Our financial system (which should be easy to understand) has had its waters deliberately muddied by vested interests to the point that even "financial experts" have great difficulty in explaining the way the system really works. We believe that our position is accurately formulated from examining official figures and statements over many years, and by including that one element that seems to be lacking in most analyses, namely common sense.

John Adams - in a letter to Thomas Jefferson.

All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.

Terminology

In order to de-mystify the religion of "high finance" which is obscured with terms like credit, currency, money supply, broad money, quantitative easing etc. - let's have a look at some of the basic terms.

John Kenneth Galbraith (Money: Whence it came, where it went - 1975, p15)

The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.

When people talk about "money" - we need to be very specific. The ANZ has a neat definition here. However, we prefer the "Monetary Aggregates D3" spreadsheet at the RBA which gives us the definitions below.

All you need to remember, is the term "Broad Money". In simple English it means:

Broad money = all notes and coins (i.e. currency) plus all deposits at all banks.

Now let's look at a graph from the RBA as given below. This graph shows the annual percentage increase in broad money. For our purposes - note that the major components of broad money on the graph are:

This then confirms that "broad money" means: notes and coins plus all deposits.

Monetary Inflation

The vertical axis on the graph above shows that the data depicts the annual % increase in the "broad money supply". This is monetary inflation - and this leads to price inflation. See the Wikipedia entry below:

The point to note is that price inflation in Australia is not the result of nurses or laborers who demand a wage increase to reflect their cost of living increase - but it is the direct result of an increase in the money supply (which fluctuates between 10% and 20% each and every year).

St. Louis Federal Reserve Bank - Review, Nov. 1975, p.22

The decrease in purchasing power incurred by holders of money due to inflation, imparts gains to the issuers of money.

What changes the money supply

This is a key question that is hardly ever asked or answered. Most people believe that the amount of money in circulation changes due to the government issuing or withdrawing some of the "national currency". However, currency (i.e. notes and coins) only makes up about 3.5% of the money supply - as shown from the RBA figures below:

So let's have a look at another RBA graph - in order to get a hint on the causative factor for changes in money supply.

Here we have a near perfect correlation between Broad Money and CREDIT. Yes - we have now finally identified the culprit that causes an increase in the money supply in our economy. Below is a quote from someone who should know:

Governor Eccles (one time head of the Federal Reserve Bank of the USA)

The bank can create and destroy money. Bank credit is money. It's the money we do most of our business with, not with that currency we usually think of as currency.

Note that when an individual obtains "credit" from a bank and spends that money, he is now "in debt". Hence "credit" and "debt" are just the opposite sides of the same coin. When we say that "money is based on debt" or that "bank credit is money" - it means the same thing. In plain English - money only comes into existence once it is borrowed. Sad but true.

Federal Reserve Bank, New York. The Story of Banks, p.5.

Because of "fractional" reserve system, banks, as a whole, can expand our money supply several times, by making loans and investments.

How deposits are created

Dr Robert Murphy has a detailed explanation of how money is created via debt, i.e. book entries. We have taken his approach and simplified it by way of an example below. Lets us assume that there is a new bank, and that on their first day they take in a cash deposit of $500 from Mike. At this point the total "deposits" in the bank is $500. The balance sheet of the bank is:

On day two - Bill decides that he wants a loan of $1,000 to purchase a new PC, and applies for "credit" from the bank. After having completed the application form, the bank approves his loan and opens his cheque account with the $1,000 available for withdrawal. At this point the total "deposits" in the bank is $1,500. The balance sheet of the bank is:

Transaction (A) is a straight forward transaction. However, transaction (B) is where things get interesting, since this is termed "monetisation of debt". When dissecting this phrase we get a better understanding of what it really means, i.e. creating money from someone's debt.

Federal reserve Bank of New York, I Bet You Thought, p.19

Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower's IOU.

Notice that at all times, the books of the bank are in balance and that the bank has created a new loan of $1,000 on which to charge interest and a new deposit of $1,000 (i.e. an increase in broad money) . The original deposit from Mike remains untouched. Let's get a Harvard professor to explain this process in his own words.

John Kenneth Galbraith (Former Professor of Economics at Harvard)

The process by which banks create money is so simple that the mind is repelled….When a bank makes a loan, it simply adds to the borrower's deposit account in the bank by the amount of the loan. The money is not taken from anyone else's deposit; it was not previously paid in to the bank by anyone. It's new money, created by the bank for the use of the borrower.

Here are a few links that explain the process of debt monetisation:

	Economist's View - a reasonable explanation of the process, and confirms that the money supply is increased.
	The Free Dictionary - confirms that the process is inflationary (i.e. increases the money supply)

Federal Reserve Bank of Chicago, Modern Money Mechanics, p.3

The actual process of money creation takes place in commercial banks. As noted earlier, demand liabilities of commercial banks are money.

In summary - by monetising debt (i.e. providing credit, which when spent - turns into money) the banks increase the money supply. This happens on each and every business day when the banks provide credit (i.e. someone agrees to go into debt). This process causes monetary inflation, which in turn causes price inflation.

What is wrong with "monetisation of debt"

How about - almost everything! Here are a few problems that stem from this system:

The last word should again be reserved for those who have the knowledge and the experience:

Henry Ford - American industrialist. 1863-1947.

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

Thomas Jefferson - 3rd US President (April 13, 1743 – July 4, 1826). Author of the Declaration of Independence.

If the American people ever allow the private banks to control the issue of currency, the banks and corporations that will grow up around them will deprive the people of their property until their children wake up homeless on the continent their fathers conquered.

The solution - debt free money

The ASP Monetary Policy is based on the creation of money by the government, which is then spent into circulation (without anyone needing to go into debt for the money to exist). We urge you to do your own research - and you will see that this is the only way to bring prosperity back to Australia.

Abraham Lincoln Senate document 23, Page 91. 1865

The government should create issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers..... The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government's greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be satisfied. The taxpayers will be saved immense sums of interest, discounts and exchanges. The financing of all public enterprises, the maintenance of stable government and ordered progress, and the conduct of the Treasury will become matters of practical administration. The people can and will be furnished with a currency as safe as their own government. Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power.