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posted on 19 June 2016

The Problem With Money And Banking: Inseparability

Written by , Director, The Kettle Pond Institute for Debt-Free Money

Some might call it "dependence". Let's discuss its implications and why it is important.mr.monopoly.with.money.bag.380x220

Introduction to 'The Problem'

Back in 1933, Economist Robert Hemphill, then Chief Credit Officer at the Federal Reserve Bank of Atlanta, declared in his famous "staggering thought" statement that "This is the most important subject intelligent persons can investigate and reflect upon." He was surely concerned about something very similar to today's manifestation of our monetary-economic conundrum - all the world's debt-saturated economies' lack a money-transmission mechanism capable of transforming our collective GDP-potential into actual GDP throughput.

As part of that statement, Hemphill declared ....

" This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve "

(In modern monetary economic parlance, "to starve" is only to resort to unworkable negative interest rates..... just prior to austerity-driven economic starvation.)

There you have it .... The 'Problem' of Money & Banking. It is that 'No bank lending = no money'. Right from the horse's mouth at the Atlanta FED.

Hemphill explains the predicament - it is 'money' that MUST provide the purchasing power that the economy needs in order to move forward. But that money cannot be had without more debt.

Unfortunately, Hemphill's money system conundrum has not been the subject that intelligent people have paid attention to over these years, for the very good reason that the money system remains un-taught in academia's business schools, for generations, and today.

Understanding "The Problem"

Despite the plethora of highly-authored papers, studies, books and theories about "Money & Banking", this seeming 'inevitable' inter-relationship between these two distinct constructs, is poorly understood - in the context of modern political-economics - and, as a result, is never really considered as 'causal' to the unprecedented debt dilemma facing the world's economies today.

As a result, many financial-economic blog sites (like GEI) sees postings that conflate the modern 'monetary system' with our system of capital markets. Money can become capital, but capital is not money, and has no relationship with our money system.

Because all of the world's advanced economies work on the same flawed "Money FROM Banking" construct - none of them can have more money (to advance aggregate demand to its potential ) without banks first making more loans.

THAT is the modern 'Money&Banking' canard that must be repaired, through separation of money FROM banking, before a new and workable paradigm around money can be installed to actually achieve that prosperity.

All of the biggest problems our national economies face today are caused by this legal joining of the fragile, and increasingly brittle, structural inter-dependence. If a nation's banking sector goes bad, then, axiomatically, the citizens lose a huge portion of their personal wealth. The economy becomes frozen in place until those same banks can somehow, usually at great public cost, begin making loans again. No loans. No money.

This institutional co-dependence is embodied within what we call the federal reserve banking system (FRBS), a.k.a. 'endogenous money', but, again, more accurately from the modern political-economic perspective, it is embodied in our system of debt-based money.


Note: There has been a debate between those who think the current system operates with 'exogenous money' where the central bank actually controls the money supply but most observations of the financial economy are consistent with the operation of banking with 'endogenous money', aka 'money out of thin air' in the form of collateralized credit. See Endogenous Versus Exogenous Money, One More Time (Unlearning Economics) for a good discussion.


Recalling the Fed economist's 'staggering thought', we MUST have more debt in order to have more money. But the debt-overhang (more debt than money to pay that debt) is what is causing our economic paralysis.

Get it?

This is Money and Banking Conundrum 101

That's the problem itself.

The Oft Ignored (and Frequently Forgotten) Irving Fisher

At the same time, eliminating the threat of TBTF, reversing the spiral of the global balance-sheet recession, and ensuring that this debt-saturated economic stagnation does not actually become 'secular' in nature, - these can all be accomplished by what Dr. Irving Fisher proposed as the 'separation' of money-and-banking. More pointedly, the separation of money-issuance .... a truly unique sovereign governmental function, from bank-lending, a common private bank, profit-generating function.


Note: Irving Fisher is ranked by many to have been one of the top economists of the first half of the 20th century, grouped with contemporaries John Maynard Keynes, Friedrich Hayek, Joseph Schumpeter, and Piero Sraffa. Fisher died in 1947, 22 years before the first Nobel Prize was awarded in economics. But Ragnar Frisch, a winner of the first prize in 1969 said this about Fisher:

"He has been anywhere from a decade to two generations ahead of his time .... it will be hard to find any single work that has been more influential than Fisher's dissertation."

Fisher's doctoral dissertation, Mathematical Investigations in the Theory of Value and Prices (Yale, 1892), was a landmark in the development of mathematical economics.


Separation

Say the word.

Let's discuss the 2-ton Gorilla 'problem' .... TBTF? Yeah, that Too Big To Fail.

The ultimate fear of TBTF is a 'fail' of the banking system (already failed, surviving only on central bank life-support) that is so big that it shuts down the money system ..... 'bank liquidity' dries up, and, of course, our economy cannot run without a viable, operational money system that provides for both money and credit.

So, the "inseparability" of the banking system's "fail" and the money system's "inoperability" is the crux of the major public consideration around the TBTF stigma.

No level of bank-capital requirement can repair from this problem. BASEL, be damned. In fact, in many aspects BASEL makes the problem worse.

But, do ANY in Congress understand today's "Money FROM Banking" system? Do ANY among the Economists, or even the bankers actually understand this deadly 'money FROM banking' recipe as the root-cause for this banker-induced, globally-feared 'financial' crisis? It is more really a crisis (of a lack of) OUR national circulating media.

If any of these powers did truly understand, it would become immediately apparent that this deadly national economic money-banking marriage is completely unnecessary, a bankers' school notion that has long since run its useful course. Once understood, then proper divorce proceedings would already be underway.


Note: Upton Sinclair once identified what is the core of the problem with the political and financial powers-that-be: "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"


Further Considerations of 'The Problem'

Looking at it another way, were we to separate the two, so that our money supply was not dependent upon the banks (FRBS), then a failure of the banking system becomes what one might call self-restricting, with the banking sector's failures actually fire-walled from money being supplied to the real economy.

Debt-basing the national money system was always a lousy idea. It is one of the major contributors to the serious problems of extreme wealth and income inequality. The idea as a field of study is now unavailable in the business schools. The reason may well be explained by the last note, above.

Debt-based money manifests in our necessarily-perennial concentration of wealth. The prosperity achieved by the debt-and-money issuing class has advanced far beyond any value they could bring to the national economy via the banking system's real and valuable intermediation between borrowers and lenders and extension of credit based on sound underwriting of collateral.

None of the bankers are really the problem here. They are all playing the cards they were dealt. They're doing the best they can with a fatally-flawed system. Unfortunately, central bankers pushing harder on their 'monetary-policy' lever will not make the whole thing work. And often times, it actually makes things worse.

Only by fixing the foundational systemic flaws can the banking institutions return to a sense of normalcy and stability. This opportunity is here again, just as it was when Fisher proposed his 1939 Program for Monetary Reform.

It was in the 1939 Program that Fisher stated the intent of the reforms being proposed - to end the 'lawless variability' in our supply of circulating medium. That's how it is written - lawless. And I would like to emphasize the words OUR circulating medium.

This is OUR Money System

Instead of a system such as Fisher proposed, passage of the Federal Reserve Act brought us a system that has legalized the 'lawless variability' of the private monopoly that issues our money supply. This is a supply that should a public supply.

The Solution to the Problem of Money & Banking

It's time to de-legalize the lawlessness of this Money&Banking system, by making the nation's 'money availability' subject only to economic need, and not subject to being the ready-made provider of bank-profits through unneeded debt. Rather than being created by banks only to produce a profit, money creation should just to ensure adequate money in circulation to maintain desired level of economic activity.

Our major money-economic problems are readily fixable. Fisher's 1930's proposals for the reforms needed for fixing the money system have been laid out within a more modern monetary-economic setting, and have already been proposed in the U.S. Congress by Ohio's Dennis Kucinich TWICE , in 2010 and 2011, as The National Emergency Employment Defense (NEED) Act, HR 2990 of the 112th Congress.

Please have a read.

There's too much debt out there, and not enough money to pay that debt. On time or delayed forever.

It is one of monetary-reformer Dr. Frederick Soddy's tenets that so-called fractional reserve banking (using private debt rather than public equity for money) actually prevents the national money system from fulfilling its natural public-power-role of national wealth distribution.

But, as obviously important as that is, that's another story.

In the above Kucinich Bill, modeled on the research work of the American Monetary Institute ( www.monetary.org ), that money-banking "separation" is achieved. The restoration of money creation and issuance into circulation as a governmental function is accomplished, as called for in the Constitution. Meanwhile, the banking system remains completely free to issue all of the credit needed by the private economy to achieve its potential; this by bankers acquiring the private deposits of that publicly-issued money, and lending it to creditworthy borrowers, like most people think they do now.

Under the new 'separated' system, bank lending can only be done by risking 'banker-owned' assets, with real money, instead of with fractionally-reserved, bank-issued credit.

Fixing the broken money system. It is NEEDed. It's worth doing. And it is do-able.

Fix the major failure of our world's money and banking system(s).

A one-word fix. A front-burner issue.

Separation.

For the Money System Common.

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