Every textbook of economics begins with the definition of money as being the following:
The essential function of money is to facilitate exchange of goods and services. This is the classic textbook first function of money.
The second function of money is that it is a measure of value, which if examined closely, is somewhat dubious.
Every prudent worker/producer wishes to store away a portion of his/her earnings as savings to be relied on at a future time. Money as a store of value is the third function. Whether or not savings represent any real store of value will be discussed later in this essay.
When earnings are stored as savings this has the potential to reduce the money supply. Currency becomes scarce and its value increases. The same amount of currency has greater purchasing power and can be exchanged for a greater amount of goods and services. This is deflation, the opposite of inflation. The simple and obvious solution to this is for the government or banking institution to inject more money into the system.
Since 1974, the Government of Canada has abdicated its responsibility to the Canadian public of putting money into existence. Instead, it has relinquished this authority to private commercial institutions that now create money through the issuance of loans under the fractional reserve banking system.
If the Government of Canada were to restore its authority and responsibility, it could direct the Bank of Canada to issue money at zero interest to municipal/provincial/federal governments for public benefits such as education, health care, social services and industrial infrastructure.
Instead, in the current monetary system, all money is created as debt on the backs of the consumer and taxpayer. Interest on loans becomes a debt to future workers and society. Furthermore, the working class is taxed in order to pay interest on public loans which is essentially the working class being indentured to the corporate state.
Consider the worker who attempts to save a portion of her income. If this money is locked away in a savings account, it reduces the money supply and creates a scarcity of money. The lending institution such as a commercial bank can put this money back into circulation by lending it out to private and public borrowers. When the worker retires she may require to make a partial withdrawal of her savings. Since not all account holders need to withdraw all of their savings at the same time, the bank can safely gamble on having only a fraction of the deposits available in cash. This is called the fractional reserve requirement of the banking system. In Canada there is zero requirement. However, a prudent banker would be well advised to maintain a minimum of 10% of outstanding loans available as cash on deposit. This is the basic principle of the fractional reserve requirement.
Let us examine this in simple terms. Imagine that initially the Bank of Canada prints money and puts into circulation $1billion. Imagine that as this money is used to trade goods and services, savers deposit 25% of this total, that is, $250million into savings accounts in various banking institutions. With a 10% reserve requirement, the banks all together can create loans totaling an additional $2.5billion. This is money created out of thin air as credit to the borrowers’ accounts.
Over time, the principal amount on the loan is repaid and the balances on individual loan accounts are reduced to zero. The problem is the interest charged by the banks on the loans. Where does the money come from to pay the interest? The interest is repaid by more loans being issued. The essential point here is that all money created in our present banking system is created as debt which will never be repaid. Our present monetary system is a system of mirrors, a pyramid scheme and a ponzi scheme. This ought to be considered criminal activity and ought be abolished.
The call for public banking
I have presented an outline of how money is created in two different systems. In the public banking system, the government of Canada through the Bank of Canada can restore its authority to create money at zero interest to be used to finance public service, infrastructure and social well-being.
In the current banking system, money is created as loans which is used to pay the interest charges which accumulate in the pockets and accounts of the banks and its shareholders. In this system, money is created out of nothing as a computerized data entry which has to keep on growing in perpetuity otherwise the system collapses. This has become a reality and only now are segments of the world population waking up to this fact.
Where is the real wealth?
At the beginning of this essay I hinted that money as a store of value is questionable. Any money stashed away as savings is supposed to represent wealth or surplus. Money gives the holder an entitlement to goods and services. In reality, money represents a burden on future workers and power to the holder over indentured labourers.
Money created as payment for interest flows back to the bankers and financial elite, the holders of power in government, business and society. When governments, businesses, individuals and the public in general assume a loan, interest charges enriches the banks. We might as well just print money and hand it over to the bankers.
Money created by publicly own banks go directly to the workers and producers of society to facilitate exchange of goods and services for the benefit of society as a whole. There is no need for the transfer of money in the form of interest charges to the banking elite.
If we abolish the practice of lending at interest we would be taking control from the banking establishment and giving it to the working class of society, the true producers of real wealth.