The old: bank money
In review, our current money is the private banking sector’s note or IOU; it is created as a promise to produce future value. Today, banks create new money when they take your IOU and put it on the asset side of their own accounting ledger. At the same time, they create their own IOU that goes on the liability side of their ledger because they promise to produce that amount of money when you ask. The two entries net out to zero. When you pay the loan back, the bank crosses out your IOU in its asset column and crosses out their own IOU in the liability column. Poof! Money was created. Poof! Money was extinguished and the money supply was reduced.
The new: OUR money
Our new money will be common wealth money. It is equity money, and can only be created by our government – given, spent, invested, or lent into circulation. Banks will only be able to loan existing money that they own or that someone lends them to loan out. Banks will no longer have the privilege of creating money for our nation.
From the private banks’ perspective
Banks will have three general accounts:
1. The banks’ own operating accounts
2. Investment accounts. If you choose to have the bank invest for you, you hand over ownership of your money to the bank and they give you an IOU. Your money becomes a cash asset on their ledger, and their IOU to you is a liability of the bank. That is the same thing that happens today when you loan your money to the bank for a fixed period and they give you a certificate of deposit (CD). The bank markets investment opportunities according to the risk, return, and level of guarantee. People loan the bank their money. The bank invests this money and pays them an agreed upon return. People decide how the bank invests their money by choosing investment funds that match their priorities and desired risk.
3. Transaction accounts. THIS is new and different: Depositors’ accounts are now trust accounts in a fund accounting system. They are no longer part of the banks’ own balance sheet. Each bank customer’s account is kept as a separate fund account, in the same way an attorney or title company would hold an escrow account. The sum total of a bank’s customer deposits is held as a single accounting record at the central bank, making transfers between banks faster and easier, much as it is today. The central bank does not have any specific information about depositor accounts, just the sum total. Your bank keeps track of your money for you and transfers it to others only with your permission and instructions. Just as today, at the central bank, the banks only transfer the net required, but now it is being transferred between the consolidated depositor trust accounts, managed by the private banks, and held at the central bank.
If and when a bank performs poorly and goes broke, no depositor will be at risk of losing their money; it will be untouched in a trust fund account at the central bank. Another bank can buy the management of these accounts just as they do today when a bank is sold, and service would be seamless for the customer. There will be no need for deposit insurance, which will reduce the cost of our money system, banking, and hence the cost of everything.
Your bank will provide you with important services: storing, keeping an account, and transferring your money. You will have to pay for this service. There will no longer be free banking. Basic banking service fees are estimated at $75–100 each year. Fees for investment services will be based on risk, supply and demand and other market forces.
I hope by now you know that paying a direct annual fee for deposit account services will be a steal compared to the amount of money currently going out of your pocket to the banking and financial sector. These fees will be a deliberate choice on your part instead of an invisible drain.
There will no longer be what we now call savings accounts. If you want your money to be 100% safe, leave it in your transaction account. If you want it to be earning something, then invest it in the investment fund of your choice, at the risk level you want, and matching your values and priorities. This takes back the power of an individual to make choices about how their money is invested, instead of giving this power to the bankers and hiding it from the public. There is risk in an investment account, you can lose your money if you choose poorly. This expanded national pool of investors will in aggregate produce better outcomes.
From the central bank’s perspective
Our new money is equity money; it is part of our common wealth and gets its unit value from what it can be exchanged for in the economy. It is an asset on our national accounts. Our new money does not need to be booked as a liability against anything, and it will not be created in exchange for anything. Our US dollars are assets for two reasons: they represent our common wealth, and they are in themselves a national common wealth asset. Money is a social technology that we jointly agree to use and own together. As a shared technology, it is a very valuable asset when its value is well maintained.
It’s easiest to understand how this system works by comparing it to the way coins work today. Today, our government buys raw materials and turns them into coins. It issues the coins at a chosen face value. The seignorage – the difference between the cost to make them and their face value – is entered into the US Government’s accounts as income.
In the new system most of our money will be created and issued as an electronic entry, just as it is today. In the same way seignorage from current coin production is entered on our books as a kind of income, newly created money will be entered as new income and be a cash asset on our government’s books.
A transition can be made to the new system without disrupting commerce in any way. The change can take place with a few changes in accounting rules, a few accounting entries and some startup entries for the new Bank of the United States. For a detailed explanation of the accounting changes read, Modernizing Money; Why our monetary system is broken and how it can be fixed by Andrew Jackson and Ben Dyson (2012), the founders of the British organization PositiveMoney.org. There are some differences in the British and American systems, but understanding their explanations will be valuable.
The accounting transition
The private banks’ balance sheets will not change in terms of their net. The money that the banks created – currently represented in their liability column as IOUs from the bank system to their customers (Federal Reserve Notes) – becomes IOUs from the individual bank to the US government. It will be as if they borrowed the money they are lending out from the US government, instead of creating it.
All deposit liabilities of the private banks will be transferred to an aggregated depositor trust account held at the central bank for the individual private bank. These accounting entries will be made on the day of implementation:
- BANK LIABILITIES CHANGE
On the banks’ accounts, the deposit liabilities will be re-designated as IOUs to the US government.
- US BANK BALANCING ENTRY
On the books of the Bank of the United States, a sum equal to that of the deposit liabilities will be entered as an asset IOU from the private bankers.
The amount of money in the supply will not change with this transition. Under our current system, if everyone paid the banks back the money they have borrowed tomorrow, it would wipe out our money supply. But, in our new system, when money-creation loans are paid back to the banks, the banks will cancel the loan asset, pay the amount to the US Bank, and cancel their own liability IOU. The banks pay the returned money to the US government as if it had borrowed the money from our common wealth. The money supply will remain the same.
In the US Government account at the Bank of the United States (our new central bank), the IOUs of the private banks are entered as an asset. This represents our money supply. As the banks pay off their loans to us, these assets change on the balance sheet from private bank IOUs to cash assets.
While the banks will continue to manage and serve their deposit customers, they will no longer be able to use deposits for their own purposes. (This will make real what most people believe is already true.) They will manage your personal accounts, and transfer your funds on your demand. At the end of day when a net of transactions is transferred from one bank to another, it will simply be an accounting entry at the central bank, just as it is today. You will experience no difference.
Most importantly, the banks can no longer turn around and create new money by issuing another loan. They will have to actually have money from investors in order to make another loan. Yes, this will be a dramatic change to their operating model. They will need to figure out how to play on the same level field that every other business in the nation plays on; they will no longer have special privileges.
The transition to our new system will be complete when the money the private bankers created by issuing loans is repaid and transferred to the US Government accounts. The majority of this transfer will happen within a few years. Today to keep the money supply in circulation, most big bank loans are made to property speculators and Wall Street gamblers who make very short-term loans. Small community banks have been carrying the burden of making loans to Main Street businesses, and can continue to do so as more people have more savings to invest. There will be a small percentage of 30-year mortgage and business capital investment loans held for the full-time, but the amount is likely to be small and relatively inconsequential.
While the change is simple – a few accounting entries – it is profound. It will radically change the role of banks.
Banks will have to make some significant changes to their business model, and we can give them a transition time. We could allow them to borrow back from the government a diminishing percentage of their previous portfolio, at minimal, but increasing interest rates. For example, for the first year after the change, the banks could borrow back from the government 80 percent of loan repayments at say, 0.5 percent interest for the first year. They could then use this money to reissue loans with a maximum 5-year run time. The second year, they could retain a maximum of 60 percent and pay a fee of one percent interest to the government. The 3rd year, 40 percent retained at 1.5 percent interest. The 4th year, 20 percent retained at 2 percent interest. And, no retention allowed after that. This would avoid a cold turkey shock to the banking establishment and give them time to find their new legs. That is being much kinder to them than they have been to the general public, but we can afford to be kind.