Banks are not evil

Banks are not evil

 

In reading this blog it is important to keep in mind that banks and other financial institutions are not the bad guys. Banks are not evil. It is the author’s position, throughout this blog, that banks and other financial businesses, which are “for profit,” should not be the only means for bringing new money into circulation. During economic contractions banks are too tied to the profit motive to take the risk of creating bank money. (Foot note: Ironically if a bank loan is not repaid the bank money created stays in circulation; however, when a bank loan is repaid that bank money is taken out of circulation (destroyed, taken off the books).) During fairly stable times of modest, but healthy economic growth, banks do a good job of making loans-creating bank money. Then during times of a boom, banks make loans as if there is no tomorrow-create bank money at a very fast rate for they are usually in the center of the current financial fad.

 

It is the author’s position that population growth, depletion of the money supply through physical destruction and hoarding of coins, for example, and healthy economic growth requires that money be created at a fairly steady rate.   Banks do not provide the “steady generation of dollars” because such money generation (creation of bank money) is not always best for the financial health of the bank. Hence, asking banks to perform a service contrary to their bottom line is unfair and downright Un-American. So, the author proposes to meet the steady long term need for money by creating base money by depositing it into the bank accounts of citizens who vote and serve on juries.

 

This will create marginally more money than is, on average, created under the present system. While there will be those who argue that productivity cannot meet the demands of such a stimulus. The Feds, for example respond to a question on their web page as to why they do not stimulate the economy continually, their answer is precisely that production cannot meet such a demand. Of course, they actually do not know. Further, under the creation of base money through voters’ accounts, the number of participants in the economy will be increased. Both sub-marginal and marginal participants will become greater participants and eventually full economic participants. This enlargement of the number of economic actors will result in more transactions that in turn will necessitate an enlarged money supply.

 

If history has shown anything it is that larger economic systems are stronger than small ones. It also shows that the less central control the economy has the less likely any given “problem” is to spread. While the US has a large economy, it has central control over the creation of money-principal dealers and commercial banks through the Federal Reserve Banks. There is one Federal Reserve Open Market Committee, about two dozen principal dealers and about 6300 commercial banks. If we were to deposit new money into voters’ accounts, there would be between 200,000,000 and 250,000,000 potential voters (and growing). This would be somewhat less centralized than only creating money through 6300 commercial banks. Notice that the primary dealers are by-passed in this system at least for the creation of money in voter accounts. Since a monetary authority will still be needed, the Federal Reserve System will stay in place.

 

Primary dealers and commercial banks will remain in place. However, their roles will be at the margin and the main creation of new base money will be through voters’ accounts, some of which will be directly deposited into citizens’ commercial bank accounts.

 

Banks will, as noted, play a role in creating money at the margin. Banks will still perform all of their for profit activities. However, their activities will no longer include a key position in the lion’s share of money creation. Hence, their actions under varying economic conditions will no longer be as devastating to all other participants in the economy if their risks taking in new financial instruments fail. Under the current system commercial banks are too responsive to new financial instruments creating bank money in hyper drive. However, when the new financial instrument bubble bursts, commercial banks stop creating bank money. There is too much fluctuation in the rate of money creation to sustain a healthy long term pattern of economic growth when left the way it is presently created in profit making businesses, commercial banks.