The current financial problem began when a group of young bankers invented a way to parcel up risk and resell it in ways that effectively avoided governmen rules limiting loans in relation to deposits. This fooled the regulators and spawned an unrealistic and very risky expansion of credit. Once these loans defaulted it started a disastrous chain reaction throughout the banking system.
Our politicians are mesmerized by the banking system. They do not understand what is going on and are frightened of taking full responsibility for printing money themselves. As a result we have poor control of the money supply (for reasons Gesell pointed out in 1929). So….Banks are going to collapse as debt finally spirals out of control.
Cuts in public spending will make everything much worse. Unemployment will cause riots and extremism. The euro will eventually collapse unless new political structures are created to redistribute wealth. The trick of using “quantitative easing” to inject new money into a broken down system will have to continue indefinitely unless the debt based system of fractional reserve banking is abolished.
The creation and management of money is one of the strangest mysteries of our human society. Silvio Gesell (The Natural Economy 1929) had great insights into the effects of money systems on human behaviour. Gesell predicted all the problems which created the great depression of 1930. Because money was tied to gold, the industrial nations could not increase the quantity of money to keep the economy going as business expanded.
Note that the gold standard became rigid in the UK in 1844. It was abandoned as a result of the first world war and then reimposed (at an arbitrary level) in 1925. The rigidities caused by this reimposition led to the Great Depression. As various countries left the gold standard during the 1930s the grip of the depression eased as Governments were able to expand the money supply.
As the 12 year old canadian girl says on her internet video, it's time for the people and their government to take direct control of the money supply - not leaving it to the banks who only create money (debt) when they think they can make a profit. Crazy. Towns and regions can take action themselves by creating their own currencies - there are 23 regional currencies in Germany for example.
This is a summary of Gesell's main points:
1. Specialisation of labour was impossible before the money supply was increased by creation of "credit". This only became possible after the introduction of fractional reserve banking (and paper money) in1689 (William of Orange and the foundation of the Bank of England). (This allowed banks to "create" new money by lending 3 or 4 times more than they took in deposits.) Before this time money was made from silver and gold and there was simply not enough to allow cities and industrialisation to prosper.
2. Gold and silver have always had attractions as "money" because they do not rust and look nice. The problem with "nice" money is that people are more tempted to store and save it which reduces quantities in circulation and causes unemployment. Money is just whatever serves to facilitate exchange - it does not need to have intrinsic value, in fact this is a disadvantage because of the tendency to save reduces amounts available for trade.
3. Money differs from normal goods because it does not decay (unlike cabbages or wheat) and is virtually free to store. Goods, on the other hand, have the opposite quality - they decay and are often expensive to store. This means those with money tend to have an advantage over those trying to sell goods. This advantage becomes extreme and damaging when money is saved and thereby taken out of circulation.
4. When people believe prices may fall they stop spending and save so they can buy more cheaply later. When people believe prices are rising they want to spend quickly so they get more for their money. So, perversely, the belief that prices will fall actually causes them to fall - and vice versa. Belief is at the centre of this critical process. (It was fear of inflation that caused the run away problems in Germany in 1922 - when the government changed the name of the currency (1000 trillion old marks became 1 new Rentenmark) and put in a new Chancellor the problem was cured!!)
5.The same kinds of money should not be used for exchange AND for savings. This must always lead to boom and bust because it is impossible for society/government to accurately "manage" the effective quantity of money in circulation for exchange. Governments can only influence "saving" very indirectly but the "signals" they give can have big effects on people's beliefs.
6. By charging a 1 percent per month levy on money used for exchange, the problems of "saving" can be avoided and we have what Gesell calls "free money" - that is money which is always free to circulate and not be saved. This was done in Worgl during the great depression - it cured the problem. The free currency circulated more than 10 times more quickly than conventional money.
7. Unless we have "free" money there will always be a tribute levied by those wishing to buy against those wishing to sell. Gesell calls this "basic interest".
What happened at Worgl in 1932?
During the year in which the Worgl scheme operated all of the Mayor's schemes were complete, unemployment was cured and taxes paid. So great was the interest of other towns and villages that the central Bank panicked and the Government made using alternative currencies a criminal offense.
This was the statement on the back of the Worgl curency:
“To all whom it may concern ! Sluggishly circulating money has provoked an unprecedented trade depression and plunged millions into utter misery. Economically considered, the destruction of the world has started. - It is time, through determined and intelligent action, to endeavour to arrest the downward plunge of the trade machine and thereby to save mankind from fratricidal wars, chaos, and dissolution. Human beings live by exchanging their services. Sluggish circulation has largely stopped this exchange and thrown millions of willing workers out of employment. - We must therefore revive this exchange of services and by its means bring the unemployed back to the ranks of the producers. Such is the object of the labour certificate issued by the market town of Wörgl : it softens sufferings dread; it offers work and bread.”