The Budget 2012: Let's rearrange those deckchairs boys!

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Budget day today, however, this is not the place for a full analysis of the ongoing deckchair rearrangement.

We here at Positive Money just wanted to remind Osborne, Cameron and Clegg that there is an alternative to selling off anything not nailed down (motorways don’t need nailing).

In 1844 a Conservative government, lead by Sir Robert Peel, passed the 1844 Bank of England Bill. This Bill outlawed the creation of money by private banks, after they unsurprisingly went a bit nuts with the privilege and almost wrecked the country. Unfortunately, the private banks eventually found their way around these regulations, and unsurprisingly went ‘nuts’ again, leading us to the mess we currently find ourselves in.

In the UK today, 97% of the entire money supply was created by private banks as debt.

Of course, no one noticed them going nuts – after all, who could expect the Treasury or the Bank of England to notice a small thing like the money supply doubling in 7 years? (This was an increase of £1 trillion between 2002 and 2009). To put this increase into some kind of perspective, it took just over 300 years from the founding of the Bank of England for the money supply to reach its first £1 trillion (in 2002).

More money was created by banks in each month of 2007 than was created throughout the whole of the First and Second World Wars.

Of course, if the government had the sole right to create money everyone’s taxes could be reduced without having to increase the national debt or reduce spending on hospitals and the like. And no, we are not advocating Zimbabwe style money printing to finance expenditure – rather that money is created by an independent body in line with an inflation target and granted to the government. If inflation is expected to be above 2%, then there would be no new money created (or some could be removed).

Of course, we could stick with the current system, where banks create money in line with their profit motives, and we essentially have to rent the money supply off them, then bail them out when they mess it all up – essentially a form of socialism for the rich.

Maybe allowing banks the power to create money wasn’t the best decision ever?

Source: Capie and Webber (2006), A Monetary History of the United Kingdom 1870-1982. And Bank of England statistical database


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Andrew Jackson

Andrew Jackson holds a BSc in Economics and a MSc in Development Economics from the University of Sussex, and is currently studying for a PhD at the University of Surrey. He is a co-author of the book “Where Does Money Come From? A guide to the UK monetary and banking system” with Josh Ryan-Collins and Tony Greenham from the New Economics Foundation, and Professor Richard Werner from the University of Southampton.
  • Stuart Moore

    Already emailed my MP and asked him to send your policy’s onto Osbourne.

  • Conrad Jones (Cheam)

    As the British experience Tax Increases by a “Prudent”  Chancellor, the People of Guernsey have to endure the following nightmare of Taxation:

    “Guernsey has an income tax, but the tax is relatively low (a “flat” 20 percent), and it is simple and
    loophole-free. It has no inheritance tax, no capital gains tax, and no federal debt. Commercial banks service
    private lenders, but the government itself never goes into debt.

    When it wants to create some public work or service,
    it just issues the money it needs to pay for the work.

    The Guernsey government has been issuing its own money for nearly
    two centuries. During that time, the money supply has mushroomed to about 25 times its original size; yet the economy has
    not been troubled by price inflation, and it has remained prosperous and stable.”

    George Osborne must think that the Government of Guernsey must be terribly dishonest as it has the audacity to create debt free money  and takes away the Banks source of profit “Government Debt”.

    Their inflation rate has been stable around the 3% target figure when ours rose above 6% (RPI).

    Another Tax that is not seen on Guenrsey is VAT.

  • simoncz
    Very good article on why we don’t need to borrow from banks. From a century ago.

    • Conrad Jones (Cheam)

      Good Link.

      ” “But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 per cent., whereas the currency pays nobody but those who directly contribute to Muscle Shoals in some useful way.“If the Government issues bonds it simply induces the money brokers to draw $30,000,000 out of the other channels of trade and turn it into Muscle Shoals: if the Government issues currency, it provides itself with enough to increase the national wealth at Muscle Shoals without disturbing the business of the rest of the country. And in doing this it increase its income without adding a penny to its debt.“It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay: but one promise fattens the usurer, and the other helps the people.If the currency issued by the Government were no good, then the bonds issued would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious values of gold.”

      How would George Osborne contest that Bond Issuance is superior to Currency Issuance by Governments?    What is the advantage of Bond Issuance, Mr Osborne ?

      • João Granchinho

         The main argument against this type of Gov’t funding is that because Gov’t would then just be able to conjure up any amount of money to pay for everything, politicians would get careless and overdo it, inflating the currency, whereas if a Gov’t asks for loans (which is issuing and selling Gov’t bonds) the interest on the loan will force politicians to be careful with their spending. Banks will nonetheless have to conjure up this money themselves, of course, but they don’t do it for themselves, they’ll do it because they’re asked to do it, and of course will later profit from this state of affairs. The solution politicians either don’t see, don’t care for or don’t believe in, is the independent body (in this case the MPC is proposed) impartial and independent from the Gov’t to serve as a buffer between the money spenders and the money creation itself. All that’s needed is to take politicians out of the equation, and instead have a public group responsible for regulating money creation to meet inflation targets. No need to issue bonds and incur in any debt to private banks and no need for the common citizen to pay extra taxes and/or Gov’t taking ever increasing loans (debt rollover), for the Gov’t to be able to meet its interest payments on the bonds.

        This debt rollover solution is preferred by the politicians because no one wants to raise taxes on account of Gov’t interest payments, but this can’t go on forever. If the economy isn’t doing too well, and the debt is already too high, interest rates start to rise, making it harder for Gov’t to raise funds, and even harder to make the interest payments, so it has to ask for further loans at ever increasing interest rates until it defaults or some exceptional event occurs.

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