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Aid, Debt & Development

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A Debt-Based System, Export Warfare & Third World Debt
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It is easy to question the morality of wealthy nations once aware of the consequences of a debt based monetary system; however, the beneficiaries of Third World debt are not the people in richer nations, nor the nations themselves. Such a system benefits no-one, explains Mira Tekelova.

26th January 2012 - Published by Positive Money

Our debt based monetary system is directly responsible for world export warfare and third world debts. In order to understand the need for exports it is necessary to understand that there is no such thing as a supply of permanent money to the economy, and the vast bulk of money within the economy has its origins in loans and is represented by a matching domestic debt.

When goods are exported, foreign money is brought back into the economy, but the debt behind that money remains overseas, in the country of origin. Through exporting, money that has been borrowed into existence in another country is brought into the economy free of debt. The money can easily be turned into domestic currency via the foreign exchanges. However, when goods are imported, money created in the domestic economy goes abroad, but the debt associated with that money remains in the economy. Money that was borrowed into existence in the home economy has left the country, but the debt remains.

If a country exports more than it imports, there is a net gain of additional debt-free money within the national economy. The influx of money provides a boost of purchasing power to the entire economy, which means that home sales boom along with the foreign sales.

However, if a country imports more than it exports, there is a net outflow of money but the debt associated with the creation of that lost money remains. That country’s entire economy is threatened. Consumers are buying goods from abroad, which means that some domestic goods remain unsold. To make matters worse, purchasing power has left the country, depressing domestic sales further, while the debt that created the money remains.

Being a net exporter means the economy is vigorous and healthy, enjoying an influx of purchasing power without having incurred a debt, although the country is effectively losing real wealth with a net outflow of goods. Despite the fact that such countries are losing in real terms, in a world run on debt they are gaining something invaluable – successful sales, and a supply of debt free money boosting domestic purchasing power within the economy as a whole.

In summary, in order to thrive, countries fight to be a net exporter resulting in exchanging actual goods that an economy can use in exchange for debt-free money. The countries economic goals, should they become successful, are counter-productive to the needs of its citizens. Only nations like America and Britain can run an economy importing more than it exports and paying with money continually created into existence that everybody accepts as payment, eventually leading to a collapse in their currency as we are experiencing at the time of writing.

As the third world export all their goods while starvation remains a problem it becomes apparent how our monetary system is no longer serving us.

In order to enhance world development the World Bank and the IMF were founded in 1944. The World Bank was intended to aid post-war reconstruction, especially in the poorer countries, by providing them with loans. The purpose of the IMF was to provide an international reserve of money – a financial pool upon which all member countries could call, whether rich or poor, should they hit temporary balance of payments difficulties. In the 50 or more years since their formation, these two institutions have largely replaced direct country-to-country lending, and have advanced loans mounting to billions of dollars to developing nations.

However wealthy a country may appear to be, all nations are in debt and trade from a position of insolvency. As a result the wealthy nations, far from being prepared to accept debtor nation’s goods, have been looking to the Third World as a continued outlet for their own goods. How can debtor nations be expected to repay their debts by exporting more goods than they import, when the creditor nations are both resisting imports and vigorously trying to maximise their own exports?

The very willingness to lend money to developing nations was based on the knowledge that such loans would benefit the wealthy countries who wanted to find markets for their own exports, and so improve their earnings. Loans would be made on the condition that purchases were made in wealthy nations. Loan policies like ‘tied aid’ were conditions on loans that ensured the creditor countries obtained a market for their exports by issuing loans on the condition that the money was spent with certain nations, equivalent to the value of the loan they advanced. Once this money is spent on imports, the money already advanced to them as loans is absorbed back into the developed countries of the world, leaving the developing nation with a unpayable debt.

Where did the money for these loans actually come from? The World Bank raises money by drawing up bonds, and selling these to commercial banks on the money markets of the world. The money raised is then loaned to nations who require money for development.

The IMF presents itself as a financial pool; an international reserve of money built up with contributions (known as quotas) from subscribing nations. However, the total funds of the IMF were massively increased and its entire function and status radically changed when, in 1979, the IMF created Special Drawing Rights (SDRs). These SDRs were created and intended to serve as an additional international currency. Although these SDRs are ‘credited’ to each nations account with the IMF, if a nation borrows these SDRs it must repay these SDRs, or their equivalent (initially 1 SDR equalled 1 US Dollar), or pay interest on the SDR loan.

Now, it is abundantly clear from this that the IMF and the World Bank are not just lending money; they are involved in creating it. Although SDRs are described as amounts ‘credited’ to a nation, no money or credit of any kind is put into nations accounts. SDRs are actually a credit facility, just like a bank overdraft – if they are borrowed, they must be repaid. Thus the IMF has itself created, and now lends vast sums of a new currency, defined in dollar terms and fully convertible with all national currencies. Thus, the IMF is creating and issuing money as a debt, under an identical system of that of a conventional bank, – its reserves being the original pool of quota funds.

Money creation is also involved in the loans advanced by the World Bank through the selling of bonds. The World Bank does not itself create the money, but draws up bonds and sells them to commercial banks which, in purchasing these bonds, create money for the purpose. When a bank makes any form of purchase it does so against the deposits it holds at the time, but does not reduce those deposits; hence additional money is directly created.

To appreciate the consequences of the IMF and the World Bank, the detail of money creation and the path of the supply of international debt money must be traced. The World Bank draws up bonds to raise the money for its loans. These are bought by the commercial banking sector, and purchased against the deposits held by those banks at the time. An amount of number-money, usually denominated in dollars, is then paid to the World Bank by the commercial bank. None of the individuals or institutions with deposits in the bank buying the bonds has their deposit reduced, or affected in any way. Thus the loan is a creation of additional number-money. This new bank credit is then advanced by the World Bank to a borrowing nation, and the debt recorded against the borrowing nation. When paid into bank accounts in the borrowing nation, it becomes clear that the total of global bank deposits has increased. Total global debt has also increased.

When nations borrow using SDRs, the IMF creates and issues a sum of additional money in the form of an international currency, fully convertible into other currencies. Thus the total of global monetary deposits has risen, along with the equivalent debt.

These loans are always associated with a need for revenue to purchase foreign goods as part of an investment, so the money received by the borrowing nation will then be spent abroad, generally in more wealthy nations. It may well be that the money will be used to make purchases back in the country whose banking sector bought the World Bank bonds, returning as export revenues to the wealthy nation whose banking sector created it. This loan money will register as an increase in the total deposits of that nation, confirming beyond dispute that money has been created.

Since these loans are advanced in dollars or pounds, they are advanced without having any of the debtor nations currencies on the foreign exchange. The money advanced as a loan thus instantly becomes part of the money stock of the wealthy nations. Meanwhile, the debt remains registered to the Third World country.

In summary, by loans being advanced to a Third World country, the wealthy nation has found a market for its goods, its economy is boosted, and its money stock increased, whilst the burden of debt has been assumed by another country crippling their economies and leading to mass poverty.

There is a singular difference between national debt and international debt. A national debt is run up at will, and under the control of the national government. International debt, and the rate of its increase, places an entire nation under the financial control of agencies outside its borders. This entire process has made a financial playground and economic disaster area out of the developing nations.

These debts have been used to buy out private and public companies, pension funds, life assurance firms and many other forms of Third World equity – even for entire industrial sectors. Many Third World countries have privatisation schemes in place, and many more are planning them. Thus, the cream of developing nation’s domestic industry is passing into foreign control.

It is easy to question the morality of the wealthy nations once aware of the consequences of a debt based system; however, the beneficiaries of Third World debt are not the people in richer nations, nor the nations themselves. As a result of this system the wealthy nations are in a desperate scramble to service debts. It is easy to blame the commercial banks who benefit from the interest on such loans, however, we are now seeing that their business models are collapsing and they are wiping out all the profit gains in the global financial crisis. Who are the banks anyway? They are public companies that consist of thousands of shareholders, me and you, remember our pensions invest in banks. There is no beneficiary. This system benefits nobody. The IMF and the World Bank are all in a system of sustaining the unsustainable. Until we recognise that a debt based system will not work and cannot work the Third world poverty will worsen.

Condensed  from the book Grip of Death: A Study of  Modern Money, Debt Slavery and Destructive Economics, by Michael Rowbotham.

Mira has a background in economics and has spent the last 3 years doing independent research into the problems with our current monetary system. She works on the Positive Money campaign trying to promote the awareness about our debt-based money by the public. She became interested in the monetary reform ideas after she realized that the way money is created is the root underlying cause of poverty and most of our social problems today.

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