Reinventing Banking: From Russia to Iceland to
By Ellen Brown
December 11, 2015 "Information
Clearing House" - Global developments in
finance and geopolitics are prompting a rethinking of the structure
of banking and of the nature of money itself. Among other
interesting news items:
- In Russia, vulnerability to Western sanctions
has led to proposals for a banking system that is not only
independent of the West but is based on different design
- In Iceland, the booms and busts culminating
in the banking crisis of 2008-09 have prompted lawmakers to
consider a plan to remove the power to create money from private
- In Ireland, Iceland and the UK, a
recession-induced shortage of local credit has prompted
proposals for a system of public interest banks on the model of
the Sparkassen of Germany.
- In Ecuador, the central bank is responding to
a shortage of US dollars (the official Ecuadorian currency) by
issuing digital dollars through accounts to which everyone has
access, effectively making it a bank of the people.
In a November 2015 article titled “Russia
Debates Unorthodox Orthodox Financial Alternative,” William
A significant debate is underway in Russia
since imposition of western financial sanctions on Russian banks
and corporations in 2014. It’s about a proposal presented by the
Moscow Patriarchate of the Orthodox Church. The proposal, which
resembles Islamic interest-free banking models in many respects,
was first unveiled in December 2014 at the depth of the Ruble
crisis and oil price free-fall. This August the idea received a
huge boost from the endorsement of the Russian Chamber of
Commerce and Industry. It could change history for the better
depending on what is done and where it further leads.
Engdahl notes that the financial sanctions
launched by the US Treasury in 2014 have forced a critical
rethinking among Russian intellectuals and officials. Like China,
Russia has developed an internal Russian version of SWIFT Interbank
payments; and it is now considering a plan to restructure Russia’s
banking system. Engdahl writes:
Much as with Islamic banking models that ban
usury, the Orthodox Financial System would not allow interest
charges on loans. Participants of the system share risks,
profits and losses. Speculative behavior is prohibited . . . .
There would be a new low-risk bank or credit organization that
controls all transactions, and investment funds or companies
that source investors and mediate project financing. . . .
Priority would be ensuring financing of the real sector of the
economy . . . .
On September 15, 2013, Sergei Glazyev, one of
Vladimir Putin’s economic advisers,
presented a a series of economic proposals to the Presidential
Russian Security Council that also suggest radical change is on the
horizon. The plan is aimed at reducing vulnerability to western
sanctions and achieving long-term growth and economic sovereignty.
Particularly interesting is a proposal to provide
targeted lending for businesses and industries by providing them
with low-interest loans at 1-4 percent, financed through the central
bank with quantitative easing (digital money creation). The proposal
is to issue 20 trillion rubles for this purpose over a five year
period. Using quantitative easing for economic development mirrors
the proposal of UK Labour Leader Jeremy Corbin for “quantitative
easing for people.”
William Engdahl concludes that Russia is in “a
fascinating process of rethinking every aspect of her national
economic survival because of the reality of the western attacks,”
one that “could produce a very healthy transformation away from the
deadly defects” of the current banking model.
Radical Money Plan
Iceland, too, is looking at a radical
transformation of its money system, after suffering the crushing
boom/bust cycle of the private banking model that bankrupted its
largest banks in 2008. According to
a March 2015 article in the UK Telegraph:
Iceland’s government is considering a
revolutionary monetary proposal – removing the power of
commercial banks to create money and handing it to the central
bank. The proposal, which would be a turnaround in the history
of modern finance, was part of a report written by a lawmaker
from the ruling centrist Progress Party, Frosti Sigurjonsson,
entitled “A better monetary system for Iceland”.
“The findings will be an important
contribution to the upcoming discussion, here and elsewhere, on
money creation and monetary policy,” Prime Minister Sigmundur
David Gunnlaugsson said. The report, commissioned by the
premier, is aimed at putting an end to a monetary system in
place through a slew of financial crises, including the latest
one in 2008.
Under this “Sovereign Money” proposal, the
country’s central bank would become
the only creator of money. Banks would continue to manage
accounts and payments and would serve as intermediaries between
savers and lenders. The proposal is a variant of the Chicago Plan
Kumhof and Benes of the IMF and the Positive Money group in the
Initiatives in Iceland, Ireland and the UK
A major concern with
stripping private banks of the power to create money as deposits
when they make loans is that it will seriously reduce the
availability of credit in an already sluggish economy. One solution
is to make the banks, or some of them, public institutions. They
would still be creating money when they made loans, but it would be
as agents of the government; and the profits would be available for
public use, on the model of the US Bank of North Dakota and the
German Sparkassen (public savings banks).
In Ireland, three political parties –
the Green Party and
Renua Ireland (a new party) — are now supporting initiatives for
a network of local publicly-owned banks on the Sparkassen model. In
the New Economy Foundation (NEF) is proposing that the failed
Royal Bank of Scotland be transformed into a network of public
interest banks on that model. And in Iceland, public banking is part
of the platform of a new political party called the Dawn Party.
Dinero Electronico: A National Digital Currency
So far, these banking overhauls are just
proposals; but in Ecuador, radical transformation of the banking
system is under way.
Ever since 2000, when Ecuador agreed to use the US
dollar as its official legal tender, it has had to ship boatloads of
paper dollars into the country just to conduct trade.
In order to “seek efficiency in payment systems [and] to promote
and contribute to the economic stability of the country,” the
government of President Rafael Correa has therefore established the
world’s first national digitally-issued currency.
Unlike Bitcoin and similar private
crypto-currencies (which have been outlawed in the country),
Ecuador’s dinero electronico is operated and backed by the
government. The Ecuadorian digital currency is
less like Bitcoin than like M-Pesa, a private mobile phone-based
money transfer service started by Vodafone, which has generated a
money” revolution in Kenya.
Western central banks issue digital currency for
the use of commercial banks in their reserve accounts, but it is not
available to the public. In Ecuador, any qualifying person can have
an account at the central bank; and opening one is as easy as
walking into a participating financial institution and exchanging
paper money for electronic money stored on their smartphones.
Ecuador’s banks and other financial institutions
were ordered in May 2015 to adopt the digital payment system within
the next year, making them “macro-agents” of the Electric Currency
According to a National Assembly statement:
Electronic money will stimulate the economy;
it will be possible to attract more Ecuadorian citizens,
especially those who do not have checking or savings accounts
and credit cards alone. The electronic currency will be backed
by the assets of the Central Bank of Ecuador.
That means there is no fear of the bank going
bankrupt or of bank runs or bail-ins. Nor can the digital currency
be devalued by speculative short selling. The government has
declared that these are digital US dollars trading at 1 to 1 – take
it or leave it – and the people are taking it. According to an
October 2015 article titled “Ecuador’s
Digital Currency Is Winning Hearts!”, the currency is actually
taking the country by storm; and other countries in Latin America
and Africa are not far behind.
The president of the Ecuadorian Association of
Private Banks observes that the digital
currency could be used to finance the public debt. However, the
government has insisted that this will not be done.
According to an economist at Ecuador’s central bank:
We did it from the government because we
wanted it to be a democratic product. In any other countries,
[digital currency] is provided by private companies, and it is
expensive. There are barriers to entry, like [expensive fees] if
you transfer money from one cellphone operator to another. What
we have here is something everyone can use regardless of the
operator they are using.
into the 21st Century
The catastrophic failures of the Western banking
system mandate a new vision. These transformations, current and
proposed, are constructive steps toward streamlining the banking
system, eliminating the risks that have devastated individuals and
governments, democratizing money, and promoting sustainable and
They also raise some provocative questions:
- Would issuing “quantitative easing” to the
tune of 20 trillion rubles for Russian development and trade
- Could merging the Iceland version of the
Chicago Plan with a public banking initiative return the power
to create money to the public without collapsing credit?
- How does the Ecuadorian national digital
currency mesh with the
“war on cash” underway in Europe?
These and related questions will be explored in
later articles. Stay tuned.
Ellen Brown is an attorney, founder of the Public
Banking Institute, and author of twelve books including the
best-selling Web of Debt. Her
latest book, The Public
Bank Solution, explores successful public banking models
historically and globally. Her 300+ blog articles are at EllenBrown.com.
Listen to “It’s Our Money
with Ellen Brown” on PRN.FM.