In my previous post I explained how the Western world's debt money system works. Currently, in our system, all money is created as debt. Debt precedes savings: it is lent out by financial intermediaries and becomes someone else's savings when it is spent. Therefore, contrary to popular opinion, for someone to have savings it is necessary for someone else to have debt. And because debt (in its widest sense, so including corporate equity) and savings are equally balanced over the economy as a whole, when debt is paid off savings are reduced by an equal amount.
In a debt money system the value judgements so frequently applied to debt and savings are unhelpful and can lead to completely inappropriate courses of action being taken by individuals, corporations and - particularly - by governments and supra-governmental organisations such as the IMF. Popular morality, particularly in the Anglo-Saxon world, has it that debt is a BAD thing and savings are a GOOD thing. These mores may be helpful when teaching fiscal responsibility to teenagers. But they are meaningless when applied to a debt money economy.
In a debt money economy, both debt and savings are necessary. Savings cannot exist without debt, and because of the way fractional reserve banking works, new debt cannot be settled without savings. It is completely circular and, as I noted above, economically balanced.
Socially, however, it is far from balanced. The fact is that most of the savings are held by richer people, and most of the debt is held by poorer people, or by governments on behalf of poorer people. And as a couple of people pointed out in the comments stream on this post, the imbalance is also inter-generational. Older people tend to have more savings, of all kinds, than younger people do, and conversely younger people tend to have more debt than older people. The commentators on Positive Money's post describe this incorrectly as a wealth transfer from younger to older. It is nothing of the kind: people build up wealth by saving from their lifetime's income, so it is inevitable that people who have lived and worked longer will tend to have more wealth (savings) than younger people. These savings are lent back to younger people to enable them to have things such as cars and - yes - houses that they do not yet have the wealth to be able to afford.This transfer of savings from older to younger, and from richer to poorer, to enable younger and less wealthy people to have a better standard of living than their present wealth would permit is in my view one of the principal benefits of a debt money system. Yes, that debt has to be paid back from future income, and if future income disappoints in relation to the money borrowed then paying back that debt can become very difficult. But as a way of redistributing wealth on a temporary basis it works pretty well.
The opposite of a debt money system is a saved money system. An increasing number of people, including (but not limited to) Positive Money, are calling for changes to the Western debt money system which would amount to transforming it into a saved money system. In a saved money system, money is created through payments, not through debt, so savings precede debt. And because savings precede debt, it is of course not necessary for debt and savings to balance. Money stuffed under mattresses or buried in the ground never gets lent to anyone, so debt will tend to be less than savings.
Intuitively a saved money system "feels" better to many people, because it's how they've always thought the money system worked - partly because banking and economic textbooks incorrectly teach that savings precede debt in fractional reserve banking. And it fits better with the mores I described above: if savings can exceed debt - as they can in a saved money system - then Anglo-Saxon moral judgements about the evils of debt and the wisdom of saving can be applied with impunity.
But there is a huge problem with a saved money system. You see, it discourages lending to all except safe risks - which generally means people who already have wealth, not people who don't but might have in the future. This is because whereas in a debt money system savings don't exist unless there is debt, so there is a tendency for debt to increase, in a saved money system not only do savings precede debt, they can exist without it. In a saved money system lending is entirely optional and hoarding is very, very tempting, and in hard times people can be very reluctant indeed to lend. In a saved money system therefore, debt tends to be much lower than it would be in a debt money system.
Now, I can hear you all saying "but less debt, more savings is a good thing, surely"? No, it isn't. Remember that in a debt money system, the lifetime savings of wealthy (older) people are recycled through their investments back into lending to poorer (younger) people? That redistributive function is much less certain in a saved money system, particularly if money supply is kept tight to control inflation. The result is that instead of poorer (younger) people financing a better standard of living (and the start of saving) through debt, they are likely to have to fund far more of their major purchases from income alone, by "saving up for them". This is particularly the case if the older generation are applying value judgements to savings and debt, so are unwilling to lend to younger people unless they already have good incomes and savings - which sort of defeats the purpose. In a saved money system therefore I would expect to see levels of evident material poverty, particularly amoung the young, that in a debt money system would be mitigated by the use of debt. The wealth inequality between the richest and the poorest would be on show for all to see. Is this what we really want?
The other way of redistributing wealth between rich and poor is of course tax and benefits. But the older to younger distribution is much less effective here. In fact in most advanced tax systems there are transfers in both directions - from older to younger in the form of state education and benefits aimed at younger people, such as child benefit: and from younger to older in the form of state pension and benefits aimed at older people, such as free bus passes and fuel allowances - not to mention the fact that older people are much heavier users of a national health service than younger ones. If we moved to a saved money system, to mitigate the evident poverty of younger people intergenerational transfers would have to be skewed considerably in favour of younger people, for example by heavy taxation of equity held in property. And hoarding would have to be systematically discouraged, for example by heavy taxation of investments deemed "unproductive" and enforced contribution to forms of saving considered "socially desirable". I have seen proposals along these lines, but all of them depend on there being a far more authoritarian and invasive system of government than we currently have. Is that what we really want?
Neither a debt money system nor a saved money system is perfect, and neither can be left to run on its own. In a debt money system left to run on its own, debt generates more debt until eventually the debt levels overwhelm the economy and the population ends up in debt peonage. In a saved system left to run on its own, obscene wealth is juxtaposed with grinding poverty, older people who have done well in life hoard their savings while younger people - and older ones who have been less fortunate - starve.
I see no benefit in changing to a saved money system, and potential for great harm in the level of authoritarianism that would be required to mitigate the wealth/poverty imbalance through taxation and coerced lending. I would rather retain our debt money system, with all its faults, but seek to put in place an effective brake on its tendency to generate more debt, and limits on the lending practices that create this tendency. This to my mind is the function of government. In recent years governments have been increasingly "hands-off" with regard to the regulation of money creation through lending. This is not freeing the market to do its best - it is abdication of responsibility.
It may be that even with brakes such as tighter lending standards and taxation of bank balance sheet expansion, debt will still get out of hand from time to time. The "debt jubilee" proposal which is doing the rounds at the moment is an idea from early Jewish culture, in which debts were wiped out every seven years and people in debt slavery were able to return to their families. It may be that we, too, need to consider introducing routine writeoff of debt after a certain period of time, or a general wipeout of debt every few years. But we shouldn't be blind to the cost of this. When you wipe out debt, you also wipe out savings. And life being the way it is, you can absolutely guarantee that it won't be the excess savings of the very rich that will be wiped out. It will be the pensions and savings of ordinary people. Steve Keen's idea seems to be that government should step in to protect those savings - but is that really a jubilee, or is it just borrowing from a future generation to protect the current one?
Whatever system of money we have, the real issue is the growing wealth imbalance in our society. And unless we address that, the same problems will return again and again. The more wealth is concentrated in a very small number of people, the more everyone else has to borrow to have a decent standard of living (in a debt system) or the more poverty-stricken they are (in a saved money system). Changing the money system solves nothing.