Foreword to the anthology Democratizar el dinero. Una introducción a la Reforma del Dinero Soberano (Democratizing Money: Introduction to Sovereign Monetary Reform)
By Jesus Suaste Cherizola (Editor)
How many more economic crises will have to occur before political organizations and social movements take on the task of reorganizing the prevailing monetary and financial system as a priority?
Within the public debate of contemporary societies, the question of how to transform the monetary and financial system seems not to be a priority. This absence is paradoxical. On the one hand, it is evident to everyone that financial institutions concentrate too much power: millions of citizens around the world are devastated by the burden of debt and have suffered the ravages of the crises generated by the financial markets; dozens of governments, in the last thirty years, have been forced to implement bank bailouts with taxpayers’ money. But on the other hand, the question of what to do with the structure of the monetary and financial system is a question that seems to fall into oblivion: it is not only that the various political actors in modern societies lack a plan of action for the radical transformation of the financial system; there seems not even to be a clear awareness of the importance of submitting monetary issues to the scrutiny of public debate.
Perhaps one of the greatest victories of the oligarchic regime that we suffer today lies in having convinced the citizenry that issues associated with finance are beyond the interests of the majority and that they are the concern of only a handful of experts. As a result, and despite the fact that we live in a completely monetized society, the general understanding of money and its political implications is often deficient and mystified by erroneous explanations.
Against the background of the forgetfulness in which the question of money is found, this book seeks to show the reader that a money system (the set of rules by which money is created and put into circulation) is the scene of a struggle for power whose consequences impact on all spheres of daily life. What are the consequences of the structure of the money system on the distribution of power and income among social classes, and which money system is compatible with the principles of freedom and equality subscribed by modern societies?
The central theme of the book – the reform of sovereign money, unfolds in two directions:
1) The diagnosis according to which contemporary societies the power of monetary creation has been captured by the commercial banks and, therefore, is subject to the imperatives of obtaining private profit –not collective benefit.
2) A plan of action: in response to the contradictions and problems generated by the private system of monetary creation, the reform of sovereign money proposes to implement a system in which monetary creation (like other state prerogatives, such as the creation of laws and the monopoly of legitimate violence) is a power of the state and is subject to the democratic control of the citizenry.
The project of sovereign monetary reform, in short, involves a struggle to replace the current privatized system of money creation with a monetary system under the control of the public.
The question of money
Since the financial system has created a specialized jargon, it is necessary to stop and clarify the meaning of some terms and ideas that the reader will find frequently throughout this book.
The diagnosis behind the reform of sovereign money starts with an inquiry into the nature of money. Money, however, is a more difficult object to define than common sense tends to assume, particularly because in contemporary societies money presents itself before our eyes in two irreducible but confusing forms in everyday life.
Perhaps the most familiar representation we have of money is that of bills and coins, whose creation is still a prerogative of states, and which we use to carry out a large part of the economic transactions of daily life. The second form of money is that of bank deposits: a mere accounting “record” that indicates the amount of money the bank undertakes to give to the account holder if he requests it. When, in everyday speech, we say we “have money” to refer to the money registered in our bank accounts, what we actually have is the promise of a bank. The first form is usually called “cash”. Throughout this book, the second form is called “bank money” or “account money”. When we speak of money “in the restricted sense”, we usually refer to money issued by the central bank (coins, bills and “reserves”, that is, the deposits of commercial banks in their respective accounts at the central bank). When we speak of “extended” money, we also include money from bank deposits.
Within developed economies, approximately 10 percent of the money is government issued money. The remaining 90 percent takes the form of deposits. This means that, unlike the money targeted in coins and bills, most of the money in societies exists as bank money, which is used to make payments through electronic transactions.
The status of money thus takes on a paradoxical form: in the strict sense, bank deposits are not money, but “promises to pay”. But in fact, these promises are used as money and constitute most of what we call money.
However, the crucial element of this system is the fact that, contrary to what is commonly believed, the granting of a credit does not presuppose or require money previously saved. In other words, a bank loan is not the transfer of an existing money from a saver’s account to a debtor’s account. When issuing loans, banks “create” money by “creating” the corresponding bank deposit: this creation is an accounting record that banks generate by entering a number into their computers. This is the basis of the banks’ power to create money.
From the fact that in society there are two forms of money (or else, money issued by the central authority and a “promise of money” (bank deposits) which for practical purposes fulfills all the functions of money) follow some consequences that may seem strange but with which the reader will become familiar throughout this book:
– Under the current system of monetary creation, the practice that allows the creation of bank money (that is, what we consider to be the majority of our money) is the issuance of loans. This means that bank money is money created in the form of debt, on which commercial banks charge interest.
– Contrary to widespread belief, banks are not “intermediaries” between savers and debtors (they do not “lend” the money that others “save”). The money banks lend is money that is created at the moment the credit is granted.
– If the practice of indebtedness were to stop, it would imply the contraction of the mass of bank money (that is, most of the money in the economy).
– When a loan is issued, an amount of money (a bank deposit) is created for an amount equal to the “principal” of that loan. However, a loan also carries a promise to pay interest. This means that, by definition, a loan creates less money than it takes for the debtor to pay off his debt.
– At the systemic level, this fact makes the debt “structurally unpayable”. One person can finish paying off his debt, but it is impossible for all people to pay their debts at the same time, because there is not enough money in the system to do so.
– Indebtedness is an inherent condition of the functioning of the economy: without debt there is no money. And the less debt that is issued, the less money in circulation.
– The power of money creation is in the hands of a private system and, as such, it is oriented towards the profit generation of commercial banks, not the public interest.
– The power of money creation that banks have today is at the base of the generation of financial bubbles.
– While governments formally retain the power to determine their currency, as well as the monopoly on the issuance of bills and coins, they have in fact delegated the power of money creation to commercial banks.
– The seemingly familiar form that bank deposits take reveals their problematic nature in that we consider an individual’s bank deposit to be someone else’s debt and that, therefore, the sum of bank deposits is a debt that society owes to the banking system.
– All the money deposited in the banking system is debt that is generating interest for the commercial banks.
– If the banks have accumulated so much power, to the point of forcing governments to rescue them from bankruptcy when financial crises occur, it is because they have seized the power to create the elementary particle of the economic transactions of modern societies: money.
The articles summarized here seek to give answers to the questions this system poses: how was the monetary system that governs us today constituted and who does it benefit? What are the consequences of the fact that most of the existing money is in the form of a bank deposit and, therefore, has been created through indebtedness? What system of monetary creation do we need if we want to build a more just society, and what is the relationship between this system and the other problems that societies face: financial instability, precarious wages, unemployment, inequality, the indebtedness of individuals and governments, climate change and the urgent need to build a sustainable economy?
This book, in short, can be read as an effort to unravel the consequences and questions that lie behind this simple phrase, private banks create money, a principle in which a complex power structure is expressed. The answers converge in the project of the reform of sovereign money, that is, the proposal to return to the State the monopoly of power to create money, and to turn the banks into true intermediaries between savers and debtors.
The content of this anthology
This book combines texts that address the issue of monetary reform from a theoretical perspective, with texts written from political activism – mainly focused on the experience of organizations that, in the United States, have fought to implement it. It is a pending task to adapt the study and practice of the monetary reform to the particularities of each country.
The order of the articles has tried to start from the presentation of the elementary themes of the reform of sovereign money (what is money, what forms does it take, how and why was the system of money creation privatized?) and then go to the relationship between the monetary system and the rest of the sectors of society. (The only exception to this order is the article “The creation of money in the modern economy”, by Michael McLeay, Amar Radia and Ryland Thomas, published by the Bank of England. Because it is the most technical and complex text, it has been placed at the end. If the reader wishes to start from a detailed exploration of the process of money creation, he or she may begin with this article).
It is impossible to exhaust in a single volume all the issues and problems that are gathered around the project of the reform of sovereign money. As the reader will see, it is not even easy to locate this reform within the classic political antinomy left/right. To the extent that the reform aims to limit the power of the banks through the nationalization of money, it seems to be a project close to the historical struggles of the left; but to the extent that this proposal seeks to end the oligopolistic power of the banks, it is compatible with the ideals of economic liberalism. Beyond these coincidences, and the specific forms that the reform should take according to the conditions of each country, it is urgent that the citizenry become aware of the power involved in the monetary system and question its current structure. In the context of a crisis which has opened new possibilities for social organization, the project of the reform of sovereign money proposes an objective which is at the same time concrete and far-reaching: to limit the power of private banks by withdrawing from them the power to create money.
I believe that the Spanish-speaking world (as well as Spain captured by the European Central Bank, austerity policies and technocratic orthodoxy, and Latin American countries subjected to the constant danger of capital flight, financial crises and the weight of foreign debt) is a propitious terrain for reflections on the possibilities and benefits of sovereign money to gain strength. This book hopes to contribute to feeding that debate and enriching the struggle of democratic forces in their quest for a more just society.
I would like to thank The Alliance For Just Money – in particular Mark Young and Govert Schüller, for their invaluable support for the publication of this anthology.