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It is a daunting message, spread by the five Dutch actors knows as De Verleiders (The Seducers). Their show on the banking system has toured around the country, giving the audience a glimpse of how rotten the system is from within. Bankers will do anything to make more money. Greed, power and wrong incentives result in ordinary people being cheated into a mortgage they are unable to repay. And surely, the audience reacts. People who have lost their houses that served as collateral to their mortgages; people stuck with high interest rates fixed just prior to the crisis; people who borrowed more than the value of their house believing house prices would always continue to rise. Something needs to be done to protect the people from these bankers. We have to take away their importance – we have to nationalise the concept of money creation.

A bold initiative with major flaws

At least, that’s what the five actors promote. Although at first it would be easy to view this as a promotional stunt for their show, they have taken it a step further with the citizen initiative Our Money, in cooperation with the Our Money association. In a short summary, they propose a system where the government creates money with no debt counterpart and no interest rate. The government would circulate this through the economy through government expenses.

The list of problems caused by the current system of money creation is quite broad, if we believe Our Money. Everything from inflation to unemployment and real estate bubbles to crises. Not all of them make a lot of economic sense. For instance, the problem of unnecessarily high taxes due to government debt. Government debt is not necessarily something bad, as it increases the spending power of the government. Of course, the amount needs to be credible and preferably stable, unlike the situation in Greece. However, the benefits of having debt can easily outweigh the costs of interest payments. The initiative would give the governments the power to create money, which they reason should solve the problem of government debt. Why take on debt when you can create money out of thin air? There are a few reasons why they lose the argument rather quickly.

“The cure is much worse than the disease”

There are countless problems with the initiative, and they all come down to the same point: the cure is much worse than the disease. A practical example proves the point. Giving governments the power to create money gives them an incentive to spend more money than necessary, because they do not have to worry about their balance. To cover these costs, they will create money. And since the point of the initiative is that money creation takes place through government expenditure, this process will at some point lead to inflation. Ironically, inflation is also one of the problems of the current system as listed by Our Money. But that is a terrible argument anyway since inflation in the Eurozone has been relatively stable around 2 percent in recent history, which shows the effectiveness of a central bank (the ECB) in controlling inflation. The most urgent problem is actually not high inflation, but the impending threat of deflation. Of course, we can try to trust the government to act responsibly, check the balance and not print money to finance expenses. After all, The Netherlands is not Zimbabwe, where government money creation has led to hyperinflation to the point where they had to abandon their own currency in 2014. But if our institutions are strong enough to prevent this practice, what is the point of the initiative? Government debt has its benefits, and it also provides an incentive to restrict government spending. That is what we call the best of both worlds.

To understand why the proposed system of Our Money is flawed, we must briefly study the concept of money. Money is not something fictional. Money is not an entity in itself. Money is in essence a measure of valuation. This is why the first sentence of every high school economics book explains (or should explain) that economics is about scarcity. It should never say that economics is about money. Money is just a tool, because it is scarce and as a result, it can provide a value. It is the oxygen of our economy. That means that the creation and distribution of money is most important. It also implies that money does not need to have a specific appearance. It exists because it is the counterpart of something else. Buying something in the store involves the transfer of money and hence the valuation of the products you acquired. Most of our money nowadays is digital, nothing more than a number on a server somewhere. As a result, almost all the money in our system is a claim. It is, for instance, a deposit at a bank. We can not physically touch it, but we can claim it and use it. By definition, that claim is debt.

Putting the banks out of business

“Although it is possible to create money without a debt counterpart, there is no argument on why we would want this”

Creating money without a debt counterpart – as the initiative wants – is nonsense. Although it is obviously possible, there is simply no argument on why we would want this. Where would we store our money? If we store it at a government bank, we have a claim on that bank and by definition: debt is created. If we need money to buy a house, who will give it to us without asking for repayment? Money creation and debt creation work together in providing the oxygen to the system. It is extremely efficient. The only conclusion is that the initiative does not understand the banking system. The most striking example of this is Van Houts’ (one of the actors) statement that banks can continue to operate with existing money. It is slightly unclear how they would do this without creating debt. Van Houts assures us that bank runs will no longer be possible and we will never have to bail out any banks. I can only assume that is because banks will no longer be able to do anything.

Another bold statement says there will be no interest-rates. That makes a lot of sense too, since there is no debt. But leaving the point on no-debt for what it is, removing interest rates is ridiculous. Interest rates exist because of risk, and risk is not going anywhere if we change the system. Risk is costly and requires compensation – interest. Commercial banks are a great way of processing this risk. They perform screening and selection when you apply for a mortgage, they ask for a collateral to remove risk on their side and there is a lot of competition in the financial industry. This allows them to diversify, to push down interest rates and it provides an incentive to create an efficient system of credit provision and risk management. The incentive is profit; having a better risk management system than your competitors provides the possibility of a higher profit margin. The government bank would have no incentive to do this, especially when they are not allowed to charge any interest. It does not solve a single problem, but it does remove all the right incentives.

Maybe bankers are greedy. Maybe all they care about is higher profits. But we can use that to improve the system that is in place. What happened during the crisis was an obvious failure of risk management systems. Of course, it raises the question on how we can make sure that this does not happen again. But the solution is definitely not a system where the government is given the power to create money, especially not debt-free money with no interest rates distributed by government spending. It creates precisely the wrong incentives for the government, and removes all the right incentives in the current system. The much more sensible route would be to allow financial regulation to improve control within the banks and to be more pro-active in financial innovation. Central banks could serve as an instrument to react to credit tightening by banks – something the ECB is doing with the QE program – thereby making sure there is enough liquidity. It is a good discussion, both for talks shows on national television and in the parliament. But in the end, it only shows the strength of the system in place. A system that needs improvement, but is certainly not something we want to throw away.


An interesting contribution to the discussion by Our Money director Martijn Jeroen van der Linden can be found Here (in Dutch)

The actors visited the talk show DWDD in January (in Dutch)