So far more than 1800 people have emailed their MPs about our Dodds poll which revealed that 7 out of 10 MPs think that only the government can create new money; and, only 1 out of 10 MPs know that new money is created by commercial banks when you make a loan. Labour MPs replied in a variety of ways and then they settled on the following as a standard response (in italics):
I know the Positive Money campaign have been raising important issues over our financial stability and the greater understanding of money supply in the UK and, indeed most other developed countries, following the global financial crisis.
It is very encouraging to have this recognition and understanding of the importance of the work we are doing. The banking systems around the world follow the British model and the problems caused by this are felt most by the poorest people in the world.
I believe we need a commercial banking sector, which works for the whole economy if Britain is to earn our way out of the cost of living crisis. However, I agree that there has not been sufficient action taken to deliver a competitive banking system, which serves the interests of consumers or the needs of businesses and the British economy.
Philosophically, Labour MPs sound committed to regulating and changing the monetary system, though they are not entirely convinced that money creation by private banks is a problem.
In my view, instability in the money supply is less related to the existence of bank credit and more an issue of incentives to ensure that loans and debts are repaid and only granted when there is a strong likelihood of repayment. If the money supply expands so quickly that doubts exist about the viable repayment of that credit then real risks emerge. That is why I strongly believe that the banks need to be tightly regulated both in terms of the constraints placed upon their leverage ratio and the core capital that they are required to hold in the first place.
Money creation by banks has led to an explosion in the levels of household debt and it is nearly impossible to service this debt without unfeasibly high rates of economic growth. Leverage ratios and raising capital requirements will decrease the amount of money banks can create, which may make the system marginally safer, but they will do nothing to address the existing overhang of debt.
As you may be aware, these issues were debated in Parliament during the consideration of the Banking Reform Bill during which the Opposition front bench proposed a number of amendments including for a leverage target to be set by the Treasury and ahead of 2018. Unfortunately, the Government rejected this amendment.
It is unfortunate that many proposals to improve the banking system have been rejected; we would like to see a proper debate about the concept of ‘Sovereign Money’, where money would be created by the Bank of England working in the public interest, rather than by banks chasing short-term profits. The Bank of England was able to create £375 billion of money through quantitative easing, but most of this money went into the financial markets. Creating money for other purposes, such as building affordable housing, would have had a much better economic effect, but this proposal is currently considered to be an economic taboo.
I accept that all three points you ask to be acknowledged in your letter are broadly correct but I cannot agree with all of the points made by the Positive Money campaign. I do however, welcome that such fundamental questions are being asked about how the money in our economy is being created and used, how our financial system can be more transparent and accountable and work for the benefit of the country as a whole.
It would be valuable to enter into a deeper discussion with Labour MPs debates that move public understanding forward. It would be helpful in creating a fairer and more beneficial monetary system that works for people and the planet.
Please ask your Labour MP to clarify which points of Positive Money’s analysis and proposal they agree with and which they don’t.