In this section we try to break down a number of points into bite-sized pieces. You can find them recreated on a single page here.
1. How Money Really Works
In order to show how money really works, we can offer a simple example. We'll build a small financial system that shows how communities create and use money, and how things like banks and debt really work too.
We'll keep it very simple. We'll start with a very small community, a community of just 5 people, who have skills they want to trade among themselves - in what we could call a 'local economy'. We'll show how they can interact with each other through money and doing so will capture how we interact with each other in much larger societies, indeed the world as a whole, today.
A Basic Financial System
- Table 1 -
The above table shows the community members' finances at the beginning. The fact that the table is filled with zeros means there's no money in this community yet. But that's not a problem, because Mark, Jo, Cassie, Lauren and Sean all read the moneytruth.org website and they know perfectly well how to get the system up and running.
The reason we have money, of course, is to have a common medium for exchange - something to offer others in return for doing things for us. Using money we can pay people to build things, grow things, repair things, move things around etc. and we can be paid for the things we do for other people too.
By being universally accepted, money overcomes a number of difficulties that would otherwise exist in organizing exchange. And money also provides a means by which to make savings, allowing us to control our balance of giving and receiving over time.
Now let's imagine that Sean needs some emergency repairs carried out on his roof. Although no money exists right now, Sean knows that he can hire and pay Mark - a skilled roofer - to do the job. And he knows that he can hire him and pay him right now, right when the work needs to be done, even though he doesn't currently appear to have the money to do so.
In this system, all Sean needs to do is legally agree that he has a reciprocal debt for the value he takes from Mark and that debt itself will create the money that pays Mark:
- Table 2 -
What you're seeing above is the actual creation of money. Sean's debt really did create 1000 currency units on the system. And although some readers may find the ease or simplicity of this process somewhat startling, this really is where most money comes from.
Be sure to go over what you've just seen. This really is the most fundamental expression of the nature of money and finance. Everything else builds up from here.
So... we've just seen money being created. Sean has a legally binding debt on the system and Mark, having provided the materials and labor to repair Sean's roof, quite rightly is the possessor of (he is the 'bearer' of) the corresponding number of legal credits/claims. Mark can now spend that money on whatever he likes. Or he can save it.
But, we also saw something just as important: We saw debt being facilitated without the need to lend or borrow anyone else's money. And that means the justification for taking interest has been removed.
Sean didn't have to leave his roof in a state of disrepair while he labored elsewhere for a wage, 'saving up' the money to pay Mark.
He also didn't have to seek out someone who could lend him money, thus he did not have to enter a lender-borrow relationship or pay interest.
So that leads us to one of the most basic observations we can make in the field of monetary economics: All people can have access to money/credit free of unwarranted lender-borrower relations and free of interest. (Banks can take competitive fees for the services they provide. Household credit, then, can and should be available to all at 0% + fees.)
Let's continue. Lauren would like to extend her property. Lauren's property is also the location of her daycare business, so extending it will allow her to expand her business and her ability to serve the community. Just as above, Lauren can enter into a legally binding 'promise to reciprocate' in order to create the money that will pay for the work to be done. She will take on a debt, 2000 units this time, and Jo - a skilled builder - will carry out the work that will earn him the title to those claims.
- Table 3 -
Once again we can see money being created and the two-sided, relational nature of money. Jo has labored for Lauren's benefit and he is now 2000 currency units better off. Lauren has extended her property and her business, but she is now 2000 currency units in debt.
Notice that Mark and Jo now have money that they can spend, without the need to create more. This confirms that we only need to create money in order to facilitate debt. So long as Mark or Jo wish to spend no more than they already have, they will not need to go into debt and therefore will not need to create more money. Indeed, the economy as a whole won't need to create more money until someone needs to spend more than they have i.e. when they want to go into debt. The money that already exists in the economy will continue to circulate until it has been settled again. That is, until the debt which created it is paid down.
The following table shows a transaction between Mark and Lauren. Mark (the roof repairer) has a young child who he would like to enroll in daycare with Lauren. The charge, for the remainder of the year, will be 1000.
- Table 4 -
By comparing Tables 3 and 4 you can see that Mark's account is debited by 1000 and Lauren's account is credited by 1000. Mark goes from +1000 credits to 0 and Lauren's account shows that, while she has a debt of 2000, her credits go from 0 to 1000. Notice that there are still 3000 units of currency in existence (the total in each column), but Lauren now has credits which she can use to pay down her debts, if she would like to.
Let's see how Lauren can transfer 1000 units from her credits column to pay off some of her debt. Notice that when she does so, that money is being paid out of existence again.
- Table 5 -
By transferring 1000 currency units from her credit column to her debt column, Lauren paid off part of her debt. And in doing so, she actually removed those 1000 units of currency from the system, leaving only 2000 currency units remaining.
What we've seen - the creation, transfer and settlement of money - covers the whole 'lifecycle' of money. And it is now very easy to imagine almost any transaction we like between members of the community. We can imagine anyone going into debt and creating more money, we can imagine anyone paying money to anyone/everyone else, and we can imagine anyone paying down debts to eliminate money that their own debts created. We can even imagine everyone paying off all their debts at the same time, returning us to where we began at the beginning, with nothing but zeros in our system and thus no money and no debts at all.
While there's more we can (and will) go on to talk about, having seen money being created, having seen it being transferred and eventually settled again, we've seen the whole 'lifecycle' of money. And that means we've already seen surely the most important things we can know about money and monetary economies:
We've seen that money comes into existence, as we need it, when we go into debt. And that's because money is that debt.
We've seen that debt is facilitated, not by the "lending" or "borrowing" of anyone else's money, but by creating new money, endogenously, within the system.
We've seen that money is not returned to a previous owner when it is paid back, but is in fact paid out of existence again.
These realities may at first be confusing for those used to thinking about money as physical objects, like banknotes or coins. Obviously, physical monies don't just disappear when you pay them back. But remember, so far, we haven't yet introduced any physical money into our system. Everything we did was done with accounts entries and nothing more; simple, legally enforceable numerical records, recorded on a ledger. And, in later discussions, you'll see that when we do introduce physical money like banknotes and coins, it really doesn't change what is happening underneath. Physical money really just 'adds on' to our money system, in very small quantities, enabling hand-to-hand trades (that is, the transfer of accounts information) outside of the banks' secure communications networks.
We won't go into any greater detail on the following point here, but it is for the very same reasons outlined above that governments too should have interest-free access to credit on the international stage. Just as domestic banks serve households, international banks serve nation states. And they can and should facilitate international debts and trades in the very same way. We could summarize that by saying: All entities protected by democratic or human rights should have access to money/credit free of unnecessary lender-borrower relations and free of interest.
So, money, banks and debts work very differently to the way we commonly believe. And you've seen that they solve, very cleverly, many of the greatest problems that exist in the economic world - many of the greatest historical problems associated with money, debt and the conflict between rich and poor.
We'll go on to add more to this model in upcoming sections, including adding governments and a plurality of banks in Sections 8 and 9.
2. Conceptualizing Money
The Fountain of Money at the Heart of All Economics
This one is just a little conceptual aid, for those who might benefit from it. I think it can help to make sense of economic reality and aid in breaking down some unhelpful economic myths.
Now I'm sure you've heard people say "Money doesn't grow on trees!" Right? But how about if I said there really is a fountain of money, or you could think of them as magic money trees, at the heart of all our economies? And they've really always been there.
If you've read a little on this website already, you'll know that money really does just come into being when people (or in fact governments) need it, when they 'deficit spend' or go 'into debt'. In other words, without much work or effort or fuss, money really does just come into being, when it is called upon, as if from a magical money fountain or tree.
And perhaps one of the most important and obvious points we can make is that it's human beings who create money. It isn't created by anyone or anything else. Every unit of currency ever created like this was created by people. And so it should have been created fairly. For some to wield the extraordinary power of money creation, but then to craft for others an extraordinarily difficult relationship with money, is, in my opinion, the height of wickedness and cruelty.
The only thing that must be stipulated about the system (and it's what makes the system sustainable) is that money comes into existence, most usually, on the condition that we return it. As you'll see, governments can or should be exceptions to that rule, but for everyone else, for ordinary people like you and me, money comes into being when we need it, on the condition that we make a (legally binding) promise to pay it back.
Money - and thus our theoretical magic fountain - is effectively infinite. There's no real upper limit to the amount of money that can be produced. And that of course presents us with a problem. If money creation were allowed to go on unmonitored, it would soon become extremely unfair and might then go on to become unstable. Money, then, must be carefully controlled. And although it doesn't address the fairness of the system, insisting that most money created is returned again is an important part of how we control it.
We can be reasonably sure that money will always be like this. Money is not and surely cannot be some kind of physical 'thing', something inconvenient and expensive to ship about the planet each and every time a transaction is made - only to be shipped straight back again when the next transaction is made in the opposite direction. Money inevitably resolves to weightless, infinitely transferable numbers that can be sent and received all over the world with the minimum of fuss and expense. This is just an inevitable practical reality for money and was surely discovered by those working right at the very beginning of the stories of money and finance.
The one hope we have at this website is that more people will discover how money really works and be able to exert their power to make money democratic and fair. The magic money fountain or tree that exists at the heart of all our economies should clearly be democratic and should be subject to fair democratic rights/rules. Every single unit of currency created should be created according to fair democratic rules. Anything else just perpetuates the injustice of this already troubled world.
3. Public Money Creation
Breaking it Down
We've said that two of the most elementary observations that can be made in the field of monetary economics are:
- Every country should have a debt-and-interest-free national currency base.
- All households and all governments should have access to interest free financing.
And that's because money is created in two spheres:
- The public sector.
- The private sector.
Both of which should be democratically legitimate.
In our first bite-sized piece, we looked at the basic foundation of money and saw why all households (and all governments) should have access to money/credit interest-free (0% + fees). Let's now look at the creation or facilitation of a democratic, reliable national base currency.
It would be pretty straightforward to simply state that every country should have a democratic, debt-and-interest-free national currency base and leave it there. Who would disagree? Most people, if they were to analyze their thinking, would assume that something like that is already the case, that governments create money democratically... because that's what they're there for.
And the idea that governments should have to 'borrow' a national currency base, into existence, as a debt repayable with interest, is illegitimate on its face.
But it's worth exploring more and seeking greater clarification around the nature of these processes and the relationships they engender. And, although it's a largely semantic concern once the core issue has been addressed, it's interesting to ask: If money is inherently debt-based, then would a public, government-issued currency base still be a public debt? If so, to whom?
When we looked at private sector money creation for households, we saw something that should be democratically just but in practice wasn't. Households' access to money (to money creation) is presented to households as 'loans' of already existing money, allowing the financial sector to achieve steep supernormal profits through the taking of interest (compensation for those "putting up" and "foregoing use of" their money). Well, the same structural relationship exists for national governments too. National governments, just like households, 'borrow' money into existence from banks (central banks in this case). And that constitutes the public sector's contribution to the money supply.
In some ways this shouldn't surprise us. We've already seen how banks create the private sector's contribution to the money supply. And we've seen that money is, fundamentally, transferable records of debt which are given their life within the banking system. Thus we've seen that money is, really, "a creature of the banking system". That contrasts well with those who think, falsely, that money is a "creature of the state". So the idea that public money creation might also be taking place through banks might not be entirely surprising.
But we should be surprised that governments too, like households, must 'borrow' this money into existence as 'loans' repayable with interest. These debts are expensive and they weigh heavily on populations all over the world, resulting in the run-down of public services ('austerity') and the transfer of money and assets from an unfairly indebted society to those taken to be "lenders" to the state.
We saw that, in the private sector, money can and should be created much more democratically - interest free. We would expect to see something at least that democratic in the public sector. So, would we expect a national currency base to be "a debt but interest-free" too?
Well, let's begin by reasserting the most important point of all: If democratic public money creation can be described as a debt, then it must be a very different kind of debt to that which we have today (a debt associated with 'borrowing' and owed by society to those taken to be lenders to the state). If, then, public money creation can be described as a debt, it must be a debt owed by society either to the holders of that currency or to society itself.
Unsurprisingly, this appears to be one of those areas where the public sector is a special case. And we can arrive at the same conclusion no matter what concept we have of money - chartalist, debt-based... - so long as we believe it can be issued democratically by or for national governments.
Public sector money creation, just like private sector money creation, adds to the overall amount of currency in circulation - which we could envisage as a big pool in the heart of our economies. When money is created, the pool grows; when money is repaid, the pool shrinks. All other things being equal, if money is created and paid back in balance, the pool would remain consistent in its size.
We instinctively feel that when money is created for ordinary people, like you and me, we must honor it - that is, we must pay it down again. But not, of course, because it was "someone else's money". The money was created when we needed it and never belonged to anyone prior to that. The reason we must pay this money back comes down to a general sense of fairness and the fact that if everyone could go into debt (which creates money) and not honor it, then we'd all drown in a pool of money growing bigger and bigger without any reciprocal effort to pay it away again.
We pay money back to the financial system, not because it was "someone else's money", but to maintan:
in the system.
Public sector financing, like private sector financing, would expand money through issuance and shrink money by recovering it - which governments do through taxes, or sales of public goods and services to the holders of that currency.
But... should we think of that money as a 'debt', in the way we think of it as a debt for households?
Well, as stated, it must be a debt either to the holders of currency, or to society as a whole. And these groups might be largely indistinguishable. If we take it to be a debt we owe to society, then it is a debt society owes to society, "a debt we owe ourselves"... which surely cannot be described as a debt at all. What does it mean to say that you owe yourself $100, or an ounce of gold? If we take it to be a debt to the holders of currency, then what would we owe them? We would owe them the acknowledgement and respect of their legal titles and their ability to redeem those titles on the system; we owe it to the holders of money to accept their money in payment for goods and services - and note, that's all across society, not just 'taxes'. But this kind of 'debt' is not what we saw with households.
In the case of household debt, we saw it was a very active obligation. Households had to go out and recover the money their debts created in order to pay it away again. To recap, that was to maintain the fairness and stability of the system. It would be no good whatsoever if such debts were passive - a debtor could simply take the money his debt created, lie in luxury on a tropical beach and claim to be "willing to accept common currency in return for his efforts" - efforts he's going to spend the rest of his days choosing not expend. Clearly, no system could work like that.
So, unless someone has a very good reason to make a government do the same thing (i.e. pay out of existence all the units of currency they create), then these cannot be equivalent obligations or debts. Indeed, governments appear to have a very much contrary obligation: to provide a persistent currency base that allows people to make savings, immune from demands for repayment. That wouldn't be possible if every unit of currency in circulation were a debt that someone insisted had to be paid away again.
In fact, let's set aside the slightly nebulous word 'debt' for a minute and try to be more precise. Let's describe the obligation side of money as "an obligation to..." In the case of households, it was "an obligation to recover all the units of currency created and pay them away again." In the case of nation states, it must be something more like "an obligation to do all we can to maintain the system in its fairness and stability." These are two very different obligations for two very different entities: individuals vs the speical case of all of us collectively as a whole.
We should, perhaps, at this point, acknowledge that the only reason public sector currency creation is recorded and regarded as a 'debt' today is because public sector financing too has been established around the notions of 'lending' and 'borrowing'. Under any other circumstances, be they arising from chartalist or debt-based concepts of money, there is simply no reason to record that money as a debt. While governments would clearly benefit from knowing how much they've contributed to a currency's overall supply, there is no reason to record that issuance as a debt.
And we shouldn't let an overzealous attachment to banks' balance sheet accounting conventions lead us astray either. There's no reason for public central banks to record this money as 'liabilities' and there's no reason to 'balance them off' against government assets either. Even if we accept the terms 'assets' and 'liabilities' to describe the creation and circulation of money, the public sector is an obvious 'special case' and we shouldn't expect the government's bank to account for itself the way a private commercial bank should.
Every unit of currency created should be created democrtically - and at a minimum interest free - no matter where that money is created or by whom.
Let's tie this up with an outline of 4 different types of debt that we see again and again:
Debt arising from household's access to financial services: This is a real debt. It might not be the result of 'lending' or 'borrowing', so should not have interest added to it (0% + fees), but it is a debt and should be honored.
Debt arising from the lending and borrowing of already-existing money: This category of debt would be a real debt and interest is sure to be payable. It is, however, in most cases, the most socially destructive form of debt. Few people who have access to banking services in a democratic society should be left to face this kind of option. Both democratic and human rights should offer a high level of protection first, by ensuring universal access to interest-free financing.
National debts derived from the creation of a national currency base by central banks: This category of debt is really not a debt at all. Public money creation is a basic democratic necessity; a necessary public good and public right.
The international debts of nation states: These are the governmental equivalent of household debts. Just like household debts, these are facilitated by banks and endogenous money creation. They are real debts, but should also be interest-free.
4. Physical Money
Nothing More Than a Communications Device
Physical notes and coins exist in the smallest number possible to facilitate day to day trades, to convey accounts information outside the banks' secure networks. In other words, they are simply durable, reasonably secure communications devices, carrying accounts information, hand-to-hand, across the economy. The materials of which modern money is made have no intrinsic value, you could not get anything for the paper or base metals out of which they are made. But neither are they supposed to, because they only exist to carry information. You could liken money to any other legal agreement that might be recorded on paper; the paper on which a contract is signed has no intrinsic value, its value lies in the information or agreement it memorializes.
Creating this kind of physical money, we would think, should be the responsibility of an accountable authority. The reason being that physical money represents the legal claim a bearer has on society, not its commensurate debt. Creating physical money free of its commensurate debt is, of course, the essence of counterfeiting (unless it is done democratically - see here). Equally, when precious metals figured to an extent within the physical money supply, accountable figures would have been expected to assure that such coins did in fact contain the weight and fineness of metals they purported to.
Today, as we move further and further away from cash handling and make ever more use of electronic payments systems, it becomes easier and easier to appreciate that physical money - banknotes and coins - makes up only a very small proportion of the total money supply. While the amount changes over time and fluctuates seasonally, physical money is kept in the smallest amounts required to get the job done, minimizing cash handling and storage risks and costs.
Let’s imagine that we have a new economy, with as yet no physical money. Of course, we wouldn’t be left to stand around, scratching our heads and unable to interact with each other, simply because we had no money. We know that money is created in the process of facilitating debts and enabling trade. And we know that we can make the economy work with no physical money, albeit with some limitations. If all transactions could be carried out by instruction alone (instructing banks to debit this account and credit that one, by, for example, checks, payment cards or online banking/payment services), then we would have a cashless economy in which conceivably vast amounts of trade could be carried on. Entirely cashless economies might be a little unrealistic, even for us today, but appreciating how such a system works enables us to understanding more clearly the role physical money plays. The essence of money is, of course, debt - an entirely non-physical phenomenon itself. But occasionally we need some physical 'stuff' on which to convey that non-physical information.
Let's now imagine that a physical money stock has been created and delivered/sold into the banking system where people like you and me can get access to it. If I have a positive bank balance of $1000, it doesn't mean that there's $1000 of physical money sat in the bank (or anywhere else) just for me. If that were the case, for all of us, 100% of the money supply would have to be represented by physical notes and coins - the vast majority of it just sat there, expensively doing nothing, for no practical reason at all. In reality, if I have $1000 in my account, then there will likely be less than about $50 of physical money in existence to support it; such is our limited need for physical money. So long as enough physical money exists that if I need to make a cash withdrawal I will be able to, then the system will work. And so long as an unusual or unexpected number of others don't want to do the same thing at the same time, then all will be fine.
Now, when I make a cash withdrawal, I'm simply swapping the numbers in my account for pieces of paper with the numbers writen on them instead. (You could liken it to 'buying' physical money with non-physical money.) It's the same information - my legal title/claim - I just now hold it in a physical form, in my own hand. I can then pass that legal title on to whomever I wish to. Should I deposit the cash back in my bank, that process would simply reverse, swapping/'selling' pieces of paper with numbers on them for numbers in my own bank account. The pieces of paper, then, will go on to be used by the next customer who comes to the bank wishing to make a withdrawal so they can hold their numbers on pieces of paper too.
So we can see that physical money really only exists to support the much larger body of money that is just numbers. That's something we should bear in mind when evaluating discussions about money and historical accounts which emphasize the physical medium and overlook the potentially far greater body of legal monetary claims and debts which underlie it.
5. Banks as Credit Agents
For Households and Nation States
As already stressed, credit systems of money are not only an inevitable refinement of money, they also present society with its greatest opportunity for democracy and the respect of human rights. And that's because this for of money works horizontally, rather than hierarchically.
If household and national finances can be facilitated free of unnecessary hierarchical, lender-borrower relations and free of interest (and of course they can), then that is what we must ensure. The result will be a new way of doing economics, a new foundation for economic life; a foundation in decency, honesty and real rights for everyone. The ability of the world's people and the world's governments to have a democratic relationship to money, to have access money, free of unnecessary exclusion or exploitation, would transform the global economy, bringing opportunity to billions and represent a multi-trillion dollar annual shift from the few out to everyone else.
Furthermore, it should be clear to the reader that the household is the bedrock of any economy. The ability of people all over the world to have access to the means of buying a home and the opportunity to work, to pay for that home and the lives that are lived within it, is the very foundation of any functional economy. It really is now time to ensure that these vital concerns are recognized and given the protection of Human Rights law.
You already know that this system works in such a way that everyone can have access to money without "borrowing" anyone else's, that banks, rather than being "lenders" over us, are really very much more in a horizontal relationship with us; they are our agents, the recorders/monetizers of our debts; they stand side-by-side with us in our relationship with society. That's simply - and thankfully - how currency systems work. Banks monetize our debts and then release that money/debt onto society; it's much more helpful, therefore, to recognize our debts as debts we owe to society. We owe those debts back to society through agents licensed to facilitate it - banks. That is a much more accurate portrayal than the conventional idea that we've "borrowed" and must return other people's money (with interest, of course). Banks are really just our bookkeepers, keeping score of who owes and who is owed. And in performing that role, banks create the medium through which we all exchange and makes the life of the economy as we know it possible - money.
For the time being, let's say that banks' role can be summarized as facilitating the lifecycle of money. They facilitate the creation, the circulation and the eventual settlement of our money/debts. We've discussed money creation and will discuss it again, so let's turn now to the fact that banks' responsibility to create money is balanced by a responsibility to uncreate that money again. Banks must ensure that the money they create - because it is a debt - is settled/honored again. And that, of course, is the very same responsibility the debtor has her or himself.
Let's explore the proper role of banks through a couple of examples; household mortgage debt and national sovereign debt:
Household Mortgage Debt
When the debts of ordinary people are used to create money, for example, to buy homes, there is first the appearance of new money on the system followed by the exchange of money and property between buyer and seller. It's clear that there's an outstanding debt, it's clear that it is the acquirer of property who is indebted and it's clear that the process can only work if it's reversed again, if the debt/money is honored/paid down. If that didn't happen, the system just couldn't work.
It is first the debtor's responsibility to pay her/his debts and it is the role of the bank to stand next in line, to backup or to underwrite the debtor in that responsibility. So long as the debt is secured, the bank can seize the securing property and use its sale to settle the account. If the debt is unsecured or insufficiently secured, then it is right that the bank should take a loss. This is what we pay them for. It is the banks' service and the risks they face that we pay for, not compensating them or anyone else for the "foregone use" or the "time value" of money.
Banking, then, does involve costs and risk (that would have to be passed on in prices). What banking doesn't involve and must be removed is the unfounded story that they are "lending" and we are "borrowing" other people's money, requiring us to compensate them with interest. The money did not belong to anyone before it was "loaned" and it will not be returned to anyone when the debt is paid down; there is simply no need to pay and nobody to compensate with interest. Banks can charge transparent, competitive fees for the services they provide; they have no need and no right to mislead customers in order to increase profits.
With regard to risk in this sector, in order to be exposed to risk, the bank must face an uninsured loss in the value of securing assets, such that their sale can no longer cover any outstanding sums against them (plus any administrative costs). Falling house prices, uninsured properties burning to the ground or being washed away in floods might present such risks. But even at today's historically low interest rates (e.g. 5%), a homeowner will pay twice for their home over 30 years. If these payments were tied to risk, it would have to mean that, each 30 year period, around 50% of the entire nominal value of mortgaged housing stock would have to be lost or destroyed, without insurance, before any sums were paid against them. Which is patently absurd.
Banks' interest taking isn't tied to risk (an argument commonly advanced), they're taking interest because they can. The competitive market fees for originating, maintaining and settling a mortgage account would be a fraction of their current cost, perhaps a fraction of 1%, if expressed as an interest rate. Banks are taking many thousands of dollars, many years of life and a great deal of opportunity away from working people (and then often taking the house as well) simply because we've been led to believe, falsely, that we are "borrowing" other people's money.
From Households to Banks: The Gift that Keeps on Giving
In what is surely an inevitable depravity once interest on household mortgage debt has been accepted, the front-loaded mortgage allows banks to keep cashing in. Here, banks not only take huge sums of interest which they have no right to take, front-loading that interest simultaneously keeps the outstanding principal, on which interest is charged, as high as possible and delays its payment for as long as possible, pushing back as far as possible any claim a homeowner might have to her/his own home; something which will pay yet again when the bank gets to take the home itself, in the next routine collapse of the capitalist system.
Over the 35 year period 1973 to 2007, mortgage interest rates averaged around 9.3%, almost exactly the rate required to make householders pay three times for their homes; once for their home, twice simply as a gift to the already rich. Every time a working person spends 30 years laboring to pay 3 times for a home, the rich are in for a windfall. The beneficiaries of that interest can buy lavish homes and profitable assets (including the firms for which the working man toils), without ever having to lift a finger in contribution to the economies they take their lavish lifestyles from. And this is a process that is repeated for each property, every time time a mortgage is channeled through it. Each mortgaged property in the land might net the rich and powerful 10 or 20 times its value across its lifespan. If nowhere else the class structure of capitalism is plain to see, it is plain to see here.
National Sovereign Debt
Just like households, governments are entities for which money should work honestly and democratically.
And just the same as with households, when a state instructs its bank (a central bank) to deficit (debt) spend, that money is created in that process. Just as with households, the dominant class would have us believe that the state, on our behalf, are "borrowing" their way into debt. But the truth, again, is that that is created money; it is no more "borrowed" than our household debts.
In fact, the story here is even more compelling: it's only by convention that we call this money creation a "debt" at all. In the case of households' deficit spending, we clearly did have debts that must be honored i.e. money created must be paid away again. If we didn't do that, the system wouldn't work. But in the case of state money creation, it's clear that we do not have that same obligation to recover money and pay it away again. In fact, the opposite appears to be true. It appears to be self-evident that every nation should have a currency base that is democratic, free of debt and free of interest, which allows members of the public to keep savings immune from demands for repayment.
As it stands, governments, at least in the capitalist world, are effectively "borrowing" their currencies into existence. The dominant class are not only taking interest on all this money, the notion that these are real debts is being used as a political and economic weapon, to dominate, dictate, contain, impoverish and extract money and assets at a global scale. It's possible that every nation on Earth today is subject to these overarching, unnecessary and wholly fabricated "lender-borrower" relations.
In the developed nations of the world, our so-called national debts are towering sums that transfer billions upon billions every year to the dominant class, deprive us of a functional public sector and public rights, as well as serve as a political football to smear political opponents or tell us we're "living beyond our means". In the poorest nations, those already most damaged by imperialist economic practices, these so-called national debts may be the reason many don't eat, or have basic infrastructure like roads, hospitals or schools. In a pattern repeated all over the world, these so-called "debts" are foisted upon nation states deprived of democratic alternatives and then used to justify the deprivation of the public sector and the transfer of valuable public assets into private hands.
For those who wish to look at how the criminality at this level of finance goes even further, John Perkins (find him on Facebook), in 'Confessions of an Economic Hitman; How America Really Took Over the World, gave us graphic examples of how countries are targeted, as a matter of foreign policy, to be saddled with heavy, odious "loans", where large sums of (again, created) money are squandered on projects which profit banks, corporations and a compliant (often installed) rulership, but are of no benefit to the citizenry who are required to pay for it.
In our effort to challenge the immense corruption of it all, we propose, simply, basic economic literacy as the foundation for greater rights for all. Although we won't discuss much more about point 3 below on this website, we've already seen ample reason that numbers 1 and 2 should form the necessary foundation for our economic lives. And point 3 is really just an extension or enlargement of the very commons that gives life to numbers 1 and 2:
A democratic, debt and interest free national currency base.
(Nations are currently required to "borrow" their currencies into existence from capitalist banks.)
Interest free access to money for households all over the world.
(Banks create and destroy money as we go into and out of debt; interest beyond fees is unwarranted and unnecessary.)
The return of public resources and industries that allow the public sector to pay for itself, reducing taxes and bills on working families.
(Capitalist states privatize national profits while socializing public sector costs, resulting in heavy taxation on working famlies - around 40% of their incomes, effect tax rate.)
6. It's Just Not Scientific
The World's Most Powerfully Misused Words
The words 'lend' and 'borrow' already have their use and meaning in the world outside of finance. Say I have a bicycle and you would like to 'borrow' and make use of it for a period before returning it to me, I could 'lend' that bicycle to you and the interaction between us really would be an example of what our language ordinarily conveys by the words 'lending' and 'borrowing'.
And if we invoke the legal construct of the 'reasonable person', I'm sure that if you approached a 'reasonable person' in the street and asked them what they thought those words mean, you'd get the very same definition I offered there.
But banks of course don't do that. Banks record money into and out of existence in the process of facilitating our debts. In the case of households, we understand that these really are real debts, but we understand they are not the result of any "lending" or "borrowing" in the commonly, reasonably accepted understanding of what those words mean. Money is endogenous and creditary; money is debt and it comes into and out of existence when we go into and out of debt.
In my experience, it's not too uncommon to find other economists or finance professionals who understand that money works this way (something they might call "multiplying money" or "expanding banks' balance sheets"). What is much harder to find are those among them who recognize that there's something fundamentally wrong in couching these processes in the extraordinarily misleading language of 'lending' and 'borrowing', or indeed show the right concern for its consequences - the establishment of very cruel and unnecessary, hierarchical lender-borrower relationships which crush and loot the economies and people of the entire world.
Recording money into and out of being, as records of outstanding indebtedness, is, clearly, an existentially different phenomenon to that of the borrowing and returning of already-existing money that is the rightful property of the lender. This is a basic fact any schoolchild could readily understand. Yet we find our highest academic, financial and political communities and authorities perpetuating this language and then raising far too few concerns about the damages being done as a consequence.
This is a clear case of the abuse of, or at best the unscientific treatment of, language. I'm sure there are many professionals who use these terms unconsciously or uncritically, who, for a lack of a better understanding themselves, believe or have assumed that banks really do 'lend' 'borrowers' other people's money. But even so, that isn't what we expect from professionals. From the professional community we expect honesty and accuracy. And as much as there may be some whose use of this language could be considered uncritical, there are clearly many others who know this is an inappropriate and misleading language, yet use it anyway.
The economics community is suffering a crisis of reputation, as I'm sure it does permanently - and certainly every time the world descends into even more calamity and it's revealed that those at the top have simply been plundering all along. With the rise of communications technology, more people every day are coming to understand that this type of economics is systematically unjust, that society is lost to corruption and about as far from the ideals of decency and democracy as economies ever have been.
If you know, as children can and should know, that money is created for us when we need it, when we go into debt, would you still be happy to hand up large sums of your hard-earned income - many thousands of hours of your working life - in interest payments to people who are not only already rich, but simply did not earn and do not deserve that money? Would you be happy to see the great majority of the working population around you do the same? At 9.3% (the 35 year average mortgage rate to the 2007/8 crash), a working families will pay almost 3 times for their home; twice as a mere gift to the already rich. We don't need to look much further to see how it is they acquired that wealth in the first place, or how such small numbers of people come to own everything of value in society - and now just about everything of value on Earth.
If you knew that very much of the world's "national debts" were also the result of simple money creation, not the actual lending and borrowing of anyone's money, would you continue to accept the endless mainstream chatter about deficits, over-spending and the cost of public services and public debt? Would you accept "austerity", the loss of public rights and public assets in the name of "paying up" and "living within our means"? Would you accept the unconscionable drain private international banks inflict on many of the poorest nations in the world? Would you still believe the capitalist system is one of justice and fairness, where wealth is "earned", where we reward 'enterprise', 'endeavor' and 'merit'? Or would you suspect that this is all just wallpaper for great frauds and corruption; perhaps the greatest examples of such in all of history? I don't imagine for a minute that you'd fail to have serious concerns about what is going on; I think you'd look very differently at how property, income and opportunity has been allocated under capitalism and I think you'd wonder exactly what alternatives we are being deprived.
So maybe we can go from understanding it's all set up by and for a corrupt few to actually doing something about it. Basic economic literacy is the foundation for a better economic future, for genuine democracies and for economics founded on the real rights of all. Let's do something now, if only for the sake of the world's poorest (enormous numbers of whom lose their fight against global capitalism every day). Let's make sure we're still around to see life and opportunity returned to those from whom they are currently being stolen. And that's pretty much every last person on Earth, including economists. What might the world look like then?
The Basics Economics
- Fig 1 -
In our earliest studies of economics, we're introduced to the idea of supply and demand (click the pictures to enlarge them) and, despite the many complications that this simple analysis can gloss over, I think it can be an important thinking tool nonetheless.
In his book Debunking Economics, economist Steve Keen, drawing on the work of Italian economist Piero Sraffa, points to the likelihood that the supply curve is not, in fact, upward sloping. At least, not in the estimation of business leaders or by empirical measurement of the world around us at this time. For Keen, the supply curve (the upward sloping line) is more likely to be horizontal, or even downward sloping (see Fig 2). What this would show is that our ability to produce, to create and to supply is not being constrained by the conditions of supply, but rather by the conditions of demand; we could potentially produce more and at lower unit costs than the economy outputs at the present time. In other words, we're being held back; we're losing out and we're watching a lot of our potential simply go to waste. And that's a conclusion that fits with our wider assumption or suspicion that capitalism is unfairly excluding people and allocating market power to an undeserving minority. It also shows that fixing it isn't a matter of improving the conditions of supply (such as technology), but allowing the economy to get demand power back into the hands of the people where it rightly belongs. (This would push the demand curve - the downward sloping line in Fig 1 - outwards to the right.)
- Fig 2 -
So this provides more support for the idea that the problems of capitalist economics are systemic and internal; they are not 'natural' features or limitations of either the natural world or our own capacity. Indeed, until we can be free from the perverse influence of systemic economic injustice, it's going to be very hard for us to understand what those limitation might be.
Capitalism is, to any casual observer, a staggeringly distorted system. For a few (who I'm sure many would regard as the least reputable among us) capitalist economics provides astonishingly well. We've already seen how much wealth is available to those who do not lift a finger in contribution to the economies that provide so phenomenally well for them. But it is surely for most of humanity that life is made crushingly difficult. The wealth and power that rules the world are notorious for their corruption and their ever increasing cultivation of a system that serves themselves at the expense of everyone else. While a few are able to rig the system and cheat their way to unimaginable wealth, many are left facing poverty, misery and struggle, perhaps a lifetime of economic subjection/slavery, at the hands of a few that abuse them.
Capitalism is the problem. The problem lies in the exclusivity of economics under capitalism, its proclivity to serve an undeserving few at everyone else's expense and that is what we are able to observe and identify as a clear and obvious assault on wider demand; that is, the income and opportunity normal human beings all over the world can ever hope to have. Billions of people are being reduced by this system and forced to live a precarious existence, while favor is lavished on the rich and immeasurable amounts of human potential are rendered dormant or destroyed.
Capitalism's many problems, then, are not a reflection of our limited productive potential, or our inability to do economics better, they are a product of distortionary pressures which render the majority of us unable to demand that which we can produce. And it's a truly basic economic fundamental that if it cannot be demanded, it will not be produced:
Hanauer, speaking principally about employment, but clearly conveying the primacy of demand in driving production, consumption and employment.
What readers of this website will know is that capitalism is exclusionary and it is distortionary by design, that it splits the world into two fundamental groups: the few who own and control the economic world and the many who are then rendered 'subject' to them. The simple fact of what they have done is steal the commons (where money comes from) and common rights. That's what capitalism is; the theft of the commons and common rights. And they've rendered the subject population sufficiently economically uneducated as to simply not know what's going on. Indeed, they've managed to make many millions of people among the subject classes believe capitalism is nothing short of "freedom" itself.
In the terms of our supply and demand analysis, what that means is that the demand curve is being pushed back towards the left, leaving many people excluded and production (Q) distorted towards the indulgences and demands of a power class. (A bloated military, unending wars for profit and bailouts/tax breaks for the rich are sure to be examples of such.)
It seems reasonable, then, to suggest that Keen and orthodox, neoclassical economic theory might find some resolution by drawing the following graph. Here, diminishing marginal productivity and rising marginal costs do set in eventually (as orthodox theory claims they should), but at a level of output/demand much higher than is realized under capitalism.
- Fig 3 -
Here, the return of people's human and democratic rights allows the demand curve to move outwards to the right, economically including a great many more people (all people we would hope!) along with their inventions, innovations and enterprise. Note that the needs of 7+ billion people must be produced within Q. As we have it, many of the world's people are simply excluded and left totally outside of the scope of analyses such as these. By swapping the unearned privileges and the exploitation of the rightsless under capitalism for real human and democratic rights, all human beings can be brought back into the embrace of human industry. And it's surely only through such means that we can give substance to the heretofore largely 'in name only' human right to life.
Let me just finally point out that I think it would seem to make little difference if Keen's assertion turned out to be wrong. Even if it is the case that today, under capitalism, the conditions of supply are more constraining than Keen believes them to be, and supply curves do in fact rise, the conditions of supply and demand are so entwined with one another that it seems reasonable to believe that a demand curve being pushed out to the right will take the supply curve with it. People who are economically excluded are obviously very limited in their ability to be productive, to pursue an education, to drive communities and industries forward through innovation and enterprise; people who are economically included face far fewer limitations. Stated another way, the economically included can and do make unproductive parts of the world around them productive. Needless economic subjection and exclusion are in and of themselves both offensive to human dignity and harmful to the economy - to both supply and demand - and that is enough to condemn capitalism as an inefficient, distortionary and unacceptable system. So even if supply curves do rise under capitalism, widespread economic inclusion would push the demand and supply curves out to the right, which is just about what it'll take to create the conditions in which the needs of 7+ billion people are included within Q.
- Fig 4 -
1. See: Debunking Economics, chapter 5, 'The Price of Everything and the Value of Nothing'. ↩
8. Accounting for Money Creation - 1
Introducing Governments and Banks
We've seen how money, banking and debt, in truth, basically work and we've considered a few conceptual ideas to strengthen our understanding of what is going on, what is going wrong and how we might fix it.
Let's now return to our original example and expand on the basic financial/credit system we built in section 1. We'll look more closely at how the creation, transfer and settlement of money is or can be accounted for. And we'll build the system up to capture more of the real world, including adding a government and a plurality of banks.
This is where we left our community:
- Table 1 -
Let's now introduce a government (which we'll assume is Mark, Jo, Cassie, Lauren and Sean themselves). We want to see government finances and government money creation in action, so we'll have the government simply credit each community member with 1000 units, either for no reason at all other than that they might have some money, or in payment for their contributed labor - perhaps for building some roads.
- Table 2 -
This action created a body of money (5000 units) which now allows community members to make savings without an accompanying real debt. You can see that this money creation is called a 'debt' solely by the convention of the language we use within this accounting structure i.e. money creation is conventionally associated with debt; as would be correct for all other actors acting in their own capacity. But does it really make any sense that the community members, having earned or been given this money, should collectively "owe" it back again? No, even if we were to consider this a debt, we'd have to consider it a debt that the community owes itself i.e. is just not a debt at all. The community can theoretically create as much money as they like, it's only concerns are 1. the social justice of these actions and 2. that it doesn't contribute to excessive inflation. Ignoring those concerns for the time being, it's quite clear that the community just created some money, democratically, for itself and doesn't "owe" anyone anything for doing it.
The next thing to observe is that only the most tyrannical, criminal oligarchs would fracture this community in order to keep some members in the dark about what is going on and lead them to believe that they, through their government, have "borrowed" money, have a real debt and owe it back with interest.
Consider for a moment the staggering sums that are being passed off as "loans" to governments all around the world. Billions of people, in surely most if not all nations, being led to believe that many trillions of dollars of simply created money are "borrowed" and are owed back with interest. The amounts of money that must have already been taken in interest, as well as in valuable public assets handed up in the name of paying off these so-called "debts", are just too frightening to imagine. I'm sure they'd require a very serious research project to determine (if anyone cares to fill me in...). I personally can't conceive of a bigger criminal racket and I find it almost impossible to believe that this is the reality of the world that exists around us right now.
I understand that some will object to governments being able to create money. However, we've just seen that such money creation plays an important role in the economy and it also seems that it's going to remain a fact of life that none of us are going to change anyway. So it seems we only have two choices: either we educate ourselves about public money creation or we remain as we are, ignorant and abused. Certainly, governments creating money seems the far lesser concern in the face of the real criminality we've just laid bare. In our example of government money creation, the government just created a base money supply and allowed community members to make savings of 1000 each, without having to burden anyone with real debts. It may also have aided them in organizing themselves to build roads. Finally, just like anybody else honoring a debt, governments can always eliminate money by taxing it out of the economy and out of existence, should it be considered necessary to do so. Here, the government taking taxes is conceptually little different to Mark charging for his services as a roof repairer.
We're still quite early in building our system, and whilst we can see that it comes with some concerns to iron out, let's take a moment to contrast it with capitalistic systems, where money (among other things) has been taken away from democracy and the realm of democratic/common rights. In the capitalist system, the underlying mechanics of money are the same, but all instances of money creation are passed off as "loans", meaning money circulates:
As the property of a capitalist elite.
At their discretion (put it in, take it away 'business cycles').
As an interest bearing debt to them (tribute economy).
Our small community system has given us a good start in understanding how money, banks and debt really work. And we can see that the system should be able to work much more honestly, much more democratically and much more inclusively than what the world has known under capitalism. Let's now make it a little more realistic by introducing banking as a formal practice.
The following is a representation of the conventional accounting structure used by banks. And we'll work with it, even though I'm sure it's as misrepresentative as the language and should really be replaced. The reason I have no fondness for this structure is that this, just like its language, is an accounting structure that would work for exogenous money; the wholly inaccurate conception of money we're all being so harmed by today, yet which the wealthy and powerful have every incentive to perpetuate.
We're still keeping it as simple as possible, so just one bank to cater to the whole community and still no physical cash stock; all money is no more than the non-physical numerical records you see in the tables and all payments will be performed by instruction i.e. by chip & pin, checks, wire, telephone, internet etc. We'll take the numbers from above and put them into a new table:
- Table 3 -
The language of 'credits' and 'debts' has been changed to 'assets' and 'liabilities'. And we can see the bank accounts for its own financial position alongside those of its customers. Any adjustments made to an individual's account will also be reflected in the bank's own accounts, as the bank's accounts mirror those of its customers (a customer's debt is an asset for the bank and the bank's debt is an asset for the customer).
When somebody goes into debt, the process of money creation is captured by the bank creating a checkable deposit (spendable money) for that person to draw on, recording it as an 'asset' for the debtor and balancing it by their 'liability' to repay it. Commensurately, banks take a mirror position: they record that newly created money as a liability for themselves (as if they're 'holding' this money in a physical sense and have the liability to give it back) and record the credit agreement as an asset - a document which allows the bank to collect repayment + interest, as well as access the legal system if a debtor falls delinquent.
So, whenever the bank creates new money, we'll see all 4 columns along the row adjusted by the same number. This is why money creation by banks is often called a balance sheet expansion. Let's imagine that Cassie needs a credit of 2000; the bank's books would be adjusted to add 2000 to each column accordingly:
- Table 4 -
2000 new currency units were made available to Cassie, recorded both as an asset and liability of her own, but now also mirrored for the bank: Cassie's asset is the bank's liability and her liability is the bank's asset.
The whole table now looks like:
- Table 5 -
We can perform any operation required on these numbers, including any transactions, as well as facilitating any reasonable level of debt for any member, without anyone "borrowing" anything from anyone. All processes consist either of creating numbers, transferring those numbers by instruction (by debiting one account and crediting another), or eliminating numbers when debts are paid down (when positive numbers are paid into negative balance accounts). So, even though we've introduced a bank, we've retained an honest, inclusive and interest free financial system which can accommodate all community members (and a government) without anyone having to "borrow" anything from anyone. And it's for that same reason that we might consider repayment conditions being made flexible enough to ensure far fewer people have to lose property during hard times.
And that, of course, was what we set out to achieve, to show that banks can serve the community, that introducing them into our model didn't have to condemn the community to class hierarchy and systemic usury.
In the next section we'll develop the model to introduce a plurality of banks and consider the attraction of an alternative model to account for these financial relationships.
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 limitations 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:
To create new money.
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:
- 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 transferring 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:
|CB Cash||CB Debt|
|CB Cash||CB Debt|
- 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:
|CB Cash||CB Debt|
|CB Cash||CB Debt|
- 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 existence, 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.