This post originally appeared on stevebaker.info.
Via The Telegraph.
The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.
But this begs the question, “Why is the money supply dependent on interest rates and government spending?”
It turns out the great economist Irving Fisher told us back in the 1930s: banks create and destroy credit money by granting and calling loans. As Fisher wrote:
Thus our national circulating medium is now at the mercy of loan transactions of banks; and our thousands of checking banks are, in effect, so many irresponsible private mints.
He went on (emphasis mine):
As the system of checking accounts, or check-book money, based chiefly on loans, spreads from the few countries now using it to the whole world, all of its dangers will grow greater. As a consequence, future booms and depressions threaten to be worse than those of the past, unless the system is changed.
Fisher set out the problem in the 1930s and a solution, one which offered the possibility of paying off the national debt and largely ending economic cycles: 100% reserves on demand deposits. We face the same problem today and we have the same tantalising possibilities.
There are politicians who understand: see for example the speech by the Earl of Caithness in the Banking Bill Debate 2009:
The Banking Bill fails to address the fault which has led to every major banking and currency crisis during the past 200 years, including this one. It merely, lazily and weakly, papers over the cracks. Like Lilliputians, we are trying to tie down Gulliver with ever more strands of rope. It did not work then; it has not worked since 1811; and it will not work now.
This is why colleagues and I established The Cobden Centre: we need honest money now to end the crisis and set us on a firm foundation for a sustainable and healthy future economy.