Where has all the Money Gone?
By Tim Jenkin


How often have you read that this or that hospital, day clinic, school, public amenity ... has to close down because of "insufficient funds"? Have you ever been to a cake sale to help the military buy new jet fighters or corvettes? Why is there always enough money to build a new casino, five-star hotel or shopping mall but not enough for the things that people really need?
It is possible for there to be an insufficiency of most things. During a drought there is insufficient water, and then an insufficiency of food. There can be too few teachers and nurses. There can be a shortage of houses. There can be scarcity all around but usually there are natural reasons for this that are beyond our control. But how can there be an insufficiency of money when it is the one thing that is created by human beings for their own use? To say there is insufficient money so resources must stand idle is the same as saying buses and trains must stop running because there are not enough tickets!
To understand this anomaly we need to understand where money comes from. Most of us think money comes from the government. After all it says 'Reserve Bank' on every note in our pockets. Governments everywhere long ago handed over the money making function to the commercial banks. All money comes into existence as debt when banks grant loans and overdrafts. Stop thinking of money as wealth because money is debt, and the amount of debt determines the amount of money in circulation.
When each loan is repaid the debt is cancelled and so the money created by the loan goes out of circulation. To maintain the flow of money in the economy someone else has to go into debt so that more money can be created. If insufficient new money is created a depression results. The spanner in the works is that as each debt is cancelled a residual debt in the form of interest has accumulated from the loan. The money to pay the interest was never created so the only way that banks can get the interest paid to them is to create more debt money. This is why lending institutions are continually seeking new ways to 'lend' out money. Banks cannot create infinite amounts of money because the Reserve Bank requires that the amount they 'lend' (read: create) is based on a cash reserve that they are obliged to keep with the Reserve Bank. Banks thus, as well as seeking new ways to 'lend' money, also encourage savers to deposit their money with them for it is on the basis of these desposits that they can create new loan money. Banks do not lend out their depositors' money, they create fresh, new money when they grant loans.
It is the cycle of creating loans, extinguishing those loans and the need to create more loans to service the interest that is behind the growth imperative of our economies. The eternal requirement to create more and more debt money is what drives our economies forward, with all the disastrous consequences this has for society and our planet. If this process stops for one minute the whole shaky edifice will crumble like a house of cards.
A single loan never creates enough money for it to be paid back with interest; a million loans will never create enough money to pay back the capital and interest. There is thus a continuous shortage of money with everyone scrambling to get hold of a share of an amount that is insufficient to go around. The players in this game of musical chairs are forced to compete with each other and eliminate their competitors.
So there really is a "shortage of funds", and state institutions that have the greatest need for funds are the weakest players because they have to depend on the government to do their bidding for them, and governments are not themselves strong competitors in the dogring because they are muzzled by all sorts of rules and regulations that define where and how they can get their share.
This perverse money system, that benefits only a small parasitic financial class, is leading the human race to global catastrophe.
Money doesn't have to be based on debt and it is possible to create a money system where there is sufficient to go around. It is possible because human beings can design it that way, just as they have designed our current dysfunctional money system where money is scarce. When there is enough money to go around the game of musical chairs will slow down because no one will have to rush to make sure they get to the next chair before the other players in the game.
The Community Exchange System is a nascent money system that demonstrates how money could work. There is always enough money in the CES because its members create their own when they trade with each other. No bank outside the circle of buyers and sellers is required to come and create our money for us, and charge us interest for doing so. When a buyer buys something she creates new money at that instant. It is 'free' money ('free' as in 'no interest') and the quantity created always matches exactly the prices of the goods and services purchased. There is never a shortfall of money because the buyer had to pay something extra to a third party acting like a highway robber demanding a toll of passage.
There is no growth imperative in the CES though healthy growth through increased trading is encouraged. Everyone benefits from more activity but it is not activity inspired by the fear of loss and failure, of not being able to pay our ransom to the robber.
When the CES grows bigger it will be able to demonstrate that there is no shortage of funds for the things that people really need. There will be enough money for schools, hospitals, day clinics and public amenities, and the providers of these noble services won't have to compete with those who feel that casinos, five star hotels, shopping malls and corvettes are better for our welfare.


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No.23, 3 August 2005