The Monetary System And How It Works
By Melvin J. Howard
Recent decades have brought with them a growing public awareness of the long-term costs of the short-term profiteering legacy of the industrial revolution. Global Warming, Ozone Depletion, and Acid Rain are now all household names. The current monetary system - the one inherited from this same industrial revolution and the one in which we always "discount the future" for short term gains- has played a large role in such destruction of the environment. Today many are asking the question - Can we design monetary and economic systems that encourage preservation of the environment and sustainable economies? Lets take a look at some of the fundamental flaws of contemporary mainstream economic theory that today has led to such environmental and financial destruction.
A hundred years ago the American citizenry had a much better understanding of their national monetary system and demanded active participation in it. Today, however, for reasons that can only be speculated on, the majority of world citizens have very little understanding of how the international monetary system works. Yet in this day and age our lives are largely determined by our relationship to, and we are highly dependent on, the international monetary system. When you live and work amongst something day in, day out, you take it for granted. Many people seem to have stopped questioning the foundations of the monetary system and go through life unaware that these foundations are on shaky ground.
Additionally those who work in finance have been "trained" to understand economics and finance in a certain way, often blinding them to new ways of looking at money. With near melt down of the global financial system many activists are now requesting reform and more economic fairness within the existing monetary system. However there is evidence to support the position that problems of economic inequity are rooted within the monetary system itself.
Let's take look of the unfairness in the banking system by exploring the undemocratic nature of it. Much of the unfairness to the non-bank public of this money creating process i.e. creating money on computer ledgers comes about because the general public has no input into decisions about money creation. It is only bank managers and the Open Markets Committee of the Federal Reserve Board that decide how much money gets created, and more importantly, FOR WHAT PURPOSES MONEY SHOULD BE CREATED. These decisions are all entirely closed to public input. Decisions on making new money will be based on whether a lender can repay and how much interest the lender can bring in, which is what creates bank profits. This means most money will be created to lend to people that already have lots of previously created money, and lots of advantages in life.
Disadvantaged people will often be denied access to the money creating process, except under exploitative circumstances, which are likely to see high interest rates and/or ultimate possession of their assets and resources by the bank. Alternatively the more disadvantaged will have to seek money from non-bank entities that have already accumulated lots of money, and this often also leads to exploitation.
What this also means is that money is not created for things most desired by society as a whole. In fact it is often created for exactly the things that society does not want at all. This includes projects that involve excessive destruction of natural resources like logging, building power plants, mining, and so forth, because the bank realizes that such projects are likely to bring back the money that will pay off the loans. It is also interesting to note that money is almost NEVER created for the purpose of providing public goods, such as education and healthcare, for such services will not pay the bank back.
Rather these services depend on recycled money through the tax system. Hence it is not surprising that we have reached a situation where monetary value and social value are inversely correlated. By this I mean that a good or service with a high monetary value in the private property markets generally has a low social value. Conversely high social value goods and services generally return a low monetary value. This is illustrated in the example where public goods providers such as teachers are some of the lowest paid workers, yet currency trading is perhaps the most lucrative profession there is, and has also become one of the most socially destructive.
It is reasonable to expect that taking social factors and public input into consideration at the point of money origination would largely reverse this situation. It is clear to the person standing on the outside that origination of money at commercial banks is an undemocratic process and so encourages the creation of money (or loans) for many undesirable activities. But often overlooked is the unchecked power of the creator of Base Money. The FOMC meetings have never been open to public input or scrutiny. While summaries of meetings are posted almost immediately, the full transcripts of FOMC are not even available until 5 YEARS after the event!
It's important to be concerned that the money origination process is not subject to democratic accountability. Many of these problems could be remedied if the public had more input into the decisions surrounding the origination of money. This requires an entirely different paradigm for thinking about money than we have today. It is a very complex problem and there are no simple answers. But at the very least it should be high on the list of topics for public debate. In addition, once you understand the process for creating money out of nothing, you begin to see that what banks and the Federal Reserve do is not so difficult after all. The hope is other alternative monetary systems can be explored and developed. That would not leave such personal, environmental and financial destruction in its wake.
