Money Creation and Idolatry: How did we let this happen?
by Elizabeth Palmberg and Bob Goudzwaard 06-01-2009In our recent blog, we described how money “creation” meets the needs of a gradually expanding economy – but also threatens to become an idol which distorts our use of the real world created by God.
Today, actual paper money is less and less used – most money exists as electronic impulses in bank accounts. Still, for centuries, money creation was mostly the monopoly of the state. (Private banks did issue notes, which were essentially company IOUs and which people used as if they were paper money – but they were usually seen as less trustworthy than government-printed bills, which are essentially IOUs backed by the full faith and credit of a government.)
But in the 20th century, a new kind of money creation become common: Private banks themselves were able to create enormous amounts of money. How did they do this? Simple – they just lent out far more money than they received from savers on deposit, from investors who bought shares, or than they possessed as their own capital (in cash, shares of stock, or treasury papers).
And this process creates real money. After all, the people taking out the loans are able to spend them (on a house, business, car, or whatever) – unless the house seller or Toyota dealer decides not to trust Citibank’s check. If that trust is lost, the system collapses. (Exhibit A: Iceland.)
Why should we care whether money is created by governments or by banks? Well, when money creation is mainly in the hands of private banks rather than the Federal Bank or the Treasury (which can create its own bills or papers), an important side effect of this system is that, if there is not any kind of control, way too much money may be poured into financial “casino capitalism.” Too many of those money-“creating” loans can go to people who use them to buy Wall Street inventions like derivatives – things that are tenuously, if at all, connected to or productive in the real world. As the article in this month’s Sojourners, A Paper God, describes, these abstruse financial speculations drive the real economy in ways that are bad for the environment and humans.
They also create financial bubbles which, when they pop (and the brilliant new Wall Street investments become “toxic assets”), take the whole economy down with them. In contrast, when money is created by governments, they insert the created money into the system at a different place – i.e., the federal budget, to form a base of the government’s spending on real things (salaries, roads, health care, etc.).
If the total annual money “created” is two, three, or even four times the growth of the real economy, then we need to understand that an illusion is working and a breakdown will follow, like the downfall of an idol.
In the past governments understood, far better than most present governments, that adding money to an economy is a public act and so needs to remain under public control. So the central banking system should always – indeed, it is its public calling to – put some limits on the growth of bank-“created” money.
Bob Goudzwaard, co-author of Hope in Troubled Times: A New Vision for Confronting Global Crises (Baker, 2007), is a former member of the Dutch Parliament and professor emeritus at the Free University of Amsterdam. Recently he chaired a two-year consultation between the World Bank, the IMF, and the World Council of Churches. Elizabeth Palmberg is an assistant editor of Sojourners.
