A Living Wealth Money System

Money, a relatively recent invention, is one of the most useful and beneficial of human technologies. And though it impacts on every aspect of modern life, it is so familiar and its existence so much taken for granted, we rarely step back to reflect on its real nature and significance. See Money Is…

As with any powerful technology, it can also be used that are harmful. The illusions and distortions of our current human relationship to money actively threatens our very survival as a species.

The proper function of any system of money creation and allocation is to match idle real wealth resources with unmet needs of people, communities, and nature. When bankers are reaping multi-million dollar bonuses for themselves while essential needs of millions of people go unmet in the midst of widespread unemployment, it is a powerful indicator of a failed economic system and more particularly of a failed money system.

A Brief History of Money

In the earliest human societies, money was unknown. People organized their lives around the relationships of family, clan, and tribe. They cared for one another and allocated resources to secure the well-being of all. Resource allocation decisions were local and based on the needs of the community.

Over several millennia, money gradually became a substitute for mutual caring as the foundation of the social, economic, and political fabric of society. This process accelerated during the latter half of the 20th century.

In contemporary 21st century societies, most of us organize our lives around earning, spending, borrowing, and saving money. Money is our ticket to food, shelter, transportation, education, recreation, health care and nearly every other essential of daily life. This has sweeping implications for values and the distribution of power in society.

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.

A Matter of Values and Power

We are taught that organizing a society around money and markets maximizes our individual freedom to make choices according to our personal values and interests. We are not supposed to notice that the monetization of relationships gives priority to financial values over life values and gives enormous power to those who control the creation and allocation of money.

In the global economy, the structures of the global financial system give inordinate power to create and allocate money to financial institutions that seek only their own financial gain without regard to any other human or natural interest. Despite the facade of political democracy, through their control of money bankers, not people, rule the world.

The structure of the money system is a choice, not a given and we the people have both the means and the right to change it.

Money in a Living Earth Economy

The proper purpose of a money system is to connect underutilized resources with unmet needs, most particularly the needs of ordinary individuals for meaningful, sustainable livelihoods and of the society for essential services and infrastructure in ways that support the restoration of the caring relationships of strong communities. 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.

Old economy institutions meet their goals by increasing dependence on money and centralizing the institutions that control its creation and allocation. New economy institutions will at their best reduce dependence on money, restore relationships of caring, and root the power to create and allocate money in living communities in ways that are transparent and accountable to those who have a natural interest in the health and well-being of the people, community, and natural systems of the place where they live.

To democratize society and the economy, we must democratize the creation and allocation of money.

Favor Small and Local

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.

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.

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 stricter the requirements.

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.


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.

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.