The way money is created and issued, who creates it and in what form - as debt or debt-free, in one currency or another - largely determines whether a financial system works fairly and efficiently or not. In our global village, money shapes our lives at personal, household, local, national, and international levels. The system now in place encourages or compels us all to get and spend money in ways that work against the planet, against other people, and against ourselves.
The great majority of the money supply in national economies is created by profit-making banks writing it into their customers' accounts out of thin air as bank loans in electronic bank-account money, not coins or banknotes. They call it "credit", to disguise the fact that it is actually money.
When money starts as debt, paying the interest in addition to the principal requires more money to be earned as income than has been created. That makes it necessary for the supply of money and the accompanying indebtedness in society to keep growing, which has damaging systemic effects for both the environment and society. For example, the economic growth that supports an increasing money supply requires more of the Earth's resources to be turned into commodities. Growing indebtedness works in favour of those who lend money into existence and against those who borrow and pay interest.
Giving profit-making banks the privilege of deciding the first use of money when it enters circulation distorts the economy. For example, it favours investing in existing assets like land and housing with ready collateral and long-term prospects of appreciation, instead of investing in needed goods and services.
A sure recipe for booms and busts
Allowing commercial banks to create our money inevitably causes frequent booms and busts. There have been more than 90 in various parts of the world in recent years, according to a UN study. During the booms, when the economy is growing, the banks greatly profit by making many loans, thus creating too much money. In the busts, they stop lending, which shrinks the money supply. Then they demand massive bailouts so they can reactivate their privilege of supplying money.
From the bankers' point of view boom/bust cycles are inevitable. Chuck Prince, the outgoing chief executive officer of Citigroup observed in 2007, shortly before he received his multi-million-dollar "golden parachute" for being chucked out of his crisis-stricken bank, "As long as the music is playing, you've got to get up and dance."
But there is an alternative-based on the wisdom of US founding fathers like Thomas Jefferson and James Madison, and later Abraham Lincoln, who all opposed giving "the money power" to the banks and said it should be reserved to the government.
A nationalised central bank would create the right amount of money for the economic conditions, and give it to the government to spend into circulation debt-free.
This would place the national currency under the control of a public agency responsible for carrying out money supply objectives laid down by the elected government, accountable to the legislature, and subject to democratic control. It would break the boom/bust cycle created by the expansion and contraction of debt. Safeguards would ensure that the agency did not allow politicians to create additions to the money supply for their own electoral or other narrow political purposes.
Commercial banks would, without doubt, resist this change. If they lose the privilege of creating money out of thin air, they'll be competing on the same playing field as businesses that don't get their stock-in-trade as a free gift.
A step towards more radical reform?
Central bank governors - like Ben Bernanke of the US Federal Reserve and Mervyn King of the Bank of England - are now issuing large sums of new money out of thin air in an effort to get banks lending again. Reducing interest rates virtually to zero has failed to persuade banks to lend money into existence. There is no alternative but to create the necessary money through the central banks.
Conventional wisdom throws up its hands in horror at the idea of a public agency supplying money as a public service. So this practice is called "quantitative easing" and sold as a one-off dose of a very special, costly laxative, designed to clear the constipation of the commercial banks after their gargantuan profit-making "credit" binge. Governments could, however, use quantitative easing, not to shore up the power of the banks, but as a stepping stone toward returning the power of issuing money to democratic control.
James Robertson wrote this article as part of 'The New Economy', the Summer 2009 issue of YES! Magazine.