This excellent video series on money and banking from moneyasdebt explains the history of banking and what is known as fractional banking. Watching this series will help greatly in reading the article below. If you don’t have time to watch it, please read some of the important points below before continuing to the bottom of the article.
Interesting Points from the Series
- Fractional banking (the banking system we currently use) was created by the Bank of England 300 years ago with a reserve requirements of 50%
- Money is “conjured” into existence by the creation of a loan, all that is required is a fractional reserve
- Government created money is less than 5% of the total
- Money is currently created as debt, however, it could simply be created through the spending on public projects
Money As Debt Video Compilation (by Paul Grignon)
Part 1
Part 2
Part 3
Part 4
Part 5
Conclusion: Nationalize Banks
The question that the series rightly brings up is why banks are given the right to create money and to charge interest on something that they do not own. A more logical system could simply have the government create the money to loan. Since the money costs nothing for the government to bring into existence, it could charge no interest, only requiring the repayment of the principle. Alternatively, they could charge interest, and this would go into the general tax fund. Banks show a strong tendency to pretend that it is “their” money that they are loaning out. Banks also have no interest in educating consumers as to this special advantage they are given by the government as it would call into question why they have this special privilege. In fact, they pretend they are private companies when they are simply a direct extension of the government.
No doubt nationalizing banks would not be popular with commentators on Fox News or with Rush Limbaugh. However, there is an easy retort to critics of the plan. Simply call them “anti-American.” After all, what could be more American than a Bank of the United States?
Do Banks Need to Issue Stock?
What is also strange is that shares are allowed to be sold in banks, even though banks are a monopoly of money creation given by the government. Why would a bank, which has the ability to create money with ledger entries, need to raise money with stock issues? This is one of the great examples that stock has more to do with executive compensation and control that with actually raising capital.
Enabling Innovation by with Interoperability
Tim Berners Lee and the W3C have written extensively on how to create self perpetuating systems based upon the foundation of a centralized standards body.
The W3C is about creating standards for the web. These standards have allowed innovation to flourish. A banking system needs standards, but does not necessarily need banks and their existence hides how money is brought into existence
One of the reasons the Internet works effectively is because standards were developed which allow for many participants to develop and publish to. These ideas can be adapted to banking. As far as innovation, while it may be true that a government controlled banking system would not innovate as quickly as a private system, just because a baking system is nationalized, does not mean that subcontractors can not add on to the system for a fee. For instance..
- Vendors that manage ATM machines could charge customers for their use (as banks that own them do now).
- As for Internet access, as the government does not tend to develop very good websites, multiple website vendors could arise that would allow the user to interact with the government bank database for a fee. The government would simply make its databases open to these web front end vendors, and would regulate and audit them to make sure they are providing the correct security and privacy features.
- As the government is also not known for great customer service, it would be important not to only have one choice for bank account holders. customer service companies could arise that consumers could chose from. They would also be regulated and audited by the government, and would have access to bank holders records. There could be hundreds or thousands of these companies with different levels of services offered and different price points, more comprehensive services would cost more. Switching service companies would be simple, since the funds don’t move making for a very competitive environment.
As one of the early innovators of the web, Tim Berners Lee could have decided to become extremely wealthy, instead he decided to focus on creating standards for the web, and because of it, we are all better off. Banking executives propose that they deserve massive salaries for their leadership, however who has contributed more to the public good, Tim Berners Lee or the CEO of CitiBank? Sufficed to say a person of moderate intelligence could easily be CEO of CitiBank. Nothing all that complex is going in banks in any case. Does a person really need to be paid 10s of millions per year to serve at the head of such a simple business? This concept of a public interest function is missing at banks who mistake themselves for swashbuckling private entrepreneurs, when in fact their power flows from the government.
Stability and Innovation All in One
Essentially all types of add-on functions could inter-operate with the government banking system providing a high degree of technological innovation and choice. This is in the same way that people can hire private investment advisers to provide financial pointers on bank accounts that are not affiliated with the adviser. This could all be available within the “standards” and framework provided of a stable national banking system. As far as financial innovation, most financial innovations make the financial system less stable and there is no reason to allow or to promote the creation of mortgage backed securities, credit swaps, etc… In this model there is no selling the mortgage, because the government holds it and Wall Street is cut out of the loop.
Freddie Mac and Fanny Mae would be irrelevant in a national banking system
Freddie and Fanny Needed?
Freddie Mac and Fannie May become irrelevant. Actually, the entire concept of allowing individual banks and Wall Street to sell government created money (in the form of loans) back to a quasi government organization like Fannie May appears ridiculous once one understands the fact that the government brought the loan into existence with bank ledger entry in the first place.
Banks are nothing more than money monopolies, they are a franchise granted by the government, much like the British East India Company. They see no public interest function for themselves, and do not admit to the public where their power originates from.
A More Equitable and Stable Banking System
No fees are necessary in this system outside of what the account holders chooses to pay through selecting a value added vendor. Nothing fancy or fraudulent, just a stable banking system and surrounded by a sea of value added technological and human services. We have estimated that the because the total US debt (consumer, federal, corporate, etc..) is $54 trillion, if the government were to nationalize banking, if a 9.5% interest rate were charged (on average of course), there would be no need to collect taxes. See the image below. Email us if you would like the spreadsheet.
The Right to Create Money
The right to create money is a huge privilege, there is no reason to give this away to a corporation, especially when their history is to not serve a public interest function, but instead to simply grow wealthy from nothing more than their privileged position. Recent events have indicated that they can not even maintain a stable financial system, and are not worthy of the public trust which has been vested in them.
Ellen Brown
The Movement for Public Banking
While considered sacrilegious by most of the general population and by elites, there is a small movement behind public banking. Public banking becomes more tenable the more one understands how little banks actually do, and how easily their functions can be overtaken by public institutions. One of the leading writers in this space is Ellen Brown. Her public banking blog is listed below.
http://publicbanking.wordpress.com/
Resources
http://www.moneyasdebt.net/
http://www.w3.org/2001/sw/
http://www.webofdebt.com
This is the type of thing that the W3C focuses on, creating Internet standards and publishing them so they can be used. The government can do the same thing for interoperable banking services in everything from ATM machines to banking web front ends. These standards would be at the root of the innovation that would make US banking the best in the world, and not requiring a single bank outside of the government.
Excellent article. Of course, you must realize that in this case you are replacing one monopoly (loaning money) with another (e.g. customer service). there is also security and identity issue. Currently, banks are responsible for the breach. Who will be responsible for that in proposed model? customer service companies? Do you really want to give them your SSN? I am not sure.
Does this mean that private loan (say, I have $1B and want make money providing loans) will become illegal?
There are also huge benefits, such as cost reduction, streamlining and standardization of risk policies (who is entitled to get a loan, for instance).
Thanks.
I would say that all the same rules apply to the service companies and to the web front end companies as to banks. Like banks they would have to go through an accreditation process. They could certainly be held to the same penalties as banks. As for SSN, you would not actually need to provide an SSN to a service company, and there would be no good reason for them to need it. The government could produce another number that maps to the SSN, but which only the government has the mapping to.
Private loans would not be illegal, the only difference is that the government would replace the credit and money creation function of banks. Of course, the central bank would be rendered unnecessary as well. In our present system the Fed sets the interbank loan rate and provides emergency capital to banks. Under a national model, all this would be done by the Treasury. Government would control the central parts such as loan generation and interest rates, but would allow entrepreneurial companies to interoperate with the national banking database and provide more responsive and flexible services on the periphery (ATM machines, customer service, web front ends, investment advice). This would be more innovative than it is currently, because you would not need to be a “bank” in order to offer these services. You would however have to go through an accreditation demonstrating service and privacy standards.
So you are desribing the Central Ban system of now dead USSR, right?:)
Not really, I am not familiar with the USSR banking system.
However, what should be appreciated is that banks are not doing much of anything. Their central function or money creation is simply power vested in them by the government. All the value added services, simply require access to a centralized bank database to process. So, ATM machines must be able read accounts and post transactions. Same for service organizations, they must be able to read accounts and post transactions. None of these services need necessarily be connected with the function of money creation. That is in a way the illusion of banking, that they have control over “money” and you are using the internet to see the money in the bank’s system. However, its not the bank’s money, its the government’s money, completely created by the government, or in this case by the bank as deputized by the government.
Fees should be paid for actual services (ATM machines, customer service, etc..) not for the right to create money. That is the monopoly unfairly vested in banks and as we can see they use that monopoly unfairly, and with no public interest function.