(Bloomberg) -- Frank Breitenbach would like to pull apart the global financial system, while he’s still in it.
And then put it back together again, only this time without credit bubbles, crises and bailouts.
It’s an old idea that’s receiving fresh impetus in Europe as populism makes political gains and concern grows about the stability of financial institutions: Remove from banks the power to create money, and give it back to the state. Exclusively.
The proposal has appeal even among some insiders, like Breitenbach. He couples his day job as a vice president at KfW IPEX in Frankfurt, a state-owned provider of export financing, with his role as a member of Monetative, an initiative to return the system to what’s known in German as Vollgeld, which roughly translates as "whole money."
“There is too much liquidity in the market now and it’s more or less the same situation we had right before the 2008 crisis,” Breitenbach said in an interview on Aug. 12, noting that he was giving his personal views, not those of KfW. “I have the feeling that another financial crisis will happen.”
Vollgeld’s solution would be to hand central banks complete control of the money supply. Commercial banks would be required to back their loans 100 percent with deposits -- whether they come from savings, capital or their own borrowings.
In other words, lenders would be barred from creating money out of nothing -- an inherent attribute of the fractional-reserve banking model that’s been dominant since the Middle Ages.
Advocates of Vollgeld say the change is necessary to prevent the credit booms that helped cause the last financial bust, and possibly the next. Central banks would be able to ensure the real economy has the liquidity it needs, and no more.
“The amount of money that the central bank will pump into the system should be in line with economic growth,” Breitenbach said. “It’s the central bank’s task to take control over the amount of money” in the system, he said.
While Vollgeld has only a handful of supporters in Germany -- Breitenbach says his organization has about 100 members -- elsewhere it’s gathering more steam. A Swiss version has succeeded in gathering the 100,000 signatures needed to hold a plebiscite on the subject, and a vote is expected around 2018.
That would be 85 years after the first version of Vollgeld was floated, as part of the Chicago Plan of banking reforms by leading U.S. economists including Irving Fisher in the wake of the Great Depression. Those ideas were never implemented, but the continued drag on growth and prosperity from the 2008 financial crisis is feeding new interest.
Vollgeld’s counterpart in the U.K. is Positive Money, a group that also advocates “People’s QE” -- central-bank financing of government expenditure. A version of that has been backed by Jeremy Corbyn, the leader of the opposition Labour party.
Adair Turner, former chairman of the U.K.’s Financial Services Authority, and former Deutsche Bank Chief Economist Thomas Mayer, have discussed similar ideas.
That’s not to say Vollgeld will arrive any time soon. Aside from the stability concerns over implementing such a new system, there’s no guarantee that the European public would trust central banks any more than their commercial counterparts. The European Central Bank is viewed with particular skepticism in Germany.
There are other snags. Responding to the Swiss initiative, the government said Vollgeld wouldn’t prevent liquidity or solvency problems emerging at lenders. It also pointed out that allowing the central bank to issue money without a corresponding rise in assets might undermine public confidence in the central bank, or in money itself.
For Breitenbach, keeping depositors’ money safe and stemming a source of bank runs will nevertheless be a huge advance in stability. And it doesn’t mean destroying the financial system as we know it.
“I don’t see the contradiction between the Vollgeld system and being a banker,” he said. “The only difference is that the banks have to collect savings before lending. ”
That’s a critical difference, and one Breitenbach argues the general public will find surprising. He says few are aware that it’s actually the commercial banks that have the largest role in money creation, not the central bank. Reverse that, and greater stability ensues, goes the thinking.
“The Vollgeld system is actually much easier to manage than the system we have right now,” Breitenbach said. “Most people think we already have this system.”
--With assistance from Catherine Bosley To contact the reporters on this story: Gabriella Lovas in Budapest at email@example.com, Jeff Black in Frankfurt at firstname.lastname@example.org. To contact the editors responsible for this story: Paul Gordon at email@example.com, Jana Randow
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