J.D. Alt: World Without Banks

J.D Alt examines how far a community could get without private banks….and it’s less far than you probably think.

By J. D. Alt, author of The Architect Who Couldn’t Sing, available at Amazon.com or iBooks. Originally published at New Economic Perspectives.

Sometimes it helps, if you want to see and understand something more clearly, to imagine the world without it. I just finished a book (“Rethinking Money” by Benard Lietaer and Jacqui Dunne) that was so thoroughly confused—and confusing—about how the U.S. private banking system “creates our money” (but perversely refuses to create enough of it) that I felt an overwhelming need to try to clarify, in my own mind, what the private banking system actually is. That’s when I got the idea of imagining a world without private banks at all—and trying to see at what point, and for what purpose, they become useful or, perhaps, even necessary.

It is certainly possible to imagine a monetary system that, up to a certain point, works very well without private banks: A collective government (sovereign) establishes a treasury which issues—at the direction of the collective government—fiat dollars. The collective government establishes a need for the citizens to earn those fiat dollars by imposing taxes which can only be paid with the fiat dollars themselves. Given this set up, the sovereign can now issue dollars to buy, from the citizens, as many collective goods and services as the citizens have time, materials, energy and technology to produce. The fiat dollars the citizens earn by creating these collective goods and services are then used not only to pay their taxes, but also as a means of exchange amongst themselves for things they privately produce, own or consume. Thus, two markets are created, each using the same currency as a means of exchange: the market for collective goods and services, and a market for private goods and services.

The citizen’s desire to “save” dollars for a rainy day could be facilitated by the collective sovereign directing the treasury to issue interest bearing bonds. The citizens could then exchange their excess fiat dollars for these bonds—with the agreement that they would not convert the bonds back to dollars for a specific period of time. This creates the advantageous situation whereby (a) the citizens can grow their savings against the day they will be unable to earn a living through their labor, and (b) the collective sovereign can reduce the number of dollars in circulation—(as a strategy to maintain price stability.)

Thus far, we have no need of a private banking system. The collective sovereign can issue dollars, collect taxes, and issue bonds. The citizens can earn dollars, and then use those dollars as a means of exchange for private goods and services amongst themselves. They can save for the future by exchanging their excess dollars for the interest bearing bonds, and they can “vote” to pay themselves to produce any and all collective goods and services they have the time, materials, energy and technology to produce. It sounds to me very much like a happy and prosperous society.

We should note, however, that the total dollars in circulation which are available for the private exchange of goods and services is limited to what has been paid to the citizens for the production of collective goods and services—minus taxes collected, minus dollars which have been exchanged for interest bearing bonds, plus interest paid on the bonds. It might well be these are not ENOUGH dollars to satisfy the citizen’s efforts to produce and exchange all the private goods and services they need or want. Private things desired, or even desperately needed—and for which resources are actually available—could fail to be provided simply for lack of enough dollars to facilitate the exchanges necessary to produce and deliver them.

It is possible to imagine, under these circumstances, various ways the collective sovereign could add new fiat dollars to the private market other than, and in addition to, the purchasing of collective goods and services. However, whereas democratic processes (when properly working) can reasonably direct the production of collective goods, it seems evident that these same processes (even if they are properly working) are not well suited to deciding what and how many private goods and services should be created. It is not clear, then, how the collective sovereign could properly know how many new fiat dollars to create, nor how to distribute them so the needs for private goods and services are optimally met.

It might well be that a private banking system could solve this dilemma. The collective sovereign might enable a system of private banks to be formed, each endowed with the legal privilege of leveraging sovereign fiat dollars by issuing “loans” to citizens backed by only a fraction of the sovereign dollars the bank actually has at hand. The business model might unfold something like this:

A private bank is given a legal franchise by the collective sovereign. The private bank then creates an incentive for citizens to deposit their dollars-on-hand with the bank—the incentive being the bank’s promise to pay the citizen some rate of interest, or perhaps providing them with free checking and check-clearing services, relieving them of the worry of having to carry around large amounts of cash. The bank is then authorized by its sovereign franchise to issue “loans” to the citizens, denominated in the sovereign’s currency, in amounts exceeding the dollars the bank has on deposit by a specified percentage. For example, the bank might be authorized to issue nine “loan dollars” for every actual fiat dollar it has on deposit. The bank then makes a profit by collecting interest on the loans.

Importantly, the sovereign ensures these “loan dollars” are just as acceptable in the exchange of private goods and services as the sovereign’s “real” dollars by guaranteeing to convert the “loan dollars” to “sovereign dollars” at any time, on demand. With this infallible promise in place, the “loan dollars” become, for all practical purposes, indistinguishable from the “sovereign dollars.” And the net result is that the quantity of dollars in circulation is dramatically increased, providing a monetary base for a greatly expanded production and exchange of private goods and services.

One could even imagine a kind of ingenious mechanism in this new set up because, if everything works with the proper incentives, the amount of new “loan dollars” created will be very close to the amount of new dollars actually needed by the private market exchanges, helping to keep prices stable. This is because the “loan dollars” issued by the private banks are for the purposes of either producing or purchasing real goods and services the private citizens actually need or desire—and this fact is continuously verified by the issuing bank’s interest in ensuring the high probability of the loan being repaid. Before a loan is issued, then, the bank does research to confirm that what the newly created dollars will produce is, in fact, something that someone wants to purchase, or that what someone wants to purchase is, in fact, something that can be produced for the proposed purchase price. The bank also establishes, to the best of its ability, that the person proposing to do the producing has, in fact, the skills and resources necessary—or that the person proposing to do the purchasing has the projected income-over-time to repay the loan.

So, by adding a private banking system to our imagined world, we have created a situation where both collective and private goods and services can be produced, exchanged, and consumed AS NEEDED, so long as the real resources necessary for their production—time, labor, materials, energy, and technology—are available. Citizens can save against the day they can no longer earn their living with their labor. Prices can be held relatively stable by the continuous draining of dollars out of the market for private goods and services through tax collections and bond issues. It seems like an almost a perfect set up. We should ask, however: are there things that can now go wrong—things that couldn’t have happened before we inserted private banks into the picture?

One thing that could go wrong is if the citizens began using the new “loan dollars” to do things other than producing and exchanging real goods and services. Before the private banks, all the “new” dollars created (by sovereign fiat) were always spent to create real collective goods. But private-bank “loan dollars” could potentially be put to other uses. For example, citizens could begin using the “loan dollars” to place bets on whether a company’s stock price was going to go up or down. Or they could use the “loan dollars” to buy companies whose sales or products are struggling, and then let-go the company’s employees and sell off its assets for a profit. In each of these examples, the problem is that the new “loan dollars” increase the money supply circulating in the private market without ever producing any goods or services the citizens want or need—or, indeed, can even spend their dollars to buy.

This problem could be exacerbated if the private banks decided it was more profitable to engage in these kinds of “investment strategies” themselves (instead of sticking to their original business model of making loans and collecting interest.) They would certainly be in a uniquely leveraged position for doing exactly that. The Directors of the private banks could create bank-owned subsidiaries, and then issue “loan dollars” to the subsidiaries for the purpose of “investing” in financial bets. If something like this happened and, driven by the greedy side of human nature, grew out of scale and control, one could imagine the strange situation arising where a great excess of new dollars would be created but never spent to produce or buy anything real—nor spent to employ citizens to produce those things. Winners of the financial bets might amass huge sums of dollars—most of which can only be used for the purpose of making further bets—while more and more average citizens struggle to find a job to make ends meet.

A worst case scenario might be if the citizen bet-winners began to use their massive financial clout to to “buy” the democratic process guiding the direction and policies of the collective government. If this occurred, this relatively small group of citizens would be in a position to direct toward themselves the private ownership of virtually all the collective goods and services the society owns—essentially enslaving the rest of the population. The strategy for doing this would likely involve something we touched on earlier, but perhaps didn’t take proper note of. This is the fact that the sovereign’s infallible promise to convert private-bank “loan dollars”, on demand, into real sovereign fiat dollars (thereby enabling the private banking system to become functional) renders the two kinds of dollars, for all practical purposes, indistinguishable. It is this undifferentiated confluence of the two kinds of dollars which enables the power-takers to perpetrate two fundamental myths which enable them to take control:

(1) That the private banks, operating in the private market, are exclusively creating ALL the U.S. dollars that exist; and (2) the only way, therefore, the collective government can get dollars to spend for collective goods and services is by taxing or borrowing from the citizens.

The original (and still very “operational”) process of sovereign fiat dollar creation for the purpose of creating collective goods and services would be suppressed by the power-takers and publicly denigrated as “printing money”—something, by inference, both illegal and unethical. The citizens-to-be-controlled are then persuaded to believe their collective government is building debt faster than it can ever repay it—and the only recourse is to (a) dramatically reduce the dollars spent on collective goods, and (b) pay off government debt by SELLING existing collective goods—such as roads and airports, sewage treatment plants and water systems, national parks and public schools—to the private citizens who have amassed dollars beyond fortune. Once transferred to private ownership, what used to be free or very affordable collective goods, begin to generate tolls and rents further enriching the power-takers—and further impoverishing the average citizens.

It is hard to conceive, however, a rational citizenry ever allowing their sovereign monetary system—which works so beautifully to create the many collective goods and services they depend on, enjoy, and leverage to such great personal benefit—to become as deceitfully sociopathic and destructive as we’ve just imagined. Surely, if a private banking system were introduced—and it seems there are real benefits to be gained from doing so—there could also be established a few simple RULES that would prevent the nightmare scenario we’ve just envisioned from unfolding.

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60 comments

  1. proximity1

    “A worst case scenario might be if the citizen bet-winners began to use their massive financial clout to to “buy” the democratic process guiding the direction and policies of the collective government.”

    Two–no, three– thoughts. 1) Yep. 2) Duh. 3) The above fact has not been lost on the controlling corporate financial elite.

    Welcome to our (stupid) world.

    And, so, I suppose that this following,

    ” It is hard to conceive, however, a rational citizenry ever allowing their sovereign monetary system—which works so beautifully to create the many collective goods and services they depend on, enjoy, and leverage to such great personal benefit—to become as deceitfully sociopathic and destructive as we’ve just imagined. Surely, if a private banking system were introduced—and it seems there are real benefits to be gained from doing so—there could also be established a few simple RULES that would prevent the nightmare scenario we’ve just envisioned from unfolding. ” —-

    is intended as a facetious joke, right?

    1. Fíréan

      ” is intended as a facetious joke, right? ”
      Exactly my i thought too, when reading. I was expecting a sarc tag along the way. As all the hypothecial pitfalls of the writer’s hypothetical private banking system are exactly what we have seen and experienced both recently and presently. Too obvious to quote all, or part of, the last seven paragraphs to make my point. The article doesn’t even read as satire.

      A recommended reading (imho), for an understanding of the UK banking system: “Where Does Money Come From ? A Guide To the UK Monetary and Banking System.” Gave to me greater insight and understanding the UK system and, i guess, as to why overseas banks establish offices in, and use, London.

      1. OpenThePodBayDoorsHAL

        A close contact of mine was the head of a smaller European nation’s central bank, prior to the euro (which he helped architect). One of his jobs was to interact with the BIS. In one of those meetings he proposed a number of structural improvements and innovations. Later, he was taken aside by the BIS head man. “Jacques (not his name), you need to understand something important. In this job we do not propose to change anything, our sole job is to preserve things exactly as they are. The government makes laws that give us a monopoly to manufacture our product, and that product we sell to governments at full retail price. Any situation other than this would be a step down”.

  2. mikkel

    I don’t feel this was a serious effort, particularly since it seemed like 75% of it was a build up to no punchline about the current system.

    First, I’ll just jump in and say that I’m skeptical that a debt-based system can work in a resource constrained economy where we will practically (and certainly should) have to deal with degrowth as the primary factor.

    But regardless, there are other obvious ways of injecting money into the system other than direct government purchases, such as unconditional basic income. One thing that I really hate about the current system is that the bulk of money creation is geared towards very specific extractive and developmental industries of real estate + fossil fuels, big farms, etc. Even though it eventually filters out through the rest of the economy, it must first be born for one of these needs and then the rest of us have to fight over the secondary and tertiary spending. It’s no wonder that influence is placed where it is. The old standby of “rich people create jobs” isn’t wholly untrue when you look at the initial credit creation, outside of revolving credit.

    Basic income is a way to bypass these narrow interests and thus democratize the first order spending. All without a need for a bank!

    Then of course, I don’t know what a “private” bank means. There is a massive industry of “private” companies and banks that do nothing other than follow algorithms to sell mortgages to government backed MBS. Why not just go directly to the algorithm itself and skip the middlemen, with interest going to the government?

    Even more discretionary lending is all algorithmic within a bank’s profile, and arguably that could be extended as the government banking service. True major off the cuff lending should probably be the province of investment banking anyway, which isn’t supposed to have fractional reserve powers.

    So in summary:

    — Fractional reserve lending done by public banks in a strategic manner (which will come down to politics, but it comes down to politics anyway since that determines risk ratios which drive the private banking system)

    — Basic income that can be saved or loaned through P2P cooperatives

    — Direct government procurement

    — MMT advice on how to adjust various money supply

    Equals flexibility and ability to adjust investment/money supply without need for a private bank. Right?

    1. Clive

      There is though, perhaps, a case to be made that in the assessment of borrower risk (both in terms of repayment of principle and also the suitability of the purpose of the borrowing) that — in a properly functioning market — a private bank could indeed add some value in producing “a better mousetrap” i.e. more effective systems and models for these two variables. If it was all down to the central bank, they could only really implement one set of systems and models for determining credit risk and suitability of purpose for the borrowing.

      If the private banks which did this well got to keep some of the rewards for their genuine value creation — and the ones which did it badly ended up out of business with no socialised losses — that should be better than having the central bank alone trying to improve this essential component.

      1. mikkel

        In principle, I agree. When banks operate on a community level with the purpose of utilizing personal connections and genuinely care about the success of its members on a personal level, then there are a lot of intangibles that they can incorporate into decisions that are superior over centralized models.

        But to me, this is a matter of scope, not private vs. public, let alone fractional lending. For instance, this blog puts to lie that government action is constrained by taxation. Why does that only apply to the Federal level — could not the Federal level assign fractal responsibility making to figure out how to allocate its resources? Even if all banking was public, it wouldn’t need to be central.

        Also, in my suggestion above, the basic income would lead to a huge pool of deposit demand, which could then be serviced by banking cooperatives who don’t have fractional powers but can provide the functionality you state.

        1. mikkel

          I realize that perhaps I didn’t make it clear in my first comment that the majority of lending wouldn’t come from the public reserve banks (hence the “strategic” label). Those banks would focus on infrastructure, land use and technological development. The reason is because those areas require systemic coordination and minimum levels of scale before profitability models can be created. At present, the government supports these through a combination of guarantees, grants, subsidies and monopoly granting, but leaves the credit creation through private entities — which effectively socializes all the profits.

          It seems to me that the government should using its lending powers to directly support companies through the “valley of death,” which is the point at which a particular idea has been shown to have market potential but is not attractive to investment entities because of the uncertainty about policy related issues.

          Most normal lending could be done on a non-reserve basis, presuming the proper amount of direct monetary injection through procurement/basic income.

          1. mikkel

            “— which effectively socializes all the profits.”

            *Privatizes* the profits, socializes the losses.

          2. Ben Johannson

            It seems to me that the government should using its lending powers to directly support companies through the “valley of death,” which is the point at which a particular idea has been shown to have market potential but is not attractive to investment entities because of the uncertainty about policy related issues.

            Assessing risk and allocating capital on this scale would require a truly vast new bureacracy. Do you really think that would be a desirable outcome?

            1. mikkel

              Ben, I don’t really think any of the things proposed as necessarily desirable. The comments have two points: the short sightedness of the post, particularly in the context of what many heterodox economics have talked about through the decades, and the political realities that exist in our current system, gleaned through much direct experience and frustration.

              The valley of death issue already creates a massive bureaucracy on the private side of the ledger, which is a huge source of malinvestment and is normally resolved through public-private partnerships. In my experience (healthcare, tech and defense), the military/health complexes identify key innovations that they need and partner with a major player who has the political might to secure procurement in exchange for buying out the small player to get them through the valley. Many startups have the explicit goal of getting just to the point where they can have a government supported contract buy them out.

              So in essence, these dynamics already exist in the political dimension, and the most common advice is to try to get a Fortune 500 company to put it on the goodie list they submit to the government and failing that, get your congressman to find one who will.

              If you try to do things the “pure” way, then you quickly find all potential investors state that policy support must be in place before they will even consider it.

              1. Ray Phenicie

                “The valley of death issue already creates a massive bureaucracy on the private side of the ledger, which is a huge source of malinvestment and is normally resolved through public-private partnerships”

                Bravo! Thank you for pointing out the the ‘huge bureaucracy’ meme is often quoted in a one sided manner as though government was the only bureaucracy in town. In fact, we all as consumers mostly interact on a daily basis with the private sector for transactions big and small. And we do that in an unprotected manner; consumer protection is so not in place for everything from pencil sharpeners to dishwashers, to houses to cruise ships. Everywhere it is ‘buyer beware’ and be prepared to lose credit ratings, cash, house all and more on the basis of several crappy deals.

              2. Ben Johannson

                That does not answer the question: do you approve of a massive new bureacracy charged with allocation of all capital in the United States?

                Or wording the same question another way: Is there any aspect of American economic life you think should not be under complete government control?

                1. elbridge

                  Or, when should stop the wife-beating?.
                  Just as relevant.

                  There is ABSOLUTELY ZERO need for any new bureacracy to allocate ‘capital’ under any public money scheme. Where do you get this stuff?

                  Really, Ben, from where do you get this stuff?
                  And, why should it be taken seriously?

                  1. elbridge

                    In case that was getting close to the miliionth time, I will repeat once: Hoping to save yet another million.
                    Public money comes into existence ….in a quantity determined by the public monetary authority ….. through the funding of the government budget in lieu of debt.
                    That’s all it is.
                    Money-funding in lieu of debt-funding.
                    At the very instant of that government money creation, at issuance as money, it becomes the private property of the persons and businesses to whom it is sent, being a deposit into a private bank account.
                    The banks own the money at the instant point of issuance.
                    What would that huge bureaucracy be doing?
                    The banks and the depositors decide what to do with ALL of that money.
                    All that capital.
                    Capital allocation of publicly created money is the same as with private debt-based money.
                    Only there is no debt.
                    Hope this puts an end to another of those red-herring issues whose only reason for being seems to be to prevent the public money option from occupying public policy discourse.

                    Digital Greenbacks are the currency of the next revolution.
                    If there’s any reason not to, give it to us here.
                    If there’s none, then why not get on with it?

    2. susan the other

      Not that anyone needs to put too fine a point on this, but we have been operating on this basic model which ran its own course from 1945 on as a Military Industrial Complex with many inconsistencies and contradictions for 60+ years (completely destroying the old American self-reliant capitalists) and finally as war became a social anachronism (which was an accomplishment of the MIC, ironically but also intentionally), the system has become a problem in and of itself – how do you perpetuate a financial anachronism? – and so what next? Where is this transition going? I think the main point of discussion needs to be the transition from a war economy to a peace economy. I see many encouraging signs, in spite of a world of missiles, terrorism of all flags, ludicrous volumes of automobiles on “freeways” spewing CO2, and melted-down nuclear plants. These are the things brought to us by the almost insane ideologues of the MIC. So switching over to a PIC – peace industrial complex – will bring with it a mandate for environmental cleanup and social responsibility which will transition us into a better equilibrium all around… lso for our favorite fellow travelers like dolphins and whales and bees and all those good bacteria. Both public, and private; but private minimally and under strict regulation. As far as our situation goes today, this very day, we are winding down our ass-backwards system backwardly. We should make it a priority to go to sovereign peaceful banking first; put a hold on private banking until we can regulate the privateers to only the limit they perform in price stabilization. But no more than that. Right now this isn’t working because the private banksters have 10,000-page “living wills” (because banks are people too) helping them survive by using an eternity of confusion and litigation. Gordian Knot. Where is Alexander?

    3. Ray Phenicie

      If Congress folks were up to doing their job, if Congress could act in an integral manner, if we had some few rules as the author states, investment in coal burning power plants would not occur because they would be outlawed as a poisonous source of pollution that they are. Investment in crappy, internal combustion engines would be impossible because there would not be any; people and goods would move around on electric powered motors. The current electric power grid would and could be solar powered. The solar panels would be made in clean factories with state of the art methods.

      We could have a manufacturing base that is ecologically sound, we could have a health care system that cares for all who need it. The products, services and goods that may come out of a newly created infrastructure would be made in a way that would ensure much less harm would come to the environment that does now.

      1. Carla

        In response to STO and Ray — Hear! Hear!

        However, the sad fact is, we can’t even do antitrust because kleptocracy: corporations are people and money is speech. If ONLY we had the rule of law (instead of the constant perversion of it). If ONLY we had a functioning Congress.

        Again, here is the full wording of the We The People Amendment. Anyone who can read can understand it. To clarify: “artificial entities” include for-profit corporations, non-profit corporations, unions, associations (professional, religious or otherwise) and any other creation of the law that is not a human being.

        We The People Amendment
        House Joint Resolution 29 introduced February 14, 2013

        Section 1. [Artificial Entities Such as Corporations Do Not Have Constitutional Rights]

        The rights protected by the Constitution of the United States are the rights of natural persons only.

        Artificial entities established by the laws of any State, the United States, or any foreign state shall have no rights under this Constitution and are subject to regulation by the People, through Federal, State, or local law.

        The privileges of artificial entities shall be determined by the People, through Federal, State, or local law, and shall not be construed to be inherent or inalienable.

        Section 2. [Money is Not Free Speech]

        Federal, State, and local government shall regulate, limit, or prohibit contributions and expenditures, including a candidate’s own contributions and expenditures, to ensure that all citizens, regardless of their economic status, have access to the political process, and that no person gains, as a result of their money, substantially more access or ability to influence in any way the election of any candidate for public office or any ballot measure.

        Federal, State, and local government shall require that any permissible contributions and expenditures be publicly disclosed.

        The judiciary shall not construe the spending of money to influence elections to be speech under the First Amendment.

        http://www.movetoamend.org/wethepeopleamendment

    4. elbridge

      “”Fractional reserve lending done by public banks””
      uummm…. has never happened and will never happen.
      Fractional-reserve banking is unnecessary in any economy, merely a tool for debt-peonage.
      No state bank ever issued debt-based money, and, sorry but, if you recall, you said above that you doubted debt-based money can work in a resource–constrained economy.
      Which is correct.
      Public banks should do banking, like they do now.
      They should never issue debt-based money, which is what fractional-reserve banking is all about.
      This would put at risk real public resources(wealth).

      Have the government directly issue the money(MMT-meme….government as monopoly currency issuer) , with states sharing in that process.(See the link to HR 2990 – 112th Congress…. as it shares money-creation powers with the states with a far greater advantage than state banking).
      Either a Basic Income or Job Guarantee program, or both.
      Cooperative and Credit Union and state banking.
      We’ve already covered MMT’s contribution.

  3. John Merryman

    We have various levels of government, federal, state and local, why not have similar levels of banking? Then you have these functioning top down and bottom up, so they can leverage the various advantages and still have it a public utility.

    1. elbridge

      John,
      If I read correctly, the proposal is for federal, state, local “public banking.
      But, there is really no problem with private banking.
      Or, say what it is.
      The problem is private money creation and destruction, the pro-cyclical lynchpin of booms and busts.
      Private banks should do all the credit allocation in an open economy.
      Let cooperative banks and credit unions provide the needed “public utility'” aspect to banking.
      No proposal for reform has ever called for an end to private banking.
      Most have offered saving private banking and ‘real’ capitalism (free enterprise) as one of their
      major reasons for being.
      http://faculty.chicagobooth.edu/amir.sufi/research/MonetaryReform_1939.pdf

      Let banks do banking.
      Let government do money creation.
      They are two different things that need to be separated in the money and banking system.
      BTW, Minsky was totally into this.

      1. Carla

        “No proposal for reform has ever called for an end to private banking.”

        That’s correct. An end to private banking would not be a reform. It would be revolutionary and transformational. But that does not mean it hasn’t been proposed.

        1. elbridge

          Carla,
          Actually, what would be revolutionary, and why we want it, would be for the banks to do banking, and to restore money creation and issuance to the sovereign people.
          Because it’s OUR money system.
          That’s what we fought the War for Independence from………PRIVATE British MONEY.
          THAT was the First Revolution.
          One more is needed.

        1. elbridge

          When did he do that, Ben?
          After he embraced it (Oct 1994), I never saw a word of change…… even more enthusiasm.
          http://www.levyinstitute.org/pubs/wp127.pdf
          esp. pgs 20 through 25.

          Some irony in that this is where Dr. Wray gets his ‘capital development of the economy’ terminology that he uses to promote private money creation, the opposite of the thinking here of Fisher and Minsky.
          From Minsky.:
          “One virtue of the 100 Percent Money scheme is that it separates the two functions that the monetary and banking system has to perform; the provision of a safe and secure means of payment, and ‘the capital development of the economy.”

          He concludes with:
          “”A Modest Proposal
          The time has come to open a national inquiry into the structure of the banking and financial system. The radical changes now underway in technology, computing and communication mean that much of what we have now may be obsolete.
          The sluggish economy of the past decades, combined with the apparent reluctance of the Federal Reserve to give full employment a chance can mean that our financing structures are not consistent with the needs of a progressive democracy.
          In the past serious changes were the result of serious public inquiry. I suggest enough is amiss in our financial and banking structures that it is time to go back to the drawing board and determine what monetary, financial and financing arrangements should be in the 21st century. A late 20th century National Monetary Commission should be on the public policy agenda.””

          Anything on that?
          Thanks.

  4. mossmoon

    A world without banks is not only possible but is happening right before our eyes. It’s called bitcoin.

    How many top 20 econoblogs understand the significance of bitcoin, including the fiesty zerohedge? Answer: ZERO.

    Fascinating, isn’t it?

    Most interesting to me has been utter failure of one of the Holy Commandments of the religion of economics: “Though shalt not have deflation.” Bitcoin can’t work because it’s deflationary money, and this wasn’t just Keynesians saying this. The real world is offering a real time experiment and exactly the opposite is happening. As prices collapse in terms of bitcoin, the bitcoin economy is growing, not collapsing. Oh, well, back to the drawing board.

    1. digi_owl

      Meh, bitcoin is a digital gold. It is a inherently scarce resource. As such, it is poorly suited to being a general currency. This can be clearly seen across history whenever a national economy bumps into the limits of a scarce metal standard…

      You are touching on something with the reference to bitcoin tho. And that is the decentralized accounting. Besides their ability to issue currency by way of loans, banks stand as a third party accountant in any transactions that are not handling physical bills or coins.

      Dogecoin, being inflationary rather than deflationary, would be a more suitable cryptocurrency in the long run. If people try to drive up the price by hoarding (hello bitcoin), others would drive it back down by mining more (not possible with bitcoin once the hard cap is hit). And unlike the private banking system, currency is not issued by way of debt.

    2. susan the other

      My instinct tells me that Bitcoin can never be a substitute for government. And money is government. So until the day that Bitcoin can run a country, I’m not too impressed with it. All Bitcoin can do is do international purchases, much like settlements at the moment of exchange. Maybe Bitcoin could replace the BIS.

      1. Carla

        STO — you’re right. Money is certainly running the country. Right into the ground.

        But like you, I’m not at all convinced by bitcoin.

  5. beene

    The problem with is article is like most discussions of fiat. No government has ever had a problem of putting or sending into the economy; normally the problem is keeping the government from creating to much fiat. The other problem is insisting that the market should have government bonds or treasuries to have a safe place to store fiat. Savings like investing is a private market issue which the governments should not be involved.

    1. elbridge

      After a little filling in for readability, I do totally agree.
      There’s a deep irony that historic calls for public money have uniquely been demonized for its ‘inflationary’ potential, but today’s anti-public money seers are trying to instill a ‘deflationary’ fear………..”Gosh, what if ‘they’ don’t make enough of that money?’
      It is as if the guy who wrote pre-eminently on “the purchasing power of money”, and the “Debt-deflation Theory of Great Depressions” didn’t see any of that coming.
      That U-Chicago faculty paper I linked to above provides all the deep schooling necessary to advance these ideas, and it is noteworthy that at the time of publication, over 400 economists PUBLICLY supported its ideas.
      When was the last time that happened?
      As to the public debt promotion,……..
      First, why is it the role of government to accommodate private savings/income preferences BY ISSUING DEBT?
      Second, Why should the taxpayers be paying for the income stream that private savers seek, rather than a private bank accommodating savings-type accounts?
      If the government was issuing the money, there would never be a need to borrow from ANY private entity.
      Rather, private entities would be borrowing from government.

      1. beene

        “Second, Why should the taxpayers be paying for the income stream that private savers seek, rather than a private bank accommodating savings-type accounts?” elbridge

        So those who usually create the problems for the nation have a save place to hide funds, from the problems the market is shortly to expose. No different than our present debt money system which requires the government backing in case of failure of the market; which is only a tax burden to the Nations taxpayer, without any benefit to the nation.

        Like the past bailout which only benefited the financial industry, and re-inflated property taxes which was a double hit on the majority of citizens.

    2. digi_owl

      Historically speaking, the only event that seems capable of getting government to create too much fiat currency is war. Either to pay for the ongoing war, or to pay reparations to the winners side afterwards.

      That is at least the case with a sane democracy. If you are operating with a dictatorship all bets are off anyways.

  6. Jack Thread

    So the problem to be solved is the proper distribution of money or credit to enable commerce. The difficulty is that the allocation of money has to be decided on a case-by-case basis, especially as requirements and situations change over time. But why automatically posit private banks to provide the proper allocation? Couldn’t public credit councils serve the same purpose? Or better yet, for a dash of true democracy, local credit juries that are randomly selected from a pool of qualified individuals.

    1. Ben Johannson

      Nothing says you must have private banks. The problem lay with people mistakenly thinking that full public banking will act as a panacea, not to mention such an outcome is politically impossible. Listening to them we’ll be waiting till doomsday for any significant change at all.

      1. elbridge

        Not a big public banking fan ….it’s OK in its adding to the diversity of credit resources.
        Not a panacea, for sure.
        But public money and private banking can solve many problems that public banking cannot touch.

  7. Gordon Brooks

    I think there are several fundamental flaws with this article. The first is the assertion that the banks refuse to create enough money. If there were not enough money in the system, inflation would be negative. It clearly is not, and anyone who’s shopped for food lately can tell you that official inflation figures are nonsense. The problem is that banks create money in such a way that the money created flows back to them and is not used by the middle class to buy goods and services.

    There are roles for private banks, but money creation is not one of them. If banks are not directly lending money deposited with them, they have a seriously reduced downside risk where lending is concerned. The result? Just what we see today: banks pushing as many loans as possible, and then pushing the real risk onto someone else.

    I also think Mr. Alt understands the role of taxation in a state (non-debt) money system; the only reason to take back money as taxes is to control the amount of money in the system. If there is too much, then levying taxes to pay for goods and services instead of issuing new money avoids inflation.

    This is not to say that state money is a perfect system. But it is certainly preferable to the system we have now, where nearly all the money is created as debt by private banks (including the Federal Reserve System, which is not an government agency); only coins are debt-free. And a debt-money system is self-perpetuating. Since all of the money created is created at interest, the only way to pay the interest is to create more money. At interest. The beneficiaries? Not the majority of people, or even the majority of large businesses. Just the banks.

    I don’t think we need a world with no private banks. I do think we need a world where the private banks cannot create money.

    1. Gordon Brooks

      Sorry, I meant I DON’T think Mr. Alt understands the role of taxation in a state money system. Oops.

    2. Ben Johannson

      There are roles for private banks, but money creation is not one of them. If banks are not directly lending money deposited with them, they have a seriously reduced downside risk where lending is concerned. The result? Just what we see today: banks pushing as many loans as possible, and then pushing the real risk onto someone else.

      The difficulty is that we once had a system where banks lent deposits, and manufacturing of bad debt (fraud) was every bit as bad. The only approach which has ever worked to prevent this sort of thing from becoming an epidemic is tough regulation and enforcement.

    3. elbridge

      I”” don’t think we need a world with no private banks. I do think we need a world where the private banks cannot create money.””
      Benchmark this distinction.
      It’s why Minsky supported 100 Percent Money.

  8. impermanence

    The notion that spending future income [what debt is] is a positive thing is false. Taking this idea to the ‘n’th degree [whereby a great percentage of the money in the system represents such] is insanity.

    We have seen what happens when you pull future demand forward, disaster in the economy, disaster ecologically, and in every other way.

    Debt is evil in every way, something that has been known for thousands of years. There is absolutely no need for it other than to line the pockets of the greatest fraudsters throughout the history of mankind.

    1. digi_owl

      Debt used for productive purposes, bootstrapping a new factory or service for example, is a overall gain for society.

      Debt used for gambling, the stock market etc, is destructive, as any addicted gambler can tell you.

      The trick is for the productive purpose to produce more income each accounting period than the interest on the initial debt.

      1. impermanence

        Sounds reasonable but it doesn’t work. You must strike a balance with the present and not steal from the future. As an example, look what has happened when you invested a disproportionate amount of money into health care technology [nobody can afford it]. It’s quite enough that people make ineffectual decisions with current resources, but to squander future resources is extremely poor management.

    2. elbridge

      “”The notion that spending future income [what debt is] is a positive thing is false.””
      While you are correct, you don’t seem to understand the “spend tomorrow’s income through debt” construct, nor its cause.
      In case you forgot, it’s because there is no “present income” to spend.
      Remember that REAL wages have not increased in 30 years, yet the cost of all things keep rising, and we’re barraged with a “need” for new things.
      So the money power substitutes debt (future income claims) for today’s income.
      “Borrow we Must”.
      It’s as negative a thing as can be, and the cause of our massive and paralyzing debt-saturation.
      MMT’s advice a la NEWMAN ! …..”what, me worry?”.

  9. cebepe

    I agree with the writer. I think a society without regulated private banks could not last very long. As for bit coins, that is just another form of private bank, but wholly unregulated. The author who helped me most in understanding the nature of money, and the nature of credit and debt, is David Graeber in Debt. It is as absurd to think of unregulated banks as it is to think of unregulated driving. I don’t agree that debt is evil; I don’t see how I could have lived my life without it. Contrary to one comment, I know of at least one government that had the greatest difficulty putting enough coin into circulation: England in the 18th century. I think our problems are political, in that we have allowed financial interests far too much influence in politics. I would strike back at their excessive influence, not try to destroy the whole system.

    1. digi_owl

      Not quite. cryptocurrency is regulated by the math involved in the generation of the hash strings that make up the currency. This in that the math is set up so that with a given CPU power, only so many strings can be generated in a given time period.

      This is a more powerful regulation than any kind of legal regulation saying that banks can only issue so much new currency based on their reserved, because the accounting involved is endlessly manipulable. for instance, big international banks can move their liabilities overseas right before an audit. And then move them back once done. Or have another entity loan them the needed reserves just long enough to pass the audit.

    2. elbridge

      “”Contrary to one comment, I know of at least one government that had the greatest difficulty putting enough coin into circulation: England in the 18th century.””

      Just in case I was that writer……. or even if not, a thought.
      Money creation and issuance in England in the 18th century (from 1694 onward) was through the private Bank of England, and the government had nothing to do with it.
      From the wiki page on the BoE.
      “The Bank was privately owned by stockholders from its foundation in 1694 until nationalised in 1946.”
      A shortage of money gives money value.and confuses the consumer.
      “In confusion, there is profit.”
      Nuff said.

  10. elbridge

    collective” sovereign?
    Why not just ‘sovereign’ ?
    Or, sovereign government ?
    What’s the point of using ‘collective’ here?
    Or, is it the obvious one?

    1. LifelongLib

      I suppose the author is assuming a genuine democratic (i.e. collective) sovereign, rather than one that serves only that part of society that already has a great deal of money?

      1. elbridge

        That’s a nice thought.
        Funny how MMT think always ends up putting the money power back in the hands of
        “that part of society that already has a great deal of money?”
        The slip-slide always seem to happen via unsupported postulations.
        Here as……
        “” However, whereas democratic processes (when properly working) can reasonably direct the production of collective goods, it seems evident that these same processes (even if they are properly working) are not well suited to deciding what and how many private goods and services should be created. It is not clear, then, how the collective sovereign could properly know how many new fiat dollars to create, nor how to distribute them so the needs for private goods and services are optimally met. It might well be that a private banking system could solve this dilemma.””
        “It seems evident…”
        “It is not clear…”
        It might well be….”

        Contrast that slippery rationale with this study of public money administration by Japanese economist Dr. Kaoru Yamaguchi, which uses science and very advanced macro-economic modeling technology, to conclude that public money can serve ALL the needs of an open economy.
        http://monetary.org/wp-content/uploads/2011/11/DesignOpenMacro.pdf

        Just like the Chicago Plan update of IMF researchers Benes and Kumhof, the reality is Dr Yamaguchi finds that no obstacle exists to prevent a true public money system from BEING the monopoly issuer of the currency, achieving full GDP-potential and doing so without either inflation or deflation.
        Alt claims its inept ‘collective sovereign’ actions: “are not well suited to deciding what and how many private goods and services should be created.”
        Guess what.
        NOBODY decides that.
        Everybody decides that.
        Aggregate demand.
        No matter who creates and issues adequate money.

  11. steelhead23

    ” It is not clear, then, how the collective sovereign could properly know how many new fiat dollars to create, nor how to distribute them so the needs for private goods and services are optimally met.

    It might well be that a private banking system could solve this dilemma.”

    NO Given the subsequent imaginary, but all too real, scenario in which private, for-profit banks become the engines for wealth and power disparity that undermine democratic principals, other solutions to stimulate demand, and thereby supply, should be sought. For example – credit unions, locally organized (so they know what is locally needed) and federally regulated could serve this purpose.

    Let us be clear when playing such games that in our modern world, supply and demand are global phenomena. Other nations (and certainly transnational corporations) may conspire to keep wages low, such that domestic production suffers and domestic productive capacity is stolen by slave-wage states, leading to a gross misallocation of resources that money management alone could not control. Hence, a system of trade protections might be needed to ensure high levels of domestic production. In this manner, economically strong states, such as the United States could create a global environment in which incentives exist to encourage egalitarian and democratic systems.

    Getting back to current reality, the underlying issues behind wealth disparity are normalcy bias (its always been this way – and while capitalism has warts (wealth and power disparity), we all enjoy its fruits (prosperity)), and the corrupting influence of money politics and the revolving door have on our political leaders.

  12. Pelham

    Wonderful post.

    While it is easy to imagine rules that would prevent the kinds of banking abuses described, it is a good deal harder to imagine the mechanism that would allow us to introduce, pass and enforce such rules. Nothing of the sort (representative democracy would be one possibility) exists.

  13. ChrisPacific

    This is an excellent piece (probably the first I’ve read that describes the role of banks in society in an understandable way) particularly the reductio ad absurdum bit at the end. Unfortunately a society so foolish as to allow this kind of thing to happen might find it quite difficult to change, since the channel that is legally available to them for doing so (the democratic process) is precisely the one that has become corrupted. The only remaining alternatives would be civil disobedience or revolution, and most societies don’t have a lot of practice at that kind of thing. (Another MLK would come in handy).

    It makes intuitive sense to me that (a) there is more economic activity in the system than can be accounted for by transactions involving the government that can be denominated in government-issued debt, (b) the money supply needs to expand to account for this activity to avoid deflation and scarcity issues, and (c) there needs to be an entity or entities that decide whether the expansion of money supply for any given purpose is a bad or a good thing (the loan quality analysis discussed in the article). However (as other commenters have noted) I don’t think the author has demonstrated that that role needs to be filled by private banks. In fact I think there is a fairly strong argument that the entities in question should not be private, since their role is the expansion of the money supply (i.e., money creation) which is a task inherently susceptible to corruption. If they are private, then they obviously need to be tightly controlled and well regulated.

    1. elbridge

      You have ‘joined’ a couple of important points, one is how democracy might solve the problems of money, and also of “the priority use of the money supply”.
      If done correctly, public money would direct the ‘first use’ of all new money in circulation because it is spent into circulation by government, either federal or, as according here, the states.
      https://www.govtrack.us/congress/bills/112/hr2990/text
      So, how to democratize money has all been thought out already.

      But the instant new money is created by ‘paying for’ the national budget, it is a private resource.
      With removal of the moral hazard associated with fractional-reserve banking (here conveniently restored in order to fix a ‘conjured’ problem of inadequate money) , so that risk and reward are all managed without the privilege of private money creation, there is no need for a ‘credit allocation’ role of the public.

      Your private deposit(savings) will be loaned by your bank, and your bank will need to earn its profits based on the money-cost arbitrage, as most people think it does now..
      Thanks.

  14. Oregoncharles

    “The collective government establishes a need for the citizens to earn those fiat dollars by imposing taxes” –
    I keep seeing this, but it is NOT my understanding of fiat money. Instead, the “fiat” is that citizens are REQUIRED to accept money as payment. Since the government is the enforcer of contracts and creator of currency, it’s in a good position to require that.
    By this definition, there is no real need for taxes, except as a way to regulate the amount of money in circulation and prevent inflation. I can see that they also create a demand for currency, but not for nearly enough – taxes are only a small portion of the economy.

    1. elbridge

      Charles,
      Sorry, that “quote” is MMT poppycock.
      The manner by which the government achieves any power over its national money system is through ‘sovereignty’. Every sovereign government is empowered to declare what serves as money in the realm.
      That’s it.
      So, its not that the government requires acceptance of fiat in “payment” for anything, but in “use” of the national legal system of money.
      That’s all it takes.
      But there is still a need for taxes.
      Until a time when the federal budget ($4 Trillion) is equivalent to potential GDP-growth funded by new money($500 Billion), taxes are necessary to fund the balance of spending.

  15. LifelongLib

    Well, in your scenario the government would have to monitor every deal people make to ensure that (fiat) money changes hands. In the usual MMT scenario everyone has to have enough money at the end of the year to pay their taxes, which creates a baseline demand for the fiat currency but doesn’t require a “1984” level of surveillance to enforce.

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