17 Aug 2012

Money Creation : How about turning the tables?

It's funny how, when you realize that there is no reason why the monetary system has to be the way it is currently set up, you see that there are a whole host of alternatives that could be used. We are literally spoilt for choice. The problem is that there is absolutely no discussion about such issues. We behave as if the current system is there because it is written in stone - an unavoidable fact of nature.

Most people don't realise that virtually all the money in the economy has been created out of thin air by commercial banks, who lend "money" to individuals, companies and governments, and then charge interest. But, even if you are one of the relatively small number of people who have worked out that the system has been rigged,  then there is a pretty good chance that you will think that since it has nearly always worked that way, that it is impossible to change.

Not true.

If we had a truly free debate on the subject, it would be clear that there are countless alternatives that could be used.

I've been pushing for the idea that all money creation should be debt free. Central banks should create the money supply debt-free and governments should spend the newly created money into the economy for financing projects that are in the public interest. I was thinking that maybe this should be a general rule - that anyone vested with the authority to create the money supply should be forbidden from charging interest.

But then I thought that maybe this was not the only option. How about a situation where governments can still spend money debt-free directly into the economy, but where they can also lend money, with interest, in certain cases. Would this be a good idea? Well, suppose that those who could benefit from such loans were the commercial banks. That would mean that when the government (or the central bank) lends the commercial banks money, those banks could be required to pay the same sort of average interest rates that the governments are currently forced to pay to the commercial banks - namely, around 5%. Now, that would be a real change. It would now be the banking system that has to pay the interest charges for creating the additional money supply, rather than taxpayers.

Looked at this way, this could be a rather neat way of effectively getting tax revenue for the government. That is because interest payments that the banking sector would have to pay to get their hands on additional newly created money would effectively act as a tax.

Consider a situation where the government uses the central bank to generate €200 billion of new money a year. And suppose that while €100 billion of that is spent directly into the economy, with no interest to pay, the remaining €100 billion can be borrowed by commercial banks for financing other activities that are less directly public in nature. If the banks had to pay 5% interest on that money at the end of the year, that would be an extra €5 billion in revenue for the treasury every year.  And if, as is currently the case for governments, the banks didn't pay off the debt at the end of the year, they would continue paying €5 billion a year indefinitely. And, just as with government debt, you could end up with a situation where, after 20 years, the banks would have paid a total of €100 billion and still not paid off the original loan.(Actually, something tells me that the banks wouldn't be so stupid as governments currently are - they wouldn't let the debt rollover from year to year - only our governments are that stupid).

So, maybe allowing money creation with interest is OK - just as long as the interest charges go to the government and are used in the public interest, rather than going to provide unjustifiable profits for commercial banks.

As I say, the range of options is enormous. But what is lacking is any real debate. And I suspect that this absence of debate is because the banks have used a substantial part of their massive revenues to buy the vast majority of politicians, economists and journalists.  That is why it will largely be up to independent thinkers and ordinary citizens to bring the spotlight on these vital questions.

1 comment:

  1. " only our governments are that stupid"
    It's not even a case of stupidity; it's a pure and simple 'couldn't-care-less' attitude as it's not their money they're squandering - the disgusting result of false democracy.