Created page with " =Discussion= Mark Joob: "'''How is the present monetary system affecting the economy and thereby society and nature, and why is it failing? I will outline the interconnec..."
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=Discussion=
Mark Joob:
"'''How is the present monetary system affecting the economy and thereby society and nature,
and why is it failing? I will outline the interconnected malfunctions of the globally prevailing
monetary system in ten points.'''
==1. Money is debt.==
Today, money comes into existence exclusively by debt creation when
commercial banks borrow from central banks and governments, producers and consumers
borrow from commercial banks. Thus, the money supply of the economy can only be
maintained if the private or public economic actors get into debt. Economic growth requires a
proportionate increase in the money supply in order to avoid deflation that would paralyse
business, but an increase in the quantity of money involves a simultaneous increase in debt.
This way, economic actors run into danger of excessive indebtedness and bankruptcy. It is not
necessary to say that overindebtedness causes serious problems to societies and individuals in
the face of the ongoing debt crisis which began as a debt crisis of private homeowners in the
United States and then transformed into a debt crisis of commercial banks and insurance
companies before being absorbed by national treasuries and so turned into a sovereign debt
crisis. Reductions in national expenditure required to pay off public debt often lead to social
unrest and are inequitable because they impose burdens on citizens who did not profit equally
from debt creation.
==2. The money supply is under private control.==
Only a small fraction of the money circulating
in public has been created by central banks. Central banks issue coins and banknotes which in
most countries account for just between 5 % and 15 % of the money supply. Most of the rest
is created by commercial banks in an electronic form as account money when granting loans
to customers. But all money, whether cash or account money, is brought into circulation by
commercial banks. Therefore, commercial banks de facto control the money supply. On the
one hand commercial banks principally bear the credit risk for the loans they grant, which
should induce them to carefully examine the creditworthiness of their customers. On the other
hand, however, commercial banks decide which customers are granted a loan and which
investments are made according to their interest in maximizing their own profits. Whether an
investment is socially desirable is definitively not the decisive criterion for commercial banks.
This way, investments serving the common good but not being profitable enough are not
supported by the banking system and have to be financed by government spending that
depends on tax revenues and public debt creation. Instead of financing long-term investments
in the interest of society as a whole, commercial banks with their credit business nourish
short-term financial speculation and over the last two decades actually have established a
gigantic global casino beyond any public control.
==3. Bank deposits are not secure.==
Bank deposits refer to account money which in contrast to
cash is not legal tender although it is handled as if it were legal tender. Account money is a
substitute for money, just a promise from the bank to disburse the corresponding amount of
money in legal tender if requested by the customer. In the present fractional reserve banking
system, usually only a very small proportion of account money is backed by legal tender.
Banks hold only a few percent of their deposits as cash and reserves at the central bank. That
is the reason why banks are reliant on the trust of their customers. In the case of a bank run,
when too many customers at the same time demand cash, they would run out of cash and face
sudden bankruptcy. Hence deposit insurance systems have been established to avoid the loss
of bank deposits. In the case of chain reactions and large-scale bankruptcy as in 2008,
however, government bailouts of commercial banks may be necessary, eventually with the
assistance of the central bank as lender of last resort.
==4. The money supply is pro-cyclical.==
Commercial banks grant loans by creating account
money in order to maximize their interest revenues. The more money they issue the higher
their profits – as long as the debtors are able to pay. In times of economic growth banks most
willingly grant loans so as to profit from the boom whereas in times of economic decline their
granting of credit is very restrictive in order to reduce their risks. This is how commercial
banks induce an oversupply of money in booms and an undersupply of money in recessions
amplifying business cycles as well as financial market fluctuations and creating asset bubbles
in real estate and commodities which may cause heavy damages to society and to the banking
system itself when they burst. Again, the 2008 mortgage-triggered banking crisis after the
burst of the U.S. real estate bubble is the most illustrative example.
==5. The money supply fosters inflation.==
Besides its pro-cyclical character in the short term, the
money creation of commercial banks in the long term induces an oversupply of money that
leads to consumer price inflation as well as asset price inflation. Principally, an oversupply of
money arises if the increase in the quantity of the money in circulation exceeds the growth of
the production of goods and services. The long-term oversupply of money results not only
from traditional granting of credit to governments, corporations and individuals but also from
credit-leveraged financial speculation of hedge funds and investment banks. Due to inflation
consumers usually face an annual loss of purchasing power, which means that they have to
increase their nominal income in order to maintain their level of consumption. Since the
ability to gain compensation for the loss of purchasing power by increasing one’s nominal
income varies from individual to individual, inflation causes a redistribution of purchasing
power to the disadvantage of unprivileged social groups which are not in the situation to
effectively advocate for their own interests.
==6. Interest on money is a subsidy to the banking sector.==
Since money is debt, it carries interest.
Therefore, on all the money in circulation interest has to be paid for and virtually nobody can
escape paying interest. Primary, of course, the customers who take up loans from commercial
banks and thereby ensure the money supply are obliged to pay interest. Second, everybody
who pays taxes and buys goods and services makes a contribution to the interest payment of
the original borrower because taxes have to be raised partly in order to finance the interest
payments on sovereign debt and corporations and individuals providing goods and services
must include the costs of their loans in their prices. This way, by using money society pays an
enormous subsidy to the commercial banks, a part of which they pass on to their customers as
interest payments on deposits. Interest is a subsidy to the banks because the account money
they create is handled as legal tender; and it is a hidden subsidy because it is not subject to
public discussion. The magnitude of the subsidy society pays to the banks is reflected in the
disproportionately high salaries and premiums of bankers as well as in the disproportionately
big banking sector which is dominated by a few giant banks. These giant banks hold assets
that exceed the size of large national economies, so they really are too big to fail since their
collapse would have disastrous social effects on a global scale.
==7. Interest on money forces economic growth.==
Interest forces monetary growth and
consequently the growth of the real economy. When customers repay their loans to the
commercial banks, the banks write off the returned amount of money and the quantity of
money in circulation correspondingly decreases. But the money that over time has been paid
as interest on the loans does not disappear; it becomes the property of the banks. Debtors need
more money than they have borrowed in order to not only pay back their loans but also pay
interest on them. The additional amount of money needed for interest payments, however, can
only be available to debtors if additional loans are granted by the banks. Otherwise the money
supply would not be sufficient for the real economy to work properly and be profitable. It
follows that the money supply must continuously increase to avoid economic crises. A
financial system that cannot function unless it grows is nothing else but a Ponzi scheme. Yet,
an even more detrimental effect of forced monetary growth is that it exerts a heavy pressure
on the real economy to grow incessantly in order to back the additional money supply by
additional economic production. The forced perpetual growth of the real economy involves an
increasing exploitation and destruction of nature and thus impedes a sustainable development
of humanity. This way, growing financial indebtedness caused by the monetary system leads
to growing ‘ecological indebtedness’. Furthermore, the quantitative growth of the real
economy will sooner or later inevitably end since the Earth’s resources are limited.
==8. Interest fosters wealth concentration.==
Interest is commonly seen as a lending charge for
using the money of someone else. Not only the customers who borrow money from banks but
also the banks which hold customer deposits pay interest. When commercial banks create
money by granting loans, they credit customer accounts and thereby expand the total of bank
deposits. Since accounts usually carry interest, the banks spend a part of their interest
revenues for interest payments to the account holders. Now, bank deposits and loans are not
equally distributed among the customers. Some have mainly loans they pay interest on
whereas others mainly have deposits they earn interest on. Because in general poorer people
have more loans than deposits and richer people have more deposits than loans, interest
payments are in toto a transfer of money from the poorer to the richer people, especially to the
few super rich. Interest thus fosters wealth concentration. This concentration of wealth to a
great extent favours the commercial banks which on the one hand make investments
themselves and on the other hand earn the amount resulting from the considerable interest
spread between borrowing and lending rates. Moreover, interest is added regularly, for the
most annually, to the initial investment and thus carries interest itself turning into compound
interest and generating an exponential growth of monetary assets. But monetary assets do not
grow in value by themselves since they are per se not productive. Value-increasing interest on
monetary assets can only be generated through human labour; and human labour is
permanently under a monetary pressure to increase its productivity and lower its costs so as to
satisfy the demands of exponentially growing compound interest. Interest is therefore a value
transfer that favours capital investments to the disadvantage of labour income.
==9. The monetary system is unstable.==
There is clear empirical evidence showing that the
monetary system suffers from structural instability arising from the mechanisms described
above. The financial crisis that started in 2008 and is still lasting, if not even worsening, is not
a unique phenomenon. In the last decades, numerous crises related to the monetary system
occurred around the world. Between 1970 and 2010 a total of 425 financial crises affecting
IMF member states was officially recorded: 145 banking crises, 208 monetary crashes and 72
sovereign-debt crises (cf. Lietaer et al. 2012:51). The multitude of financial crises and their
contagion effect on separate national economies plainly demonstrate their structural-systemic
character. The present monetary system inevitably evokes crises in finance and consequently
in the real economy which in turn is the basis for the monetary system. Briefly, the instability
of the monetary system is largely due to the fact that the monetary system is not compatible
with a finite world.
==10. The monetary system counteracts crucial moral values.==
A moral value is something that is
seen as valuable from a general perspective after careful consideration. Moral values hence
embody the most rational and most important values of society. Moral values and monetary
values do not fully overlap; monetary values represent only a limited number of moral values.
Money as a means to satisfy basic human needs, for example, is morally valuable whereas
money harming the needy by speculative investments is certainly not. Since money,
respectively the monetary system, rules the economy and dominates society, moral values not
contributing directly to the profitability of business are systematically suppressed in policy
making. This way, the current monetary system counteracts crucial moral values, such as
solidarity, amicable relationships and a fulfilling life.
My analysis above clearly demonstrates the failure of the globally prevailing monetary
system. The monetary system undeniably fails to ensure stability and security in finance, to
enable a consistent and sustainable development of the real economy and thus to serve society
as a whole. My analysis also shows that the apparent deficiencies of finance and the real
economy can not be remedied without radically reforming the monetary system. Hence, it is
about time to fundamentally redesign our monetary architecture. As Joseph Stiglitz and other
experts, realising the prime importance of monetary reform, note in their recent UN-report:
“The current crisis provides, in turn, an ideal opportunity to overcome the political resistance
to a new global monetary system.” (Stiglitz et al. 2010: 166)
(http://www.althingi.is/pdf/umsogn.php4?lthing=141&malnr=239&dbnr=864&nefnd=ev)
=More Information=
See also the companion piece:
* [[Mark Joob's Monetary Reform Proposal]]
[[Category:Money]]
[[Category:Economics]]
[[Category:Commons Economics]]