Money is a Moral Issue

Most economic problems are moral problems, not technical ones. Money is a good example. Many economists treat money as a technical problem that needs a technical solution, but money is really a moral issue. The key to sound money is to outlaw all immoral behaviour from the banking system.

When I get paid, my salary goes into my cheque account. I do not want to lend my salary to the bank, because I intend to spend most of my pay in the fortnight before I next get paid. I want to be able to spend that money whenever I choose, for whatever I want to buy, so I choose a demand deposit. When my salary goes into the bank, I have not transferred the ownership of that money to the bank. The money is mine. It does not belong to the bank.

The current accounting process is that the bank records the cash it has received as an asset and records it responsibility to me as a liability. This is wrong. The cash does not belong to the bank. It belongs to me. The cash will be an asset on my balance sheet, so it should not be an asset on the bank’s accounts at the same time. An asset cannot have two owners.

Consider a parallel example. If I am going out of town for a while, I may engage a warehousing company to store my dining suite until I return. The warehouse will charge a fee for providing this service. When my dining suite goes into the warehouse, its ownership does not change. The dining suite still belongs to me. The warehouse owner cannot do what he likes with the table. He cannot bring it out and use it when he has guests for dinner. He cannot dance on the table top or use it for playing table tennis. The warehouse owner cannot decide how the table will be used, because he has no ownership rights to it. He has a duty to care for my dining table in the way specified in the contract. If I decide not to return, I can write to the warehouse and ask that the table be delivered to my daughter and the chairs to one of my friends. The warehouse owner will do this, provided I pay the cost of transport. He cannot refuse to carry out my request, because he has relatives staying and is using the table. If this happened, I would accuse him of misappropriating my dinning suite. If he has moved it to his own home, I could accuse him of theft. Everyone would understand that he has done something immoral.

If the word got out about what he had done, his warehouse would soon be empty, because people would stop trusting him. The service that he offers is skill at caring well for things that belong to other people. This service only has value to customers, if they can trust him to provide the care that he has promised. He is really selling trust, so if he proves to be untrustworthy, his service has no value and people will be unwilling to pay for it.

The warehouse owner does not record the things stored in his warehouse on his balance sheet. The only asset on his balance will be the warehouse that he owns. He does not include the contents of the warehouse, because he does not own them. They are not his assets. The only way that they will appear on his balance sheet is through a contingent liability for inadvertent damage that might be done to something that is in his care.

This is the heart of the problem with the modern banking system. Banks claim ownership of the cash that has been deposited by their customers. They record this cash as an asset on their balance sheet. This is problematic because the cash now has two owners. The result is bank runs when everyone tries to withdraw their money.

The technical solution to this problem is central banks as lenders of last resort and banks that are too big to fail.

The moral solution to this problem is banks that behave like an honest warehouse. They will keep an inventory of all the money being stored and the identity of the owners. This should be separate from their financial accounts. The money stored should not be able to creep onto the bank’s asset register.