Topic: The relationship between private bank profits and the Dutch economy and democracy
Abstract
“Money is power”
A popular idea in the world is imagining how much power an individual would have if he or she could create money. However, the practice of making money has been employed since the first coin.
Banks create money with the use of loans. They control where and in what way newly created money goes into the economy. This gives banks, in a way, more power than a government.
This topic has been brought to light a few months ago in the Netherlands trough a group of stage actors called “De Verleiders” (the seducers). Their play and ideas have gotten a lot of attention by the media and they have started an initiative to get this topic to the Dutch government. This paper will first explain commercial moneymaking and will look at the way banks function. Secondly it will explain what it would mean for democracy if the power of banks would be in the hands of a government. In conclusion the opinion of the researcher will be given about this topic, together with a proposed solution to this problem.
1. Commercial moneymaking
There is a Dutch law that states: ‘The livelihood of the people and spread of wealth are in the care of the government’ (artikel 20 lid 1).
However, current Dutch money system is dominated by commercial banks.
These banks control the money supply and therefore have a big influence on the Dutch society.
First of all, there are a lot of misunderstandings about money and the Dutch monetary system. Most people see it as a system that can’t be changed, a system that is there to stay. In other words, money and the Dutch monetary system isn’t seen as something that is created by people and controlled by people. And yet it is. Even specialists, economists and bankers often give a wrong definition of what money is.
For example, the bank of England has recently stated that most of our economy school books give a wrong explanation about how money is created. (http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf).
1.1 What is commercial moneymaking?
How banks create money is simple. It goes as follows: when a person, company or country is in need of money he or she visits a bank. This bank will asses if the person or subject can pay back the money they want to lend. When the person or subject is suitable for the loan, the bank shall make a contract and fill in the balance sheet on the computer. Both sides of the balance sheet will be raised by the bank. Money is equal to bank debt. When the person uses this money to pay for things, there is new money in circulation. So to say it in simple words: typing numbers in a keyboard is enough to put digital money on an account.
Private banks can thus create money through the accounting process that they use when they lend money. The numbers that are seen in the books of the account are basically just entries in the computer system of the bank. These numbers are a liability from the bank to the customer.
By using your bank card or mobile banking, the customer can use these digital accounts in the same way as physical money. This makes the digital money from private banks a perfect substitute for physical money from the central bank.
By creating money this way banks have pushed out the credit money, bills and coins, and created a system where banks can control the money supply. Eventually the debt burden became too high and resulted in the financial crisis.
Figure 1 shows that 97% is deposit money and only 3% is left as cash money.
However, private banks are still under somewhat of control. For example; the Basel II
Accords have been made to keep an eye on the way money is created.
The Basel Accords determine how much equity capital – known as regulatory capital – a bank
must hold to buffer unexpected losses.
These Accords are applied under supervision by the central banks and governments.
It is well known that private banks want to make a profit, and in the mean time they have the privilege to create money.
1.2 What are the consequences of commercial moneymaking?
A major cause of the financial crisis was the Housing Bubble, which exploded in 2006.
In the years prior to the financial crisis the private banks had been raising the amount of money they created every year.
At the start of 2007 till the end of 2011 the credit crisis has raged in the world, as seen in Figure 2. Banks have created too much money too fast. They used this money to invest in financial markets and made the prices of houses grow by lending this money.
By lending this money, the price of houses will be pushed up along with the level of personal debt. On all the loans that banks give out, interest has to be paid. Because the debt rose quicker than the national income, people where eventually unable to pay their debt. People stop paying their debts and banks found themselves almost or completely bankrupt.
1.3 The researcher’s opinion
The first change that I think has to be made is; money has to be created by a transparent and democratic committee which works with the customers in mind.
In my opinion this power has to be controlled. Everyone should know how it is created and what is happening with their money. The government can’t be trusted with this power either. That’s why there should be an independent committee who works in the customer’s best interest and not against it. The government could work as a controlling power over this committee and protect the customer’s against misuse. There should also be a safety net which prevents too much or too less money creation.
The second thing that has to be changed in my opinion is; money has to be created debt free.
As stated before banks create money by creating loans. But when money is created by the state, with common interest in mind, and put in circulation by government spending in stead of the use of loans, this money would then stimulate the economy and create jobs.
The final change I would make is; banks will not be allowed to create money again.
History has shown that as soon as banks have the power to create money, they create too much in good times, which leads to financial crises, and create too few in bad times, which leads to recessions and unemployment. Keep in mind that banks want to make a profit.
So plain and simple, we can’t allow banks to create money.