Dinero, crédito y banca, ponencia en la IX Universidad de Verano del Instituto Juan de Mariana.
… by extending credit, banks actually create 97% of the money supply. Given that a dollar in new bank loans increases the money supply by a dollar, banks are not financial intermediaries; they are money creators.
The growing recognition of banks’ true function will be a game-changer in areas like monetary policy and financial regulation, enabling officials to tackle effectively problems like recurring banking crises, unemployment, and underdevelopment. But it will take time to be fully accepted – not least because it challenges a fundamental tenet of traditional economics. Indeed, according to this new paradigm, savings, while useful, are not an essential prerequisite to investment and thus to economic growth. The United States, which experienced a prolonged period of growth without savings, is a case in point.
In general, economic growth depends on an increasing number of transactions and an increasing amount of money to finance them. Banks provide that finance by extending more credit, the impact of which depends on who receives it. Bank credit for GDP transactions affects nominal GDP, while bank credit for investment in the production of goods and services delivers non-inflationary growth.
The problem lies in bank credit-for-asset transactions, which often generate boom-bust cycles. By extending too much of this type of credit, banks pump up asset prices to unsustainable levels. When credit inevitably slows, prices collapse. As the late-coming speculators go bankrupt, the share of non-performing loans on banks’ balance sheets rises, forcing banks to reduce credit further. It takes only a 10% decline in banks’ asset values to bankrupt the banking system.
With an understanding of this process, policymakers can take steps to avert future banking crises and resolve post-crisis recessions more effectively. For starters, they should restrict bank credit for transactions that do not contribute to GDP.
Moreover, in the event of a crisis, central banks should purchase non-performing assets from banks at face value, completely restoring banks’ balance sheets, in exchange for an obligation to submit to credit monitoring. Given that no new money would be injected into the rest of the economy, this process – which the US Federal Reserve undertook in 2008 – would not generate inflation.
In order to stimulate productive bank credit – and boost the effectiveness of fiscal policy – governments should stop issuing bonds, and instead borrow from banks through loan contracts, often available at lower rates than bond yields. This would bolster bank credit and stimulate demand, employment, GDP, and tax revenues.
Finally, a network of small not-for-profit local banks should be established to provide universal banking services, and loans to small and medium-size firms, like the scheme that has underpinned Germany’s economic strength and resilience over the last 200 years. Beyond making the banking sector more robust, such an initiative would boost job creation per dollar in bank credit.
… The unfettered creation of money by large private banks has generated overwhelming instability, undermining the fundamental principle that money creation should serve the public good. This does not have to be the case. By implementing safeguards that ensure that credit serves productive and public purposes, policymakers can achieve debt-free, stable, and sustainable economic growth.