Why Banks Must Be Allowed to Create Money

Naked Capitalism has the article Why Banks Must Be Allowed to Create Money by Yves Smith.

Ann Pettifor has penned an effective rebuttal of the Chicago Plan, which has been taken up in the UK as “Positive Money”. Its advocates call for private banks to have their ability to create money taken from them, and put in the hands of a committee, independent of the state, that would decide on the level of money creation. Banks would be restricted to lending money that they already have on deposit.

Pettifor explains how the enthusiasm for the Chicago Plan rests on a fundamental misunderstanding of the nature of money and confusion about its relationship to credit. While readers may not like the notion that credit, and therefore money creation, is best left in the hands of banks, the problem is much like the one that Churchill articulated about democracy: it looks like the worst possible system until you consider the alternatives.

Pettifor points out that banks’ ability to create money out of thin air dates from 1694 in England. In addition to helping lower the cost of financing wars, an objective was to reduce interest rates to help facilitate commerce and end usury. If you read the works of early economists, one of their favorite topics was the need to end usurious lending, since businesses could not afford to borrow at those rates and survive, and so the money typically went to the most unproductive activities imaginable, namely, financing gambling by aristocrats.

I like the comment by lolcar.

People don’t fail to grasp the modern monetary system because it’s so complicated and opaque. They fail to grasp it because they are repeatedly told simplistic fairytales by competing propagandists. It’s the rare person who doesn’t have to be dragged kicked and screaming to a new understanding when told something that conflicts with everything they thought they knew, even if what they thought they knew was only passively absorbed listening to media talking heads bloviating about the economy.

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