Inflation is likely to occur when more money is available than goods and services to buy. This is not the only reason, as money is held in “stationary” assets and other stores. However, if we consistently create more new money than the economy needs, we will experience inflation. If we control the creation of new money, inflation will stop.
Most economies experience endemic inflation, and the primary cause is the excess production of new unnecessary money by banks and other financial institutions. The mechanism is capital gains, “unearned money,” or “super profits.” With banks, it is hidden behind the word interest. Banks are the institutions that keep track of money flows, store excess money, and introduce new money into the economy. They are service providers to the government, and their high profits measure how inefficient they are at their job.
Banks should be owned by their communities, and their profits should be returned to those communities. When they are not, they will find ways to make excessive profits that they claim make them efficient.
Organisations that provide services should profit from their work. Capital gains come from someone else’s loss, and banks with loans create a capital gain to themselves equal to the sum of interest and fees they collect on loans.
They do it by paying themselves loan interest and loan fees when they debit a loan. A loan debit extends the loan and generates new money, and the bank claims it as its own. Other loan debits give new money to the borrower (because that is what a loan is meant to do), and the borrower uses it for some purpose. With interest and bank fees, the purpose is to pay the bank the interest and fees owed. The bank bypasses giving the money to the borrower and claims it as a capital gain to themselves.
What justification exists for banks collecting a capital gain equal to the interest and other fees charged on loans? The banks provide a service, and the interest paid is part of the service fee. The capital gain is passed on to bank shareholders as an increase in share price and dividends and to staff in bonuses.
In Australia, if there is a capital gain from the generation of new money, it should go to the Australian Government or the Australian taxpayers, or better still, it should not be collected. Each year, Australian banks are estimated to pay themselves about $300 billion in capital gains taken from borrowers. This is about 15% of the Australian GDP. It is a hidden increase in the money supply and is the reason for endemic inflation in the Australian economy.
The cost of implementing the change is a simple accounting transaction. The change transfers interest and fees resulting from a debit to a loan. Instead of a credit to the bank, it becomes a credit to the borrower, and then the borrower pays the bank the interest and other fees.
Furthermore, stopping banks from giving loans to buy and sell existing assets with new money will increase productivity further. This will save the cost of creating new money, typically the value of the assets. The savings are immense and will slow the development of monopolies and monopsonies and reverse the trend of the already rich acquiring all new wealth.
Summary
Banks are behaving badly. They can stop of their own volition, but history tells us they won’t until required to. If the government requires them to stop taking undeserved capital gains from all borrowers—including governments—then the economy can have zero inflation, a much higher GDP, and funds to address the existential crisis of humans' influence on the planet. To learn more, read some of my other articles here.
