Banks Caught in the Act

Bankers Caught in the Act.

by John M Repp

Since the financial crisis of 2007-2008, many people have taken a closer look at how that system works. The goal is to create a better monetary system, one more stable and one we don’t need to bail out from time to time, at great expense to ordinary people.

I recently found an academic article on the web that proves empirically, with a scientific experiment, that individual banks create money out of thin air. This they do when they make a loan. This is the idea Ellen Brown, a founder of the Public Banking Institute, has been writing about for years. Unless you like reading academic papers, I suggest at most, reading the abstract and the last paragraph. In the last paragraph, the author gives his recommendation for a more accountable monetary system.

The experiment was possible because the author and his fellow researchers convinced a small cooperative bank in Germany to allow them to see exactly what went on inside the bank’s accounting and management systems after one of the researchers borrowed 200,000 Euros. EU banks are regulated so they all follow the same procedures, so the experiment holds for all banks in Europe, and I believe, the rest of the world. The researchers learned that the bank did not withdraw the amount of the loan from any other internal or external account. It simply credited the borrower’s account with the loan principal. A bank employee manually changed the number in the borrower’s account, adding 200,000 Euros.

Most professional economists today declare such a theory of money creation to be a “crackpot” or “utopian” idea. They believe what most people believe, that banks take the money people have deposited with them and use that money to make loans. No new money is created. The economists would ignore the conclusions of this academic paper. And they would attack anyone holding this theory of money with ad hominem “arguments”, or they use logic to deduce from accepted assumptions that the idea is wrong. But they have never actually investigated the facts, in the whole 5000 years  of this kind of banking. This paper investigates the facts.

Many progressive people I have met cannot believe that banks create money out of nothing. I understand the difficulty. It is not what we have been taught. What about the videos or pictures of the government printing money? We have all seen that with our own eyes. Actually, what we see is the Bureau of Printing and Engraving printing cash, which they sell to the Federal Reserve, for 8 cents a bill regardless of the denomination. The Federal Reserve is a huge consortium of private banks with just a few public ones. The Fed distributes the cash to individual banks. Cash and coin is just 3% of all the money in circulation.

The implications of the theory that banks create money are huge and very positive. The private banking industry “privatized” the control of money creation in our country long before neo-liberalism. Money creation should be a power of a sovereign people. The private creation of money could be declared unconstitutional. Section 8 of the U.S. Constitution gives the power to Congress. Unfortunately it uses the word “coin” to express the idea. But the intention of the Founders is clear if we consider the fact that the Continental Congress started issuing money in June 22, 1775. Emperors and kings had the sovereign power to create money, why shouldn’t a democracy have it as well? And why can’t we the people today have full sovereignty?

If the Congress takes back the power to create money, why can’t they pay off the $15 trillion debt? Why do we have to cut social programs to balance budgets? Looking to the future, we could pay for the transition off fossil fuels without more taxation. We can afford free education at all public schools. We can afford a universal health care system. We can have full employment. This is no utopia. People will still get sick, and have conflicts.

I must say the author of the paper, rather than wanting to return the sole right to create money to a central government, suggests 1) a network of small credit unions combined with 2) local authorities being able to create debt-free money. The second function could be done in the U.S. by Congress creating money and then revenue sharing with local jurisdictions. This returns the sovereign right to create money closer to ordinary people. OH! The cry will be heard all over by gold bugs and fiscal conservatives. That would be inflationary! The people will want too much! They cannot be trusted! But the author and more and more economists think the key is what the new money is spent on. If it is spent on real wealth creation that meets the needs of people and the people earn a good living and can pay for the real wealth they create, it will not be inflationary.

Right now, we have the unholy alliance of huge private banks and in the U.S., the Federal Reserve, creating massive amounts of money that is then used, by those same banks, to speculate on world markets. The returns on that speculation are higher than investments in needed public infrastructure, education, and health care. Except when they are not, like in 2007-8. Then we bail them out.