Icelandic Parliament investigating Full Reserve Banking

Home » Blog » 2012 » December » 05 » Icelandic Parliamen…

Is Iceland – the wonderful island with just 300 thousand citizens – going to be the first country seriously questioning the privatized money creation and considering Full Reserve Banking proposals? It seems that it might well be the case…

A motion has recently been put forward in the Althing – the Icelandic Parliament – calling for the forming of a committee to report on the benefits/costs of full reserves banking. The motion reads:

“Althing concludes that the minister of finance will form a committee of specialists to research how the separation of money creation and loan function of the banking system can be achieved by limiting banks’ ability to create new deposits through lending.”

Deadlines for submission was December 4th.

Ben Dyson made a submission on behalf of Positive Money to the Icelandic parliament in favour of the establishment of a committee to assess the need for reform. It reads:

Proposal No. 262 proposes the establishment of a committee to consider how in the current banking system  the function of money creation can be separated from the function of lending.

Such a separation would end the situation where most of Iceland’s money supply is created and allocated by the same private banks that were implicated in the financial crisis.

We feel that it would be a serious oversight to ignore this issue in light of one of the worst  financial crises in history, particularly given its effect on Iceland at the time of the crisis.  However, the issue is not simply one of preventing future financial crises. The current  system of privatized money creation also has impacts for debt, poverty, inequality, the  business environment, and economic growth. Reforming money creation would have significant economic and social advantages.

Positive Money has also offered to provide to any established Committee highly-detailed step-by-step reform proposals, an assessment of risks etc.  to show that alternatives are feasible.

You can read the whole submission here.

There were 12 submissions made, 9 of them positive letters (in English), 1 submission was slightly negative and 2 rather negative (from The Central Bank and the Icelandic Financial Services Association, which considered it ‘pointless’ to investigate the issue further (surprise surprise).

All the recommendations can be seen here.

The full (unofficial) translation of the motion is below:

Althing concludes that the minister of finance will form a committee of specialists to research how the separation of money creation and loan function of the banking system can be achieved by removing banks’ ability to create new deposits through lending. The committee shall complete its work by January 1st 2013 and the minister deliver a report to Althingi about the conclusions of the committee no later than one month after the committee completes its work.

Report

It is the opinion of the person introducing the proposal that adequate steps have not been taken to prevent another banking crisis in Iceland. It is important to take action to promote financial stability, in order to prevent further financial catastrophe such as the banking crisis in 2008.

The current monetary system’s deposit may create the equivalent of money by lending of excess deposits. In fact, most of the money used in general transactions are electronic deposits which private banks have created with excess deposits. Money creation and bank lending must be separated by changing laws and only allow the Icelandic Central Bank to create money, whether the money is made of paper, metal or electronic form.

With this amendment net interest income (interest income on loans in excess of interest expenditure on deposits) will be transferred by a large extent to the Central Bank, but banks have until now profitted received this profit. The separation will give the Central Bank more control over the money supply and prevent banks from creating asset bubbles with their lending activity.

It is important to see the pros and cons of such an arrangement in this country to prevent another crisis. Recent research of specialists working with the International Monetary Fund confirms that such separation delivers the benefits which Irving Fisher (1936) stated that they would do, ie to:

  • improve control of the main causes of business cycles which is a sudden increase and decrease in lending and the supply of money that banks create,
  • prevent bank runs,
  • reduce public debt and reduce the indebtedness of individuals, where money creation would no longer need to be based upon borrowings.

 

If those statements are true it is the assessment of the person introducing the proposal that this is a opportunity for authorities to create great benefits for people with low cost. Therefore, it is important to take action soon and a committee of experts will be formed that review the IMF report, apply the assumptions implied on Icelandic society and assess whether such a path is possible, how best would be to implement this plan and any amendments are necessary in this purpose.

It is proposed that the committee delivers its findings no later than the first January 2013 and the Minister returns a report on the findings no later than one month after the committee finishes its work.

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  • DozyHole

    Iceland would be doing the world a great service if they curb private money creation to some degree, or completely.

    I’m glad positive money mentions the ridiculous time frame they have put on this, although they also put our timelines for bank reform to shame.

  • http://twitter.com/granchinhojp João Granchinho

    Iceland is a beacon and a role model in the way they dealt with their crisis. May we one day follow them.

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  • Sergio Turner

    Congratulations to Positive Money for being attuned to the opportunity to inform and present its proposal to the Althing. Please keep us informed – a positive response would be a great Christmas gift to Icelanders and the world.

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  • Tony Harvey

    The PM submission to Althing looks really good to me. And several eminent Profs have also submitted contributions along similar lines. I am interested in learning from Prof Werner in his submission about commercial banks being exempt from the ‘client money rule’ which I understand applies to all other businesses & gives banks unique & unreasonable privileges. I believe Iceland’s considerations here is one example of some big milestones lately along the road leading to the end of the appalling yoke of the debt based private monetary systems around the neck of humanity. I believe that the inhumane speculation based international economic system will be drastically curtailed too, partly as a result of the ending of these privatised debt based money creation & allocation systems.

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  • vincentr

    I agree with PM on this issue.Iceland has been at the centre of a storm re banking.The problem can be curtailed at national level but what about the international level?Icelandic banks created alot of accounts overseas,but when the money started to vanish the Icelandic central banks could not cope with the sheer volume of money involved.

    It is all well and good looking after the domestic banking in individual states but what do we do about global banking?,Where money is deposited and loaned outside the remit of any national central bank.

    Apparently Icelandic banks were operating in the UK with no access to BoE funding when those bank runs started.The Icelandic central bank was therefore in no position to help.This is a bit of a vacuum.Do we need each and every national central bank to get any overseas banks operating in its territory to come under its direct control,as if it were a domestic bank?Any suggestions?

  • Hollandmix

    Only last March the talked about having two options, joining the EU (Euro) or adopt another foreign currency, what happened when I wasn’t looking? Anyway, great news!

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  • elspeth

    BRAVO! xxx :) xxx may the change continue!

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  • Daniel

    There will be many interested parties watching the progress of the Icelandic reforms. This reform is not in the interests of the Financial cabal and they will be looking at ways to sabotage it. There will be many dirty tricks put into play I fear. Good luck to brave Iceland.

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  • Graham Lyons

    I don’t understand the report’s first sentence: “The current monetary system’s deposit may create the equivalent of money by lending of excess deposits.”, in particular the meaning of ‘deposit’ in both cases. I didn’t know a deposit could be lent.

  • NoNonsenseNana

    PM submission makes great reading – clear and brief. The Prime Minister of Aotearoa/NZ made a fortune as a moneytrader prior to his election so he has no interest in banking reforms – but lots of other Kiwis do, and sharing PM’s data makes the banking ripoff so much easier to understand.

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  • Guest

    Three economic reforms are essential, and full-reserve banking is first. It is the only way Iceland can issue debt-free money without the banks leveraging that money to cause inflation.

    However, when rich people can no longer magnify their money to lend even more money, they will be inclined to get out of banking and instead up the land of Iceland, making land less affordable for ordinary Icelanders. Iceland can avoid that by collecting enough of a tax on land values to make land speculation unprofitable.

    Then there will be concern, whether justified or not, that small landholders will be unable to pay the tax. This can best be addressed by paying a per capita dividend (or at least a dividend to the elderly) out of land value tax proceeds.

    Each of these three reforms is worth doing without the other two, but combining the three will produce the best results of all. And, no, they do not have to all be done at once. Given Iceland’s situation, full-reserve banking should be the top priority.

  • http://www.facebook.com/people/Dan-Sullivan/1408883609 Dan Sullivan

    Three
    economic reforms are essential, and full-reserve banking is first. It
    is the only way Iceland can issue debt-free money without the banks
    leveraging that money to cause inflation.

    However, when rich people can no longer magnify their money to lend
    even more money, they will be inclined to get out of banking and instead
    buy up the land of Iceland, making land less affordable for ordinary
    Icelanders. Iceland can avoid that by collecting enough of a tax on land
    values to make land speculation unprofitable.

    Then there will be concern, whether justified or not, that small
    landholders will be unable to pay the tax. This can best be addressed by
    paying a per capita dividend (or at least a dividend to the elderly)
    out of land value tax proceeds.

    Each of these three reforms is worth doing without the other two, but
    combining the three will produce the best results of all. And, no, they
    do not have to all be done at once. Given Iceland’s situation,
    full-reserve banking should be the top priority.

    • Brad Knobel

      James Robertson ( http://www.jamesrobertson.com/ ) has written about these aspects of monetary reform for decades. He proposes that land assessments include a consideration for the nature of increases in land value. If a home-owner improves his property directly with investments in it, the increase in value would be untaxed. If land value goes up without direct investment in it, the marginal “speculation” value would be heavily taxed. I’m probably not making this clear, but his site is a rich resource and is easy to navigate, and he describes it better than I can. He has recently written his new book on monetary reform.

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  • http://www.facebook.com/profile.php?id=1633775172 Daniel Rose

    Debt free money creation should implemented along side a government funded program to automate as many jobs as possible and creating a society where food accommodation are available for free without servitude.

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