Post by Antti Jokinen on Jan 16, 2019 13:22:23 GMT
Can the ability of private banks to create money be taken away from them by the authorities? (I refer now to the famous Chicago Plan and its modern equivalents.)
To be able to answer the above question, we need to understand what gives the private banks the so called 'ability to create money'. To understand that, we need to understand what money is. And that's where this gets complicated. But let's try, without going too much into details at this point.
To be considered a private bank a company usually needs a banking license issued by authorities. As far as I know, the license doesn't mention 'money creation', so we probably need to assume that the 'license to create money' is an implicit part of the banking license itself. Actually I cannot think of any piece of legislation that would touch explicitly on 'money creation'. Help, anyone? "Lombard Street" by Bagehot comes to my mind as the most authoritative source which establishes this 'license to create money', but even there it is not mentioned explicitly: in my mind it follows the role of the central bank as a lender of last resort.
I don't have time to revisit the Chicago Plan now, but if I remember correctly, they try to take away this ability by just calling deposit accounts in banks holding risky assets (for instance, mortgages) with other names, like 'investment accounts' or similar. What is required for this approach to work is that people would stop treating credit balances on these accounts as money. Would they? Yes they would, if those balances were seen, and preferably proven, as risky. What if banks strived to make them more or less risk-free? If successful, the balances would most likely be considered money. That is to say: people decide what is money and what is not.
I might sound somewhat provocative. I'm trying to, at least. I just think it's about time to look critically at this suggestion which is nowadays quite widespread. The problem I see with it is that it has a vague starting point, which is that private banks have some kind of special 'ability to create money'. If we don't fully understand what money is or what gives banks this said ability, then we are treading on thin ice.
To be able to answer the above question, we need to understand what gives the private banks the so called 'ability to create money'. To understand that, we need to understand what money is. And that's where this gets complicated. But let's try, without going too much into details at this point.
To be considered a private bank a company usually needs a banking license issued by authorities. As far as I know, the license doesn't mention 'money creation', so we probably need to assume that the 'license to create money' is an implicit part of the banking license itself. Actually I cannot think of any piece of legislation that would touch explicitly on 'money creation'. Help, anyone? "Lombard Street" by Bagehot comes to my mind as the most authoritative source which establishes this 'license to create money', but even there it is not mentioned explicitly: in my mind it follows the role of the central bank as a lender of last resort.
I don't have time to revisit the Chicago Plan now, but if I remember correctly, they try to take away this ability by just calling deposit accounts in banks holding risky assets (for instance, mortgages) with other names, like 'investment accounts' or similar. What is required for this approach to work is that people would stop treating credit balances on these accounts as money. Would they? Yes they would, if those balances were seen, and preferably proven, as risky. What if banks strived to make them more or less risk-free? If successful, the balances would most likely be considered money. That is to say: people decide what is money and what is not.
I might sound somewhat provocative. I'm trying to, at least. I just think it's about time to look critically at this suggestion which is nowadays quite widespread. The problem I see with it is that it has a vague starting point, which is that private banks have some kind of special 'ability to create money'. If we don't fully understand what money is or what gives banks this said ability, then we are treading on thin ice.
