Real money instead of empty promises, June 4, 2013

Banks should finally provide what we expect from them: the protection of our money.

Cyprus in 2013 and Iceland in 2008 are just the two latest in a long series of bank crises which led to at least partial losses of customers deposits. Since the bankruptcy of Lehman Brothers had a global domino effect, we could have lost a large part of our deposits in 2008 if the governments had not bailed out the banks with giant sums of money. Based on these events, it should be clear to everybody now that basically our money is not secure in the banks.

The problem is that our money in the banks is not really available, only a small fraction of it. For the public only cash embodies legal tender. Bank deposits are just virtual money. At least we can use this virtual money for credit transfers. However, we should be aware that we lend our money to the banks when we make deposits. In return, the banks promise to pay back our deposits in cash when we want it. But this is an empty promise since in crises if many customers demand their money at the same time, the banks can only pay out a small percentage of the deposits in cash. So, precisely in a crisis when the security of our bank deposits is so important, we cannot rely on the banks.

Bank deposits are in fact a dangerous Ponzi scheme because the banks owe their customers much more money than their stock of legal tender amounts to. Ponzi schemes represent a form of fraud and are therefore  illegal. Surprisingly, hardly anybody cares that our entire banking system is a Ponzi scheme.

Actually, there is a quite easy solution to the problem. We should forbid the banks from creating virtual money and restrict them to use exclusively legal tender created by the central bank. This way, our bank deposits which we do not want to invest would remain in our possession and embody real, secure money. Then, banks would never again need to be bailed out in order to secure the movement of payments because the bank  deposits would always be available. The banks would manage these deposits as trustees and would not be allowed to use them for other purposes€“ - e.g. speculation - without the prior consent of their customers.

The conversion of virtual money into state-guaranteed money is not a cure for all, of course, but it is surely the most important step to improve the trustworthiness of our banking system. Our bank deposits would be secure from crises and our taxes would not be wasted to maintain a Ponzi scheme.

So there is a reasonable and feasible alternative to the current dysfunctional money and banking system. It is about time to put this alternative into effect.

Mark Joób


Money Reform

Prof. Dr. Mark Joób