“Strip private banks of their power to create money”: Financial Times’ Martin Wolf endorses Positive Money’s proposals for reform

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Martin Wolf - Strip private banks of their power to create moneyPositive Money’s proposals have just been advocated by Martin Wolf, the chief economics commentator at the Financial Times, in an article entitled Strip private banks of their power to create money“:

“Printing counterfeit banknotes is illegal, but creating private money is not. The interdependence between the state and the businesses that can do this is the source of much of the instability of our economies. It could – and should – be terminated.”

Wolf highlights the fact that the ability of banks to create money requires governments and taxpayers to underwrite the banking system:

“Banking is therefore not a normal market activity, because it provides two linked public goods: money and the payments network. On one side of banks’ balance sheets lie risky assets; on the other lie liabilities the public thinks safe. This is why central banks act as lenders of last resort and governments provide deposit insurance and equity injections. It is also why banking is heavily regulated. Yet credit cycles are still hugely destabilising.”

“What is to be done? A minimum response would leave this industry largely as it is but both tighten regulation and insist that a bigger proportion of the balance sheet be financed with equity or credibly loss-absorbing debt. … A maximum response would be to give the state a monopoly on money creation.

The article then refers to Modernising Money, the book that we published in early 2013, and gives an overview of our proposals (summarised below):

  • The state, not banks, would create all money. Customers would own the money in transaction accounts (which would never be put at risk), and would pay the banks a fee for providing payments services.
  • Banks would also offer investment accounts, which fund loans. But banks could only lend money that was actively invested by customers. They would no longer be allowed to create new money out of thin air.
  • The central bank would create new money as is necessary to promote non-inflationary growth.
  • Decisions on how much money would be taken by a committee independent of government (much like the Monetary Policy Committee).
  • Finally, new money would be injected into the economy via a) government spending, b) tax cuts, c) to make direct payments to citizens, d) to pay down existing debts – national or public, or e) to make new loans through banks or other lending firms (such as peer to peer business lenders).

Wolf highlights some of the benefits of this reform:

“The transition to a system in which money creation is separated from financial intermediation would be feasible, albeit complex. But it would bring huge advantages. It would be possible to increase the money supply without encouraging people to borrow to the hilt. It would end “too big to fail” in banking. It would also transfer seignorage – the benefits from creating money – to the public. In 2013, for example, sterling M1 (transactions money) was 80 per cent of gross domestic product. If the central bank decided this could grow at 5 per cent a year, the government could run a fiscal deficit of 4 per cent of GDP without borrowing or taxing. The right might decide to cut taxes, the left to raise spending. The choice would be political, as it should be.”

He points out only 10% of UK bank lending actually goes to businesses, meaning that restricting the level of bank lending doesn’t have to mean that businesses will suffer. (Speculative credit to property bubbles and financial markets could be restricted whilst preserving credit to businesses).

Wolf summarises by saying that:

Our financial system is so unstable because the state first allowed it to create almost all the money in the economy and was then forced to insure it when performing that function. This is 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 concludes that the although this change won’t come about immediately, we should remember the possibility of making these changes, because “When the next crisis comes – and it surely will – we need to be ready.”

Naturally, we’ll be working to try to bring about this change before the current system causes another crisis.

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Ben Dyson (Positive Money)

Ben is Positive Money's Head of Research. He founded Positive Money in 2010 and is a co-author of Modernising Money. Ben's research focuses on potential reforms better forms of monetary policy, structural reforms to the banking system, and the potential for technology to disrupt the payment and banking systems.
  • Douglas Struthers

    Well done everyone. What next? Obediently wait for the next meltdown?! Marvellous!?!

    • Chris

      I don’t think we will have long to wait – It looks very much like the dollar is swirling around the drain. I am concerned however that the Central Banksters will use the pandemonium that ensues, to try to introduce their own global currency (free of all government controls)
      That the BRICS countries have set up their own central bank in their desire to move away from the petro-dollar, will probably explain why the US are currently acting tough with both Russia and China
      (It is a little known fact that both Iraq and Libya were making similar arrangements to ditch the dollar before the skies were filled with cruise missiles)

  • steveb

    Huge congratulations to the PM team and all who campaign for this.

    Wolf has clearly been teetering on the brink of making such a commitment to endorsement for some time and hats off to him for what I am sure must (in his circles) be a radical stand to take.

  • John Morrison

    This looks like a pretty firm endorsement of PM from the editor of the FT. With the B of E becoming more honest about what is going on and a student led revolt against clasical economics in acedemia, it looks like the ground may be starting to move.

    Can the FT now start to lead the rest of the media on this?
    or alternatively
    What will happen to Martin Wolf now?

    • Simon Eaves

      Probably retirement. Why only come out with this now, shame it wasn’t sooner.

  • Rahul Jain

    He’s the same guy who came out in support of LVT as well, right? If so, I can see the UK economy leading the world out of the current doldrums

  • Peter J. Morgan, New Zealand

    Congratulations to Ben and the PM team. The monumental effort you have all been making is at last paying off. Hopefully, Lord Adair Turner will swing in behind and endorse PM as well!

  • Simon

    Well done to the Positive Money team for getting this published. I sent a letter in March 2014 saying similar to my MP Julian Smith (Skipton and Ripon), and got a reply from Nicky Morgan at the Treasury. I mentioned that the banks created over £400 billion to increase house prices in the boom years, and yet we have crumbling infrastructure (specially away from London), and an age of austerity.
    Nicky Morgan said in her reply “Requiring banks to hold deposits wholly in cash would vastly reduce the lending capacity of the UK banking system, making it difficult for households and business to obtain loans. This would limit investment in the economy and harm long term growth”. I said that the whole point was to increase the amount of money in the economy and reduce credit / debt, keeping the money supply constant or growing slightly, so no inflation or deflation, and there would be much less need for borrowing anyway in this environment by business and households. I suspect the recent growth in the economy is more borrowing for housing and cars, and a bit of an increase in the velocity of money. She also missed the point I was making when she said “If the government issues it’s own money, it is problematic because it does not allow for separation of fiscal and monetary policy, which is a key feature of the UK’s economic policy framework”. I replied that the Bank of England would decide how much money (or not) to issue, free from political influence, not the government, so there is still a separation of fiscal and monetary policy. Government would decide where money is to be spent, as now. I also said that the multiplier model was not an accurate description of banking and money today, and that most MPs and government ministers had little time, knowledge or inclination to find out “Where money comes from”.
    I feel the Positive Money team should try and get a meeting with a government minister at the Treasury to explain how the existing system works, and how to improve it as we suggest. Perhaps we have already tried but I think it is worth another go.

    • Laurence Renshaw

      I can see some huge benefits of this proposal, but I can’t see how it would encourage more ‘good lending’ and less ‘bad lending’ (e.g. to finance property bubbles), unless the government or BoE takes over much of the commercial banks’ lending function. Can you explain?

  • http://cushyglen.com cushyglen

    Previous journalists who were this explicit ceased to have a career in the mainstream media. I hope this does not happen to Martin Wolf. Long may he ply his trade!

  • Sanjay Mittal

    Congratulations to PM. I see Ann Pettifor is twittering about not agreeing with Wolf’s “Austrian” ideas in this connection. Anyone know where she expands on that point?

  • Dave R

    They wont do it because without being able to extort the rest of the country via inflation, London would be a 3rd world hell hole. It has nothing productive, no industry, no value, just government theft and bankster theft. Tourism wont pay the bills.

    As its home to the global elite, this will not be allowed to happen and the country will forced to play host to the city state parasite. We must suffer so London may prosper.

    • Simon Eaves

      Depressing but true. Positive Money’s proposals will never be allowed to happen through the current “democratic” process because The City of London corporation with all it’s immense political lobbying power stands in the way. We are talking about the worlds biggest offshore financial centre and tax haven, home for the elites money, a state within a state outside UK law that governs the rest of us plebs.

      • John Morrison

        It is more likely that another country will do it but the UK can still be a source of ideas on how to do it. Or alternatively we could take out The City of London with our pitchforks.

        • Simon Eaves

          I don’t think we are going to able to have a quiet revolution along the lines of Iceland. Maybe this Is this why London’s other Mayor is so keen on police water cannon use.

    • PlentyONothin

      You are probably correct, however, I bet there are some very interesting conversations going on in the various banks’ boardrooms all across the USA too.

      Well Done Positive Money. Keep up the good work….and the pressure!

  • bill439

    Those who appose the PM proposals on the grounds that they would restrict the ability of banks to grant loans don’t seem to realize that their thinking is as out of date as the text books they learned at uni. Bank loans are not the only way of putting purchasing power into the economy. Government debt-free money does too.

  • joebhed

    Way to go, Ben and PM people.
    Martin is in for plenty of pushback, not the least of which comes from FT colleague I. Kaminska over the past couple of days.
    Wolf accepted his role as the narrative gatekeeper on the subject of money, joining Turner’s taboo of the subject of public money.
    If he hangs in there, this could become one helluva ride.
    Joe

  • Chris

    Congratulations this is very good news and is a reward for all the efforts of the team as a whole
    I will broach the subject on the various newspaper discussion threads I patronise. Although, being utterly lazy bastards, you can bet many other journalists will pick the story up

  • JosephMeyer

    Congratulations!
    Now everybody should mobilize his friends and entourage as much as she/he can!
    Joseph Meyer

  • Cynic

    Bravo! and congratulations to PM! Keep up the good work, fantastic to see the public conversation acknowledging the fraud of private money creation.

    Marc Bombois in Canada

  • Simon Eaves

    Did Martin Wolf just say “banking is heavily regulated”?! Surely some mistake.

  • Colin Cook

    Great work Ben & Co. In Australia we have a government proclaiming a budget emergency and declaring ‘that everyone must help in the heavy lifting’. My question is, ‘Will that include banks or will they be able to continue their heavy lending?’ Last February, 53% of the A$2,320 bn bank lending went to housing!

  • SandySure

    “In 2013, for example, sterling M1 (transactions money) was 80 per cent
    of gross domestic product. If the central bank decided this could grow
    at 5 per cent a year, the government could run a fiscal deficit of 4 per
    cent of GDP without borrowing or taxing.”

    That is a form of taxation…unless it creates real growth, the deficit would take goods and services from consumers. That is the “real” tax. Money is just part of the way the economic control system, it is not part of the economic engine.

    The increase in nominal demand resulting from such action would raise prices and so reduce the value of incomes and nominally fixed wealth* (c.p.). It would mean that ALL deficits resulted in wealth erosion. Is that right?

    *E.G.bonds, that have a fixed money face value.

  • kavadias

    “When the next crisis comes – and it surely will – we need to be ready.”

    I surely disagree with this argument of Martin Wolf. I, actually, suspect he does not really believe this himself.

    When the next crisis comes –most likely– there will be more “too big to fail,” much bigger public and private debts, and much more people to be harmed from the crisis. Moreover, and this is the fundamental reason for reforming money now rather than next time, banks will definitely move towards bigger and more interconnected, especially big banks, and next time these big banks are very likely to be bigger than the hosting national economies; thus, it will be less likely to save them next time and the panic will be much greater.

    The counterargument is, mostly, that brought forward by Sir Adair Turner (and others much before him), invoking an advantage of original British central banking principles against France’s, where the British system did not have reserves when the French was gold-backed. Of course, the British system also caused banking crisis, but then advocates argue that the whole evolution of the economy was upwards, and has been in other crisis afterwards, including the great depression. There is no proof this will be the case always. For Japan it was not. For other advanced economies, after the current recession, we do not know, and most economists fear “secular stagnation”.

    Reversely, the economy and the banking system needs to be already in a healthy state to be able to make the transition to full-reserve banking, so it cannot be after a crisis but after a recovery that such a transition occurs. And there is nothing more fail-safe for the health of a banking system than having successfully managed a transition to 100% reserves, thus there will be a lot to invest in the host economy of this banking system, and, so, this is surely a way to kick-start economies in stagnation.

  • David Mowers

    Wait so instead of people who don’t need or deserve it getting access to unlimited financing you are saying poor people having access for the first time in their lives might actually turn the economy around?

    OMG shocking to think that!

  • bilejones

    “The state, not banks, would create all money”

    And the bullshit never ceases, does it?

    “money” is that thing that meets three needs:
    1. Universal acceptance as a means of exchange,
    2. A store of value.
    3. A unit of account.

    The buffoon here confuses “money” with “currency”

    • Mike Rivero

      wow did you miss the point. Re-read the article – slowly.

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