In February 2019 economics students at the University in Maastricht in the Netherlands penned an open letter in which they challenged their economics professors and their textbooks on the money and banking theories they teach. The initial letter is now updated with the help of the organization Rethinking Economics so it can be signed by any and all economics students, professors and organizations worldwide. The problem they see is as follows.
Economics textbooks across the world, some of them first published in the 1960s, continue to teach students a model of the monetary system in which commercial banks act as intermediaries, that only move existing money around the system, like lubricant in a machine. Many economics courses rely on the models in these textbooks, without recognising the empirical evidence that undermines them. This gives an unbalanced view of the way the monetary system functions and of the role of banks in the economy.
Students believe that an accurate portrayal of the monetary system would present evidence showing that currently:
. . . banks are not intermediaries channeling pre-existing funds from savers to borrowers. Commercial banks create the vast majority of money in circulation. Unlike other financial institutions, they create money when they extend loans to borrowers. In the process of extending a loan, banks do not move pre-existing funds from any other account but newly ‘invent’ the money by crediting the borrower’s account.
At the Alliance For Just Money, we agree with these students’ assessment and support their initiative. We encourage students to challenge their teachers and examine their textbooks and curricula for outdated theories of banking. We would also point out that some textbooks might be actually correct (for example, McConnel & Brue’s Macroeconomics which addresses “Money-Creating Transactions of a Commercial Bank”) but may lack any discussion of the systemic adverse impacts of such money-creating transactions on such things as the formation of asset bubbles, resulting financial crises and economic inequality. We encourage students to press for such assessments and explore possible alternative solutions.
We also encourage them to challenge not only their teachers, but all other economists, especially the ones at central banks. To that purpose we released recently an article by monetary reform activist Nick Egnatz explicitly questioning the work by economists at the Federal Reserve banks in the USA. He stated that,
Federal Reserve economists and the overall economics profession have shirked their duty by failing to communicate and explain to us, how our money is created by private banking corporations when they issue loans to us.
And we would encourage these economics students not just to get their theories right, but also to look at existing proposals to fundamentally reform the current monetary system. We think banks should be intermediaries, like most people, including economist and politicians, incorrectly assume them to be. To that effect here in the USA the Alliance For Just Money (AFJM) and the American Monetary Institute (AMI) pursue identical policy objectives. The Alliance’s mission reads:
1. Require Congress to exercise its Constitutional power to be the sole creator of all U.S. money, issued debt-free, and to establish a transparent and independent public monetary authority to determine the amount of new money the Treasury will disperse under authority of Congress.
2. End the privilege of commercial banks to create and issue what we use as money.
3. Transfer ownership of the 12 Federal Reserve Banks, and all remaining operations of the Federal Reserve System, to the U.S. Treasury.
In 2011 the Democrat congressman from Ohio, Dennis Kucinich, with the help of Stephen Zarlenga, the late director of AMI, and Jamie Walton, its current acting director, introduced the NEED Act in which these specific proposals are anchored. We consider this historic bill as ready-to-go legislation or at least the template for any future version of this radical proposal.
Given the above we are excited about these developments in academia and request, if you know any interested students–they don’t have to be economics students because this change will engage almost all social sciences–please encourage them to critically examine how the monetary system is portrayed in their classes and textbooks. And recommend that they contact local Rethink Economics groups, which are all over the world, and explore how groups are advocating for monetary reform, beginning with the Alliance For Just Money and the American Monetary Institute here in the USA.
On a critical note, there is a textbook by Mitchell, Wray and Watts incorporating what we think is the correct theory of the current money and banking system, i.e. the credit creation theory covering the idea that private banks create what we use as money when extending loans, but it is written within the framework of the problematic Modern Monetary Theory (MMT). Most monetary reform groups are not on board with MMT because its implicit and explicit policy implications will leave the prerogative of banks creating the money supply intact. We also think that MMT incorrectly argues that the state already has the power to spend debt-free money into circulation. We think that MMT’s position amounts to a false promise.
We are looking forward to connect with these groups and help them in both their research and the working out of sensible policy recommendations.
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