What the fuck is money.

Note: This rant got crazy, especially talking about private banks and why they exist. I fully reserve the right to go back on these comments completely and provide a more nuanced understanding of how our economy works lol.

I went for a walk today and was thinking about economics. I have read two books recently that have really got me thinking about economics and how best to run an economy. It is always good to have ideas of what your ideal world would look like so that you can shift the world incrementally towards that picture. Some of the ideas I thought about would require huge structural changes to the way we think about society, and I appreciate that there is no changing everything all at once even in a revolution, but these are some of the ideas that I think would be present in my ideal society.

This began with some thinking about banks. I was reading Talking to My Daughter by Yanis Varoufakis, and he explained that banks, whether they be a market bank like Commonwealth or the state bank like the Reserve Bank of Australia, virtually create money out of thin air. The way that private banks operate is that they are supposed to keep a certain level of real reserves in their vaults, but so long as they are banking responsibly, they can loan someone any amount of money and create that money by pressing keys on a keyboard in the bank. This is a jarring idea – at least, it was for me – and while I had heard it before, it got me thinking about money really is and what value really is.

My train of thinking was a little weird, but my first thought was: if banks can conjure money out of thin air and loan it to people, why don’t they just do that for their bankers’ wages and never charge their customers any interest? See, it seems that one of the biggest ‘real’ money makers for banks is the interest that its customers pays on their loans. That interest can then be used by the bank to pay its bankers’ wages. In this way, the customer is effectively paying the banker to loan money from him. This makes sense – the customer is paying the banker for a service. But if banks can conjure money out of thin air, loan the money to the customer and collect interest, what really is the point of a private bank, and why on earth do we have to pay interest?

I haven’t explained that well, but my main point is also coming from the book The Deficit Myth by Stephanie Kelton. In this book, Kelton explains how the central bank of a country with a sovereign currency works. She explains that what the media commentators and many economic analysts call the ‘debt’ or the ‘deficit’ is the wrong way to look at the economy. Because the central bank is the currency issuer (that is, it can create money out of thin air), it can never go bankrupt. In this same way, so long as the government’s central bank guarantees that a private bank never runs out of cash (this can be done by guaranteeing people’s savings), then why do private banks exist? Again, I am not explaining this nascent thought nearly well enough.

What I am proposing is that rather than having private banks that give loans and charge interest on those loans, what would be stopping the central bank from offering that same service to the consumer, except without charging the interest? The bank would simply pay its bankers with a government defined sum of money that ultimately comes from the central bank itself. I don’t see an economic reason, other than the mammoth interests which exist in the banking sector currently, that this would not work. Then, people would be able to loan money from the central bank and never pay any interest on it.

Come to think of it, what does the private bank need the interest for anyway? The private bank didn’t take money out of its vault to give to the loanee. They just conjured that shit from thin air. So, as you’re paying your loan back, why do they need that extra bit? It’s almost an optical illusion, making us think that they need the interest to pay their bills. But they conjured it out of thin air, and they aren’t putting it all into their reserves (banks only operate with like 10% reserves), so everything that we pay them is profit. Why not just pay your bills with the money we give you?

If I have fundamentally misunderstood how this system works, then this writing will come off as the writings of a paranoid idiot. I may look back on this piece of writing and correct the flaws in my own thinking, but at this point I really don’t understand why private banks exist and why they charge interest.

The point of this piece was to show the fact that value isn’t taken from money but rather from what value you can bring other people. I was going to use this point to show that many professions, for example stock market traders, bankers and landlords do not bring any value to the economy and therefore should not exist in those roles. Instead, they should add value to the economy in whatever they can and make money from those value-adding actions.

The Deficit Myth is what really got me thinking about money in this way. From the central bank’s perspective, they can inject money into the economy in any which way they would like to. They can incentivise whichever behaviour they want to. From this perspective, you can see how the ideal objective should be to make the economy as productive as possible.

Full employment would be the first policy in this path. Once you have full employment, you can really look at increasing the quality of the employment and shifting the workforce to produce the results that we want as a society. If we want a society that cares for our elderly and our children, for example, we would put money into these areas. If we want a society that is highly educated and creates new things, we would put money into education and the arts.

This puts a whole new perspective on economics. And this is only the start of my research. There are a lot of things I thought about today around land reform and the stock market that I haven’t written here, but I have no doubt that I will write about them in the future.