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‘Why have we given our greatest social creation – money - over to private, profit seeking companies?’
This was a question posed by Martin Wolf, chief economics commentator of the Financial Times, at the beginning of the event Does Money Grow on Trees? organised by Positive Money and the Institute of Chartered Accountants for England and Wales (ICAEW). Over 100 people turned out to discuss what Wolf described as the ‘fascinating intellectual questions’ associated with permanently taking power to create money away from banks and giving it to the state.
As Ben Dyson, founder of Positive Money has explained in a previous article for Open Democracy, banks currently create 97% of the money in our system when they issue loans. Positive Money, a campaign and research organisation set-up in 2009, argues that leaving the power to create money in the hands of the financial institutions that caused the economic crisis is a mistake – and one that not enough people understand. Results of a recent Dodds Monitoring poll show that only 1 in 10 MPs accurately understand where money comes from. Positive Money highlights the causal relationship between the current monetary system and instability in the economy, high house prices and increasing inequality, arguing that without an understanding of money creation our MPs are ill-equipped to prevent another financial crisis.
Since the Bank of England published a paper earlier this year confirming that banks create money when they issue loans many more voices have joined the money creation debate. Perhaps one of the most prominent voices has been that of Martin Wolf. In April 2014, Wolf described banks’ ability to create money as ‘a giant hole at the heart of our market economies. It could be closed by separating the provision of money, rightly a function of the state, from the provision of finance, a function of the private sector.”
Wolf joined the Financial Times in 1987 from the World Bank and became an associate editor ten years later. Widely considered to be one of the world’s most influential economic writers, he is a highly respected member of the economic establishment. By his own acknowledgement, that makes him a surprise ally of the Positive Money campaign: “When I am viewed as a wild-eyed radical you know something very strange is going on in the world”. Nevertheless, he has contributed significant column inches: writing two articles in the past year as well as dedicating a chapter of his new book ‘The Shifts and The Shocks’ to the subject.
Accompanying Wolf at the ICAEW was a panel made up of Ben Dyson, founder of Positive Money, Alderman Alison Gowman, Michael Izza, Executive Director of ICAEW and Frosti Sigurjónsson, Member of Parliament for Iceland.
Making it clear from the outset he was unwilling to tie himself ‘entirely to the mast’ of eliminating the current system of fractional reserve banking, Martin Wolf addressed the key objections to full reserve banking head on noting that, whilst these objections clearly raise important issues, they could all be handled. Threading throughout Wolf’s talk was the contention that the dangers posed by transitioning to a new system do not pose a greater threat than the dangers inherent in our current system.
This point resonated with Frosti Sigurjónsson. The severity of Iceland’s financial meltdown has meant politicians are seriously looking for alternatives to the current banking system and studying the role that fractional reserve banking played in the financial crisis. Frosti was hopeful that, for Iceland, now is the time for alternative banking models, having realised whilst ‘we cannot contain the volcanoes, we can contain the banking system’.
The challenges facing the Positive Money campaign were the subject of much discussion over the course of the evening. This radical a proposal presents a huge challenge to the status quo and would encounter a large amount of resistance, Alderman Alison Gowman was quick to point out. Sigurjonsson questioned whether proposals to strip banks of the power to create money should be seen as ‘radical’ or if it is the current system, which gives banks the power to create money out of thin air, that is the radical option. These ideas have the best chance of being implemented, Wolf argued, ‘when, not if’ the next financial crisis hits.
Shocked by the timidity of politicians in the wake of the financial crisis, Wolf expressed concern that this generation was ‘depressed but accepting’ about the fundamental problems caused by the financial sector. Wolf observed that since WWII there has been a steady decline in political engagement and a general detachment to the idea of the state as a collective. The rallying cry, although at times tentative, from the chief economics commentator of the Financial Times seemed to be – demand more. Our economic system can serve us better and we need to ensure that it does so.
Whilst the barriers to change were acknowledged during the evening, the event signified the impressive space this debate now occupies. In the heart of the square mile, the room at ICAEW was packed with journalists, economists, academics and politicians discussing these ‘radical’ ideas. Positive Money’s support base has more than doubled in the last year and the debate is gaining traction around the world.
On Thursday 20 November the backbench debate Money Creation and Society is scheduled to take place in the UK Parliament. This will be the first time in 170 years Parliament has debated money creation and another significant breakthrough in the campaign for monetary reform.
ABOUT POSITIVE MONEY
Positive Money is a movement to democratise money and banking so that it works for society and not against it. Founded in 2010, we work to raise awareness and understanding of the fact that most of the UK’s money is created by banks as they issue loans. www.positivemoney.org