There is no reason digital money has to be created as debt - the Government creates it interest free every time they pay a pension, or allowance, into a person's bank account. It is purely a bookkeeping transaction. It is correct to advocate the separation of retail banking from investment (gambling) banks. Investment banks only lend money if there is a potential to make a profit – if there is no profit potential, no gamble, or "investment," will be attempted. It is also correct to say the private retail banks do provide a genuine public service in distributing the nation's money supply. However, it is completely ridiculous to claim that a bank can only lend out the money deposited by its customers. If that were to be the requirement, then the only way a customer could get any money to deposit would be if the Government gave it to them interest free. It is true that the Government is the only entity authorised with the constitutional power, to create the legal tender to be used as the nation's money supply.

Just think about it. Where does the Government get the money from in the first place, in order to declare anything as legal tender tokens? They create them from anything they like, paper, plastic, tin, copper, bronze, or even gold and silver. (if they are crazy enough to do that) And what about all the digital money they create every time they write a cheque, or pay a pension? They do exactly the same as the private banks – they create it out of thin air – either by using some cheap physical thing, or by transferring some numbers from one account into another account. No physical money is every used in digital transactions.

Unfortunately, the constitutional provision granted to the Government has been completely ignored, or more correctly, dishonestly delegated to the private banks without any approval from the people. The Government allows the private banks to create credit out of thin air and lend it to the borrower as interest bearing debt.

How about we change the system?

A valid and practical idea to generate a source of income for a government is to reverse the current fractional reserve scheme and have the Government sell access to credit creation to the private, commercial, retail banking system.

The fractional reserve system is essentially a ‘ponzi’ scheme, but if reversed and modified in a properly controlled manner, it can be made to serve the benefit of the society. Instead of allowing the private banks to create ‘new’ money as they currently do, by advancing interest bearing credit out of thin air, the Government, on behalf of the people, would create this ‘new money’ and sell it to the private banks. Obviously, the creation of this ‘new money’ would be a simple bookkeeping, or computer spreadsheet activity, exactly as it currently applies.

The critical issue as far as the nation’s economy is concerned is in managing the amount of money needed for the nation to function effectively. It is an obvious fact that a growing population must automatically create increasing demand in goods and services, and that increased production necessitates and increase in the money supply. However, it is pointless to produce anything, anything at all, unless it is going to be consumed. Hence, to avoid inflationary, or deflationary pressures, it is essential that the productive capacity of the nation must maintain a close balance to the nation’s consumption capacity.

Thus it becomes obvious again, that there needs to be an independent body setup to monitor, and control, the nation’s money supply in keeping with those three principle issues, the population level, the productive capacity to meet the demand, and the consumption capacity to consume the production.

This is where the private retail banks help serve the nation’s economy. They do this by ensuring the distribution of the bulk of the nation’s money supply is distributed on a proper due diligent basis, to borrowers who can demonstrate a reasonable potential to repay the loans. A loan is merely a legal agreement, and in the case of advancing credit, it is simply the ‘monetisation’ of future effort. The borrower promises to repay the loan at a later date from the fruits emanating from the advance. In this respect, all credit is really public property because only people are capable of producing products and services that will create the ability to repay the advance. The creation of credit should never have been handed over to the private banks in the carte blanch manner which applies today.

Issuing loans and conducting due diligent analysis for private sector borrowers is not a rational function of a Government, but it is the Government’s responsibility to ensure the money supply does not create the ongoing boom and bust cycles. To date, those cycles have almost always been caused by the private banks manipulating the credit supply for their benefit.

That is not to say a Government should not create the necessary interest free funding for financing the publicly owned natural resources, or for building maintaining and supplying the public’s essential services.

The private retail banks would continue to be set up in the manner as presently in place, by obtaining capital from investors through the issuing of shares, debentures or bonds. As legitimate registered businesses, they would be eligible to apply for, and purchase, ‘new money’ from the government at a price which would allow the bank to "resell" with a market controlled "profit" margin. It is assumed this "new money" would be lent out on an interest basis, and the interest rate would be controlled by market competition, as well as prudent banking practices, especially if the Government is no longer the lender of last resort. The amount of ‘new money’ the banks request would be set as a ratio of their subscribed capital, and perhaps, any long term deposit money they hold on behalf of their customers.

As a registered business, these banks would operate under standard corporate law and be responsible for their operations without any reliance on the government as lender of last resort. The banks would have to take out, and maintain, appropriate private insurance to cover their customer’s deposits as part of their legitimate registration responsibilities. Every application to purchase ‘new money’ from the government would be made with an appropriate set of audited accounts.

Under the current system, Governments borrow money from private sources and pay interest on the bonds they issue. This revised system could operate through modifying the role of the Reserve/Central Bank. Specifically, this Bank’s role would be to monitor the nation’s population levels in relation to the productive demand and the consumption capacity, and handle the sale of ‘new money’ to the private sector banks on behalf of the people. This sale of “new money” would actually be represented as selling the private banks a defined amount of ‘credit’ which they could then pass on to their customers at a competitive, rate of interest above the purchase price they paid the Government. The Government would have to be constitutionally constrained from creating this ‘new money’ in excess of the production/consumption parameters, but a controlled fractional reserve ‘ponzi’ system is a way of increasing the money supply in keeping with the needs of a growing economy. Effective constitutional restrictions on the level of ‘new money’ the Government is allowed to create, and sell, and this would effectively control inflation.

A ratio between a private bank’s capital, and the ‘credit’ they would be allowed to buy from the Government, could be determined from a number of factors. Some of those factors would be the number of registered banks, their location, and possibly their size of operation. This ratio could vary with circumstances, but would aim at providing the banks with an adequate level of funds to use in passing on the credit to their customers. As the economy grows the banks would be in a position to increase their capital base, and thus, apply for additional ‘new money’ to support the continued growth. One of the major anomalies in relation to the current financial system is the fact that when the private banks create credit out of thin air and loan it to a customer, they do not directly provide that customer with the interest that will have to be repaid.  In the case of, say, a typical 25 year mortgage, the total amount of interest that would be paid over the 25 years would amount to around 200% of the original principle advanced. It is this interest money that has to come from somewhere, and that somewhere is inevitably, from someone else's pocket. While it is argued that the interest comes out of the profit made by the entrepreneur that profit comes from the consumer.
Unfortunately, the vast bulk of consumers are wage/salary earners and it is easily proven that that 'income' only accounts for 25% to 35% of the cost of any product or service created by the entrepreneur/manufacturer. Thus, this vast bulk of consumers can never have sufficient 'income' to pay for the products and services they need to buy without going into perpetual debt to the banking industry, or using up whatever savings they have been able to put aside.

The other anomaly occurs by allowing the banks to create "money" as a ratio to the deposits they hold - usually that ratio is at least 10:1, meaning, they can create $10 out of nothing for every dollar they hold as deposit. Two things to note regarding the customer's deposits - a very high percentage of these deposits are themselves, "money" created as a loan or credit advance - and secondly - these deposits are never actually lent out as loans, as many people believe - because no bank customer has ever had their balance reduced because it has been lent to someone else.

Insurance Companies becoming the “Lenders of last Resort”.

As mentioned above, the additional restraint on the private banking system, both retail and investment banks would be for the banks to take out their own depositor’s insurance, thus removing the Government as the “lender of last resort”. If the banks are properly run there would be no problem in arranging this insurance. If the insurance cover cannot be arranged then the bank would lose its licence to operate.

Investment Banks

This proposed process would not apply to the investment banking system, which would have to be a totally independent system divorced from any form of Government support and denied the legislative access to fractional reserve credit creation. The reason for this distinction is that investment banking is largely a financial gambling system with the sole motive of profiteering. Its interest in productive and employment issues is strictly limited to the profit potential related to the buying and selling of organisations and/or their related physical or paper assets. Genuine productive businesses have a plentiful array of options for raising capital without being dependent on the services of investment bankers, but it must be up to that banker to carry any risk involved as its own responsibility.