Debt-free money
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Debt-free money is simply the creation of new money into the economic system that does not require the return of this money to the government or a private financial institution at some point in the future. Governments do this by the issuance of paper money, and coins. In the past, gold and silver were also used as a form of debt-free money.
However, debt-free money only makes up a small amount of the entire money supply. The rest of the money supply is created by the debt-based monetary system where the lending and relending of money they hold in deposits generates money in circulation.
This method of debt-based credit creation is called fractional reserve banking. This is referred to by some as a debt-based monetary system because, unlike governments which can and do create debt-free money already, this money is (at least theoretically) required to be returned to the issuing institution at some point in the future. Opposition to fractional reserve currency is not widely found amongst orthodox economics, but is prevalent in the writings of some economists in the field of Austrian Economics and those writers who support libertarian philosophies.
Also to be considered is the sovereignty movement in America that calls for the printing of debt-free money to make interest-free loans available to state and local governments for capital projects.
Debt-free money is notably discussed in the writings of Clifford Douglas who was the founder of Social Credit. He believed that some amount of debt-free money could be used and not repaid without causing serious inflation. This would reduce taxes until they were necessary to combat inflation. Silvio Gesell was also critical of debt-based money, as is Michael Rowbotham today.
Debt-free money has been created by governments during times of emergency (ie. wars, and revolutions). But afterwards money created by bank loans is the money in circulation that nations tax to advance their national programs and meet their operating and capital needs. For a critical history of debt-based money, and the attempts to create debt-free money, see Michael Rowbotham's The Grip of Death.
Supporters of debt-free money suggest that the "freeing" of the economy from the shackles of the debt-based monetary system will give rise to the possibility of a no-tax economy, and indeed, an interest free economy where wealth is distributed more equitably in society. The social, economic, and political implications of such a policy has yet to be fully developed and would have huge implications. Research, and development is currently being undertaken on this issue by Robert Searle, the originator of Transfinancial Economics. This is the most advanced version of what is now called Non-Taxation Monetary Reform. He claims this will be desirable to business as a) no taxes are paid b) loans would be interest free, and c) non-repayable business incentive grants (or BIG) would encourage greater growth.
Other people have had similar ideas about using debt-free money as a means of replacing taxation. Abba Lerner believed that this could be achieved with savings which could reduce the amount of money in circulation, and thus, allow governments to create new funds. However, if there is a rise in inflation taxation may be re-introduced temporarily. An engineer Theodore Thoren has used mathematics to apparently show that zero taxation is indeed possible. John DeSantis also believes in such ideas, and has set up a website to that effect.
Governments already do this by the issuance of paper, and coin. However, this only makes up a small amount of the entire money supply. Most money is literally created out of thin air, often subject to a small capital reserve requirement. The creation process occurs when a customer takes out a loan, and the money is created to his or her account. This method of credit creation is called fractional reserve banking. Compound interest charges are then applied to the new money created by private interests.
One of many economists who offers insight into the method of money creation is Professor Herman Daly, formerly of the World Bank. In a book he co-authored entitled For the Common Good, Daly wrote: “As a result of fractional reserve banking over 90% of our money supply is loaned into existence by commercial banks and thus must grow by enough to at least pay the interest on the loan by which it was created. This gives a basic growth bias to the economy. Fractional reserve banking also transfer to private hands the state’s traditional right to issue money, and does so in a way that increases the cyclical instability of the economy. The corrective call for 100% reserve requirements has been made periodically not only by so-called ‘monetary cranks’, but also by economists of impeccable reputation such as Frank Knight and Irving Fisher.”
