A Living-Wealth Money System
Money System Design
The banking system can be structured to favor large Wall Street banks or small local community banks. The ownership can be for profit or nonprofit. Nonprofit banks can be governed by a self-perpetuating board, organized as cooperatives, or owned by a state or local government. Priorities of the individual banks will vary accordingly. Private banks generally favor private profits. Properly managed cooperative banks favor their member interests. Properly managed government-owned banks favor public purposes. There is nothing radical about a nonprofit bank. Cooperative banking has a long history in the United States and elsewhere.
The proper purpose of a money system is to connect underutilized resources with unmet needs. Real resources follow the money, so design the financial system to put the money where it will produce the greatest living-wealth benefit. At a most basic level, this means directing the flow of money to productive Main Street businesses rather than to Wall Street speculators.
Favor Small and Local
A New Rules Project study has confirmed exactly what we might expect. The smaller the bank, the greater the portion of its loans that goes to Main Street businesses. Since we want to favor a system that gives priority to funding productive Main Street business, the rules governing the banking system properly favor smaller banks over larger banks. Appropriate measures include limits on bank size, antitrust action to break up large banks, and regulations and tax penalties/incentives that favor independent community banks over Wall Street conglomerates.
Fractional Reserve Banking
The critics of fractional reserve banking that allows banks to create new money by issuing a loan is well founded when lending is for a non-productive (speculation or current consumption) purpose and the interest flows out of the community. Allowing a bank to create money is appropriate and beneficial when the proceeds flow into productive investment in response to local needs and the interest recycles in the community.
The proper response to the banking crisis would have been for the federal government to take over failed Wall Street banks, break them up, and restructure their local branches as individual community banks, savings and loans, or credit unions—with a preference for banks organized as nonprofits, cooperatives, or owned by state and municipal governments.
Under a real-wealth banking system, the federal government would continue to insure the deposits of member institutions as is now the case. But they would do so only for banks that accept strict reserve- and equity-ratio requirements and do not participate in or fund speculative trading of assets. The larger the bank, the more strict the requirements.
Federalize the Federal Reserve
In a living-wealth money system, the federal government, state governments, and local banks properly share the functions of money creation and allocation in response to local and national needs. Overall money-supply management is properly a federal function. Currently that responsibility resides with the Federal Reserve, which professes to be a federal agency and is so listed in the government’s organization chart. It operates, however, beyond meaningful public oversight, and generally acts in the best interests of Wall Street bankers—which rarely coincide with the public interest.
The Fed is properly brought under the general supervision of Congress and the Department of Treasury and its operations rendered publicly transparent and subject to audit. A restructured Fed would have the tools to adjust the flows of both private and public money as required to support productive investment, local employment and environmental balance while minimizing wage and asset inflation.
Keep the Gambling in Vegas
So what of the Wall Street casino? Let would-be gamblers go to Vegas, where the games are regulated.
The ideal way to deal with a malignant cancer is to cut off its blood supply. Similarly, the best way to deal with financial speculators is to cut off their money supply through appropriate taxes and regulatory actions that render outsized banks, financial speculation, predatory lending, financial fraud, and the shadow banking system of unregulated hedge funds and private equity funds illegal or unprofitable.