Over the course of this series, we present various proposals for monetary reform.
These proposals seek to address the systemic risk posed by the private banking system and establish Canada’s path towards economic recovery.
This series also examines the wise intellectuals throughout the centuries that have all consistently been opposed to a private banking system because of its monopolistic tendencies which are undoubtedly created due to fractional reserve lending.
Thus the types of monetary reform that are analyzed are proposals that academics and various intellectuals have advocated for in order to address this moral dilemma.
This article outlines a summary of each of these reform proposals and also offers the most plausible and workable solution for Canada to implement on its path towards monetary reform and economic recovery.
The list of proposals we have examined have been the following;
- Fiat Debt-Free Money Reformers (FDF)
- Modern Money Theorists (MMT)
- Post Keynesian Reformers (PKR)
- Islamic Banking Advocates (IBA)
- Social Credit Reformers (SCR)
- Land Reformers (LR)
- Hard Money Reformers (HM)
- Competing Currency Reformers (CCR)
Each of these proposals is outlined below.
Summaries of Proposals
1. Fiat Debt-Free Proposal
- Abolishment of the fractional reserve lending system
- Nationalization of private banks
- Restore government control over money creation
- Use government created fiat money to fund social welfare programs and infrastructure projects
2. Modern Money Theory Proposal
- Implementation of a Job Guarantee Program to achieve Full employment
3. Post Keynesian Proposals
- Creation of a national depository that holds all transaction deposits
- Transition to a full-reserve system banking system
- Restrictions on commercial banks lending only time and savings deposits
b) Steve Keen
- Nationalization of the banking sector
- Debt Jubilee write off all private sector debt
- Introduction of jubilee shares to discourage speculation on share prices
- Implementing the Property Income Limited Leverage (PILL) program to limit the amount banks can lend for mortgage financing
4. Islamic Banking Proposals
- Shift towards full-reserve banking system
- Abolishment of interest
- Create a code of investment
5. Social Credit Proposals
- Establish an independent institution that would act as a National Credit authority
- Enable the National Credit authority to print credit money
- Distribute credits to the public via a national dividend
6. Land Reform Proposals
- Government nationalization of all land
- Government imposition of a land value tax on land-owners to prevent land speculation
- Redistribution of land tax revenue for funding social welfare/infrastructure programs and a national dividend to provide people with basic incomes
7. Hard Money Proposals
- Immediate repeal of existing legal tender laws
- Reduction of government intervention in the economy
- Abolishment of the fractional reserve system and transition towards Free Banking and/or Full reserve banking
- Introducing competing currencies and/or gold standard
8. Competing Currency Proposals
- Immediate repeal of existing legal tender laws
- Decentralizing the role of money creation into the hands of ordinary citizens
- Elimination of a central bank
A majority proposals mentioned thus far center on two central themes,
Two central themes of the proposals mentioned above include;
- Nationalizing the banking sector
- Abolishing the fractional reserve system
We analyze the benefits of these two proposals in greater detail below.
Nationalizing the Banking Sector
Monetary reformers across many different schools of thought agree on the call towards the nationalization of the banking sector.
- Fiat-Debt Free Reformers
- Modern Money Theory Reformers
- Post Keynesian Reformers
- Social Credit Reformers
In Canada, nationalizing the big five banks could be considered a viable path towards economic recovery.
Nationalization proved to be a success in Iceland’s case, when it nationalized its three major banks; Kaupthing, Landsbanki and Glitnir as a result of the 2008 financial crisis.
Journalist Tim Cavanaugh notes that the purported assets of the Icelandic banks were 11 times larger than Iceland’s GDP. Thus the collapse of the Icelandic banking system was inevitable.
Iceland experienced a gut-wrenching recession in 2008; however it began to experience growth by 2011.
Iceland’s recovery can be attributed to;
- Allowing its three major banks default
- Nationalizing its three major banks
- Prosecuting corrupt officials
However, nationalizing its banks has not come cheap. In order to nationalize the Glitnir bank, Iceland paid around $860 million U.S.
In order to recover from the cost of nationalizing their banks, Iceland devalued its currency relative to the currencies of its trading partners. As a result their exports surged, and their trade deficit of 28% in 2008 is projected to turn into a surplus of 3% in 2012.
Thus, as noted in Iceland’s case, nationalization can turn out to be successful.
Abolish the Fractional Reserve System
Most monetary reform proposals advocate in eliminating the fractional reserve system and the compound interest rates.
Fiat-debt free reformers advocate in abolishing the fractional reserve system so that the government can regain total control over money creation.
Fiat-debt free reformer Stephen Zarlenga proposes for a shift towards Full-Reserve Banking to accomplish this goal.
Proposals from various other schools of thought are very ambitious in nature.
These ambitious proposals such as the;
- MMT’s Job Guarantee Program
- National Dividend
- Free Reserve Banking
- Government nationalization of land
May be unsuitable on their own given Canada’s current financial situation.
Each of these proposals is summarized briefly below.
Critiques of Proposals
1. MMT’s Job Guarantee Program
MMT’s proposal would not be an ideal solution for Canada since it would cause inflationary pressures in the economy and subsequently hinder economic recovery.
In order to ensure everyone is employed, MMT would like the government to borrow or print the money necessary to hire workers. Naturally, this would be inflationary due to the large increase in the money that is necessary to hire and pay for each worker.
2. Social Creditor’s National Dividend
If Canada were to undergo this proposal, it must decide how to implement the dividend, and how much to distribute to the people.
Naturally, this idea shares the same criticism as the job guarantee program, in that it causes inflationary pressures in the economy since the National Credit authority would be the institution printing all new ‘credit’ to redistribute as a national dividend.
3. Libertarian’s Free Reserve Banking
Academic Libertarian’s concept of free reserve banking is very similar to the practice of fractional reserve banking.
The difference is that the public would not participate in bailing out the banks, and the government would allow them to default as a result of their risky speculative positions.
This solution would not be ideal for Canada since the Canadian banking system is built on the philosophy of ‘too big to fail’.
Thus the Canadian banking system has had prudent regulations because regulators and politicians have understood that the Canadian banking system is ‘too big to fail’.
Since many of Canada’s major banks also act as shadow banks, if these banks were to fail then it would lead to the collapse of a wide number of other financial services such as investment and insurance banking.
4. Land Reformer’s Government nationalization of land
Like the proposals mentioned above, this proposal would also cause inflationary pressures in the Canadian economy. This is so because, in order to nationalize all the land, the government would have to do 2 things;
- Create money into the economy thus causing inflation
- Borrow money from private banks, thus causing inflation, and increasing the debt levels
Rather than nationalizing the land, it may be wiser for Canada to focus its efforts on implementing a Land value tax instead because the revenues gained from the tax could be used by the government to fund social welfare and infrastructure programs.
As we present the cases for and against various proposals on monetary reform, it becomes clear that any one proposal will not completely address all the problems facing Canada today.
Thus, Canada must implement various aspects of all the proposals mentioned above, to form their own unique path towards monetary reform.
1. Implementation of a Debt Jubilee to wipe of all Private debt
As noted in article 1 of this series, Canada’s national and private debt has skyrocketed because of the compound interest charges imposed by the private banks
In order to cope with the rising debt levels, the government’s response to this has been ineffective in reducing the debt. Their actions have led to the privatization of crown assets and fiscal austerity cuts to social welfare programs.
These actions serve to marginalize Canadians and decrease their standard of living. In order to correct this issue, the government must get rid of the net debt.
One tool in the government’s arsenal includes implementing a modern debt jubilee as has been done in centuries past.
One of the earliest examples of a debt jubilee occurred during 6th century BCE in Ancient Athens. At the time, the famous lawmaker, Solon, implemented a set of laws known as the seisachtheia which canceled all of the debts in society.
The concept of a debt jubilee is supported by several religious texts as well. The holy book of Islam, the Qur’an, supports debt forgiveness as a form of charity.
The Qur’an (Koran) explicitly states the goodwill of a debt jubilee, where it reveals,
If the debtor is in difficulty, grant him time till it is easy for him to repay. But, if ye remit it by way of charity, that is best for you if ye only knew. —Qur’an 2:280
Debt forgiveness is also mentioned in the Book of Leviticus (the Third book of the Hebrew Bible and the Torah). In the book, God councils Moses to forgive debts in certain cases every Jubilee year – at the end of Shmita, the last year of the seven year agricultural cycle or a 49-year cycle, depending on interpretation.
2. Transition towards a Full – Reserve Banking system
Canada could very well adopt a policy of Full reserve banking; however, it would still not address the root cause of the problem which would mitigate the problems of the fractional reserve system.
However, this solution would not address the compound interest charges.
Canada could draw inspiration from the Islamic bank model and simply abolish interest payments altogether. This approach would obviously require tremendous public support, since banking lobbyists would place pressure on parliament to retain the profits they reap from the interest revenues.
3. Legalization of alternative currencies
This is perhaps the most painless and most workable solution for Canada.
Alternative currencies would allow competition within the banking industry thus ensuring no monopoly over money creation in the economy.
In addition, Canada would also have an effective counter-attack to inflation.
Inflation can be caused by a number of factors including by government through
- Government mismanagement of fiscal policy
- Central bank’s mismanagement of monetary policy
- Private banks through excessive credit creation that inflates the money supply
Alternative currencies can hedge against government and central bank mismanagement of fiscal and monetary policy by protecting citizens from inflation.
An alternative currency solution would encompass many different forms of money, including commodities such as gold and silver.
4. Imposition of a Land Value Tax
Just as excessive credit creation causes inflation it can also lead to speculation. As noted in Article 14, borrowers can take out loans from commercial banks and invest this money to speculate on real estate.
The imposition of a land value tax would discourage this speculation and prevent real estate bubbles.
In addition, the revenue generated from this land tax could be spent by the government to recover some of its social welfare programs and infrastructure projects it cut down to pay off the compounding interest debt.
5. Limitations on Bank Financing
Post Keynesian Steve Keen notes that the creation of money by fractional reserve is not the root cause of the problem. The root cause is the compound interest charged on the non-existent money, and the use of this money to fund speculation.
Keen argues that Canada must also enforce stricter governmental regulation in order to limit the type of loans (i.e. mortgages) banks can give.
One example of this proposal is put forth by Keen which involves limiting the amount of money banks can lend through mortgage financing via the Property Income Limited Leverage (PILL) program.
Interestingly, the Governor of the Bank of Canada Mark Carney is also calling for additional governmental regulation on banks through the adoption of Basel III requirements. Basel III requirements are a global standard regulating the amount of capital that banks are required to hold in their reserves.
In addition, Carney has also called for stronger regulation in the shadow banking sector. These regulations extend to shadow institutions including money market mutual funds, hedge funds, and securities dealers.
Canada is in a unique crossroad in comparison with other western democracies because it has the ability to correct the errs committed by those in the international financial community.
However, the changes will not come easy, nor will they be easy to transition into.
There is no singular path towards monetary reform; rather, there must be a meshing of different proposals in order to create a sufficient solution to address the root problem affecting Canada’s economy.
The implications for reform are immense and will continue to generate significant intellectual debate.
This is to be encouraged and championed since we must be able to engage in innovative ideas and come towards a common understanding of the goal.
The various reformers mentioned throughout this series understand the problems quite clearly, however it is in the solutions that they differ on.
Whether the differences are in philosophy or ideology, one thing remains: they are committed to see a better society.
They are committed to a society that liberates people , rather than marginalizes against them; that celebrates renewable and innovative ideas even if they pose a threat to the status quo; that gives ordinary citizens a voice in decisions affecting their communities; that acknowledges the nature of the business cycle that revolves around planned obsolescence and continually pushes for more consumption, at the behest of environmental standards; and that give the people a higher quality of life.
The financial turmoil as a result of the 2008 crash has spurred ordinary citizens into action. Throughout countries around the world, public demonstrations have been organized by individuals fed up with the current monetary system.
Some of these movements come in the form of the ‘Occupy Wall Street’ movement that has gained critical fame (and criticism).
Others come in the form of bloggers that discuss methods for meaningful reform and for advocating alternative solutions.
Ultimately, we must hold a stronger understanding on how money is created, circulated, and used for consumption. And once we do, that is when we will learn that the current system today, is one that perpetuates the current financial problems.
Thus we must address our concerns to politicians, demanding answers, and expecting to see change because that is ultimately what Canada needs.