Time for a new theory of money

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

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

From translators: intruding into the economy, information technology should be evaluated by economists. Digital money and community currencies and cryptocurrencies make us 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 Moyni, a professor of economics at the University of Oklahoma City, argues that money was never a “commodity” or “thing.” It was always just “Attitude”, a legal contract, a credit / debit agreement, recognition of a debt and a promise to pay it off.

The concept of money-as-goods can be traced back to the use of precious metal coins. Gold is considered the oldest and most stable of the 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 an accounting system and grew into the use of coins made of precious metals. Money as a “unit of account" (the sum of payments and debts) preceded money as a "stock of value" (ie, goods or things) for two millennia; the Sumerian and Egyptian civilizations that used such payment accounting systems did not exist for hundreds (as in the case 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 like the courts today,

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”, which was originally not a coin, but a standardized measure. The word “She” was called barley, suggesting that the original unit of measure was the weight of the grain. Other products received estimates in comparison with it: such and such a number of shekels wheat equaled such a quantity of cows that equaled such a quantity of shekels of silver, etc. Prices for basic goods were set by the authorities; Hammurabi, the king of Babylon and the legislator, had detailed tables of such prices. The interest rate was also constant and unchanged, which made economic life very predictable.

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

Credit Revolution

The problem with 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, which could keep up with intensive trade expansion. They did this with the help of a loan, which emerged from the permission for cost overruns on accounts for their depositors. As part of the so-called “partial reservation” of banking 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 in gold, paying bills and allowing you to balance the bank balance.Credit created in this way was in great demand in a rapidly growing economy; but since it was based on the assumption that money is a “thing” (gold), bankers had to participate in some kind of thimble game, which periodically created troubles for them. They bet that all their clients would not come for gold at the same time; but when they were wrong in their calculations or for some reason people had suspicions, too many people tried to withdraw everything from their accounts, the financial system collapsed, and the economy was plunged into depression.

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

As British author Anne Pettifor observes : "The banking system ... failed in its primary goal: to act as a machine for lending to the real 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 any. Banks control money taps and can refuse credit to small players who default on their loans, allowing large players with access to cheap loans to buy up basic assets very cheaply.

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

The scene of the bank from the movie It's a Wonderful Life

Securitization: “monetization" of loans not with gold, but with houses

Money markets are part of the “shadow banking system,” where large institutional investors place their funds. The shadow banking system allows banks to circumvent the requirements for capital and reserves that are currently presented to depository institutions by debiting loans from their accounts.

Large institutional investors use the shadow banking system because the conventional banking system only provides deposits of up to $ 250,000, and large institutional investors move significantly larger funds daily. 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 sliced ​​and packaged, just like sausages.

As in the case of 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 the corporation Electronic Mortgage Registration System), which allowed houses to move between several rapidly changing owners, bypassing local registration laws.

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

Bankers actually engaged in massive fraud, not necessarily because they started with criminal intent (although this cannot be ruled out), but because they were obliged to do this in order to come up with goods (in this case, real estate) in order to secure their loans. This is how our system works: banks do not actually create credit and do not provide it to us, counting on our future ability to repay it, as they once did under the deceptive but functional facade of partially reserved lending. Instead, they suck out 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,

Public Credit Decision

The shortcomings of the current scheme are currently understood 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 a compound interest. We can avoid the pitfalls of private lending through a public credit system, i.e. a system that relies on the future performance of its members, guaranteed not by the “things” that the thimbles risk stealthily, but by the community itself.

The simplest model of government credit is electronic currencies within communities. Consider, for example, one of those called Friendly Services ( http://www.favors.org/FF/) The participating online community should not start its activity by creating a fund of fixed capital or reserves, as is now required from private banking institutions. Participants also do not borrow money from the pool of 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 lending to others. If Jane bakes cookies for Sue, Sue credits 5 “favors” to Jane’s account and deposits them into her own account by 5. They “created” money like banks, but the result is not inflationary. Jane plus-5 and Sue minus-5 balance each other, and when Sue pays his debt by doing something for someone else, it all comes to nothing. This is a zero sum game.

Community currencies can be very functional on a small scale, but since they are not traded in national currencies, 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 bank in public ownership . By turning banking into a public function that works for the good of society, the virtues of the expanding credit system of medieval bankers can be preserved, while avoiding the parasitic exploitation to which private banking schemes are exposed. Profits made by the community can be returned to the community.

A public bank that creates a loan in national currency can be created by a community or group of any size, but as long as we have requirements for capital and reserves 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 can use part of the money invested in various state funds. This money does not need to be spent. They can simply be transferred from Wall Street investments , where they now lie, to the state’s own bank. There is a precedent that a state-owned bank can be both a very reliable and a very profitable investment. The Bank of North Dakota , now the country's only state-owned bank, has a AA rating and recently brought a 26% return on capital [ source ] state. In the United States, there is a growing decentralized movement for exploring and implementing this option. [More info here ]

We emerged from the financial crisis with new clarity: money today is just a loan. When a loan is issued by a bank, when the bank belongs to the company, and when the profit is returned to the company, the result can be a functional, effective and sustainable financing system.

Ellen Brown, published October 28, 2010

Translation by Politeconomics and New Deal