9. Accounting for Money Creation - 2

Introducing a Plurality of Banks

 

In the previous section, I tried to establish that a basic financial system could exist, that included a bank and a government, that had a form that was democratic and fair, that did not reduce the rights of the people, that did not condemn the community to hierarchy and systemic usury and therefore did not transfer money, power or property from the many who are deserving to the few who are not.

 

The challenge is now to retain the efficacy of that system as we add a plurality of banks. But there are a couple other fundamental questions we might want to consider first. Firstly, what exactly should be the extent of this system, where should its boundaries lie? And, second, can banks as we know them really serve society or must the very structure of finance be changed?

 

 

 

Where Should This System's Boundaries Lie?

 

Money is, of course, an infinite source; it must be subject to limitatations or it can't work. So what should this system's limitations be?

 

I think this question has a graceful and appealing answer. I think all money creation, thus the extent of the body of formal currency as a whole, should be tied to our human and democratic rights. In other words, money not created with respect to just and fair human and democratic rights should not be created at all. We can have money creation for households and we can have money creation for democratic nation states. And that should be it.

 

In seeking out debt, there are of course 2 logical options:

 

  1. To create new money.

  2. To turn to the extant stock of money and actually 'borrow'.

 

Number 1, I posit, should be the realm of democratic and human rights and nothing more. This option, free of all unnecessary exclusion or exploitation, should be the very foundation of human rights law and the cornerstone of any democratic society. In fact, it seems clear enough that there can be no democracy and no real human rights without it.

 

But commercial firms and risky business ventures? I don't think they should have the same rights as human beings and I don't think there's any economic justification for allowing them access to that commons either. Human beings and the structures that democratically represent them are the only entities that should have access to number 1. Firms, without human/democratic rights, should be required to use number 2. So I say banking splits very naturally between interest free, commons based and public service banking, where money is endogenously created and clearly attached to human/democratic rights, and interest bearing investment banking where money is handled as exogenous, rather than created in the process of granting access to it. If we could achieve that, or perhaps anything near it, then we'd have achieved a paradigm shift from the dark age systems of exclusion, power and privilege we have today.

 

 

 

Can Private Banks Serve Society?

 

There are some who insist that private banks, given their record, cannot be trusted to operate; simply, they will inevitably turn into predatory institutions that use their power over money to dominate and subjugate the communities beneath them. Although anyone familiar with the capitalist financial system or the history of capitalism could certainly understand that view, I still believe that private banks can serve the community according to new rules and based in a new popular literacy. For me, the problem isn't that banks are private, it's that popular economic illiteracy has made corruption phenomenally lucrative and thus inevitable; banks just haven't been held to standards that would be imposed upon them by informed citizens. Plus we'd have the difficulty of imagining what should replace them.

 

Surely the most prominent alternative put forward is public banks. In advocating a commons, I already advocate that some of our resources and industries should be commonly owned. But I also believe that private firms can and should serve the commons. What private entities can't be allowed to do is take, steal or otherwise enclose them (which they did do in constructing the social order of/under capitalism). But I think they can and should be encouraged to serve the commons all day long. If I were to have to compromise, I'd perhaps accept the public running of the endogenous, interest free system (number 1 above). But I do not have a preference for it and I cannot see public entities running the banks that serve the commercial sector (number 2). Perhaps public banks will be a part of a future financial landscape, but I'm sure we'll continue to see, the commercial domain particularly, dominated by private banks.

 

 

 

Introducing A Plurality of Banks

 

Let's get back to where we were and now introduce a second bank. I'll just cut the table through the middle and move Lauren, Sean and the Government to Bank 2. I've also included a row for totals, so we can see the total assets and liabilities for the bank and its customers. The one thing I haven't changed which I'd like to is the word "Loans". I haven't yet thought of an appropriate term to use, so we'll stick with convention for the time being. None of you believe these are actual loans, so I'm hopefully not going to mislead:

 

 

Bank 1 Individuals
Assets Liabilities Assets Liabilities
Loans Deposits Deposits Loans
0 1000 Mark 1000 0
0 3000 Jo 3000 0
2000 3000 Cassie 3000 2000
2000 7000   7000 2000

 

Bank 2 Individuals
Assets Liabilities Assets Liabilities
Loans Deposits Deposits Loans
1000 1000 Lauren 1000 1000
1000 1000 Sean 1000 1000
5000 0 Government 0 5000
7000 2000   2000 7000

 

- Table 1 -

 

 

We can see that there are still 9000 currency units in circulation. We want to see how how moving money between customer accounts at these banks works out. But we can already see a problem. Money has been moved and now Bank 1 has assets far below its liabilities (which by convention would mean it's failing) and Bank 2 has assets far above its liabilities, meaning it's doing excessively well.

 

Because customer deposits are liabilities in this model, transferring them between between banks would change their asset-liability ratios. Banks taking deposits would take on greater liabilities and worsen their financial position; those transfering them out would see theirs improve. To tackle this problem within this structure, we can introduce another layer of banking. By introducing a bank for banks - a central bank (CB) - banks can hold accounts at the CB and move assets and liabilities among themselves. In other words, when a customer deposit (bank liability) is moved from one bank to another, an asset can move along with it. So let's take the government out and make its bank the central bank. To make this work, I've had the central bank create 10,000 for each bank so that we have some assets to move around:

 

 

Central Bank Banks
Assets Liabilities Assets Liabilities
Loans Deposits Deposits Loans
5000 0 Government 0 5000
10,000 10,000 Bank 1 10,000 10,000
10,000 10,000 Bank 2 10,000 10,000
25,000 20,000   20,000 25,000

 

Bank 1 Individuals
Assets Liabilities Assets Liabilities
Loans Deposits Deposits Loans
0 1000 Mark 1000 0
0 3000 Jo 3000 0
2000 3000 Cassie 3000 2000
CB Cash CB Debt    
10,000 10,000      
12,000 17,000   7000 2000

 

Bank 2 Individuals
Assets Liabilities Assets Liabilities
Loans Deposits Deposits Loans
1000 1000 Lauren 1000 1000
1000 1000 Sean 1000 1000
CB Cash CB Debt    
10,000 10,000      
12,000 12,000   2000 2000

 

- Table 2 -

 

 

We can now move customer deposits between banks 1 and 2 and see that assets as well as liabilities can move. We'll have Cassie spend her 2000 'loan' equally between Lauren and Sean. Notice that we begin (above) with Bank 1's net assets at -5000 and Bank 2's net assets at 0. Previously, if we had moved customer deposits from one bank to another, that would have raised the sending bank's net assets and lowered the receiving bank's. Now, when Cassie's bank (Bank 1) transfers her payments to Lauren and Sean at Bank 2, it makes a net 2000 transfer of assets from its account at the CB to Bank 2's:

 

 

Central Bank Banks
Assets Liabilities Assets Liabilities
Loans Deposits Deposits Loans
5000 0 Government 0 5000
10,000 8,000 Bank 1 8,000 10,000
10,000 12,000 Bank 2 12,000 10,000
25,000 20,000   20,000 25,000

 

Bank 1 Individuals
Assets Liabilities Assets Liabilities
Loans Deposits Deposits Loans
0 1000 Mark 1000 0
0 3000 Jo 3000 0
2000 1000 Cassie 1000 2000
CB Cash CB Debt    
8,000 10,000      
10,000 15,000   5000 2000

 

Bank 2 Individuals
Assets Liabilities Assets Liabilities
Loans Deposits Deposits Loans
1000 2000 Lauren 2000 1000
1000 2000 Sean 2000 1000
CB Cash CB Debt    
12,000 10,000      
14,000 14,000   4000 2000

 

- Table 3 -

 

 

So now, although payments have been made and liabilities transferred between banks, because assets moved alongside them, both banks' net assets remain unchanged: Bank 1 at -5000 and Bank 2 at 0.

 

With the introduction of this tiered system and a central bank, we have a structure that has the appearance of being capable of supporting a plurality of banks, including in terms of financial regulation also. But in taking this approach, we've potentially reintroduced an old problem: Because banks appear to be required to transfer their assets to another bank in processing these customer payments, we've reintroduced the idea that the bank is now 'paying' on their customers' behalf. We've reintroduced the idea that customers are "borrowing" and should rightly pay interest to banks, which is the very idea our system is required to oppose.

 

But then the endogenous money solution can surely offer something at this tier also, even if it's just banks "borrowing" those currency units into exitence, interest free, from the central bank. We'd then have endogenous and interest free money working at both tiers of the system to ensure non‑usurious, non‑exploitative access to money for all.

 

So no matter what problems we might encounter in trying to understand how the system should work, it's clear how the system should work overall: interest free and democratically just. This is true for governments' finances also. And that implies not only that governments have the ability to create and maintain a base of democratic, debt and interest free money, but that they should be able to hold interest free international debts in just the same way households should be able to hold interest free domestic debts. At the international level, banks do for governments what highstreet banks do for citizens; facilitate exchange by endogenously recording into being/monetizing debts. Taking interest beyond fees is just as inappropriate here as it is for taking interest beyond fees on household debts.

 

Another alternative to consider whether or not a more appropriate accounting structure might be better from the ground up. After all, the structure we've taken here is that of the capitalist finance system and is a structure that would be appropriate for exogenous and capitalistic, rather than endogenous and democratic forms of money. My suspicion is that if we were to begin again, we'd probably design it differently. And we'd certainly find new, more appropriate language to describe how it works.

 

 

 

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