Last week Paul Buitink and I interviewed the two authors of The End of Banking (2014), a thought-provoking book I read about a year ago. The authors write under the pseudonym Jonathan McMillan; one of them is Swiss economist and journalist Jürg Müller, the other is a New York based investment banker. We discussed topics as money creation out of credit, shadow banking, full reserve banking and their proposal for a new systemic solvency rule.

I do recommend this interview and their book for two reasons. First, the authors understand how the digital revolution is changing money, credit and banking. Second, the authors attempt to tackle the problem at the fundamental level of accounting. The End of Banking clearly explains how banking got out of control in the digital age and how information technology can be used to implement a more stable financial system. By using balance sheets McMillan shows how traditional banking and shadow banking work and are interconnected. Today, information technology allows banking over a series of interlinked balance sheet; i.e. banking is not dependent on banks anymore. Every company with a balance sheet or group of companies with different balance sheets can create money out of credit by applying the six financial techniques of banking. According to McMillan, in the digital age credit became extremely mobile, and this is why for example capital requirements no longer work.

McMillan argues that we need a political response to unconstrained banking and suggest that we have to end banking; i.e. we have to end the creation of money out of credit. The authors explain how a financial system without banking can work. They propose to split money (public sphere) and credit (private sphere), and to introduce two new monetary tools: a liquidity fee and an unconditional income. Moreover, to prevent money creation out of credit the authors propose a new systemic solvency rule:

The value of the real assets of a company has to be greater than or equal to the value of the company’s liabilities in the worst financial state. (p. 147)

Although it is at this moment hard to understand how this systemic solvency rule would work in practice, McMillan attempt to tackle banking at the level of accounting seems to be the right approach. More research has to be done to fully understand the consequences, but in my opinion The End of Banking is a fundamental contribution to the debate on the future of money.

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