John Tomlinson

A Challenge to Banking

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SECTION TWO - Honest Money

Serious Surgery

The question must now be asked - and it is a serious and hard question: do we wish to change our current dishonest banking and monetary system for an honest one?

If we do not, then this is no more than an academic exercise. If we do, we can actually begin the process of seriously addressing the problems of inflation, debt, unemployment and growing government budget expenditure.

Of course, none of us is free to wave a magic wand and make it all happen just as we wish. But, each of us is capable of thinking the problem through, learning what needs to be done, and influencing our political electees. Have you ever noticed how, when enough people set the right example, their leaders follow?

The steps required to stop the creation of new units of money by the banking system are fairly straightforward. Legislation will have to be enacted which makes new loan agreements legally unenforceable from the date of the Act. The Act will have to deal with all existing law which offers protection to any sort of lender, depositor or creditor. It will have to remove any form of debt collection, any assistance to debt collectors and any action against debtors - including bankruptcy - from the police, the courts and all other areas of government authority, except perhaps in matters of taxation, for debts incurred, credit given or deposits made after the date of the Act.

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Option 1: allowing existing debt to continue

Under this option, there will be no change for debts already in existence, credit already issued or deposits made prior to the date of the Act. They will be enforceable under the law applying at the time of the agreements into which the parties entered.

The changes required in taxation rules will require a similar approach. To put interest payments and dividend payments on a level playing field, either dividend payments will have to be allowed as a deduction before tax is calculated or interest payments will have to be made from profits after tax. With respect to existing debt, many companies are so dependent upon debt finance that they would not be able to meet interest payments from profits after tax. For them to survive, they would have to continue to pay interest from income before tax. Where existing debts are allowed to continue, therefore, the tax rules, which existed immediately prior to the Act, must continue to apply to debts incurred before the Act.

Following these changes, debt will no longer be an attractive option and the money-lending activities of commercial banks and the banking system as a whole will cease due to lack of security.

Existing debt will be repaid over time, as their various maturities are reached, bringing home units of money which have been removed from their domestic market-places by either a time or a geographical factor. The real domestic money supply will then become apparent and the process of accurately measuring both its domestic and its international exchange value can begin. But, this process cannot begin until all existing debt is repaid. That could be a long time indeed.

For many, these changes will not be enough. They leave the current extensive burden of debt in place. Businesses could still be made bankrupt under the law covering existing debt. Interest payments will still be required. Either could continue to add to the growing roll of the unemployed.

The cost to taxpayers of interest on government debt is gigantic. This is a cost about which many can ask valid questions. Why, when the government is the only legally authorised creator of money, do governments license others to create it and then pay interest to those whom they have licensed on the new money created? It is more normal for licensees to pay royalties or fees of some sort to whoever grants the license. Banks should be paying the governments fees. Governments should not be paying interest. Elimination of interest payments from government budgets can reduce them substantially.

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Option 2: converting all debt to equity

The conversion of all existing debt to equity will resolve these additional concerns. Complete conversion is a more radical and thorough solution. It will, of course, require a more complex legislative package. The nature of the relevant legislation will obviously vary from country to country. The purpose here is merely to outline the essentials.

New legislation will be required to repeal all existing law which offers protection to any sort of lenders, depositors or creditors. It must also, except in the areas of taxation, immediately remove from the jurisdiction of the police, all courts and all other areas of government authority, any form of debt collection, any assistance to debt collectors and any action against debtors - including bankruptcy.

Simultaneously all existing debt must be converted to equity. Conversion will be an enormous task. Title to the unpaid portion of goods will need to revert to the seller or to the finance house, depending on which had issued the credit. An exception to this can only be allowed when both parties agree to retain an investment as a debt - so long as each party acted in the full knowledge that the debt will no longer be legally enforceable.

To resolve any bona-fide disputes which will naturally arise from the above two acts, a system of special Courts of Equity will need to be established, to which parties unable to agree can appeal for arbitration or determination. These courts can be self-financing, deriving their costs from fees set as a predetermined portion of the disputed equity. Fees would be paid proportionately by each contestant in a ratio determined by the court. It will be in the interest of both parties to settle before fees are imposed. Pressure would be on each to find a basis for agreement and thus to avoid these costs.

The conversion of all debt to equity will raise questions about the strength of the various claims on the actual cash held by each bank. There will not be sufficient cash in any bank to meet the claims of all its depositors. Claims will have to be honoured in some order of priority. Current or cheque account depositors who have lodged their money in the bank for safekeeping, should have a preferential claim to those who deposited their funds in interest-bearing accounts for investment purposes. The latter would then find themselves actually having to bear the risk of investment.

Unsatisfied deposits will have to be converted to shares in the bank itself. Each bank is a borrower from its depositors. So, each deposit remaining after the allocation of cash will have a claim on a portion of the total remaining assets of the bank. By issuing shares in lieu of cash, banks will become giant holding companies, owned by both the banks' original shareholders and their unsatisfied depositors, each in proportion to their particular contribution.

Individuals in debt will have to issue shares in their assets in lieu of debt. Companies in debt will have to issue shares in themselves in lieu of debt. Lenders will thus become part-owners of the assets which their loans helped to acquire. As a result, individuals or existing shareholders may no longer be able to retain full control of assets acquired through debt.

In the case of individuals, it may be that joint ownership of an asset is established with one or more of the lenders becoming entitled to exercise control over that portion of the assets reasonably agreed to represent the unpaid loan balance. If the asset was, for instance, a house, a fair rental can be determined for its use, and the borrower will be required to pay his new co-owner the appropriate portion of the rental. Or, if agreed, the house may be sold. The borrower and the lender will now each own a portion of the house. Each will be entitled to his share of the proceeds of the sale.

In the case of a company, new shares will be issued to replace debt. New shareholders will be entitled to exercise their voting rights and control may shift to the new shareholders.

Governments are amongst the biggest borrowers. Converting their debt to equity is a different matter. While governments can issue shares in their tangible assets, they cannot issue shares in themselves. They can, however, mint new notes and coins in a quantity sufficient to equal the total of any government debt remaining after the conversion of government owned tangible assets to shares.

The actual physical printing of money is seen by many as inflationary by definition. This is not necessarily the case. Some printing of new notes is not inflationary. To the extent that banks had loaned money to governments, the new money created would simply return to the banks as tangible units against which depositors could legally claim. The money supply would then not increase. Its form would merely change. Depositor claims without real substance behind them would become depositor claims with substance behind them.

Repayment of government debt to lenders other than banks by this method will simply give actual physical substance to units of money removed from the market-place by a time factor. Of course, once returned their presence will be felt. But that would have happened anyway. When the debt had matured, they would have been returned as demand deposits and their presence would then have been felt. The worst that can be claimed about minting new notes and coins to repay government debt to other than banks, is that it will bring forward the timing of inflation which was already in the pipeline and due to occur at some future date.


Sound Money
We explore the consequences of the conversion from a debt based system to an equity based system. The possible changes in social and economic terms and how we would have to re-assess the value of money, good and services.

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