The second largest newspaper in Germany Die Sueddeutsche Zeitung recently published an article entitled: “The measures against the banking crisis: All power of the central bank”. It explains exactly how money is created by commercial banks when they make loans. It also presents the reform proposals of the German initiative Monetative which are fully in line with Positive Money’s proposals.
Here is a translated extract:
“Most of the money today comes into the world in the form of debt. Commercial banks create money out of nothing by making loans. Some see this as a cause of the crisis and demand radical reforms: Banks should only lend the money they possess. The idea is: 100% money [full reserve banking] – and now it receives the support from an unexpected source.
Central banks create only a small portion of the money by minting coins and printing notes. However, about 80 percent of the money comes into the world from commercial banks as debt. They create what is called commercial bank money: If a customer takes out a mortgage of 200,000 euros, for example to buy a house, the bank transfers the amount to his account – and it creates these 200,000 euros out of nothing.
“If the central banks controlled the creation of money, it would be possible to permanently stabilize the economic process” says the economist Hans-Christoph Binswanger. And that’s why he calls for the introduction of 100% money [full reserve banking]. In this system, the central bank would create digital money alongside coins and notes. Only the central banks would be responsible for creating and controlling the money supply. “In such a system the central bank could prevent inflation and deflation, as well as the speculative expansion of the money supply,” says Binswanger.
The article then continues about the recent IMF working paper supporting Full Reserve Banking.
Full article in German: Maßnahmen gegen die Bankenkrise, Alle Macht der Notenbank
Another large German newspaper Spiegel has published an article entitled “Two alternatives to the money glut”.
Here is a translated extract:
How much money ultimately ends up in the economy depends on the whim of the banks.
This system is extremely vulnerable. The banks tend to allocate too much credit in good times and too little in bad times. They reinforce both the upward trend and the downward trend of the economy. In boom times, they are fueling dangerous asset bubbles, in times of crisis the healthy companies get no more loans.
In addition, the financial institutions themselves can be easily destabilized: Because they do not hold their clients’ money completely, they are threatened by so-called bank runs, the rush of customers who want their money back. In an emergency, they have to be rescued by the government.
All this would be over if we switched to a 100% money system, assert the proponents. The concept which was developed by the American economists in the thirties, provides a 100-percent coverage of bank deposits. This means that the banks would be unable to create money out of nothing.They would be allowed to make loans only if they really had the appropriate amount available – either through customer deposits or through money they had borrowed from the central bank.
“It’s about regaining control over the creation of money,” says Joseph Huber, economic sociologist at the Martin-Luther-University Halle-Wittenberg.
Huber is the German head of an international movement of scientists who are campaigning for the introduction of the full reserve banking. In Germany they have united under the project Monetative, in Switzerland in the association Monetary Modernization.
The most prominent representative is the economist Hans Christoph Binswanger, the supervisor of the former chief of the Deutsche Bank Josef Ackermann.
European researchers have recently received unexpected support from the United States: In a recent working paper two economists from the International Monetary Fund (IMF) argue for the introduction of full reserve banking. Jaromir Benes and Michael Kumhof come to the conclusion that the boom & bust cycles of the economy would be significantly reduced, if the quantity of money would no longer be controlled by the cyclical bank lending. Also, the risk of “bank runs” would be eliminated. And also both private and public debt would be significantly reduced.
Full article in German: Zwei Alternativen zur Geldschwemme