Why I care about Sovereign Money

Positive Money’s new Economist, Konstantin Bikas, shares the reasons why he cares about Sovereign Money.

Where does money come from? It is surprising how often people will get the answer to this question wrong. It was eye opening for me when I found out that new money is mostly created by private banks when they make loans.

In fact, 97% of money in circulation is in the form of deposits at commercial banks with only 3% existing in the form of notes and coins, i.e. cash provided by the Bank of England. Commercial banks have the power to grow the amount of bank deposits, and therefore to create money. But isn’t this one of the most important powers in our society with vast implications for our economies and lives? Why isn’t this power in the hands of a public, accountable body? Governments determine all other important aspects that govern our society, but money creation is the one area where not only do we have no control- but most of us are misinformed and often think that governments do have control.

This trail of thought is what led me to become a firm supporter of a Sovereign Money system. It offers a viable way for ‘we the people’ to gain control of this most important function in our economy, by wresting back the power of creating money, and handing it to a state-sanctioned institution. Currently, this power rests in the hands of a small number of people in the private banking sector. But those small number in the banking sector are completely unaccountable to the public and make decisions based on their quest for profit. This has led to over 80% of the money created not contributing to the growth of the real economy but predominantly to exacerbate asset and house price inflation. The results of this are evident by the financial crisis of 2007 where unconstrained money creation by private banks led to the credit bubble and its eventual busting, with disastrous consequences for the average citizen.

By moving this power to state-sanctioned hands, we would protect our societies from the dangers of the pursuit of reckless profit by a small number of financial institutions which have unaccountable influence. We would also enhance the ability of the state to act in the economy.

In our current system the central bank tries to influence the rate of money creation by influencing interest rates, indirectly attempting to affect the banking sector’s decisions. In a Sovereign Money system, the main tool of monetary policy would be the direct creation of money through the central bank, based on targets set by government with the broader public interest in mind. It would give the government direct leverage in its efforts to positively shape society, affect our lives and the ability to boost demand without the creation of debt being necessary. It could also help tackle unemployment and inequality while simultaneously providing more accountability, via the democratic process, when it comes to this most important function of money creation.

What is perhaps scary about the current situation is that most of us are misinformed about this vitally important issue of where money comes from, its consequences and the viable alternatives. In fact, it seems that even those in government are often mystified by the whole process. A poll by Positive Money surprisingly found that 85% of MPs do not understand that banks create money. Only 15% of MPs were aware that new money is created when banks make loans, and existing money is destroyed when members of the public repay loans. 62% thought this was false, while 23% responded ‘don’t know.’

How then are we to make a choice for ourselves or form opinions when voting? What’s more – even when we do vote, not even the people representing us seem to understand basic but vital facts about our money and banking system. How can we make decisions when the information we have is false? This misinformation is not only fundamentally undemocratic but has also been proven detrimental to sustainable and comprehensive economic development as attested to by growing inequality and levels of debt.

This is where Positive Money comes in. By developing research around the problems of the current monetary and banking system, we can form proposals for change, Sovereign Money being one of them. Through campaigning, and thus informing the public and decision makers, our mission is to push for a money and banking system that serves a fairer, truly democratic and sustainable economy, and to support the public in making informed decisions for the future of all of us, instigating positive change.