ANALYST-2010

“Money is neither my god nor my devil. It is a form of energy that tends to make us more of who we
already are, whether it's greedy or loving.” ~Dan Millman. The world moves around money and the
money moves around the world due to Debt. The Debt Engine is a phrase to describe unrelenting,
forever increasing private and government debt. The need to stay ahead of escalating debt fuels
practically everything we do; it forces us out of bed in the morning to go to jobs that most of us
despise. Corporations make all their decisions around first how to service their snowballing debt,
and secondly around profit. Governments spend all their time worrying about how to meet their
social agendas while at the same time service the increasing debt load of deficit spending.
Un-repayable Debt is different than the everyday debt of normal life. Un-repayable Debt is
an actual built in flaw of our present monetary system: The Fractional Reserve System. It
benefits no-one except those intimately connected with the banking industry and in spite of its
devastating repercussions, it is a flaw that can be fixed.
Money is neither created nor destroyed, it just flows:
Everyone has some ideas about money, who controls it, where it comes from and how it
operates. Some say the government prints it; others say hard work makes money, while others
would guess that it's something to do with gold. They might also picture it as a vast pile with
everyone competing for as much as they can get. Bankers sometimes inflame our passions
by claiming that the government has grabbed all the money and there is none left for private
industry.
Our money supply isn't created by the government; a brilliant idea doesn't make money and
neither does hard work. Our money is a national accounting system of who owes what to whom,
and it is a system that is owned and operated by the private banking industry. There is no such
thing as a static heap of money created by hard work and business cunning. Money flicks in and
out of existence as credit and debit balances; the money supply swells and contracts continuously
as loans are created and then destroyed. Money is simply a bookkeeping system; a man created
device.
The Fractional Reserve System:
The man who invented the monetary system which we use today was a Scotsman, John Law,
who lived during the 18th. century. He invented a new type of money to replace the old one
of specie (the use of coins). In doing so he created the mechanism to finance the industrial
revolution, and ultimately our modern technological world.
Much has been made of the astounding inventions of that era but what is often forgotten is that
most of them would have never have seen the light of day without John Law and his invention:
the Fractional Reserve Money System. Without it, there would have been no development in
any field. There would have been no space shuttle, no Love Canal, no drift net fishing, no heart
transplants and no Cruise missiles. What John Law did with his invention of a new money
system was enable the Industrial Revolution, with all of its good and bad aspects, to take place.
Without him, the Revolution would have fizzled and died. And with it, our technological world
would have died too.
Here was the problem which John Law solved. In the early 1700's the newly industrializing
nations of the world were in a perpetual state of economic crisis because their coinage system
of money could not keep up with demand. Governments tried everything to increase the money
supply. One trick was to make new coins much smaller than the old thereby getting more per
ounce, but it was a stop gap measure at best. To grasp the magnitude of the problem, try to
imagine building just one modern skyscraper using only gold coins as finance. The industrialists
of the Industrial Revolution were faced with a similar problem; how to build their factories, mills
and railroads using only scarce gold coins.
John Law's solution was to create a national paper money supply; banknotes that would be
officially recognized as "real money". The advantages were obvious. Paper money could be
expanded indefinitely and was much cheaper than specie to make. To get and keep initial public
confidence, Law suggested a fraction of gold be always kept on hand for the few people who
wanted to redeem their notes.
Through a process of trial and error it was found that specie could support about ten times
its value in paper money. That is, a bank which held $10 in gold could safely print and loan
out about $100 in paper money. The gold held in reserve was obviously a mere fraction of
the banknotes which it supported and so the system became known as the Fractional Reserve
System. Cheques or credit cards have largely replaced paper money but the principle remains the
same; the banking industry creates the money which government and society then borrows.
John Law's method of money creation is still the dynamo that powers our present world. By
replacing specie with a simple national accounting system of credit and debit, he made money
infinitely more flexible, able to be contracted or expanded to meet any situation. However, using
the Fractional Reserve System has not been a universally happy experience. It has a built in
mechanical flaw that always keeps total national and private debt ahead of the money available
to repay it. In fact the more a nation expands, the more it automatically goes into debt to the
system over and above the money that it borrows.
To explain, imagine the first bank which prints and lends out $100. For its efforts it asks for
the borrower to return $110 in one year; that is it asks for 10% interest. Unwittingly, or maybe
wittingly, the bank has created a mathematically impossible situation. The only way in which the
borrower can return 110 of the bank's notes is if the bank prints, and lends, $10 more...at 10%
interest.
When presented with this scenario, there is often a tendency to think :"Ah, but the borrower can
always make the extra $10 somewhere else, through hard work or a deal overseas." However,
although we frequently inter change the two sayings, earning money is not the same as making
it. Earnings are simply a transfer of money from on ownership to another and not increase or
decrease the total money in existence. Making money actually does increase the nation's money
supply but no-one can do that but the banking industry itself as laid down in its charter from the
federal government.
The result of creating 100 and demanding 110 in return, is that the collective borrowers of a
nation are forever chasing a phantom which can never be caught; the mythical $10 that were
never created. The debt in fact is un-repayable. Each time $100 is created for the nation, the
nation's overall indebtedness to the system is increased by $110.
Many economists are not unmindful of the problem but pass it off as irrelevant. They say that
if the marketplace economy keeps expanding, thereby fuelling an increase in the total money
supply, there is no problem with meeting interest payments on an increasing debt load. But under
such circumstances, economic expansion is not a luxury but an imperative to stay ahead.
In John Law's day, the need to continuously expand to meet growing debt repayments was seen
as a minor problem of no consequence. Today however we all know the planet cannot sustain
unlimited growth. Even so, we are stuck with a monetary system that demands continuous
expansion or face the chaos of total economic collapse.
The consequences of the Debt Engine are everywhere. Political and business leaders are
sacrificing the planet to stay ahead of bankruptcy. Technology is not being used to create a sane
and sustainable lifestyle for us all but is being channeled into the narrowest band of activity:
the market place activity of "making" money. Just as governments are forced into ignoring vital
social and environmental questions in their efforts to balance the books, so many corporations
are putting to one side such things as resource depletion and the destruction of the ecosystem in
their frantic efforts to remain economically alive.
The Fractional Monetary System proposed by John Law has slowly showed up its true form.
During the Industrial revolution, everyone was contented because of the growth. But, gradually
it came into notice that the un-repayable debt phenomenon is bringing a huge gap between the
rich and the poor. The saying, “Rich gets richer and the poorer gets poorer” is the correct way to
describe the exact scenario.

Source: Based on an Article by Roger Langrick

QUESTIONS
1. John Law suggested a system that was well suited to his time.But this system has flaws
leading to an unbalanced flow of money. Can you think of ways to reform the fractional
reserve system to fix the flaws it bears till this day? Suggest changes in the fractional
reserve system that could adapt it to the present economic scenario. Support your answer
with Facts, Graphs, Illustrations, etc..
2 . “Rich gets richer and the Poor gets poorer”. Searching for a solution to this, suggest an
alternative monetary system to the one proposed by John Law which can result into a
sustainable global economy.
3 . Can you think of a world without money? Clearly identify the short comings and
advantages of re-developing a world without money.

Note:
1. All references to Data, Information and Statistics used in your solutions should be properly
appended with their source.
2. Your answers should not completely rely on your thought process but should be supported by
facts, figures and illustrations.
3. Huge amount of reference links and material are provided on Google Groups.