9 July 2015

A solution to the economic problems facing Greece

All loans made to the Greek Government or to its central bank by the IMF or the European Central Bank, or other banks, has been made with money created out of thin air – it is not money from depositors.

Greek citizens are under no obligation to repay them, nor any interest on them, and Greece should tell its creditors that all repayments will be put on hold until the Greek economy has recovered from the austerity demands imposed on it by those very same creditors – austerity demands that have crippled the Greek economy and made the debts un-repayable.

"The process by which banks create money is so simple that the mind is repelled."

John Kenneth Galbraith - (1975) Money: Whence It Came, Where It Went, Ch. III, p. 18

The Bank of England explains in its Quarterly Review Q1 2014:

“One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them.”

“…..rather than banks lending out deposits that are placed with them, the act of lending creates deposits. Commercial banks create money.”

“Of the two types of broad money, bank deposits make up the vast majority - 97% of the amount currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.”

Professor Carroll Quigley, in his book “Tragedy and Hope – A History of the World in our Time” backs this up -

“Loans were made by creating a deposit for the borrower, who in turn would draw checks upon it rather than withdraw it in money. Such created deposits also were a creation of money out of nothing.”

The International Monetary Fund, in a report released in August 2012 titled “The Chicago Plan Revisited” has this to say about it –

This paper revisits the Chicago Plan, a proposal for fundamental monetary reform that was put forward by many leading U.S. economists at the height of the Great Depression.

Fisher (1936), in his brilliant summary of the Chicago Plan, claimed that it had four major advantages, ranging from greater macroeconomic stability to much lower debt levels throughout the economy.

The critical feature of this model is that currently the economy’s money supply is created by banks, through debt, rather than being created debt-free by the government.

As the New Zealand Reserve Bank explains, 97% of NZ’s money supply is created by commercial banks:

Banks do create money and credit, adding to broad measures of the money supply. Notes and coins make up only a small proportion of broader measures of money and credit - the majority being created by banks.

Around three percent of M3 (currency and primary liquidity), is created by the Reserve Bank with the remainder being created by commercial banks.

In March this year the government of Iceland issued a comprehensive 134 page report, commissioned by the Prime Minister, “Monetary Reform, a better monetary system for Iceland” proposing the implementation of a sovereign money system for Iceland.

Let me quote from the report:-

“In the current system the bulk of new money is created when banks make loans. This means that in order to create new money for a growing economy, households and businesses must go deeper in debt.

The money supply is currently issued only when households or businesses take on loans from the banks, placing an unnecessary burden of interest payment on society.”

“…the CBI [Central Bank of Iceland] can create the money that is needed by the economy. When the CBI creates sovereign money the government can spend or invest it into circulation.”

“By using a state created money supply, instead of effectively ‘renting’ the money supply from private banks, the overall level of debt in the economy will be reduced.”

Greece must take full ownership and control of its central bank, or establish a new one, so that, just like the Federal Reserve in America, the Bank of England or the Reserve Bank of New Zealand, it has the ability to create new money, to replace the Euros that are currently being rationed, and supply the Greek Government with the funds it needs to run the country, debt free and interest free.

This process may take a little time so in the mean time, some important interim steps the Greek government should take are:-

1. To alleviate the immediate cash shortage in the household and business sectors, declare, in this national emergency, that all mortgage payments and business loan payments to domestic or international banks be suspended for the duration of the crisis. The payments that are suspended will be either delayed with no additional interest or will be written off by legislation by the Greek government depending on the duration of the money sanctions against Greece.
2.
2. Immediately have printed in quantity and in denominations as it sees fit, a money-like coupon (perhaps called "Apollos" after the well known figure of ancient Greek beliefs). The Apollo will have the status of "legal tender" and will act as money, each unit having the value of one Euro.

The government will provide to every citizen on its tax rolls at regular intervals, an amount of the Apollo as if they had received a dividend, which people can spend at stores or in their transactions with each other.

This negotiable, spendable, transferable substitute for money will circulate freely and all Greeks will accept it because it allows them to buy things and to pay taxes. Dealers in foreign goods will likely accept them, because they can be used to buy Greek goods for which foreigners will still have demand.

The government will, for the duration of this emergency (and perhaps permanently), stop taxing its people in Euros and will instead accept the new coupon in payment of taxes. Legislation will require all banks operating in Greece to accept the new Apollos as legal tender.

The Apollos will eventually be redeemed and replaced with Greek money, printed by the new Greek Central Bank.

3. Stop all Euros being exported or transferred out of the country, except small amounts in the possession of travellers.

4. Replace over time any Euros taken from the accounts of Greek citizens as a result of any “bail in” action, in amounts of equal value of the new Greek currency.

Greece should then adopt a Sovereign Money System tailored to its needs along the lines of that proposed in the document ‘Monetary Reform - a better monetary system for Iceland’ which clearly and cogently presents the practical case for monetary reform.

This report, considered alongside an IMF report from 2012 known as “The Chicago Plan Revisited” would enable Greece to establish an independent economic position, and rebuild its economy without financial dominance from outside the country.

Negotiations on foreign debts could continue without the pressure of a collapsing economy, and the economic recovery generated by the implementation of the plans, would put Greece in a much better position to repay such of the overseas loans as it chose to, without going further into debt.

ends

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