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Positive Money & the Wizard of Oz

Written By: - Date published: 1:58 pm, July 7th, 2012 - 13 comments
Categories: monetary policy - Tags: , , ,

In our current system, we give men like Bob Diamond the immense power to create money.

Need it be so?

The Positive Money movement wishes to change that, and give that power back to Government.

Henry Ford said: “It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.”  And it certainly seems true that most people don’t understand that money is created by private banks when they give you loans, having the quaint idea that the bank must have had somebody save that money first.

But that is not how our Fractional Reserve Banking system works, and banks just get to create money when they give you a loan.

Banks have not been the best corporate citizens of late, hardly responsible with their lending, but then we only need look back at the founder of the Rothschild’s dynasty at the start of the 19th century: “Let me issue and control a nation’s money and I care not who writes the laws,” and we can see it’s not a new trend.

So the Positive Money movement (oddly with some editorial backing from NZ Investor magazine), wants Government to issue money instead of banks, which would go back to the old days and only lend what they have in savings.  They point out that the first Labour Government did that – using the money created to build houses and infrastructure, without causing any dangerous inflation.

Inflation becomes an additional source of revenue other than taxes – one that would have to be strictly controlled by a Monetary Policy Committee or similar, rather than left in the hands of politicians looking at a 3-year electoral cycle.  It’s worth looking through a more detailed analysis of how such a system would work, but the short answer appears to be: better than the current one.

The current system relies on people and countries going into the banks’ debt for anything to happen.  As Thomas Jefferson put it:

If the American people ever allow private banks to control the issue of their  currency, first by inflation, then by deflation, the banks…will deprive the people of  all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

And it is through banks inflating the money supply that we had our debt-fuelled boom in the noughties, followed by the GFC when Fear finally trumped Greed in the bi-emotional world of banking.

It is through Greed and inflationary bank-lending that our house prices keep rising, out of all proportion to incomes.  The price of a house is no longer the capitalistic “what someone’s willing to pay”, but “who has the greediest bank, and what are they willing to lend”.

Over the last 30 years in the UK banks have caused 7.8% inflation pa through their lending, causing a 6-fold increase in house prices.  Banks are slowly channelling all wealth into them, through interest: in 2008 NZ banks made $3.2 billion in profit, while all other companies on our stock exchange made a total of $2.89 billion.  95% of that profit went to Australia.

It is odd that the argument over banking and monetary systems has been going on for hundreds of years, yet almost everyone is unaware of it.  Thomas Jefferson’s quote above is from 1808; The Wizard of Oz was written in 1900 as an allegory of monetary reform (the yellow brick road is the gold standard; Dorothy the everywoman/man, taking the Scarecrow – agricultural workers – and the Tin Man – industrial workers – with her, and her silver slippers are the ability to create money ourselves; The Wicked Witches of the East & West are Wall St Bankers and JD Rockefeller respectively; and the Wizard is the charlatan running our system, using illusion to fool the citizens in Oz to convince them he has real power – among other symbols).  The Federal Reserve Act was only passed in 1913, with President Woodrow Wilson opining only a few years later:

I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of  credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most  completely controlled and dominated Governments in the civilized world no longer a  Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.

Nixon abolished the Gold Standard only in 1971, with the world quickly following suit.  Clinton only repealed part of the Glass-Steagall Act in 1999, allowing banks to blur the line between investment and retail banking.  So things have most definitely not always been this way.

All too often we accept the current way as inevitable, or the only possible way.  But almost always There Are Real Alternatives.

On the other hand we mustn’t fall into the trap that we need change, this is change, we need this.  So, now that I’ve put forward Positive Money’s case, I’d like to hear the counter-arguments.  Have a good read about how Full Reserve Banking works, and tell me:  How would we transition from the banks current state to the one envisaged by Positive Money?  Would we still have the necessary fluidity to provide capital to our productive businesses (already struggling for capital)?  What else could go wrong?

13 comments on “Positive Money & the Wizard of Oz”

  1. Draco T Bastard 1

    Would we still have the necessary fluidity to provide capital to our productive businesses (already struggling for capital)?

    Of course we would. The question you really need to be asking is: Would we still have access to the resources for our businesses? Which I’ve already answered many times – yes. We have the resources and, as we already own them, they’re the cheapest available to us and using them is the most efficient.

    What else could go wrong?

    It would take awhile to change over from the present delusional system and so we’d have to be on watch for the present system trying to come back.

  2. Colonial Viper 2

    Nice one Bunji.

    And one other point: a higher level of inflation is VERY helpful to reducing debt burdens, as fixed amounts of debt become less onerous.

  3. Colonial Viper 3

    This Steve Keen blog post on the pivotal role of banks in money creation and the ‘Endogenous Money’ theory is very helpful as well.

    http://www.debtdeflation.com/blogs/2012/07/03/7787/

    Note the empirical research which shows that changes in overall debt levels have been very closely related to changes in employment.

  4. DH 4

    When the gold standard was removed it seems all the world did was end up transferring it to a property standard. The defacto value of money now is property. I’ve got some cash on call and it’s real value is less than when I deposited it.

    I wonder if a simpler way to rein in the banks is to ban interbank borrowing. Endogenous lending is only possible because banks can borrow the deposits of other banks. If trading banks had to work off only their own deposits we’d see a big drop in money creation. The central bank could then fill the gaps in demand.

    • Colonial Viper 4.1

      What you are asking is for banks to become strictly ‘savings and loans’ institutions. Good idea I say, with only Government holding the ability to issue new money.

  5. Kotahi Tane Huna 5

    I think the real way to “fix” this is to acknowledge that any system we design will have inherent flaws that the unscrupulous will exploit, and that if the system has to be abandoned in favour of different settings in the future – so be it.

    • DH 5.1

      You make a good point. The big debate over endogenous lending revolves around the banks manipulating the way the central bank gives an unlimited overdraft to trading banks. It’s purpose is to provide stability to the banking system but the banks instead exploit it to lend money they don’t have.

      • Colonial Viper 5.1.1

        It’s purpose is to provide stability to the banking system

        And it doesn’t do any such thing, as we have very clearly observed.

        • Kotahi Tane Huna 5.1.1.1

          The point is that unintended consequences are inevitable, whatever we do. Something needs to change, but we shouldn’t fool ourselves that that would be the end of the matter.

  6. muzza 6

    Very well written Bunji…

    The problem with all of this is that our political system is owned by the same owners of the monetary supply, and until the awareness of how the current system works reaches a critical mass, nothing is going to change!

    We have to take back our politics first, which is why we are having our sovereignty signed away so quickly/secretly in the TPPA, and the energy assets disposed of. The same owners, will get the assets, and own the companies, which our sovereignty will be lost to.

    “Money”, sits at the very top of the heap, so controlling it, effectively allows you to control most any industry you care to name!

    Think this is a joke, think much harder!

  7. muzza 7

    Oh and in case it went unsaid, we have a banker in charge of our country, and another future National leader working for the Westpac!

  8. prism 8

    Sounds positive!

  9. vto 9

    20 years ago only few people realised all this.
    10 years ago the internet allowed more people to find this out.
    5 years ago people like travellerev started telling everyone.
    today it is a subject on a widely read blog.
    tomorrow it will be a mainstream news article
    then it will be all over for the bankers

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