I find this a very difficult subject – but extremely interesting. I hope that socred will give me his opinion on a few thoughts (I do not yet understand the whole scope of the matter):
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What is inflation (according to Douglas)? Imagine a movie theatre:
“Would you call it inflation to issue tickets for every seat in a hall, despite the fact that the hall had never before been filled, or more that a fourth of the seats sold, because there not being enough tickets available?
Inflation would consist in issuing more tickets than there are seats.”
(New English Weekly June 16, 1932 - according to Ezra Pound)
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How does money come into “circulation”?
As far as I understand it (simplified):
Central banks create money out of nothing and lend it to private banks, let’s say at an interest rate of 3 % --- private banks then lend the money to companies, let’s say at an interest rate of 6 % --- companies then produce and distribute products, they pay wages and salaries etc.
The consumer then, with this money, buys the products and therefore gives the money back to the companies.
The companies pay the loans back to the private banks (plus 6 %) --- the private banks pay the loans back to the central bank (at 3 %)
The central banks destroy the money (because paper money is not very durable) and issue new money, created out of nothing, as loans to private banks. The whole thing starts again.
The good thing is that therefore the money supply will not increase too much. The interest rates determine which companies or persons really expect to be able to pay back the principal plus interest. Central banks only create money (out of nothing) as long as private banks need it. Inflation is – almost non-existent?
Problems: Where does the interest come from? Money cannot “multiply” in mysterious ways. Money is issued as e.g. 100 Dollars – but it has to come back as (at least, depending on the time) 100 Dollars plus 6 %.
In other words: If fortunes grow because of interests – it automatically means that debts are growing somewhere else. (You needn’t be in debt to pay debts because debts are included in all prices, just as labour is included in the price calculations. Even large companies that have enough capital will “charge themselves” interests (earn these interests) in addition to what they earn as profit.)
Moreover, since fortunes do not stop growing if deposited in a bank at an interest rate – debts do not stop growing. Even if all countries pay back their debts – the banks will have to find somebody else to pay the growing debt. This can be done via consumer debts. However: consumers will be broke much faster than countries. Plus: who will pay taxes if everyone is broke? Who will buy the products if everyone is broke? (Look at the situation in Great Britain: Consumer debts are already higher that the gross national product! The U.S. is headed the same way in consumer debt – and the Iraq war sure is a problem for national debts. It is interesting that Keynes is usually made responsible for national debt – which is not untrue. However, it was Ronald Reagan, who made U.S. debt rise to astronomical heights – because of military. And Reagan was the first President not to follow Keynes ideas – but instead the monetarists ideas, as invented by Milton Friedman.)
More problems: Countries are not allowed to get loans from central banks without interests. Normally, they pay the “free market” interest rate and borrow money from private banks.
Fortunes are per se – at least in part – very unreal. It becomes visible every time one of those “bubbles” burst. This complex can lead the world financial system into a crisis, in the long run it will probably lead to a collapse.
Therefore I find it very important to consider the ideas of Major Douglas or, for example, the ideas of Silvio Gesell.
