Research for Policy Bart Stellinga Josta de Hoog Arthur van Riel Casper de Vries Money and Debt: The Public Role of Banks Research for Policy Studies by the Netherlands Council for Government Policy Series Editors J. E. J. (Corien) Prins, WRR, Scientific Council for Government Policy, The Hague, Zuid-Holland, The Netherlands F. W. A. (Frans) Brom, WRR, Scientific Council for Government Policy, The Hague, Zuid-Holland, The Netherlands The Netherlands Scientific Council for Government Policy (WRR) is an independent strategic advisory body for government policy in the Netherlands. It advises the Dutch government and Parliament on long-term strategic issues that are of great importance for society. The WRR provides science-based advice aimed at: opening up new perspectives and directions, changing problem definitions, setting new policy goals, investigating new resources for problem-solving and enriching the public debate. The studies of the WRR do not focus on one particular policy area, but on cross- cutting issues that affect future policymaking in multiple domains. A long-term perspective complements the day-to-day policymaking, which often concentrates on issues that dominate today’s policy agenda. The WRR consists of a Council and an academic staff who work closely together in multidisciplinary project teams. Council members are appointed by the King, and hold academic chairs at universities, currently in fields as diverse as economics, sociology, law, public administration and governance, health and water manage- ment. The WRR determines its own work programme, as well as the content of its publications. All its work is externally reviewed before publication. The Research for Policy Series In this series, we publish internationally relevant studies of the Netherlands Scien- tific Council for Government Policy. Many of the cross-cutting issues that affect Dutch policymaking, also challenge other Western countries or international bodies. By publishing these studies in this international open access scientific series, we hope that our analyses and insights can contribute to the policy debate in other countries. About the Editors Corien Prins is Chair of the WRR and Professor of Law and Information Technology at Tilburg Law School (Tilburg University). Frans Brom is Council secretary and director of the WRR office. He also is Professor of Normativity of Scientific Policy Advice at the Ethics Institute of Utrecht University. More information about this series at http://www.springer.com/series/16390 Bart Stellinga • Josta de Hoog • Arthur van Riel • Casper de Vries Money and Debt: The Public Role of Banks Bart Stellinga Josta de Hoog Netherlands Scientific Council Netherlands Scientific Council for Government Policy (WRR) for Government Policy (WRR) The Hague, The Netherlands The Hague, The Netherlands Arthur van Riel Casper de Vries Netherlands Scientific Council Netherlands Scientific Council for Government Policy (WRR) for Government Policy (WRR) The Hague, The Netherlands The Hague, The Netherlands ISSN 2662-3684 ISSN 2662-3692 (electronic) Research for Policy ISBN 978-3-030-70249-6 ISBN 978-3-030-70250-2 (eBook) https://doi.org/10.1007/978-3-030-70250-2 © The Editor(s) (if applicable) and The Author(s) 2021. This book is an open access publication. 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This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Preface This book is a translation and adaption of the Dutch report ‘Geld en schuld. De publieke rol van banken’, published by the Netherlands Scientific Council for Government Policy (WRR). The report was presented to the Minister of Finance Wopke Hoekstra on 17 January 2019. In it, the WRR recommends to restore the balanced growth of credit and debt, and strike a better balance between public and private interests in the financial sector. This entails fostering greater diversity in the financial sector, curbing the excessive growth of debt, being prepared for the next crisis and anchoring the public dimension of the banking system. On 11 June 2019, the government gave its formal response in a Memorandum to Parliament, in which it acknowledged the importance of the report and its analysis and welcomed many of the recommendations. More information is available on the WRR website: https:// english.wrr.nl/topics/money-creation. The report was written in response to a formal request by the Dutch Minister of Finance to investigate the monetary system and the advantages and disadvantages of alternative monetary systems, as suggested in a motion adopted by the Dutch Parliament during a debate on money creation in March 2016. The parliamentary debate was the result of a play by the theatre group De Verleiders (The Seducers) and a subsequent citizens’ initiative Ons Geld calling for money creation to be placed exclusively in public hands. This publication was written by Bart Stellinga, Josta de Hoog, Arthur van Riel and Casper de Vries. Together they formed a project group that also included Arnoud Boot, Janne Verstappen, Berend Rigter and Robert Went. The original Dutch publication has been adapted for an international audience, but not updated. It is important to note that the original report was written and published before the COVID-19 crisis, and in this translated book we do not address how policymakers, central banks and financial actors have responded to the economic and financial challenges raised by this new crisis. This book is the product of an extensive process of consultation and analysis. In addition to studying the academic literature, we conducted interviews with experts, policymakers and stakeholders. We are very grateful for their contribution to this v vi Preface book. Their names are listed at the end of the book. A special word of thanks to the experts who were willing to review (parts) of the report: Dirk Bezemer, Wim Boonstra, Teunis Brosens, Charlotte van Dixhoorn, Bas Dommerholt, Wouter Elsenburg, Clemens Kool, Martijn Jeroen van der Linden, Bart Nooteboom, Roland Uittenbogaard, Hans Visser, Edgar Wortmann and several experts of the Dutch central bank (De Nederlandsche Bank). The Hague, The Netherlands Bart Stellinga Josta de Hoog Arthur van Riel Casper de Vries Contents 1 Introduction ........................................... 1 1.1 What Is Money? . 3 1.2 What Is Debt? ...................................... 7 1.3 The Importance of Trust . 10 1.4 The Dynamism of the Financial Monetary System . 11 1.5 Overview of the Report ................................ 14 Bibliography . ........................................ 15 2 How Is Money Created? .................................. 17 2.1 Banks and Money Creation ............................. 17 2.1.1 Electronic Payments and Cash Withdrawals . ........... 20 2.1.2 Free Money? . 23 2.2 Driving and Constraining Forces . ....................... 23 2.2.1 The Role of Households and Businesses .............. 24 2.2.2 Banks’ Balance Sheet Risks . .................... 25 2.3 Monetary Policy . 36 2.3.1 Objectives and Instruments . ...................... 37 2.3.2 How Monetary Policy Works in Practice . 39 2.3.3 Quantitative Easing . .......................... 41 2.4 Conclusion ......................................... 43 Bibliography . ........................................ 44 3 The History of Money Creation ............................ 47 3.1 Money and Finance in the Nineteenth Century . 48 3.1.1 Money and Payments ............................ 48 3.1.2 Financing . 52 3.1.3 Policy and Regulation . 53 3.1.4 Summary: Money Creation in the Nineteenth Century . 56 3.2 The Interwar Period and the Great Depression (1918–1939) ..... 57 3.2.1 Money and Payments ............................ 58 3.2.2 Financing . 58 vii viii Contents 3.2.3 Policy and Regulation . 61 3.2.4 Summary: Money Creation in the Interwar Period ....... 63 3.3 The Bretton Woods Period (1945–1973) . .................. 64 3.3.1 Money and Payments ...........................