28 Jul 2012

Money creation : governments or banks?

Let's compare two systems.

In the first system, the one we currently have, commercial banks have an effective monopoly on money creation. They can effectively create as much money as they want to, they can charge as much interest as they want to (or at least as much as they can get away with), and they can decide where the money goes.

In the second system, the one that we should have, money creation is the job of governments. Under that system, money can only be created if there is a real need for it, those who create the money need not charge interest at all, and the money is only spent on projects that are clearly in the public interest.

Which of these two systems would be better?

Well, we know that the first system costs tax-payers a fortune. It has cost European tax-payers €5.6 trillion in interest charges since 1995, and it has cost US taxpayers $8.5 trillion since 1988. In both cases, these numbers account for more than half of all government debt. I don't yet have figures for how much interest payments have cost the governments of the rest of the world, but I would bet that we can imagine that it will be a similar eye watering number.

What did the banks do with all the money they get from the interest charges? Do they reinveste it in useful projects that are in the public interest? I would be interested to hear a representative from the banking sector explaining what they did with all our money. But I note in passing the recent study showing that between $21 and $32 trillion is currently stashed away in tax havens on the accounts of very wealthy individuals. Where did those people get all their money from? Do you think they really earned it by hard work or skill? Or are they the people who have siphoned the money out of the system? Is it a coincidence that the numbers are actually quite similar to the sum of the €5.6 trillion and the $8.5 trillion plus the interest charged on the other nations of the planet?

What about the way the newly created money is used. Do banks really do it better that governments? Given the recent reports showing that around half of newly created money goes to finance the property bubble (not even to finance the construction of new property), 30% goes to the financial sector (to allow them to speculate on the markets). Only a few percent gets used for actually developping the economy. Furthermore, there are virtually no figures on the amount of money that banks actually create temporarilly to play the markets. When Jerome Kerviel ran up a deficit of €50 billion for Société Générale, do you think he was using the money that savers had deposited with the bank? Very unlikely. He had almost certainly been given the green light to create the money directly. Just make sure that you make a profit with it. This ability to push the markets one way or another is seen everyday in the way that share prices go up and down. There is no need to use depositors money if the banks can just create some more out of thin air.

But whatever the banks do, they will be charging the rest of us interest on the money they create. Even when the central banks lend them money at 0.25%, they will lend it on to the public at whatever rate they can get away with. Is there any limit to the level of greed? Apparently not. I think that Quid 24.com wins the prize for the biggest ripoff - they charge an APR of 14,348%.

Now compare that with a system in which the government creates the same volume of money supply per year as the commercial banks currently do, but injects it directly into the economy in the form of public spending. In that case, the money could be used directly for things that are in the public interest. For example, rather than lending money to buy houses that already exist, money could be used to build lowcost public housing that could be rented out to people on modest income. The money could also be used to renew the transport infrastructure, build hospitals and schools, pay for teachers, firemen, police officers. In other words, all the things that we actually need.

With a money creation budget that is a fraction of what the commercial banks are currently pumping into the economy, it is likely that it would be possible for governments to fund all the expenditure programs that are currently paid out of taxes AND WITH NO INTEREST TO PAY. And what does that mean? It means that governments could probably abolish all the existing taxes.

Imagine that. No income Tax. No VAT. And no corporation taxes that the multinationals don't pay anyway. No tax avoidance schemes. No unfair advantages for those wealthy enough to hide their money in tax havens.

Why is noone talking about this? Even those at the Positive Money site don't seem to push the idea that public money creation could be a perfectly viable alternative to taxation.

I think that the answer is clear. Nearly all the media and many politicians are controlled by the financial lobbies who would lose their power if governments were no longer in debt to the banks. The fact that Stephen Zarlenga had to publish "The Lost Science of Money" himself (via the American Monetary Institute) suggests that these ideas are too hot for conventional publishers to handle. They, like many of the mainstream media, almost certainly owe money to the bankers. And those bankers can refuse to lend to anyone who doesn't play their game.

I believe that it's now up to ordinary citizens to make the move. Despite everything, we still do live in a democracy where most of us can elect our governments. And if there were politicians around who were supporting the idea of taking money creation away from the banks and using debt-free public money creation instead, I cannot believe that they would not be able to get the 99% voting for them.

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