In order that an organized body of knowledge might be classified as science, its hypothetical law must be based on facts. Unlike any other social science, fallacies are the root of the technique of thinking in economics. Economic, social and political instability, in addition to concentration of wealth are the outcomes of such way of thinking.
Failure of present economic policies to realize prosperity makes it necessary to review the foundations on which these policies are based, and look for alternative policies that would reflect fair economy.
In present economies, funds can be raised through issuance or borrowing money;
1. Issuance of money
The monetary authority (Central bank or US Fed bank) is the only note-issuing institution. Present money is issued in form of paper notes or coins made of material of negligible cost. The international monetary system sets rules to control issuance of money by a state. Since money is still viewed as a commodity, the issuance process is regarded as a transaction of buying money. Money is sold at its face value for a price to be paid at issuance or at later date. For price to be paid on spot, the monetary authority issue money covered by currency backing in form of precious metal or foreign currency reserve. For price to be paid on credit, the monetary authority issue fiat money. Against these notes it holds marketable government securities.
2. Borrowing money
Since the power of the monetary authority to add to the note issue is limited by law or economic growth, borrowing is the only way to raise funds unless money is granted for other type of benefits.
A government may borrow money from giant lenders or rich countries. It may also borrow money from public against marketable government securities. Funds are deposited into banking accounts.
Banks retain current accounts and borrow deposits. Speculative activities and refinancing tools inject more liquidity to the banking system. Banks raise funds by activating the money creation process. Both borrowed deposits and granted credits are increasing. Issued money in USA as at January, 2007 was 750.5 billion dollars, while commercial bank money (in M2) was 6.33 trillion dollars.
Raising funds through issuance of fiat money or borrowing money involves encouragement of inflationary financial activities. More money is needed to pay for these activities. Interests or profits are paid in return for lending. Profits from synthetic appreciation of assets are paid to speculators. Financial corruption grows as result of the increase in public and private spending. Taxes are not only used to finance public services, but also they are used to settle public debts, pay interest on public debts, and cover financial corruption in public sector. As cost of products increases, business owners gain more profits to keep up with target profit margin. Since these financial activities do not result in an increase in national product, the value of the currency unit declines to reflect an increase in the general level of prices. It is obvious that the technique of thinking in present monetary system is based on creation of intentional inflation.
Unlike the natural increase in prices which reflects an increase in the real value of products, intentional inflation is the source of all evils;
A relatively small number of individuals and corporations control huge pools of capital. A study by the World Institute for Development Economics Research at United Nations University reports that the richest 1% of adults alone owned 40% of global assets in the year 2000, and that the richest 10% of adults accounted for 85% of the world total assets. The bottom half of the world adults owned 1% of global wealth. Alcoholism, families breaking up and increased criminal rate, public demonstrations, political instability and revolutions represent additional costs of concentration of wealth.
Prices soar. Demand falls. Exports become more expensive to sell. Imports increase. Pressure for increased wages mounts to keep up with consumer prices. Suppliers respond to the fall in demand. Some go out of business. Some reduce number of labors. Since full employment and fast output growth are both promoted by high level of investment, the decline in output growth rate makes unemployment rate rise. The value of the monetary unit declines. Inflation, as a result of the excessive expansion of credit, is responsible for almost all financial crises including the Wall Street Crash of 1929, the 2008 US Mortgage Crisis, the 1997 Asian Financial Crisis, 1998 Russian Financial crisis, and the Latin American Debt crisis. Protection of banking deposits is introduced to justify supporting the financial system in case of crisis, but the process involves social oppression as governments use money owned by innocent people to reward financial institutions for their reckless excessive expansion of credits.
Giant lenders generate interests and redirect local economic plans and political decisions in such a way to be in their favor.
Based on this technique of thinking, the objective of the monetary policy has changed. While the primary aim of any sound monetary policy is to reach an optimal level of output growth in order to meet the economic requirements of the community and to ensure full employment of available labor force, the real choice becomes between more or less output growths coupled with more or less inflation. Economic growth becomes dependent upon availability of money. Over and above, issuance of money covered by currency backing involves hoarding of monetary resources.
In order to lessen the ghastly impacts of inflation, monetary and fiscal policies are directed toward controlling quantity of money. The monetary authority controls interest rate, bank discount rate, banking liquidity ratios, quantity of issued fiat money, and rate of currency exchange. The government controls prices, wages, government spending, and taxes. A country may apply a spending cut policy at the expense of raising unemployment rate and reduction in the rate of output growth.
Presentation of an alternative monetary policy
Recent voices have been raised to emphasize the necessity of getting rid of inflation. With reference to the National Emergency Employment Defense (NEED) Act of 2011, HR 2990 introduced by Congressman Dennis Kucinich, it is stated that “the purpose of this act is to create a Monetary Authority which shall pursue a monetary policy based on the governing principle that the supply of money in circulation should not become inflationary nor deflationary in and of itself, … and to abolish the creation of money, or purchasing power, by private persons through lending against deposits”.
The target of optimal output growth with full employment can be achieved without producing inflation. The idea is very simple. Two parts are involved in each exchange transaction; a payer pays an amount of money and a recipient receives the same amount of money. The exchange process has no effect on the quantity of money in hands. Based on this simple truism, the target of economic growth can be achieved with constant quantity of money. Instead of controlling quantity of money, an alternative monetary policy can be set to control movement of money in order to ensure that money is earned in return for contribution in productive activities. National output is the real currency backing. The new approach requires transformation of present monetary system to a closed monetary system.
According to the closed monetary system, a governmental monetary authority will exclusively provide all banking services in local and foreign currencies. Currencies are exchanged at the valid market exchange rate.
With regard to money in local currency, cash money will be recalled for cancellation and banking deposits will be transferred to the monetary authority. Unrestricted interest-free deposit account in the name of the money owner will be retained by the authority. Since all payments represent transfers between accounts with the monetary authority, total of deposits will remain constant. The mechanism of the system is described as follows;
The monetary authority will not issue money. For sundry expenses, prepaid cash notes in several denominations or prepaid electronic cards with or without ceiling, will be issued by the monetary authority and sold to the account holder for its face value.
Banking deposits will be replaced by funds raised by the monetary authority in order to finance real productive activities through financing entities. The monetary authority will generate profits out of provision of funds. Profits represent new source of public revenue.
Present interest-based lending system will be replaced by current capital finance system. Financing entities shall replace present banks and lending institutions. They are highly specialized and well-equipped for-profit entities act as an intermediary to finance productive projects (or trading deals) under the supervision of the monetary authority.
Upon request of the financing entity, cost of the project will be transferred from its account to the account of the provider of goods or services. Upon request of the payer, revenue of the project will be transferred from his account to the account of the financing entity. The debit balances of the financing entity which relates to the project will show the movement of the capital invested by the monetary authority in the project. The financing entity will keep separate historical accounting records for each project.
The relationship between a financing entity (as an intermediary), its customer (as a partner), and the monetary authority (as a financier) will be based on profit/loss sharing contract. The contract will specify the initial capital of the project and the minimum capital share which should be maintained by the partner. It will also show the profit share of each party in return for his efforts or work.
Profit is recognized on cash base after capital is being fully refunded. Loss is recognized by liquidation of the project. Capital refund will be made in proportion to the balance of invested capital. On recognition date, profit shares in return for work will be paid, and then balance of profit (or loss) will be distributed among the partner and the financier in proportion to the accumulated invested capital computed on daily base.
The closed monetary system has many advantages. Issuance of money, borrowing, or reliance on foreign investments will be abolished. Stealing, smuggling or hoarding of money will be discarded. Output growth will not be dependent upon availability of money. The inflationary roll of money will be avoided. Neither international nor national controls over money supply will be employed. A country will not be liable to retain currency backing, foreign currency reserve, or even liquidity reserves. Instead of seeking foreign funds, a government will use its revenue of foreign currencies to import foreign assets. Since each deposit account will provide a complete record of receipts and payments of the account holder, the system will help creditability studies and introduce effective tool to combat financial corruption, and eliminate illegal operations, tax evasion, and procrastination in paying debts by a wealthy man. The current capital finance system suits different cash flows of different projects and different customers. The money creation process will not be a valid issue.
The views expressed here are undoubtedly drastically different from the views of other researchers. However, financial distress is increasing and people will, sooner or later, realize the truth and make concert efforts to gradually embrace an alternative system that would reflect advance the needs of humanity as a whole.
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