Dominic co-wrote a feature documentary about the global financial crisis, ‘The Four Horsemen’ and his most recent short film, ‘Debt Bomb’, went viral with 250,000 hits in two weeks. He also has a column about gold and money for Moneyweek.
He has recently written a book looking at the mess the West finds itself in – he explains how changing our currency system could help us get out of the financial crisis…
I’ve heard a lot of explanations for the financial crisis in which the West now finds itself. I’ve read a lot of the touted solutions.
But I’ve not heard one high-profile economist, banker, journalist or politician – those who can actually influence the fixing of ‘this mess’, in other words – suggest that the problem lies in our system of money.
We spend a lot of time thinking about how to make more money. But few think about how our system money actually works.
Money: We spend much of our time thinking about how to make more money – but few think about how the system works
It’s a system that has been in operation globally for just 40 years – since the US finally departed the gold standard in 1971.
The Bank Of England calls it ‘fiduciary money’, others ‘fiat currency’. Under this system, money is the issuance of governments. It is the law that we use it. Banks have the power to create money through lending.
Under ‘full reserve’ banking, a bank can only lend out as much money as they have on deposit – I deposit £10, they can lend out £10. So the amount of debt created is directly linked to the amount of savings there are.
- Pound soars as Britain escapes from recession and moves into the black
- Bank of England rift means decision over more QE will be ‘close call’ next month
- From the Brixton to the Bristol Pound, how towns have turned to printing their own money
But we operate under ‘fractional reserve’ banking. A bank need only have on deposit a mere fraction of the money they lend out. I deposit £10, the bank can lend out £100 – so £100 is created and spent in the economy.
As money is no longer linked to anything tangible – as it was, for example, under the gold standard – there is now almost no limit to how much money can be created. The amount of money that gets created is further exacerbated by the ‘fractional reserve’ banking process.
The more money there is, the more its purchasing power is diluted and the higher prices inevitably rise.
Some benefit hugely from this system: those who control money, and those who are at or near its point of issuance. Governments and banks, in other words.
They have the power to create money (whether by printing or through lending) and to then charge interest on it. They also get to buy assets with their share of the newly created money, before prices rise to levels that reflect the new money in circulation.
So there is a constant transfer of wealth to these sectors. And it compounds over time. It’s how the state and finance have both grown to such disproportionate size.
It’s how banking has become so over-leveraged. It’s how the gap between rich and poor has grown so large. It’s how the next generation has become so indebted.
It’s how house prices get so inflated and unaffordable. Any number of unnecessary evils can be traced back to this system of money, which we have no choice but to accept and use.
Let me give you another example to think about.
In 1914, when gold was official money, neither Britain nor Germany had enough of it to pay for World War One.
Once they’d spent their gold, the war should have ended. But both governments took their countries off the gold standard, ran up colossal deficits and printed the money they needed, thereby passing the bill – and the buck – onto their people. This was an essentially fraudulent action made to suit a political agenda.
Over 16million killed. Another 20million wounded. Then came wave after wave of consequences – German reparations, Weimar hyperinflation, the rise of Hitler and another world war. If there had been no government monopoly on money, if they hadn’t had this power to issue money, this just couldn’t have happened to anything like the same extent. An astonishing thought. It’s why many praise gold for its “restrictive force” on governments.
Governments and banks should operate by the same rules as the rest of us. No bail-outs, no deficit spending, living within your means, real risk of failure forcing prudent conduct – all that kind of stuff.
The monopoly that governments and banks have on money gives them too much power. Whether by incompetence or worse, that power will inevitably get abused. The best way to stop the abuse of power is to spread it as widely and thinly as possible.
We need a system of money that is independent.
My book, Life After The State, is a simple-to-understand look at the mess the West now finds itself in, and how changing our currency system could help us get out of it.
I am publishing it via crowd-funding with Unbound and I’m delighted to say it is now fully-funded. But you can still pre-order one of the special editions.