Money and Debt : The Public Role of Banks

257 Pages·2021·7.279 MB·English

by  Bart Stellinga , Josta de Hoog , Arthur van Riel , Casper de Vries

Research for Policy
Bart Stellinga
Josta de Hoog
Arthur van Riel
Casper de Vries
Money and Debt:
The Public Role
of Banks
Research for Policy
Studies by the Netherlands Council for Government Policy
SeriesEditors
J.E.J.(Corien)Prins,WRR,ScientificCouncilforGovernmentPolicy,
TheHague,Zuid-Holland,TheNetherlands
F.W.A.(Frans)Brom,WRR,ScientificCouncilforGovernmentPolicy,
TheHague,Zuid-Holland,TheNetherlands
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onissuesthatdominatetoday’spolicyagenda.
TheWRRconsistsofaCouncilandanacademicstaffwhoworkcloselytogether
inmultidisciplinaryprojectteams.CouncilmembersareappointedbytheKing,and
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tific Council for Government Policy. Many of the cross-cutting issues that affect
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AbouttheEditors
CorienPrinsisChairoftheWRRandProfessorofLawandInformationTechnology
atTilburgLawSchool(TilburgUniversity).
Frans Brom is Council secretary and director of the WRR office. He also is
ProfessorofNormativityofScientificPolicyAdviceattheEthicsInstituteofUtrecht
University.
Moreinformationaboutthisseriesathttp://www.springer.com/series/16390
• • •
Bart Stellinga Josta de Hoog Arthur van Riel
Casper de Vries
Money and Debt: The Public
Role of Banks
BartStellinga JostadeHoog
NetherlandsScientificCouncil NetherlandsScientificCouncil
forGovernmentPolicy(WRR) forGovernmentPolicy(WRR)
TheHague,TheNetherlands TheHague,TheNetherlands
ArthurvanRiel CasperdeVries
NetherlandsScientificCouncil NetherlandsScientificCouncil
forGovernmentPolicy(WRR) forGovernmentPolicy(WRR)
TheHague,TheNetherlands TheHague,TheNetherlands
ISSN2662-3684 ISSN2662-3692 (electronic)
ResearchforPolicy
ISBN978-3-030-70249-6 ISBN978-3-030-70250-2 (eBook)
https://doi.org/10.1007/978-3-030-70250-2
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Preface
This book is a translation and adaption of the Dutch report ‘Geld en schuld. De
publieke rol van banken’, published by the Netherlands Scientific Council for
Government Policy (WRR). The report was presented to the Minister of Finance
Wopke Hoekstra on 17 January 2019. In it, the WRR recommends to restore the
balanced growth ofcreditand debt, andstrike a better balance between public and
privateinterestsinthefinancialsector.Thisentailsfosteringgreaterdiversityinthe
financial sector, curbing the excessive growth of debt, being prepared for the next
crisisandanchoringthepublicdimensionofthebankingsystem.On11June2019,
thegovernmentgaveitsformalresponseinaMemorandumtoParliament,inwhich
itacknowledgedtheimportanceofthereportanditsanalysisandwelcomedmanyof
the recommendations. More information is available on the WRR website: https://
english.wrr.nl/topics/money-creation.
ThereportwaswritteninresponsetoaformalrequestbytheDutchMinisterof
Financetoinvestigatethemonetarysystemandtheadvantagesanddisadvantagesof
alternative monetary systems, as suggested in a motion adopted by the Dutch
Parliament during a debate on money creation in March 2016. The parliamentary
debatewastheresultofaplaybythetheatregroupDeVerleiders(TheSeducers)and
a subsequent citizens’ initiative Ons Geld calling for money creation to be placed
exclusivelyinpublichands.
This publication was written by Bart Stellinga, Josta de Hoog, Arthur van Riel
and Casper de Vries. Together they formed a project group that also included
Arnoud Boot, Janne Verstappen, Berend Rigter and Robert Went. The original
Dutch publicationhas beenadapted foraninternational audience, butnotupdated.
Itisimportantto note that theoriginal report was writtenand published before the
COVID-19crisis,andinthistranslatedbookwedonotaddresshowpolicymakers,
central banks and financial actors have responded to the economic and financial
challengesraisedbythisnewcrisis.
Thisbookistheproductofanextensiveprocessofconsultationandanalysis.In
additiontostudyingtheacademicliterature,weconductedinterviewswithexperts,
policymakers and stakeholders. We are very grateful for their contribution to this
v
vi Preface
book.Theirnamesarelistedattheendofthebook.Aspecialwordofthankstothe
experts who were willing to review (parts) of the report: Dirk Bezemer, Wim
Boonstra, Teunis Brosens, Charlotte van Dixhoorn, Bas Dommerholt, Wouter
Elsenburg,ClemensKool,MartijnJeroenvanderLinden,BartNooteboom,Roland
Uittenbogaard, Hans Visser, Edgar Wortmann and several experts of the Dutch
centralbank(DeNederlandscheBank).
TheHague,TheNetherlands BartStellinga
JostadeHoog
ArthurvanRiel
CasperdeVries
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 WhatIsMoney?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 WhatIsDebt? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.3 TheImportanceofTrust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.4 TheDynamismoftheFinancialMonetarySystem. . . . . . . . . . . . 11
1.5 OverviewoftheReport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Bibliography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2 HowIsMoneyCreated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.1 BanksandMoneyCreation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.1.1 ElectronicPaymentsandCashWithdrawals. . . . . . . . . . . . 20
2.1.2 FreeMoney?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.2 DrivingandConstrainingForces. . . . . . . . . . . . . . . . . . . . . . . . . 23
2.2.1 TheRoleofHouseholdsandBusinesses . . . . . . . . . . . . . . 24
2.2.2 Banks’BalanceSheetRisks. . . . . . . . . . . . . . . . . . . . . . . 25
2.3 MonetaryPolicy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.3.1 ObjectivesandInstruments. . . . . . . . . . . . . . . . . . . . . . . . 37
2.3.2 HowMonetaryPolicyWorksinPractice. . . . . . . . . . . . . . 39
2.3.3 QuantitativeEasing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Bibliography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
3 TheHistoryofMoneyCreation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.1 MoneyandFinanceintheNineteenthCentury. . . . . . . . . . . . . . . 48
3.1.1 MoneyandPayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.1.2 Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
3.1.3 PolicyandRegulation. . . . . . . . . . . . . . . . . . . . . . . . . . . 53
3.1.4 Summary:MoneyCreationintheNineteenthCentury. . . . 56
3.2 TheInterwarPeriodandtheGreatDepression(1918–1939) . . . .. 57
3.2.1 MoneyandPayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
3.2.2 Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
vii
viii Contents
3.2.3 PolicyandRegulation. . . . . . . . . . . . . . . . . . . . . . . . . . . 61
3.2.4 Summary:MoneyCreationintheInterwarPeriod . . . . . .. 63
3.3 TheBrettonWoodsPeriod(1945–1973). . . . . . . . . . . . . . . . . . . 64
3.3.1 MoneyandPayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
3.3.2 Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
3.3.3 PolicyandRegulation. . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.3.4 Summary:MoneyCreationintheBrettonWoods
Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
3.4 ThePre-crisisPeriod(1973–2008). . . . . . . . . . . . . . . . . . . . . . . . 70
3.4.1 MoneyandPayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
3.4.2 Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
3.4.3 PolicyandRegulation. . . . . . . . . . . . . . . . . . . . . . . . . . . 74
3.4.4 Summary:MoneyCreationinthePre-crisisPeriod. . . . .. 77
3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Bibliography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
4 AnAppraisaloftheFinancialMonetarySystem . . . . . . . . . . . . . . . . 83
4.1 EconomicContribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.1.1 ThePaymentSystem. . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.1.2 TheVolumeofDebt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
4.1.3 ReducingDebtLevels . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
4.2 Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
4.2.1 StabilityofIndividualBanks. . . . . . . . . . . . . . . . . . . . . . 92
4.2.2 SystemicInstability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
4.3 Fairness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
4.3.1 ThePublicCostsofaCrisis. . . . . . . . . . . . . . . . . . . . . . . 99
4.3.2 FinancialBenefitsforBanks. . . . . . . . . . . . . . . . . . . . . . . 102
4.3.3 BenefitsandCostsofIncreasedIndebtedness. . . . . . . . . .. 105
4.4 LegitimacyandInfluence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
4.4.1 ThePublic-PrivateNatureofFinancialInstitutions. . . . . . . 108
4.4.2 OptionsforDemocraticControl. . . . . . . . . . . . . . . . . . . . 109
4.4.3 PositionofCitizens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Bibliography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
5 HowDoestheSovereignMoneySystemWork? . . . . . . . . . . . . . . . . 117
5.1 ThePaymentSystem. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
5.1.1 PaymentAccountsatPaymentInstitutions . . . . . . . . . . . . . 120
5.1.2 PaymentAccountsattheCentralBank . . . . . . . . . . . . . . . 122
5.1.3 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
5.2 TheFinancialSystem. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
5.2.1 FinancingInstitutionsOperatingontheBasis
ofDebt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
5.2.2 FinancingInstitutionsOperatingontheBasis
ofEquityOnly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Contents ix
5.2.3 PrivateandPublicLending . . . . .. . . . . . . . . . . . . . . .. . . 128
5.3 MonetaryPolicyandFinancialRegulation. . . . . . . . . . . . . . . . . . 128
5.3.1 TheCreation,AllocationandDestruction
ofMoney. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
5.3.2 RegulatingtheFinancialSystem . . . . . . . . . . . . . . . . . . . . 131
5.3.3 IndependenceandAccountability. . . . . . . . . . . . . . . . . . . 132
5.4 TransitiontotheNewSystem . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
5.4.1 TowardsaNewPaymentSystem. . . . . . . . . . . . . . . . . . . 132
5.4.2 TowardsaNewFinancialSystem. . . . . . . . . . . . . . . . . . . 134
5.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Bibliography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
6 AdvantagesandDisadvantagesoftheSovereignMoney
System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
6.1 EconomicContribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
6.1.1 TheOperationofthePaymentSystem . . . . . . . . . . . .. . . . 140
6.1.2 TheFinancialSystem’sProcyclicality. . . . . . . . . . . . . . . . 141
6.1.3 PriceandAvailabilityofCredit. . . . . . . . . . . . . . . . . . . . 143
6.1.4 One-OffDebtReduction. . . . . . . . . . . . . . . . . . . . . . . . . 145
6.1.5 Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
6.2 Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
6.2.1 TheStabilityofIndividualInstitutions. . . . . . . . . . . . . . . 147
6.2.2 SystemicRisks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
6.2.3 Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
6.3 Fairness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
6.3.1 AbolitionofImplicitandExplicitPublicSupport. . . . . . . . 151
6.3.2 Seigniorage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
6.3.3 TheBenefitsandCostsofDebt . . . .. . . .. . . .. . . .. . . .. 154
6.3.4 Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
6.4 Legitimacy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
6.4.1 TheSeparationofPublicandPrivateActivities. . . . . . . . . 155
6.4.2 PublicControlandDemocraticOversight . . . . . . . . . . . . . 156
6.4.3 ThePositionofCitizens. . . . . . . . . . . . . . . . . . . . . . . . . . 157
6.4.4 Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
6.5 OtherIssues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
6.5.1 TheInternationalDimension. . . . . . . . . . . . . . . . . . . . . . 159
6.5.2 TheTransition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
6.5.3 DynamicsandInnovation . . . . . . . . . . . . . . . . . . . . . . . . . 160
6.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Bibliography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . 165
7 PoliciestoRestoretheBalanceintheCurrentSystem . . . . . . . . . . . . 167
7.1 TamingtheMoneyandDebtCycle. . . . . . . . . . . . . . . . . . . . . . . 167
7.1.1 CurbingtheGrowthofDebt. . . . . . . . . . . . . . . . . . . . . . . 168