PRINCIPLE with PRUDENCE

by
Paul Hellyer

As a life-long monetary reformer I have been seeking a solution that would clip the wings of the elite robber barons who have been ripping off ordinary citizens for centuries, produce a just, workable and stable financial regime worldwide and, most important, transfer control of the most powerful tool in the economic arsenal from private hands to those of the elected representatives of the people. This is not an easy task but unquestionably the most urgent reform facing humankind today.

There are a number of monumental obstacles to be overcome. The first, and most formidable, is the near universal ignorance about the nature of money, what it is, and who prints (manufactures) it. Only about one percent of the population is aware that almost all money is virtual, nothing more than a computer entry.

About the same proportion is aware that nearly all money is created by privately-owned banks in a system that is nothing more than a giant Ponzi scheme that has allowed those banks to lend the same money to twenty different people or organizations – including the governments that own the patents to create money – and collect interest from each one. This would clearly be a criminal offence if it had not been for the collaboration and collusion of the banking elites with kings, queens, emperors, presidents, prime ministers and legislators over a period of centuries.

It is little wonder, then, that the private banks’ “licence to steal” has become so much a part of our everyday life that it is seldom questioned. When the G20 world leaders met in Toronto in June 2010 they spent much of their time discussing how to prop up the unstable debt-based system that has produced twenty-five recessions and depressions in the U.S. since 1890, and totally devastated millions of lives in the process. There was no discussion (none reported) of the urgent need for a fundamental change in the system.

So the balance of power worldwide is very much on the side of the bankers who, apparently, have the politicians – thanks to the advice of their principal economic advisers – in their pockets. The politicians, in turn, have the armed forces and police under their control so even a peaceful protest faces monumental odds.

Yet what monetary reformers are asking is only that sovereign governments, that have inherited the right to create money, exercise that right on behalf of all the people who are equal shareholders of that right, instead of borrowing it from licensees who don’t even pay a royalty for using someone else’s patent. There is absolutely no excuse for sovereign governments to balance their books by borrowing money from private bankers who create it out of thin air – a computer entry! Sovereign governments should have no sovereign debt in their own currency. None! They have been taken to the cleaners by the rich, elite bankers who constantly outwit them.
Assuming that one day soon politicians should see the “light” and start doing what is best for their electors, instead of digging themselves deeper and deeper into the quagmire of partisan politics, there is still the problem of what, specifically, to do. In principle, they have the right to exercise one hundred percent of the money creation function and leave the private banks with none. But would that be prudent? Would some kind of compromise that incorporated checks and balances result in both a better system and a much smoother transition?

Monetary reformers are their own worst enemies when they consider that question. Each of us has our own preferred solution. When I broached the subject with one of America’s most knowledgeable reformers he said something like, “This time we’ve got them (presumably meaning that the banking cartel was vulnerable following the 2007-2008 catastrophe that it was directly responsible for) so we’re going to go for the jugular.” (Meaning 100% government-created money.)

I have never been able to convince myself that this is the preferred solution. It would mean that private banks would have to have one dollar in their vaults, or on deposit with the central bank, for every dollar they lent out. This was the solution Milton Friedman favoured all his life but that he finally abandoned because he concluded it was politically impossible.

I agree that it is politically impossible, but I am far from convinced that it would be the best solution even if it were possible. To be blunt, I don’t trust politicians with that much power. It is a kind of absolute power that would inevitably lead to corruption. We have already seen the kind of total chaos that the bankers have created by abusing their power. They are directly responsible for both the Great Depression and the current Great Recession. We would not want to see a system where very different but similarly corrupting practices might evolve.

I speak with the advantage of considerable personal experience. In the course of my political career I had some of Canada’s largest public companies report to parliament through me. These included Canadian National Railways, Air Canada, and Central (now Canada) Mortgage and Housing Corporation. While it was publicly owned the railway was sometimes asked to postpone the abandonment of uneconomic lines until after an election or partial election. Air Canada was pressured by senior politicians to establish and maintain uneconomic routes for political purposes. Canada Mortgage and Housing Corporation, which is still in the public domain, was required to take over tens of billions of dollars worth of mortgages from Canada’s chartered banks in order to restore their liquidity during the meltdown of 2007-08. Who knows if the public got full value for its money? So I am convinced that having governments responsible for the day-to-day operations of the entire financial system could be a case of jumping out of the frying pan into the fire.

My reservation applies both to the principle of 100% reserves and to the potentially negative consequences of its implementation. A well-known Canadian monetary reformer recently circulated an e-mail to about a dozen of his friends who support the 100% reserve system and asked them how fast they would implement their proposal if given the choice – in effect, how fast they would print enough money to buy all of the federal government’s outstanding debt. The response ranged from “immediately” to “12 months.”

To my mind they have not adequately considered the total chaos that would ensue. Insurance companies, retirement funds and some wealthy individuals would be awash with cash but with extremely limited opportunities for investing it. Their actuarial tables would be in shatters. Worse, if banks were suddenly required to convert from near zero cash reserves to 100% they would have to call almost all of their loans and bring on the worst depression the world has ever seen. That is a result that can and must be avoided.

The criteria for any worthwhile reform must be a fast, smooth transition to full employment and the transfer of the ultimate power over interest rates and the rates of growth of the money supply from unelected, unaccountable bankers to the elected representatives of the people who, in theory at least, should operate the system in the interests of their electors.

This is not just an academic issue. It means that the whole notion of “capital adequacy” has to be abandoned. There is no such thing as “capital adequacy” because it is just a benchmark, someone’s best guess as to a line that might reduce the number of bank insolvencies under “normal” circumstances.

“Capital adequacy” is the open door through which the banking fraternity galloped following Milton Friedman’s curious flip-flop from being a proponent of 100% cash reserves to zero percent for no better reason than “to get the government out of the business of having anything to do with the lending and investing activities of private financial entities. Either 100 percent reserves, i.e., a narrow banking system, which is what I would prefer, or zero percent reserves so government has no supervisory power over banks has that result,” as he told me in a letter dated October 15, 1998.

One has to question the judgment of an economist who went from one extreme to the other without considering the merit of 25% reserves, or 50%, or 75%. One also has to question the judgment of anyone who believes that the financial system can operate independently of government. That point was proven beyond question in 2007-2008 when governments had to intervene with massive amounts of taxpayers’ money to prevent the whole international deck of cards from collapsing. So governments must, if they have any independence at all, renounce the capital adequacy expedient and re-introduce the requirement for cash reserves as the regulator of monetary aggregates.

For many years I opted for a 50% cash reserve system. It was just an arbitrary figure – one that seemed reasonable. Dr. Douglas Peters, former chief economist of the Toronto-Dominion Bank, as it was then, who has been a good friend and adviser over the years, complained that at that rate the banks would have to call all of their loans.

I did an exercise based on his own former bank’s balance sheet for the previous year. The bank would not have had to call any loans, but would have been required to sell all of its other assets including stocks, bonds, real estate, etc., many of which they really had no business buying and owning in the first place. A factor that I did not consider at the time was that the bank would be left with no margin for expanding its loan portfolio even if that should be in the public interest.

In my latest book A Miracle in Waiting: Economics that Make Sense, I changed the ratio from 50% cash reserves to 34%. That would mean, in effect, that for every additional dollar in cash (legal tender or government-created money) deposited at the bank, it would be able to expand its portfolio of interest bearing assets by two dollars. That would still leave the banks with sufficient capacity to finance new commercial and industrial development, as well as increased consumption. It would deprive them, however, of their ability to engage in all of the risky gambling games that have developed in the last few decades. No money for hedge funds, no money for exotic derivatives, no money for margin purchases of stocks and bonds, etc. It would be back to basics.

The seemingly miraculous flipside is that the 34% annual creation of new money by governments would allow them to balance budgets at all levels, federal, state and municipal with reasonable tax levels – certainly lower than they are at present. This ability to get by with lower taxes would be augmented by the fact that very significant amounts of existing debt would be monetized over the period of time banks were allowed to achieve their 34% cash reserve levels. With an approximate reduction of sovereign debts by one-third worldwide, the interest components of taxes should be dramatically reduced. It would be possible to achieve further incremental reductions in outstanding debt if governments budgeted for a small – perhaps 1% o 2% a year – reduction in debt as part of their new fiscal planning regime.

Right now, however, the world economy needs a massive infusion of government-created money. It is difficult to quantify exactly how much is needed because there is no precedent for it. But something of the order of ten trillion worldwide, to start, and more if needed should achieve morally acceptable levels of employment in each country and the European Union. Then pump priming should be reduced as appropriate until normal balanced budgets were adequate.

So what I am proposing is a staged transition involving a massive quick start for the world economy, the establishment of cash reserve requirements that would sterilize the huge amounts of money created for this purpose, a subsequent division of the money creation function that would see governments creating 34% of all new money put into circulation each year, and the reduction of bank lending ratios from their current larcenous levels to a modest two dollars in interest bearing assets for every one dollar – reserves held in its vaults or on deposit with the central bank.

The new system would be one of checks and balances where governments would be key players in the rate of expansion of their economies, and business cycles, as we have known them, would become a thing of the past. The banking industry would survive as profitable businesses that would be good investments for anyone, including individuals and retirement funds. Most of the people working in the industry, with the exception of the rogue traders and others who have caused so much trouble, would preserve their jobs.

The plan would in no way preclude the establishment of state banks or other competition. In fact the big monster banks should be broken up to the extent that the failure of one would not and could not disrupt the entire financial system. Entry into the banking system should be encouraged and small banks should be able to survive much more easily because the rules would be the same for both the small and the large.

Finally, the urgency for action cannot be over-emphasized. Millions of people who are unemployed have lost confidence in their leaders and are losing hope for the future. They represent a very volatile element in world society. Their needs have to be met and their futures assured in order to create stability as a by-product of justice.

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