Modern Monetary Theory states that banks create new money by debiting a bank account. The work involved in debiting a bank account is zero-cost. The issue is who gets the money and for what purpose.
The government licenses banks to deposit money in bank accounts to introduce new money into the economy. The usual reason is to create a loan. On the surface, this is a good reason, as loans must be repaid, so the borrower uses the money to earn a profit rather than spend it on consumption. Unfortunately, profits redistribute money from those who can’t get loans to those who can. It inevitably leads to a world where a few have wealth, and most are poor.
As we saw during COVID-19, the government can instruct banks to deposit money into bank accounts for other reasons. Banks deposited money into company accounts to pay workers who could not work and deposited new money directly into people’s accounts to increase government benefits.
The current financial crisis in home ownership and funding renewable energy is an opportunity to expand the reasons we introduce money. Doing so will reduce costs and make any community that adopts low-cost fair methods much wealthier.
Another Way to Increase the Money Supply
A government could deposit money into a community organisation's bank account to increase the money supply. The community could then ask the government to build an infrastructure asset, like a road, available to the community. The bank would be paid a service fee for its work, just like any other merchant, and the government would supervise the construction as they do today. The difference is that the community of users would own the infrastructure and be asset custodians.
The steps to build a community asset could be:
- The government and community agree to develop a community asset.
- Banks create new money, provide it to the community, and collect a fee to ensure it is spent on the asset.
- The government goes to the market, as it does today, to select a company to build the asset.
Today’s Method of Funding Community Infrastructure Assets
Today, we tax communities to find the money to build community assets. Banks create new money with loans. The bank lends money to a company, charges them interest on the money, and takes the risk that they won’t pay it back within a specific time. Banks only lend money to companies with existing assets that the bank can claim if there is a default on repayments. The company spends the money building a profitable investment to pay back the loan from the profits. When the bank returns the money, it destroys it, and the bank and company pay tax on their earnings. The government then uses the tax to build community assets like a road.
The steps today are:
- The government decides to build a new asset and pay for it.
- Companies compete for the business, and the government decides on the company.
- Companies seek loans from banks to develop their assets.
- Banks issue the loans, and Companies spend the new money the government supplies from the loans.
- Companies repay the loans, and the banks destroy the repayments to prevent too much money from entering the economy.
- Companies make a profit and pay tax. Workers in the community pay a tax on their wages to build the asset.
- The government spends the tax to build the asset.
The Difference Between the Approaches
Both systems will produce the same goods and services and have the same competitive approach to construction. Both systems use the same infrastructure to do the work. The difference is that the community that uses the infrastructure will own it rather than the body that finances it.
Because the community that uses the infrastructure owns it, almost all the finance costs disappear. If the infrastructure is built with new money, the community owners can recycle that money to pay for maintenance, upkeep, and expansion. For example, people who live in an area could pay to use roads by buying shares in the roads they use. The money they pay is used to maintain and purchase a share of the streets. If all the owners have to sell a portion of the roads, it removes the cost of capital embedded in the usage price.
The approach will at least halve the cost of goods and services, and the price people will pay will be determined by the community owners of the assets.
Money as a Community Asset
Money is an asset and should be available at the same price. Today, individuals own money, and there are markets for it. Money, however, is not a commodity; it is a measure that can be put into an economy at zero cost. Giving new money a value through loans leads to distortions in the economy and the uneven allocation of funds.
A much better system uses loans of existing money to transfer existing assets and new money to build or buy community-owned assets where the money stays within the community that uses it.
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