As Messenger readers will know from an earlier guest editorial (“Who Creates Money and Where Does it Go,” Jan. 28, 2017), the bulk of the money circulating in our economy is in the form of account money which is created by banks as they make loans.
The fact that banks create new money when they make loans has not been widely acknowledged by bankers or economists, but — thanks to a citizen-initiated national referendum in Switzerland — the ability of banks to create money with just a few keystrokes when making loans is now readily admitted and out in the open. The Swiss referendum, the Vollgeld Initiative, called for a vote to change the way Swiss money is created. It would have brought to an end the standard bank practice of creating money through loans and transferred the power to create money to the Swiss National Bank.
The referendum brought international attention to the issue of money creation. A major article entitled appeared in the June 2 Wall Street Journal entitled “A Shocking Challenge to the Banking System.”
Every growing economy needs a continuous supply of new money to operate. The Vollgeld Initiative proposed that new money be created by the national bank and distributed to the Swiss federal government, and to the Cantons (Swiss states), presumably to be spent directly into the economy in support of public goals and domestic programs. Some of the money created would even have gone directly to Swiss citizens. The powerful Swiss banking system and Swiss Parliament campaigned fiercely against the initiative, but it still garnered 25 percent of the Swiss vote. While the referendum did not pass this time around, it succeeded in raising fundamental questions about how money does — and should — work in an economy. Monetary reform movements are growing in countries around the world.
Many reasons for reform can be cited. For the Swiss, the major issue was economic stability and the use of “fake” money created by banks. The banking system has not significantly changed since the meltdown of 2007-8. Many recognize the potential instability of the current system, and feel that a repeat is likely, if not inevitable. The instability comes from the banks creating too much money, i.e., easy credit in good times, producing debt levels, both personal and governmental, that cannot be managed.
Banks have an incentive to lend as much as they can, within the limits imposed by risk, because loans are the product from which banks profit. When lending produces real economic growth, matching the growth of the money supply, there is no problem. But lending has always tended to outstrip real economic growth, through lending for speculative, non-productive purposes, such as buying houses only for resale when prices rise. As a result, we have increasing debt levels and continued devaluation of our currency, reflected by rising prices.
The current system, in which all new money is created by commercial banks as they make loans, allows these banks to direct where new money goes. It doesn’t go for roads, bridges, water systems, education, healthcare, etc. It goes to where banks can make secure loans. If that new money were created by the federal government, as Article I, Section 8 of the U.S. Constitution calls for, it could go toward support of our physical and social infrastructure. Or, because the monetary system should be regarded as belonging to all of us, that is, part of the commons, at least part of all new money could go directly to citizens.
Because our money is currently created as debt (as credit), interest payments flow on every dollar in circulation from the many, the users of money, to the few, the lenders who are given the privilege to create it. This is a major driver of the concentration of wealth into fewer and fewer hands, largely into the financial sector. This concentration of wealth erodes democracy as the wealthy few come to control elections, government and everything else. The fact that government is not creating money, as the Constitution directs, leads to public austerity and crumbling infrastructure. Extreme concentration of wealth coupled with weakening public institutions is a recipe for social collapse.
Perhaps the most compelling argument for monetary reform is that the current system depends upon growth for its own stability. On a finite planet, growth can’t continue forever. An economy that uses resources faster than they can be replenished by nature and produces waste faster than nature can absorb it is not sustainable. We need to reject the current system which demands growth and adopt one that can provide stability both in times of growth and in times of no-growth.
The system must give way to change. It is time for us to come together to work out how this change can be implemented in ways that will avoid collapse, provide a smooth transition, and leave a future for our children. Proposals are available. They have been formulated in this country as well as in Switzerland, England and The Netherlands, and are being promoted in many other countries as well. They need to be topics for discussion, for political dialogue and for further research.
John N. Howell