The West has unleashed a devastating plague of kleptocracy upon the world that is threatening all our futures. After deregulation of finance, the giant engine of Western money-creation devoured ex-Communist countries, sharing ownership of the spoils with corrupt kleptocrats whose political machinery integrated robbery and political domination. The rest of the world was already corrupted in the same way; and so now we have 8 (eight) individuals owning as much as half the rest of the world’s population.
How this kleptocracy (rule by thievery) works is simple, but apparently not a subject the mainstream press will admit for discussion.
Chief among the fundamentals is not some sexy item like ‘weapons of mass destruction’. It is ‘negotiable debt’ which means ‘debt you can buy and sell’. As I will explain, laws supporting negotiable debt mean that value can be created out of nothing on a vast scale and used to purchase the lives, work, possessions and freedom of others.
Like the most boring devil in hell, the subject of ‘negotiable debt’ is protected from scrutiny by its supreme boringness. In various forms, it has been introduced into many civilizations, and it has always been highly damaging, producing extreme inequality, social dislocation and eventually a stark alternative: reform or collapse. Some of its ancient manifestations were debt-slavery and tax-farming. (With debt-slavery, the debtor and the debtor’s family became the property of the creditor to buy and sell. With tax-farming, rulers auctioned off the tax-obligations of the citizens to the highest bidder.) The principle modern manifestations of negotiable debt are bank-money, national debt and ‘financial instruments’ that create value out of nothing.
Negotiable debt means simply ‘debt which can be bought and sold’. When the power of pure money begins to become greater than other powers in a nation – than the sword, for instance, or religion, or land, or manufacture, or business – laws are made that turn debt into a commodity. The content of such laws is, simply, that the State will enforce the collection of a debt by its current ‘owner’ regardless of whether that ‘owner’ made the loan in the first place.
The introduction of negotiable debt transforms a society. Without it, prosperity for all is in everyone’s interest – rulers included. With it, a whole new layer of people is introduced, given legal authority and power to grow spectacularly rich by squeezing every last penny out of those who work, driving them into penury, debt-bondage, and (finally) slavery or welfare.
We are all aware of ‘negotiable debt’ in one form or another: governments selling student debt perhaps, or mortgage companies flogging off mortgage debt. But these are just sideshows to the main event. The main event is this: Once debt is valuable, value can be created out of nothing. This is how bank-money works. This is how national debts work. This is how ‘financial instruments’ work which are created and destroyed (for profit) to the music of trillions of dollars each year.
It is easy to demonstrate how value is created once debt becomes a commodity. First, take a situation in which no value is created. Take two ordinary citizens: me and you, perhaps. I lend you some money. I no longer have the money; you have it. I won’t have it again until you return it, whereupon you will no longer have it. No value has been created. If, on the other hand, I lend money to a government or corporation, I get a ‘bond’ in return, equal in value to what I have lent. This ‘bond’ is negotiable, and effectively money, circulating among the wealthy and related in value to the money used by everyone else. Value has been created for those who lend.
National debts profit those with money to lend because those lenders get bonds, which are effectively money. In the words of the godfather of economics, Adam Smith: ‘The merchant or moneyed man makes money by lending money to government, and instead of diminishing, increases his trading capital.’ Montesquieu: ‘National debt takes the wealth of the state from those who work, and gives it to those who are idle.’ Hume: ‘The taxes, which are levy’d to pay the interests of these debts, are a check upon industry, heighten the price of labour, and are an oppression of the poorer sort.’ Everywhere, national debts grow in step with the predominance of bank-money – because they depend upon the same law.
Banks create money for private profit. Today, money is created, by central and commercial banks, by the simple device of creating two equal and opposite debts – which add up to nothing. When a bank makes a loan, it creates a debt from bank to borrower, and a debt from borrower to bank. The debt from the bank becomes money (the Bank of England describes how this works in its Quarterly Bulletin, 2014 Q1). What we own, when we have money in our account, is negotiable debt from a bank. It circulates among us as money, but it was created for the profit of borrowers and banks.
In practical terms, this means that when a bank ‘lends’ a billion for some purpose or other, it has, in fact, created that billion out of nothing for the profit of itself and the borrower. These billions are ‘retired’ – they disappear – when profits have been taken and the ‘loan’ is repaid. The whole process can then be repeated. The value being created and destroyed in this way comprises, at any given moment, the whole of our money supply. Unfashionable as it is to believe in devils, ‘diabolical’ seems the only word adequate to describe such an arrangement. No wonder 8 individuals have come to own more than the poorer half of the world’s population!
You would have thought the ability to ‘create money’ would be a ticket to secure and endless wealth, but banks are vulnerable because of the way they create it. When borrowers default, banks lose their assets, but their debts remain, circulating as money. Conversely, when a bank goes bust, its customers – owners of its debt – lose their money. The system is inherently unstable. Although there is a lot of money to be made in banking, the main beneficiaries of the system are not banks: they are speculators, plutocrats and – governments.
‘Negotiable debt’ supplies assets to both governments and plutocrats, so they share an interest in keeping the system going. Socialism in its current guise offers no improvement. Impressed by the power of negotiable debt (euphemistically called ‘credit’) Marx wanted to take over all its sources for the State (‘plank 5’ of his communist manifesto). Today’s socialist movements are stuck in this broken groove, suggesting no advance in justice, merely ever greater concentrations of State power.
What effect does negotiable debt have on the wider world? Here are the words of a historian (stripped of jargon): ‘Negotiable debt is not just a way of oppressing the lower classes. It has other functions too. First, by creating large concentrations of capital, it allows governments to create military power and exercise control over wide areas. Second, it involves wealthy people in government, where they all profit together. Third, it creates a system of dependence, poor on rich, which ensures social stability. Fourth, when debt itself becomes money, a huge variety of speculative techniques opens up, by which the wealthy may increase their wealth. Lastly, negotiable debt enables governments to reward supporters with stable and long-lasting incomes.’
This short summary was included in a book celebrating the creation of value out of nothing. It says a lot, but not nearly enough. A more critical account would include many other things. Here are some: ‘Negotiable debt allows corrupt payments to be made without scrutiny. It enables predation on a vast scale by nations, corporations and individuals. It creates extremes of inequality. It favours monopolization. It transforms democracy into unstable plutocracy. It makes ‘steady-state economy’ an impossibility: because most money ends up in the hands of a few, economic growth becomes a necessity for an economy to merely function. When growth is pursued as a ‘public good’, an increase in environmental destruction must inevitably follow. Arms production and war are financed invisibly and in secret, from created money. In conditions of extreme inequality, arms production and war become, perversely, an economic corrective, as workers and soldiers earn (and spend) without producing for public consumption. Arms production and proxy wars become, monstrously, a source of economic health.’
In these ways, the development of our modern world has been profoundly affected by profoundly unjust law. It is only to be expected that as society changes, ruling powers will try, and to some extent succeed, in making laws that favour themselves. Feudal law is an obvious example – a fact easily acknowledged, because feudal law is now defunct. As conditions change, laws that favour a ruling order must yield eventually to reform, either peacefully or by violence. Feudalism yielded in France only after a Revolution; in England, only after a Civil War.
The effects of ‘negotiable debt’ have got a great deal worse over the past thirty years or so, because restraints have been removed (financial deregulation). A partial reform would be to bring back some of those restraints. Proper, radical reform would result in law only enforcing recovery of a debt if the claimant made the loan in the first place. This would put an end to value created out of nothing for the benefit of those with power.
While reform would not be difficult, arriving at a place where reform is seriously considered looks difficult, if not impossible. There is little public discussion of the significance of negotiable debt and its relation to the ills that plague us. The public is bewildered and bemused. Self-interested opposition among the powers-that-be, and the dull complexity of the subject-matter, keep even simple facts (such as those referred to above by Smith, Montesquieu and Hume) beneath the radar of public debate. When people are desperate, and reform is out of the question, they look to destruction of the whole edifice of exploitative power.
Getting rid of negotiable debt would mean that our money-supply would consist of simple units of ownership, not ownership of debt. A program of replacement, unit-for-unit, would not be difficult. In the interests of justice, it should be accompanied by some form of debt reduction. Restructuring our institutions around the new arrangement would bring new life to our tired and ailing world.
There is another aspect that makes everyone nervous about the prospect of reform, victims and profiteers alike. The system itself has become a tyrant. For those it robs, earning a living is increasingly precarious. For those it profits, who own mostly debt, their own wealth also looks precarious: the burden of created debt is now so great that a reasonable rate of interest has become an impossibility. Defaults look inevitable.
Vast wealth accumulated as debt always involves the destitution of many people and, without reform, is always, sooner or later, followed by societal collapse. We are puzzled by the kinds of monsters now emerging as political ‘leaders’, but we shouldn’t be. People are looking to robbery-by-dictator as preferable to robbery by a system that they do not understand, which is growing more extreme day by day.
It’s basic enough to be a historical cliché: Degraded humans look to vicious leaders; vicious leaders produce more degradation. We are lodged in a classic vicious circle that can only be broken by timely reform – or catastrophe. Solon founded Athenian democracy by outlawing debt-slavery. Perhaps we could found a true democracy for ourselves, by outlawing its modern equivalent: bondage to negotiable debt.