Time for a new money theory

By understanding money simply as a loan, we get a powerful tool for our communities.

The reason that our financial system regularly gets into trouble with periodic waves of depression, like the one we are now fighting with, may be due to a misunderstanding of not only the role of banking and credit, but also the very nature of money. In our economic childhood, we saw money as a “thing” - something independent of the relationships they promote. But today our money is not backed by either gold or silver. Instead, they are created by banks when they give out loans (for example, in the form of Federal Reserve banknotes or dollar accounts created by the Fed, a private banking corporation, and lent to the economy) [ The group of authors evaluates the Fed as a private banking corporation with a state guarantee of solvency, attributing it to thus to the public sector economy ]. Virtually all money today is created as a loan or debt, which is merely a legal contract of payment in the future.

From translators: invading the economy, information technology should be evaluated by economists. Digital money and community currencies and cryptocurrencies force us to rethink the sources of money as such and think about what the money of the future will be.

Average reading time: 8 minutes

Money as a ratio

In an instructive dissertation entitled “ Toward a General Theory of Credit and Money ” in The Review of Austrian Economics, Mostafa Moini, a professor of economics at the University of Oklahoma City, argues that money has never been “a commodity” or “a thing." “Relationship”, legal agreement, credit / debit agreement, recognition of the debt and promise to repay it.

The concept of money-as-a-product can be traced back to the use of coins made of precious metals. Gold is considered the oldest and most stable of known currencies, but in fact it is not. Money did not start with gold coins, followed by evolution into a complex accounting system. On the contrary, they began as a accounting system and developed into the use of coins made of precious metals. Money as an “invoice unit” (the amount of payments and debts) preceded money as a “stock of value” (ie a commodity or thing) by two millennia; Sumerian and Egyptian civilizations that used such payment accounting systems did not exist for hundreds (as in with some civilizations that used gold), and for thousands of years. Their ancient payment systems, similar to banks, were public organizations under the control of power structures just as today courts, libraries, and post offices function as public services.

In the payment system of ancient Sumer, the value of the goods was determined in units of weight and in these units they were compared with each other. The unit of weight was “shekel", something that was originally not a coin, but a standardized measure. The word "Sheh" was called barley, suggesting that the initial unit of measure was the weight of the grain. Other goods received marks compared to him: such a shekel wheat was equal to such a number of cows, which was equal to such a number of shekels of silver, etc. The prices of basic goods were set by the authorities; Hammurabi, the Babylonian king and legislator, had detailed tables of such prices. The interest rate was also constant and unchanged, which made economic life very predictable.

Grain was stored in granaries, which worked as a “bank”. But the grain quickly deteriorated, so that silver eventually became a standard measure in which obligations to pay were calculated. A farmer could go to the market and exchange his perishable goods for silver, and then return at a convenient time to buy out other goods for this market loan if necessary. But still it was just a debt bill and the right to repay it later. In the end, the silver measure became wooden, then paper, then electronic.

Credit Revolution

The problem of gold coins is that their volume does not expand to meet the needs of trade. The revolutionary innovation of medieval bankers was the creation of a flexible money supply that could keep up with intensive trade expansion. They did this with the help of a loan that emerged from overdraft clearance for their depositors. As part of the so-called "partial reservation" of bank operations, bankers issued paper receipts, called banknotes [from banknote, bank receipt], for more gold than they actually had. Their customers sailed with their goods by sea and returned with silver or gold, paying the bills and allowing the bank balance to fall. The loan thus created was in great demand in a fast-growing economy, but since it was based on the assumption that money is a “thing” (gold), a ban The kirs had to participate in some kind of game in thimbles, which occasionally caused them trouble, they said that all their clients would not come for gold at the same time, but when they were wrong in the calculations or for some reason people had suspicions, too many people tried to remove everything from their accounts, the financial system collapsed, and the economy plunged into depression.

Today, paper money can no longer be redeemed in gold, but money is still perceived as a “thing” that must “already exist” before a loan can be issued. Banks are still creating money by issuing loans, which become deposits in the borrower's account, which, in turn, become money for non-cash payments. However, for their outgoing checks to be accepted by the other party, banks must take money from the general fund to which they deposit their customers. If they do not have enough deposits, they should borrow money in the foreign exchange market or from other banks.

As British author Ann Pettifor observes: "The banking system ... failed in its main goal: to act as a vehicle for lending to the real sector of the economy. Instead, the banking system turned upside down and became a loan machine."

Banks suck out cheap money and return it as more expensive, if at all. Banks control money taps and can refuse to loan small players who default on their loans, allowing major players with access to cheap loans to buy basic assets very cheaply.

This is one of the systemic flaws in the current scheme. Another disadvantage is that borrowed funds securing bank loans usually come from short-term loans. Like Jimmy Stewart's long-suffering savings and loans in the movie It's a Wonderful Life , banks “take short-term loans to issue long-term loans,” and if the money market dries up suddenly, banks will have problems. This happened in September 2008: according to a member of the House of Representatives, Pavel Kanerski, who spoke at C-Span in February 2009, $ 550 billion was immediately withdrawn from the money markets

Bank scene from the movie It's a Wonderful Life

Securitization: "monetization" of loans not by gold, but by houses

Money markets are part of the “shadow banking system,” where large institutional investors place their funds. The shadow banking system allows banks to bypass capital requirements and reserves, which are now imposed on depository institutions, by writing off loans from their accounts.

Large institutional investors use the shadow banking system, because the conventional banking system provides deposits of up to $ 250,000, and large institutional investors spend significantly larger amounts of money every day. The money market is very liquid, and what protects it instead of FDIC insurance is that it is “securitized” or supported by some kind of securities. Often, collateral consists of mortgage-backed securities (MBS), securitized units into which American real estate has been cut and packaged, just like sausages.

As is the case with gold, which was borrowed many times in the 17th century, the same house can be mortgaged as “collateral” for several different groups of investors at the same time. All this is done behind an electronic curtain called MERS (an abbreviation for Mortgage Electronic Registration Corporation Corporation), which allowed homes to move between several rapidly changing owners, bypassing local registration laws.

As in the 17th century, however, the scheme faced problems when more than one group of investors tried to claim their rights to real estate at the same time. And the securitization model has now broken on the hard rock of centuries of state real estate law, which has certain requirements that banks have not fulfilled and cannot fulfill if they are going to comply with tax laws for mortgage-backed securities. (More information here .)

Bankers actually engaged in massive fraud, not necessarily because they started with a criminal intent (although this cannot be excluded), but because they were required to do so in order to come up with goods (in this case, real estate) to secure their loans. This is how our system works: banks do not actually create a loan and do not provide it to us, relying on our future ability to repay it, as they once did under the deceptive, but functional facade of partially backed loans. Instead, they suck our money and return it to us at higher rates. In the shadow banking system, they suck out our real estate and return it to our pension funds and mutual funds at compound interest. The result is a mathematically impossible financial pyramid, which by its nature is subject to system failure.

Public Credit Solution

The shortcomings of the current scheme are currently being sorted out in the largest media, and it may well be in the process of final destruction. Then the question is how to replace it. What is the next logical phase of our economic evolution?

Credit should come first. We, as a community, can create our own credit , without participating in the impossible pyramid, in which we always borrow from Peter, in order to pay Paul for compound interest. We can avoid the pitfalls of private lending with a public credit system, i.e. a system that relies on the future performance of its members, guaranteed not by the “things” that sneak at risk by playing thimbles, but by the community itself.

The simplest model of public credit is electronic currencies within communities. Consider, for example, one such such as Friendly Services ( http://www.favors.org/FF/ ). The participating online community should not start its activities by creating a fund of fixed capital or reserves, as is now required of private banking institutions. Participants also do not borrow from the pool of already existing money, for which they pay interest to the owners of the pool. They create their own credit by simply depositing funds into their own accounts and crediting others. If Jane bakes cookies for Sue, Sue credits 5 "favors" to Jane's account and deposits into her own account by 5. They "created" money just like banks, but the result is not inflationary. Jane Plus-5 and Sue Minus-5 balance each other, and when Sue pays her debt by doing something for someone else, it all comes to naught. This is a zero sum game.

Community currencies can be very functional on a small scale, but since they are not traded in the national currency, they are usually too limited for large enterprises and projects. If they become much larger, they may face exchange rate problems inherent in small countries. These are actually barter systems, not intended for issuing loans on a large scale.

The functional equivalent of community currencies can be achieved using the national currency by creating a publicly owned bank. By turning banking into a social function that works for the good of society, you can preserve the merits of the expanding credit system of medieval bankers, while avoiding the parasitic exploitation to which private banking schemes are subject. Community profits can be returned to the community.

A public bank that creates loans in national currency may be created by a community or group of any size, but as long as we have capital and reserve requirements and other strict banking laws, the state is the most acceptable option. He can easily meet these requirements without compromising the solvency of his collective owners.

For capital, a state bank may use part of the money invested in various state funds. This money does not need to spend. They can simply be transferred from the investments of Wall Street , where they now lie, to the state’s own bank. There is a precedent that a state bank can be both a very reliable and very profitable investment. The Bank of North Dakota , currently the only state-owned bank in the country, has an AA rating and recently brought 26% of its return on capital to the state. A decentralized movement to explore and implement this option is growing in the United States. [More information here ]

We came out of the financial crisis with a new clarity: money today is just a loan. When a loan is issued by a bank, when a bank is owned by a company, and when profits are returned to a company, the result can be a functional, efficient and sustainable financing system.

Ellen Brown, published October 28, 2010

Translation of author groups Politeconomics and New Deal