A Second Model for Regaining Control of Our Money

(This is the fifth in a series of posts about stripping private banks of their power to issue money)

Modernising Money: Why Our Monetary System is Broken and How It Can Be Fixed

by Andrew Jackson and Ben Dyson (Positive Money 2012)

Book Review

Modernizing Money lays out a model for restoring government control of the money supply that’s very similar to the Chicago Plan. However it differs from the Chicago Plan in several important ways. Unlike the Chicago Plan, this second model isn’t obsessed with sovereign debt repayment. This, in my view is the most significant difference. Given the IMF’s singular focus on servicing debt, their heavy emphasis on debt repayment isn’t terribly surprising.

In allowing publicly accountable government bodies to assume responsibility for issuing money, both models ensure decisions around money creation are based on the needs of a productive economy, rather than the profit profile of private banks.

Thus both go a long way towards ending bubbles and boom and bust cycles, as well as reducing debt and minimizing inflation and deflation. The 2008 economic downturn was triggered by sudden deflation, i.e. the permanent loss of 60-200 trillion dollars from the global economy.*

Because income inequality increases in direct proportion to debt levels, nationalizing the money supply will also reduce income inequality.

A Radical Change in the Function of Banks

The function of banks changes radically under both proposals. In both cases, private would function purely as money brokers, like credit unions and savings and loan associations. They would only be permitted to loan money from existing assets, from customers’ investment accounts or from reserves borrowed from the central bank. Under both plans, there would be no bank bailouts or bank depositor insurance. When private banks cease to serve the essential function of creating and maintaining the money supply, they will cease to be “too big to fail.” Those that continue to make risky speculative investments will be allowed to go bankrupt.

How the Two Proposals Differ

The proposal Positive Money puts forward in Modernising Money is based on the British economic system, whereas the Chicago Plan is based on the US system. Thus the transition would be somewhat easier in the UK, where the central bank (the Bank of England) has been government-owned since 1946. In contrast the US the central bank (the Federal Reserve) is a consortium of privately owned banks.

Unlike the Chicago Plan, the Positive Money model would use newly created sovereign money for other purposes that paying down existing debt. Under the Chicago Plan, using the new debt-free money to repay sovereign debt (aka national debt or public debt) would be one of the first steps in the transition. The Chicago Plan would also use the new money to issue a citizens dividend that businesses and households would use to pay off private debt.

The Positive Money proposal would simply transfer all existing public and private debt (i.e. mortgage and consumer debt) to the Bank of England balance sheet. Businesses and households would continue to make loan repayments to the Bank of England according to the terms agreed with their bank. This new revenue accruing to the BOE would be spent into the economy in one of five ways. At the discretion of the British government, it could be used to increase public spending, cut taxes or repay government debt. It could also be used to issue a citizens’ dividend (which households and businesses would be required to use for repayment of existing debts) or new loans to businesses.

Ensuring Adequate Credit for the Business Sector

Positive Money is also more explicit about how they would ensure there is adequate credit in the economy to make sure new businesses have adequate access to loans for productive business investment. They would use a variety of qualitative and quantitative methods, including the existing Credit Conditions Survey. They would then auction off a specified amount of new credit to private banks. This new credit could only be used for business loans and not mortgages or consumer credit.

*Both proposals also make the claim that nationalizing the creation of money would also end real estate speculation and bubbles by restricting the funds available for mortgage loans. However given that both proposals spend new money into the economy, there’s still a good chance this could be used for real estate speculation. In my view, the only way to prevent this would be to implement a Land Value Tax simultaneously with the transition to government-issued money.

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.

UK Greens Call to End Debt-Based Money

According to Positive Money, the Green Party of England and Wales has joined the US Green Party in proposing to strip private banks of the power to create money. The September 13 motion calls for the power to be placed with a democratically accountable National Monetary Authority at the Bank of England.

The US Green Party has recently adopted a similar plank in their Economic Justice Platform:

15. Nationalize the 12 Federal Reserve Banks, reconstituting them and the Federal Reserve Systems Washington Board of Governors under a new Monetary Authority Board within the U.S. Treasury. The private creation of money or credit which substitutes for money, will cease and with it the reckless and fraudulent practices that have led to the present financial and economic crisis.

16. The Monetary Authority, with assistance from the FDIC, the SEC, the U.S. Treasury, the Congressional Budget Office, and others will redefine bank lending rules and procedures to end the privilege banks now have to create money when they extend their credit, by ending what’s known as the fractional reserve system in an elegant, non disruptive manner. Banks will be encouraged to continue as profit making companies, extending loans of real money at interest; acting as intermediaries between those clients seeking a return on their savings and those clients ready and able to pay for borrowing the money; but banks will no longer be creators of what we are using for money.

The New Zealand Green Party is still debating whether to include a similar provision in their monetary reform policy.

Link to US Green Party: http://www.gp.org/

Link to British Green Party: http://www.greenparty.org.uk/