This article comes in two parts. Part I looks at the very nature of money itself and argues that the creation of money (as opposed to the spending of it) in any form is a right that belongs solely to the commons. This is the legal and 'technical' argument, if you like, for getting rid of banks.Part II itself has four sections, which are:

• The numbers that don't add up - the loans made by banks cannot be paid off with the existing money supply

• The shitty things that banks do - a laundry list of things that have to be cleaned out by getting rid of banks

• The problems that private banks create - from environmental issues, to inequality, to inadequate welfare support, to housing issues; private banks are behind them all.

• Private banks enable and foster the share owned corporations, and private ownership of land and natural resources - get rid of private banks and these things will go as well.

Access Part II here.

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Part I

This article requires a familiarity with the process of credit creation as described in A Bird’s Eye View of Capitalism.

 

In various articles - including The Bank for International Settlements - I show why the banking system is pivotal to tackling Capitalism. Without changing the banking system, few systemic changes are possible in the real world; change the banking system in the right way, and everything else will fall into place. This article (Part I) is an attempt to show conclusively why a privatised banking shouldn’t exist and that its existence is a travesty of logic and social justice. Because of the absolutely central importance of credit creation to the endurance or demise of Capitalism, it requires a rock solid exploration of what money is, to justify the cessation of private banks’ ability to create money.

 

Part of the problem in addressing the banking/money issue is that we have an incomplete, and sometimes faulty, understanding of what money is. There is a certain ‘abstract-ness’ in what money is, and picturing money as fully ‘real’ only when it has a physical existence (i.e. as notes and coins) is a central part of the problem. Computerised money, which I will call ledger money, is something of an abstraction to some people. We have to come to terms with the understanding that something which is a bit of an abstraction can be very real, and can have a very real impact on the world.

 

Let’s familiarise ourselves with something which is an example of a common ‘abstract’ notion: democracy. There is nothing in the physical world that says that human beings should be ‘equal’ in rights. If one looks at the real world, human beings are definitely unequal in their makeup – some are more clever than others; others more sensitive to music, or the ‘language of nature’; others are more disciplined and have a stronger will, and so on. There is no equality in any of these measures, and yet we recognise that there is something in each human being that prompts us to say that every human being should have the right to participate equally in the making of the rules/laws that govern society. (I would argue that this ‘something in each human being’ is of a soul and spiritual nature.) Democracy arises out of this recognition - it is not just a working arrangement so that we do not tear at each other's throats. Similarly, in the realm of money creation, our economic relationships are based not so much on equality (as in the political life), but on an active participation by, and inclusion of, all individuals of society.

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A study of money

There are many attempts at explanations of what money is. Many of these also give an historical account. I think most people miss the main point about what makes for money. A proper understanding will reveal that money creation is the sole right of the commons.

 

Money has essentially undergone three stages:

1. Coins made of precious metals, namely, gold, silver and copper

2. Paper money.

3. Money recorded in ledgers – including computerised ledgers - which I shall simply call ledger money.

 

At some point in history, someone, or a group of person must have realised that a metal like gold could be used as money. Now textbooks will tell you that money is a medium of exchange and a store of value, and that it needs to have certain qualities like durability, portability, and so on.

 

I will add one other important condition for something to become money: the limit to its supply and/or the ability of the commons to regulate the supply. It makes no sense for something to be made money if private parties can manufacture more of it in any way. Money only has value if its supply is limited. When money existed as coins of precious metals, the supply of money was pretty much limited by Nature – nobody could generate more money unless he found it in Nature and extracted it. The governing authorities (kings or priestly caste) of society could not increase the supply of money, so the money supply was out of their hands.

 

Fast forward to seventeenth century Europe. The story goes that people would deposit gold coins with a goldsmith for safe keeping. The goldsmiths gave receipts in exchange for the deposits. People quickly found that they could hand over these receipts as payment for goods and services rather than cash in the receipt for their gold, and then had over the gold. The goldsmiths also discovered that they could loan money out to people in the form of receipts. They found they could loan a lot more in receipts than they actually had in gold. So for instance a goldsmith with 500 ounces of gold could loan out say 5,000 ounces worth in receipts. This was quite safe if people did not come in in a rush to claim the gold denoted by their receipts.  In banking terms the goldsmiths were practising credit creation and expanding the money supply.

 

Note that it is possible to have money exist in paper form similar to the receipts without any reference to gold, or any such promise to be exchangeable for gold. This is what we know as fiat money. Fiat money is money issued by legal authority only, with no gold or silver backing. It is an abstraction in the sense described earlier.

 

Let’s examine what makes fiat money possible as money. Firstly there must be a body that must be capable of limiting or regulating its supply. If a criminal gang is capable of forging perfect bank notes, the money supply is corrupted and becomes useless. Secondly, the body that is authorised to regulate and print this money must be a communally authorised body. In a democracy this authority is called the national government. It does not make sense that a private entity has this authority. In the language of political science, we can say there is a social contract that allows a democratically elected government to regulate the money supply. In theory, but only in theory, our government authorises a subsidiary body called the central bank to regulate this printing of paper money and coins of no precious metal. Let us for the moment go along with the notion that our central banks has a legitimate social contract to regulate and print our money supply. I debunk this notion in the article The Bank for International Settlements – the single most powerful institution in Capitalism?.

 

So now paper (fiat) money is circulating around in the economy. And just as people in the seventeenth century left their gold with goldsmiths for safekeeping, we are depositing our paper money with registered banks for safe keeping. And just as goldsmiths loaned out more paper receipts for gold than the gold they had in their vaults, so banks are crediting more ledger money than they actually have in paper money deposits. In other words, a bank might have say $100 million in paper money in deposits, but in fact has loaned out say $5 billion. But is this ledger money any less ‘real’ than paper money? I shall show that this ledger money is real money.

 

A useful definition of money

I propose a terse but exact description, perhaps even a definition, of money, to be: a communally recognised and authorised form of record keeping which facilitates the exchange of goods and services. Let’s unpack this description/definition.

 

How are all the three historical forms of money – coins of precious metals, paper money, and ledger money – to be called ‘forms of record keeping’. Let’s examine a gold coin. It appears that a gold coin, when used as money, is an exchange of something of value – the gold – in exchange for something else of value – the goods and services it purchases. However, prior to some social authority declaring gold to be recognised as a medium of exchange, gold would have just been a shiny metal with limited use, and therefore of limited intrinsic value. The Conquistadores’ rabid hunger for gold and silver, in contrast to the Incas’ rather blasé attitude, lay in the fact that the former’s community – meaning, the whole of Europe – had invested gold and silver with the function of being a medium of exchange. Gold and silver had been shanghaied into service as a medium of exchange so that they acquired a different value for the Conquistadores compared to the Incas.

 

Now when a person receives a gold coin in exchange for goods and services, what society is saying is that the coin is a record of that person having performed a service, or given goods over, to another member of society; and that therefore the person with the gold coin is entitled to a similar value of goods and services from another member of society. See how the coin is a form of record keeping? It records a person’s entitlement to goods and services from another member of society. So a person in possession of a gold coin does not possess something of intrinsic value as such, but rather a record of his entitlement to goods and services. It is not a record as we usually understand the term but it is nonetheless a form of record keeping.

 

At a certain point in history (under Abraham Lincoln’s Union government to be exact) it was realised that this record keeping could be conducted by fiat paper money. There was no need to for any gold to back the paper money. This development was only possible because a) the vast majority of people were literate to at least a functional level, and b) it was possible, or believed to be possible, that money could be printed which was very hard or impossible to counterfeit. With this kind of money, it was also realised that the government could expand and contract the money supply – expanding it by printing more of it; contracting it by collecting it via taxes and simply burning it.

 

In principle, we could today, issue a currency that exists solely as ledger money, i.e. a purely computerised money that has no paper equivalent. Again it would only have value as money if the supply was regulated by the commons, and private parties could not create more money, i.e. hacking into the commons' computer. Try for a moment to imagine this scenario: a government or commons authority issues money only in the form of (computerised) ledger money – there is no paper money. Let’s say it issues $10 billion, i.e. transfers $10 billion into private and public accounts. When it loans money, it just issues more of the same money. It might issue, say $100 billion. This is credit creation money which originates differently from the original $10 billion. But there is no difference in quality between the two kinds of money. Original money and credit creation money - both kinds of money are just computer entries in the communal bank account. When a loan is being paid off, the money supply contracts; when a new loan is issued, the money supply expands; when over a certain period, loans are being paid off as quickly as they are being issued, then the money supply stays steady.

 

One can see in the above scenario that there is not only no need for private banks – there is no justification for it either.

 

Allow me a kind of overview here. The goldsmiths used paper money as credit creation money against the ‘hard currency’ of gold coins in circulation. Private banks today are using ledger money as credit creation money against the ‘hard currency’ of paper money. When money exists only as ledger money, as described above, then there is no more avenue of creating yet another form of money as credit creation money – credit creation money is identical to ‘original’ money, and both kinds of money exist as computer entries in the commons bank. It is impossible for a private bank to generate new (electronic) money in its ledgers and then transfer those funds into the commons banking system – the latter wouldn’t recognise it as money; it would only read it as some meaningless computer data. In effect, if a private bank was to attempt a form of credit creation with its deposits, it would be a foreign currency in all but name. Good luck with that.

 

Let me be a bit philosophical here. As I have shown, money in its three major historical forms – as gold coins, paper money, and ledger money – has always been a form of record keeping. When money exists as ledger money, we can say, using philosophical language, that it is ‘ideal’ money. What this means is that the idea of money (as a record keeping tool) is identical to its practice as a form of record keeping. Gold was an imperfect form of record keeping; paper money was a more perfect form of record keeping; ledger money has reached its ideal. It is record keeping. Ledger money is also 'ideal' on account that it only exists in a community account (recall my definition of money involves 'a communally authorised form of record keeping'). It doesn’t make sense that a private entity manages these records, because it can fiddle with it for personal gain.

 

The problem with gold coins and paper money is that they exist as physical entities in space. One can hold it in one’s hands. One can also hold it back from circulation. This then enables one to demand interest if other parties wish to borrow that money. Private banking arises out of this problem with physical money – the ability to hold money back from circulation. The private banks claim they serve a function in facilitating the aggregation of such physical forms of money in order to loan the money. When money exists purely as ledger money, there is none of this holding back of money. The community, or commons, does not need private parties to release (or deposit) their money in order to make loans; it just creates new money with a few taps on a keyboard.

 

Historically, money has evolved in its three forms in the order that I listed above – firstly, gold coins; secondly, paper money; thirdly, ledger money. When we conceptualise money as existing in its pure ideal form – as ledger money – we will have eliminated the possibility of private banks having the ability to exercise credit creation. However if most people are like me, they will not want to see the end of paper money – there are too many instances where one would like to continue using paper money and coins. Now that we have conceptualised money in its ideal form of ledger money (and eliminated the possibility of private credit creation in the process), we can work in a reverse chronology to history: we can (conceptually) reintroduce paper money into the economy. The paper money is printed under the auspices of the commons bank; it circulates in the economy and gets deposited in the commons bank again.

 

Paper money, unlike computerised money, could in principle be deposited in a private bank, but the commons would deny such a bank the right to credit creation. If a private bank practised credit creation, the money would not be transferable to the commons bank; one could not pay one’s taxes with the ledger money held in a private bank; and no-one else would recognise the money unless they were also a client of that bank. Further, if someone was to deposit money with such a private bank, and the bank then loaned that paper money out, the depositor would have to be informed that their deposits could not be accessed until the loan was repaid. Very few people would be willing to suffer that imposition on their deposits; such a bank could hardly survive.

 

Another way of explaining the above process is as follows:

A central bank could issue fiat money in two forms - as paper money and coins, or as ledger money. Both are equally real money. A central bank may have issued say $100 billion in currency. Because it is fiat money, the central bank can claim that it actually has $100 trillion - it has just chosen to issue one-thousandth of that amount. Now when it makes a loan, the central bank (which should be a commons bank) can simply say:

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"Now we are issuing more money with this loan, as is our right. When the loan is repaid, the extra money supply (caused by the loan) will be negated. We are not allowing anyone else to create more money. Period."

 

The social contract in the issuance of money

In Loan making in a commons bank I show a new principle in loan making under the auspices of a commons bank. Currently private banks require you to put up collateral when you take out a sizeable loan. I junk this practice and show it is discriminatory and not in the best interest of society. I replace the principle of financial guarantee with a ‘social guarantee’ which means that when a person or incorporated entity applies for a loan, it will have to have others such as friends, peers, business acquaintances, to go in as referees or social guarantors. A person has to have a certain credibility in her community to get a loan (credit and credibility have the same etymological root). The article explains why this practice will work. Since a loan approval involves credit creation, what this practice means is something quite remarkable when one thinks about it: it means that individuals have the potential to take part in authorising the issuance of new money. Elsewhere I have said that a Threefold Economy is extremely inclusive and participatory from individuals’ point of view. This inclusivity and participation extends to creating new money!

 

Allow me an historical overview. At some point in time a monarch or priestly caste authorised by decree the use of gold and silver as a medium of exchange. The social contract of that time enable them to make such decisions unilaterally. With paper money we came to the idea that our democratically elected government created an entity (central bank) to issue money on our behalf. When we have a proper understanding of ledger money, we don’t just elect a communal body (government) to issue money on our behalf; we actively take part in its issuance by being social guarantors in a loan. Can you see that the social contract in the evolution of money has expanded more and more; and has, over time, allowed every individual a more meaningful say in society? In the article The Bank for International Settlements – the single most powerful institution in Capitalism? I show how the banking system really turns this principle of social participation and inclusivity upside down to create a global hierarchical structure. In Direct democracy – making democracy immune to capitalist corruption I continue the discussion of the modern social contract – both what it should be, and what it is under Capitalism.