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Old 28-06-2017, 07:09 PM   #19
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Shifting from Central Planning to a Decentralised Economy: Do we Need Central Banks?
15 January 2017
by Professor Richard A. Werner, D.Phil. (Oxon)
Paper presented at the 14th Rhodes Forum: Dialogue of Civilisations Research Institute, Panel 2: Economic Alternatives when Conventional Models Fail, Rhodos, Greece, on 1 October 2016 and at the 4th European Conference on Banking and the Economy (ECOBATE 2016), in Winchester Guildhall, Winchester UK, on 12 October 2016

I. The Central Bank Narrative

For more than the past four decades, public policy discourse, especially when touching on macroeconomic and monetary policy, has been dominated by the views held and actively sponsored by the central banks, particularly in Europe and North-America, as well as Japan.

Their policy narrative has been consistent over time and virtually identical between central banks, which is why I shall refer to it collectively as the ‘central bank narrative’. It has been mirrored in the type of economics that central bankers have supported and that has indeed subsequently become dominant in academia and among the economists selected as the experts of choice in the major newspapers and television channels: the theoreticians advancing neo-classical economics.

This central bank narrative (and hence also the dominant neo-classical economics, also known as ‘mainstream economics’) has at least five major pillars, which I shall list briefly:

1. Interest rates are the main policy variable to move the economy
2. Markets are in equilibrium, thanks to price movements that have equated demand and supply.
3. Banks are just financial intermediaries, like other non-bank financial firms. They thus do not need to be singled out in the analysis or modelled explicitly.
4. We need to save in order to fund investments that are the precondition of economic growth and development. If domestic savings are insufficient, we need to borrow from abroad or attract foreign investment.
5. Both the foreign investors and the domestic goal of high growth require deregulation, liberalization and privatization, since only in such an economy can market forces deliver high and stable growth.

The truth of the matter is: We don’t need central banks. Since 97% of the money supply is created by banks, the importance of central banks is far smaller than generally envisaged. Moreover, the kind of money that commercial banks create is not privileged at law. Legally, our money supply is simply private company credit, which can be created by any company, with or without banking license.

Eurozone countries, having given up the right to their own currencies, can still create money and reflate the economy: the government, for instance in Spain, simply needs to stop the issuance of government bonds, and fund the entire public sector borrowing requirement from the domestic banks that create it out of nothing – and can do so at more competitive rates as the bond markets: this policy of Enhanced Debt Management (Werner, 2014b) not only would make it obvious that Spain does not need the ECB, but it would also put the national debt profiteers – the bond underwriting firms such as Goldman Sachs and Morgan Stanley – out of business.

This reality of private money creation also means that we can, without legal obstacles, create a decentralized system of local currencies, without central bank involvement.
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