Life without banks

News and views from New Zealand

Dennis Dorney

It is immensely pleasing that after such a long incubation the re-affirmation of a government’s right to create its own money supply is beginning to bear fruit. At times, since the idea was first promoted in the 1920’s by Major Clifford Douglas and Professor Frederick Soddy, the concept has come tantalisingly close to government approval, but has virtually disappeared from economic discussion in the last thirty years.

The near collapse of world finance after the prime mortgage debacle has brought monetary reform back to centre stage again and has highlighted some new players like PositiveMoney and the American Monetary Institute. Most reformists have allowed a role for commercial banks, after removing their power of fractional reserve lending, on the basis of their claimed expertise in evaluating loan applications for capital investment. Bearing in mind that in recent years commercial banks have shown no desire at all to take on such risks, preferring instead to find easier profits in the much safer mortgage market and their various derivative games, I am not so sure that there is much validity to the argument. It is not hard to argue that, if we were to take full advantage of modern technology, banking in its present form would appear to be obsolete.

As we know, banks came into being as safe places to store the surplus wealth of woollen merchants in the Middle Ages, in the days when coinage had real value, being made of gold or silver. It didn’t take long for the banks to change that to credit money, still allegedly backed by the reserves in their vaults. Today, whether money is paper or coin, or entries in a computer, it is generally accepted that such money has no intrinsic value, except that it gives the bearer or account holder access to a portion of the real national wealth that he helped to create.

The concept of a bank as a safe place to store wealth is clearly obsolete. Today no bank is safer than the programming that allows access to the computer storage device and presumably no safer than non-bank financial institutions such as Credit Unions and Building Societies. Furthermore the more banks there are, each with its own data storage system, the less safe the total system must be.

It is possible to divide a nation’s economy into two parts, the cash economy and the digital money system. The cash component is already minted or printed on behalf of the NZ Reserve Bank. It is true that the cash is bought by the Banks and then circulated into existence but there seems to be no reason why this function cannot be handled by the other financial institutions. This then leaves the digital economy. In a country the size of New Zealand (4.3 million people) I doubt if the number of monetary computerised transactions per day averages five per person. This volume of transactions would not appear to tax the capacity of any state of the art computer.

Let us assume that the Reserve Bank has taken on the function of creating our money supply. The banks are on 100% Reserve and are therefore taking- in and on-lending money that already exists in circulation, the debts from the previous monetary system having been cancelled by one of several means. New money is being created, as economic growth required, to maintain stable prices in the consumer market and additional money may be also necessary to finance capital works. This is the suggestion of Professor Frederick Soddy in his book “The Role of Money” and, since he was much smarter than I am, I don’t intend to dispute it. The required amount becomes a computer entry in the accounts of the NZ Treasury.

The distribution of the money may be by e.g. increases to WINZ Superannuation for consumer growth, or to contractors for capital works. Currently those payments will finish up in accounts held by private banks but why should that be so? Virtually every person of wage-earning age has transactions with the government. Why should I not have an account within the Reserve Bank so that all my interactions with Government are internal and therefore quick and safe? Why can’t I have just one Credit card (a Bankcard, if you can remember that), which also doubles as an ID card with my essential data on it? And why eventually shouldn’t all my digital transactions pass through that one account?

I can already hear mutterings of “Big Brother” but think of the advantages. If all digital transactions pass through the one computer it should put a stop to money laundering, white collar crime, tax evasion, fine dodging, the cheque Clearing house etc … and banks. How would you buy a house? The Building Societies would become Mortgage brokers who check out the financial viability of a would-be house buyer, assess the value of the property and make a recommendation to a Mortgage Section in the Reserve Bank. All mortgages would be unalterable, fixed–interest contracts. The brokers then obtain a fee from the buyer and presumably carry some kind of risk insurance. They are largely performing the function of Real Estate agents, but from the buyers, not the sellers, perspective, which should stop some dubious practices. This process gives the Reserve Bank substantial control over the housing market and should stop property booms and busts.