WHAT IS MONEY in banking?
In short, money is a form of public-private partnership that removes risks to the public sector and benefits the private sector. The creation of money and credit must indeed be recognized as a benefit that benefits society as a whole, not just the private banking sector.
MONEY AND BANKS:EVERYTHING YOU NEED TO KNOW ABOUT
The design of the money and banking system is involved in the key challenges we face as a society:
• Increase in debt (public and private)
• Economic instability
• Concentration of wealth
• Loss of democracy
• Environmental and climate disturbances
However, there is little public knowledge of how these systems work, and there are many misconceptions, such as the following:
• Money is created by the government
• Banks are financial intermediaries who borrow money received on deposit
• Returning to the gold standard will solve our economic problems
The monetary and banking system has become very complex over the past three decades due to the financing of banking activities, the rise of shadow banking services, and the globalization of the wholesale money market. This can be difficult to understand. However, the key features of the system design are easy to understand. They reveal the role that the system plays in the problems we face and a strategy to redesign it so that money can work to the collective benefit and within the limits set by limited ecosystems. It is essential for our democracy that the general public understands these issues and has the power to challenge monetary and banking systems.
To understand money, start by overcoming four thought patterns:
1. There is no free lunch
2. Money is a being of a nation-state
3. Money is uniform
4. Money is a positive number
1. There is no free lunch.
The ‘free lunch’ has to do with the banks creating the money they borrow. This simple fact is at the heart of banking and is the cause of current problems in the monetary and banking sector.
2. Money is a being of a nation-state.
Money is a state-owned enterprise and partly from the private sector, which makes it a hybrid system. In fact, the vast majority of the money we use is private money created by the banking sector to borrow money.
3. Money is uniform.
Money is not uniform, it is hierarchical. There are many different types of money (currency, central bank deposits, bank deposits) and they differ in quality. If the monetary and banking system works well, it appears that ‘one dollar is one dollar, in the form of a banknote or a checking account. But bank deposits and the national currency occur at two different levels of the monetary hierarchy, as is usual during banking crises. It is important to understand that although banks create the money we use in the form of account deposits, they do not create the money they use to complete their interbank transactions. To do this, they must use the central bank deposits created by the Federal Reserve.
4. Money is a positive number.
Money is essentially an accounting creature; it can be a positive or negative number depending on what balance you are in. The paper money it spends is a weight (negative number) for the Federal Reserve. But for the banking and private sector, paper money is good (positive number). Bank deposits are a liability in the banking sector and an asset in the private sector.
All money is created as debt.
With the exception of the coins in our pockets, all money is created as debt. The paper money issued by the Federal Reserve is guaranteed by the debt of the US government. Most of the money we use, more than 95% of the US money supply, is electronic money created with accounting data when loans are provided by the private banking industry.
The private banking sector determines the amount and initial use of the money it creates and lends it to specific sectors. This decision is driven by profit, not business priorities or the needs of the economy as a whole. For example, over the past decade, banks in the United States and other developed countries have created a lot of money simply by lending it to real estate and financial speculation, leading to a global housing bubble and bloated financial markets.
Money is never created to pay interest on that debt.
This is probably the biggest design flaw in our money system. This is what keeps money scarce.
If all money is created with interest or debt, the only sustainable scenario is one where all the interest flows into the economy and no one saves a penny. After someone builds up savings, he creates a corresponding amount of unpaid debt in the economy.
• This design flaw causes many people to neglect their loans and lose all collateral.
• Force the amount of money in circulation, and therefore the total debt level must continue to rise because we will have to borrow more money next year to pay interest on last year’s debt. The economy as a whole must therefore continue to grow.
• Because the growing debt far exceeds the amount available to pay it, the tendency to convert nature into goods and relationships into services increases. Recall that almost a century ago, almost all childcare, parenting, and food preparation services required no money exchange.
The private banking sector now has a monopoly on money creation.
Over the centuries, the US government and many governments around the world have transferred an important governmental function – the creation of money – to the private banking sector.
• If their tax revenues are insufficient to cover their expenses, these governments are forced to borrow from the entities they have given their power to make money.
• We all effectively borrow our money supply and pay interest on it every year.
• These interest payments serve as taxes on the productive economy, which rewards only the wealthy and the private banking sector.
• The mathematical consequence of this process is a continuous increase in wealth inequality.