Bank Nationalization or Monetary Reform?

The essence of today’s problem is that banks, working in conjunction with Wall Street, were creating credit, i.e. ‘money’, far in excess of the needs of the real main street economy.  There are both ethical and technical objections to the private creation of money, even if that creation had not been as grossly abused as it has been in the last several decades.  For at least a century, monetary system reformers have been suggesting that the public and not the private sector should be creating society’s money and benefiting from its creation.  Any number of authors – most recently and accessibly, Ellen Brown in “Web of Debt” – discuss in more detail the process of money creation and the issues involved.  In 1926, the Nobel prize-winning chemist Frederick Soddy wrote “Wealth, Virtual Wealth and Debt”, the product of his years-long study of money, banking and economics.  Eight years later he produced “The Role of Money”.  Both read like they could have been written to describe our current economic crisis.

Monetary reformers argue the creation of society’s money supply based upon privately-held debt is a recipe for economic crises such as the one we are now facing.  Most of our money is currently created in exactly this fashion.  This is true for both what we recognize as money, US Federal Reserve notes, and for less easily recognizable forms of money such as credit card debt, bank loans and checking account balances.  The Federal Reserve’s responsibility for the current mess has to do with its acquiescing in the creation of too much credit:  for wealthy investors - whose ability to repay investment loans depended on constantly increasing asset values; and for lower income borrowers with no realistic prospect of repaying loans.  (The Federal Reserve is NOT ‘federal’.  So says the Supreme Court.[2]  It is a consortium owned and run by and for privately-owned member banks; “…dividends are, by law, 6 percent per year”.[3])

This excess money creation permitted banks, working in conjunction with Wall Street, to collect huge fees connected with the creation, packaging and selling of debt to investors.  When the banks and Wall Street were creating and selling all this credit, what they were doing was, in effect, creating money for those of us in the real economy.  For borrowers, it was the money used to buy or refinance homes, etc.  For ordinary investors it was the debt from which an income could be derived in the form of interest on the underlying loans.

We are now experiencing the consequences of a technical flaw associated with a money supply based upon privately-held debt.  When the debtors responsible for that debt are no longer able to pay the interest on it, the value of the ‘money’ their debt backs is destroyed.  It is obvious that if the supply of real wealth remains constant but the quantity of money suddenly decreases people will be able to pay less for that wealth.  This is true for both the necessities of life and investments.  Declining prices are the essence of the deflation fears expressed by financial commentators.  Another manifestation of a decimated money supply is a ‘liquidity crisis’; if there is not enough money, people in the real economy have a difficult time securing loans and selling their investments.

Once you understand how money is created, i.e. mainly credit based upon privately-held debt, the ethical issue is obvious.  Since money constitutes an effective claim on society’s real wealth, why should a private party – whether that party is a bank or a counterfeiter – be allowed to create it?  If government were to create money instead of private parties, it could use the wealth so requisitioned to reduce taxes and provide essential public services.

None of the above should be construed to suggest that nationalization of the banking system is the only alternative if we desire a functionally stable and ethically just monetary system.  All that is required is for the government to create credit money as well as the traditional currency we thought it was creating.  Such a scheme, called The Chicago Plan, was proposed by a group of this country’s preeminent economists formed in the 1930s to study the causes of the Great Depression and propose fixes to insure such an economic catastrophe did not recur.  Under the monetary system proposed by the Chicago Plan economists, the government would be able to control the quantity of money in circulation to insure it exactly matched the needs of the real economy without producing either inflation or deflation.

Private bankers could still profit borrowing government-created money or paying depositors at a lower rate of interest then loaning that money to borrowers at a higher rate.  Nor would a Chicago Plan-like monetary system require the decimation of our forests and fleets of vehicles to move paper currency between banks before they could make new loans.  Banks would simply have to have government money, i.e. a credit entry in the government’s computer money supply ledgers, backing every dollar of credit they created for the economy at large.

Whether it is a Chicago Plan or something else, fundamental changes to this country’s and the world’s monetary and banking systems are urgently required.  The Federal Reserve has presided over one economic catastrophe since its creation.  It now looks as though another is on the way.  The United States and the world are on the verge of taking drastic actions to insure our monetary and financial systems do not destroy the real economies upon which the lives of billions of people depend.  We must insure those actions really fix the problems and not just disguise them under a deceptive label of banking system “nationalization”.