John Tomlinson

A Challenge to Banking

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SECTION TWO - Honest Money

World-Wide Changes

Applied on a world-wide basis, the conversion of debt to equity and the printing of notes and coins to repay government debt, can also resolve the international debt problem. From the perspective of individual nations with foreign debts, it offers a practical means for liquidating their foreign debts without the domestic political and economic sacrifices now being demanded.

Meeting foreign debts

Non-government foreign debts can be met by share issue, in the same fashion as non-government domestic debts. Government foreign debt can be met in the same way as government domestic debt. New notes and coins can be printed to the value of the foreign currency owed by the government at the exchange rate prevailing immediately prior to the payment. It can then be given to foreign creditors as payment in full.

In some cases, this would lead to a substantial proportion of a nation's money supply being in foreign hands. Consider, for instance, the money- supply of the following countries from my 1985 study (as of June/July 1985; presuming no banks hold government debt):

Currencies in billions (bn)

Nation US UK Brazil Mexico S Africa
Currency Dollar Pound Cruzeiros Pesos Rand
Current Money supply 3,136.0 138.5 161,580.0 10,475.8 45.3
Govt. debt
domestic 6,349.9 158.5 205,501.0 7,200.0 43.2
foreign 175.5 12.2 676,401.0 21,933.6 53.3
US dollar equivalent     ($113.3bn) ($96.2bn) ($22bn)
New money supply 9,661.4 321.8 1,043,482.0 39,608.8 141.8

Had each of the above nations converted their total government debt at that time and at those rates, each would have experienced a growth in its total money supply. The United Kingdom would have experienced the least growth. The United States and South Africa would have each found its money supply to have exceeded three times its previous size, Mexico would have found its money supply almost quadrupled, and Brazil's would have increased six and a half times. But there it would end: there would be no further increase. Holders of each currency would look forward then to a stabilising influence rather than the current continued diminution of the level of exchange value.

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Effects on domestic money supply

With the exception of the United States, the amount of money in each domestic market-place initially would have doubled. One third of the total South African money supply, half of that of Mexico and two thirds of that of Brazil would be held in foreign hands. This money would only find its way back into its domestic market-place when it was used by its foreign owners to purchase products exported from, or to travel within, its country of origin.

If Brazil, Mexico and South Africa were each to provide a framework for foreign investment that was attractive, external holders of each currency would wish to invest in those countries. The increased level of economic activity provided by these investments would bring an increase in the demand for money. The increase in demand for money would help to offset its loss of exchange value caused by the return of foreign-held units. Repayment of debt by this method would then trigger a substantial investment boom in each country.

Of this group of countries, the United States alone would immediately experience a substantial increase in domestic money supply: by a factor of three. Therefore the exchange value of the dollar could be expected to be reduced by two thirds and prices and wages could be expected to treble very quickly.

Yet the American dollar would also gain enormous strength if a world-wide programme of conversion were to be undertaken. Eurodollars do not appear in the above figures. They are dollars which have been permanently removed from the American market-place, lodged in non-American banks and in non-American debt instruments.

Through a process of lending and re-lending, the number of such dollars has multiplied to a sum many times the US domestic money supply. The potential for these Eurodollars to return to the United States now poses a major threat to the domestic value of the US dollar.

In a world-wide conversion programme, however, Eurodollars would be converted to shares or other currencies. Eurodollar loans to borrowers in the private sector would be converted to shares. Eurodollar loans to governments would be converted to the currency of the particular borrowing government. Eurodollars would disappear. The threat which now hovers over the US dollar would no longer exist.

The figures above portray the maximum possible increase in the money supply of these nations. In fact, the increases could be significantly less. To the extent that nationalised industries and other government-owned assets can be converted to shares, the amount of paper money required to repay government debt will decrease. To the extent that banks have lent to government, the newly minted notes and coins would be used to repay depositors and would not, therefore, represent an increase in the money supply.


Converting from debt to equity can have many positive benefits, to conclude we look at these benefits and how to ensure they follow conversion.

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