Editor’s note: By a happy coincidence, it was discovered the authors of both parts 1 and 2 of the series share the same birthday. For this reason, the series was scheduled to start on June 9. Part 2 will be out on June 18.

Part 1: Critique of the Current

Money is the medium we use to represent exchange within our economy. When we pay for our groceries, utilities, and all paid-for activities, we pay with a currency we can collectively recognize, a recognition that stems primarily from legal backing by the government for major payments like taxes and debts. In the United States, it’s the American Dollar, in the European Union, it’s the Euro, and so the list goes for every sovereign nation or group of nations.

Money is a fundamental need for a functioning market, thus speaking of its importance in the functioning of our economy also brings up the need for an institution that can store and give it, which is where the role of banks comes in. In a most simple definition, banks are designed to accept deposits of money from those looking to store, and lend out money to users for any purpose, like buying a house or investing in capital. They play a pivotal role in managing money and providing the services needed for their efficient use and safeguarding. It’s for this reason why, for about 4000 years, they’ve existed as a mainstay of economies. 

However, there exists a complication to the role of banks and their impact on the supply of money in the economy. Every financial system across the world is currently based in fractional-reserve banking, a system where banks are required to keep only a fraction of their deposits as reserves on hand to be readily available. 

What this means is that, in our modern economy, commercial banks are able to create new money when lending, money which can only be destroyed when the loaned money is paid back. Of course, commercial banks can’t just create as much new money as they want to. A combination of competition with other banks, central bank policies, general behaviors in the economy, and the risks associated with lending keep money creation in check.

Yet these constraints don’t contain the whole breadth of the system. Money created by commercial banks still make up the majority of money created across the economy, about 97 to 98 percent. Commercial banks getting returns from creating their own supply of legally backed money, whose recognition stems from the government and is non-reproducible by other currencies, brings several problems that have created long-lasting calls for reforms. Many Georgists who have dedicated themselves to the money system are no different, and there is perhaps no better person to state the core problem than Henry George himself. As he puts it:

“the issuing of credit money for general circulation is a valuable privilege, which ought to be shared by the whole people and not suffered to enrich a few.” 

Indeed, Henry George was opposed to commercial banks creating money. He himself was a Greenbacker who supported money creation only by the general government, not commercial operators. However, this isn’t the only solution available to Georgists, the latter portion of this article written by my colleague will cover that.

The problematic effects of commercially creating, as George calls it, credit money have been identified as far back as the 1930s by figures like Irving Fisher. Some examples he brought up included massive fluctuations in money and credit supply for economic use, potential bank runs, and severe public and private debt stemming from money creation requiring simultaneous debt creation. Fisher identified the fractional reserve system as a major contributor to the Great Depression, and had hoped his plan for monetary reform, the Chicago Plan (which will be covered in due time), would eliminate the monetary issues of the economy.

Where the problems of private money creation begin to go into a spin cycle is when they become connected to the economic rents of other non-reproducible resources, above all land. The rents of land and other fixed-supply resources in its class aren’t a return for production, but are instead an extraction; owing to them only being accessible by buying them from their previous owner, who can charge as high as possible without fear of competition or giving anything in return.

The financial system plays directly into these rents. Per economist Michael Hudson, around 80 percent of bank credit released into the economy is dedicated to real estate, with a major portion of said real estate’s value stemming from land. In our current economy, that land price share is about 50 to nearly 90 percent of the price of real estate in our most major and prosperous cities. The self-reinforcing cycle of increasing land prices amidst increasing land banking, one that is strengthened by the issues of our current financial system, brings an enormous bubble. Let those bubbles balloon and boom enough, and they burst and bust economies and livelihoods.

Land banking being a primary driver of booms and busts has been well-documented by Georgists for over a century, starting with George himself and continuing on to famous Georgist writers and economists like Fred Harrison and Fred Foldvary. Of course, the solution to the land banking aspect of the business cycle is the flagship policy of the Georgist movement, a land value tax, near universally agreed as the answer to the land question.

However, while the land issue is well documented and resolved, the problems George spoke of in the commercial creation of money in our current financial system remain to be dealt with; he himself agreed as far back as 1889. There isn’t a single universal solution among Georgists on how it should be done, but there are several possible avenues to take. It is here where my part ends, and where the part of my colleague, Eric, begins.