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Money + Credit = Money Supply

- only government issued bank notes & coins are legal tender money
- what that means is that if you owe someone $20 and you give him a $20 bill (or two $10 bills, etc.) then legally he is paid and if he refuses payment in this form, then you are absolved of that debt

- all other mediums of exchange (cheques, debit cards, credit cards, etc.) are really promise-to-pay money, or instruments endorsed by financial institutions which promise to pay legal tender to anyone who presents these instruments at any of their branches
- legally no one has to accept your cheque, even if it is certified, and if they refuse it, your debt still stands

How Bank-issued loans increase the Money Supply

- when a bank issues a loan it does not loan out the money of its depositors
- it cannot tell someone coming into the bank for their money "Sorry, but we loaned your money out to one of our other customers"
- the bank continues to have an obligation to fulfill the requests of all of its customers who ask to withdraw all or any part of their deposits

- when a bank issues a new loan then, it actually creates new promise-to-pay money the moment it credits the account of the borrower with the amount of the loan
- at that moment, the money supply increases by exactly the amount of the new loan
- as the principal amount of the loan is repaid, the money supply is reduced again in a similar fashion

- for example, if a bank has 2 million dollars in deposits and 1 million dollars out in loans, its contribution to the total money supply is 3 million dollars, for it is fully obligated to provide its customers with up to 2 million dollars and it has already loaned 1 million dollars into circulation

- nearly 96% of the "money" that we use today is not the government's legal tender but rather is the private banks promise-to-pay instruments
- the bank will give you legal tender if you want, but it knows that most people don't want legal tender
- what they want is a chequing account or a debit card so that they can send the bank's promise-to-pay to folks they owe money to... folks that also don't want legal tender, but do want to deposit other bank instruments as credits to their own accounts

Society is shifting towards Credit & Credit Dependence

- since 1974, Canadians have been relying heavily on credit to maintain their standard of living

- in 1974, total public and private debt in Canada was $234 billion; total GDP was $152 billion; and the ratio of debt-to-GDP was 154%

- in 1994, total public and private debt in Canada was $1,833 billion; total GDP was $750 billion; and the ratio of debt-to-GDP was 244%

- during the twenty year period, total debt grew by a factor of 8 (784%) while GDP only grew by a factor of 5 (493%)

- in 1994, all mandatory reserve requirements in Canada were eliminated so that the banks could go on creating more money
- most international currencies are now backed by nothing other than debt

Rising Interest Costs Reduce Purchasing Power

- when interest payments rise faster than wages, consumers must either borrow more in order to sustain their purchasing power or else cut back on their consumption, which leads to a recession

- when interest payments rise faster than revenues, governments and corporations must "downsize" in order to avoid deficits and operating losses

- between 1974 and 1994, total interest payments increased by a factor of 7 (685%) from $26.9 billion in 1974 to $184.3 billion in 1994

- during the same period, wages and salaries only grew by a factor of 5 (495%) from $82.9 billion in 1974 to $410.3 billion in 1994

- in 1994, the total burden of interest in the economy was equivalent to almost half (45%) of the total that was paid out in wages and salaries that year

- in 1967, the Liberals abolished the legal maximum on interest rates which was then 6% (the only remaining restriction on interest rates is contained in the Criminal Code and it is set at 60%) - since then, we have been "interested" to death

There is now too little Legal Tender Money in circulation

- in 1945, legal tender money accounted for about 27% of the total money supply; in 1974, it accounted for about 11%; in 1994, for less than 5%

- what bankers call the M1 is the closest estimate of the total amount of interest-free money, or owned dollars, in the economy. M1 is the total amount of cash and short-term deposits that Canadians have either in their pockets or in their short-term savings and chequing accounts

- in 1966, the M1 represented 36.5% of the total money supply; in 1994, the M1 accounted for only 13.6% of the total money supply

- when the M1 per capita is expressed as a % of total GDP, it becomes clear that, relative to the growth in the population, the M1 has dropped steadily from 5.6% of GDP per 10 million Canadians in 1966 to just 2.6% of GDP in 1994
- there is simply not enough new, interest-free money being added each year to the total money supply in Canada to keep pace with our spending requirements


Most Important Attributes of a Good Monetary System

- must have a common, understandable base

- must be backed by something that is concrete, valuable and accessible to all

- issued and controlled by the public, not by a privileged elite

- must be comprised of mainly owned money, not rented money

- must have the attributes of legal tender, not promise-to-pay money

- non-exploitive and co-operative in nature

- complexity breeds corruption

- the public must have confidence in it

- attractive design, hard to counterfeit, etc.


Retailer Credit Cards, Gift Certificates, etc. extend the money supply but where they can be used is limited


Canadian Tire Money, Coupons, etc. like in-house money - extend the money supply but where they can be used is limited (although CT money is now collected and traded widely and is regarded by some as being Canada's second official currency)

Deli Dollars - were an interesting way to raise capital and avoid traditional bank financing. In Great Barrington MA, a deli-owner whose lease had expired was facing a rent increase of 200%. Knowing he had to either come up with the money to move or shut down his business, he went to see his banker for a loan. Although his loan requests were rejected many times, rather than giving up, he decided instead to issue discount notes to his customers. The $10 notes sold for $8 and were redeemable after six months for sandwiches and other deli delights. The six-month redemption delay enabled him to relocate and generate sufficient cash flow to repay his notes in kind. To ensure that all the Deli Dollars did not come in together immediately after the expiration of the six-month period, the note redemption dates were staggered over a ten-month period. Instead of paying the banks an interest premium, the deli's borrowing costs went to its customers who enjoyed a 25% return on their investment


LETS System & Ithaca HOURs - two alternative money (barter) systems which are pegged to the national dollar

LETS System: The Local Employment & Trading System was developed by Michael Linton on Vancouver Island in 1983. LETS is a computer-based barter system in which trade transactions generate debits and credits for its members. When members sign up, usually paying an initiation fee, they describe the goods or services that they are offering or seeking. The information that they provide is entered into a computer and made available to other members to browse. As well, monthly or bi-monthly listing updates are published and distributed to all of the members. Upon joining, each member is assigned a computer account, with an opening balance of zero, which is credited (increased) when the member sells a good or service and debited (reduced) when the member buys something. Prices are determined through individual buyer/seller negotiations and there is no printed currency to exchange. Instead, when a deal has been agreed upon, it is reported by either mail or telephone to a local LETS office which serves as a clearing house and records all of the debits and credits involved in each transaction. The members of a LETS system need not have sufficient credits in their account to cover the full amount that is to be debited, as credits (or green dollars, as they are often called) are loaned to all members in good standing. No interest is charged on any borrowed credits and no repayment rules are defined. However, a member with a negative balance has a moral obligation to make a valuable contribution to the community in the near future. The success of the system, and its greatest weakness is that it relies on the mutual credit and trust of its members. A high proportion of negative balances could cause a local system to collapse. The risk of failure increases as the membership base broadens and individual members become more anonymous.

Ithaca HOURS: Founded by Paul Glover in 1991, this highly flexible system uses a paper currency called the Ithaca HOUR. Supplementing the conventional monetary system, Ithaca HOURS mobilize under-employed resources, such as human labour, as needed by the community. Like the LETS system, there is no need for two individuals to find a direct match for the goods and services that they desire. Any buyer can purchase any good or service from any seller and that seller can then use those same HOURS to buy any other good or service from any other seller. There is no central computer or any complex record-keeping involved in HOURS transactions as it is a hand-to-hand paper currency system. There is also no formal mechanism for debt or credit. Each Ithaca HOUR represents the equivalent of $10 US, which is the average hourly wage, excluding benefits, paid to workers in Tompkins County NY. The program is based on the idea that one person's time is worth just as much as another's and that each hour of labour has the same dignity. The system attempts to raise the effective minimum wage and helps to enable people, especially low-wage earners, to buy goods and services previously priced beyond their reach.

The Ithaca system recognizes, however, that it is impossible to enforce equality much beyond moral suasion and allows that unique skills may require the payment of more than one Ithaca HOUR for one hour of services. For instance, a dentist may collect several HOURS for each work hour because the dentist, receptionist, and assistant work together. Ithaca HOURS provide additional flexibility in that they may be accepted in combination with US$ when paying for goods and services.

To participate in the HOURS program, an individual or business must be willing to offer goods or services that are priced, at least partially, in Ithaca HOURS. Each participant pays a one-dollar registration fee and receives four Ithaca HOURS in return. Additional HOURS can be acquired by selling goods or services to others and all members who continue in the program can earn two Ithaca HOURS every eight months simply by sending in a coupon to verify their phone number. HOURS are also distributed regularly by the members at community dinners known as "Barter Potlucks". Those in attendance, referred to as the "Municipal Reserve Board", conduct business and manage the system, particularly regarding how much currency to print and issue. Attenders of the potlucks also vote on whether or not to make Ithaca HOUR grants to local individuals, entities or community organizations. A bi-monthly newspaper called Ithaca Money lists the goods and services that participants offer or request and sells display advertising space priced in HOURS.

The Ithaca HOURS system helps to expand the local economy by empowering under-employed and unemployed persons, the housebound, seniors and part-time employees. Anyone with excess time can participate in the program to obtain value for their special skills that would otherwise go uncompensated because of a shortage of US dollars in a community. A sense of community is strengthened as participants learn more about, and work with, their neighbours. Consumers are encouraged to shop locally and employ each other because the trading area for HOURS is restricted within a twenty mile radius around Ithaca. By accepting HOURS, an existing or new business can tap into a market of people who would not be able to afford to buy their goods or services without using HOURS. HOURS can also be used like coupons to discount slow-moving merchandise or to divert customer traffic to off-peak hours. As the acceptance and use of Ithaca HOURS expands, the diversity of goods and services that are obtainable with HOURS increases and the community becomes more locally self-sufficient and less vulnerable to outside economic shocks.

In short, the Ithaca HOUR system has all of the most important attributes of a good monetary system.

note: all of the economic statistics that appear in this handout were calculated using data sourced from Statistics Canada and the Bank of Canada