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Edition 02 :10 February, 2013.




Summaries of monetary reform papers by L.F. Manning published at


NEW Capital is debt.


NEW Comments on the (Jaromir Benes and Michael Kumhof) Chicago Plan Revisited Paper.


DNA of the debt-based economy.

General summary of all papers published.(Revised edition).

How to create stable financial systems in four complementary steps. (Revised edition).

How to introduce an e-money financed virtual minimum wage system in New Zealand. (Revised edition) .

How to introduce a guaranteed minimum income in New Zealand. (Revised edition).

Interest-bearing debt system and its economic impacts. (Revised edition).

Manifesto of 95 principles of the debt-based economy.

The Manning plan for permanent debt reduction in the national economy.

Missing links between growth, saving, deposits and GDP.

Savings Myth. (Revised edition).

Unified text of the manifesto of the debt-based economy.

Using a foreign transactions surcharge (FTS) to manage the exchange rate.



(The following items have not been revised. They show the historic development of the work. )


Financial system mechanics explained for the first time. “The Ripple Starts Here.”

Short summary of the paper The Ripple Starts Here.

Financial system mechanics: Power-point presentation. 


Creative Commons License


This work is licensed under a Creative Commons Attribution-Non-commercial-Share Alike 3.0 Licence




By Lowell Manning                                                  

Version 4  09/02/13


For background work see:


The world is now locked in a debt trap.


You can have debt without capitalism but you cannot have capitalism without debt.


Nor is it possible to have debt without interest, or usury as it has been called through much of recorded history. All major religions ban usury because the payment of interest transfers wealth as unearned income from borrowers to lenders.  That means the major religions morally ban debt. Despite that, those with money to start with or who could mint it or plunder it or control it have almost always been financial and political winners. That is still the case today.


As Stephen Zarlenga in “The Lost Science of Money” says


“[B]y misdefining  the nature of money, special interests have often been able to assume the control of society’s monetary system, and in turn, the society itself.” [1]


This paper will show that in the capitalist system there must be debt to enable the purchase of capital goods and that the amount of debt used to purchase new productive capital goods defines productive economic output (savings=investment).  Because productive debt and economic output in the capitalist system are closely interwoven, capitalism = use of debt. No debt, no capitalism.


The bond between capitalism and debt does not necessarily hold in reverse. There have been periods in history long before the advent of capitalism when communities have gone deeply into debt and had to be rescued through debt jubilees such as the one proposed in The Manning Plan referred to in this article.


In this day and age, practically all money is created as interest bearing debt by private banks. As a result, most of the world is now locked into a debt trap and usury is almost universal. Interest is justified by “lending risk” even though the lenders nearly always take separate security in full for the debt.


The online Oxford dictionaries define capitalism as “an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state”. 


There are a lot of similar definitions that also fail to take one of the basic features of capitalism into account: that investment money usually has to be borrowed [2].  


Monetary reform proposals like those referred to in this paper must take all debt into account if we are to retain some form of capitalist economy. The alternative is to adopt some other cooperative or mutual form of economic organisation. Economic organization evolving over the coming decades might replace capitalism as we know it today; or it might be a hybrid of capitalism that embeds cooperative locally distributed production and consumption, shared use of the commons for the public good and even, perhaps, subsistence systems.


Traditional hoarding has been replaced by deposits in banks.


Most monetary reform proposals (with the exception of the Manning Plan ) fail to account for and manage total debt and interest rates thereby leaving the existing capitalist economy intact. In the longer run they will accentuate the glaring problems of income and wealth distribution, global environmental decay and widespread injustice, especially at the cost of women, that characterize the present system.


In Figure 1, if hoarding is stable, the value of consumption goods and services and new capital goods matches total incomes. There is enough income to “clear the market” and exchange all production. Conceptually, some people in a traditional cash-based economy save some of their income and on-lend it to entrepreneurs to invest to buy the new capital goods. Savings = investment is one of the cornerstones of orthodox economics. The money supply is relatively small because most of it is recycled with each cycle of production and consumption.





GDP = CIRCULATING MONEY x NUMBER OF PRODUCTION CYCLES/YEAR.                                                     


Figure 1 represents a capitalist Savings and Loan model of economy and it forms the basis of the equation Savings = Investment found in most orthodox economics textbooks.


In Figure 1, not all savings are invested, so that in practice new Investment = (Savings minus hoarding). As long as the hoarded savings remain constant as a proportion of all savings and there is no interest paid on the investments, inflation-free growth in the Savings and Loan model shown in Figure 1 is limited only by resource constraints and monopolistic business behaviour.


The main change in the Savings and Loan model over time has been that for most of history savings were physically hidden because there were no deposit banks, whereas these days most savings are “banked”[3] as shown at the lower right of Figure 1.


Despite appearances, the Savings and Loan economy of Figure 1 is far from being debt-free. Assuming the money supply itself is debt-free, as was the case when coin was the primary means of exchange of goods and services, the total debt accumulated in the system is the sum of outstanding loans provided by savers to entrepreneurs plus that loaned to exchange existing capital goods. Hoarded money was taken out of circulation (frozen) and did not begin to participate in the real economy until Savings and Loan institutions developed. Savings and Loan deposits were on-loaned, typically to governments and local authorities, increasing the total debt.


In the debt system the accumulated net savings owed by entrepreneurs in Figure 1 is the sum of outstanding productive capital investment or, more simply the capital employed in the economy.


Capital is debt, and therefore capitalism is debt-based.


Orthodox economics texts are unanimous in defining investment in the equation Savings=Investment as investment in new productive capacity as shown in Figure 1.  In practice, economies have never behaved the way orthodox economic theory would have us believe because many people invest in non-productive and existing productive capital assets like housing and stocks and bonds, creating a non productive “shadow economy” now called the “investment sector” or “paper economy”.


With a constant rate of saving, when savings are directed into non-productive investment instead of new capital goods (productive capital), economic growth in the Savings and Loan model of Figure 1 must stall unless new money is injected into the financial system to compensate for the losses to the investment sector. The growth of the investment sector means that either productive capital has to be generated from somewhere else to compensate for the withdrawals from the productive economy or disposable incomes in the productive economy must fall rapidly. In the present financial system debt to feed the investment sector and prevent failure in the productive economy is created by private banks for profit. This is discussed in more detail later in the paper.


Payment of interest further complicates the basic structure shown in Figure 1. Savers must have “an incentive to invest” otherwise they would either hoard their surplus income or spend it. In Figure 1, as long as the savings go into new productive investment as orthodox economic theory requires, the productivity gains from the investment should be sufficient to allow both for interest payments and for repayments of principal. If the financial surplus from the new investment is not enough to pay both principal and interest, the new investment project will not proceed.


On-lending of savings for production creates productive debt for capital goods while non-productive investment creates secondary debt for existing assets as shown in Figure 1. There is always a total debt equal to the outstanding loans in both the productive and the investment sectors whether the financial system is based on interest-bearing debt issued by private banks or whether it is based on debt-free money.


Failure by economists to take the debt in both the productive and the non-productive sectors collectively into account and their insistence on viewing public debt as independent from the total debt shows just how limited their understanding of the present financial system is.


Periodic debt jubilees freed debtors from the need to repay their debts.


Figure 1 suggests that debt has been around almost as long as money has been used. There are several documented cases of whole countries being bankrupted because the (typically non-productive) investments they made with borrowed money failed. [4]


The debt that forced debt jubilees thousands of years ago was probably also a kind of unproductive “pre Savings Bank” savings and loan debt broadly similar to that shown at the lower right of Figure 1. Peasants may have had to borrow during hard times to maintain their existing production, especially when that production was used to supply the lender’s “city”. The land was often held in common by a tribe or clan. The impoverishment resulting from the payment of interest usury left little alternative to forgiving the debt. Without the produce from the land the “city” itself would die. That historical process may have been a precursor to the feudalism that swept through parts of Europe during the medieval period when those working the land became serfs directly beholden to and literally owned by the lord of the land.


For a long time most investment was non-productive.


Historically, interest rates on borrowed money tended to be high. There was little productive investment because there were few savers willing to lend and not much new technology to invest in. Even many of the wealthy elite hoarded their money. [5] The green coloured text box in Figure 1 shows that in a Savings and Loan system “some savers lend savings to entrepreneurs for new capital goods”. The church(es) and nobles used their “savingsto build cathedrals, churches, castles, manors and stately homes, and had little incentive to invest in new technology. They represented an extraordinarily tiny elite of land-based feudal aristocrats that persisted until the industrial revolution transferred what the French economist Francois Perroux called the “dominant revenue” from land to industry.[6] That was one reason why, until the industrial revolution, lending  became concentrated within a small group of goldsmiths, money lenders and merchants. 


Capitalism has been resisted almost since it began with European colonial expansion, the introduction of improved agricultural methods and land enclosures. From the Levellers in England in 1648 with their manifesto “Agreement of the People” and the Diggers of 1649, to the Chartists and their Peoples Charter of 1838, through Marx and Engels’ famous Communist Manifesto of 1848 [7] to the Paris Commune of 1871, the Communist Revolution in Russia of 1917 and the broad Fabian and Labour movements of the late 19th and 20th centuries, people have been fighting to retain ownership of the commons and (in some cases) the means of production. The various commons movements reject free market capitalism to a greater or lesser extent insisting that the nation’s resources belong to everyone and should not be sold to or stolen by capitalists for profit.


While earlier movements were sometimes motivated by religion the later ones were based on the understanding that the wealth generated by colonial expansion and the industrial revolution was not being shared then any more than it is today. Whatever definition of capitalism you choose, when “a country’s trade and industry are controlled by private owners for profit “ (from the on-line Oxford dictionary referred to above) there is, by definition, little room for cooperation or the common good or even for the planet itself. The bottom lines of self interest and profit are all that matter.


The negative effects of the enclosure of the commons.


Marxism and the other modern social movements grew in the cities due to urbanisation. Peasants didn’t live in large groups and didn’t travel much. In England, for example, the progressive enclosure of the commons by the country’s elite land owners forced many peasants off the land. They migrated into the towns and cities (and to the colonies as indentured labour) to find work in the expanding textile mills and industrial factories at home and on the sugar/cotton/tobacco plantations offshore. Living conditions in the cities were terrible. About 1850, the medical journal “The Lancet” reported that the average life expectancy for males in Manchester at that time was just 18 years.


The capitalist enclosures of land haven’t stopped. Ongoing resource exploitation by privileged corporations encloses the land and the sea as much or more than the agricultural elite ever did because they cover the whole world (or much of it). These days, knowledge is enclosed in the form of patents over almost everything imaginable, from individual genes that occur in everyone’s body, to the seeds and medicines we buy. Even the airwaves, water, education and general healthcare are being enclosed in a far more aggressive and insidious manner than the land enclosures in earlier times. Perhaps, most importantly of all, money itself has been enclosed as described in this paper.


In a broad sense modern enclosures represent ongoing efforts by capitalism to monetise the commons. The more of the world and what it contains can be monetised (and therefore counted in GDP) the greater control capital has over the world and everything that lives on it. In medieval times very little was monetised. Most people sold or exchanged only what they produced over and above their subsistence needs so relatively little money was needed. The advent of modern debt-based banking has enabled much more of the world to be monetised. Further monetisation of human activities and assets requires capital. Ongoing monetisation is a therefore feature of capitalist expansion.


The arrival of Savings and Loan institutions.


As long as hoarding reduced the circulating money supply it severely limited productive investment and growth. When the money supply was constant, investment was dependent on the savings income earners were willing to on-lend. The creation by statute of “Savings and Loan” institutions like the Post Office Savings Banks in countries such as New Zealand and the UK meant that ordinary savers could deposit their hoarded savings without risk instead of hoarding them at home. The savings were government guaranteed and could be on-loaned as shown in Figure 1. To the extent they were on-loaned, new secondary debt was created as already mentioned. Total deposits grew as loans originating from the savings were spent and the money re-banked, because some of that re-banked money was then also saved creating a new Savings deposit. In the savings and loan system operated in countries like New Zealand and the UK savers did not automatically have access to their savings, that were mostly invested by the Savings and Loan Institutions in Government and Local Government securities, but the deposit still remained credited to their accounts. So there was a cascade effect of savings being recycled, passing to new savings deposits, which were in turn invested, leading to more saving and more recycling, and more saving ....  The savings multiplier produced by that multiple legally authorised on-lending is not known. It may not have been large but it was definitely more than 1. That same problem is a principal weakness of all but one (The Manning Plan) of the monetary reform proposals referred to later in this article. The historical facts are there for all to see. If the amount of deposits is limited, as some of the reform proposals intend, the response will not be a reduction in debt, but an increase in the speed of circulation of the available savings deposits.


From the mid 19th century, the secondary on-lending of savings deposited with Savings and Loan Institutions therefore tended to increase debt without directly increasing the money supply. Instead of growth of the money supply the speed at which the existing money supply circulated increased. The Savings banks paid interest on their clients’ deposits, generally in the region of 2-3%. Savers were then “hoarding for profit” instead of hiding it and taking it out of circulation.


The critical element of the Savings banks and other secondary lenders such as building societies, lodges and the like was that they often lent for non-productive purposes like new and existing residential property. The actual construction of new houses is part of the productive output (GDP) but new houses themselves are not new productive capital investments because they do not add any new productive capacity. While the activity of building is productive, the investment by the house-buyer in the property itself is not. Housing debt is part of the grey box “new investment” at the lower centre of Figure 1. The money used for initial construction activities first makes a round of the productive cycle then some of it finishes up “hoarded” in existing assets. The buyer on the other hand usually finishes up with just a large long-term non-productive interest-bearing debt. Productive transaction account money is used to build a house but capital  (usually debt) is needed to buy it.


Traditionally, while wealthy elites built vast palaces, housing was not a very important part of ordinary family investments. In many areas of the non-industrialised world this is still the case today. Increasing housing expectations (bigger and better houses, more and better fittings and the like) have become an Achilles heel of the capitalist system. The proportion of incomes committed to housing has skyrocketed, depriving the economy of productive investment. That is why nobody in developed capitalist economies can find a way to provide “affordable housing”.


The interest payments on those non-productive loans for housing had to come out of productive sector incomes as did the principal repayments on the original amount borrowed. That is not possible in the Savings and Loan model of the economy shown in Figure 1 without injection of new money into the financial system because the speed of recycling of savings could not increase quickly enough to meet the extra demand for housing finance. The immediate result of rapidly increasing non-productive lending for housing tended to reduce disposable incomes and deflate the productive economy. To avoid deflation, ever more new money had to be injected into the financial system. Instead of the same pool of money circulating faster, some way had to be found to make the pool of money itself grow.


Companies and limited liability legislation led to a high demand for private debt and the expansion of industrial capitalism. 


One early response to the lack of money in countries where precious metals were being used for coins was to reduce the amount of precious metal in the coinage. [8]  Another way to increase the money supply was to create what is called  fiat money in the form of tokens or banknotes that have no intrinsic value. That has been done at various times throughout history.


Until the British Parliament passed the Joint Stock Companies Act in 1844, companies in England could incorporate only with a royal charter or a separate Act of Parliament. There was only a handful of joint stock companies at the start of Queen Anne’s reign in 1702 and, with a few famous exceptions like the British East India Company and the Bank of England, they were mostly chartered for privately owned  “turnpike” roads. After the South Sea Bubble crisis of 1720 there were no new joint stock companies established in England for more than a century. So there were very few large businesses in which to invest and only a small pool of savings to supply the capital that would have been needed. Most savings that were not hoarded were invested in government debt. That meant there was very little industrial expansion.


Limited liability was not available in England until the Limited Liabilities Act of 1855.


The result of such limited access to capital prior to the early decades of the nineteenth century was that in England, until 1826, capital was still mostly accumulated through partnerships. For a time there were hundreds of small “country banks” there that issued their own notes. They were limited to 6 partners and many of them failed during the 1825 banking crisis. The Country Bank Act of 1826 allowed larger commercial country banks to be established outside of London.[8] They and their smaller predecessors helped power what is called the First Industrial Revolution from about 1790 through to the mid 19th century. The subsequent Bank Charter Act of 1844 limited the powers of those British regional and retail banks, and gave the Bank of England a monopoly on the issue of bank notes. It also established a gold standard whereby the Bank’s notes over and above its share capital (then 14 million pounds) had to be backed by gold.


Notwithstanding the limitations in the Bank Charter Act, the new legislation opened the door to a vast expansion of demand for private debt and greater risk-taking to fund industrial expansion once James Watt’s patents [35] on the steam engine expired in 1800. Boulton and Watt produced just 496 pumps and engines under patent in 25 years up to 1800 and 1164 by 1824, but they gave Britain a head start in industrial development. The Bessemer process for making steel was also patented in 1855. Those and similar patents slowed the speed of industrialisation through the first part of the nineteenth century, illustrating some of the negative effects of capitalism and patent systems.


Inflation was negligible for six hundred years.


The introduction of steam technology and rail led to rapid industrialisation and greater urbanisation that reduced the excessive weather dependence of income earners nationwide. Despite the changes in population demographics, the mass of peasants and others who had few assets and very little money continued to hoard what little money they had. [12] At that time, few ordinary people had bank accounts, in part because there was no network of deposit banks where most people lived. People had hoarded their savings for more than 500 years because there had been little or no inflation. Many people continued to do so after the mid-nineteenth century because there was still no inflation despite the introduction of Savings banks in Britain in 1861 and despite the increased pooling of savings for investment. The price index there rose by a factor of just 6 over the 600 years from 1300 to 1900; a doubling period of about 250 years compared with a doubling period of 10 years in some more recent decades. Aside from two brief historical bursts of inflation during the early Tudor period when prices increased threefold because the Crown needed to generate income by debasing the currency to pay for wars and for the extravagance of the Royal Court, and the Napoleonic wars when prices doubled, there was no inflation at all for six centuries.[10] Even in the face of rapid population growth and industrialisation, prices in Britain fell during the industrial revolution after the 1844 Bank Charter Act was introduced. That was due to the impressive productivity gains achieved from technological development.[11] The social costs created by poor living standards were enormous because the benefits of increased productivity were not shared then with the workers who produced the additional goods and services any more than is the case today. The late nineteenth and early twentieth centuries saw industrial capitalism at its worst, as brilliantly portrayed by contemporary authors like Charles Dickens.


For most of the period 1300-1900 only a relatively small proportion of the total economic output was monetised. Except in the towns, families generally consumed and exchanged what they produced. Moreover, while prices for staple commodities varied wildly in the short term, there was considerable elasticity of demand because many people could shift to cheaper alternative products. The Savings and Loan model shown in Figure 1 coped well with the vast increases in output through the industrial period until long after World War II, as well as with war inflation that doubled prices in both WWI and WWII. The legislative changes previously referred to enabled the money supply to grow and savings to be recycled and there was relatively little interest-bearing private bank debt. The new regional banks helped power what is called the Second Industrial Revolution beginning in the mid 19th century as the development of steam technology reached its peak and railways expanded.


Productive investment is the sum of all outstanding current and past investments.


The productive investment from the green box in Figure 1 “Entrepreneurs borrow savings to buy capital goods =debt =Capital = capitalism” can be accumulated over time. The total productive investment at any time must then equal the sum of the outstanding principal on current and past investment. The total national economic output (Gross Domestic Product or GDP) is also a function of the circulating money supply in Figure 1. To the extent GDP is created through productive investment rather than monetisation of existing production there must be a direct relationship between the outstanding productive debt and GDP at any given point of time. [13] A good case can be made that much if not most of measured economic growth in recent decades results from monetisation of existing non-monetised output rather than any actual growth in GDP. Child care, elderly care, the fast food industry and a sizable part of the healthcare industry are just a few examples among many.


If we accept the definition of capitalism as an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state” (or something similar), then the available productive capital is represented in Figure 1 by the cumulative outstanding invested savings so that:


No productive investment means no capital and no measured economic growth (the increase in GDP output measured as shown below Figure 1) other than what arises from monetisation of existing activities. In Figure 1, as an economy becomes more monetised the physical money supply must be increased to avoid deflation.


The use of new fiat money came with the Bank of England in 1694, gradually replacing the tally sticks used for 700 years.


In the absence of enough precious metals, notwithstanding the 19th century gold rushes, the money supply problem and the associated supply of productive capital were eventually resolved by creating new fiat money. When, starting in 1690, the American colonies began one by one to print their own fiat money (called colonial scrip) to fund their economic expansion, their economies boomed because their money supply increased. The colonies injected publicly-issued and owned debt-free fiat money directly into new productive economic activity. That increased the money supply pool in Figure 1. There was little inflation because population growth and economic development were both high. More money and more production produced more saving and more productive capital for investment.


In 1751 the British government restricted the use of colonial scrip but did not ban it entirely. The restrictions related to using the colonial bills as legal tender to repay debt that was likely to have been lent in sterling. The British government action caused a classic extension of the issues arising from Figure 1. It was impossible for the American colonies to expand without new money just as it was impossible to expand the British industrial economy without new money, even with the use of split tally sticks. [14]  Split tallies were a form of Government fiat money that had already been in use in England for 600 years before the Bank of England was established. The limitation of tallies was that they represented government debt at a time when the crown’s contribution to economic activity was still only around 6% of GDP [15] and they were cancelled almost as fast as they were created. They were unsuitable for paying war costs because soldiers and their suppliers needed cash. Tallystick stocks (the forerunners of stocks and bonds) were of little use to those who paid little or no tax. Tallysticks or “Tallies” as they were often called introduced new money into the circulating money supply shown at the left of Figure 1. They may have led to some increased saving but their impact on the capital formation shown in the green box of Figure 1 in England (and later the UK) was probably modest. In the past, government productive investment was not capitalist because it was neither private nor for profit. That has changed in recent decades to the extent government productive capital investment has been made on the basis of a “business model” that operates like a private investment and is also profit seeking.


The creation of the Bank of England in 1694 provided a new source of fiat money.[16] The actions of the bank have often been misrepresented because government debt had been around for many centuries. The new feature of the Bank of England was that its first loans to the government were created as perpetual interest-bearing debt. Subsequent debts to the bank were not perpetual and many of them were eventually repaid. The main drawback of the Bank of England was that it was established as a privately owned joint stock company. Its debt was issued at interest for private profit. That represented a major change from the tally sticks created by the government and the colonial scrip created in America.[17] The Bank of England’s ability to create notes was strictly regulated and its main source of income for many years aside from Government debt was in the discounting of commercial Bills. For a time, Bank of England notes were “as good as gold”.[18] The Bank’s main function in its early years was providing interest-bearing loans (debt) to the government to fund government deficits during the political instability of the 18th century when increasing taxation was politically impossible. In 1719 it was, however still a small lender. At a time when the government debt was £50 million the Bank of England’s share was a little over £3 million, in the same order as that held by the British East India Company. By contrast the South Sea Company held nearly £12 million. Individuals held the rest of the government debt either in the form of redeemable debentures or as annuities (pensions).


The Bank of England grew by financing wars.


Most government debt in the early 18th century represented the secondary lending of individual savings. As already mentioned, government expenditure did not necessarily directly increase productive capital in the green box of Figure 1, though there may have been “downstream” productive capital raising by government suppliers.


Prior to the onset of the industrial revolution the Bank of England’s impact on the British economy was small.


“The 18th century was a period dominated by governmental demand on the Bank for finance: the National Debt grew from £12 million in 1700 to £850 million by 1815, the year of Napoleon's defeat at Waterloo.” [19]


The vast bulk of that debt was created during the Napoleonic wars though not all of it was Bank of England debt. Referring again to Figure 1, the new wartime money created as interest-bearing debt was added to the money supply while existing manpower and resources were mostly diverted from existing productive output to the non-productive military. Unlike previous centuries, plunder was usually insufficient to pay for war even when you were on the winning side. And unlike the American colonies, Bank of England debt creation allowed more new money to be circulated than was offset by population growth or increases in productivity. Private secondary lending to the government accentuated that effect. Prices and incomes in England therefore rose during the Napoleonic period because total production did not increase in proportion to the increase in the money supply.


The Napoleonic wars increased government debt but they did not necessarily increase the capital base in the green box of Figure 1 in proportion to that new debt. No doubt armaments and shipbuilding businesses among others borrowed capital and expanded greatly. Capitalists usually benefit from war and war lending as was well demonstrated by the actions of the major banks and corporations during and after  WWI and WWII.


Industrialisation and much greater productivity allowed the money supply to be increased while at the same time creating substantial financial surpluses (saving) that could be recycled into new productive capital investment and secondary investment as shown on the right hand side of Figure 1. From 1861, as previously mentioned, ordinary people could bank their savings in the Post Office Savings Bank where their deposits were government guaranteed, thereby reducing hoarding and providing a new pool of Savings and Loan investment funds [20]. Throughout this period and later, most bank loans were business overdrafts that directly supplied new fiat money to the productive circulating money supply (today’s productive transaction account balances) in Figure 1.


The rapid increase of debt-based money came with financial deregulation.


As late as 1960 in New Zealand, about 90% of commercial trading bank lending was to businesses and only 10% to households. In March 1976 when regulations limiting interest on deposits were revoked, Savings bank deposits totalled NZ$ 4.2 billion while Trading bank deposits totalled just NZ$ 2.6 billion. Trading bank lending was NZ$ 1.8 billion. In New Zealand in 1976 there was about NZ$ 0.3 billion of cash and coin in circulation.[21] As noted above, the figures show that bank lending was largely to supply working funds actually used for the physical production of goods and services. Working funds are not capital in the capitalist sense. They are the productive transaction account money (typically borrowed from banks) used in the productive cycle which is then cancelled when the product is sold. That money forms the dynamic balance of the productive part of M1 in the System for National Accounts (SNA system).  Transaction account money is used to build a factory but capital  (usually debt)  is needed to buy it.


The subsequent period of deregulation in New Zealand amounted to a financial revolution.


By 2003, the debt situation in New Zealand had been reversed.  By then, private banks were creating out of nothing more than 90% of household debt [22] compared to 20% in 1985 and 10% in 1960.[23] The fundamental change that resulted from financial deregulation in New Zealand and around the world was that savings based investment was switched to investment using private interest-bearing bank debt. This is shown in Figure 2.


In Figure 2 existing savings in the blue box are no longer being recycled primarily into new economic activity as they were in Figure 1. They are instead typically channelled either directly or through so-called institutional investors into the exchange of existing non-productive assets. In that sense they perform the same function as the Savings and Loan institutions previously described. To the extent the savings end up in institutional transaction and reserve balances secondary lending is on a one to one basis and there is no cascading effect from multiple secondary lending. 


The financial revolution was that the savings in the savings and loan structure of Figure 1 that previously funded new productive investment were replaced by new bank debt as shown in the pink box of Figure 2 while at the same time the secondary non-productive debt in Figure 1 was also replaced with new household bank debt shown in the lavender box of Figure 2. That new bank debt for households is mainly circulated as mortgages, student debt and credit card debt.




The closed money supply shown in Figure 1 has been replaced by the open ended money supply in the form of interest-bearing bank debt shown

 in Figure 2.


The resulting increased money supply created as interest-bearing debt created greatly increased capitalist opportunities for private profit seeking, especially in the private financial sector. That is, referring again to the French economist Francois Perroux, when the “dominant revenue” switched from the industrial sector to the financial sector where it has remained ever since.


The speed of circulation of the money supply has reduced as interest-bearing bank debt has increased.


One effect of the change appears to have been a reduction in the speed of circulation of the money supply. It may now be less than 1 because, as shown in the yellow box of Figure 2, there is less secondary (non-bank) debt because not all bank savings deposits are recycled into circulation. Since savings deposits are liabilities for the banks, the banks cannot on-lend them. For practical purposes, except for deposits on-loaned on behalf of and with the express authorisation of the deposit holders, bank savings deposits are withdrawn from circulation, or frozen.


Historically, the speed of circulation of the debt-free money supply in Figure 1 may have been roughly 2.5.[24]


A reduction in the speed of circulation of the broad money supply in Figure 2 means there is a much larger pool of money and therefore much more profit for the financial institutions that have created nearly all that money supply. The banking system itself has become a parasite on the productive economy because its financial power arises from exponentially increasing privately created interest-bearing debt. Aside from providing day to day banking services the banking sector does not contribute to the economy. Instead, its retained profits constitute savings in Figure 2 that under existing banking rules it can use to create new debt at the rate of about $12 for every $1 saved. It also passes to deposit holders unearned interest income on their rapidly rising pool of hoarded savings causing systemic inflation in the productive economy as described earlier. More debt leads to more interest, more inflation, and an exponentially expanding banking sector so that the current financial system is truly capitalism run amok.


The profound difference between Figures 1 and 2 is the introduction of additional interest-bearing bank debt in the pink and lavender boxes in Figure 2. 


The amounts involved are now vast. The banks’ interest income, their claims or lending rate less their funding or deposit rate, used to be based on a relatively small amount of bank debt. The interest now being paid on a vastly increased volume of interest-bearing bank debt has been the primary cause of inflation and the boom-past cycles in recent decades.[25]


Figure 2 is simplified for clarity. In practice, the supply of capital for business or accumulation of funds and debt for the man in the street is not entirely limited to bank debt. As shown by the dotted line at the centre right of Figure 2, share offerings and issues of debenture stock and other financial paper still occur, but Figure 2 is a reasonable first approximation. These days businesses borrow from banks, so banks supply the bulk of entrepreneurial capital as well as day to day working funds. They add their own bank interest “spread” or margin to the interest they pay on the resulting deposits, thereby increasing the price of debt for their own profit. Instead of one cost of borrowing, the interest paid on savings as in Figure 1, there are now two. The borrower must pay the cost of interest paid by the bank to the depositor (the “savings” in Figure 2) and the margin cost of interest (the bank spread) to the bank. As discussed above, that has set the capitalist system (inflation, debt growth and interest) into overdrive in comparison with the Savings and Loan model shown in Figure 1.


After the US dollar was de-linked from gold in 1971, the banking system captured the money supply for profit.


The monetary revolution was that deregulation allowed the private banking system to capture the money supply for profit once the US abandoned the US$ gold peg in August 1971. Once US dollars could no longer be converted into gold, bank deregulation meant that private bank debt world-wide suddenly became 100% fiat money with few controls on the amount of debt created.  


The monetary revolution has reinforced capitalism through increasing the money supply for profit. As previously described, the interest on that money supply creates a feed back loop that continually transfers wealth from debtors to deposit holders and the financial sector, inflating both the “savings” in the investment sector and the productive capital investment required to generate GDP.


The financial system mechanics now force the money issued in the form of interest-bearing private bank debt to grow exponentially to fund both non-productive investment and productive business expansion.[26]  Few people these days borrow from modern day savings and loan institutions such as finance companies because the interest rates they charge on their loans are typically much higher than the interest cost of newly created private bank loans.[27] This means that multiple on-lending of credit-based savings with a higher speed of circulation has been replaced by the creation of new debt which conceptually circulates just once, though there is some secondary lending in most countries that slightly increases the speed of circulation.


Interest-bearing debt increases exponentially.


In heavily indebted countries like New Zealand, the lavender box in Figure 2 is also inflated by the nation’s accumulated current account deficit that represents historical household borrowing in excess of available disposable income.[28] That accumulation of domestic debt to fund the current account deficit was impossible before financial deregulation introduced (so-called) floating exchange rates. Previously, a system of fixed exchange rates meant that every country except the US had to devalue its currency once its foreign reserves were exhausted.[29] Current account debt increases the amount of interest that has to be funded by the productive economy and that in turns feeds through inflation into the capital requirements needed to support higher nominal GDP.


In the present deregulated debt-based system, the amount of new debt being fed into the financial system through the pink and lavender boxes shown in figure 2 is constrained only by the risk-based capital requirements of the Basel Accords that set out how much the banks can lend relative to their own capital, and by the regulatory policy settings such as Central Bank official cash (interest) rates, designed to manage the physical market demand for new debt. The “regulatory” settings work very poorly because the systemic customer demand for new debt precedes any consideration of central bank reserves.


Most of the demand for new debt is systemic. As shown in both Figures 1 and 2, debt growth is inherent in the debt-based financial structure through the payment of interest or usury on loans. That is the case whether or not the debt is secondary Savings and Loan debt as shown in Figure 1 or bank debt as shown in Figure 2. Much of that interest is justified on the basis of measured inflation but according to detailed papers available at the websites shown at the top of this paper, there is a systemic feedback loop that means inflation is related directly to the interest rate paid on deposits. Deposit interest represents “something for nothing” because it produces nothing, becoming instead a burden on the productive economy.


In the absence of high productivity gains, the money supply in Figure 2 must increase by both the principal of the new non-productive loans in the lavender box, by the interest paid on those loans and by the new productive loans in the pink box, causing inflation in the productive sector. That inflation creates an exponential debt spiral along with a corresponding exponential price spiral in the productive sector. In addition, the invested savings shown on the right hand side of Figure 2 create a parallel exponential growth of prices in the investment sector. (See “The DNA of the Debt-Based Economy” on the referenced websites.) Assuming interest rates are constant, the bigger the debt in the lavender box becomes and the more new interest is payable on it the faster the total debt load on the productive sector will also have to increase.


Interest paid on investment sector debt is inflationary and falls within the definition of usury because the depositor literally gets something for nothing. The interest must be funded by the productive economy creating an imperative for GDP growth that rests at the heart of capitalist economic expansion.[30]  


Private banks can create far more debt than their shareholders have invested.


Both the Savings and Loan model of the economy shown in Figure 1 and the bank debt model shown in Figure 2 generate new debt. Both of the models are capitalist to the extent that entrepreneurs use debt to pay for productive capital investment. The former (after savings banks were established as shown at the bottom right of Figure 1) is a mixture of new productive debt and secondary debt while the latter is mostly private interest-bearing bank debt loaned on the basis of the leverage allowed by the Bank of International Settlements in Basel that sets the rules about how much banks can lend in relation to their capital. That enables private banks to create far more debt than their shareholders have invested in the banks. In addition, Savings and Loan savings, particularly within the Figure 1 model, can create a cascade of secondary debt that all monetary reform proposals need to take into account. 


In Figure 1, as long as savings keep being recycled into new productive investment a constant level of new productive investment can be maintained with the same money supply. In that case, the debt entrepreneurs have to savers, the total productive capital, increases. The same is true with multiple recycling of savings into the non-productive investment sector to exchange existing assets.


In the bank debt system shown in Figure 2 there is, subject to several important qualifications, a one to one relationship between debt and capital assets, both productive and unproductive. The qualifications include the need for the accumulated current account to be in balance, secondary debt (such as corporate bonds in the US) must be small in comparison with the total bank debt and the dynamic debt needed to fund the productive economy must be small in relation to the total debt. Those relationships can easily be quantified using the revised Fisher Equation of Exchange developed in the papers available from the websites referred to at the start of this paper.


In Figure 1 the secondary debt is built up through the cascading effect created by Savings and Loan institutions through the multiple recycling of depositors’ savings as authorised by Statute. The historical figures do not lie. Prior to World War I inflation was low because secondary debt was relatively modest and relatively little interest was paid on bank deposits.[31].


In Figure 2 on the other hand, if the productive circulating money supply in the productive sector is to remain constant the interest paid on the productive debt (the pink box in Figure 2) must either be recycled into consumption or it must be replaced by new interest-bearing money creation by private banks. The interest on that new money must be added to the interest on the existing money supply and, because all the interest has to be borne by the productive economy, the new money will cause inflation. Inflation increased this way after World War I because interest on the non-productive war debt had to be added to the circulating money supply just when more hoarded savings were being banked and the rate of economic expansion from the industrial revolution was tailing off.


The exponential increase of interest on bank debt causes inflation.


Those inflationary pressures have accelerated in recent decades because of the rapid endogenous (internally self-generating) increases in bank debt caused by the systemic exponential increase of unearned interest referred to above. Moreover, the attempts to manage those inflationary pressures using interest rate policy have been the direct cause of modern business cycles and financial crises. As mentioned previously, when total debt increases, capitalism concentrates financial power in ever fewer hands.


In summary, both the secondary debt of the Savings and Loan structure shown Figure 1 and the bank debt shown in Figure 2 are inflationary when interest is paid on deposits and savings are recycled into existing capital assets instead of new productive investment. Accumulated current account deficits in debtor countries like New Zealand add to the household debt burden and to the consequent inflationary pressure. The primary advantage of the Savings and Loan structure is that there is relatively less bank-created debt and therefore less control of the money supply by private profit seeking banks.


The lower the interest paid the lower the rate of inflation.


One obvious practical response to avoid inflation is to reduce interest rates toward zero, especially deposit interest rates. Japan has had zero deposit interest rates and zero inflation for more than a decade. The US has almost zero deposit interest rates in recent years, but inflation there was still about 3% in 2011. The reasons for the ongoing US inflation are related to the privileged position the US dollar holds as the world’s reserve currency. Most northern European countries now have low deposit interest rates and low inflation. One advantage for savers in the Japanese economy is that they can safely hoard their savings because, just as was the case for hundreds of years in England, those savings do not devalue. On the other hand, where interest is at or near zero there is little incentive for savers to invest either in existing capital assets or in new productive assets because, in the absence of inflation, debt growth is relatively small and capital gains almost non-existent. House prices in Japan have gradually fallen over the past decade. Despite private banking, Japan now functions as much like the economic model shown in Figure 1 as the unstable model shown in Figure 2. 


Capitalism is inherently inflationary because it relies on interest-bearing debt whether that debt is bank debt as in Figure 2 or secondary debt as in Figure 1.


Successful reform proposals must stop the march of unbridled capitalism.


With the idea of reducing interest rates to zero, several monetary reform proposals aim at nationalising the issue of money. Some of those proposals first appeared nearly a century ago before inflation and exponential debt growth became a major concern. At least 5 of them involve a public monetary authority issuing all new money interest-free, thereby removing the ability of private banks to create new interest-bearing debt.[32] All 5 seek to undo the banking revolution of the 1980’s based on the model shown in Figure 2 and return to the model shown in Figure 1.


There are several advantages to the reform proposals. They eliminate new interest bearing bank debt entering the economy. The proposals all involve a government appointed monetary authority issuing new money debt-free and interest-free into the economy instead of its being loaned into the economy at interest. Four of the proposals do this initially in a sort of “big bang” debt jubilee.


In the remaining proposal, The Manning Plan, new debt-free interest free money would be progressively introduced in the form of a universal basic income. Some of that new money would be used to cancel existing bank debt while the rest would be loaned back to the monetary authority at a low interest rate for recycling into new productive capital investment.


The proposals all tacitly accept that there will be secondary interest-bearing debt generated through Savings and Loan facilities as shown in Figure 1, whether or not that secondary lending is mediated by the commercial banks. However, only one of the proposals, The Manning Plan, manages both the quantity and price of secondary debt. The other proposals deny (both conceptually and practically) the cascading effect of both the quantity of secondary debt and the interest rates paid for the use of that debt.[33] Escalating interest-bearing secondary debt can still concentrate capital just as privately issued interest-bearing bank debt has done, though probably at a slower rate. The Manning Plan attempts to limit concentration of that capital. The other proposals do not, despite the best intentions of their authors.


Secondary debt must be included in the total debt figure.


This paper has dealt with the historical impacts of secondary lending within a fiat-based monetary system shown in Figure 1. Further research is needed to confirm the speed of circulation that existed in developed economies before and after the deregulation of the 1980’s. The value of secondary debt from official records will need to be added to the bank debt (Domestic Credit) to get the total debt. The same can be done for the present banking system, taking great care not to double count secondary debt. Those figures can then be carefully compared to, say, GDP to get a Total Debt / GDP ratio, making sure that “apples are being compared with apples”.


The advantages of good monetary reform are better control of both the total money supply (debt-free money plus secondary debt) and the price of that money.  One without the other will not necessarily improve the financial system. Apart from the Manning Plan, the existing monetary reform proposals do neither because they neither manage the amount of secondary debt nor do they sufficiently manage its price.


Productive and non-productive public and private debt together make up the total debt.


Total debt determines the status of the economy in a reformed financial system that allows the recycling of a debt-free interest-free monetary base because the real money supply is the sum of the original debt-free interest-free system deposits plus the total secondary debt arising from recycling those deposits. Total deposits alone no longer represent the actual money supply.


A tiny elite has now “enclosed” the total money supply for its own profit.


Capitalism involves debt creation of all kinds and is just one of several tools available for the generation of economic activity in a world with little real or cash money. In recent times, the quantity and price of debt have been abused, allowing a large pool of unearned interest income to be accrued through usury. Due to the systemic effects of that usury the money supply in the non-productive investment sector has finished up in the hands of a tiny financial elite. That is characteristic of both the Savings and Loan model of the economy described in Figure 1 and the Debt-based model described in Figure 2. The main difference between the two models is that in Figure 1 capitalism and power over money tend to be more diffuse because at least some of the money supply is under public control. In the debt-based monetary system in Figure 2 both capital and power over money are concentrated in the hand of an ever smaller elite.


Under capitalism as defined in this papera country’s trade and industry are controlled by private owners for profit”. Most of the world is now “controlled by private owners for profit”. The public commons are being “enclosed” down to the genes in our bodies and the water, food and plants we depend on for survival. For the first time in history money itself has been “enclosed” for private profit.


At a more theoretical level this paper has shown that Capitalism is Debt-based, where just a few control the money supply and the debt load is borne by others.  In the debt system, debt gives birth to money. For every dollar of debt there is a dollar claim on money created somewhere, whether or not there are bank deposits backing those claims. The bottom line is that Capitalism has created a financial elite that accumulates the money while leaving the corresponding debt as an everlasting burden on society at large just as it has consumed the earth’s resources and left the mess for society to clean up.


Monetary reform must serve the public good.


As for models for monetary reform Alperovitz and Dubb, referring to the US, wrote recently:


For decades, to many the only longer term choices have seemed to be state socialism or corporate capitalism. But new approaches may also begin to pose new systemic ideas for a longer term progressive structural change that is both quite American in content, and quite radical in its vision of a system beyond the traditional models.”[34]


This paper has shown that to be useful, those new systemic monetary reform ideas must reverse the enclosure of the public commons and they must manage debt and money for the public good. Managing money is not the same as managing the amount of bank deposits. If capitalism is to remain part of our economic and social structure, “control”, “ownership” and “profit” in the definition  control of trade and industry by private owners for profit” will all have to be heavily moderated in favour of the public good. With the exception of The Manning Plan , the monetary reform proposals referred to in this paper do not do that, so that as they are presently formulated, they are insufficient to satisfy any “vision of a system beyond the traditional models”.


End notes:


[1]  Stephen Zarlenga “The Lost Science of Money” American Monetary Institute 2002, ISBN 1-930748-03-5, p3.


[2] US corporations are said to be “sitting” on $2 trillion of retained profits and the proportion of new investment funded from retained profits varies widely over time, but neither factor changes the more general proposition.


[3]  Savings were often under a hearth where they could survive a house fire and easily be recovered. In days gone by house fires were extremely common.


[4]  The Court of Phillip IV of France was bankrupted in the early 14th century because his crusade to the holy land failed and there was no plunder to pay the crusade costs. Other instances (among many) were King Phillip II of Spain and Louis XIV of France.


[5]  There was large-scale hoarding in medieval England.  For example, at the time the second Earl of Arundel (2nd creation beginning 1289) died in 1376 he seems to have hoarded something like 5% of the entire English money supply. New productive investment was constrained both by slow technological development and by the money-holding elites like the Church and the nobility who tended to invest unproductively in Churches, Castles and war. Though there were legal constraints on interest rates in England for hundreds of years, money for productive investment was often, if not typically, borrowed from moneylenders because there were no banks as we know them today. The high interest rates charged by moneylenders were justified by the vast increases in productivity gained, for example, from a new water driven flour mill.


[6]  The numbers of those in the nobility (including the church) was tiny. For example there were just 13 Earls in England  in 1300 when the population already lived in some 6000 settlements of various sizes. The author’s research suggests there were then about 4000 “squires, knights and nobility” at that time of which roughly 80% were squires who were at the bottom of the elite class. They would usually own, a couple of small villages or hamlets. Most of the remaining 20% were knights. Elite numbers fell to about 2000 as the population decreased during the plague years. Much later, in 1688 when the population of England was about 5.2 million, Gregory King estimated their number to include about 186 lords (Dukes, Marquises, Earls, Viscounts, Barons and 26 “spiritual” lords of the church), about 600 knights, 3000 squires and 800 baronets. Baronetcies are usually hereditary titles but do not qualify for a seat in the House of Lords. During the 17th and 18th centuries monarchs sold baronetcies when the crown was desperate to raise money. There are now excellent records for the nobility from baronet up and it is possible to work out exact numbers at any given time.




[8]  Fiat money is like cash today where the notes and coins have no intrinsic value. When gold and silver were used the coins were “worth” what they bought. When the coinage was debased by reducing the amount of precious metals in it, as famously happened in the “Great Debasement” of Tudor England, the coins still had some intrinsic value. They were a hybrid of precious metal and metal with little or no intrinsic value. Fiat money has been used on and off for thousands of years in Greece, Rome, Venice, and the colonial US, to name just a few places.  


[9]   (downloaded 25/1/13)

Due to recurrent crises the Act was suspended in 1846,1857 and 1866. [see [19]]

  Under the Act, no bank other than the Bank of England could issue new banknotes, and issuing banks would have to withdraw their existing notes in the event of their being the subject of a takeover. At the same time, the Bank of England was restricted to issue new banknotes only if they were 100% backed by gold . The Act served to restrict the supply of new notes reaching circulation, and gave the Bank of England an effective monopoly on the printing of new notes. The Act exempted demand deposits from the legal requirement of a 100-percent reserve which it did demand with respect to the issuance of paper money. Until the mid-nineteenth century, commercial banks in Britain and Ireland were able to issue their own banknotes, and notes issued by provincial and “country” banks were commonly in circulation.”



[11]  There is considerable research on the population in England until reasonably reliable census figures became available in the early part of the 19th century after the Census Act of 1800. The population in England was about 8.3m in 1800. It had been about 5.4 million in 1300, falling to a low of 2.3m around 1475 before recovering slowly to 5.4m around 1700 with a tiny peak in 1665. Population was determined by famine, plague and disease, slow technological development, emigration, and sunspot induced climate variation (as in the “mini ice age” of the 17th century).


 [12] In England in 1300 about 96% of the people lived on the land and a little less than half of the remaining 4% lived in London. The proportion of urban population increased slowly (5% in 1500, 12% in 1600, 20% in 1700).


 [13] There is a lengthy analysis of this by the author in the paper “The DNA of the Debt-Based Economy” published at The author’s estimate of GDP for more than 5 million people in England in 1300 is less than 2 million pounds.


[14] The split tally stick was a kind of fiat money widely used for more than 700 years. Tallies were issued by the crown (exchequer) as receipts for government purchases and could be used in payment of taxes. They were transferable, so stocks (the larger pieces of the split tallies) on which the details were inscribed also circulated as money. The crucial role played by split tally sticks from the time they were introduced in England around 1100 until their use was abandoned in 1826 cannot be overestimated. The destruction of old tallies in 1834 created the fire that burned down the houses of parliament. It has been said that the British Empire was built on tallies. A brief introduction can be found at . For a shorter and more readable background see 


[15]   where there is a graph from work done  by Professor Gregory Clark. The spikes in the chart are major wartime periods especially the Napoleonic wars and WWI and WWII.


[16]  See Sir John Clapham “The Bank of England” 2 volumes, Cambridge University Press, 1944 for a definitive history. Many of the Bank’s records survive and they provide details of most of the key events from the time it was created. 


[17]  The tallies were not always interest free, as some monarchs like King Charles II sold them at a discount to raise cash.


[18]  Gold convertibility was suspended during the banking crisis of 1797 and again during WWI.




[20]   A few cooperative banks existed long before Post Office Savings Banks were established. One of the most famous of these is the Monte dei Paschi di Siena, the world’s oldest surviving bank, which was founded in 1472.


[21]  Source: New Zealand Official Year books.  


[22]  Source NZ Official Year Book 2004 p 438


[23] The reason for the change was the sale of Post Bank to ANZ in 1989. It was fully subsumed into ANZ by the year 2000.


[24]  Research by the author hints that the speed of circulation in medieval England was around 2.5. Other authors have suggested different, usually higher, figures but they appear to be based on a monetised economy when most of the economy in medieval times was not monetised. Any estimate is subject to a wide margin of error due to uncertainty about the amount of physical money in circulation, despite some excellent research. The amount of Savings and Loan debt in more recent times is much better known. For example in New Zealand in 1983 there were more than NZ$ 19b of deposits at the Post Office Savings Bank alone, while bank deposits were NZ$ 7.9 billion and bank debt NZ$ 5.9 billion. Most of those savings deposits were loaned to the government that then used them to fund infrastructure development and housing investment helping account for the fact that bank deposits exceeded bank debt.


[25]  According to Friedman and Schwartz in their monumental book “A Monetary History of the United States, 1867–1960” 1963, the Great Depression was caused by the monetary policy followed by the US Federal Reserve. Nevertheless there had been a period of poorly regulated lending by the multitude of US State Banks. The US Federal reserve allowed thousands of those banks to fail, thereby collapsing the money supply and with it, the productive economy.


[26]  This assumes for simplicity that all the domestic debt funding and accumulated current account deficit has been returned to the debtor country in the form of reverse capital flows. (And vice versa for accumulated current account surpluses).


[27]  Though there are well developed secondary debt markets in a few developed countries like the US  they still represent only a relatively small proportion of total debt compared to bank debt.


[28]  The Net Foreign Investment Position can also be used. While the burden of the accumulated current account deficit falls ultimately on households, the major financial causes of New Zealand’s current account deficit are the repatriation of foreign profits and interest on foreign debt. In New Zealand the actual balance of trade typically fluctuates around the balance point depending on the terms of trade and the exchange rate.


[29]  Until recently the US was largely exempted from currency constraints because, since August 1971, when the US peg to gold was abandoned, the use of the $US as the world’s reserve or trading currency enabled the US to flood the world with US$.


[30]  The methodology and management of interest rates is beyond the focus of this paper, but they are supposedly managed by the central bank. In New Zealand the central bank sets an Official Cash Rate (OCR). Other countries use different names for it. The OCR is the interest rate that determines the price the central bank charges its member banks for reserve funds to satisfy their liquidity requirements. By law banks must keep a minimum balance (liquidity) in the settlement reserve accounts they hold with the central bank. The OCR is usually a little higher than the interbank lending rate thereby encouraging member banks to borrow among themselves rather than from the central bank. In practice there are other influences on interest rates besides the OCR.


[31]   In New Zealand in 1914 there were 20 million pounds in all Savings Bank deposits and 28 million pounds in Bank deposits. Bank lending was 25 million pounds. Source: NZ Official Year book 1920.


[32]   They are:

-       The Social Credit Movement founded by Major Douglas in the 1920’s.

-       The Chicago Plan proposed by Fisher and Simons and supported by Friedman that was recently revived in an IMF paper “The Chicago Plan Revisited” by

         Kumhof and Benes.

-       The “Bank of England – Creation of credit Act” promoted by Positive Money in the UK.

-       The “National Emergency Employment Act” (NEED Act) promoted by the American Monetary Institute (AMI) in the US.

-       The Manning Plan proposed  by the author of this paper (available at the websites referred to at the beginning of this paper.) 

        [ ]


[33]    The AMI NEED Act does cap some secondary debt interest rates at 8% including bank costs but that is still more than sufficient to create massive systemic inflation.


[34]   1/2/13


[35]  (James Watt)





The author is greatly indebted to Terry Manning of the Netherlands NGO Bakens Verzet for his careful editing of this paper.




Summaries of monetary reform papers by L.F. Manning published at


NEW Capital is debt.


NEW Comments on the IMF (Benes and Kumhof) paper “The Chicago Plan Revisited”.


DNA of the debt-based economy.

General summary of all papers published.(Revised edition).

How to create stable financial systems in four complementary steps. (Revised edition).

How to introduce an e-money financed virtual minimum wage system in New Zealand. (Revised edition) .

How to introduce a guaranteed minimum income in New Zealand. (Revised edition).

Interest-bearing debt system and its economic impacts. (Revised edition).

Manifesto of 95 principles of the debt-based economy.

The Manning plan for permanent debt reduction in the national economy.

Missing links between growth, saving, deposits and GDP.

Savings Myth. (Revised edition).

Unified text of the manifesto of the debt-based economy.

Using a foreign transactions surcharge (FTS) to manage the exchange rate.



(The following items have not been revised. They show the historic development of the work. )


Financial system mechanics explained for the first time. “The Ripple Starts Here.”

Short summary of the paper The Ripple Starts Here.

Financial system mechanics: Power-point presentation. 


"Money is not the key that opens the gates of the market but the bolt that bars them."

Gesell, Silvio, The Natural Economic Order, revised English edition, Peter Owen, London 1958, page 228.


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