Top: Getting Money Right

Bankers are Unelected Sovereigns

Stanley Dundee

2017-09-07 v. 1.1

The power to create money is the power to commandeer any salable resource in the society. Like the sovereign, banks create money, but banks loan money into existence, while the sovereign spawns money by spending. Unlike the sovereign, which is at least nominally subject to the will of its citizens, banks exercise their sovereignty mostly in the absence of social control: weak, captured regulators are a poor approximation of democratic control. Bankers are unelected sovereigns who create money by issuing loans entirely at their own discretion with the only the slightest oversight by the rest of society.

We consider the broad picture of the role of banks vs. sovereigns in the creation of money and the attendant consequences for society.

Let's hear first from one of our great socialist economists. Michael Hudson, as part of a magnificent review of a century of economic struggle, captures the crucial issue:

The past century has shown that if society does not control the banks and financial sector, they will control society. Their strategy is to block government money creation so that economies will be forced to rely on banks and bondholders. Regulatory authority to limit such financial aggression and the monopoly pricing and rent extraction it supports has been crippled in the West by regulatory capture by the rentier oligarchy.

For a liberal viewpoint, consider the cautions of a beloved friend with extensive US and international economic policy experience:

In terms of the mechanics of money creation, I'd suggest that you underemphasize the role of bank reserve requirements, fed funds rate, repo programs, etc. These affect the leverage in the banking system's credit creation mechanism and hence are collectively an important driver of liquidity and effective money supply. And they are instruments of government policy (whether by design or auto-pilot default as was the case during the Greenspan years). This does not take away from your main point that government ultimately has the power to influence money supply, but it does suggest that the picture you paint of banks being unaccountable engines of credit creation is a bit broad brush. Other countries have financial regulatory track records that have made much more proactive use of these levers than the US to dial up or back monetary stimulus and limit mischief or overexuberance by banks (China recently, Canada last decade, etc.).

We turn now to technical details for actual money creation.

The acknowledgement of the fallacy of banks as intermediaries deploying savings into investment has been recently acknowledged by some establishment luminaries, including the Bank of England (pdf):

[The] majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions -- banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they multiply up central bank money to create new loans and deposits.