Newsletter No. 16 - October 2008
Links to other Newsletters can be found here.
CONTENTS
1. Common
Sense about Money and Banking - after
the emergency
2. The American Monetary Institute – making
great progress
3. Dethroning the Dollar – a
role for India?
4. "A Green New Deal" – the
New Economics Foundation
5. Bring Back Keynes? - Ann Pettifor
6. "A crisis is
a terrible thing to waste" - Hazel
Henderson
7. Fairness with
Freedom -
Charles Bazlinton's recent blog posts on banking
1. COMMON SENSE ABOUT MONEY AND BANKING - AFTER
THE EMERGENCY
Emergency measures are being taken
now to bail out the banks and stop the banking collapse
turning into the deepest and most damaging global economic
depression of all time. But they must not only protect
us against that. They must obviously avoid rewarding
bank chiefs whose irresponsibility and incompetence got
us into the mess. Less obviously but more importantly
in the longer term, they must open the way to
more deeply rooted permanent reform.
In a world governed by common sense we wouldn't
dream of allowing the public money system to be managed
as it has been up to now. Anyone would be
laughed out of court who proposed to allow commercial
banks to create as debt the supply of public money
on which we all depend. To let them do this, as part
of their profit-making business in the market for lending
and borrowing, would be seen as idiotic.
It is obvious that the two functions conflict. Combining
them prevents either being done wisely or well. We don't
need rocket science to see that today. The fact that
they are merged is the underlying cause of the present
financial crisis - and previous ones too. The two functions
need to be separated. In a world addicted to debt, that
goes unnoticed. It is what Alcoholics Anonymous calls "the
elephant in the room".
Most of the items in this present newsletter are about
that. But we shouldn't forget that governments
- "democratic" or not - handle their other
main financial operations also in ways that inevitably
produce perverse outcomes. As managed at present,
taxation and public spending, along with the money supply,
systematically transfer money from less wealthy to more
wealthy citizens, and from less wealthy to more wealthy
nations - with undesirable economic, social and environmental
consequences in both cases. Item 5 below includes a brief
reference to taxation and public spending. Other documents
on this website deal with them at greater length.
So what's to be done about money and banking?
The present money and banking crisis has clearly shown
that allowing commercial banks to create money
is bound to cause recurrent credit booms and busts, with
damaging consequences for people all over the world.
Chuck Prince recognised its inevitability from the commercial
bankers' point of view a year ago. He explained when
given his $100 million 'golden parachute' as the 'chucked
out' CEO of Citibank: "As long as the music is playing,
you’ve got to get up and dance".
Many months ago, Mervyn King, Governor
of the Bank of England - whose performance in this whole
affair deserves respect - stated publicly that a number
of steps were needed to avoid future banking liquidity
crises and "ensure
that the temporary measures put in place in recent weeks [to
deal with Northern Rock - JR] evolve into permanent
reforms in the coming months". These steps
included:
to separate banks' retail deposit books - the insured
deposits - from the rest of a bank's balance sheet, -
to ensure that the risks of losses on bank lending
remain with banks' shareholders, and
-
to introduce a special insolvency law, or a more
far-reaching deposit insurance scheme, for banks to
provide greater security for retail deposits than now.
The emergency measures introduced now by governments
in panic in many countries are intended to cover these
points, and also to purge 'toxic assets' from
banks' balance sheets. That is needed to free-up
the flows of money through the economy which, under the
present arrangements for managing the money supply, the
banks' excessive gluttony has constipated. While we must
hope these emergency measures will stabilise things,
it will be very difficult to see whether the separate, interacting proposals
are being effectively enforced because of their complexity.
These aims will be more simply and transparently
achieved by a basic monetary reform consisting
of a pair of complementary measures:
(1) transferring to nationalised
central banks the responsibility for creating,
not just banknotes as now, but also the major part
of the supply of public money consisting of bank-account
money held and transmitted in electronic form; and
(2) prohibiting anyone else, including commercial
banks, from creating money out of thin air
as profit-making, interest-bearing loans to their customers
- just as forging metal coins and counterfeiting paper
banknotes have been treated as criminal activities
for many years.
These complementary measures will amount to genuinely
nationalising the national money system but
not the commercial banks. The commercial banks that
have been nationalised should be denationalised when
the crisis is past, and all
commercial banks should be required to compete unsubsidised by
their present privilege of creating the public money
supply as profit-making debt.
The first of the two
measures would make
an agency of the government responsible for
directly creating and maintaining the public
money supply in the public interest. The
second would
lead to a more competitive market for facilitating
loans between lenders and borrowers than today. That will
bring commercial banks into line with ordinary businesses which
don't get given their main materials for free. It will
encourage them to provide more efficient services
to customers than now. It will also attract
new entrants into the industry, who may be more motivated
and able to do just that.
A key factor influencing the prospect of world
society surviving in anything like its present
form through the rest of this century will be how the
money system works. What will it reward and what will
it penalise? How will it motivate us all to live? Reforming
the way money is created and put into circulation is
an urgently necessary change.
Further background can be found at:
Creating New Money: A Monetary
Reform for the Information Age - www.jamesrobertson.com/books.htm#creating
"Money From Thin Air" - Guardian
online article, March 20 2008 - www.jamesrobertson.com/news-jul08.htm#guardian
2. THE AMERICAN MONETARY INSTITUTE
- MAKING GREAT PROGRESS
I was presented with the AMI Lifetime Achievement
Award by the American Monetary Institute (www.monetary.org) at
its recent 2008 Annual Conference. As I was unable
to be there myself, I was grateful to Alistair McConnachie
(www.prosperityuk.com)
for responding on my behalf as follows:
"I am greatly honoured by
the AMI Lifetime Achievement Award, and very sorry
not to be with you to respond to it. But I'm delighted
that Alistair McConnachie is with you to make this
response for me.
"You in the USA and other
countries and we in Britain, thanks to the efforts
of Alistair and his colleagues, are building
the foundations of an international movement for
monetary reform.
"This simple proposal to change the
way the money system now works recognises that managing
the public money supply and conducting competitive
banking business in the market for borrowing and lending
are two different functions. They must be
separated, if either is to be done properly.
"The present credit crunch, following
the latest in the recurring series of credit booms
and busts, demonstrates once again the inevitable consequence
of confusing the two functions. From the commercial
banker's viewpoint, Chuck Prince of Citibank famously
explained why it happens: "So long
as the music is playing, you’ve got to get up
and dance".
"This year's AMI conference is taking
place at an exceptionally topical time. I am confident
that you will make significant further progress toward
our shared goal of monetary reform. Achieving
it could make a vital contribution to the future of
human society through the rest of this century and
beyond."
AMI is indeed progressing under Stephen Zarlenga's
leadership. For examples, go to its
website.
Outstanding are its two draft Acts - the American
Monetary Act, setting out details of the Monetary
Reform proposed by AMI; and the Monetary Transparency
Act, requiring the US government to publish
detailed information about who benefits and what is supported,
and who and what doesn't benefit and isn't supported,
by the present privately controlled method of creating
new money.
3. "DETHRONING THE DOLLAR" - A ROLE
FOR INDIA?
As the US dollar loses its 'hegemony' as the leading
currency for international trade, the creation
of a world currency must be the global counterpart of
national monetary reform.
The world currency should be issued by a world
central monetary authority reporting to the United
Nations. It should be a parallel currency,
not replacing existing national currencies but providing
a fairer medium for international or global transactions
than any particular national currency can.
Otherwise
a chaotic situation will develop over the
next few years, in which of a number of powerful
national currencies - such as the euro, the Chinese
yuan, the Russian rouble and the failing US dollar
- will compete to profit from handling the international
transactions of other countries as well as their
own.
The Indian Business Magazine Businessworld published
my article on "Dethroning the Dollar" on 26
September. See www.businessworld.in/index.php/Columns/Dethroning-The-Dollar.html
For geopolitical background,
see one of many current American expressions of understanding
that the world's future will be post-American - www.informationclearinghouse.info/article20926.htm
For an outspoken but relevant Latin American
view see www.asalbuchi.com.ar/?p=82
4. "A GREEN NEW DEAL" -
THE NEW ECONOMICS FOUNDATION
Published by the New Economics Foundation in
July, this first report of the Green New Deal
Group (www.neweconomics.org/gen/z_sys_Publication
Detail.aspx?pid=258) puts forward a combination
of policies to deal with the 'triple crunch'
of the financial crisis, accelerating climate change,
and the onset of peak oil and
rising energy prices. The Group's nine authors will all
be known to many UK readers of this newsletter as prominent
in the environmental and 'new economic' fields.
Their approach, modelled on President Roosevelt's
New Deal in response to the Great Depression
of the 1930s, includes a £50 billion a year crash
programme to create a low carbon energy system that
will make 'every building a power station', and a range
of measures to re-regulate the domestic and international
finance systems, such as controlling the generation
of credit more tightly and minimising tax evasion by
clamping down on tax havens.
I recommend Jonathan Porritt's
summary and
comments of 28 July (www.jonathonporritt.com/pages/2008/07/how_bad_is_the_economic_
downtu.html) and
also Brian Leslie's comment below
it that, in addition to the measures the report proposes,
the banks' privilege of being allowed to create money
in the form of 'credit' should be ended - see also
the proposal at 1. above.
The Green New Deal Group asked for comments on the
report. My comments on 30 September
were as follows.
"I don’t think anyone should be surprised
that the Group’s first report didn’t
cover all the “green” threats humanity
faces and possible responses to them. Later reports
might perhaps deal with:
- population - too many people
for the planet’s capacity to support
decent lives?
- shortages of drinkable water and adequate
food, exacerbated
by the overriding priority now being given to carbon reduction
and therefore to biofuels?
"Since the report was published in July, the severity
of the monetary, banking and financial crisis has become
much more apparent. In future reports you might like
to look at the following:
(1) the case for monetary reform,
transferring the function of creating the
supply of money (which provides the scoring system
of rewards and penalties that shape how everyone
plays the game of economic life) to
central banks that serve the public
interest; and prohibiting the commercial
banks from creating the supply of money as
profit-making, interest-bearing loans to
their customers;
(2) the need for a tax shift, away
from the value of the rewards (incomes and
profits) to people and organisations for contributing
to the common pot by their work and skill and
enterprise, and on to the value of common resources
(including environmental resources) which people
and organisations take from the common pot – a
shift that would make it more difficult for the rich and powerful
to exploit tax havens;
(3) the need for a citizen’s income,
to support more self-reliant and responsible citizens
providing for themselves and one another; it would
be financed by the proceeds of the above tax shift
and by replacing much of the present heavy expenditure
of public money on the provision of dependency-creating
services and social welfare benefits to citizens by big government
and big business; and
(4) the encouragement thereby
of a shift of policy on work,
away from pushing people into dependence on jobs with employers
(very wasteful in terms of commuting, duplication
of buildings, energy use and other facilities at
workplaces, not to mention its negative impact
on many people’s perceptions
of the purposes and impacts of their work); to encouraging more self-organised
work on meeting the needs of oneself, one’s family and neighbours
and local community.
"NEF has in fact published
a number of reports in recent years on those topics. It
might be worth taking a look at them."
5. BRING BACK KEYNES? - ANN PETTIFOR
Ann Pettifor is one of the authors
of "The Green New Deal". Her letter in the "Financial
Times" on 30 September hits the nail on the head
(www.ft.com/
cms/s/0/efefb156-8e87-11dd-9b46-0000779fd18c.html).
See also www.debtonation.org.
These are powerful comments, although I hope
that sixty years after Keynes' death we can go further
than he did on important points - such as
the four at 4. immediately above.
6. "A CRISIS IS A TERRIBLE
THING TO WASTE" - HAZEL HENDERSON
" A crisis is a terrible thing to waste! Each
new revelation of greed, recklessness and stupidity
will drive the emergence of new forms of more ethical
markets suitable for human needs in the 21st century."
" The task now is to manage the downsizing
of Wall Street and the global financial casino and redesign
regulatory systems and markets to restore
their useful but limited role in facilitating the
production of useful, ecologically-benign goods and
services in the growing green economies of the Solar
Age. The truth is now in plain sight: there was no
invisible hand! Markets
and money are both shaped by legislation, central
bankers, tax policies, subsidies, lobbying special
interests and cronyism. Economics has always been
politics in disguise".
I hope those two quotes will encourage readers to read
the whole article "Chicago Boys' Curse Comes
Home to Wall Street" (www.ethicalmarkets.
com/?p=873).
7. FAIRNESS WITH FREEDOM
- CHARLES BAZLINTON
See Charles Bazlinton's blog posts on
15th and 27th September on "Banker’s Rewards & Risk
Management"
(www.the-free-lunch.blogspot.com/2008
/09/bankers-rewards-risk-management.html)
and "The
choice: More banking regulation? or Banking reform?" (www.the-free-lunch.blogspot.
com/2008/09/choice-more-banking-regulation-or.html).
It's not all bad news. A breakdown can
be a breakthrough too.
James Robertson
13 October 2008
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