Plutocracy vs. Democracy: Reforming Money Creation and Circulation

Each year, the wealthiest 10% of Australians increased their wealth by as much as the remaining 90%.

This happens because borrowers pay interest on new money that costs nothing to create. Repayments made by the borrower should pay the interest. The banks already do it when they sell money to each other. They should do it when they sell money to borrowers with a loan.

It has become the business model for the rest of the economy and is justified by the concept of markets. The wealthier you are, the lower the cost of new money.

It means the wealthier you are, the more you will get for the same amount. The richer you are, the more power you have to get others to do what you want, leading to a plutocracy.

Plutocracies lead to a failure to share money, which in turn leads to lower productivity, which in turn leads to poverty for all and, ultimately, the extinction of homo sapiens.

Money Creation and Destruction

The Australian government issues the Australian dollar by printing it at the mint or allowing banks to credit funds to bank accounts. Banks play a key role for the government by creating new electronic money with loans and removing it from circulation when repaid.

Banks create new money by crediting a trading account and debiting a loan account. The borrower can spend the money in the trading account. They repay by paying money into the loan account. The payment reduces the loan account and removes the money from the economy.

Today, borrowers pay the interest fee by the banks not crediting the loan account when the interest is paid.

The seemingly simple act of banks treating the payment of interest as though it was part of the loan and, hence, charging the borrower more than the face value of the money creates an inefficient money system that requires much more money than needed. Worse, it leaves the extra money in the economy, causing inflation.

Taking the interest costs from the repayments made by borrowers reduces the money paid and increases productivity.

Changing the System

To change the current system, the banks will deduct interest from the loan balance and credit their income account when the borrower pays interest. Otherwise, everything else stays the same.

Implementing this strategy will lead to the following outcomes:

1. Electronic Money Functions Like Cash:
   Buyers pay its face value when purchasing new money, allowing everyone to acquire it at par.
2. No Inflation:
   Since new money is always sold at the same price, there can be no inflation.
3. Banks have less Risk:
   Banks will continue to offer the same services but face less risk as they collect less money. While banks will experience fewer capital gains, they will see increased income, which can lead to higher profits. Consequently, banks will produce less money for the same investment, substantially improving economic performance.
4. Bank Competition Increases:
   Banks will compete based on the fees they charge for distributing money on behalf of the government. Governments will choose banks with the lowest risk and the lowest costs.
5. The Government, with the Reserve Bank, has control over the Money in Circulation:
   Money is removed from circulation when assets are built or purchased, and those assets cannot be sold. Governments with Central Banks decide how much excess money to remove from circulation by determining how much to destroy.
6. Rate of Circulation:
   While not mentioned here, governments can control the rate at which ownership is transferred in infrastructure assets. This adjusts the rate at which money circulates within local communities, making the process “invisible” to the public and adjusting the money supply to meet demand.
7. Reduced Taxes:
   The money that is not destroyed is available to the government and reduces the need for taxes. Many taxes can likely be eliminated, except for consumption taxes.

Removing the ability of banks to capitalise interest creates a stable financial system by maximising economic efficiency. To the citizen in the street, there will be a significant reduction in the cost of capital goods and an increase in their bank deposits and ownership of productive assets.