Finance Fix. Plan C.


The finance world seems to be falling apart. Money does not exist to pay off all the debt that has been created. The US government debt, plus unfunded liabilities is said to be over 100 trillion dollars($13,000 per earthling or $300,000 per American). It has got so bad that people’s deposits can be taken to prop up banks (called a haircut) and interest rates on deposits go negative. The proposed solutions to this crisis seem to be only ones that have failed in the past. Many big banks are being fined for illegal activities or pay over some money to have the case called off. Bankers do not go to prison except in Iceland. Small banks in the US fail.

No doubt there is a plan B which repeat old solutions. There is a growing movement that sees the creation of money by banks is illegitimate. Fractional reserve money is created out of thin air. This means money is created without a corresponding material value creation available to be purchased with that extra money.

They say that the value of money is guaranteed by the State, so the State should own the only bank that can create money and eliminate the creation of counterfeit money. Our bank note put out by the Reserve Bank states that the note is “Legal tender for N dollars”. The currency is then backed by the natural wealth of the state. Many commentators have observed that the whole debt based money system is in danger and seems headed for the collapse of western currencies. In ordinary purchases, about a third of the price goes to pay off debt by someone in the chain of production. The taxes on business profits also provide the state with money where some goes just to pay interest on debt. The deregulation that occurred in the US removing the separation of investment and commercial banking is also blamed for routine criminal activities in this sector.

The state responsibility for maintaining the value of the national currency is the basis of a “Public Bank” Plan-C solution. Just as credit unions that use an old-bank to hold money for their contributors, this one Public Bank solution means that there will be only one bank that is owned by the state and is able, on behalf of everyone to hold genuine money. It will be a public utility. It is a depositors bank. It will guarantee to take care of real money. Deposits will not pay any interest. This has been proposed before as the “Chicago Plan.” in the 1930s following a depression. The Public Bank will hold all money but not do any lending.

Any old financial organisation will have to hold its money in this “Public One-bank”. This Public utility bank will be responsible for adjusting the amount of money in circulation to suit the population level and commercial activity. Only the Public Bank can hold legitimate money apart from banknotes and coins that circulate as usual. Old-banks in borrowing money from depositors who will have their money in the Public Bank, will have real depositor’s money transferred into the Old-bank’s accounts held in the Public Bank. The Old-bank can then lend to who-ever it chooses. The money Old-banks thus borrow (plus their shareholder’s money) in the Public Bank accounts will have to be transferred to borrowers accounts held in the Public Bank so that the borrower can spend the money.

The depositor who makes a fixed rate loan to an old-bank will not have the use of their money that they loan to an old-bank because it will not be in their account. It will be transferred to the Old-bank’s account. For a depositor to run an overdraft, it will have money transferred to the depositor’s account from an account of an Old-bank that has borrowed from another depositor. The account holder with an overdraft will not be able to spend more than the account holds (deposits plus overdraft transfers).

For these Old-banks to deal with foreign currencies, they will have to get it from the Public Bank, the currency they want through the actual money they have on account with the Public Bank. When they have foreign currency they want to convert into local money they will have to trade with the Public Bank. Thus all foreign trades will be done through the Public Bank which will have to manage the exchange rate. A Tobin tax will be easy to operate in this situation. It would also be possible to implement a “sales tax” on loans to the Old-banks from depositors who of course have their money in the Public Bank. International money laundering will be efficient to trace. The difference between buying and selling rates of foreign currencies gave Old-banks good profits. Now this difference will benefit the public’s One-bank on behalf of every citizen.

There are a number of advantages to this simple approach. There will be the elimination of the delay in clearing cheques. The transfer from one account to another account which will be in the Public Bank will be done overnight (subject to funds being present in the Public bank account). There will be no inter-bank settlement process and the necessity for an inter-bank interest payments.

The Old-banks will become specialist lending institutions with less need for main street outlets. The Public Bank can have outlets in a more efficient distribution without the inefficiencies of competing Old-bank locations. Plastic debit cards would still be needed by the public and would debit their accounts in the Public bank. Old-banks would be the vehicle for credit cards and they would have to have money in Public Bank accounts for the card holder to spend money from. This could have the effect of limiting public credit for consumption.

Illegal money manipulation and money laundering will be easier to trace. The Public Bank will be prevented from dealing in dodgy operations such as assisting money transfers to avoid tax.

Bank speculation will be obviated. There will be no bank runs for there will be no other place to hold the money. The level of private debt will be controlled by the amount depositors in the Public Bank can allow money to be lent to the Old-banks with control of how that money can be lent. Those Old-banks as financial institutions will not be able to contrive new money to lend. The State through this Public Bank could control how much additional money, if any, can be lent for consumption rather than capital goods. This will come after the Public Bank lends money to local bodies for infrastructure development at minimum rates of interest and not for any form of consumption. The One-bank will be the only way to create money and it will have to do this only on the basis of population growth. There will never be any need to bail out banks.

As this is proposed as an emergency plan (Plan C), some thought can be done to prepare the steps needed to make it possible. Before the NZ currency was decimalised in 1967, some banking was already computerised. This was done with all existing accounts re-numbered. The printing of cheque books with magnetic ink code lines was prepared (1966). As every citizen is already documented in the electoral roll with addresses, this could be used to speed up an initial computerisation of private accounts.

Accounts could be set up for every registered voter before any transfer of money from the Old-banks. The current banking code line contains a bank branch number of 6 digits while the account holder has a number of 7 digits although the first digit of this number is always a zero (haven’t you noticed this?) (Thus a trillion accounts possible). There is also a suffix of two digits to provide each customer with the capacity to split accounts for convenience. A different hierarchy of accounts can be organised within a smaller code line. The account code can include extra digits for security and avoidance of transposition errors. A single check digit is enough so that any digit transposition or single erroneous digit would not produce any other legitimate account. Posting to wrong accounts will be reduced.

To make a change of this nature will involve a very complex operation that will disrupt current operations. It should be done at the quietest time of banking activity. Presumably this will be in the Xmas-New Year period. Computer systems and programs will have to be prepared and thoroughly tested beforehand. A comprehensive system of running a backup protocol will have to be tested prior to any implementation. It will be similar to the original computerisation process.

Business accounts would have to be created in advance and given enough time to prepare. For them a transfer to the Public Bank might have to be staged.

The multiplicity of competing banks with street offices in major cities will by avoided by having Public Bank outlets distributed about in enough locations for convenience of the customers. In smaller locations the problem of Old-banks of whether to have an outlet to compete will be avoided and have just one Public Bank shop-front. In very small communities an office can be maintained with services of other government offices (such as postal services) made available as an additional service.
The total cost of running such a system will be less than the total costs of the many Old-banks because the power law can be expected to apply.

The political problem of introducing a radical change, no matter how valuable, is an implementation difficulty, especially because of official and political inertia and resistance to any change. However a crisis if large enough, may enable implementation.

If money and debt become impossible to stabilise, the answer could be to introduce the Public Bank domain with a new currency. This has been done successfully before so it must be remembered only to be undermined by old style banking and the effective free forgery of new money unbacked by real assets. With new accounts set up in advance, based on existing accounts in Old-banks and exploiting the requirements that all citizens need to be on the electoral role, a new currency through new accounts for all citizens will be made. Each account would be initiated with a quantity of the new currency to initiate its use. It would re-establish people on an egalitarian level in the manner of a historic Jubilee. The denominations of a new money should be made so that the smallest money transaction be one unit of the new currency. No decimals of the new currency will be needed in normal business.

No doubt there are questions about this system so some brainstorming will be needed to complete a complete and sound system of money. My thought is that all the issues can be throughly considered to create a full plan for this backup plan.

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