An IMF Proposal to Ban Banks from Creating Money

(This is the fourth of a series of posts about ending the ability of private banks to issue money.)

For the past 18 months ago, IMF economists Michael Kumhof and Jaromir Benes have been circulating a proposal to end the ability of banks to create money.

As Kumhof explains in the Nov 2013 video below, the perception that governments create money is totally false. In the current global economic system, only about 3% of money (mainly coinage) is created by government. The other 97% is created by private banks out of thin air when they generate new loans. See Economic Justice: the Rolling Stone Version

For various reasons, which Kumhof explains in the video, he and Benes believe that unlimited and unregulated private money creation by banks is responsible for the current economic crisis. And that full recovery is only possible if the privilege of creating and controlling the money supply is restored as a government function.

In addition to assuming sovereign control over the money supply, national governments would also require banks to hold 100 percent reserves for the loans they initiate. This effectively terminates the ability of private banks to create money out of thin air. And this, in turn, massively reduces their political power.

Ironically, the proposal isn’t new. Entitled the Chicago Plan, it was first put forward by University of Chicago professors Henry Simons and Irving Fisher during the Great Depression.

The History of Private vs Sovereign Money

During the Q&A at the end, Kumhof briefly discusses previous experiments with government-issued sovereign money, which have mainly occurred in the US. Sovereign money funded the original 13 colonies, the American War of Independence and the Civil War.

In their paper The Chicago Plan Revisited, he and Benes trace the history of sovereign money back to the ancient Greeks and Romans. During the Middle Ages and Renaissance, all currencies were publicly controlled (by kings and the Pope) until 1666, when Charles II transferred control of money creation to private banks with the English Free Coinage Act of 1666.

The slides, which are difficult to see in the video, are available here

For me the high point of the video is Kumhof’s disclaimer that he doesn’t represent the IMF – that he’s only doing research. Yeah right. I sure wish I had an understanding boss who let me run around making radical proposals to strip investment banks of their power and wealth.

It seems more likely that people in high places know the ship of capitalism is going down – that this is a last ditch effort to save it.

Economic Justice: the Rolling Stone Version

(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.