What Type of Monetary Framework Should the Greeks Adopt If They Were to Part Ways with the Eurozone?
What Type of Monetary Framework Should the Greeks Adopt If They Were to Part Ways with the Eurozone?
By Positive Money / positivemoney.org

The “Grexit” might be just around the corner. Wall Street bets on 75% chance of Greek default. Greek prime minister escalated his defiance towards the country’s official creditors, with a pointed attack on the International Monetary Fund, saying the IMF bears “criminal responsibility”. Greeks are withdrawing cash from banks in fear of Grexit. And the Greece’s central bank has warned for the first time that the country could be on a “painful course” towards default and exit from the eurozone.

If the Greeks would really part ways with the Eurozone, what type of monetary framework should they adopt?

Here is what we would suggest to the Greek people, should a Grexit come to fruition:

The Problems of Current Monetary Systems

Firstly, if the Greeks were to establish their own currency there would be little sense in basing it on a monetary framework that has failed time and time again in the UK, Europe, Asia, Latin America, and North America. The countries that have permitted the banking sector to create money out of nothing have been subjected to pro-cyclical booms and busts, making millions unemployed and wiping out years of growth. For the following reasons, there is virtually no point in replicating a system that history has shown does not work:

A. The amount of money in the economy is determined by the confidence of private banks

Banks are private sector entities that are naturally profit-maximizers. Yet, they are special in that the vast majority of their profits come from creating money by issuing loans. In periods of relative economic stability, they therefore have an incentive to create vast sums of money, normally for pre-existing assets in the financial and property sectors that do not directly contribute to GDP. The prices of these assets then quickly increase. However, as the majority of lending is used to buy pre-existing assets that do not enhance GDP growth, the majority of incomes do not increase in line with the proportion of debt in the economy. The growth in private sector debt vastly outpaces growth in incomes.  The rate of lending and new money creation eventually slows down. Prices start to decrease, but the value of the loans stay the same (i.e. the value of assets decline while the value of liabilities go unchanged) and a crisis unfolds.

This however, is just the tip of the iceberg. Just as banks can create money through lending, money is destroyed when loans are repaid. Thus, when the rate and value of loans being repaid exceeds the rate and value of new loans being extended, the stock of money decreases. When a crisis begins to unfold, banks that have lent too much to people or businesses that can’t repay become concerned about the solvency of their balance sheet. Consequently, they limit their lending to households and businesses, spending is diminished, and prices go down even further, leading to a recession.

Indeed Greece should be all too familiar with this last process, as the Greeks have been forced to deleverage and pay down their debts by the Troika, and run a primary budget surplus 4.5% of GDP per year. According to Steve Keen this effectively means that roughly 4-5% of the Greek money supply (or 4-5% spending power) is being withdrawn from the economy every year.

B. The economy can only be stimulated through encouraging further indebtedness

All of the above implies that the only effective way to get the economy going again and the only way to get businesses and consumers to spend more is by encouraging more borrowing. But if excessive levels of debt (specifically private sector borrowing) were the source of the crisis, then is this not the recipe for the next crisis?

C. The revenue generated through money creation (seignorage) is acquired by the banking sector instead of the general public

Central Banks sell the money they issue, in the form of notes and coins, at face value. Yet creating this money only costs a fraction of the face value of the notes and coins. The Central Bank therefore makes a significant profit when creating cash (called seignorage), and then passes this profit on to the treasury.

However, as banks are able to create money in the form of electronic bank deposits, they also acquire a certain amount of seigniorage. The difference is that private banks issue between 95-97% of all money, while only 3-5% of money is created by central banks. Therefore, the vast majority of seignorage profits are captured by private banks and not the general public.

D. Banks are too big to fail

Under the current monetary system, banks are too big to fail. If we did let them fail, the entire payments system would collapse. This is because banks perform three functions, which are currently inherently interconnected: 1) They provide a payments system, allowing money to be transferred as well as received, 2) They offer savings and investment schemes which allow savers and investors to grow their money over the long-term, and 3) They provide loans and mortgages.

The deposits that banks create – i.e. the electronic money that makes up the majority of the total stock of money – are essentially the liabilities (promises to pay) of private banks. Because we use these liabilities (or promises to pay) as our primary form of money, an irresponsible bank that has issued too many loans of poor quality must be rescued just so that the entire system of payments doesn’t collapse along with it.

The Solution: A Sovereign Money System

A.

In a Sovereign Money system, the power to create money would be removed from the banking sector and transferred to a public body, such as the Bank of Greece. The Bank of Greece would be solely responsible for creating new money, which would then be transferred to the government, who could use it for public spending, tax cuts, or direct transfers to citizens. Current account customers would hold the electronic money issued by the Bank of Greece, rather than holding the liabilities of the private banks.

Banks would still have the important function of matching savers with borrowers, and would act as intermediaries. The difference being that a bank could only lend out money that a saver made available through an investment account.

Such changes would allow the Bank of Greece to make sure that money creation would correspond to growth in the real economy. Money creation would therefore not depend on the willingness of the banking sector to lend. If inflation rose above the targeted level, then the Bank of Greece would slow the rate of money creation. Conversely, if there was deflation, then the Bank of Greece could speed up the rate of money creation. The newly created money would be transferred to the government to spend directly into the veins of the real economy. The  Bank of Greece would be able to influence the wider economy much more effectively and directly than under the current system.

B.

Instead of having money created through the process of lending, Sovereign Money would be created free of debt. When new money would be created, the Greek Treasury would issue a certain amount of ‘perpetual zero-coupon bonds’. These would be interest free and would never need to be repaid. The Bank of Greece would then purchase these bonds by crediting the Treasury account with new Drachmas.

So that the Bank of Greece’s balance sheet would balance out, the newly created money would appear as a liability of the Bank of Greece and an asset of the Greek treasury. The bonds would be an asset to the Bank of Greece and a liability of the Greek treasury.

C.

Giving the Bank of Greece a monopoly on issuing all new currency would mean that new money could be created even while businesses and households are paying down their existing loans. No one would have to take on more debt for there to be an increase in spending in the economy. The supplementary spending by the Greek government would counter any reduction in spending caused by the private sector trying to pay down its debts. It would permit debt reduction without increasing risks of a future crisis.

D.

Allowing the Bank of Greece to have a monopoly on all new money creation, would mean that all the profits from creating electronic money and bank notes would go to the Greek government. With 95-97% of current money created by banks, transferring this prerogative to the Bank of Greece would increase public revenues massively, allowing for more public spending or the repayment of public debt.

E.

A separation of investment accounts and current accounts would mean that the payments system would not be jeopardized when a bank fails. Instead of having current accounts with money that is composed of uncertain promises to pay issued by banks, such accounts would hold risk-free and debt-free money issued by the state. If the customer’s bank were to fail, the money in the current account would still be safe and the customer could still access it and spend it. Customers that made their money available for lending in an investment account, would need to wait while the bank was liquidated in order to get their investment back. Payments could only be made via a current account and not an investment account.  Accordingly, it would not be necessary to bail out an irresponsible bank in order to protect the payment system.

Ultimately, Greece could have a much brighter future ahead, with money creation under democratic control. The Bank of Greece would have more direct and better means of influencing the economy when necessary, not to mention a sounder and less complex banking system.


Creating a Sovereign Monetary System

Download Here (Free, PDF, 56 pages)

0.0 ·
0
What's Next
Trending Today
10 Provocative Quotes from Ivan Illich's "Deschooling Society"
Daniel Lattier · 20,138 views today · Ivan Illich’s groundbreaking book Deschooling Society (1971) offers a radical critique of the institutionalization of education within modern societies. Illich believed that we...
11 Traits of People With High Emotional Intelligence
Raven Fon · 5,716 views today · Lately, new ways to describe human interactions, social behaviours, and many facets of psychology have emerged on the social network scene. One of those descriptions is “high...
This Text Message Exchange Between a Mother and Daughter is Pure Gold
Belinda Hankins · 5,574 views today · When Belinda Hankins got a text message from her 13-year-old daughter, who was shopping for period products, it started an exchange that will resonate with women everywhere. Enjoy.
Welcome to Marinaleda: The Spanish Anti-Capitalist Town With Equal Wage Full Employment and $19 Housing
Jade Small · 5,304 views today · With virtually no police, crime or unemployment, meet the Spanish town described as a democratic, socialist utopia. Unemployment is non-existent in Marinaleda, an Andalusian...
Superblocks: How Barcelona Is Taking City Streets Back From Cars
5 min · 5,058 views today · Modern cities are designed for cars. But the city of Barcelona is testing out an urban design trick that can give cities back to pedestrians.
When You Kill Ten Million Africans You Aren't Called 'Hitler'
Liam O'Ceallaigh · 4,602 views today · Take a look at this picture. Do you know who it is? Most people haven’t heard of him. But you should have. When you see his face or hear his name you should get as sick in...
Who Are You? Watching This Breathtaking Video Could Be the Moment You Change Your Life
2 min · 3,148 views today · "Normal is getting dressed in clothes that you buy for work, driving through traffic in a car that you are still paying for, in order to get to a job that you need so you can...
Throw (2016)
10 min · 3,145 views today · The first installment of Invisible Thread, an ongoing ELM passion project series, Throw tells the story of an outsider from East Baltimore, an area challenged by gang violence...
What Makes Call-Out Culture So Toxic
Asam Ahmad · 2,888 views today · Call-out culture refers to the tendency among progressives, radicals, activists, and community organizers to publicly name instances or patterns of oppressive behaviour and...
Real Change in Democracy Comes Not in the Voting Booth but Activism at the Grass-Roots
Ilze Peterson · 2,356 views today · Many years ago, the late Judy Guay, a low-income woman from Bangor, founded the Maine Association of Interdependent Neighborhoods in order to advocate for the neediest in our...
Fighting Trump - Residents Opposing Donald Trump's Scottish Golf Resort
14 min · 2,203 views today · Documentary on the residents protesting against Donald Trump's golf development on the Menie Estate in Aberdeenshire, Scotland. Directed and Presented by James Trosh.
Today I Rise: This Beautiful Short Film Is Like a Love Poem For Your Heart and Soul
4 min · 1,941 views today · "The world is missing what I am ready to give: My Wisdom, My Sweetness, My Love and My hunger for Peace." "Where are you? Where are you, little girl with broken wings but full...
Doctors Response to Daily Mail Bigotry is Beautiful
Neil Tiwari · 1,805 views today · A poetic open letter to the Daily Mail newspaper from Dr. Neil Tiwari, in response to a bigoted attack on his colleagues, is going viral and it's beautiful.
93 Documentaries to Expand Your Consciousness
Films For Action · 1,675 views today · There are over 800 documentaries now cataloged in our library of social change films. That's probably way too many for any mortal to ever watch in a lifetime, let alone a few...
How a Trump Presidency Would Unleash a Torrent of Racist Violence-And Devastate the Left
Arun Gupta · 1,488 views today · The Left should take the Trump threat very seriously.
Forest Man
16 min · 1,459 views today · Since the 1970's Majuli islander Jadav Payeng has been planting trees in order to save his island. To date he has single handedly planted a forest larger than Central Park NYC...
Maya Angelou's 3-Word Secret to Living Your Best Life
3 min · 1,343 views today · Dr. Maya Angelou says that in order to be the best human being you can be, you must follow one simple directive: "Just do right." Watch as Dr. Angelou reveals how you can never...
How to Criticize with Kindness: Philosopher Daniel Dennett on the Four Steps to Arguing Intelligently
Maria Popova · 1,187 views today · “Just how charitable are you supposed to be when criticizing the views of an opponent?”
What You Might Notice If You Forgot Your Phone For a Day
2 min · 1,181 views today · There is a moment happening right in front of you, right this second, and you just might be missing it
Ikigai - Finding Your Reason for Being
Chip Richards · 1,144 views today · What Gets You Out of Bed in the Morning? When asked what is the single most powerful contributing factor to one’s health and vitality, integrative medical...
Load More
Like us on Facebook?
What Type of Monetary Framework Should the Greeks Adopt If They Were to Part Ways with the Eurozone?