13 Aug 2012

EUREKA! A way out of the crisis?

At 5am this morning, I awoke with an idea that may just be really important. Maybe it was the excitement of the Olympics, of seeing over 10,000 sportsmen and women from 204 different countries, coming together to celebrate what is good in humanity. Maybe I was inspired by that. But, in any case, I really think that I may have a proposition that could provide some light at the end of the tunnel.

So, what's the idea?

First, let's recap on the world in which we currently live. Commercial banks have been given the right to create virtually unlimited amounts of money (credit) in the form of interest bearing debt. Paying the interest on those loans costs taxpayers something like $1 trillion every year.  In the case of multinational banking corporations like HSBC, Credit Suisse, Goldman Sachs etc, they can create money in any currency they like. And, thanks to the existence of a system where they can convert from one currency to another, at no cost, this gives them enormous power. If the banks decide to, they can flood the markets with dollars, pounds, euros, swiss francs, yen or whatever. And they can move the money around from one place to another, making free use of taxhavens to hide their activities. Every three years, the BIS provides some numbers on the level of these foreign exchange swapping activities - at least $1000 trillion a year.

Most of the people I know who have been proposing that this system needs to be changed - people like Ellen Brown, Bill Stills, Stephen Zarnlenga, James Robertson, Joseph Huber and Ben Dyson - have been taking a rather local view. They have been arguing that the US Treasury should take over the money creation process in the USA, or that the Bank of England should be in charge of money creation in the UK. Strangely, I've not yet come across many people arguing for the same sort of action in the case of the Eurozone and the ECB (do let me know if there are any groups out there).

But a second point that strikes me is that I haven't heard anyone talking about what would happen if a single currency zone were to impose a shift from money creation by commercial banks to debt-free creation of the money supply by central banks. However, my Eureka moment at 5am this morning was the realisation that such a move could be very, very intereresting.

The bankers are not going to give up their right to create money easily. Nor will they accept that there should be restrictions on foreign exchange. OK. So leave them the right to create money in other currencies.

Suppose that tomorrow, the Eurozone governments got together and passed a law making it illegal for banks to create new Euros. The banks would still be able to create credit in other currencies such as dollars and pounds. But any bank that extended credit in Euros without having the funds to cover the loan would be charged with counterfeiting. If they wanted euros, they could always create some dollars, and then buy the euros. But the supply of euros could not be increased by the banks.

Now, obviously, people need euros. In particular, if you are living in a eurozone country, you are obliged to pay your taxes in euros. Since the banks are no longer able to create euros at will, there will probably be an increased demand for euros. Indeed, since investors know that the supply of euros cannot be increased at the whim of some powerful bankers, they would probably feel that having euros is safer than having other currencies.

When people start trading other currencies (which can be generated by banks) for euros, this could lead to the euro increasing in value. So, what do we do? Well, we get the European Central Bank to do its job by creating more euros so that the relative value of the euro (and hence prices) remains stable. But what will the ECB do with the money? I would propose that it simply gives the funds to the governments of the 17 eurozone countries to spend into their economies. Not in the form of an interest bearing loan, but simply as a donation. The money could be specifically used for projects that are in the long-term interests of citizens. It could be used for infrastructure spending, including the development of transport and energy systems. It could be used for educational purposes, by building new schools and universities, providing grants to students. It could be used for financing research. You name it. If it is in the interest of citizens, then it can be used.

How many euros would have to be created by the ECB and spent into the economy by the 17 eurozone governments to keep the value of the euro stable? Well, I'm only guessing, but I suspect that the answer is probably very large. At least as big as the trillion euros or more that were being generated by the commercial banks every year between 2006 and 2008.

Imagine that. Huge amounts of euros could be generated centrally and under full public scrutiny. And yet, at the same time, the commerical banks are still able to create their own credit in other currencies. They can still create dollars, pounds and swiss francs. And they can buy euros with their own fictive money. But whereas there are no controls on the volume of dollars and pounds that can be produced (which means that they are more risky), such variations in value for euros can be controlled by the central bank.

I suspect that once a powerful and important currency like the Euro has made the shift, then the other currencies would be forced to act in the same way. 

One last thought. You might think that a major problem would be to decide how much of the newly created ECB money supply should go to each of the 17 eurozone countries. Indeed, it could be tough sorting that one out. So, how about simply dividing up the money pro rata with the number of inhabitants in each country. That would immediately provide a relative boost to those countries which have been suffering the most as the result of the market-imposed austerity - countries like Greece, Spain and Portugal.

That's all for the moment. I'll be thinking hard about the implications of the idea, and will no doubt come back with further thoughts in the days to come.  And I would be very happy to hear your comments.


  1. Letting the governments of the EU member states spend the money on "projects in the interest of citizens" would be impossible to control or supervise and undoubtedly lead to politicians buying votes with nonsense civil service jobs (like the 26.000  foresters in Sicily) and overspending on nonsense infrastructure projects with nice kickbacks for them. Until the EU leaders have gathered enough courage to implement the 1%  transaction tax you propose it would be far better to have the money spent into the economies by the citizens themselves by just cutting taxes. Starting with  VAT and immoral taxes like death duties and then just lowering the percentages of other taxes.

  2. Thanks for the comment Octagon.

    I used to think that a transaction tax that replaced all the other taxes would be all you need - and it does go a long way for sure. However, after have read and digested Ellen Brown, Bill Still, Stephen Sarlenga and co (not to mention Aristotle!), I am now convinced that there is an even more fundamental reform necessary. If  governments  have to borrow money from the banks (at interest), we will always be in the hands of the plutocracy. Even if the governments didn't have to borrow at all (because the FTT raised enough to pay for all the expenditure), the fact is that the bankers have the ability to flood the markets with euros, or use them to buy other currencies - thus making trading extremely difficult for all concerned.

    As for the question of whether the governments would only waste the money - I don't agree. If you say  that the ECB can generate €1 trillion a year (i.e. an amount that only matches what the commercial banks do), and that money is handed out on a pro rata basis, there will be a lot of pressure from the public to use that money intelligently. That's what elected governments are supposed to do. And in the end, even if the governments did use some of the money in a non-optimal way, it is virtually guaranteed to be better than what the banks do. Give the banks €1 trillion, and €770 billion gets parked back with the ECB for overnight deposit. They don't have a clue. And when they do have a clue, you can bet that they won't use it for something that is actually in the public interest. Lending billions to property developers in Spain was completely stupid. There has to be a more intelligent way.

  3. Thanks again for the informative comments. We are on the same wavelength.

    I'm afraid my German is not up to following the videos from Franz Hörmann-Vortag. Is there anything he has done in English (or French!)?

    While I have mentioned 1% for an FTT, the fact is that in many countries 0.2% would be plenty to abolish the existing taxes, and in countries like the UK, 0.05% would be enough. In such cases I have serious doubts that the effect on the real economy would be signficant - although a whopping amount of pointless speculation could well drop out. No problem - the rate can be automatically adjusted to guarantee the levels of revenue.

    Any chance that you could provide a bit more info about yourself? Where are you? Do you have a blog or a webpage??



  4. In my latest youtube video I specifically propose that new ECB created money could be dispatched prorata the population size to the 17 eurozone governments. Those governments could indeed chose to use the money as they wish. They could repay government debt. They could reduce taxes. They could spend some money into the economy via infrastructure projects. All are fine with me as long as there is no debt involved!