If you or I printed our own money at home, we'd find the police kicking the door down in the middle of the night. But there's a collection of private companies that have a licence to 'print' money electronically. These companies are known as 'banks', and they create 97% of the money in our economy.
Banks create money when they make loans. Those numbers that you see when you check your bank balance are simply electronic digits in the bank’s computer systems. As the Bank of England explains:
"Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money."
Banks would like us to think they’re busy collecting money from savers and then lending it to small businesses, helping entrepreneurs to create jobs and grow the economy. But this is a fairy tale. Most bank-created money goes directly into the property market, pushing house prices out of reach. Much of the remainder goes to the financial sector, fuelling trading, speculation and the 'socially useless' activity that former Financial Services Authority chairman Adair Turner highlighted. As little as 13% of bank lending goes to businesses outside the financial sector. Whatever they'd like us to believe, banks are not busy supporting the nation’s entrepreneurs.
In the hands of reckless banks, this power to create money led to the financial crisis and the recession that followed. Since that crisis there's been a growing call for changes to the way that money is created, particularly from Positive Money. This debate reached new levels recently with the Financial Times’ chief economics commentator, Martin Wolf, arguing that we should "strip banks of their power to create money".
Positive Money argues that we should take the power to create money away from the banks that caused the financial crisis, and transfer that power to a democratic, transparent and accountable body working in the public interest. The new body could be the Bank of England’s Monetary Policy Committee, or a completely new organisation. Its members must be independent of both profit-seeking banks and vote-seeking politicians, and be able to take a long-term, non-political view and consider the interests of society as a whole.
The committee would look at the health of the economy and decide how much new money should be created. They would then transfer the newly-created money to the government, who could use it to increase spending on public services or to reduce taxes. It could even give every citizen an equal share, to be spent as they wish.
The important thing is that newly-created money would be spent into the real (i.e. non-financial) economy, rather than being pumped by banks into property bubbles and financial markets. This would do far more to create jobs and improve the economy than the bank loans ever could. Banks would still be able to make loans, but rather than creating the money they lend, they'd actually have to get money from savers first. If there was ever a significant shortage of finance for business, the Bank of England would be able to create new money which banks could borrow to finance business loans, ensuring that the real economy would be better supported than in the current system.
These changes (more detail here) would mean that we were no longer dependent on banks to create the money our economy runs on. Not everyone is in favour of these changes, however. Ann Pettifor writes that these ideas are "deeply flawed" and would lead to "a shortage of money, high unemployment and low economic activity".
Pettifor argues that "the idea that society can set up a single 'independent' committee of men to make far-reaching decisions about the quantity of money needed by a nation of sixty four million people, all engaged in varied and complex activities, is bordering on authoritarian".
Instead, she argues that we should leave banks with the power to create money, but use regulations to make them put the money they create into productive parts of the economy rather than bubbles and financial markets. But regulation is also set by a committee - a committee that is far less transparent, accountable or in the public eye than the existing Monetary Policy Committee. Such a committee would have to decide whether the current levels of mortgage lending are appropriate or excessive. They would need to adjust the regulation they set to encourage more lending to businesses. When they find that the regulation isn't working as intended, they'd need to adjust it again. And ultimately they'd be trying to protect banks from their own biases and recklessness. This approach would place much more control in the hands of a committee – a situation that Pettifor finds to be ‘authoritarian’.
More worryingly, Pettifor's proposal relies on a committee of regulators outsmarting the big banks. In contrast, our approach recognises that banks have the resources to run rings around regulators and that they will make stupid mistakes regardless. For that reason, we believe they can’t be trusted with something as powerful as the ability to create money. Leaving them with this power would mean that the taxpayer would once again be on the hook for bank failures. Profits would be privatised, but losses would be socialised. In other words, nothing would change.
More fundamentally, the idea that we can simply patch up the current system with better regulation ignores a much bigger problem. The problem is not just how newly created money is used; it's also a question of how the money is created. Pettifor's proposal still leaves us with a system where new money is only created if people go further into debt (because banks create money when they make loans). To grow the economy, we need households and businesses to borrow even more (or to run down their savings). In contrast, our proposals would allow the Bank of England to create
money 'debt free', which could be spent into the economy (by the elected government) without anyone else having to go further into debt. Some of the new money could be used by people to pay off existing debts. This offers the greatest hope for reducing the amount of debt in society.
Ultimately, if we leave banks with the ability to create money, we leave them with the power to shape society.
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