Global movement on existing monetary system

Guyton · 2016-01-17T14:36:52+00:00

Money was supposed to be nothing but just the unit of accounting, medium of exchange and means of saving. But in our modern world, money has become so valuable than the value itself, to the extent that even modern preaches are money oriented. In 2008, economic crisis began in Western and American sphere, since then debates on economy begin but of interest is on how money is created. During the time, various surveys were conducted in public asking peple …who creates money? Common answer was, it is exclusively created by the Government through the central bank (in America, Federal Reserve Bank, in England, bank of England). Also people believed that commercial banks lend money as loans to borrowers from the money received from savers and that commercial bank cannot issue loan when it out of money (reserve money) saved by its savers. This knowledge is parallel with the literatures in books of economy. Of course, that obvious answer was inevitable as it is clearly known that creating counterfeit money is serious crime. And if by any chance counterfeit money enters in circulation inflation is inevitable, that is simply as to say any money created out of nothing is prone to increase or create inflation. This is explained by quantity theory of money as ‘pumping more money in economy without corresponding increase in production of goods and services inflation is inevitable’. This public knowledge on how money is created and the principle that commercial banks are using in lending loans as it is supported by literatures in books of economy was challenged by various activists in America and Europe especially England. These activists believe that Government is no longer exclusive producer of money and that actually commercial banks also producing money whenever they issue new loan. In plain English, when bank issue new loan, it simply create credit in borrower deposit account without transferring physical money. For example bank with 2 million dollars in its reserve can lend a loan of 4million dollars, that is to say this bank has created 2milion dollars out of nothing. These activists also believe the economic crisis we are facing which begins in 2008 and its inflation was highly due to over creation of money from these banks as a lot of loans were issued from these commercial banks from 1997 to 2007. The idea that commercial banks create money was seen silly in eyes of economists and faced strong resistance from both specialist economists and bankers. In 2014 the bank of England released article with the title ‘Money creation in the modern economy’, the article is found in its website. To understand some of quotes from the article lets me introduce to you types of money in modern economy. There are two types, bank deposits and currency, the currency is the physical money (paper money and coins) which are created by Government. Of the two types, bank deposits make up the vast majority in modern economy and in UK it makes 97% of the money in circulation, with only 3% of money in physical forms (source-bank of England in its article). That means 97% of money in circulation in UK is created by commercial banks with only 3% being created by Government. From the article; The article admits that, the majority of money in modern economy is created by commercial banks making loans. Quote from the article ‘In the modern economy, most money takes the form of bank deposits. But how those deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.’ The article also addresses the other misconception that the central bank determines the quantity of loans and deposits in economy by controlling the quantity of central bank money (as it is described in economics books in so called-money multiplier approach). Quote from the article ‘For the theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves-that is, interest rates.’ In plain language this part address another misconception from economists, that the amount of loans that commercial banks make are not determined by central bank reserves (physical money) as economic textbooks describe, but commercial banks decide themselves how much to lend in order to make profits depending on the interest rates set by the central bank and the central bank then decides on how much to hold as reserve to meet public withdraws, which is reverse from what is taught in economics. Article also states that it is this interest rates that limits the amount of money that commercial banks can create and to defend its position on limitation of amount of money commercial bank can create, the bank of England through its article has referred the study which was done by James Tobin with the title ‘limits to broad money creation’. James Tobin was credited Nobel Prize for this study. Now it is clear that commercial banks create money as bank deposits, the type of money which makes up the vast majority of money in circulation today. The problem with this money is that, firstly is created out of nothing by bankers and not by Government, second these bankers sell this money which have created out of nothing by charging interest on it once issuing loan. Remember the concept of banks were to serve the role of intermediary between those who have excess money, who want to save it for future use (savers) and those who do not have and need it (borrowers), and not to create new money for lending which it does not possess in its reserve. The other problem is, most of this money created as loans are taken in areas which do not effect productions like buying houses, cars. Although the central bank of England claims in its article that the amount of money created by commercial banks is limited by interest rates they set, but still the allocation of fund is 100% decided by commercial banks. Up to the date, there are various Organizations working on monetary reform exist in many countries, with only one in Africa called Firstsource money in South Africa. The movement is about; money should be created exclusively by the Government for public interest and should be created in amount that matches the production of goods and services so as to facilitate exchange of goods and services, not in huge amount as commercial banks want to create profits from interests out of loans, thus causing inflation and this role should not be entrusted to commercial banks. The movement is most developed in Britain and United States, with Positive Money and The American Monetary Institute having elaborated full proposals for Parliament. So far the response is good and in 20th November 2014, UK Parliament had society debate on Money creation with Steve Baker MP as the main speaker. The debate was marked as the historical debate as it was the first time for 170 years, the UK Parliament discussed on money creation. In modern economy Governments take loans from commercial banks with high interest charge on it, the burden of high interests come to the citizen as taxes. If the money that the Government lends from banks is not from banks reserve and simply new money created by commercial banks, why can’t Governments produce the same amount of money without interest charge on it? This is the question to ask. It is time now Africans participate in global discussion on the existing monetary system; instead of waiting for the change to change us. To me the movement is of public interest, what is your position? Famous quotes from famous people "The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple that the mind is repelled.’ John Kenneth Galbraith writing in 'Money: Whence it came, where it went' (1975). ‘Of all the many ways of organizing banking, the worst is the one we have today’ Sir Mervyn King: Bank of England Governor (2003-2013)

Thread starter Guyton
Start date Jan 17, 2016

Guyton

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Global movement on existing monetary system

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