Somik V. I., Moroz I. O., PhD Nezhenets E. V., Miсhaylenko O. G.

Oles Honchar Dnipropetrovsk National University, Ukraine

DEBT-FREE MONEY: FEATURES AND ECONOMIC ROLE

Humanity stands at the threshold of fundamental changes in the financial system. People and even entire states are swallowed up in ever-rising levels of debt. There is a point of view that the crisis we are now watching has been provoked by features of credit system in developed countries, first of all, in the USA. So we are faced with the need to enrich the existing theoretical basis and to work out new approaches to the financial policy development.

Debt-free money  – sometimes called «publicly-created money» – is money created by a public body, for example, an accountable public body, which has the power to create money on behalf of the people; the profit from creating this money goes directly to the Exchequer or, in other words, directly into the public purse, so that the people may benefit financially from the measures [1].

The publicly-owned State Bank creates «debt-free money» when it prints the notes which it sells at face value to the private banking system on demand. The profit – called seigniorage – is simply the face value minus the cost of printing. This sum is paid to the Treasury as, effectively, a debt-free input to the public purse. Around 5–10 % of money in highly developed countries circulation are notes created by the State Bank. With the ever-declining use of cash, this debt-free seigniorage revenue is reducing all the time. It is money created by a public body, the profit of which benefits the people [1].

For example, in the United Kingdom in 1948 around half of all money (46 %) in circulation was notes and coins which were created debt-free by the government. Nowadaysthe proportion of money created without debt in the developed countries is about 3 %. And even these 3 % bring the state 1,618 million pounds of income. So the state loses the debt-free benefit of the public purse in the form of seigniorage. The government has power to create money debt-free [2].

The private banking system creates almost all the money out of nothing. The money did not exist before the bank created it. As Richard Greaves wrote in the November 2001 Prosperity, «For as long as the power to create money is in the hands of private interests who do it for profit and control, we can never say that we live in a democracy» [1; 3].

And what are the advantages of debt-free money?

1. It can stop the continuous stimulated growth of costs and prices. The economy has to keep growing to meet the demands of debts.

2. Debt drives poverty. The way the money is created leads to domestic debt in the system, which leads to unsustainable levels of debt at a personal and public level. Thus, debt-free money is a major part of an anti-poverty platform.

3. Debt drives huge bank profits and gives them authority. Banks represent a form of «hidden government». Banks make huge profits because people’s money supply is, essentially, privatized and banks have a virtual monopoly on its provision. Money that banks receive through this can be beneficial for people.

4. The democratization of economy. This requires the democratization of the power to create the means of exchange – the money – which is necessary to survive.

When money is being created as a debt at its point of origin, then it will feed into other debts throughout the economy and require more people and businesses to go into debt to service them, which leads to another increase in the debt-based money supply, which leads to more people and companies acquiring debt, and so on and on. Creating debt-free money is the way to stop this unsustainable growth [1].

The only tool to stabilize the monetary value is through the public management of the amount of money in circulation. This could be carried out through the control of lending money to the banks and through the fiscal policy. Specifically, in case of inflationary state, lending money to the banks may be curbed, or the money in circulation could be sucked back by raising taxes or cutting government spending. In case of deflation, demand for money by the banks would be weak, so that government has to take a strong leadership by spending more than tax revenues with newly issued money. In this way, complicated monetary policies such as the manipulation of required reserve ratio, discount ratio, and open market operations under the system of money as debt are no longer required.

Finally, it is posed that debt-free macroeconomic system is far superior to the debt-burden current macroeconomic system in a sense that it cannot only liquidate government debt but also attain higher economic growth.

The list of references:

1. Money reform reformer policy policies [Electronic resource] // Sovereignty Website Blog of Alistair McConnachie Sovereignty Journal Magazine. – Access mode: http://www.sovereignty.org.uk/features/articles/manifesto07/mreform1.html

2. Our Money Reform brings Democracy and Freedom from Debt Slavery [Electronic resource] // Prosperity. – Access mode: http://www.ismennt.is/not/jonasg/jg/jg06/deptfreemoney/ deptfreemoney.html

3. Publicly-Created Money: The Democratic Imperative [Electronic resource] // Prosperity UK – Monetary Reform & Freedom from Debt Slavery. – 2003. – Access mode: http://www.prosperityuk.com/ 2003/06/publicly-created-money-the-democratic-imperative/

4. Thomas Edison on Government Created Debt-Free Money  [Electronic resource] // Prosperity UK – Monetary Reform & Freedom from Debt Slavery. – 2000. – Access mode: http://www.prosperityuk.com/2000/09/thomas-edison-on-government-created-debt-free-money/

5. Debt Drives Unsustainable Growth [Electronic resource] // Prosperity UK – Monetary Reform & Freedom from Debt Slavery. – 2007. – Access mode: http://prosperityuk.com/2007/04/debt-drives-unsustainable-growth/

6. Monetary Reform [Electronic resource] // Wikipedia, the free encyclopedia. – Access mode: http://www.en.wikipedia.org/wiki/Monetary_reform

7. Miller A. We Used to Have Debt-Free Money [Electronic resource] / A. Miller // Positive Money. A Positive Solution to the Financial Crisis. – 2011. – Access mode: http://www.positivemoney.org.uk/ 2011/10/debt-free-money/