banks

Most people don’t really understand how money is created and what political choices are embedded in that process. As a result, the privatization of money-creation is largely invisible to public view, and the anti-social, anti-ecological effects of privately created, debt-based money go unchallenged. 

Mary Mellor, professor emerita at Northumbira University in the UK, wants to change this reality, as she explains in a recent essay, “Money for the People,” at the Great Transition Initiative website. Mellor, the author of Debt or Democracy and an expert on the development of alternative economies, writes that we must create new public circuits for money-creation so that we can direct money toward socially and ecologically needed activities, and not just the types of debt-driven loans that banks deem profitable. In other words, money-creation need not be controlled by private creditors in the course of creating debt.  

The average citizen knows that banks are too powerful and often predatory, but they may not realize that the state has largely ceded its power to create new money ("seignorage") to banks. Banks create new money out of thin air when they make loans. That money is not something they otherwise hold in a vault. It is literally created when a loan is approved. That is how banks make profits. 

The power to create new money is something that the government could feasibly control and administer itself, for the benefit of all.  But governments have surrendered their power of seignorage to the private banking system and its investors.

This has far-reaching, negative impact because, as Mellor explains, “It is the private, bank-issued money system that leaves us with a pernicious cycle of debt and growth. Money could encourage socially and ecologically sustainable production and consumption, but only if it ceases to be a creature of the market and is reclaimed as a social and public representation of value.”

Although it is widely assumed that governments are the source of all new money – through “printing it” – the so-called private sector is the source of most new money put into circulation.  In one of the most successful enclosures of the commons in our time, commercial finance institutions have captured the power to create most new money through their discretionary lending.  This power has become so normalized and pervasive that hardly anyone acknowledges the startling fact that commercial lending accounts for more than 95% of “new money” created.  Government has in effect surrendered its enormous power to use its money-creating authority for the public good.

Perhaps the leading champion for reforming the current money system is Mary Mellor, emeritus professor at Northumbria University in the UK and author of the recently published, eye-opening book Debt or Democracy:  Public Money for Sustainability and Social Justice (Pluto Press, 2015, distributed in the US by University of Chicago Press Books). 

Mellor recently published an oped piece in The Independent, the British newspaper, that summarizes some of the key themes in her book. Her essay focuses on the “myth of handbag economics” – the idea that government budgets are comparable to household budgets.  This distorts our understanding of how the money supply works, says Mellor, and inexorably leads governments to adopt fiscal austerity policies. 

The critical political question that is rarely asked, said Mellor at a policy workshop last September, is: Who controls the creation and circulation of money?

She notes that the government, as the sovereign, has the authority to issue new money – an ancient authority known as seignorage.  But in practice, governments have surrendered this authority to the commercial banking sector, whose lending creates nearly all of the money in circulation as debt. 

Banks create money out of thin air by issuing new loans.  They need not have those specific sums of money on hand, in a vault. They need have only a small fraction of reserves of the total sum lent, as required by “reserve banking” standards. In this way, bank lending quite literally introduces new supplies of money into the economy based on strictly private, commercial standards – i.e., banks' assessments of borrowers’ ability to repay the debt with interest.

Mellor believes that we need to recover the power of public currency to meet public needs.   By “public currency,” she means “the generally recognized and authorized public currency created through a public money circuit that originates in central banks and government spending.”  Privately created currency is money designated as public currency that is issued through the banking sector as loans.  It is the fact that bankers are creating the public currency when they make loans that makes the state liable to honor that money when banks go into crisis.

The Green Party of England and Wales really knows how to stake out some fresh territory in their national politics!  At the autumn conference, the Greens adopted a resolution calling for “a programme of reform to remove the power to create money from private banks, and to fully restore the supply of our national currency to democratic and public control so that it can be issued free of debt and directed to environmentally and socially beneficial areas.” 

Bold thinking!  The Greens explain why the existing banking system is so pernicious: 

"The existing banking system is undemocratic, unfair and highly damaging.  Banks not only create money, they also decide how it is first used – and have used this power to fund financial speculation and reckless mortgage lending, rather than to finance investment in productive businesses.  Through the interest charged on the loans on which all credit is based, the current banking system increases inequality.  It also regularly causes economic crises:  banks create and lend more and more money until the level of debt becomes unsustainable, boom turns to bust, and the taxpayer bails out banks that are ‘too big to fail.’  Finally, the need to service the growing mountain of debt on which our money is based is a key driver of unsustainable economic growth that is destroying the environment."

The right to create money and profit from it is known as seignorage.  Banks currently enjoy this right and exercise it through their lending, which creates most of the money in circulation.  Governments have effectively let banks privatize control of the money supply.  In so doing, governments have forfeited the opportunity to provide debt-free lending to support productive enterprises and public needs as opposed to fueling boom-and-bust speculation and relentless economic growth that destroys the environment.

Reclaiming seignorage for public benefit has been a serious idea among many progressive economists for years.  A notable figure in this regard is James Robertson, the founder of the new economic foundation in Great Britain, in 1986, who has championed this issue for years.  Robertson’s most recent book Future Money explains how re-gaining public control over how new money is created and circulated could result in “an annual savings to all citizens of the UK of £75bn, and second in a one-off benefit to the public purse totalling £1.5bn over a three-year transition period.”

The Swiss are known for their highly secretive banking services for the super-wealthy.  Who would have guessed that they would inaugurate a Summer School on Social Banking and the Commons? 

The Institute for Social Banking and the Alternative Bank Schweiz are hosting a week-long seminar in the Swiss Alps on “social banks” and how their practices can strengthen the commons.  As the Institute’s website explains, “The Summer School will be a live, working inquiry [that aims] to understand and develop pioneering, entrepreneurial practices and policies that enable the commons to flourish for shared gain.”  The Summer School is intended for up to 100 people who want to learn more about social banking and finance and how they can be used to support the commons.

Among the topics to be discussed:  the commons paradigm; indigenous commons; money and the commons; social banking; the financing of common businesses; and alternative currencies.  The sessions will feature bankers, academics and commoners from all over the world, including Jean-Pierre Caron of the French mutual finance society, La Nef ; Sion Brackenbury, a Wales consultant with Commons Vision who works with business models and the commons; and my colleague Silke Helfrich of Germany, cofounder of the Commons Strategies Group.

There are of course many fascinating new initiatives involving alternative currencies and innovative banking, but I have yet to encounter one that directly addresses the relationship between banking and the commons.  Here’s hoping that the Institute for Social Banking pushes this important line of inquiry many steps forward.

The Renegade Economist website has a clever and instructive video animation on how banks, corporations and governments use debt to prey upon needy countries and stay on top. As “Billion Dollar Bill,” the superhero banker, candidly explains, “The cheapest, most lethal weapon in the world [is].....spreadsheets!” 

The ingenious tool for consummating enclosures around the world is debt – loans made to impoverished countries with coveted natural resources that can be acquired via corrupt or gullible leaders. It works this way: Bankers and the U.S. Government persuade the countries to put the natural resources in hock in order to finance loans for infrastructure development (with lots skimmed off to the middlemen bankers and politicians, and kudos for "helping" poor countries "develop.").

The loans intensify pressures to monetize nature in order to come up with funds to pay the loans.  Government aid programs then collude with multinational corporations to enclose shared forests, pastures, water and other resources used by commoners.  Land values rise, along with rents, displacing poorer people from their apartments and homes, swelling the ranks of the homeless and "informal sector."  As the Renegade Economist folks put it, "It is not conspiracy -- it's structural economic behavior locked into Western Foreign Policy and therefore the global economy.  It's branded aid but really it's neo-colonialism."