by Valentin Katasonov
Late last year, the Swiss Federal Chancellery was sent a petition with 110,955 signatures, demanding another national referendum. That referendum was spearheaded by activists from the Sovereign Money Initiative. The goal of the referendum is to ban the creation of money by private commercial banks and force a return to the use of actual, tangible money.
The «money multiplier» con game
In economics, when a commercial bank is allowed to create money by extending credit in excess of the cash reserves it holds, this is known as fractional-reserve banking. For example, banks can accept deposits of 1,000 units of legal tender from depositors (which is «real» money, in the form of central bank banknotes), yet based on these reserves, lend out 10,000 units of legal tender, which is ten times more. And that credit will be issued in the form of what is called deposit money, which is in itself a kind of abstraction, because it cannot be used to settle the claims of depositors in actual banknotes. This flagrant duplicity does not end well, eventually culminating in a run on the banks, followed by their collapse.
In economics textbooks, this manufacture of money by commercial banks is called a «money multiplier», and the maximum value of the «multiplier» is set by a financial regulator (usually the central bank) in the form of a reserve requirement (which is the percentage of deposits that must be held in a special reserve fund). Incidentally, these requirements are being abolished in many countries today. It used to be that producing fiat money was viewed as an act comparable to counterfeiting, but now it is simply called a «money multiplier».
A victory for the alliance of bankers and corrupt politicians
The fractional-reserve banking system has developed gradually over the last three hundred years. The alliance between the bankers and the politicians they corrupted triumphed over public opinion. This chicanery was partially concealed by the establishment of the central banks, which are often called the lenders of last resort. Central banks could extend a lifeline to private commercial banks in the form of various «emergency», «remedial», and «stabilizing» loans. In the twentieth century, state and quasi-state agencies were created in order to insure bank deposits. However, both the «lenders of last resort» as well as these agencies have proven useless during major banking crises.
In the twentieth century, people stopped thinking about how the monetary system is structured or about the roots of the banking fraud. The «aha moment» only hits once there is a massive economic, financial, or banking crisis.
One example of this sudden burst of insight occurred in the 1930s, when the West was stricken by the worst economic crisis in the history of capitalism. In 1933, a group of prominent economists led by Irving Fisher began to draft a report that was later to be known as the Chicago Plan. The final version of the report appeared in 1936. The report identified the causes of the economic crisis (the Great Depression). The fractional-reserve banking system was primarily to blame, as it had flooded the economy with an enormous supply of fiat money. This money was not legal tender and was issued in the form of credit, which created a debt pyramid.
This lack of restraint on the part of private creditors stood in contrast to the rules for issuing legal banknotes by the central banks. What they could issue was limited to the size of their holdings in gold. And it’s true that before the onset of the crisis, a number of European countries (particularly Great Britain and France) had restored the pre-war gold standard, which in the US had not been abolished even during WWI. The Chicago Plan concluded that first and foremost, private banks must immediately return to a full-reserve banking system (by holding 100% of demand deposit accounts.)
But the Chicago Plan’s recommendations were ignored. Even in the US, where President Franklin Roosevelt managed to rein in the appetites of Wall Street bankers, full-reserve banking was not resurrected. American banks were more powerful than the president.
Very few economists even remembered about full-reserve banking after WWII. References to it were removed from economics textbooks and «money multipliers» were portrayed as the norm. Among Western economists, the Austrian School of economics was perhaps solely responsible for keeping alive the memory of full-reserve banking, and Murray Rothbard was a particularly bold spokesman for that cause.
The return to the Chicago Plan
In its scope and devastation, the 2007-2009 financial crisis was comparable to the Great Depression of the twentieth century. And suddenly the memory of Irving Fisher’s Chicago Plan resurfaced. In August 2012 two IMF economists, Jaromir Benes and Michael Kumhof, published a paper titled «The Chicago Plan Revisited.» The paper correctly states that the restoration of a 100% reserve requirement would make it possible to dramatically revive the world economy. Gone would be the causes of inflation, the breeding ground for the «bubbles» in real estate and the financial markets, and no longer would pyramids of public and private debt arise. However, by 2012, the world had already returned to a position of relative financial and economic stability, and only a few financial experts took any notice of the brochure written by the IMF economists.
But 2015 was another story entirely. Dark clouds gathered over the global economy once again. The second wave of the global financial crisis threatened. Economists from various countries began to spend more time pondering the idea of full-reserve banking. In March of last year a report titled «Monetary Reform: A Better Monetary System for Iceland» was drafted by an economist named Frosti Sigurjónsson at the direction of Iceland’s prime minister. Some sources claim that Iceland is preparing for a monetary reform that will include abolishing the system of fractional-reserve banking (according to other sources there will be a dramatic increase in reserve requirements.)
The Swiss oppose «gray» money
One recent event related to the restoration of a normal monetary system is the preparation for a referendum in Switzerland. To a large extent the results of the referendum will depend on how the questions on the ballot are phrased. Of course it is quite impressive that over 100,000 people in that small country were found to sign the petition demanding the referendum. However, given the fact that for many decades the reserve-system problem was a taboo topic, it is difficult to imagine that a few million Swiss will be able to make sense of what is involved. Looking at a sampling of Swiss articles about the upcoming referendum, it is clear that even journalists do not always grasp the issue. For example, some think that the referendum involves a choice between paper money and a cashless system. Others believe that this is a question of backing money with stockpiles of gold or commodities.
Recently a referendum was held in Switzerland about potentially increasing the country’s central bank gold reserves. Most citizens of the Alpine republic rejected the idea that there was a need for such an increase. However, in their comments about the results of the «gold» referendum, many experts pointed out that the respondents did not fully grasp the real question. There are fears that the same could happen with the new referendum.
So once again let’s pinpoint the crux of the matter: this would entail a ban on the creation of fiat money by private banks. The right to issue legal tender should be granted only to the central bank. That bank issues money primarily in the form of banknotes. Commercial banks will turn into financial intermediaries in the traditional sense, which merely draw money into their accounts and then disburse it into the economy in the form of loans and investments. In this manner, real control over monetary circulation will be concentrated in the hands of the central bank. The risks of various types of economic imbalances and crises will drop sharply, because private banks will be stripped of the right to create their own credit funds.
Of course, some problems would inevitably arise during a return to full-reserve banking. For example: what should be done with the huge supply of money that was created by commercial banks? In some countries, the supply of such «gray» money is many times greater than the supply of legal tender issued by the central banks. And this «gray» money can’t just be suddenly erased, because it is fueling the economies of almost every country in the world today. In addition, the proposed Swiss monetary reform is completely at odds with the prevailing trend for not only commercial, but also central banks to increase the money supply. This is happening under the guise of the «quantitative easing» programs pursued by the US Federal Reserve, Bank of England, Bank of Japan, and ECB.
A careful, gradual monetary reform is needed, which will minimize the risk of corporate bankruptcies and sharp rises in unemployment. In addition, one must not forget that any radical monetary reform would deal a blow to the plans of the global financial oligarchs to displace paper money with cashless systems. After all, cashless systems are based on the very same «gray» money that the sponsors of the Swiss referendum are vowing to fight.
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