Democracy and our future on a livable planet depends on changing how nations create their money supplies
Power. Climate. Democracy. Solutions.
In preparation for a couple public policy talks at universities, I put together a presentation explaining why people who care about democratic governance and climate change need to have a correct understanding of how nations create their money supplies today. National money systems are one of, if not the largest, sources of funding propelling the expansion of the fossil fuel industry. They are also profoundly undemocratic. In fact, they are constantly driving economic development in the opposite direction intended by legislated policies.
I made a recording of the talk that you can view on Youtube here:
00:00 - Why national money systems are important
04:20 - How I came to study money systems
05:18 - How national money systems work, today
19:52 - How today’s national money systems undermine democracy and the climate
26:04 - The game-changing new understanding of how the economy works
37:30 - How national money systems can be made more democratic and responsive to public priorities, such as addressing climate change
49:47 - The political economy of transforming national money systems, in brief!
In the conclusion of the video, I point people to this blog for further information about reforming money systems. I did that because I am planning to publish a guide for navigating the diversity of monetary reform resources. In the meantime, I highly recommend the following resources:
Positive Money’s Banking 101 video series provides an accessible introduction to how money and banking work, in reality. The videos speaks about the UK money and banking system, but the US system is identical in many respects because our system is based on that of the UK and France. Today, most countries use the same system as the UK, a legacy of colonization and post WWII financial imperialism.
The New Banking Consensus Database contains more than 150 cited quotations by central bankers, bankers, banking law scholars, economists, and others confirming that banks create 100% of the money they lend through deposit creation.
Govert Schuller has compiled an extensive monetary reform video collection and bibliography on the website of the Alliance for Just Money, a grassroots monetary reform group in the US.
https://www.youtube.com/playlist?list=PLbjqQEPFY1J8ShzMPiaULMDCIuFmaBs0Y
Transcript
This is an AI-generated transcript. It may contain inaccuracies. Do not quote. Recording is the record of truth!
00:00
Sam, Hi friends. My name is Sam Hummel. I'm a graduate student at Duke University in an interdisciplinary master's program where I study national money systems. So what is a national money system? Well, it's the laws and institutions that determine how each additional unit of dollar or euro or yen gets created and put into circulation. For example, who has permission to create additional money, and for what purposes can they do it? For whose benefit and when and where can they do it, and what limits how much they can create. So I study national money systems to answer the question, how do those decisions impact society, the economy and the environment, and the short answer is that they have a massive impact. And in fact, when I tell people what I study, most people say, Wait, why do you study that? And the reason is that I've been studying the social and economic and environmental impacts throughout my career, as I've been working in renewable energy, in higher education, sustainability, in sustainable procurement with governments and corporations, and in promoting the localization of the 2030, sustainable development goals, and in all of those places, what I've seen is that We just have way too much money flowing into the very activities that are producing the harms that we're working to solve, and way too little money is flowing into the solutions that we know work and just need implementation.
01:34
And what I have learned is that there's a wave of research since the 2008 crisis in in it's coming from researchers around the world who've been studying how money is created, and what they're telling us is that the way that money is created today is increasing inequality and poverty is driving up housing costs and creating a housing crisis which is also part of our household debt burden crisis. It's actually fueling right wing extremism and corporate power as well. It's increasing in our government debts and creating huge budget cuts, cuts as a result. It's actually promoting polluting industries, industries that are harming biodiversity and, you know, increasing climate change. It's also part of what causes economic instability and stagnation in our economies. Now to be clear, these folks are not saying that how money is created is the is the root cause of all of these problems, and they're not also suggesting that it is the cure all for them. What they are saying is that if we can change the way money is created today, that will be a very big lever for creating positive change, and in particular, if you think about it, the reason that money can be connected to so many different issues is what I described before, too much money flowing into the things that are causing us harm, and too little into the things that are solutions. And what these folks are telling us is that if you change the way that money is created, it's pretty straightforward how you can dramatically increase the availability money for solutions and reduce the money for harmful activities at the same time. What I'm going to show you in this workshop is why that's the case.
03:40
So those folks that I mentioned earlier are not alone, and there is a growing global movement of NGOs, civil society organizations, university academics, legal scholars, Policy Advocates, and even folks coming from inside the banking sector, such as the Bank of England and International Monetary Fund. And so I am participating in that movement, as well as a member of the money justice collaborative. We seek to transform national money systems into a force for good, focusing on equity, sustainability and well being for all, and we do research, education and strategy consulting for civil society organizations that are campaigning to create a better world and a better financial system. So the next question people usually ask me is, wait, how did you come to study money creation? And the answer is that a few years ago, I learned something about how money and banking works that just blew my mind, and it revealed a lot about why there is so little money available to solve society's pressing problems and so much flowing into the things that are making those problems worse. So I spent the last four years researching the topic, reading hundreds of books, 1000s of articles, attending many presentations by bankers, central bankers, legal scholars, economists and so on. And I now feel like I have a much more empowering. Perspective on our money system and how it can be changed to bring large scale and fast acting relief, such as debt relief, for huge numbers of people and governments, especially in the Global South, that type of debt relief becomes possible readily in a new way of looking about at how money is created, and real world ways in which it has been created, differently at the scale of large modern economies. So in this video, I'm going to quickly give you a sense of what it is that I learned that blew my mind, and why it matters, and why understanding it at a deeper level gives me hope that we can create some some change at a significant scale. So in a moment, I'm going to show you some videos and articles that can allow you to see what I saw and hear what I've heard with your own ears. But first, I want to just say that I encountered these resources because bankers, banking, legal scholars, economists who study banking, were all pointing to them when claiming things that at that time, I was sure could not be true. So here are just a few of the things that they were saying. Banks don't lend out depositor savings. Every time banks make a loan, they newly create 100% of the money that they're lending by simply typing numbers into the borrower's bank account. Banks enjoy an exclusive government granted privilege to create money when making loans, as long as they abide by government imposed limits. Now, all of that ran contrary to what I'd always heard. I'd always heard, for example, that banks lend out depositor savings and that they can multiply those deposits up using central bank reserves. I never would have come to believe any of this, if it wasn't for who was saying it and the evidence they had to support their claims. So having now read through a lot of the evidence and the authoritative sources on this subject, I want to curate just a few of those for you. The first one is the Bank of England. The Bank of England is not just any old bank. It is the bank upon which the money and banking systems of nearly every country in the world is designed today. The Bank of England is the oldest and most venerated central bank in the world because it played a major role in installing this national money system in countries around the world during the era of colonization. So among people who study money systems and banking for a living, it was a big deal when in 2014 the Bank of England came out and said in very plain language that what what many of those experts already knew, which is that the reality of how money is created today differs from the description found in some economics textbooks. Now what, what one study found when they examined the textbooks is that actually it's 91% of undergraduate economics textbooks teach an inaccurate description of how money is created in reality. So the article goes on and says, This article explains how the majority of money in the modern economy is created by commercial banks when making loans. And this is news to about 85% of people. That's research. So you know, if it's news to you that, you know, governments only create about 5% of the money supply, and banks create about 95% of the money supply, you're in good company. This is, you know, these are statistics, you know, presented by the American Bankers Association in a in testimony to Congress, another the Bank of England bulletin goes on and says, money creation and practice differs from some popular misconceptions. Oops, banks do not act simply as intermediaries lending out deposits the Savers place with them, and nor do they multiply up central bank money to create new loans and deposits, right? So those are the two things that are you typically find in economics textbooks, is banks lend out depositor savings, or they do something that's dubbed fractional reserve lending, and the bank being loan is saying that that story, those stories are incorrect.
09:45
Instead, it explains that whenever a bank makes a loan, it creates a deposit in the borrower's account, thereby creating new money. And that reality of how money is created today differs from the description found in some you can. Mix textbooks. Now the Bolton says that a couple of times, and it's really, you know, difficult to believe that that could be the case. So I just want to play you a quick video clip from from Claudia Borio, who is the head of the monetary and economic department at the Bank of International Settlements, which is kind of like it's actually called the central bank for central banks. And so here's what he said in a at a conference presentation about his experience discovering that what he was taught in school is not correct.
10:38
All of the models of banks that we had studied at university actually abstracted from capital. If I wanted to be a good economist here at an institution that works for central banks, I had to broaden my horizons. So I worked in financial markets, I worked in banking and worked in regulation and supervision. I even taught myself accounting. Then I worked a lot on payments and Settlement Systems. I worked on monetary policy implementation. And there I did learn that everything that I had learned at university was wrong, that it had been no resemblance to to what was going on in the real world. And that was a major eye opener.
11:28
So of course, the Bank of England is is not the and the Bank for International Settlements are not the only ones that are saying that this is how it works. The bank, the Federal Reserve in the United States, wrote in a book called Modern Money Mechanics. Of course, they meaning banks do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. And a colleague of mine and I have compiled a database of more than 150 cited quotations in publications in which central banks, banks, banking, legal scholars, economists, international banking organizations, all say that this is the case that banks are creating 100% of the money that they lend. So okay, we have a bunch of authorities in economics textbooks that are saying one thing. We have these folks in the banking industry that are saying something different. You know, how can we trust who is correct? And the answer is that there is a source of truth. In this case, we're talking about accounting, and where did banks get the money that's on their in their accounting books and banking software, you know, is shared. There are 1000s of banks that use the same accounting software. So there's an Oxford trained economist who studies banking, who decided, you know, why don't I just go look at what the accounting software does, and what he did is he wrote in a paper titled A loss entry in economics, the test of booking a bank loan in banking software yields the finding that the credit creation theory of banking alone conforms to the empirical facts the banks do not lend out pre existing money, the financial intermediation and fractional reserve theories of banking are rejected by the evidence. So if you're interested in learning more about how all of this works, I highly recommend a series of videos produced by Positive Money in the United Kingdom. It is called banking 101, and it explains in some detail how the system works. It is specifically talking about the Bank of England and, you know, British pounds. But if you just think about the Federal Reserve and US dollars, it's the same story. Our national system money system is based on their national money system. So I think it's really important that you hear directly from some of these experts, own words in coming out of their own mouths. I've watched hundreds of hours of interviews, conference presentations and webinars by experts on this topic. So I've picked up just three brief videos that will let you hear from a central banker, a banker and a banking scholar. So the first one is Rylan Thomas. He's a senior economist at the Bank of England, and one of the co authors of that bulletin published by the the Bank of England. And you may not understand everything that he says, but I think you'll catch some of the key elements, such as that banks are creating the money that they lend, and the government is not controlling the money supply directly. Raila
14:57
and your articles about how money gets created, we're surrounded. Adhere by gold in the vaults of the Bank of England, and historically, in the gold standard, the amount of gold would have been related to the stock of money in the economy. Things are very different. Now, in the modern economy, Where does money come from? Well,
15:13
let's start off with narrow or central bank money, as the name suggests. Central bank money is determined by the Bank of England and consists of notes and reserves. In normal times, at least, notes and reserves are determined by the amount of notes that people want, people want to hold or need for their transactions, and the amount of notes and reserves that banks want to hold given the level of interest rates in the economy, it is not chosen or fixed by the Central Bank, as is sometimes described in some economics textbooks. Your article
15:39
focuses on broad money. What determines how much of that there is?
15:43
Well, broad money, which in many ways is a better measure the amount of money circulating the economy includes all the bank deposits of households and companies. And one of the key points of the article is that banks create additional broad money whenever they make a loan. And while this is nothing new, is sometimes overlooked as the main way in which money is created, and it runs contrary to the view sometimes put forward that banks can only lend out deposits that they already have. In fact, loans create deposits, not the other way around.
16:13
So you probably heard there, in addition that the textbooks are different in how they describe this. The next one is a banker. This is Michael kumhof. He's a former Barclays banker. Actually, he's now an economist at the Bank of England. He was also at the International Monetary Fund when he wrote a phenomenal paper called The Truth about banks and the Chicago Plan revisited. So let's hear from from Michael.
16:47
Basically, the banks sit there, they wait for deposits to arrive, and if they have enough deposits, they lend them out to somebody else. And that is completely wrong. This is the wrong model of banks, because what happens in reality is exactly the opposite. And I've done this. I'm a banker. I know that that's how it works, and you can read it on many central bank websites. That's how it works, that banks, when they decide the economy is good, we are optimistic, we are now making loans. They don't need to wait for any deposits, because when they make a loan, they create the deposit, right there banks create money.
17:30
So next we'll hear from from Richard Warner. He is the, you know, the University of Oxford trained economists, also the London School of Economics, who teaches international banking and finance, and he's the one who conducted the study of bank accounting software. So let's hear from
17:56
now, banking actually has not been very well understood. There have been three theories of banking, and they've existed and CO existed for at least the past century. The most dominant one currently is still the financial intermediation theory of banking, and nobody had ever done an empirical test. So I thought, well, you know, since these theories are mutually contradicting when it comes to the crucial question of, where does the money come from when you get a loan from the bank? Well, let's, let's figure it out. Let's do an empirical test. So I did this and published 2014 and 2016 two papers. The conclusion is the financial intermediation theory was rejected. Banks are not financial intermediaries. You may have heard of the fractional reserve theory, slightly older that one was also rejected. It says that, you know, banks lend money out of reserves and they don't. Financial intermediation theory says they lend out of other people's deposits and they don't. So the oldest theory that was the one that was found to be correct, and that's the credit creation theory, which was known 100 years ago, which is why one of the papers is called last century in economics, banks create money out of nothing through the process of credit creation. So banks are special. They create the money supply. 97% in most countries, of the money supply out of nothing through the process of what's called credit creation. Now the recognition of bank credit creation is a game changer to solve many of the world's problems, such as the recurring banking crises can be prevented. Unemployment can be solved. Business cycles under development, depletion of finite resources, all these problems can be solved.
19:52
So you just heard Richard there, and I'm sorry the video cut off there where he says, these can be solved through the power. Of bank money creation. And what he's specifically talking about there is that banks, when they're making loans, they are making really powerful decisions about our society. You know, they're they have the power to decide who receives funding from new money creation. Right now, the answer that question is banks and so, you know, how are they making those decisions? Well, the purpose for which banks make those decisions today is private profit optimization. And you know, that has really big, really powerful impacts on our world and our economy. So for example, since the Paris climate accord was signed in 2016 Chase Bank, just one bank has created and lent $430 billion to the fossil fuel industry, including to many fossil fuel companies that have expansion plans. And the chase. Bank is not alone. Since the Paris climate accord was signed in 2016 banks have lent to the global energy sector, 93% to the fossil fuel industries and only 7% to renewable energy companies. So that's what I'm talking about when I say too much money for harmful activities and too little money for solutions. We literally have this, this, this big part of our economy where banks are creating our money supply and they're directing it at huge quantities into things that are actually causing our problem. So what if we changed who has that power? And what if we, for example, gave it to publicly countable, non non profit institutions. And you know, what would that do in terms of the purposes for which money would be created? And, you know, I in the case of, for example, public banks or state development banks or other entities credit unions, what we see is that these not for profit organizations that have public interest missions baked into their corporate charter create money and lend it for things that benefit the public interests at a much higher rate. So let's just take the the 2015 Paris Climate Agreement as an example. You know, we need to limit a temperature increase to 1.5 degrees Celsius. Our governments, public institutions have, you know, signed on at that time, most of them in the world, and said, you know, our goal is to to reduce greenhouse gas emissions, and that's going to require dramatically increasing the money available for renewable energy and reducing investment in in the fossil fuel industry. And as I just mentioned today, the banks are lending in a way that isn't compatible with those goals, but and what the scientists are telling us is that this is what we need the bank lending flows to look like in order to hit the Paris climate goals of 2030, we need 80% 86% of bank lending to be going to renewable energy instead of 14% to fossil and only 14% to fossil fuels, So myself and other folks in this global moon are not the only ones calling attention to this, the importance of the situation. One of the leaders in sustainable economy thinking in the world is Jason Hickel at the Autonomous University of Barcelona. And he wrote, you know, in 2016 as it turns out, reinventing our money system is crucial to our survival in the Anthropocene, at least as important as getting off of fossil fuels. And Jason says, as it turns out, because he had just discovered this reality, and it was news to him, and he's mentioned it in a couple of his books since then. Again, this isn't a cure all, but it is a powerful lever, and you can see that if you just think about a little thought experiment. You know, this year, 93% of fossil fuels. It's going to fossil lending is going to fossil fuel companies, only 7% to renewables. Just imagine if next year, just for one year, we switched those numbers, and 86% was going to renewables, and only 14% was going to the fossil fuel industry. Well, what that would mean is that you'd have a 12 to 13 time growth rate, or you would increase the renewable energy energy industry investment flow by 12 to 13 times, right? That would cause create millions of jobs overnight next year in the renewable energy industry, you would see, you know, people going in droves to get solar jobs, to get energy efficiency jobs, you know, to get wind. Installation jobs, because renewable energy companies would have the money to invest in that. At the same time, you would see fossil fuel expansion projects come to a stop, and many of those folks would presumably go from working on those projects into those renewable energy jobs. And again, that would happen just next year. If you just flip those numbers, the money flows would change in a way that would dramatically shift the shape of our economy. And that's what I want to bring your attention to, is that bank lending is powerfully shaping our economy every single year, we just don't see it because it's being shaped every year by the same private for profit motivations that shaped it the previous year. So bank money creation is powerfully structuring our economy. It's remaking it every single year, but it's doing it just in the same images before, and that's why we don't see it. So finally, I want to bring your attention to what this means in the big picture, because this wave of research is what some are calling a Copernican revolution in our understanding of the relationship between money and the economy, one which is opening new pathways for making large scale change in how our economies function and the footprint that they have on society and the planet. As you just saw, it's it's re it's structuring our economy. So let's look a little bit more closely at that. So when I say that there's a shift, a Copernican revolution, right in the time of Copernicus, he said, you know, wait a minute, you know, the Earth is circulating the sun around the sun. It's not that the sun is circulating around the Earth. So at that time, people, most people, believed that the sun was going around the earth. Well, here's what most people believe today about the relationship between money and the economy. And then I'm going to show you the Copernican revolution, right? And by the way, this is what I used to think. It's what all of the members in the money, justice, collaborative, collaborative used to think. And in fact, research shows that it is what 80% of people believe to be the relationship between money and the economy. So it goes like this. You know, the economy is made up of people and firms that are passing the relatively fixed amount of money back and forth in trade and investment. The government is the one that created the money, and the amount of certain money in circulation is relatively fixed, but sometimes in emergencies like the COVID pandemic, the government may add money to the circulation by deficit spending, but that's a really bad thing to do, because it always causes inflation. This is what most people believe, because it's what is taught in the best selling economics textbooks. To this day, if you open, for example, the best selling economics textbook in the world, figure one is the circular flow diagram, and what it shows you is that money is circulating in a closed loop between businesses and consumers. There's no money being added or deleted from the economy again, so the circuit flow diagram matches what most people think. There's a fixed amount of money being circulated between actors in the economy. But what this what you just heard from the the banking central banker, banking scholars, you know is that banks are creating money every time they make a loan. And what that means is, and you know this just from logic, that this picture of a fixed money supply and that we're just passing back and forth cannot be correct, cannot be a closed system. So if banks are creating new money every time they make a loan, it means that new money is being added to the economy at all times, in good years and bad and the quantities of money we're talking about here are massive. For example, the Federal Reserve reports that there is roughly $14 trillion in existence. This is between 2016 and 2019 but in those same years, from 2016 to 2019 every single year, the banking industry in the United States lent $21 trillion newly created money into the economy. Right? Just to put that in perspective, $1 trillion
29:46
that's you will not have spent $1 trillion if you were to spend a million dollars every day for the next 2500 years, right? If you spend a million dollars every day. For the next 2500 years, you will not have spent $1 trillion and the banking sector is, is putting that much money in the economy 21 times every single year, between 2016 and 2019 and I picked those four years because it's, it's normal times, right? It's, it's not during COVID or post COVID, it's just normal years. Now, of course, you know, if that was the whole story, you know, the economy would be overflowing with money. You know, we wouldn't have a money supply of roughly $14 trillion a year or $14 trillion so there's something else going on, and the Bank of England tells us why that isn't happening. And it's that, believe it or not, when banks loans are repaid, the accounting process in which banks typed the money in the bank account is simply reversed. This means that the principal repaid is simply deleted from the economy. In other words, huge amounts of money are being created and deleted every year, and the interest payments are what the banks keep as profit, but the principal payments are just on creating the money that was created when the loan was first made. Now just compare that to the massive government money creation that we're being told about from the COVID stimulus. Right? That was about an average of $2.5 trillion per year between 2020, 20 and 2021, so between 2020, and 2022, compared to $21 trillion every year, between 2016 and 2019 created by The banking industry. So these quantities are just massive. And when you think about who's deciding where this money is flowing into the economy, the banking industry is, you know, has it as an outsized influence on that. And what this means, actually, is that the amount of money in the economy goes up and down depending on the flow of money creation, which can change a lot from year to year. Most of the times, it's increasing. But in 2023 it went down by 4.5% in just one year, and that was because of what was happening with the faucets and the drains here. So given that these flows are so big, a more accurate way to think about the relationship between money and the economy is that the money flowing from faucet to drain, from lending to repayment, is is what is spinning the economy. It's not that the economy is circulating a fixed amount of money, and this is the Copernican revolution. Wow. You know, the economy essentially exists in a in a flow, a river of money that's going from creation to deletion, and that those creation decisions, as you saw with the fossil fuel versus, you know, renewable energy distribution, are powerfully shaping what's happening in the middle, and it also is influencing just how the economy is doing overall. There's a wave of research now that showing that the economy basically slows up and speeds up and slows down in pretty close synchronization with what is happening with bank money creation. Now, all of this is happening, you know, through banking, which means that the way that the faucets and the valves are being influenced is through the logic of bank profit maximization, right? So whether or not banks are going to lend that's the faucet, is a question of what's profitable for them. You know, how quickly they're going to demand that it be repaid. You know, is part of their business logic as well, and how much interest they're going to charge is generally going to be the maximum that they can in order to optimize their profits, not necessarily, you know, the minimum that they can to serve the economy. So again, I mentioned that how these decisions are shaping the economy. I just want to give you that that mental model for it. So because it isn't just the volume that's the shaping the economy, it's those lending choices as well as I as I mentioned. So, you know, I talked about fossil fuels before and renewable energy before, but these types of lending decisions, you know, discretion, right? Apply. Through a huge range of things, and banks have, you know, strategies and policies that determine what types of loans they'll make and in what regions. And these decisions, again, are primarily driven by profit seeking and regulations. So for example, you know, doing mergers and acquisitions to make ever larger corporations and monopolies is actually far more profitable than processing the paperwork for 1000s of small business loans. So this is one of the reasons why we see banks moving ever and ever towards big business. Now these are green light red light decisions right at the level the banking sector as a whole, these green light red light decisions are determining what investments receive newly created money and what does not. And this, as I mentioned earlier, powerfully in influences what we get. So I mentioned earlier that 2016 2019 $21, trillion per year being created and lent by the banking sector. What is important to understand is that that's $21 trillion in green lit, green light decisions being made by banks every single year. And what's interesting is we don't know how much or what it was that banks red lit in that same time, they are not required to port that report that data. Interestingly, in Spain, they are, and it revealed something profound about the 2008 crisis, which is that in the 2008 crisis, it wasn't that businesses suddenly stopped wanting to borrow, it was that banks stopped lending. Right? So businesses that were still going, enterprises that were profitable, suddenly went from having a relationship with one bank where they were able to get green lights to finance their inventory or finance their expansion plans or whatever else, to suddenly needing to go to six different banks to try to get that money, and often could not. Again, I told you this story about the 93% 7% and you know, just imagine, you know, what would happen if you you swapped those for just one year. So this is what I'm talking about. There's this flow bank lending decisions are powerfully influencing what activities are happening. So an important thing to understand about, you know, thinking about like, wow, could we just flip these, these flows? You know? Well, the yes, we can, and it's been done a lot of times before. And the reason is quite simple. So I just want to give you a quote here from Morgan Ricks. He is the senior policy advisor on the financial reform during the US Treasury, you know, at the US Treasury, following the 2008 crisis, and today he's a leading legal scholar on banking regulation, and he has proposed, for example, that the banking sector should be regulated like a public utility. So we have, you know, private energy companies, you know private electric utilities, but they're regulated in in for public benefit. They are required to provide service to absolutely everyone. They're required to kind you know, try and keep their their costs low and rate increases low, and to do it in ways that are safe, etc. And what Morgan Rick's points to here, oops, sorry. Um, yes, there we go is that banks are endowed with an extraordinary legal privilege. They are licensed to issue the money that we use deposits. And so what he's calling attention to here is that the headwaters of this entire thing is not the banks. It's actually the legal privilege to create money which has been given to banks by our governments. And this legal privilege is actually constructed out of a number of things that governments have provided to banks as as essentially legal exclusive privileges. One is that they bar anyone else but banks from creating bank deposits. They require the payment of taxes in bank deposits. In fact, if you tried to pay your taxes in in cash, they've made it virtually impossible for you to do so. There's an economist who who tried and he wrote an interesting article about just how incredibly difficult it was to pay your taxes in anything other than bank creative money.
39:49
They also insure bank deposits, such as the FDIC and so all of this, you might wonder, Why in the world would governments out. Source the privilege to create money in this way. And there are a couple of reasons. If you go back through time, often the argument is made that, well, you know, you can't trust government with the privilege of creating money. It'll give them too much control and so on. Or, hey, you know, bankers and businessmen know the best places to put money into the economy to grow it, you know, so therefore we should give it, give it to banks. There are a number of arguments that are made like that. But you know, if you go back in the history, there's a lot of power that's being negotiated. And for example, in those two stories that I just told you right there. Those are not the only two choices, right? Give it to the banks or give it to for profit banks or keep it, you know, with the national government, right? There are lots of other options. And, you know, I don't have time to get into those today, but, but I'll give you just a taste of three of them. So, yeah, the good news is, is that this, if we wanted to change the way that money is flowing right now, in these really large quantities at the headwaters of the economy, we don't have to go around and try and get depositors to move their deposits from a good bank or bad bank to a good bank. You know, we don't have to go around and try and get shareholders to create new, you know, profit strategies for their banks that aren't so, you know, destructive. Because actually, all of those decisions, all of that power, originates in, you know, a few bills, right? A few laws. It's five laws in the United States that construct this entire legal privilege so it's highly concentrated and it doesn't, you know, changing these flows doesn't involve, you know, having to go negotiate the private property rights of you know, depositors, whose deposits are being lent out, deposits are not being lent out. Every time a bank makes loan, they're exercising this legal privilege to create new money. So there's no private property rights there that need to need to be renegotiated. So these this legal privilege has been changed in many times before, as I mentioned, I'm just going to tell you about three. So one way is that you can choose to regulate them like public utilities, right? So today, we primarily regulate them for financial stability and for ensuring that that they're able to make payments, and that those payments, you know, are recognized as valuable. Now, what it would look like to regulate them, like public utilities, would be to put strict regulations designed to ensure that while remaining private for profit, banks, they are, you know, necessitated to serve the public good. So regulating interest rates to keep them low, regulating fees and free checking accounts for everyone, requiring that they only accumulate reasonable profit margins that they do small business lending, provide rural services, and they're not lending for speculation. This is very similar to an electric utility, where we keep their fees low. We make sure that their profit margins are not, you know, rapacious. We require that they provide service and affordable costs to small businesses and in rural communities, and that they not be gambling, you know, with our safety, for example. And you know, there are real examples of this. So coming out of the Great Depression in the United States, the US government did exactly this. It regulated banks like public utilities. It restricted bank money creation to economically productive lending, such as for small businesses and home construction, and it blocked lending for risky speculation. It kept interest rates low, especially for government borrowing, the government was borrowing at three eight of percent interest, which actually is a negative real interest rate when you take into account inflation. So the government was essentially making money by borrowing at that rate, and it was able to do that to finance universities, infrastructure and programs like Social Security and Medicare, each bank was only allowed to lend to a specific region or sector, and this meant that the banks had to invest wisely in growing their region or their sector. If they wanted to grow their bank, they couldn't all pile in in the most profitable sectors and neglect the rest, right? And during that time, you know, the government supported the establishment of 45,000 nonprofit credit unions to create and lend money in rural and working class communities, primarily. So again, that's what that this is what that looks like regulating private banks. And their lending choices. But there's another option, which is you could establish public banks. These are not for profit, publicly owned and controlled banks, such as credit unions, cooperative banks, development banks, local government banks or municipal banks, state owned banks and so on. And this has been done. These banks have a charter that has a mission statement that explicitly requires them to create and lend money for the public's benefit. And this is real. This has been done. And I forgot to mention, with the United States example, that most of this private bank regulation, regulating banks as utilities, was undone during the 1970s and 1980s you know, as part of a wave of deregulations that was happening across the airline industry, the railroad industry and many other industries. So coming back here, we could have establishing public banks as an alternative to private for profit banks, and these have a public benefit mission and are not extracting profits for private shareholders. And if you look at a country like Germany, they have over 60% of their banking ministry is made up of locally owned, not for profit banks, not for profit banks owned by industries. These are cooperative banks. They have, for example, a cooperative bank for the auto industry, for the steel industry and so on. And the fact that the banks are owned by all of the companies in these industries, means that they have, you know, an incentive to make sure that the bank is operating fairly in the way that it's treating different companies within the industry. And then they have state development banks that are owned by the national government, which specifically, you know, finance things like road construction or railroad construction, or things that are going to make the economy grow, you can go to kind of another extreme, which is to go to public not for profit banks, but that are entirely state owned. And here we're talking about owned at the national level, by the national government. And just to say that this is another option, I'm not advocating this, just to say that this was real. This can be done, and it can really change the structure of an economy. So state owned banks in China. So in the 1990s the Chinese government, or, you know, in the 1980s the Chinese government, had a very concentrated control of the money supply by the central bank, and in the 1990s they reformed it, creating hundreds of and actually, ultimately, 1000s of state owned banks. And these are not for profits. They're municipal banks, they're regional banks, they're industry banks, but they're all state owned, and a significant portion of the bank lending is allocated to government infrastructure projects, township development. And this reflects the policy priorities of the national government, really the Communist Party, rather than purely commercial considerations. So for example, when they decide, you know, we're going to build the largest high speed rail network in the world. You know, having the ability to create the money for that to happen is really important, and that was a big part of those types of projects getting done.
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They have, you know, shown the benefit of this, just like the United States had a massive growth rate and during its era of tightly regulated public utility banks as public utilities, and just as Germany has had an enormous growth rate and also a very strong economy, it's the fourth largest economy In the world, despite having a much smaller population, and it is, you know, you saw the benefit of that for the economy. Keeping interest rates low, interest rates are a break on the economy. Keeping interest rates low making sure that lending is going to real economic development. China is another example of that 10% economic growth in the 1990s and 2000s with these this reformed bank, or state owned bank, money creation, significant reduction in poverty. And of course, I'm not advocating this. I don't believe in having our money where our banking system controlled at the level of national government. But you know, just to show that this can make a big difference in terms of ways economy is structured and growing. So those are just three examples of different ways that the legal privilege to create money could be structured. And one of those is right here in the United States. You know, we went to it during the Great Four. Question, we went away from it during an era of deregulation in the late 1970s and 1980s we can go back right, but there are actually many more options. Human societies have come up with many, many ways of answering the question, how should we create the money that we're going to use? And so my research, what I look at is, I look at those many different systems, and I ask questions about, you know, what are the social environmental economic impacts of those things? And obviously the answers depend on what values and concerns you have, right? So for me, I care about fairness. I care about public accountability, social responsibility, environmental responsibility. And so for me, I would say that private for profit, banks creating wealth for shareholders out of holding a special government granted privilege to create money and lend it out that I would say that that's not fair. They also have demonstrated that they're not very publicly accountable, and that they are also, you know, not necessarily lending in ways that are socially beneficial or environmentally responsible. If we regulate private banks as public utilities, like they did in the middle of the last century, I still think that's unfair. You know, banks are, you know, have a our shareholders are able to make a lot of money out of holding, especially government granted privilege that why did they get that privilege? Why should they get that benefit? And also, what we saw during that area is that while they were much more accountable to the public interest and social responsibility, environmental responsibility, it was a constant fight between regulators and the for profit private banks to sustain that, because ultimately, the the private banks, you know, are still driven by for profit, private you know, profit motivation. And I could go through these last two but let me just say that, that for those of us that are want to see something different. This is a great quote from a banking law scholar and the nominee for the US Comptroller of the Currency in 2020, solely amarilva. You know, she says, she says, We, as a public are subsidizing banks. We are subsidizing them in a very important sense, their ability to make private profits. So we have the right to press them all the time with respect to the decisions that they're making. Right? This idea that they should be accountable for the for the well being, you know, really just it's it's no, no. It makes so much sense. In fact, it makes so much sense that when people are told that banks create more than 95% of the money supply today, 86% of people. This is research. 20,000 people surveyed. 86% of people opposed the current system, right? So there's a huge population just waiting to be brought into this, into this discussion, and press the banks and press our government about the legal privilege to create money, and we know why that's not happening today. It's not happening because nearly everyone is walking around with an incorrect understanding of the relationship between money in the economy and a wrong picture of where money comes from. It that Copernican revolution is just like Copernicus. You know, Copernicus said, hey, you know, I have the evidence that the Sun is the center and the earth is going around it. But for another two, 300 years, most people were still doubting that, and walking around with the idea that the Earth, the Sun, was going around the Earth. So this, this is the general population I'm talking about here that has the incorrect understanding. But it's also national leaders. In the UK, they polled twice the members of parliament, three years apart, and found that 85% of them believe that the, you know, government is creating the money supply, not private banks. And we know that it's very similar here in the United States. There you can watch, you know, hearings in the, you know, house or Financial Services Committee of Congress. And here, you know, the legislators say things like, you know, when banks are lending out deposits or savings, and believe it or not, it's even 74% of people employed in the financial sector. You know, my father is one of those people. He worked for 30 years in the financial sector. He still has trouble, you know, grasping this new reality, or this new new understanding. I have a friend who works at one of the largest banks in the world. He, you know, says that when he talks to the other bankers about this, you know, they'll say, Wait, what? What do you mean? We're creating money. And then they'll think about it for a minute and go, Oh, yeah, of course, that's how it works. And and then they'll argue that it's perfectly good and fine, but it's just to say it's not top of mind. It's not something that people are really. Be thinking about. And so the good news is that that can change. It can be changed. In fact, during the Great Depression, you know, there was this moment where where people, you know, were really questioning, what are the banks up to? And there was actually quite a bit of awareness that was raised during that time about how it worked. And it resulted in, you know, significant legislation that changed how how banks were treated. Right now, we don't have, you know, a Great Depression moment to kind of cause that, that shift in attention and awareness, but if we are prepared, you know, should such a moment occur, that lack of awareness or that misinformation could change very quickly. So one of the things that you can do to help with that is, is help spread the message. There are a few links here just to a few things. You know, I'm on on sub stack. So if you want to be in communication with me, you can the money justice collaborative does workshops and and presentations about this. There, if you want to find a group in your country working on this, there's the international movement for monetary reform website there, where you can find groups in different over 30 countries. And then, as I mentioned before, there's the video series banking 101, produced by Positive Money in the UK. All excellent resources to help be part of the change