Chapter 4
"The Money Syndrome"  by Helmut Creutz
Commercial Banks, Central Banks,


»Money and banking are so mysterious for the average person, that it consists only of a ›taboo‹ as the sole popular concept..... The popular concepts including those of average banking experts are as primitive as the superstitious beliefs of Russian farmers before the World War.«

Irving Fisher
(US-economist and money theoretician 
in "The Illusion of Money", 1934)


What Is the Main Task of Banks?

Market participants usually receive their income only by bringing in work and are therefore capable to demand the service of others. A demand beyond this income is only possible through loans. Loans in turn require the savings of another person as a prerequisite.

For the steady movement of the economic circulation, no one is compelled to spend all his earnings. Nonetheless is it necessary to leave all income surplus to others for satisfying their demands. With the mediation between saver and debtor the banks fulfill an important task in political economy. The mediation of credits does not only serve the debtor but also the economy as a whole. For the debtor closes a demand gap which would be created by the saver's non-demand. The clearing of the market by the debtor is particularily in favor of the saver, whose output is bigger than his demand. Without the replacement of demand by the debtor, his output surplus would remain in the market.

Of course, it is not the only task of the banks to fill the money boxes or accounts of market participants by loans. Another important task is the cashless settlement of accounts in the economy. If you consider that in 1993 about 3'260 billion DM had been moved between deposit accounts every month, that is nearly 50'000 DM per capita, then the dimensions of this service will be conceivable. In addition to that comes the circulation of cash money, the dimensions and turnover of which, however, is much smaller. But it would be wrong to regard the circulation of cash as a negligible factor. According to a research of the Bundesbank from 1985, 87% of all payments of ›non-banks‹ (= market participants without banks) had been settled with cash and only 13% by transfer of credit items. Even though single amounts of these surpass cash settlements by far, the role of cash becomes clear. Moreover it must be noted, that the majority of the shifting of assets and speculative business are being settled via deposit accounts as well as the multitudinous payments immediately before investments and consumption. All the latter settlements immediately before consumption can only be performed as long as there is a consumer at the end of the chain who takes his money bill and goes shopping.

What About the Power of Banks?

Generally, the power in the land can be told from the size of buildings. In former times these were temples, castles, cathedrals, palaces or city halls. In our times these seem to be banks. This is not only true for the bank-towers in Frankfurt, but even in the remotest village the popular bank is often the most representative building.

The numbers, too, are impressing: a total of almost 4'000 banks with 40'000 branch banks and 600'000 employees have shown a volume of business of 6'597 billion DM in 1993, more than double the national product of Western Germany. The volume of credits with 4'090 billion DM by the end of 1993 was almost eight times as big as the budget of the Federal Government.

Despite these facts a conclusion about proportions of power would be somewhat doubtful. Because the size of bank buildings and the growth of banks only reflect the size and the growth of money assets that the banks are entrusted with by their clients. For the most part their power is just a borrowed one. The banks' own funds rarely exceed the six percent of the volume of credits specified by the supervisory board of banks. And two thirds of all banks organize their own capital under public law or in co-operatives. The three well-known biggest banks in Germany only hold 12.5% shares of the total volume of their business and the liable capital is put together by hundreds of thousands of shareholders. Genuine private banks like those of Rothschild or Rockefeller, where individuals or families hold the capital, rarely exist anymore. In the Federal Republic their portion of the total volume of banking business doesn't exceed 1.3%. Power, that means influence on economy and through that on politics, can only be wielded by banks which possess large stocks of single firms. But much more serious is the fact that in stockholder's assemblies banks can act as representatives of their clients who delegate their voting right to them. But this wielding of power is not a specific question of the banks but one of stock laws, which can easily be amended.

Does the Power of Banks Grow with Their Turnover?

The assumption seems obvious that banks grow more powerful and influential with the over-development of money deposits and credits. But in reality, as in all processes of over-growth, finally countercurrent effects occur. For the bigger the money assets and debts in political economy, the greater become the risks for granting loans because of decreasing real securities. And if it comes to a massive insolvency of debtors, then the market price of credited objects fall below the open bank claims.

In the beginning of the eigthies a series of breakdowns of banks in the countryside occured in the USA when ten thousands of highly endebted farmers had to sell their properties at auctions and the returns couldn't cover the credits. The same happened at the end of the eighties to savings banks and a number of regional big banks. It was caused by Reagan's extended limits for credits on real estate meant as a stimulus for the economy. Consequently their value shot up and enabled further grantings of loans. When the speculative balloon burst, many of the outstanding claims could not be called in. According to a report in the Frankfurter Allgemeinen Zeitung (FAZ) from Oct. 21/92, »1'492 (=12%) of almost 12'000 business banks were close to bankruptcy and another 1'179 actually insolvent«. In the beginning of 1993 Prof. Udo Reifner reported in ›Bank Watch‹, an information service of the Institut für Finanzdienstleistungen, that the breakdown of those banks »will cost the American taxpayer depending on different estimations between 500 to 1'200 billion DM until the end of the nineties.« But as he further writes, problems also heap up in our country, for instance »the crooked position of German big banks like the Bank fuer Gemeinwirtschaft (BfG), the DG-Bank and the BRZ which can only with pains be covered by payments of billions of DM from third parties interested in the German market... or from the funds of small co-operative banks«. The security funds have already been reduced by 2.6 billion DM, and since the contribution to these funds are only 0.03 to 0.06 DM per 100 DM deposit, the securing of depositors is here limited, too.

The increasing number of bank fusions or the fusion of banks with assurance companies is therefore not always a sign of growing strength but more often a sign of the very opposite.

What Are the Tasks of Issuing Banks?

The tasks of issuing banks are mainly related to supplying the economy with money and to assure the stability of the purchasing power.

The realization of this task depends on the instruments and rights which are granted to them. Beyond that it depends on the proficiency of the persons in charge and last not least on the right of veto of third parties, i.e. primarily governments. Concerning the right of veto it is of course essential who is the holder or owner of the issuing banks. According to researches of longer date four fifth of all issuing banks are completely in possession of the state, the rest at least for the major part. Only few issuing banks (like for instance in Switzerland) are organized according to private law. However, for the success of issuing banks the question of private law matters less than their independence. If, for instance, the state has the right to call for loans then any effort of the issuing bank for the stability of the currency gets corrupted.

As the description of tasks already shows, issuing banks - also called central banks - are in reality no banks but institutions for fulfilling a task of public law, namely, the provision of the economy with money. Here, too, by using the term »bank« for banks and issuing banks, which have completely different tasks and are acting in totally different fields, unnecessary confusion is provoked and misunderstandings can be anticipated.

The Federal German Issuing Bank, How Is It Organized?

Our issuing bank, the Deutsche Bundesbank, is owned by the Federation, but it is an autonomous institution of public law, comparable, say, to the Constitutional Court (Verfassungsgericht). The president of the Bundesbank and all the other members of the board get appointed by the government, but in their decisions they are extensively independent and bound to the fixations in the »Gesetz über die Deutsche Bundesbank« (Law Concerning the Federal German Issuing Bank). The most important statements are found in § 3 BBG:
»With its authority for currency policy the Deutsche Bundesbank regulates... the circulation of money and the provision of the economy with credits in order to secure the currency...«
And § 12, in which the relation of the bank to the Federal Government is laid down, it says:
»The Deutsche Bundesbank while preserving its task is obliged to support the general economic policy of the Federal Government.«
If you unbiasedly read these two paragraphs, then you can only shake your head upon such vague declarations. These uncertain formulations might have resulted from the poor monetary knowledge of the politicians and their counselors who have formulated this law in 1957. So you might well argue about the practical consequences which can be derived from the obligation »to support the general economic policy of the Federal Government.« This raises the question, whether this obligation weighs heavier than the task of regulating the circulation of money and the securing of the currency.

What Does »Securing the Currency« Mean?

An unprejudiced person might guess that these words refer to the backing of the money's value by gold, to the prevention of counterfeiting or the safe deposition of money bills in treasuries. In fact for a long time it was debatable, what the authors of this version of the text had in mind: fixed exchange rates or stable purchasing power of money. In the meantime - primarily since the desaster with fixed exchange rates at the beginning of the 70ties - the authorities have agreed on the aim of a stable purchasing power even though with little practical success. For, if you consider that the German Mark of 1950 is not even worth 30 Pfennig today (= 0.30 DM) and that it had to deplore its biggest loss during the last two decades, then you can hardly pretend the Bundesbank had fulfilled its task according to § 3. The main cause for this inefficacy is the inadequate securing of money circulation, which is its expressed task according to the same paragraph.

How Does the ›Bundesbank‹ Control the Circulation of Money, and Why Is this Task so Important?

Starting from the provision of the economy with money, we think at first of controlling the amount. The amount is but one factor of the efficiency, the second one is the frequency of its active use in economy as a medium of exchange. For, if issued money remains sitting somewhere, it is just as inefficient as not issued money. An issuing bank therefore has not only the task of putting money into circulation, it also must care for its steady circulation. Only with a circulation speed that is free from disturbances can the trade cycles be free from interferences and the purchasing power be stable.

If you compare money with a horse and economy with a carriage pulled by horses, then the issuing banks could be taken as the coachmen, who have to care for the horses and their steady pace. If the coachman wants to achieve the optimum, he will lead the horses on short bridle, so that the carriage maintains a smooth movement. Above all, he will ensure that the horses will not run off the track as they like or even come to a halt.

But the issuing banks are satisfied with harnessing the »number of horses« to the economic carriage, which they consider to be just about appropriate. They control the pace of the horses - if at all - with a very long bridle, hoping, that the horses will do it on their own. Only when they realize that the carriage runs too fast or too slow, they start getting active. But they don't do this by handling the bridle. They rather try to influence the movement of the »horses« by either reducing or increasing the »portion of oats« they offer to them. In terms of reality: if the issuing banks realize, that the issued money does not circulate steadily, they try to stimulate the owners of money by more or less »oats of interest« instead of leading the money on a »short bridle« in order to make it circulate more smoothly. And in contrary to their oaths for stability, they keep it running with the whip of a little inflation. Since they only recognize changes in the speed of the economic carriage with delay and since their efforts to correct via interest rates and inflation are associated with even greater and incalculabe delays, the outcome is more than arbitrary. In their despair they eventually fight the self-induced inflation with too much issued money and high interest rates, which is like exorcising the devil with old Nick. No wonder, the success of this procedure is the same everywhere in the world.

There is a clear prerequisite for the velocity of circulation, namely, the speed of the currents of income. The issuing banks need only to care for all incomes to become expenses again by introducing a well working circulation assurance. They wouldn't have to care for the level of interest rates anymore, the »appropriate amount of money« and the stability of purchasing power would adjust automatically.

What Does That Mean: »Regulates... the Provision of the Economy with Credits«?

Even today most minds get confused by that formulation. Even experts conclude from this, that the Bundesbank does provide the economy with credits. But in our economy credits - if not from private sources - stem from bank deposits of savers, i.e. from income surplus of the participants of the economy and not from the Bundesbank. Only until 1994 the Bundesbank could grant short-termed cash loans to the state, however, with restrictions and relatively small amounts only.

Besides that, only the business banks are granted credits which they can call from the Bundesbank only in cash money. That means, those credits alone serve for the provision of the economy with money. By the amount and the granting conditions of these credits the issuing banks try to control the »amount of money« in aiming at a stable purchasing power. Since today the circulation is not assured (because every money owner has the right to withdraw [hoard] money as he likes), this is the only attempt up to now.

Credits to Banks - How Does It Work?

Since business banks can only call cash money from the issuing bank, they only take loans to such an extent as they need for settlements at the bank counter. That means, neither the issuing banks nor the business banks determine the amount of money in economy, but the participants in economy who withdraw money from their bank accounts. Do they withdraw more money than the bank has in its cash box, the bank extends its debts at the issuing bank in order to get additional money. Does the bank have too much money in its cash box, it immediately returns it to the issuing bank. For all money in the cash box is »dead capital« for the bank and it has to pay interest for it to the issuing bank. That means, that the German business banks are all indebted to the Bundesbank over the amount of money they have put into circulation. For the main part of the money they have given out (nearly 197 billion DM by the end of 1993), they have to pay interest without being able to charge the withdrawers and users of money with these costs. This even applies to bank notes which maybe since years lie dormant in some treasuries, are current in foreign countries or have even been destroyed by fire or whatever. That means, the banks have to charge the debtors with the costs for all current as well as non-current cash money, who maybe don't call for cash at all in requiring a loan. Beyond these necessary credits for the supply with cash money, the business banks only get indebted up to the amount of ›minimal reserves‹ they have to keep (nearly 60 billion DM by the end of 1993).

These minimal reserves originally were compulsory deposits for assuring the deposits of clients. In the 60ties and in the beginning of the 70ties these had been used by the Bundesbank in order to withdraw over-issued money from circulation (mainly as a consequence of purchases in support of the dollar). Today they only serve the purpose to tie the banks tighter to the »bridle of interest« by compulsory indebtedness, however questionable this may be. That means, even though this may still be differently presented in manuals: from all the savings that are deposited in a bank, not a single Mark goes as minimal reserve to the Bundesbank. Hence, the granting of loans by a bank is not restricted by these ›reserves‹. The Bundesbank rather grants »central bank assets« to the business banks up to the amount of the minimal reserve as specified by the Bundesbank itself.

When Do Issuing Banks Have to Multiply Money?
How Can They Do This?

A banker of the Swiss issuing bank once said, that one needs just a printing-press and a stove in order to regulate the amount of money - the press for printing more money if needed and the stove for burning the surplus. Yet, a little more difficult than printing and burning is the putting money into circulation and withdrawing it again.

The issuing banks can put money into circulation in various ways. For instance by purchasing other currencies from export surplus, by »support purchases« in order to assure the exchange rate and by credits or distribution of profits to the state. The most frequently used method is - as described - the provision of banks with »fresh money«. If they want to control the amount, they have to specify the contingencies for distribution in the same way as they nowadays do with accepting promissory notes. However, in this way they can only get rid of money if the bank clients ask for more. In order to make this attractive to the participants of the economy, they must in a given case make it »cheaper«, i.e. lower the interest rates. This most frequently used method of regulating the amount via the interest rates is already quite doubtful, when precise results are required.

A simpler method would be if the state put additionally required money into circulation. As long as the issuing banks alone decide upon whether and how much money they distribute to the public, this way via the state would be without problems - at any rate less troublesome than nowadays distributed fluctuating profits to the state.

The necessary withdrawal of money, as recognized by the mounting price level, could most simply be done by the state. For the state can be forced to return money or to hold it back, not so the citizens. And since these regulations would have to deal with relatively small amounts, much smaller than all other revenues of the state, this method would be associated with no problems.

With such a regulation of the amount of money by the state it would also become clear, that the issuing of money as well as the stability of its purchasing power are public affairs. On the other hand it would become distinct, that bank deposits and granted loans from there are the responsibilities of the business banks only. A reckoning on the issuing banks as »lender of last resort«, i.e. as an emergency service providing freshly printed money, wouldn't be needed any more.

What About the »Money Amount Aim« of Issuing Banks?

At the end of the year most of the issuing banks inform the public to what extent they plan to increase the amount of money in the following year. That these announcements have little to do with reality and if at all have only psychological effects is being proved not only by the results but by actual facts: the issuing bank's task is not the determination of an »amount of money« for the economy to find a position, but in contrary the issuing banks have to smoothly adjust to developments of the economy. But since they let the harnessed »horses« go as it pleases them instead of leading them on short bridle, which in other words reads: since they cannot control the amount of money, they hang the »interest-oats-bag« higher or lower instead and take resort to doubtful »money amount aims« as a reinforcement for themselves.

One could compare this method of the issuing banks with a railway administration, which, while keeping wagons in readiness, doesn't care about the actual needs for the traffic of transportation, but plans the volume of traffic for the year ahead. If then the number of wagons does not comply with the actual needs for transportation, and if it tries to regulate the »stability« of the traffic by increasing or decreasing the prices for renting a wagon instead of adjusting the necessary number of wagons, then it acts like our issuing banks.

The determination of the aim by issuing banks can even more simply be compared to parents, who determine the size of the shoes for their children in the forthcoming year to which the children's feet are to adjust their growth.

Which »Amount of Money« Do the Issuing Banks Try to Regulate?

One should think that the issuing banks in their attempts of regulation are concerned with that amount of money about which only they can decide, i.e. the amount of cash money, which is the sole real money. Instead, they theorize about various »aggregates of money amounts« which for the most part are made up of figures that are no money at all but only money assets. In that they are not at all content with bank deposits, which by force of their transferability could still be considered as demand potential, but they also include savings and term assets into the »money amount aim«.

Thus, the issuing banks try to maintain the stability of purchasing power not by watching the price level and corresponding corrections of the amount, but by preliminary calculations about the additional amount of money in a year. This method likens to someone in charge of keeping the amount of water in a reservoir stable who doesn't watch the water-mark, but tries to achieve this aim by calculating the influx of water per year. If he left out of consideration that a part of the influx wouldn't show at the water-mark because more or less of the water evaporates, then this method of regulation would be more than doubtful. But even more doubtful would it be, if the person in charge included in his calculation the amount of water in the clouds besides the influx.

But exactly this is what the issuing banks are doing. In their preliminary calculations they do not consider, that some part of the additional money does not affect the price level, because it disappears from the circulating amount. They also comprise with the »money amount« the money which is bound in bank assets. But just as the water in the clouds isn't contained in the reservoir, so is the purchasing power delegated to the banks contained in the circulating money. In both cases the summary must lead to double counts and therefore to false figures in the calculation.

Where Do the Profits of the Bundesbank Come from?

Like any enterprise and any authority, the Bundesbank has revenues and expenses, too. In no institution, however, there is such a big and extremely fluctuating gap between those figures as in the currency authority in Frankfurt.

If we have a look at the numbers of the year 1991, then the revenues of the Bundesbank amounted to 25 billion DM. Almost 99 percent of these revenues came from interest returns. 17 billions of it had been withdrawn by the banks from the German national economy, 7.5 billion were returns from investing currency reserves (mainly dollars) in foreign countries. From the expenses of the Bundesbank of nearly 10 billion DM a part of 1.4 billion falls to the costs for the personnel of around 18'000 employees and 330 million DM to the printing costs of bank notes. The biggest items were the expenditures for interest with an amount of 4.3 billion and for the deduction of currency reserves amounting to 2.9 billion DM.

The profit after the reduction of the legally prescribed reserve flows - as is well known - to the owner of the Bundesbank, that is the Federation. In 1991 these were almost 14.5 billion DM and in the preceding year 8.3 billion. That means, in 1991 the Federal Government took high profits from the policy of high interest rates of the Bundesbank. The distribution of the profits of the Bundesbank is for the state as well as for the economy nothing else but an additional tax, the precise amount of which, however, cannot be calculated. This item of revenues fluctuated since 1980 between 240 million DM (1987) and the foregoing 14.5 billion (1991). The average was about 9 billion DM.

If we relate this profit of 14.5 billion to the 34 million employees in the united Federal Republic, then everyone got 430 Marks pulled out of his pocket by this hidden tax collection. In relation to the 7'500 DM wage and income taxes that every occupied person had to earn in 1991, these 430 DM are just a minor amount. Yet the question arises, whether this indirect seizure of the state on citizens by way of Bundesbank profits is compatible with a democratic constitutional state.

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