In his masterpiece of a book “Debt- the First 5000 Years”, David Graeber concludes in the final chapters with what is a prediction and a challenge. The prediction is that we are at the early stage of a new age in the history of debt and money which is likely to last 500 or 600 years. The challenge is to imagine what it will look like and he asks us to try and re-imagine what our monetary system could look like.
This paper is an attempt to describe what this new system might look like. In creating this outline of a possible future banking and monetary system to replace the one that has evolved over the last 30 years or so, in tandem with the evolution of capitalism, I have applied the fundamental tenets of Modern Monetary Theory (MMT). That is those elements which contain universal truth, but not those elements that form the “superstructure” of empirical narrative which is MMT’s description and analysis of the existing system, which we have inherited during the evolution of capitalism and its associated banking and monetary system. I am firmly of the view that most advocates of MMT fail to see that what it describes is a contingent product of history and not a universal, inevitable phenomenon and, as a result, they fail to see that MMT is also a tool for re-imagining the future and for designing a replacement system.
What follows is essentially the new algorithm which could drive the banking and monetary system through a phase transition and into the new age of which David Graeber speaks so eloquently. I am sharing these ideas now as I see this re-imagining process as a collective one. This is an attempt at starting the conversation.
The New Algorithm:
(1) central bank, (2) Government (Treasury),(3) National Investment Bank (government owned), (4) Mutual banking sector: 4.1 – personal banking; 4.2 – business banking (5) a National Pension & Investment Fund (6) National Credit Risk Fund (government owned) (7) National Stock Exchange (government owned)
(3) provides loan capital and banking services to businesses (including insurance companies and private pension funds)
(4.1) provides loans and banking services to private citizens and gateway to gilts issues via the Stock Exchange (7)
(4.2) provides banking services to business and acts as gateway to capital from the NIB, NPIF and Stock Exchange (3,5 & 7) also a gateway to the Stock Exchange for purchase of gilts
(5) provides equity capital to businesses (established and new start ups), also lends to government (bond/gilt purchases)
[NOTE: I have written a separate detailed proposal for an NPIF and the Abstract of that paper was published on Progressive Pulse on September 6th 2020.]
(6) Underwrites credit risks for (3) and (4) – the levy of a credit risk premium replaces interest charges on loans
Only (2,3+6) pay interest on public debt. All loans provided by (3) and (4) are interest free but (3)+(4) can charge fees for providing banking services and pass on credit risk insurance costs to borrowers
(4) operates on a full reserve banking basis. Account holders are able to purchase government bonds/gilts and earn interest at a rate set unilaterally by the government.
The fact that only government, the NIB and the NCRF pay interest on their public debt means (5); the NPIF, as well as companies and private individuals can earn interest by lending to the government the NIB and the NCRF. This is a source of new reserves…the interest can only be paid by creating new central bank debt (new money creation).
(3) and (6) can be capitalised by creating new reserves in the form of new central bank debt, or by the government issuing bonds for the purpose of financing the NIB and NCRF
(8) Insurance companies; (9) private banks; (10) Private pension funds
(8) (9) and (10) remain in private ownership and can obtain returns from purchase of government bonds and/or from purchase of company equity (shares) either in IPOs or in the secondary markets. These transactions are facilitated in (7) the Scottish Stock Exchange. (8) and (9) are capitalised by equity share holdings and/or direct equity investment partnership with (5), the NPIF. (10) are savings derived funds.
Companies (including insurance companies) wishing to raise either loan or equity capital via the Stock Exchange must comply with strict listing rules aligned with a new Company Code and Companies Act (these provisions will set out the terms of a ”licence to operate” for companies in Scotland).
Companies are unlikely to issue corporate bonds as they can access interest free loan capital from the NIB, but there may be circumstances where the NIB refuses a loan or the company considers the risk premium required is too onerous and then seeks loan capital from a corporate bond issue in the Stock Exchange at a lower cost of capital (7). Private investors will need to have a large risk appetite, however, if they choose to provide capital to a company which has been unable to access capital via the NIB or NPIF.
This model implies a high degree of control by government over the economy and the banking and monetary system. This means that it must operate within the framework of a wider Constitutional settlement which establishes a high level of democratic accountability to ensure that the outcomes meet the needs of all citizens individually and collectively. It also should function in close tandem with a sophisticated economic policy and industrial strategy. This is a banking and monetary system designed to facilitate carefully crafted policy.