Agenda: Root the power to create and allocate official money in democratically governed communities.

Real wealth has intrinsic value. Examples include land, labor, knowledge, and physical infrastructure.

The most important forms of real wealth are beyond price and are unavailable for market purchase. These include healthy, happy children, loving families, caring communities, and a beautiful, healthy, natural environment.

Real wealth also includes all the many things of intrinsic artistic, spiritual, or utilitarian value essential to maintaining the various forms of living wealth. These may or may not have a market price. They include healthful food, fertile land, pure water, clean air, caring relationships and loving parents, education, health care, fulfilling opportunities for service, and time for meditation and spiritual reflection. For most purposes, real wealth is living wealth, and living wealth is real wealth. Money is neither.

The proper function of a money creation and allocation system is to match idle real wealth resources with unmet needs of people, communities, and nature.

A Powerful and Easily Abused Technology

In serving this function, money is one of the most useful, beneficial, and consequential of human technologies. I is also one of the most powerful. And its ephemeral nature—it has no meaning or utility outside the human mind—make its power easy to abuse.

When bankers reap multi-million dollar bonuses for themselves while essential needs of millions of people go unmet in the midst of widespread unemployment—our current situation—it is a powerful indicator of a failed economic system and more particularly of a failed money system that creates unimaginable and wholly unnecessary suffering.

As we now experience, those to whom the money system allocates money in abundance may live in grand opulence in the midst of scarcity. Those from whom the system withholds it may die of starvation in the midst of plenty.

International money flows that involve nothing more than numbers moving from one financial asset account to another, possibly even on the same computer, can determine the fate of nations and shape the boom and bust cycles of economic life.

Mayer Amschel Rothschild, founder of the Rothschild banking dynasty, once proclaimed, “Permit me to issue and control the money of a nation and I care not who makes its laws.” The abuse of this power by the bankers who hold it now threatens our very survival as a species.

Although money impacts every aspect of modern life, it is so familiar and its existence so much taken for granted that we rarely step back to reflect on its real nature and significance. For further elaboration, see Money Is…

A Brief History of Money

In the earliest human societies, money was unknown. People organized their lives around the relationships of family, clan, and tribe. They allocated available resources according to custom, status, and mutual caring.

Over time they developed tokens of exchange, such as shells used as ornaments, salt, or bit of precious metal. Eventually they used number printed on pieces of paper. Now most money consists of electronic traces on computer hard drives.

The more people came to rely on money, the more it because a substitute for sharing based on custom and caring. This process accelerated during the latter half of the 20th century and growth in GDP became the defining measure of economic progress. In our present time, most of the relationships that define the social, economic, and political fabric of society are based on money exchange.

In contemporary 21st century societies, money exchange defines most our our social, economic, and political relationships. And most most of us organize our lives around earning, spending, borrowing, and saving money. It is our ticket to food, shelter, transportation, education, recreation, health care and nearly every other essential of daily life. This has sweeping implications for values and the distribution of power in society.

Money System Design

The banking system can be structured to favor large Wall Street banks or small local community banks. The ownership can be for profit or nonprofit. Nonprofit banks can be governed by a self-perpetuating board, organized as cooperatives, or owned by a state or local government. Priorities of the individual banks will vary accordingly. Private banks generally favor private profits. Properly managed cooperative banks favor their member interests. Properly managed government-owned banks favor public purposes. There is nothing radical about a nonprofit bank. Cooperative banking has a long history in the United States and elsewhere.

Modern Money Creation

In our current system, money is created from nothing with a simple accounting entry when a bank issues a loan. As economist John Kenneth Galbraith famously observed, the process by which money is created is “so simple it repels the mind.” 

Fractional Reserve Banking

The critics of fractional reserve banking that allows banks to create new money by issuing a loan is well founded when lending is for a non-productive (speculation or current consumption) purpose and the interest flows out of the community. Allowing a bank to create money is appropriate and beneficial, however, when the proceeds flow into productive investment in response to local needs and the interest recycles in the community.

When you take out a loan from a bank, the bank opens an account in your name and enters the amount of the loan in its ledger. That becomes a liability on the bank’s accounts, offset by the corresponding asset of your promise to repay with interest. Two simple accounting entries and money magically appears from nowhere. The bank then essentially rents it to you with an interest charge. This makes banking a very profitable business and is the key to the ability of the institutions of global finance to rule the world.

When societies create money through transparent, democratic processes to serve the common good, creating money is an honorable action. When individuals create it for purely private benefit to create personal claims on the public commons and wealth created by others, it is an invisible form of theft.

Making money by speculation,  usury, and accounting manipulation concentrates control of existing real wealth. It does not create wealth and serves no beneficial economic or social purpose. There is no legitimate reason to allow it. And certainly no justification for providing predatory banks and financiers with public risk guarantees and subsidies.

Unless the processes of money creation and allocation are open, democratic, and devoted solely to serving the public good, the system of accounts through which money is created and allocated can become the most effective and undemocratic of tyrannies. It allows the institutions of finance to control virtually everything. In current practice, the system’s inner workings are invisible to the public. Based on illusion and accounting slight of hand, the system by its nature largely defies logic and thereby understanding.

A Matter of Values and Power

We are taught that organizing a society around money and markets maximizes our individual freedom to make choices according to our personal values and interests. We are not supposed to notice that the monetization of relationships gives priority to financial values over life values and gives enormous power to those who control the creation and allocation of money.

In the global economy, the structures of the global financial system give inordinate power to create and allocate money to financial institutions that seek only their own financial gain without regard to any other human or natural interest. Despite the facade of political democracy, through their control of money, bankers and private equity fund, not people, now rule most of the world.

The structure of the money system is a choice, not a given and we the people have both the means and the right to change it.

Money in a Living Earth Economy

The proper purpose of a money system is to connect underutilized resources with unmet needs, most particularly the needs of ordinary individuals for meaningful, sustainable livelihoods—including essential public services and infrastructure. Thus a proper financial system should be designed to put the money where it will produce the greatest living-wealth benefit for the people of the place it is intended to serve. At a most basic level, this means directing the flow of money to productive Main Street businesses—not to Wall Street speculators and global corporate monopolies.

Old economy institutions are structured and managed to maintain the dominator structures of Imperial Civilization by growing dependence on money and centralizing the institutions that control money’s creation and allocation. The new economy institutions we seek will reduce dependence on money, restore relationships of caring, and root the power to create and allocate money in living communities in ways that are transparent and accountable to those who have a natural interest in the health and well-being of the people, community, and natural systems of the place where they live. At a most basic level, this means directing the flow of money to productive Main Street businesses rather than to Wall Street speculators.

These are some suggested measures.

Favor Small and Local

A New Rules Project study has confirmed exactly what we might expect. The smaller the bank, the greater the portion of its lending that goes to Main Street businesses. Since we want to favor a system that gives priority to funding productive Main Street business, the rules governing the banking system properly favor smaller banks over larger banks. Appropriate measures include limits on bank size, antitrust action to break up large banks, and regulations and tax penalties/incentives that favor independent community banks over Wall Street conglomerates.

Lesson of the 2008 Financial Crash

Imagine how different our national economic situation would now be if at the time of the Wall Street crash the federal government had taken over failing Wall Street banks, broken them up, and restructured them as locally owned independent, cooperative community banks and credit unions with a clear mandate to fund local homeowners and responsible businesses.

Far from being a radical idea, the result would be a system of financial institutions that would look very much like the one the United States used to have comprised of community serving local banks, mutual savings and loan associations, and credit unions—until the frenzy of deregulation that began building momentum in the early 1980s destroyed it.

The proper response to the banking crisis would have been for the federal government to take over failed Wall Street banks, break them up, and restructure their local branches as individual community banks, savings and loans, or credit unions—with a preference for those organized as nonprofits, cooperatives, or under ownership by state and municipal governments.

Unfortunately, none of that happened. Wall Street bankers and money traders pulled off the biggest bank robbery in history. We taxpayers funded it.

Under a real-wealth banking system, the federal government would continue to insure the deposits of member institutions as is now the case. But they would do so only for banks that accept strict reserve- and equity-ratio requirements and do not participate in or fund speculative trading of assets. The larger the bank, the stricter the requirements should be to discourage banking consolidation.

Federalize the Federal Reserve

In a living-wealth money system, the federal government, state governments, and local banks properly share the functions of money creation and allocation in response to local and national needs. Overall money-supply management is properly a federal function. Currently that responsibility resides with the Federal Reserve, which professes to be a federal agency and is so listed in the government’s organization chart. It operates, however, beyond meaningful public oversight, and generally acts in the best interests of Wall Street bankers—which rarely coincide with the public interest.

The Fed is properly brought under the general supervision of Congress and the Department of Treasury and its operations rendered publicly transparent and subject to public audit. A restructured Fed would have the tools to adjust the flows of both private and public money as required to support productive investment, local employment and environmental balance while minimizing wage and asset inflation.

Keep the Gambling in Vegas

So what of the Wall Street casino? Let would-be gamblers go to Vegas, where the games are regulated.

The ideal way to deal with a malignant cancer is to cut off its blood supply. Similarly, the best way to deal with financial speculators is to cut off their money supply through appropriate taxes and regulatory actions that render outsized banks, financial speculation, predatory lending, financial fraud, and the shadow banking system of unregulated hedge funds and private equity funds illegal or unprofitable.

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