Removing the constraint of currency for full employment

It is common knowledge that banks do not lend out savings, but rather create money out of nothing when a contract is signed.

For example, the currency (account balances) for a mortgage does not exist until the contract is signed. Then a bookkeeping entry gives the bank an asset and the borrower a liability.

This newly created currency can then be used to purchase a house, materials, contractors, etc.

But there’s a catch …

The catch is that the currency required to pay the interest is not created.

Since the principle (the amount created) is paid back with interest (not created), there is a drain on the currency supply causing

  1. bankruptcies and dispossession of private people and governments, and
  2. forcing governments to increasingly borrow in order to maintain the currency supply, economic activity, and employment.

Thus the biggest, single expense on all government budgets is interest payments

Note also that the amount of currency (and thus economic activity) is controlled by banks who can thus engineer booms and busts at will.

Please note that national currency is simply a concept, and as banks can create currency out of nothing, then so can governments.

Prior to 1973, governments of most democratic countries did indeed manage their own currency supply. New currency was issued debt-free into circulation through government budgets.

Some movements like Social Credit propose it be distributed as a citizens’ dividend for private people to decide how to spend (or save), and thus create demand (or capital) for economic activity, and employment.

Transition

The question arises, how do we transition back to pre-1973 banking where banks were brokers not creators of currency, genuinely lending out savings according to reserve requirements.

With a 100% reserve requirement banks cannot practice fractional lending (in countries such as Canada and the UK, there is not even a reserve requirement).

The transition would simply require a change in bookkeeping.

Currently, when principals are paid, that currency is removed from the accounts. In order to prevent a precipitous decline of the currency supply, since banks cannot create currency at will any more, the transition would entail that principals paid back not be destroyed, but become the assets (along with savings) that the banks can thus lend out again.

Only governments, through publically-owned central banks (like the unusual Banque du Canada), create new currency to manage inflation and employment.

Again, there’s a catch…

Governments, like banks, cannot be trusted to manage the currency supply. It is far too tempting an instrument for humans to manage, and will thus quickly lead to inflation and corruption.

Organic alternative

The alternative is to create frictionless currency whenever required by economic activity.

Just as a bank creates currency on the strength of a contract, so a contract between two participating people creates the required debit/credit bookkeeping entries.

In this way the number of buildings (flying cars, spaceships, …) that an economy can produce is not limited by the amount of capital it can raise, but by the number of builders in the economy.

Thus full employment.

One last comment. Since this contract currency has no interest obligation (usury, riba), there is no shrinking of the currency supply leading to bankruptcies and dispossession.

Currency supply and prices are a dynamic match to economic activity and scarcities. People and skills are the capacity of a community, not connections to finance.

Removing the constraint of currency for full employment

 

 

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2 thoughts on “Removing the constraint of currency for full employment”

  1. Love this post, very well explained. My only disagreement is that I don’t believe this is “common knowledge.” The average joe does not understand the basics of monetary system… most business students probably understand… Even after reading such a clear and concise explained post like this, most won’t understand the ramification and impact on their lives. And the ones that do understand, most of them simply believe “this is just the way it is” But I hope they one day do this rare knowledge does become common knowledge and people realize “this ISNT the way it has to be”

    It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. Henry Ford

    Like

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