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Blackmail

A hundred years ago, in 1907, with the article ‘Defects and Needs of Our Banking System’, Paul Warburg started a discussion about the banking system in the United States of those days, which resulted in creating the private central bank. The Federal Reserve in 2013 will probably celebrate the centenary of its origin. We say probably because the banking system created in the previous century is currently undergoing a deep breakdown.

The depression of 2008 started from the crisis of the banking system. We, the citizens know very little about the sources and the extent of the catastrophe. The data is concealed and we are presented with a fake state of the situation. However, politicians and bankers admit that without repairing the banking system, solving the problem of toxic assets and restoring the trust in banks and mutually among the banks, the economic revival is impossible. Simultaneously they assure us that the banks are big and they cannot collapse, that politicians will take as much funds from our taxes as it is necessary to save them, that there is no alternative to saving banks at the cost of the tax-payers. These worrying voices force us to take a closer look on what is actually going on. Do we really have to be the hostages of the bankers and politicians? Isn’t there any other option?

Money

The source of the economic progress is based on human work. We don’t have to, as it was centuries ago, occupy ourselves with everything from agriculture, tools making, house building, cloth weaving to pottery. We can use our talents to do what we can do best. We work easier and more efficiently. The division of work, specialisation and inventiveness enable us to produce and provide access to a great amount of consumer good, thanks to which the standard of our material life is raising.

Money is a miraculous means that facilitated the work division. It serves to price the fruits of our work. It mediates in the exchange. By working we gain income in money. We spend the financial income on goods produced by others. Producers get the financial income which again goes to the employees. Money circulates in the economy. We save money restraining ourselves from consumption. These savings goes to those, who promise us to take economic advantage of them in an efficient way or to those who want to consume something earlier at the expense of intending part of their future income to the payment of debt.

It is not without a reason that our economy is called the Money-Goods Economy. From the great importance of money in our work follows that the disturbance in the financial system may hit the essence of the whole economic system and cause its collapse, bankruptcy, unemployment or even wars.

Until the end of 2008, in the United States about 8.1 billion dollars was issued and in Poland 660 milliard zlotys.

Notice: the decline in the money supply in 2006 results from the undisclosed by the Federal Reserve, since that year, state of the huge term deposits (above 100 000 USD). The reasons stay unknown.

During last ten years, in the United States’ the amount of money increased by 50% and in Poland by 146 % (nearly twice and a half). The dynamic grow in money supply was not accompanied by the equally dynamic growth in the real GDP. Between 1999 and 2008 the GDP grew by 23% in the USA and by 44% in Poland. As a result the increase in the amount of money in the circulation that was not covered with the increased amount of goods and services caused an advance in prices – inflation. In the United States the price level of goods and consumer services in 1999-2008 increased by 29% and in Poland by 36%. Despite the fight with inflation officially declared by the central banks, politicians and bankers in the United States have control neither over money supply nor over price level.

Or maybe objectively they cannot?

Let’s take a look at the changes in the price level in the Unites Stated since the Declaration of Independence in 1776. The United States are appreciated subject of the analysis due to the maintained state and monetary continuity (as opposed to Poland).

For nearly a hundred and fifty years the price level in the United States underwent only mild changes. The prices grew in the times of war (The American War of Independence 1775-1783, The Anglo-American War 1814, The American Civil War 1861-1865) and afterwards they fell even to the level from before the war. It happened even tough the wars took place on the American land and affected directly the people and the property of the United States. However, since World War I a drastic change can be observed. The price level started to increase rapidly and even during the time of the Great Depression it didn’t decrease to the level from before the First World War. The period after the World War II, especially in the ‘70s of the 20th century is a real inflation orgy.

In a result the price level in the United States is presently about 25 times higher than in the years before the World War I.

Emission

Since Federal Reserve had been created, money emission has been strictly related to gold and silver. In the 19th century bimetallism dominated in the Unites States. Gold and silver coins were in the circulation (only 1 cent and 0.5 cent were minted from copper). Since 1990 the gold standard has been introduced. By virtue of it the actual gold cover was provided as well in characteristic green banknotes emitted since 1862. The gold standard was suspended in the times of the First World War. In 1933 it was annulled in the interior market of the United States and in 1973 the possibility of exchanging dollars into gold on request of the foreign central banks was eliminated. Breaking the relation between money and noble metals (of which amount is naturally limited)  gave bankers and politicians the possibility of unrestrained money issue.

Universal and surprising feature of nowadays banking systems in the world is that the central banks issue minor part of all the money. In the United States only about 10% of the money supply are the banknotes and coins and in Poland this rating comes to about 14%. Deposits in the banks (current and term deposits) comprise the rest of the money in the economic system.

In everyday expectations prevails an opinion, that if we allocate the money to the current deposit than the bank has the cash to pay out our funds anytime. This is a false conviction.  Even if all the money issued by the central banks were in the treasuries of the commercial banks, the banks wouldn’t be able to pay out more than about 17% of the current account deposits in the United States or about 36% of the current deposits in Poland. And in fact the majority of this cash doesn’t stay in hands of the bankers. It is in our wallets or in the cash registers of the enterprises.

Commercial banks in the whole world are constantly threatened with insolvency due to the entitled claims of the clients to withdraw the deposits. It refers to practically every bank, the worst and the best, the biggest and the smallest. The fear of bankruptcy is so overwhelming that public mentioning of these facts causes a reaction of dismay for the possibility of evoking panic (run on the banks).

If the money of the central bank (banknotes and coins) are in minority then where does the overwhelming amount of deposits in the commercial banks come from? They were created by the commercial banks themselves. This idea was born in the times of the metallic money. Bankers accepting metals for deposit and making out a receipt in return (which started to circle as money themselves) noticed that the clients do not call to take out their metals at one time and usually some metal stay in stock in the banks’ treasuries. They started to make out more receipts than they actually had metal in the treasury. Nowadays, the roles of the metal, treasury and receipt were replaced with credits and deposits in the banks’ accounting records. While granting a credit, the bank makes two actions: notes that the sum of credit is the liability of the debtor (amount due to the bank) and simultaneously it makes the amount of money available on the current deposit of the debtor (bank’s obligation). By the very act of granting the credit the new money is created. The only worry of the banker is to have a cash in stock when the client wants to pay out the current account deposit. But this is in fact an incident on a scale of thousands of clients. Those who pay out are balanced with those who pay in. Banker may give much more credits and create more new current deposits than the actual cash in stock. Politicians sanctioned this “habit” by obliging commercial banks to keep the compulsory reserves only as a small part of the deposits (in the United Stated 3 and 10% and in Poland 3.5%).

Money creation by commercial banks has even crossed the borders of the countries. The funds in currency paid to the bank in the country in which this currency is not a legal means of payment, started to be used by the bankers to give new credits and create deposits in this foreign currency. Hence, outside of the United States borders dollar started to be created in a way that violates the monetary sovereignty of the USA. The phenomenon occurred in Europe on a large scale, where the euro-dollar market was created (in general Eurocurrency). Little regulation of this market (among others, the jurisdiction problem) led to the situation in which the market became an abundant source of cheap money, used by international speculators for unbelievable operations, even against the whole countries (attack on the pound in 1992).

Creating the deposit money by granting credits is an unquestionable golden opportunity for the commercial banks. Banks earn on the ratio of the credits’ interest rates to deposits. Simultaneously they can direct the credits to the market in any way and thereby the new created money. Credit marketing concentrated on the specific market segment results in an increase in prices on this market. The latest example for this is the real estate market in the United States (2006) and in Poland (2008). It is the credit decisions of the commercial banks that led to the inflation of speculative bubbles. On the second hand, if the banks decide not to give credits, then no new money appears in economy. What is more, the already granted credits are being gradually paid off which causes the decline in money supply. We are currently facing this phenomenon in which the banks have in fact frozen the credit activity. There are suppositions that the bankers decisions to hold up the credit activity were not always accidental or justified by the bad state of the banks. Their aim could have been to cause the deflation and economic crisis in a result of which those who had access to the funds could purchase cheaply numerous assets (for e.g. real estate bonds).

A similar situation with the threat of a decline in money supply takes place when the banks suffer losses justifying their bankruptcy. Such a situation is probably taking place in the biggest banks in the United States and in Europe. For the bankruptcy means, that the insolvent banks cannot give new credits and all previous are being paid off. It decreases money supply. The decrease in the amount of money in a case of bankruptcy can be instant, if due to the bad credits, the deposits placed in an insolvent banks disappear. The bigger the bank threatened with bankruptcy, the higher the deflationary threat. This is the source of an unshaken certainty of the present biggest banks; that even in the case of their insolvency, they will receive a financial aid from their colleagues, bankers from our, tax-payers’ money and they will be able to continue to benefit from all the attractions, financial as well, of the banker’s life.

The consequences of the decentralisation of money emission are:

1. central bank’s loss of the influence on the amount of the majority of money in the economy,
2. system threat of insolvency of the commercial banks in a case in which even a small part of clients would call to withdraw their deposits without the balance of those who place the deposits in the bank,
3. possibility of disturbing money supply by the commercial banks with their excessive voluntary creation (inflation and speculation) or holding up the credit activity (deflation and depression),
4. a threat of a sudden decline in money supply in a case of banks’ bankruptcy causing the deflationary pressure and depression.

Central bank

Is it possible to get back to the ‘golden’ years of the actually stable price level? To the times when the saved money through the course of a professional activity of a human practically didn’t change its value. To the times, when saving was not accompanied by the risk of the loss in value (inflation tax)  and planning and running business were easier and safer.

Longing for stability firstly leads us to considering the possible return to the gold standard. The system is easy and proven. There is only one problem. To reintroduce the gold standard what is needed is gold (or any other rare metal). The problem with gold is that the central banks have very little of it. At the end of 2007 the world resources of the extracted gold came to 161 thousand tons, of which the central banks owned about 29 thousand tons. In 2008 the monetary authorities of the USA had 8.1 thousand tons of gold worth about 231 milliard dollars and of Poland 102.9 tons of gold worth about 3 milliard dollars. The value of gold possessed by the American and Polish banks comprises only 3-4 per cent of the cash money and current deposits in these countries. Providing a gold cover for the existing money would demand purchasing an amount of a worth corresponding to practically a whole money supply in cash and current deposits (such a demand would increase the price of gold as with its present prices there would not be enough even just for the United States). Such an operation is to expensive, especially in proportion to the little costs of money emission in a form of non-metal coins, banknotes or computer records (deposits). Another drawback of the return to the gold system is that the financial benefits of the gold money emission would go to the owners of the resources (stock and deposit).

If the return to the past doesn’t seem rational due to the costs, we must base our further considerations on the existing fiduciary financial system (money have no cover in metal). Such money is cheap in “production” and storing (particularly deposit in a form of a computer record) and accepted by overwhelming majority of the world’s nations.

Our first postulate, resulting from the analysis of the defects of the precious banking system is to centralise money emission by the central bank (monopoly). Monopoly of the central bank for money emission, from its definition, will enable the bank to exert control over the whole money supply in economy.

Estimating the essential amount of money for the liquid functioning of the developing economy is relatively simple. Our preferences facilitate the task. We keep a fixed part of our incomes in money. In 2008 in the United States and in Poland it was about 50-60% of our yearly incomes (total of all the incomes in the whole economy is called the Gross Domestic Product).

In the United States the rate of money to the GDP shows a good stability. In Poland in the times of high inflation the rate was a little lower, inter alia, because of the withdrawal from the money constantly decreasing in value. However, it gradually grew with the progress of disinflation (this growth mitigated the inflation impulse coming from still over-abundant “printing” of money in Poland).

In the course of a year, this rate is basically stable. Consequently, to maintain a stable price level during this period the increase in money supply should be at the same rate as the GPD growth rate. If the American economy will develop at a rate of 3% yearly then the increase in money supply should as well come to 3% a year. With the dynamics of GPD amounting to 8% in Poland the increase in money supply should as well equal 8% a year. Basing on these values it is possible to estimate the appreciable task of the central bank having a monopoly for the emission. In the United States money supply of the central bank should then grow in the course of the year by about 243.7 milliard dollars and in Poland by about 52.8 milliard zlotys.

Introducing new money from the central bank to the circulation is most often done by the agency of the government in a free of charge or payable form (interest). When the government receives new money from the central bank without any equivalent, there is a serious jeopardy of politicians becoming addicted to such a form of financing. In result government’s expenditures are increasing as well as money supply financing them which in a radical case gives birth to a hyperinflation. Hence, in those days this form is uncommon.

Lending the government the issued money by the central bank became a pattern. In the United States the Federal Reserve purchased government debt instruments for issued money (e.g. securities). Since 2008, in regard to the breakdown of the banking system, FED, for the emitted dollars, has acquired other assets as well (among them treasury securities) or has even given credits. In Poland after the hyperinflation, at the turn of the ‘80s and ‘90s of the 20th century, there was a constitutional ban placed on financing the Polish government by the central bank. Zloty issue takes place through purchasing foreign debt instruments by the National Bank of Poland, most of all American government’s securities denominated in Euro currency. The National Bank of Poland buys exchanges for the emitted zlotys and afterwards it purchases foreign securities for the exchanges. In this way official reserve assets were created in Poland.

New emission goes into circulation anyway and starts to go round in the economic system, is it through government’s expenditures (United States) or exporters and foreign investors (Poland) selling the exchanges. The questions arise whether the issued money must in the first instance go to the clients of the government (USA) or exporters or foreign investors (Poland) and should the central bank always get the interest for the emitted money?

Considering the purposes of money in the economic system, the way the money goes into the economic system is secondary. The fact that at the moment money goes into economy through some groups of subjects is only due to the politicians and bankers’ preferences. Considering the stability of the economic system, the best solution is to scatter the emission among the participants of the economic life. By these means the new emission will foster such a demand as the society really has and not as preferred by the previous beneficiaries of money emission. A demand for the product is not artificially distorted. Scattering the emission is as well a powerful anti-speculative tool since the new money is not directed to narrow market segments (e.g. real estate, stocks) where it can cause the inflation of the speculative bubble.

The strongest scattering of the new money emission is to happen when it will reach all the citizens. Considering previous assumptions, in calculation per one person in the United States, per one American there is a sum of about 800 dollars a year and in Poland, there is an amount of 1385 zlotys a year per one Pole. In this form of introducing new money emission to the circulation there is no justification to apply interest.  Fiduciary money is cheap from its nature and the cost of storing are covered by the banks’ fees for current account deposits.

Then, we can propose the second, after the monopoly for emission, postulate on changes in the banking system. New money issues resulting from the advancing needs of developing economies  should go to all the citizens of the country without consideration e.g. in a form of paying interests. Central bank becomes than a national institution which emits money essential for the efficient functioning of the economic system for all the citizens of the country.

Positioning the new money issue directly to all the citizens omits politicians in the transmission of the monetary impulse. It abridges them not only from the right to decide on what they allocate new money emission but simultaneously it disciplines them by depriving them of the chance to finance their countless whims from the central bank’s emission. In every case they must apply to the nation for the taxes or for the loan. It must be the nation to decide on whether the aims pointed by them are adequate to the funds demanded from the citizens.

New way of locating the new money emission omits commercial banks as well. Regardless of whether they want to or don’t want to give credits, whether they function or go bankrupt, the nation is provided with the access to the money. Theoretically, even a bankruptcy of all the banks and a loss of all deposits would not threaten with the annihilation of the money circulation. At any time, the new money emission supplementing the loss in the money supply can go directly from the central bank to the citizens.

National emission, apart from the economical justification is of a large social significance. It is a manifestation of the national bond and appreciation of each citizen entitled to new emitted money. The state, regardless of the age, religion, education or gender gives an opportunity to a citizen, having faith that he will contribute with his work to multiplying his wealth, the wealth of his family and the power of the state. Regardless of this faith, all the money introduced to the circulation, even by the worst profligate, starts a circulation beneficial to the whole economic system. Money will not be a tool of dominance over a human but it will become a means of facilitating the division of work in the national community in the least painful way and increasing its efficiency.

In spite of the fact that the sums estimated above are not big, the national emission has a social value. The amounts of it are sufficient e.g. to buy food so that no American and no Pole was hungry. National emission promotes families. The more members the family has the higher the demand they will have jointly, thanks to the funds from emission.

Commercial banks

From the assumption of the central bank’s monopoly for emission follows the conclusion that the commercial banks must be deprived of the possibility to emit deposit money by granting credits.

Achieving this goal becomes trivial if we go back to the source of the money emission with no cover by bankers. They have noticed that not everybody calls for cash and having it continuously in stock, they could have emit more deposit money by giving credits. In a result the current deposits have only a partial cash cover. To end this banker’s ‘habit’, it would be enough to create full reserves for current account deposits. A commercial bank must have a 100% worth of the current deposits in cash in the treasury or at the account in the central bank so that it could give credits.

In such a situation granting credits is possible only from the banks’ equities or term deposits placed in other banks (relatively other term liabilities, e.g. issued bonds). Commercial banks, instead of employing themselves with money creation, return to the role of the financial intermediary between the savers, investors and consumers. Meanwhile an interest rate becomes a price of balance between the savings supply and a demand for credits and loans. The interest rate stops being a tool of dis-regulation of the market through indirect control of the credits’ volume with this rate to shape the money supply in the previous system (artificial decreasing of the interest rates of the central banks, practically to zero in order to revive the credit activity of the commercial banks at any cost).

Thanks to 100% reserves keeping the current account deposits in bank will become completely safe. In regard to the impossibility of investing the current deposits in credits or securities by the banks, the deposits will not be exposed to risk by bankers’ unprofitable investments. Moreover, even if all the clients called to withdraw their deposits they would get their money instantly. It means eliminating the system jeopardy of banks’ insolvency resulting from the ‘run on the banks’.

At the moment, after introducing the full reserves for the current account deposits, practically no bank could be giving credits. It would become possible only after monetarising the current account deposits by gathering cash in the banks’ safes or at the account of the commercial bank in the central bank.

There are many methods of monetarising the banking sector.

The simplest way is to inverse the previous process of deposit money creation. The credits gradually paid off by the clients would directly decrease the value of the current deposits or increase the amount of the cash in the bank. However, it would result with a decline in money supply. It is unprofitable due to the deflation pressure and depression pressure. Because of these, a central bank can start to emit cash money in a scattered way in order to sustain the money supply. However, during the time of implementing such a scenario the banks credit activity would stay frozen until they would achieve the cash in stock equivalent to the current account deposits (at least for a few months). In other words, practically all the existing banks would not be able to run new operations of typical financial mediation.

Enabling the bank to continue with the credit activity would only be possible if the bank had the cash to cover the lacking reserve for the current deposits. This may happen, inter alia, by raising the equity of the bank paid with the capital.

Additionally, monetarising some of the banks’ assets is worth consideration. In American banks’ assets there were the USA’s government bonds worth 1.2 billion dollars at the end of 2008. In turn, active banks in Poland gathered about 149 milliard zlotys of the securities proving the debt of the Polish government. Central bank of the state can carry out a single money emission in order to pay this liabilities. In a result, not only the commercial bank will gain funds to cover the full reserves, but as well the new lasting indebtedness of the state will take place. Apart from scattered money emission by the central bank going directly to the citizens, it is a manifest of the withdrawal from the foundation of cash and deposit money on debt.

Other assets of the commercial bank may as well fall within the monetarising from a one-shot money emission by the central bank. Educed subject, being a property of the state could be fed with the cash money emission which will be allocated to buy e.g. a part of the credits’ purse from the commercial banks. In Poland the commercial banks have given credits denominated in foreign currencies coming to 208 milliard zlotys, including 135 milliard PLN intended to real estates and households (state at the end of 2008). The cash funds form the central bank could be earmarked for payment of a part of these credits in commercial banks and their conversion into low interest-bearing credits in zlotys without an exchange risk in an appointed state subject (state investment bank). As the credits in zloty were paid off to the subject, the capital could be returned to the central bank (withdrawn from the circulation).

Another form of monetarising the current account deposits is placing the term deposits by the central bank in the commercial banks financed from the single money emission. These deposits would be withdrawn as the cash was acquired by the commercial banks from other sources.

In a situation of incomplete reserves for the current deposits commercial banks would be as well interested in promotion among those clients who have stable balance on their current account deposits of placing a part of their funds in a term deposits. Such an action would increase the value of the beneficial for the economy middle-term and long-term sources of financing.

From enlisted methods of providing a full cover for current deposits from cash reserves we can compile a variety of ways accurate for a situation of any banking system. A diversity of the methods, by the way, enables to achieve aims favourable from the aspects of monetary, budgetary and social policy.

International banking

Basing the commercial banks’ operations on full reserves for the current account deposits will prevent the banks from money creation based on foreign currency deposits. It will restore the monetary sovereignty of the central banks in the countries of the currency emitters. National money issue will depend exclusively on their decision. Moreover it will eradicate the reservoir of the funds used to finance the world’s speculation on every market in the worlds (e.g. Eurocurrency).

The foreign currency reserves of the central banks in the whole world are the remains of the gold standard. In the times of gold currency gold was the reserve. The financial means issued by the banks had their cover in metal and could have been exchanged at any time. Emission was based on purchasing gold for the issued money. Gold salesman could have bought goods for this money produced in the country of the money emitter. After suspending the exchange of the most of the currencies into gold, the function of gold was taken over by the American dollar. Initially it was rather convincing as the central bank could have still exchanged the dollar into gold in the Federal Reserve. Dollar became a substitute for gold in the foreign currency reserves. The United Stated were able to play such a role thanks to huge gold resources coming from its compulsory sale by the American citizens to the State at a lowered rate in the times of the Great Depression and as well from an inflow of gold from Europe that paid with it for the deliveries related to the II World War. Despite that in the ‘70s of the 20th century, the United States one-sidedly abolished the dollar-gold exchange, in a situation when the USA were and still is the biggest economy in the world dollar continues to be a basic currency reserve of the central banks in the world.

For the end of 2008 the official foreign currency reserves of the central banks of all the countries in the world amounted to about 7.7 billion dollars which comprise about 11% of the world GDP. This sum does not include the reserves in the special funds created, inter alia, by the countries exporting crude oil (United Arabian Emirates and Norway). According to the previous international finances theories these reserves are to assure maintaining liquidity in the international accountings and enable stabilising the exchange rates. About 64% of the reserves is held in the instruments denominated in dollar currency, about 27% in Euro and about 3% in yen. Regarding safety and liquidity, the most often form of investment of the foreign currency reserves are the governments’ treasury securities of the countries of currency emitters in which the reserves are denominated.

Foreign currency reserves are created by the banks through purchasing currencies and their investments in the foreign governments’ bonds. The currencies are purchased for the national money issued by the central bank at the time of buy. The currencies bought by the central bank mainly come from the exporters and foreign investors making business in the country of the given central bank. Currencies purchase cause an increase in their demand with a simultaneous increase in the national currency supply. These are the factors that influence the weakening of the national currency and strengthening of the foreign currency. In a result, the process of creating foreign currency reserves induces the pressure on the surplus in the trade balance of the country creating the reserves and deficit in the trade balance of the country of which the currency is the reserve. Hence, creating forex reserves is a source of commercial and payment instability on a world scale. It is not an accident that the highest trade deficit is noted by the United States, of which the currency is the main component of the forex reserves in the world. At the same time, the pressure on the currencies of the state with the reserve status affects falling economic activity in these countries and contributes to the ‘export’ of the workplaces. It is not by chance that the depression started in 2008 touches most deeply the real economies in the countries, of which the currencies are the main component of the foreign exchange reserves in the world.

The process of investing the currencies purchased as reserves arises the demand for the debt instruments in the countries having the forex reserves. It induces a part of the subjects in these countries to getting into debts. The effect is noticeable particularly in the United States which have a huge budgetary deficit previously financed in majority by foreign investors. For the United States, having a currency that is the main component of the forex reserves entailed double deficit of America: in foreign trade and in the budget.

Foreign exchange reserves became a source of a gigantic unbalance on a world scale. Simultaneously enormous amounts of financial assets acquired by the central banks, which in theory were meant to stabilise liquid exchange rates, attracts speculators from all over the world interested in playing for the reserves. In other words, the reserves, as a potential element of the speculative game, contributed to disturbances in the currency system in the world.

Import in 2008, on a world scale, amounted to about 16.2 billion dollars, which comprises about 23% of the world GDP. The reserves enabling financing the monthly import amount to about 1.9% of the world GDP. To maintain liquidity in currency accounting between the central banks, even monthly reserves (in ratio to the value of import) are unreasonable. Central banks, due to the historical occurrences keep the redundant foreign exchange reserves worth up to 10% of the world GDP of which creating and maintaining generates unbalance on every market in the world.

The National Bank of Poland, at the end of 2008 owned forex reserves worth 184.2 milliard zlotys (62.2 milliard USD). Meanwhile the foreign debt of the Polish government (according to the place of emission) came to 149.7 milliard zlotys (about 50.5 milliard USD).

Changes in the rules of money emission by the central bank through aiming it directly to the citizens makes it useless to create the foreign exchange reserves as the emission cover. At the same time the significant surplus of the reserves in proportion to the needs of sustaining liquidity in the international accounting enables to intend these reserves to other aims.

In the first place, the reserves can be used to decrease the foreign debt of the state. In this way the ineffective spiral of the growing debt is stopped as well as the growing reserves. The reserves could be used for economic purposes as well. Considering the denomination in foreign currencies it must take place by agreement with the countries, of which the currencies are the reserves. Thanks to the reserves, countries such as Poland may generate the demand for the products from the countries with the reserve currency status. In order to improve economic effectiveness of the import and limit the pressure on the imported goods on the interior market, the import financed from the reserves should be of an investment character, especially in scope of building modern energetic and transport infrastructure, and environment protection. It could be possible to create scholarship programs for students at the best foreign universities from a part of the reserves. In this way, the reserves would not only contribute to the economic progress in the countries in which they were gathered, but moreover, they would be an important impulse to revive the economies that are currently deeply affected with the world economic crisis. Such as Poland could intensely develop thanks to the development of the foreign trade with the whole world, including European Union and the United States, now it can help other countries to overcome the depression with simultaneous modernisation of its own economy. This process should have a global character with participation of, among others, the biggest debtors and creditors (the United States and China) and its implementation will be possible thanks to international agreements defining the way of decreasing the reserves and directing them to the markets in the countries – emitters of the reserve currency.

We have a different option

The collapse of the banking system in the United States and in Europe is immersing the world into the greatest depression since years. However, every crisis brings hope, that it could get better. In the times of crisis, the defects of the economic systems, including banking which were the trigger of the catastrophe, are particularly noticeable. It gives opportunity to apply modifications to the systems in order to stop their degradation and begin the process of a peaceful repair of the damages.

The analysis of the banking system which has spread around the world since the times before the I World War enables us to formulate three reformative postulates:

1. money emission by the central bank should be aimed directly to all the citizens of the state without consideration e.g. in a form of interests,
2. commercial banks should work on the basis of the system of full reserves for the current account deposits,
3. foreign currency reserves of the central banks should be decreased to the level assuring the accounting liquidity with the foreign central banks.

The results of the considered changes of the existing banking systems will be:

1. restoring the monopoly for emission of the central banks, which will provide a direct influence on the amount of money supply,
2. scattering of the money emission to all the markets, which will hinder formation of the new speculative bubbles,
3. permanent exclusion of the politicians from the source of cheap money straight from the “printing machines”,
4. eliminating deposit money emission by the commercial banks, which is a significant source of financing international speculations,
5. restoring the interest rate’s function of balancing the savings and investments,
6. limiting the effects of passing disturbances in credits activity of the central banks,
7. assuring solvency of the commercial banks for all the current account deposits even in a case of the “run on the banks”,
8. eliminating the risk of a breakdown in money circulation in a case of bankruptcy even of the biggest banks,
9. opportunity of a quick payment of a part of the public debt resulting from the previous rule of money emission through incurring debt,
10. constriction of international speculations through decreasing the foreign currency reserves which are often the aim of speculation,
11. eradicating of the lasting unbalances in the balances of payment arising during creating foreign currency reserves,
12. liberation of ineffective surpluses in foreign currency reserves to the advantage of taking over the debt spiral on a scale of international economic revival in the countries of reserve currencies and modernisation of the countries possessing reserves.

It will get better.