Positive Money has today released a report showing that stripping the banking sector of its ability to create money, a proposal endorsed by e.g. Martin Wolf, Chief Economics Commentator of FT, would not result in a shortage of credit.
The banking system needs to do a better job of supporting businesses and serving customers according to the manifestos of the three main parties published this week. Labour promise to “develop a banking system that works for businesses in every region and every sector in Britain”. The Conservatives “will continue to build a stronger, safer and more secure banking system that… provides businesses with the finance they need to grow and create jobs” and the Liberal Democrats pledge to “grow a competitive banking sector, support alternative finance providers and improve access to finance for business and consumers”.
Would stripping banks of their power to create money cause a shortage of money, high unemployment and an economic decline? (Report)
Some economists and commentators have claimed that Positive Money’s proposals for a sovereign money system, in which banks are not permitted to create money, would leave the economy with a money and credit supply that is rigid, inflexible and unresponsive to the needs of the wider economy. According to one critic, such a system would result in “a shortage of money, high unemployment and low economic activity”.
Barclays Bank have been criticised for cutting between 10,000 and 12,000 jobs on the same day it announced it was increasing the total paid in bonuses by 10% to £2.38bn. But should we accept that it's up to the banks to run themselves, and that, in a capitalist world, they are the keys to wealth creation?
One of the really common concerns that comes up regarding the Positive Money system is that it would lead to a reduction in credit available to business and therefore stagnation/deflation, a lack of dynamism, low growth, etc. The argument is basically that monetary reform is a choice between growth and dynamism on one hand and stagnation and stability on the other.