INTRODUCTION and CONTEXT
Rightly or wrongly increasing numbers of people around the world are seeing the money system as a threat to democracy and a major cause of the economic efficiency, destructiveness and injustice that they experience under the present form of globalisation. Monetary reform will be one important response to that. Monetary reform is about changing the way new money is created. And the first thing to remember is that whoever creates new money makes money (unless they give it away).
The money supply is now very largely created (over 90% in UK) by commercial banks. They are allowed to write electronic money out of thin air into the bank accounts of their customers - as profit-making loans. The rest of the money supply is banknotes and coins (paper and metal money) created by agencies of the state and put into circulation debt-free - a source of public revenue.
The main international currency now is the US dollar. The US is estimated to receive over $400bn a year from other countries, especially poorer countries, for using it.
The proposal that follows refers to the United Kingdom, but the proposal in "Monetary Reform - Making it Happen" follows the same general principles as the proposal for national monetary reform.
Below is a summary of the national monetary reform proposal, its benefits and obstacles and objections made against it
NATIONAL MONETARY REFORM PROPOSAL
The proposed reform is as follows.
- Central banks should create non-cash money (i.e. bank-account money) out of thin air, as the commercial banks do now. At regular intervals they should create as much as they decide is needed to increase the money supply. They should transmit these amounts to their governments as debt-free public revenue. Governments should then put the money into circulation by spending it like other revenue - as they decide.
- It should be made illegal for anyone else, including commercial banks, to create new bank-account money denominated in the national currency, just as it is already illegal to forge coins or counterfeit banknotes.
- In order to regulate increases in the money supply the central bank will no longer need to manipulate interest rates in order to influence the amount of new money created by commercial banks.
- In order to lend money, commercial banks will have to borrow already existing money from elsewhere. They will become brokers, linking potential lenders to potential borrowers - as many people wrongly assume they are now.
- This reform will parallel what happened to banknotes in the 19th-century. Banknotes, issued by the banks, were then recognised to have become real money and no longer merely "credit notes". When that was accepted, the central bank took over issuing them. Similarly now, electronic bank-account money is recognised to have become real money, ready for immediate spending - not just something called "credit". It is time to transfer responsibility to the central bank for creating it.
- On the best available estimates this would mean in Brtain about £45bn a year in new public revenue, and loss of a hidden subsidy of over £20bn now enjoyed by the banks.
- The reform will be evolutionary, not revolutionary. Since nationalisation in 1946, the Bank of England has continued to evolve from being a commercial bank with a special relationship to the government, towards becoming a straightforward agency of the state, as central monetary authority. Meanwhile, the commercial banks have become somewhat less monopolistic, somewhat more competitive businesses, with fewer public service functions, subsidies and controls. For both the Bank of England and the commercial banks, the proposed reform is clearly the next evolutionary step.
- Two Things Monetary Reform Does Not Propose
1. Public spending. The reform will not affect the power of elected government to decide how the new money, or any other public revenue, is spent. (It will not give the Bank of England any power in that respect.) 2. Borrowing and lending. It will not restrict the borrowing and lending of already existing money.
SOME BENEFITS OF MONETARY REFORM
- Reductions in taxation and government debt and increases in public spending, up to £45bn a year.
- The value of a common resource - the national money supply - will become a source of public revenue rather than private profit. That will remove an economic injustice and a distortion of economic efficiency.
- Withdrawing the present hidden subsidy to the banks will result in a freer market for money and finance, and a more competitive banking industry. The recently published huge bank profits, and Don Cruickshank's recent outspoken criticisms are very relevant.
- A debt-free money supply will help to reduce present levels of public and private indebtedness. They are partly caused by the fact that nearly all the money we use has been created as debt, which has to be paid back and on which interest has to be paid.
- The economy will become more stable. Banks want to lend more and their customers want to borrow more at the peaks of the business cycle - and less in the troughs. So, linking the creation of new money to the readiness of banks to lend and of bank customers to borrow, automatically amplifies the booms and busts that destabilise the economy.
- The central bank will be better able to control inflation. It now tries to control inflation indirectly, by raising interest rates (the costs of bank loans). But raising those costs actually helps to cause inflation - as well as bankrupting businesses and individuals.
- Environmental destruction will be reduced. When, as now, almost all the money we use started out as debt, people have to produce and sell more things in order to repay the principal and interest of the debt than they would if all our money had started its life debt-free.
SOME OBSTACLES & OBJECTIONS TO THE REFORM
The following are among the obstacles to national monetary reform and the objections against it by Ministers and MPs. They are documented and, in most cases, refuted in "Monetary Reform - Making it Happen", where the names of particular MPs and Ministers are given.
- Powerful opposition from banking and financial interests, and associates - official, professional, academic, corporate, political. The threat that even raising possibility of monetary reform - will damage the economy.
- Public ignorance and confusion about how money is now created.
- Positive wish for public and political ignorance.
- Misunderstanding and misrepresentation about what the monetary reform proposal actually is.
- Fear, genuine and spurious, that monetary reform will involve further centralisation of state power;
- Knee-jerk reaction that monetary reform will be inflationary.
- Knee-jerk reaction that monetary reform will 'crowd out' investment in the private sector. This ignores (a) that there is no compelling reason why it should, and (b) that the Private Financial Initiative (PFI ) was brought in precisely in order to channel private sector finance into public sector investment!
- Depriving banks of their hidden subsidy will increase the costs of borrowing and payment services, and force banks to cut costs, close branches and reduce jobs. (But why should banks be subsidised any more than other industries?)
- It will damage the international competitiveness of UK banks and therefore of the UK economy as a whole;
- No other country has seriously considered it.
An additional note
Power of the state. To make an agency of the state directly and transparently responsible for controlling the public money supply, which it now controls indirectly by manipulating interest rates, will not give excessive new power to the state - only clarify an existing responsibility.
Consider taxation - a parallel case. Agencies of the state are directly responsible for taxation. Does anyone seriously support "decentralising" the power of the state by giving the Big Four banks responsibility for raising taxes on a profit-making basis?
James Robertson The Old Bakehouse, Cholsey Oxon OX10 9NU, UK Tel: +44 (0)1491 652346 e-mail: email@example.com
- James Huber & James Robertson, Creating New Money: A Monetary Reform for the Information Age. New Economist Foundation, 2000.
- James Robertson & John M. Bunzl, Monetary Reform: Making it Happen! London: International Simultaneous Policy Organization, 2003. The text of this book can be downloaded free.
- James Robertson. The Role of Money and Finance: Changing a Central Part of the Problem into a Central Part of the Solution. A paper given on 18th October 2003 at the XXIXth Annual Conference of the Pio Manzu International Research Centre, Rimini, Italy, in a session on Sharing Limited Resources And A Change Of Course.
- Michael Rowbotham, The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics. Charlbury, Oxfordshire: John Carpenter Publishing, 1998.
- Rodney Shakespeare & Peter Challen, Seven Steps to justice. London: New European Publications, 2002.