient to pay for their basic needs; and the ability to stop people getting their income in ways harmful to the environment by giving them another means of being productive. 

4.5  Basic mechanism of binary economics 

Very briefly, the binary mechanisms work in exactly the same way as happens at present, using existing institutions and practices with a little modification.  Each year in the USA new capital investment is made – somewhere around $7,500 per woman, man and child per year.  That is a huge amount and it remains huge even when depreciation is taken into account.  Yet, each year, it stays narrowly owned, and will always stay narrowly owned, because ‘free market’ practices are unfree and ensure that narrow ownership. 

Binary economics, however, uses principles now well established in USA ESOP (Employee Share Ownership Plan) legislation, but extends the principles to cover 100 % of the population.[19] 

The credit privileges and special tax advantages that the U.S. government has given to workers who adopt ESOPs, allow workers without savings to purchase shares on credit wholly secured by the future profits of the company.  Because employees are directly linked to productivity increases and profits through their ownership rights, studies indicate that firms financed through ESOPs, when combined with participatory management and gain sharing, generally perform better than their competitors.  Knowing about the ESOP helps towards understanding how binary economics enables everyone, over time, to come to individual ownership of productive capital. 

Suppose a big corporation or company wishes to expand.  It could go to a local bank for the money which would be lent at interest.  Yet the corporation could also decide to ask a Constituent Trust (similar to an ESOP) to put up the money – the Trust would offer to give the money to the corporation and, in exchange, the corporation would issue new shares to the Trust which would then hold the shares in the name of its constituent clients.  Acting for employees or for anyone, the trustees then makes a proposal to a local bank which independently evaluates the soundness of the proposed expansion. 

At which point binary economics proposes that cheap money should be available.  The state’s central bank (e.g., the US Federal Reserve) would issue the money at a 0% rate of interest, and give it to the local bank which would then lend it to the Trust.  So this would be interest-free loan money for market-driven productive investment as long as the investment makes capital owners of previously capitalless people.[20]

For the next five to seven years, on average, the Trust will receive dividend income from the stock held in trust for the client.  This income is credited towards the cost of the stock bought in the client’s name and is repaid to the local bank which provided the original loan.  The local bank, upon receiving repayment from the Trust, in turn repays the Federal Reserve.  The Federal Reserve can, of course, then cancel the money or recycle it into further industrial expansion. 

As each share of stock is paid for in full, it is released from the Trust and ownership accrues to the clients who thereafter will receive the cash income from their investment in the form of dividends or capital appreciation.[21]  

The specific result of all this is that the clients become the independent owners of a capital estate providing income.  The overall result is, among other things, an increase in productive and consuming capacity but no corresponding increase in the money supply, so there is no inflation; rather counter-inflation.  A new word is needed – perhaps ‘doeflation’.

Consequently, efficiency and justice are forwarded.  In binary economics, the efficiency creates the justice and the justice creates the efficiency.  Yet, in contrast, neoclassical economics thinks that nothing much better than the present can be reasonably expected and that those who have little or no labor income (or no security of income) are only getting what they deserve.

Crucially, binary economics ensures that all individuals can become, and remain, economically productive (whereas conventional economics only conceives of people being productive when they are in paying jobs).  Thus binary economics serves everybody, and not just a few, with remarkable benefits.  Without inflation or recession, the binary economy offers to release the full potential of technology to the immense advantage of humankind and the environment.  It offers to lower and eventually remove the need for redistribution, consumer debt, and deficit spending.  It offers to tame, if not eliminate, the destructive economic cycles that have blighted history.  It will establish economic justice and, eventually, eliminate material poverty.

In a binary economy, moreover, freed from the constraints and pains of poverty, people will have happier, more balanced and independent lives.  They will have a greater freedom to be creative.  There will be an overall increase in our physical capacity to do God’s work.  

4.6  Small business 

The basic principle of interest-free loans for productive capital investment (if new capital owners are created) can be used for small business but possibly without the requirement for new owners to be created.  There would still be a requirement for collateral as security against the possible loss of the loan and it might be desirable for eligibility for the loans to be confined to socially beneficial businesses.  That said, the key point is that interest-free loans could be used for small businesses in exactly the same circumstances as today except that the small businesses would not be suffocated by interest payments. 

5  A second basic income 

As has been seen binary economics and its provision for all of a basic income stemming from capital ownership is counter-inflationary – greater output and consumption, particularly for the previously poor, but in the context of generally lowered prices.  Yet it is a generally agreed aim that the general level of prices should be stable. 

Whereon a remarkable possibility arises – of a second basic income.  When the context is counter-inflation, prices could be raised to a stable level by the issuance of debt-free (non-repayable) money on the lines of the proposal made by Joseph Huber and James Robertson.[22]  Such issuance would not be directly related to productive capacity but, such is the counter-inflationary power of binary economics, the issuance becomes acceptable as the price of achieving a stable level of prices. 

6  Summary of the Seven Steps 

The Seven Steps are set out in the book by Rodney Shakespeare and Peter Challen.[23]  With brief accompanying comment, they are that:

·          That there be open, regular and public acknowledgement by state, economists and academia that the present banking system is an unjust monopoly that creates 97% of the money supply as interest-bearing debt.

At present widespread debate on monetary reform is not possible because the subject is maginalized, even suppressed.  Therefore obtaining acknowledgement that the present banking system is an unjust monopoly is not something that can wait.  Rather progressive individuals and groups should agree to put the issue to the front of their discussion and altercations with government, academia and economists.  Once there is a widespread understanding of the main features of the banking system, the other Steps will surely follow.

·          That interest-free loans (i.e. state-issued repayable loans created free of charge beyond administrative and other necessary cost) be used, via community investment corporations and the like, for capital investment needed by the public sector thus enabling such investment to be for one half, even one third, of the present cost.

No disadvantage comes from introducing this Step.  It does not increase the amount of public capital spending and is counter-inflationary.  Its great benefit is that public capital works can be done for one half or even one third of the present cost.  Any society not introducing this Step suffers a detriment.

·          That interest-free loans (i.e. state-issued repayable loans created free of charge beyond administrative and other necessary cost including loan insurance) be used, on the principles of binary economics, for private capital investment which will create ownership stakes and property incomes for all income groups, especially the poor. 

The underlying mechanism of binary economics is to permit the use of interest-free loans for private capital investment if new owners of capital are created thereby.  Binary capital requires the full payout of earnings which could be eight or nine times what is paid out at present.

·          That interest-free loans (i.e. state-issued repayable loans created free of charge beyond administrative and other necessary cost including loan insurance) be used for loans to start-up and small socially beneficial business. 

Instead of small businesses being burdened by interest so that their backs break, this Step gives them a better chance to survive.  Since they are the seed corn of any economy, it is important they do so.

·          That, since the Steps above, while enhancing productive capacity and individual productiveness, are counter-inflationary and ultimately diminish the money supply, debt-free money (state-issued, non-repayable money) should be issued for another individual basic income to the extent necessary to keep a stable level of prices.  The amount should be decided by a body free from operational control by politicians.

Money is being manufactured on a huge scale at present by the banking system (which, of course, then adds interest to it).  So there is nothing new in the manufacture of money.  Debt-free money, therefore, could be introduced by itself if balanced by compensating measures in the rest of the economy.  That said, the Seven Steps proposal sees the case for debt-free money as being much stronger when it is allied with interest-free loans for capital investment purposes.

·          That women be addressed as to the role they can play in providing two basic incomes for all individuals throughout the world.

It should be pointed out to women that they can play a big role in implementing two basic incomes for all individuals.  Such incomes cannot be a detriment to them nor, for that matter, to anybody else.

·          That moves be made to establish The Abraham Society and The Kashmiriat Society.

This Step uses the previous Steps to find a new solution for the problems of the Middle East and Kashmir.  A solution is urgent and would be about as clear a gain to the human race as anything could be. 

6.1  What the Seven Steps will create 

Implementation of the Seven Steps will create:-

  • Healthy non-inflationary economies and societies.
  • A sturdy independence for all individuals as they become economically productive to the extent necessary to satisfy their reasonable needs.
  • Balanced growth which is also a green growth because:-

a)     individuals involved in practices destructive of the environment can be given another way to earn

b)    the economic efficiency allows for the introduction of more costly, but greener, processes.

  • Enhanced economic status of women and a proper power balance between the sexes.
  • A solution to poverty through a guaranteed two income security for all.
  • A foundation for the ending of National and Third World debt and the stimulation of economies and societies no longer in hock to outsiders.
  • Deepened democracy because all individuals will have much greater control over their daily lives.
  • An economic foundation for the voluntary control of population levels.
  • Hope of a solution for two of the worst danger spots in the world – the Middle East and Kashmir.
  • The existence everywhere of a practical basis for a new honesty, optimism and generosity of spirit.

[1]  Or, looking at it from another perspective, debt money because it has to be repaid, or from still another perspective, fiat money.  The word fiat comes from the Latin and means “let it be made”.  Therefore ‘fiat money’ covers any form of money which is created out of nothing be it by banks or by governments.

[2]  Michael Rowbotham, The Grip of Death (1998).

[3]  Michael Rowbotham, op. cit.

[4]  Letter to the authors, 24th October, 2001, from the Governor of the Bank of England, Sir Edward George.

[5] Michael Rowbotham, op. cit.  The method was neatly summarized by Graham Towers, former Governor of the Central Bank of Canada who in 1939 said that, “Each and every time a bank makes a loan, new bank credit is created – new deposits – brand new money”.

[6]  In 1948 roughly 50% of the UK money supply was cash created by the government and 50% was created by the banking system.  Today the ratio is roughly 3% to 97%.

[7]  Such losses, however, are usually covered by the provision of collateral i.e., if a house is put up as collateral, the house is sold to pay for the loss. 

[8]  At 3% compound interest, money doubles in 24 years; at 6%, in 12 years; at 12 %, in six years.

[9]  It was the practice of UK building societies only to lend their members’ deposits for house purchase.  Of late UK building societies have changed their status and become akin to banks.

[10]  Margrit Kennedy, Interest and Inflation-Free Money (1995).

[11]  Margrit Kennedy, op. cit.

[12]  In the UK, in order to raise money, the government issues Exchequer or Treasury bonds i.e. government stocks or securities.  The buyer of these stocks is given a commitment to repay the stock plus interest at a given date or dates.  When banks buy the stocks, money is created by the banking system to do so.  However, pension funds etc. also buy the stocks.

[13]  In 2002, UK government debt interest payments are expected to be £22 billion!  That is £8/9 per week per person.  The total UK National Debt stands around £400 billion (£26 billion in 1960).

[14]  In 1694 the founder of the Bank of England gave £1.2 million (@8% interest) to King William III to fight the war with France.  This was the first UK National Debt and, in effect, the government’s inherent right to issue money had been sold to the banking system.  The National Debt principle has been copied worldwide.

[15]  At one period, the exchange rate was about 50,000,000,000 marks to £1.

[16]  When, for a sum of money, productive capital has been brought into being and the money is then repaid and cancelled, just the productive capital is left.  That capital, however, continues to produce wealth and incomes for its owners worth many times the original formation cost. 

[17]  Robert Ashford and Rodney Shakespeare, Binary Economics – the new paradigm (1999).  Full information may be obtained from the Center for Economic and Social Justice, Washington, D.C., www.cesj.org

[18]  The true, full dividend earnings of shares, in a binary economy, could be as much as five, possibly eight or nine, times what is paid out at present.

[19]  Although there are now well over 11,000 ESOP schemes, embracing around eleven million people in the USA, present ESOPs are not binary ESOPs because, alas, the ESOP has never been legislated to conform with the demands of binary theory. 

[20]  In order to protect the bank and the Trust against possible losses from business failure and default by the corporation, the Trust pays a premium to buy insurance from a commercial capital credit insurer.  The cost of the premium is added to the cost of the investment and charged to the client, as is the administrative cost of operating the Trust.  The financial soundness of the privately owned capital credit insurer will be guaranteed by new legislation creating a state capital credit re-insurer (similar to the USA Federal Deposit Insurance Corporation – ‘FDIC’ – which safeguards bank deposits against loss).

[21]  Although, of course, it is possible to arrange things so that the money is held on trust for the client, if that is appropriate; and it is also possible to arrange things so that (e.g. for new-born children) previously paid-up capital is used thus giving immediate income.

[22]  Joseph Huber and James Robertson, Creating New Money (2000).

[23] Rodney Shakespeare and Peter Challen, Seven Steps To Justice (New European Publications, 2002).

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