6 Apr 2013

The need for monetary reform in France

I'm currently in contact with a number of people in France who believe that we really need something like the UK's Positive Money movement to press the case for monetary form. We are trying to put together the arguments needed to convince the French public and government that there are indeed alternatives to the current diet of austerity.

I'm also preparing for a talk that I will be giving next week in a meeting in Montbrun, a small town in the Ariege.

So, to start the ball rolling, lets just have a look at how the French national debt has increased over the past 35 years.

Back in 1978, the debt level was a modest €72.8 billion. By the end of 2012, it had been multiplied 25-fold to reach €1833.8 billion. What was the main reason for this?

Well, the graph also shows the cumulated interest payments on government debt. As you can see, the total since 1978 has reached something like €1150 billion, i.e. around 64% of the total outstanding debt. Actually, the number could be €1400 billion, according to many authors, although I have not been able to find where that particular number comes from.

The important thing to realize is that the French government should not need to borrow money at all. If we had a sensible system, the French government would be able to obtain money free of interest from the Banque de France. Indeed, this was how things worked until 1973 when Pompidou and Giscard D'Estaign passed a law which effectively meant that the government would have to borrow from private banks (La loi du 3 janvier 1973). Could this have had anything to do with the fact that before becoming Président, Georges Pompidou had been the General Manager of the Rothschild bank?

Interestingly, the situation would have been a lot worse if the interest rates that the government had been paying had stayed at the levels that had been typical in the 80s and 90s. Here's one graph that I produced from Eurostat figures that goes back to 1993 and which shows that long-term interest rates reached a peak of 8.23% in January 1995.

For the effective interest rates going back to 1978, have a look at this graph that I got from a report published in April 2010 called "Rapport sur la situation des finances publiques" by Paul Champsaur and Jean-Philippe Cotis.

Here again, you can see that interest rates of between 7 and 8% were common throughout the 80s.

The important thing to realize is that when the commercial banks lend money to the French Government and then charge the French taxpayer interest on those loans (something that cost taxpayers €52.6 billion in 2011), they don't actually have the money they lend. They create the "money" out of thin air. This is because elected governments have handed the right to create (and destroy) the money supply to the commercial banks.  This is insane. Why should the French government borrow money from the banks and pay interest when money creation can be done with no interest by central banks?

Of course, the government isn't alone in having to borrow its money from the commercial banks. Businesses and households are also forced to borrow from those banks. And here again, the banks are happy to create the money out of thin air, and charge interest.

The latest BIS dataset provides the numbers for Private Sector debt, qnd distinguishes between Household debt and Non-financial Corporations (i.e. Business). Here's are the data since 1977 in graph form.

As you can see, the total has been skyrocketing, reaching €3.31 trillion at the end of the third quarter 2012. It's less easy to find out precisely how much the interest charges on that cost, but if we assume a figure of 5%, we can imagine that around €165 billion gets sucked out of the French economy every year in the form of interest payments.

And of course, we can add private sector debt to government debt to get a total of €5.13 trillion in debt, and a combined interest charge of something like €220 billion a year - about 8% of French GDP (which was €2.77 trillion in 2012).

Where do those interest charges go? Well, here's a graph that I got from the Agence France Trésor which shows that currently, about 64% of government debt is held by non-residents. In other words, the majority of those interest payments leave the country. Maybe they go to fill the $21 trillion in private accounts held in offshore tax havens?

It is very clear to me that, like the UK, France needs a radical reform of its monetary system. Implementing the ideas proposed by Positive Money in the UK could be especially difficult to achieve in France, because any moves by the French government may well be blocked by the ECB and its president, Mario Draghi. As the ex-European director of Goldman Sachs, it is unlikely that he will be very keen on killing the proverbial goose that has been laying golden eggs for the banking system for decades.

But the moral case for change is overwhelming. And if the ECB and the Bundesbank block changes, there are alternatives. I have previously argued that the insane fractional reserve money creation machine could be turned on itself to cancel out public debt -see this piece from last year. Another alternative would be to introduce a parallel debt-free public money - the N-Euro.

Nevertheless, it is clear that the first step has to be to get the problem out in the open. The public has to be made aware that they have been the object of a massive scam. It has to stop.


  1. Simon,

    Have you seen Ellen Brown's article on Canada (on her webofdebt.com site)?

    She describes how the Canadian government borrowed from its central bank (effectively at zero interest) from 1939-1973), very successfully. What changed was that the BIS insisted that governments should stop doing this and borrow from the commercial sector instead.


    I wonder if it was this that caused the change in France as well.

    Incidentally, does the French government actually borrow direct from commercial banks, or does it issue bonds, like the UK government's gilts?

    Have you seen Richard Werner's proposals (first put forward to the Japanese, but he's suggested it in the Eurozone, and also in the UK), that instead of issuing bonds, governments should take out loan contracts with commercial banks? These should be (at least in present circumstances) at low interest (same as Bank Rate, I think) which should be less than they are paying on the bonds. In addition there should be no commission to the likes of Goldman-Sachs. It would have the advantage (he says) of stimulating bank lending, and generally getting the economy moving.

    Of course, in the long run, he wants monetary reform (he is an advisor to Positive Money after all). But this is something that could be done in the short term, without a major change to the system, and hopefully dig us out of recession.

  2. p.s. I know that Positive Money (in its forum) warns against getting hung up on conspiracy theories, but it's hard not to see this as a conspiracy by the banks.

    And central banks are essentially the creatures of the banking sector ... where do central bankers go when they "retire"? Where do they come from? Here is the soon to be governor of the BoE:


    "Carney spent thirteen years with Goldman Sachs in its London, Tokyo, New York and Toronto offices.".

    Well, well, well, imagine our surprise! (To be fair, Mervyn King doesn't seem to have come up this way, and neither did Eddie George, the previous governor, now sadly the late Eddie George).

  3. Hi Monty,

    That's a fascinating article by Ellen Brown. I'll do a review of it on my own blog and give you credit for spotting the article.

  4. Thanks for the link to Ellen's Oh Canada piece. Excellent as usual. Isn't it amazing how both Canada and France somehow spontaneously decided in 73-74 that allowing the government to borrow interest-free from its own central bank was a terrible idea. It's obviously so much better with the current system... ho, ho....

    What has changed is that people really are beginning to cotton on to the fact that commercial banks do money creation just like central banks. The slight difference is that when commercial banks do it, it is purely driven by the need to maximise their profits, whereas a central bank could (at least in principle) be required to control the money supply in the public interest.

  5. Ah! Thanks for the point about Mark Carney's period with Goldman Sachs - I'd missed that. I had thought about doing a piece about the Bank of England's Monetary Policy Commitee to look at its composition. In fact, I was suprised to find that of the current 9 members, only one (Ben Broadbent) is a Goldman Sachs man .... most of them appear to be either academic economists or people who joined the Bank of England straight from University. So with Mark Carney, Goldman Sachs will now have 2 of their men in position - just like they do with Mario Draghi at the ECB. Brilliant!