(This is the first in a series of posts about ending the right of private banks to create money.)
In January Jesse Myerson, writing in the Rolling Stone, called for five seemingly radical economic reforms in an article entitled Five Economic Reforms Millenials Should be Fighting For: guaranteed jobs for everyone, Social Security for all (a guaranteed Universal Basic Income for all citizens), Land Value Tax (which I blog about in Progress and Poverty ), creation of a Sovereign Wealth Fund (enabling government to buy back and own public assets), and a state-owned bank (like the Bank of North Dakota) in every state.
Personally I found the article disappointing and a little sad. Myerson seems to deliberately overlook the most pernicious problem in our present economic system: the power we give private banks to issue and control our money supply.
Contrary to popular opinion, the government doesn’t issue money, except for a limited amount of notes and coins. As the film below explains, 97% of the money supply is electronic and created by private banks when they issue loans.
A lot of people have the mistaken impression that banks use other depositors’ money when they loan us money to buy a house. What actually happens is that the bank creates the money out of thin air by entering numbers into a computer.
Another common erroneous belief is the the Federal Reserve, which serves as the US central bank, is a government agency. It’s not. It’s a consortium of private banks.
97% Owned (Positive Money 2012) makes the case that the only solution to the current economic recession is to ban private banks from issuing money. They argue for making money creation publicly accountable by restoring this function to government (ironically this is where most people mistakenly believe it lies). Until we make this happen, private banks will continue to use their control of the monetary system to undermine genuine economic and political reform.
Excellent post as usual SJB. It is interesting that what you are speaking about is so misunderstood by most people. It has been assumed by many that economics is difficult to understand and boring and so people shy away from it. Tubularsock believes there has been a conscious effort to promote this idea thereby making “regular” people think they aren’t smart enough. And it has worked.
Tubularsock has attempted with many “educated” people to discuss what you have posted but they just dodge the subject and then get out their charge card and pay for dinner. Now should Tubularsock rock this gravy-train?
It’s a tough question, Tubularsock. A fella’s gotta eat. What really irritates me is the clear public deception that’s going on. The corporate elite want us to believe that the government issues and controls money. They don’t want people to know that it’s all controlled by private banks.
That’s what really pisses me off about the Rolling Stone article, which essentially perpetuates the Big Lie. More people understood about the role of private banks in money creation in 1960 than do now. This is verified in several recent studies.
In 1961 we learned in 8th grade math that there were 3 forms of money: bills, coins and demand deposits (created by banks). Of course my math teacher couldn’t explain what a demand deposit was, but the concept was still in the curriculum.
Nice Doc – thirty or forty years ago a well managed bank was leveraged at maybe 10 to 1 (that is, it had a dollar of its own capital for every ten dollars it held in assets) and it’s loan / deposit ration was maybe 80% at most (that is, a bank lent out up to 80% of its own deposits and no more if it didn’t want the Regulators on it’s back). Remaining deposits were held in government securities. The acquisition and merger of regional banks into the too big to fail banks of today. the virtual elimination of meaningful capital requirements and the funding of lending through slick accounting with the Fed has created banks which are in actuality insolvent. They have no capital, extend far more credit than their deposits alone would support; they should be broken up into smaller units and Glass Steigall should be re-instated. Don’t hold your breath. And your right – nobody talks about it.
According to Modernising Money, recently published by Positive Money, banks create as much credit (debt) in the form of loans as they like and only seek reserves (by borrowing from the Federal Reserve) as an afterthought. They don’t need any reserves at all to issue business loans – and 10% reserves for mortgage and household loans. The tricky part is that they’re allowed to estimate the value of reserves they hold as assets, which legally includes all the subprime mortgages they bundle and sell on as securities.
Of course, the money they borrow from the Fed doesn’t exist, either. This, too, is just a number in a computer.
Nobody talks about any of this except some IMF economists who are running around trying the promote The Chicago Plan (first floated in the 1930s during the Great Depression) which would outlaw banks loaning any money they don’t have sufficient reserves to cover.
I’m planning a post about IMF economist Michael Kumhof and the Chicago Plan as part of this series.
Had to set aside some time to watch the film Doc, Great share!
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Excellent post. We need to be aggressive in making these reforms happen. We must enlighten the ignorant masses about the fact that the Federal Reserve, Goldman Sachs and the rest of the financial “industry” are nothing more than economic terrorists. And, that there will never be anything resembling democracy until this is done. Thank you.
In my view, the first thing that needs to happen is ending the ability of private banks to issue money. Unless we do that, it’s way to easy for Goldman Sachs et all to sabotage other economic reforms by manipulating the money supply.
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