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The prevailing global banking regime is based on the principle of ‘fractional reserve banking.’ In simple terms, this means, commercial banks or ‘deposit takers’ are required only to reserve a fraction of deposits and are allowed to lend out the remaining portion. Typically, reserves are only 10% of deposited amount. In the case of investment banks, (which are prohibited in Ethiopia) the situation is even ludicrous.

In the case of commercial banks, deposits are made by individuals/legal entities. Government authorities regulate these banks so that public deposits remain relatively safe. In the US for example, savings up to $250,000 are insured by FDIC, (Federal Deposit Insurance Corporation) a federal government undertaking. Here is how ‘fractional reserve banking’ essentially works. If, for instance, one deposits 1000 birr in a bank, the bank retains 100 birr and lends out the rest of the 900 birr. If the individual/company that is loaned the 900 birr takes the money and deposits it in another bank, then the new bank retains only 90 birr and can lend out the 810 birr and so on and so forth. It is clear how the initial 1000 birr ends up becoming a whole lot of money circulating in the economy. Again this is a very simplified example so that one grasps the essence, otherwise banks don’t even need deposits to create money, what they must do, perforce, is create loans. When they create loans, bank-money (impostering like the real birr) automatically and magically appears. Presto! The current reserve requirement in Ethiopia is around 27% and this is because government wants to cut down the supply of money in the economy, which gives rise to inevitable inflation. Reserve requirements are dictated by central banks, in our case the National Bank of Ethiopia.
It is obvious ‘fractional reserve banking’ is the main source of inflation and mal-investment. The boom and bust cycle associated with ‘fractional reserve banking’ is a manifestation of gross misallocation of capital by banks and other operators–bubbles. Investment banks that don’t deal with small depositors and are engaged in only mega deals that involve huge amount of money involving, supposedly, sophisticated clients {wealthy individuals, corporations, investors (pension funds, etc) or sovereign states/funds, etc} are/were not regulated as much as deposit takers. The presumption here is, these operators are sophisticated enough to fend off for themselves! Five years ago, this supposition proved fatal and a lot of investors/businesses got wiped out, almost. If it weren’t for the massive bailout undertaken by the central banks of the world, none of the major banks along with their so-called sophisticated investors/businesses would be around today.
Before the 1930s commercial banks (deposit takers) were also engaged in investment activities that were for the most part speculative (risking depositors’ money) and ultimately this exercise led to the implosion of the banking sector, causing the Great Depression. Immediately after that, the US Congress passed an act that segregated the operations of ‘deposit taking’ from ‘investment making’ (Glass-Steagall Act–1933.) But in the 1990s the US abrogated the Glass-Steagall Act and banks were again allowed to engage in all sorts of exotic (read fraudulent) activities. The deregulation allowed rapid consolidation of the banking system, creating very few gigantic banks that eagerly engaged in massive speculation, which again landed the whole global economy in what the status-quo now calls, the ‘Great Recession.’ All the five major investment banks of the world went kaput, starting with Bear Sterns followed by Lehman brothers. At the height of the crisis Bank of America swallowed Merrill Lynch at the insistence of the authorities. Subsequently Goldman Sachs and J P Morgan Chase were rushed to change their status from investment banks to commercial banks so that they can qualify for all sorts of government protection and bailouts. Since then, the US central bank (Federal Reserve Board) has pumped the equivalent of half of the world GDP (@ 30 trillion USD, in one form or another) to stop the crumbling global financial system, but to no avail. What all the protracted effort has done so far is; postpone the day of reckoning. Enter critical thinking! See Mills article next column.
As usual, when all sorts of mess suffocate ordinary activities, thanks to shortsighted and narrow-minded operators, (big and small) unconventional ideas force themselves to the fore. One such idea was presented in the 1936 by the big guns of the time. It was called the ‘Chicago Plan.’ Just like the situation today, the global depression of the 1930s was pleading for new ideas to ease the situation created by the greedy empty suits (the affectionate phrase for ‘unthinking bankers’ ah, but we are repeating ourselves.) A while back our research staff whose prestigious domicile is the ‘kebele pub house,’ recommended the complete nationalization of the major global banks by their respective states, in order to make room for innovative ideas to forge solutions to what afflicts the global economy, particularly its detached, parasitic and unrealistic financial system. To this end, we also recommended; all for profit banks must be stopped from engaging in the business of phony money creation, compliment of ‘fractional reserve banking.’ In other words we insisted 100% backing of deposits by government–issued money (real birr in our case)! Money is a public common, just like air, water, roads, etc, hence people don’t want ‘idiot bankers’(ah, here we go again repeating ourselves) to tamper with it. Only central governments must create money or money-like stuff and even at that, they should be under sever legal constraints (maybe constitutional stipulations), lest the politicos run away with it also (abuse.)
Recently the unexpected happened! A working paper was visibly/publicly circulated by two researchers, Jaromir Benes and Michael Kumhof of the IMF, endorsing the ‘Chicago Plan’; by extension/extrapolation also our ‘kebele plan.’ Hallelujah, even IMF with a whole lot of IVY idiots can sometimes get it! See ‘Dust off the Chicago Plan’ on page 50. Here is an honest commentary by a major banker with conscience, (a rare breed) who had immensely benefited from this warped financial system. “The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin. Bankers own the Earth. Take it away from them but leave them the power to create money, and with a flick of a pen, they will create enough money to buy it back again. Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in. But if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit.” Sir Josiah Stamp, president of the Rothschild Bank of England and the second richest man in Britain in the 1920s. Good Day!