A vote to upend banking as we know it?

Author Govert Schuller

By Howard Switzer. 

For a decade the nascent monetary reform movement has been educating people about what money is, how it is created, its consequences and solutions. In a June 1st article by Brian Blackstone titled “A Vote to Upend Banking as We Know It,’ [1] the Wall Street Journal recognized monetary reform, taking it seriously thanks to the Vollgeld (Sovereign Money) Initiative in Switzerland.[2] Of course being the voice of Wall Street there is a bit of spin on the issue as the title itself suggests.

It is fast becoming common knowledge that banks create money when they make a loan, be it to an individual, a business, or a government. In fact nearly our entire money supply is created by the private commercial banks this way.[3] The problem with this, that reformers and honest economists recognize, is that the money for the principle of the loan is created but not the money that must be paid in interest. That money must come from the principle of another loan as that is how money is created. That problem is exacerbated by the fact that as the principle of the loan is paid that money is extinguished leaving even less money in the system to pay interest. When a default happens, as the WSJ says, the bank’s profits, meaning the interest, take a hit. Not mentioned is the fact that the banks then collect the real wealth that was put up as collateral in order to obtain money that was created out of thin air via keystrokes. Thus as soon as loan payments exceed loans being made the system, our economy, crashes and many lose their homes, farms and businesses, often including the assets of many smaller banks.

Previously many people believed the myth that government creates our money and that banks only lend money they have held in savings deposits. This is not what happens. While this is indeed how banking should operate, as an intermediary providing services for already existing money, they actually operate what is called the fractional reserve system. This has been practiced by banks for literally hundreds of years, when bankers discovered they could lend many times what they held on deposit because the paper receipts were found to be so much more convenient as a circulating exchange medium, i.e. money. In 1913 Congress made it the law of the land giving a few private banks control over the nation’s money, our monetary policy.

As the article notes The Chicago Plan, presented by economists in the 1930s, would have made it so banks only lend existing money which would be created by government and spent into the economy on public projects or gifted to the people, as in a citizen’s dividend, to give the economy a shot in the arm when necessary. This for the first time would actually give our elected representatives the power to fulfill their Constitutional mandate to promote the general welfare, a fact that the author overlooks. For there to be enough money in the system, public spending would need to increase greatly with money going into the pockets of the public to spend on the production and services provided by the people who would then deposit much of it in the banks. This then allows the banks to operate as had been believed, lending existing money held in time deposits for making wise investments. Banks, unable to just create money, would then regard risky investments much more carefully.

Would such a policy upend banking as we know it? Many bankers are unaware of how the money system works as well and are fearful of any change in the system despite this actually only amounting to a small change in bookkeeping rules. However, in general the banks would gain just as the people and their government would gain as prosperity would be the natural result of such policy. Banks would operate as people believe they do so “banking as we know it” would not actually change. What would change is the ability of government to fund ways for the needed goods and services that polls have shown for decades what the people want; healthcare, education, a 21st century energy and transportation infrastructure and the re-building of the local food networks and economies where we all live.

While the article calls it a 100% Reserve System that is something of a misnomer as a Sovereign Money System would do away with reserve requirements, and the Federal Reserve, as they would no longer be needed having been replaced by real money. Rather than having some 15,000 independent banks manufacturing and destroying our check-book money in a haphazard way, based on their notions of what will be profitable, Government control of the money supply would save the banks from themselves and stabilize the economy. No more booms and busts due to loan payments exceeding loans being made, that is, no more financial system crashes, no more recessions and depressions.

Sovereign money in fact is what was at issue with the founding of our nation, it was the reason, as Ben Franklin described, for the revolution. It was an effort to wrest monetary control away from the international banking industry then headquartered in the Bank of England, then privately owned. While we won the revolution militarily we lost in monetarily in the power struggle that ensued as represented by Jefferson the farmer and Hamilton the banker. We all know who won.

As people become more aware of how the system works and how it could work better, the movement will grow despite what will no doubt be an unrelenting propaganda campaign against it. However, once the benefits that are possible to obtain broadly for the nation by implementing a sovereign money system are understood, it will be too great to resist for everyone.

Sources

[1]. Blackstone, Brian. 2018. “A Vote to Upend Banking as We Know It“.  The Wall Street Journal. 1 June 2108. 

[2]. Vollgeld Initiative. “Campaign for Monetary Reform – News from Switzerland“.  The Swiss Sovereign Money Initiative Web Site.

[3]. For the definitive proof of this practice see: McLeay, Michael & Radia, Amar & Thomas, Ryland. 2014a. “Money Creation in the Modern Economy”. Monetary Analysis Directorate. Bank of England Quarterly Bulletin (Q1, 2014): 14-27.

Howard Switzer was a 2012 Green candidate who sought election to the U.S. House to represent the 7th Congressional District of Tennessee.  Switzer was also the 2010 Green Party candidate for Governor of Tennessee. He previously ran for Governor in 2006 and is a National Committee Delegate of the Green Party since 2001.

The  Green Party US has endorsed monetary reform. See: Green Party US. 2014. “Monetary Reform (Greening the Dollar)”. July 2014.