What private banks can do, the Cuban Central Bank can do better. With the added advantage that, if it is done wisely, the people will benefit; not the State, nor a tiny elite, but the people i.e. every individual man, woman and child. We refer to the wonderful power of money creation out of nothing. Earlier we explained how this is done. Just like the private banks in capitalist countries do all the time, the Cuban Central Bank can extend credit without using its own money, nor money that was deposited at the Bank by any third parties. Such “unbacked” or “empty” credit constitutes new money that the Cuban Central Bank can create at will.
In principle, the creation of new money is limitless, the dream of every school-boy: a machine that makes as much money as you want by simply flicking a switch. However, in a finite world nothing can be limitless, although it is difficult to indicate where the limits are, as they tend to recede. Like the limits of human knowledge. There are, however, a number of strict rules that have to be adhered to, otherwise serious accidents will happen. For instance, one can’t just let the money-presses roll indiscriminately; this would cause hyper-inflation, as happened in Germany before WW-II. Compare money-creation to electricity. It’s a wonderful power, but unless it is properly and safely used, it can be lethal. In short: obey the law!
Is there never a limit to rules? No, otherwise lawyers would be redundant!
The basic rules for safe money creation by the Central Bank are:
1) Only productive investments should be financed with newly created money, i.e. investments that will produce goods and services generating enough profit to be able to pay back the loan within a relatively short period of time and that will thereafter continue to generate goods, services and profit for a considerable period of time;
2) Newly created money should never be used to finance consumptive expenses. This should be left to the private sector, either banks or other businesses (e.g. by means of hire purchase contracts);
3) All financing by newly created money must be paid back in full;
4) All new money loans must be secured by ‘capital credit insurance’ and should be extended at 0% interest; in this Solidarism sides with those sincere Muslims who have always held that ‘riba’ (interest) is against natural law;
5) Only ESOP- and similar companies should be financed with newly created money;
6) Only green or environmentally neutral investments should be financed with newly created
money.
Blind rules are as unconvincing as Cuba’s outdated slogans. We owe the reader an explanation. This will be done as we go along. A few words here about Rule 2. The need to adhere to this rule (in conjunction with Rule 1) was demonstrated by Germany’s experiment with financing its deficits with ‘printing press money’ (which is one way of creating money out of nothing). This flooded the market with lots of money that was used indiscriminately, mostly for consumptive purposes. This caused a severe imbalance
between the available money and available goods. Such imbalance causes inflation (too much money chasing too few goods), accelerated by the fact that consumptive goods disappear once they have been consumed. This increases the imbalance, causing hyper-inflation.
No doubt there were other causes that contributed to the inflationary crisis in Germany at the time, but our explanation serves to make the point that financing of consumptive goods will tend to cause imbalance between money and goods, which causes inflation. Productive investments on the other hand produce goods so that the opposite imbalance can occur (with deflation as a result). There are, however, effective ways to control this opposite imbalance, which we hope to have occasion to explain
elsewhere.