Posted April 8, 2014
by Jerry Alatalo
“The mischief springs from the power which the moneyed interest derives from a paper currency which they are able to control, from the multitude of corporations with exclusive privileges which they have succeeded in obtaining… and unless you become more watchful in your states and check this spirit of monopoly and thirst for exclusive privileges you will in the end find that the most important powers of government have been given or bartered away, and the control of your dearest interests have been passed into the hands of these corporations.”
– Andrew Jackson (1768-1845) 7th President of the United States
Farewell Address, March 4, 1837
Michael Kumhof is deputy division chief of the modeling division at the International Monetary Fund (IMF). In the following lecture at the London School of Economics, he makes the case for a new monetary system on Earth. For readers, it is helpful to know that Mr. Kumhof is not expressing any official view of the IMF but that his lecture is a result of independent research. For men and women who have spent time on monetary reform, his lecture – especially because he comes from the IMF and traditional monetary environments – comes across as nourishment to famished souls who, in some instances, have advocated the same ideas for decades.
It is especially encouraging for monetary reformists because it signals movement toward banking/money reforms that will benefit societies/nations greatly. For those readers who haven’t had the time to research into monetary issues, don’t allow your first perceptions that economic theories are very complex and difficult to understand fool you. What Mr. Kumhof talks about here is actually simple. He is advocating monetary reform that takes money creation away from private commercial banks and placing it in government.
Fractional reserve banking is now the system.
A quick look into fractional reserve tells us that banks need to keep approximately 10% of their total loans in reserve. An individual example would be: “Local Bank” takes in $10,000 on deposit from Ms. Johnson and it goes into her savings account. With a 10% reserve requirement, the loan officers at the “Local Bank” can lend an additional $90,000 to customers. Ms. Johnson’s $10,000 = 10% reserve, $90,000 in loans = 90%, 10%+90%=100% limit of fractional reserve rules, and $90,000 has been “created” and added to the money supply. If you owned the bank and your customer deposited $20,000 in a savings account, you could then loan (“create”) $180,000 to other customers.
If “Local Bank” has a grand total of $30 million in deposits it could then, according to current fractional reserve rules, write loans for $270 million to other customers. The problem with fractional reserve banking is that not so straight and narrow bankers will go far beyond the limits and rules, throwing economies of nations – now, planets – into the bust part of “boom and bust”. This returns us to Mr. Kumhof and his suggestion for 100% reserve requirements at banks, and an end to fractional reserve lending.
The 90% that banks loan out to customers is how money gets created at present, and represents 97-99% of the entire money supply in circulation. The other 1-3% is coins created by, in America, the government. The 97-99% is “banking money” and the coins/1-3% is “sovereign money”. What Mr. Kumhof is advocating is 100% “sovereign money” created and controlled by the government. If, and when, such a monetary reform occurs, banks would become intermediaries of sovereign money instead of creators of banking money.
In his lecture, Mr. Kumhof revisits the theories of economics/banking of the 1930’s known as “The Chicago School”. He finds that the level of thought on economics decades ago was greater than here in 2014. After pointing this out he then adds some heavy-duty reinforcement by stating: “and I’m not kidding”. Historic examples of “sovereign money” are found in America’s experience. Many are unaware, because the history books don’t include it, that the War of Independence was fought over “banking money” demands from the British Crown and the colonists’ self-created “sovereign money” system.
The American colonies issued government created money on a state-by-state basis; Benjamin Franklin said in his writings that it was “extremely economically beneficial” and, because the colonists left Europe to escape financial slavery – and knew what would happen if they were to go along with British demands – the decision to fight the British was chosen, leading to independence. Further along in American history, after Abraham Lincoln went to Wall Street bankers for loans to finance the Civil War and he was given a “yes” – at 35% interest – he then huddled with his political colleagues and they printed “Greenbacks” (sovereign money without debt) and successfully financed the war.
Lincoln was killed by an assassin and the “Greenbacks” were removed from circulation, ending sovereign money during that period in America.
President Andrew Jackson was the most ferocious opponent of private Wall Street bankers and took the power to create money away from them, leading to America being debt-free when he served. Although debated, John F. Kennedy wrote Executive Order 11110, and issued some billions of dollars in government currency into the society; many believe JFK’s assassination shortly after those billions went into circulation was the reason he died. Lincoln’s assassination is seen by some as retribution for his decision on the “Greenbacks”. Jackson would have been killed but for his assassin’s weapons’ malfunctioning.
Mr. Kumhof lists several good advantages to sovereign money during this talk. If the Chicago Plan becomes followed through, there would be no government debt (or negative debt), plus a lower level of private debt. It would bring about an enormous, economy-wide debt-to-equity swap. Bank runs would be completely eliminated. Monet would now be completely safe as it no longer depends on what is happening in the private credit market. Money – the lifeblood of the economy – is no longer afflicted by problems in the credit system. Other benefits include lower interest rates, lower tax rates, and lower fraud-monitoring costs.
The instances of boom-and-bust cycles would be greatly reduced, Wall Street financial fraud would be reduced significantly, and money would be directed to the broad, real economy instead of toward “casino finance”. It is instructive to note that before the Federal Reserve Act of 1913, there was no such thing as a World War. The present worldwide economic downturn has shown that too much of a “dynamic” financial system can most certainly cause major problems. Mr. Kumhof suggests that to help the real economy grow needs a “real boring financial system”, which he believes the 1930’s Chicago Plan offers. Although he admits that “getting from here to there” is anything but trivial – a complicated transition – if governments can get there, tremendous benefits will become realized.
For those readers who are new to monetary reform issues, there are a few people and films which will convince you that change is simply needed and – most importantly – changes will bring about better conditions for people. Many men and women, because they are unaware that another, more beneficial financial system is possible, have never questioned finance/banking/money creation as they’ve always felt “this is just how it is, and has always been”.
Find and view “The Secret of Oz” by documentary filmmaker Bill Still. Mr. Still’s latest video reports on his YouTube channel featured clips from the lecture by Mr. Kumhof. The film is an excellent explanation of money-creation and the subject of sovereign money. Bill Still has been talking about sovereign money for decades. Visit the YouTube channel “Bill Still” and/or billstill.com.
Find and listen to any interviews of public banking advocate Ellen Brown – founder of the Public Banking Institute – and/or visit the website publicbankinginstitute.org. Ellen Brown is like Mr. Still in that she has devoted years of research and writing on monetary reform. Visit the YouTube channel “Public Banking Institute TV”.
Find and view the Academy award-winning documentary “Inside Job” by Charles Ferguson, to learn what really happened leading up to the 2007-8 financial crisis.
Watch “All Wars Are Bankers Wars” by radio host Michael Rivero, to learn how private central banking is a big part of issues surrounding war and peace. The film is found on this blog by going to “categories” and scrolling down to documentaries.
To the best of my knowledge these sources – “The Secret of Oz” by Bill Still, Ellen Brown (Ms. Brown’s latest book is “The Public Banking Solution”), “Inside Job” by Charles Ferguson (he has written books available at Amazon as well), and “All Wars Are Bankers Wars” by Michael Rivero – offer the quickest education on money/finance/banking for those men and women interested in gaining a more thorough understanding.
Please suggest or recommend any additional sources of information on this most important global issue in the comments section below. Knowledge is power, and there is a real possibility that men and women from many nations will benefit from knowledge sources you provide here. Thank you very much.
This issue is central to the situation now unfolding in Ukraine.
Monetary reform is one of the most important issues – if not the most important issue – on this Earth in 2014.
(Thank you to London School of Economics and Political Science (LSE) at YouTube)