Frank Breitenbach would like to pull apart the global financial system, while he’s still in it.
And then put it back together again, only this time without credit bubbles, crises and bailouts.
It’s
an old idea that’s receiving fresh impetus in Europe as populism makes
political gains and concern grows about the stability of financial
institutions: Remove from banks the power to create money, and give it
back to the state. Exclusively.
The
proposal has appeal even among some insiders, like Breitenbach. He
couples his day job as a vice president at KfW IPEX in Frankfurt, a
state-owned provider of export financing, with his role as a member of
Monetative, an initiative to return the system to what’s known in German
as Vollgeld, which roughly translates as "whole money."
“There is
too much liquidity in the market now and it’s more or less the same
situation we had right before the 2008 crisis,” Breitenbach said in an
interview on Aug. 12, noting that he was giving his personal views, not
those of KfW. “I have the feeling that another financial crisis will
happen.”
Vollgeld’s solution would be to hand central banks
complete control of the money supply. Commercial banks would be required
to back their loans 100 percent with deposits -- whether they come from
savings, capital or their own borrowings.
In other words, lenders
would be barred from creating money out of nothing -- an inherent
attribute of the fractional-reserve banking model that’s been dominant
since the Middle Ages.
Advocates
of Vollgeld say the change is necessary to prevent the credit booms
that helped cause the last financial bust, and possibly the next.
Central banks would be able to ensure the real economy has the liquidity
it needs, and no more.
“The
amount of money that the central bank will pump into the system should
be in line with economic growth,” Breitenbach said. “It’s the central
bank’s task to take control over the amount of money” in the system, he
said.
While Vollgeld has only a handful of supporters in Germany
-- Breitenbach says his organization has about 100 members -- elsewhere
it’s gathering more steam. A Swiss version has succeeded in gathering
the 100,000 signatures needed to hold a plebiscite on the subject, and a
vote is expected around 2018.
Chicago Plan
That would be
85 years after the first version of Vollgeld was floated, as part of the
Chicago Plan of banking reforms by leading U.S. economists including
Irving Fisher in the wake of the Great Depression. Those ideas were
never implemented, but the continued drag on growth and prosperity from
the 2008 financial crisis is feeding new interest.
Vollgeld’s
counterpart in the U.K. is Positive Money, a group that also advocates
central-bank financing of government expenditure known as “People’s QE.”
A version of that has been backed by Jeremy Corbyn, the leader of the
opposition Labour party.
Adair Turner, former chairman of the
U.K.’s Financial Services Authority, and former Deutsche Bank Chief
Economist Thomas Mayer, have discussed similar ideas.
That’s
not to say Vollgeld will arrive any time soon. For a start, Breitenbach
acknowledges that either it would have to be introduced in the entire
19-nation euro area or a decision taken to break up the single-currency
bloc. Aside from the stability concerns over implementing a new system,
there’s no guarantee that the region’s citizens would trust unelected
monetary officials any more than their commercial counterparts. That’s
especially true in Germany, where the European Central Bank is viewed
with particular skepticism.
Confidence Question
There are other snags. Responding
to the Swiss initiative, the government said Vollgeld wouldn’t prevent
liquidity or solvency problems emerging at lenders. It also pointed out
that allowing the central bank to issue money without a corresponding
rise in assets might undermine public confidence in the central bank, or
in money itself.
For Breitenbach, keeping depositors’ money safe
and stemming a source of bank runs will nevertheless be a huge advance
in stability. And it doesn’t mean destroying the financial system as we
know it.
“I don’t see the contradiction between the Vollgeld
system and being a banker,” he said. “The only difference is that the
banks have to collect savings before lending. ”
That’s a critical
difference, and one Breitenbach argues the general public will find
surprising. He says few are aware that it’s actually the commercial
banks that have the largest role in money creation, not the central
bank. Reverse that, and greater stability ensues, goes the thinking.
“The
Vollgeld system is actually much easier to manage than the system we
have right now,” Breitenbach said. “Most people think we already have
this system.”
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