8 Aug 2012

Creating the money supply : The Euro as a testbed for new ideas

The current system for creating the money supply is demonstrably insane.

Commercial banks are currently creating up to $8.8 trillion every year of new credit - i.e. debt. They lend that money to consumers, businesses and governments, who then have to pay those banks interest on their debts. If we just take into account government debt, this is costing taxpayers over $1 trillion every year just to cover the interest charges.

There is noone controlling how much new credit the banks create. At best, the next Basel III regulations will try and prevent banks from generating more that 33 times more credit than they have in capital reserves. But as my facetious proposal for solving the UK governement's debt crisis in 5 easy stages shows, it doesn't take much for the banks to completely ignore any such restrictions. If they wanted too, the commercial banks could collectively decide to flood the world economy with $100 trillion of new debt.  Who could stop them?

Giving the commercial banks the right to create the money supply is not only  a rip-off because it allows them to charge enormous interest charges for lending money that they don't actually have, it also gives them an unbelievable amount of power.  As is increasingly obvious, elected governments have no control whatsoever on where the banks put the newly created money. Although everyone is calling for banks to provide money to struggling businesses, the banks can do precisely what they want with the money. They can decide to lend 50% of the new money to housebuyers - not to build much needed new housing, but to buy the existing houses - which explains why house prices have gone through the roof. It's a great system for the wealthy - they already have houses to live in. But it's a total disaster for anyone trying to get in at the bottom end.

The banks also use massive amounts of newly created money to pump into the financial system. This money gets used for speculating on the commodities markets (producing insane fluctuations in the price of essential goods including food) and playing with the exchange rate system (which produces even more instability in pricing). Remember that to maximise the amount of money that can be earned, it is actually a good thing for traders to maximise instability, because it is by playing with those instabilities that they make their profits.

And of course, much of the newly created money goes to finance takeovers and mergers, allowing people like "Sir" Philip Green to buy up much of the British High Street with borrowed money, and then pay his wife £1.2 billion in dividends. And of course, since she is resident in Monaco, she didn't have to pay tax.

You couldn't come up with a more stupid system if you tried. But since the current system is incredibly favorable to a relatively small group of extremely powerful people, and those people control the media and politicians, it will be a tough job getting it changed.

Consider a simple alternative - an alternative that is being proposed by an increasingly vocal group of people, including Bill Still, Ellen Brown, Stephen Zarlenga, James Robertson and Ben Dyson. We all believe that commercial banks should be banned from creating new money. It is, after all, simply a legal form of counterfeiting.  If anyone except a banker did it, they would go straight to jail.  Instead, the money supply should be created by elected governments and in the interests of all in society - not just the privileged few. Yes, there need to be controls to prevent abuse of the money creation process. But, surely, nothing could be worse than the current system where commercial banks do precisely what they want.

Some people argue that the best thing would be to allow each country to have their own central bank, which would be free to create their own money supply locally. A country that "printed" too much would have the value of its currency cut by the international foreign exchange markets. A country that was frugal and didn't print much money would be "rewarded" by the foreign exchange markets - it would see the value of its currency increase.

I think this is a very bad idea. Apart from anything else, it gives the Foreign Exchange Traders enormous power. Currently, if a government tries to implement a policy that is not approved by the markets, it can be punished by having its currency attacked. With tens of trillions stashed away in tax-havens, the possibility for the plutocracy to impose their will is enormous.

We need to remove this power. One way would be to use a Financial Transaction Tax to make currency speculation less attractive. But the other way is to group different countries together with the same currency and come up with a more intelligent way of deciding how to create the money supply.

Hmm.. having several countries sharing the same currency, and having to come up with a common way to create the money supply? Could that be done?

Well, yes. We almost have that already. With the Euro, there are 17 different governments that all share the same currency. What we don't have is the other part of the equation - that bit that gives those 17 governments the responsibility of controlling the creation of the money supply. Currently, the money supply is in the hands of the commercial banking system. And although the ECB is supposed to be regulating what happens, the fact that the markets can charge one Eurozone government 1.30% (Germany) and another one 27.82% (Greece) is the perfect demonstration that it simply doesn't work.

What is needed is an intelligent way for the European Central Bank to create the Euro money supply directly without the need to use commercial banks. And the ECB should provide the money directly to Eurozone governments debt free. Of course, there will be those that say that government funding needs to involve debt - otherwise governments will be tempted to spend too much. But the European Union has several decades of experience in dividing up the cake. It has a budget of €141 billion. Much of this is distributed roughly on the basis of the relative GDP and population of each member states. But if the European Parliament thinks that it is important to give an extra boost to infrastructure development in poorer countries, then more money can be diverted to those poorer countries.

Likewise, when it comes to dividing up the European Budget for Scientific Research (something that I know a fair bit about), it is clear that it is not GDP that is the criterion - it is the quality of the scientific projects that determines where the money goes.

Why not use the EU's competence in attributing resources for coming up with a scheme for dispatching ECB creating debt-free funding? Instead of just talking about the €141 billion EU budget, the governments of the 17 Eurozone countries could get together and ask themselves how to develop an intelligent way to create the money supply within the Eurozone. Could they come up with something more intelligent that allowing commercial banks within the Eurozone to create whatever sums they like, and to lend the money to whoever they want, and to charge as much interest as they can get away with? You bet they could! It would be impossible to come up with anything worse!

I really think that the Eurozone is the perfect testbed for coming up with something better. We don't want each country with its own currency, with all the risks of allowing the markets to blackmail them by playing the exchange rates. We want something intelligent, in which reasonable people get together and devise something that distributes the money supply in a rational way.

I will be thinking hard about the best way to do this.


  1. Thank you once again Simon.
    Excellently put. 
    As I usually say; "May the gods hear ye …"

  2. Thanks Michael. I'm actually rather pleased with my latest proposal for using the Eurozone as a way to break the stranglehold of the banking system. I think I can feel a new Youtube presentation coming on....