Global
developments in finance and geopolitics are prompting a rethinking of the
structure of banking and of the nature of money itself. Among other interesting
news items:
-- In Russia, vulnerability to Western
sanctions has led to proposals for a banking system that is not only
independent of the West but is based on different design principles.
-- In Iceland, the booms and busts
culminating in the banking crisis of 2008-09 have prompted lawmakers to
consider a plan to remove the power to create money from private banks.
-- In Ireland, Iceland and the UK, a recession-induced
shortage of local credit has prompted proposals for a system of public interest
banks on the model of the Sparkassen of Germany.
-- In Ecuador, the central bank is
responding to a shortage of US dollars (the official Ecuadorian currency) by
issuing digital dollars through accounts to which everyone has access,
effectively making it a bank of the people.
Developments in Russia
"A
significant debate is underway in Russia since imposition of western financial
sanctions on Russian banks and corporations in 2014. It's about a proposal
presented by the Moscow Patriarchate of the Orthodox Church. The proposal,
which resembles Islamic interest-free banking models in many respects, was
first unveiled in December 2014 at the depth of the Ruble crisis and oil price
free-fall. This August the idea received a huge boost from the endorsement of
the Russian Chamber of Commerce and Industry. It could change history for the
better depending on what is done and where it further leads."
Engdahl notes that the financial sanctions launched by the
US Treasury in 2014 have forced a critical rethinking among Russian
intellectuals and officials. Like China, Russia has developed an internal
Russian version of SWIFT Interbank payments; and it is now considering a plan
to restructure Russia's banking system. Engdahl writes:
"Much as
with Islamic banking models that ban usury, the Orthodox Financial System would
not allow interest charges on loans. Participants of the system share risks,
profits and losses. Speculative behavior is prohibited . . . . There would be a
new low-risk bank or credit organization that controls all transactions, and
investment funds or companies that source investors and mediate project
financing. . . . Priority would be ensuring financing of the real sector of the
economy . . . ."
On September 15, 2013, Sergei
Glazyev, one of Vladimir Putin's economic advisers,
presented
a a series of economic proposals to
the Presidential Russian Security Council that also suggest radical change is
on the horizon. The plan is aimed at reducing vulnerability to western
sanctions and achieving long-term growth and economic sovereignty.
Particularly interesting is a
proposal to provide targeted lending for businesses and industries by providing
them with low-interest loans at 1-4 percent, financed through the central bank
with quantitative easing (digital money creation). The proposal is to issue 20
trillion rubles for this purpose over a five year period. Using quantitative
easing for economic development mirrors
the
proposal of UK Labour Leader Jeremy Corbyn for "quantitative easing for
people."
William Engdahl concludes that Russia is in "a fascinating
process of rethinking every aspect of her national economic survival because of
the reality of the western attacks," one that "could produce a very healthy
transformation away from the deadly defects" of the current banking model.
Iceland's
Radical Money Plan
Iceland, too, is looking at a radical transformation of its
money system, after suffering the crushing boom/bust cycle of the private
banking model that bankrupted its largest banks in 2008. According to
a March 2015 article in the UK
Telegraph:
"Iceland's government is considering a revolutionary monetary
proposal - removing the power of commercial banks to create money and handing
it to the central bank. The proposal, which would be a turnaround in the
history of modern finance, was part of a report written by a lawmaker from the
ruling centrist Progress Party, Frosti Sigurjonsson, entitled 'A better
monetary system for Iceland'.
"'The findings will be an important contribution to the
upcoming discussion, here and elsewhere, on money creation and monetary
policy,' Prime Minister Sigmundur David Gunnlaugsson said. The report,
commissioned by the premier, is aimed at putting an end to a monetary system in
place through a slew of financial crises, including the latest one in 2008."
Under this 'Sovereign Money' proposal, the country's central bank would become
the only creator of money. Banks would continue to manage
accounts and payments and would serve as intermediaries between savers and
lenders. The proposal is a variant of the Chicago Plan promoted by
Kumhof and Benes of the IMF and the Positive Money group in the UK.
Public Banking
Initiatives in Iceland, Ireland and the UK
A
major concern with stripping private banks of the power to create money as deposits
when they make loans is that it will seriously reduce the availability of credit
in an already sluggish economy. One solution is to make the banks, or some of
them, public institutions. They would still be creating money when they made
loans, but it would be as agents of the government; and the profits would be
available for public use, on the model of the US Bank of North Dakota and the German
Sparkassen (public savings banks).
In Ireland, three political parties
--
Sinn Fein,
the Green Party and
Renua Ireland (a new party) -- are now supporting
initiatives for a network of local publicly-owned banks on the Sparkassen
model. In the UK,
the New Economy Foundation (NEF) is
proposing that the
failed Royal Bank of Scotland be transformed into a network of public interest
banks on that model. And in Iceland, public banking is part of the platform of
a new political party called the Dawn Party.
Ecuador's Dinero Electronico: A
National Digital Currency
So far, these banking overhauls are
just proposals; but in Ecuador, radical transformation of the banking system is
under way.
Ever since 2000, when Ecuador agreed
to use the US dollar as its official legal tender, it has had to ship boatloads
of paper dollars into the country just to conduct trade.
In
order to "seek efficiency in payment systems [and] to promote and
contribute to the economic stability of the country," the government of
President Rafael Correa has therefore established the world's first national
digitally-issued currency.
Unlike Bitcoin and similar private
crypto-currencies (which have been outlawed in the country), Ecuador's
dinero electronico is operated and
backed by the government. The Ecuadorian digital currency is
less
like Bitcoin than like M-Pesa, a private mobile phone-based money
transfer service started by Vodafone, which has
generated a
"mobile
money" revolution in Kenya.
Western central banks issue digital
currency for the use of commercial banks in their reserve accounts, but it is
not available to the public. In Ecuador, any qualifying person can have an
account at the central bank; and opening one is as easy as walking into a
participating financial institution and exchanging paper money for electronic
money stored on their smartphones.
Ecuador's banks and other financial
institutions were ordered in May 2015 to adopt the digital payment system
within the next year, making them "macro-agents" of the Electric Currency
System.
"Electronic money will stimulate the economy; it will be
possible to attract more Ecuadorian citizens, especially those who do not have
checking or savings accounts and credit cards alone. The electronic currency
will be backed by the assets of the Central Bank of Ecuador."
That means there is no fear of the
bank going bankrupt or of bank runs or bail-ins. Nor can the digital currency
be devalued by speculative short selling. The government has declared that
these are digital US dollars trading at 1 to 1 -- take it or leave it -- and the
people are taking it. According to an October 2015 article titled "
Ecuador's Digital Currency Is
Winning Hearts!",
the currency is actually taking the country by storm; and other countries in
Latin America and Africa are not far behind.
"We did it from the
government because we wanted it to be a democratic product. In any other
countries, [digital currency] is provided by private companies, and it is
expensive. There are barriers to entry, like [expensive fees] if you transfer
money from one cellphone operator to another. What we have here is something
everyone can use regardless of the operator they are using."
Banking
Moves into the 21st Century
The
catastrophic failures of the Western banking system mandate a new vision. These
transformations, current and proposed, are constructive steps toward
streamlining the banking system, eliminating the risks that have devastated
individuals and governments, democratizing money, and promoting sustainable and
prosperous economies.
They also raise some provocative questions:
Would issuing
"quantitative easing" to the tune of 20 trillion rubles for Russian development
and trade trigger hyperinflation?
Could merging the
Iceland version of the Chicago Plan with a public banking initiative return the
power to create money to the public without collapsing credit?
How does the
Ecuadorian national digital currency mesh with the
"war
on cash" underway in Europe?
These and related questions will be explored in
later articles. Stay tuned.
Two top Santa Clara Waste Water Co. officials were arrested Friday on
new criminal charges related to hazardous materials district attorney
investigators say were still being stored at the company's facility a
year after a toxic explosion and chemical spill.
