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Should Public Banks Print Money Without Holding Reserves?

The Giant Banks Are ALREADY State-Sponsored ... So Why Not Create Public Banks to at Least Share the Gains, Help Out Main Street, and Grow Our Local Economies? ... Economist Steve Keen writes today: Neoclassical economists do not understand how money is created by the private banking system – despite decades of empirical research to the contrary, they continue to cling to the textbook vision of banks as mere intermediaries between savers and borrowers. This is bizarre ... – Washington's Blog

Dominant Social Theme: If we could just print as much money as we want, everything will be OK. 

Free-Market Analysis: Just yesterday we presented an article from Washington's Blog on US false-flag manipulations of the public. It was a bold summary of a dominant social theme that provided additional support for reports that have long appeared here. But we are somewhat disappointed with this recent financial article (see excerpt above) that also seems to us a kind of dominant social theme.

Now we know that Washington's blog does not purposefully purvey power-elite memes, but the views expressed in this article are likely nonetheless satisfactory to Western elites. It is a kind of elite meme, in fact, because it argues for state control of money. Dominating state processes are what elites are good at doing. Such a process is called mercantilism.

Those who believe that the "people" will be able to maintain control of public banks are probably being naïve in our view. This is one reason we argue for a free-market solution. A CLEARER remedy in our view is a fully established system of PRIVATE money. The relationships between people in government and the private sector are inevitably opaque. It is a lot more convenient to use free markets because it is relatively easy to determine if the public sector is encroaching on the private one.

Anything that confuses people about money and banking is probably helpful to Anglosphere elites in their quest to keep their Money Power franchise intact – which in turn funds their quest for a new world order. Recently, various blogs that have sprung up espousing "public money" – blogs run by individuals that seem to have some affiliation to the US military and intelligence establishment. No coincidence in our view as the "public money" movement continues to grow. (We are NOT referring to prominent public banking advocate Ms. Ellen Brown here.)

Washington doubtless has no relationship to any of this. Like many others in the alternative news community, he is a true believer in the idea that money should be under the control of the state. How he can believe this while writing about the numerous false flag events that the US government is responsible for is puzzling to us. But he seems to be able to juggle these two disparate notions.

Anyway, the point of the article is certainly that printing money should be done by individual states in the US, not by the Federal Reserve. This is what we call a "Brownian" perspective, and while we have had long discussions with Ms. Ellen Brown about these approaches we continue to disagree.

Money, from our point of view, is gold and silver and the way gold and silver should be introduced into the economy as money is through money competition as offered via free-banking. We call the underlying assumptions on which Washington's suggestions are based "neo-Keynesian" and most recently wrote about it here: Rise of the Neo-Keynesians?

Washington makes the same point as ones discussed in the article above. The banking system, he writes, only expands loans after the [Federal Reserve] System (or market factors) have put reserves in the banking system. We pointed out that this was an incorrect way of looking at the problem. The issue was one of monetary demand and velocity. Banks cannot lend if no one wants to use what is available.

But there is a deeper issue as well. The Brownian perspective is that the amount of money to be offered by banks is commensurate with community needs. Presumably, the borrower may be required to put up some property or other assurance so that the money is not lost. This of course is an altogether artificial system. Anybody with collateral can gain a loan. If collateral is not necessary, we would argue that makes things even worse. Anybody can take out a loan if they can convince the bank that their project is viable.

In this system, money, and the process of dispensing it, is entirely uncompetitive. Washington and others attempt to get around this by claiming that demand precedes supply when it comes to currency circulation, but how does one determine what projects and home loans are viable and what are not? Didn't work out very well earlier this century did it?

Contrast this to a money system featuring gold and silver. If too much gold and silver is available, then the value for these money metals goes down – mines shut down as well and hoarders continue to hoard. After a while, a scarcity becomes apparent, mines open back up and hoarders dishoard.

This is how the free-market deals with the issue of monetary circulation. There is a delicate balance between money available, its price and the ability of the entrepreneur and merchant to gain funding for particular projects. The free-market itself adjudicates this ratio. It is a competitive system not an artificially competitive one.

What Washington and Brownians (and others) want to do is substitute the judgment of the banking class for the market itself. Inevitably, this will lead to various forms of monetary disaster including corruption and serious inflation. There is almost no operative example of this kind of system working, nor could it work. It would need considerable regulatory strictures and would simply fix the price of money. Price fixes always distort the market.

These schemes are a failure at the federal level (see China and India) and will not be anymore successful elsewhere. There are plenty of proponents that will cite massive amounts of history to show that such systems can operate far more effectively than private money, and that they have in the past. We always return to the bottom line verity: a public money system is constructed via regulation and is bound to distort the market.

Washington and his allies are not discouraged. This is why it is so important to establish that loan-demand precedes deposits. One can justify public banking then, because it seems to be market driven. He quotes such luminaries as Ph.D economist Steve Keen on this issue and adds in addition that, "two Nobel-prize winning economists have shown that the assumption that reserves are created from excess deposits is not true: The model of money creation that Obama's economic advisers have sold him was shown to be empirically false over three decades ago."

A final thought: One of the most interesting points in the article that Washington raises has to do with the idea that bank reserves are unnecessary in a modern economy. (Ben Bernanke has mentioned this concept as well.) We agree with him, but for a different reason: Modern money has been divorced from the underlying gold and silver that used to back it. At one time, it was very important for a bank to have reserves as customers would demand money metals in exchange for the a given bank's certificates. But these days money is not what it used to be. Money is merely paper – and actually a debt obligation as well.

This is why the stress tests so beloved of regulators are of little value. Banks, they insist, must hold a certain amount of reserves on hand, but the reserves themselves are worthless. They are nothing but paper promissory notes. And they can be printed at will, relatively speaking, by the central banks that regulate them.

The solution that Washington (and others have come up with) involves banks (large or small) owned by the government and issuing out money (with or without collateral) and without reserves. With all due respect, this is madness. One might as well set up a copying machine in the basement and begin churning out currency.

Money in our view is gold and silver because history shows that it has been a reliable store of value and fulfills the various criteria that people have for money. Of course, we have often pointed out that the best way to determine what money is involves money-competition, including free-banking.

Conclusion: One thing we are almost sure of, however: The model of government owned banks issuing out paper money in massive quantities backed by nothing at all is probably not a winning formula in anybody's money competition. It is however a tremendous recipe for inflation and the destruction of wealth and future prosperity.

SOURCE: Daily Bell

© Copyright 2008 - 2011 All Rights Reserved. The Daily Bell is an informative compendium of independent economic views and analysis, which is published by The Foundation for the Advancement of Free-Market Thinking (FAFMT).

 

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