Stung by Financial Crisis, Iceland Wants Soviet-Style Banking

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The exploding volcano above is an apt visual metaphor for what Iceland’s economy looked like in the early years of last decade’s world financial crisis. Flirting with a total and complete economic meltdown, perhaps even teetering on the edge of becoming a failed state, Iceland mounted an incredible turnaround thanks to several key measures. Paramount was the decision to let the country’s banks collapse like a house in a Buster Keaton movie. It’s safe to say that the Icelandic people have no problem forcing banks to bend to their will.

A radical plan currently brewing in Iceland’s government could lead to more of the same.

As reported by Agence France-Presse and Max Ehrenfreund of the Washington Post, Iceland’s prime minister Sigmundur Davíð Gunnlaugsson has requested a report by parliamentarian Frosti Sigurjónsson detailing why the government should disallow banks to create money. Ehrenfreund explains:

“It sounds strange to say it, but creating money is indeed something that banks do all the time. Say you take out a loan to start a business from your bank. You write checks to your workers and your rent and you buy goods wholesale. Eventually, your suppliers and employees deposit that money at their banks, which can in turn make new loans. One of those banks might extend a mortgage to help someone buy a house, and the cycle repeats.

As the checks change hands, the total amount of money out there actually multiplies with each cycle. Even though the homeowner has paid for the house she’s now living in, your employee can still withdraw her cash from her bank account. And although you have money to pay all your expenses at your business, your bank’s depositors can still take out their money as well. Money has been created.”

The current Icelandic government is not a big fan of this! Ehrenfreund discusses the contents of the Sigurjónsson report, which argues that the above system is unsustainable. Instead, what’s prescribed is a “sovereign money” system featuring a more centralized banking entity in which the government “would essentially run checking and savings accounts.”

While sovereign money systems aren’t exactly a new development, a change of this degree would certainly be unprecedented in modern times. Ehrenfreund includes several perspectives that vary from eagerly supportive of the Sigurjónsson plan to vehemently opposed (calling it “Soviet-style”). Check out the piece (linked below) for more info on this interesting idea.