The Issues

Private Debt

Under the current system, much of our money is created by banks when they make loans. This leaves us all stuck under a mountain of credit card debt, mortgages, and car loans.

Being in debt as a currency user comes with a price, one in which we all would like to avoid. The excessive build-up of private debt tends to severely destabilize the economy, a side effect which inflicts significant harm on our standard of living (See Recessions and Crises) section. In our current system, money is created largely through bank lending, requiring a money supply in order to facilitate economic activity. This means that in the absence of adequate money created through public spending (and in order to have the money supply necessary to facilitate economic activity), we as an economy have to take on a massive private debt burden, and perpetually remain deeply in debt.

In effect, not only are we required to take on this private debt burden by our failure to provide an adequate money supply through public spending, but the nature of the system also makes it virtually impossible to relieve it. When we pay down the principal of our debts, the money that leaves our bank account doesn’t go to anyone else — it effectively disappears. Loan repayments are essentially the reverse of the process of money creation: banks create money when they make new loans, and ‘extinguish’ money when the loan is repaid. Only interest payments are retained by the bank as revenue, which can be spent back into circulation without a corresponding increase in debt. So when lots of people try to pay down their debts at the same time, without simultaneously taking on new debts to replace the old ones, the money supply shrinks. As a result of there being less money in circulation, spending tends to slow down. If the money supply contracts enough this can paralyze the economy. This means that within typical functioning of the current system it’s virtually impossible to significantly reduce our overall private debt burden without causing a recession.

We Need More Public Spending and Less Private Borrowing

This artificial necessity of building up and maintaining a massive private debt burden serves only the banks and their shareholders, at the expense of everyone else. The rest of us are left to carry this burden, most often without realizing that it is largely unnecessary.

Our proposed reforms would remove this artificial necessity. The key is ensuring that significantly more of our money supply is created through public spending rather than private borrowing. A job guarantee would promote increased money creation through public spending in a way that would counteract the contraction of the money supply associated with private debt repayments. It would do this by automatically triggering money creation to fund public employment anytime private sector workers are laid off and seek employment through the job guarantee program. This would provide us with the money supply necessary to keep the economy stable even as people pay down their debts.

Further, by limiting the allocation of what are effectively public funds when banks create money to public interest uses, our reforms would limit the build up of private debt, leaving more of our money supply to be created through public spending. This would further minimize our reliance as an economy on private borrowing.