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Who are you?

We’re the UK branch of a global movement to democratise money so that it works for society and not against it. We’re working to tackle an issue that is at the root of many of the social and economic problems that we’re facing today…

What’s the problem?

Right now most of the money in our economy is created by banks. Banks create up to 97% of money, in the form of the numbers in your bank account, when they make loans. This means that they effectively decide a) how much money there is in the economy, and b) where that money goes.

The control of the creation of money, in the hands of banks, has contributed to the problems of:

What’s the solution?

We believe the power to create money must be removed from the banks that caused the financial crisis and returned to a democratic, transparent and accountable body. New money must only be created and used to benefit the public and society as a whole, rather than just financial sector.

We have detailed and workable proposals that would allow this to happen. Even the Financial Times has written about the need to prevent banks from being able to create money.

How can I get involved?

See Join in to start…


More Frequently Asked Questions

1. About Positive Money (9)

What is Positive Money?

Positive Money is a not-for-profit campaign and research organisation. We raise awareness about how money is created, why it is a problem, and how we should change the monetary system so that it benefits society, business, and the environment. More here.

How can I get in touch?

Click here for our contact details.

What does the name “Positive Money” mean?

Positive Money refers to money that is not based on debt. We believe that allowing the state to create debt-free money (under control to prevent abuse) would have a positive effect on the whole of the economy and society.

Who started Positive Money?

Positive Money was founded by Ben Dyson in 2010 after much interest in his blog www.BenDyson.com.

How can I get more involved?

There are a number of ways you can get more involved with the Positive Money campaign, please click here to find out more.

Is Positive Money connected to a political party?

No, we are a not affiliated with any political party. Positive Money’s reforms are supported by members from all the main political parties in the UK and from individuals across the political spectrum. Many political activists welcome the end of a situation where the interests of banks overrule the interests of democracy; this is what Positive Money advocates for.

How have you made a difference?

We’re launched in late 2010 and  have already made significant progress. We have drafted comprehensive reform proposals for the UK banking sector (which would remove the ability of UK banks to ‘create money’), and turned these proposals into a book called Modernising Money, and into draft legislation. This book has been featured by the Financial Times’ chief ecoomics commentator, Martin Wolf. We have held events on this issue in the Westminster parliament, Scottish parliament, and in the Welsh Assembly, as well as presenting these proposals in person to the government-established Independent Commission on Banking.

We worked with the New Economics Foundation to research and produce the book Where Does Money Come From?  which was described as ‘refreshing and clear’ by a member of the Monetary Policy Committee of the Bank of England. The book is already being used as a course text in money and banking courses at UK universities, and prompted the Bank of England to publish articles confirming how money is created by banks.

Where does the funding come from?

We rely on small monthly and on-off donations that make up our 50% our funding, and a further 40% comes from Trusts. You can find see a more detailed breakdown here.

Where do donations go?

Approximately 60% of our income goes on staff salaries for research, campaigning and coordinating the UK and international campaign. No member of staff is paid more that £26k (below the average for similar not-for-profit campaigns). Other costs include rent for a small (220sq ft) office, admin costs, and online services. For a full break down click here.

2. The Current Monetary System (14)

How is money created by banks?

Currently only 3% of all the money in circulation is created by the Bank of England. This 3% consists of coins and banknotes. The remaining 97% is numbers in bank accounts. These bank deposits are created by commercial (i.e. high-street) banks, through some simple accounting, when they make loans. Find out how banks create money here.

What is the problem with the way money is created?

Around 97% of money today is created by commercial banks when they make loans.

One problem is that when banks decide whether or not to make loans, they also decide where the money they create will go. Because  they lend far more to property and finance-sector businesses than they lend to businesses in the real (i.e. non-financial) economy, most newly created money starts its life in the speculative economy, rather than creating jobs.

A second problem is the more money banks create (by lending), the more profit they earn. So they have a real incentive to create too much money. This happened in the financial crisis that started in 2007, and led to the current global recession. More here.

A third problem is that this system makes it necessary for the level of household and business debt to keep rising, in order to keep the economy growing. This is because banks create money when they make loans and destroy money when loans are repaid. So we face a catch-22 choice between having:

  • More money AND more debt, or
  • Less debt AND less money

So even though we have historically high levels of private debt, the government’s economic strategy relies on growing the economy through further borrowing.

This monetary system leads to a wide range of other problems. See the Issues menu above for more.

Do banks really create money? Where’s the proof?

Yes – see this page where the Bank of England explains how money is created every time a bank makes a loan.

What is a bank run?

A bank run is when depositors at a bank all ask to withdraw their money at the same time. Bank runs are brought on by panic or uncertainty about a bank going bust.

In the current banking system banks are only ever able to repay a fraction of their account holders at the same time, so it is impossible to give all the depositors back their money at the same time.

In a ‘sovereign money system’ a bank run would not be possible because banks are required to keep the full amount of their customer’s funds unless they have explicit permission to invest those funds. (Customers who had agreed to have their funds invested, by putting them into an ‘Investment Account’, would not be able to withdraw the money until the date they agreed when they opened the account, and so can’t ‘run’ on the bank.)

Aren’t you just talking about the money multiplier model of banking?

The money multiplier model described in economics textbooks is outdated and incorrect because of three false assumptions:

  • That a bank needs deposits before it can make a loan.
  • That the Government can control the amount of money created by the banking sector by altering the reserve ratio and amount of ‘base money’ in circulation.
  • The amount of money created by banks is mathematically limited (based on the previous 2 assumptions).

Point 1 is really crucial because this leads to all kinds of misunderstandings. Under the current system, banks don’t work as middlemen between savers and borrowers and do not need deposits before they make a loan. The Bank of England has addressed this misconception here.

Charles Goodhart said over 20 years ago that the Money Multiplier is “such an incomplete way of describing the process of the determination of the stock of money that it amounts to mis-instruction”. Our Banking 101 course covers the problems with the money multiplier model. For empirical evidence see this paper by the Fed, or this one for the UK.

The term ‘fractional reserve banking’ is also confusing, because it is used quite freely to describe different things. Some people might say that fractional reserve banking is based on this money multiplier model, where banks retain a percentage of their deposits as reserves. This model doesn’t exist in reality,  therefore banks are no longer operating under a fractional reserve banking system. However other people might say if banks are only able to repay a fraction of their depositors at any time, then this is ‘fractional reserve banking’, so we still have a fractional reserve system. Welcome to the world of money and banking, where one phrase can mean multiple things! It’s always best to clarify what the person means before responding!

 

If banks can create money then why aren’t they “lending” to businesses?

Banks have a preference to lend whereever they will make the biggest profit for a certain level of risk, and therefore don’t like lending money unless they are confident they’ll be repaid.

When banks make mortgage loans, they know that even if the borrower doesn’t repay the loan, the bank can repossess the house and sell it to recover some of the money. But many businesses don’t have a great deal that can be repossessed to recover the value of the loan. So banks tend to lend far more for mortgages than they lend to businesses. In the ten years before the financial crisis, 51% of bank’s additional lending (i.e. newly created money) went to lending on property (residential and commercial) whereas just 8% went to businesses outside the financial sector.

If banks can create money, how can they run out of money or go bust (become insolvent)?

There are two ways for a bank to go bust:

Firstly, for some reason the bank may end up owing more than it owns or is owed. In accounting terminology, this means its assets are worth less than its liabilities. When banks create money they increase their assets and liabilities by an equal amount, meaning that an insolvent bank would still be insolvent, even if it creates more money.

Secondly, a bank may become insolvent if it cannot make the payments to other banks when it settles up at the end of each day, even though its assets may be worth more than its liabilities. This is known as cash flow insolvency, or a ‘lack of liquidity’. Banks can create the kind of money that businesses and the public use, but they can’t create the type of money that they use to pay other banks. If they run out of this type of money, then they must borrow it, either from other banks, or from the central bank. But if no-one is willing to lend to them, then they have a serious problem.

This article explains how banks can go bust in more detail.

How is money ‘destroyed’ when loans are repaid?

When banks make loans, they record a new asset (the loan) and a new liability (the deposits that appear in the borrower’s account) on their balance sheet. When loans are repaid, the deposits (liabilities) are cancelled out against the loan (asset) and both sides of the balance sheet ‘shrink’. The deposits disappear from the economy. See Banking 101 Part 6 for an explanation of how this works.

How does money (credit) being destroyed relate to a recession?

When the financial crisis hit, banks panicked and severely limited how many new loans they made. As a result there was less new money entering the economy, and consequently there was less spending. But because all that earlier borrowing still has to be repaid, money continued to disappear from the economy. In this situation, if the government does nothing then the amount of money in the economy would start to fall. This is exactly what happened in the US in the Great Depression, when the amount of money in the US economy shrank by a third. The money wasn’t “going somewhere else” – it was actually disappearing out of existence. Fast-forward to 2008 and the same thing happened again. A decreasing/contracting money supply can lead to a fall in spending, a shrinking economy and rising unemployment. Even though people might be paying off debts, this leaves them with less money and the economy as a whole ends up with less money flowing around.

Chapter 4 of Modernising Money covers the ‘debt-deflation’ problems that occur in a recession due to the fact that money is created by banks.

Why doesn’t raising interest rates at the Bank of England limit commercial bank lending [i.e. money creation] and inflation?

Chapter 3 of Modernising Money covers the problems with using interest rates to try to manage bank lending (and money creation). However, empirically it is clear that interest rates do not effectively influence bank lending and money creation. Raising rates before the crisis (and in the 1980s) did not slow down the rate of bank lending, and lowering interest rates to 0.5% after the crisis did not encourage banks to increase lending. Interest rates are the wrong tool to manage money creation.

Don’t liquidity requirements or reserve ratios limit bank lending and money creation?

Our Banking 101 video course explains why liquidity requirements and reserve ratios don’t limit bank lending and money creation.

See also Chapter 3 of Modernising Money for an indepth explanation

If the Monetary Policy Committee targets inflation doesn’t that keep the money supply under control?

Currently, one of the Bank of England’s two core purposes is to maintain price stability, which in practice means keeping inflation at a target level of 2% a year. It attempts to do this by manipulating the short term interest rates at which banks lend reserves to each other on the interbank market. But historically this approach hasn’t worked well to keep money creation under control. Raising rates before the crisis (and in the 1980s) did not slow down the rate of bank lending, and lowering interest rates to 0.5% after the crisis did not encourage banks to increase lending. The Monetary Policy Committee does not have the correct tools to manage money creation by the banks.

What about the national debt?

Usually the government doesn’t borrow from banks. Instead it borrows from ‘the markets’ – mainly pension funds and insurance companies. This process means that government borrowing does not lead to money creation, unless the government borrows from banks (as with some ‘private finance initiatives’). For a full explanation of issues around the national debt, see What about the National Debt?

Why do banks offer current and savings accounts to the general public if they don’t act as intermediaries between savers(depositors) and borrowers?

When a bank makes a loan, it is extending to the borrower a promise that it will settle payments on the borrower’s behalf up to the value of the loan. It can make this promise whatever the state of its own finances, but it can only keep the promise if either:

  • the borrower wants to make payments only to others who are in turn prepared to accept the bank’s promise in lieu of immediate payment, i.e., people who already have accounts or who are prepared to open accounts with the bank, or
  • the bank is in possession of sufficient cash or other assets, i.e., central bank reserves, with which it can induce other banks to credit the accounts of those whom the borrower wishes to pay or enable the borrower to make payments directly to those without bank accounts.

If the bank is the only bank, then it will want everyone to open accounts with it so that they can all make their payments to each other through the bank’s books, and the bank will never have to pay cash to anyone. It can also make any promises it pleases to borrowers (regulatory constraints aside) since these can all be kept simply by changing the account balances of those making and receiving payments.

If there are other banks, however, then eventually its own customers are going to want to make payments to customers of those other banks and the bank is going to have to pay over reserves to those banks to keep its promises to settle these payments. At the same time, however, payments and reserves will be flowing in from those other banks and their customers, so the net flow of reserves will be considerably less than the total amounts of the payments, the amounts that would have had to be paid out in cash if people didn’t have bank accounts.

In principle, if everyone had accounts at one or other of the banks, the net payments between banks should all average out to zero, but in practice each bank will experience day-to-day fluctuations ranging from net payments to net receipts, and these fluctuations could vary wildly. The worst case scenario for a bank would be if all its customers decided one day to pay all of their account balances to customers of other banks and at the same time received no payments in return. The more customers a bank has, and the more cautious the bank is in extending new loans, the less probable are such extreme events, but the probability can be reduced even more by encouraging customers to set aside part of their account balances as savings, and make payments only from the residue.

So banks offer current and savings account to the public because current accounts allow payments to be settled by book entries rather than with cash and savings accounts greatly reduce the day-to-day volatility of payments settlement net balances.

3. The Positive Money proposals (23)

What are Positive Money’s proposals?

We propose returning the power to create money to a democratic, transparent and accountable body. Banks would no longer be able to create money. This would have a wide range of benefits, including a more stable economy, lower levels of private debt, and banks that could be allowed to fail without taxpayer-funded bailouts. Find out more here.

Wouldn’t allowing the state to create new money be inflationary?

Between 1983 and 2009, lending by the banks increased the money supply by an average of 12.5% a year. Much of this newly created money went into mortgages, causing huge inflation in house prices and making housing unaffordable. So the current system, where banks can create money, is already very inflationary.

The Bank of England currently tries to control the amount of money being lent into the economy by manipulating interest rates, which is ineffective. In a sovereign money system the Bank of England would have direct  control over the amount of money entering the system directly and therefore would be able to control inflation much more effectively than at present.

Positive Money proposes that the decision between how much money  is created and where the money goes is strictly separated, specifically to avoid situations where the government create too much money – for example in order to boost the economy before an election – which could lead to inflation. For more details see here.

Is Positive Money advocating for interest-free loans? Don’t we need to abolish interest?

In a sovereign money system banks will still charge and receive interest on loans. Savers will still get interest on money that they’ve asked the bank to invest on their behalf.

Positive Money is not campaigning against the charging of interest, for reasons that are discussed in detail here.

Is your proposal the same as ring-fencing?

No. Ring-fencing will not stop banks lending too much, into the wrong things. Banks will still be able to create money by making loans, meaning that if there is another crash, the government will still have to bail them out. The idea is that with the ring-fence banks doing risky-lending activities will be reigned in, but nothing fundamental changes. We are proposing that money which customers want to hold risk-free is not used for lending or investment at all, and that the payment system (which is essential to the rest of the real economy) is separated from the risky activities of banks.

Where does the idea for Positive Money’s reforms come from?

Our reforms are based on ideas that date back to 50-75 years ago from economic thinkers including Irving Fisher, Frank Knight, and Frederick Soddy. You can find out more in our Research Library.

How would banks make loans?

After the reforms, banks would need to borrow money from savers before they could lend it to borrowers (instead of being able to create money by lending). So they would be real middlemen (intermediaries), and banks would move money from A to B, rather than creating new money each time a loan is made. In the post-reform banking system, a bank will only be able to make loans using money from one of the following sources:

  1. The money that bank customers give to the bank for the purposes of investment, i.e. money in specified ‘Investment Accounts’.
  2. The bank’s own funds, for example from shareholders or retained profits.
  3. Any borrowings from the Bank of England.

How will the new money be spent?

When the Bank of England authorises the creation of a certain amount of new money, it will be added to the government’s account at the Bank of England. The government is then free to use this money however it chooses in order to achieve its democratically-mandated policy objectives. Therefore the government may choose to:

  1. increase government spending
  2. reduce the overall tax burden
  3. make direct payments to citizens (sometimes referred to as a ‘citizen’s dividend’)
  4. pay down the national debt

The exact mix of the above will depend on the priorities of the government of the day. Since the newly created money will simply be added to tax revenue, there is no need for a special process to decide how to spend it.

Wouldn’t these reforms make it difficult for banks to lend, damaging the economy?

There is no reason why lending should be more restricted in the new system.

If there is a lack of credit for businesses banks will be able to borrow from the Bank of England to on lend into the economy. This could be through standing facilities at the Bank of England (i.e. overdrafts). So there need not ever be a lack of credit. Money creation in the Positive Money system could, if desired, be completely endogenous (i.e. responsive to demand for loans), although this might be dangerous. Business lending could become endogenous if required, with money being created whenever a business loan is made, but speculative and non-productive lending could not (since that is the same system as we have now). Alternatively, regional investment banks could be set up to lend to businesses with the Bank of England deciding how much money would be created (but not who gets it).

During the Transition Process from the current system to the reformed system the Bank of England will need to ensure there is enough money in the economy. Our proposed ‘Transitionary Lending Scheme’ is to ensure enough money is available to lend during this process. This finance will be on-lent by the commercial banks and will work to smooth out any changes in the availability of credit from the banks during the period of the transition. If the government is concerned that there isn’t enough lending occurring post transition, they can continue to use the ‘Lending Scheme’ to target business lending.

How will the reforms affect mortgages?

House prices originally got so far out of reach because banks were able to create vast quantities of new money and pump it into mortgages (see this video).

Removing the power of banks to create money would make it harder for this to happen in the future, so it’s unlikely that house prices will increase further. But they’re unlikely to fall much either, as people simply don’t like to sell houses for a loss, so most people tend to sit and ‘wait for the market to recover’. So with average house prices being pretty much fixed, our only option is to wait for salaries to catch up. But don’t forget that home ownership is already out of reach for anyone who doesn’t own a home right now. That situation is unlikely to change under the existing system.

How will the reforms affect interest rates?

If there is a strong demand for lending, interest rates will go up, encouraging people to save more and provide more money for investment. As more people put money into investment accounts, interest rates would come back down again, balancing things out.

How will the reforms affect the Pensions?

Pension funds invest in companies and rely on those companies being able to make a steady profit (which the pension funds receive as dividends) so that they can pay pensions. But the current monetary system causes financial instability, which means those returns can be artificially inflated in the short-term but lower overall in the long-term. It also means that the customers of the businesses that pension funds invest in, end up heavily indebted, with little money left over after paying the mortgage to spend in the real economy. So in the long run the current monetary system is bad for pensions. Removing the power of banks to create money would lead to a more stable economy and would be better for pensions.

How will the reforms affect the business loans?

There is already enough money in people’s savings accounts today to cover all of the lending that is needed for businesses and mortgages put together. The problem is that banks prefer to lend to property and speculation than to invest in businesses. Part of our reforms allow the Bank of England to create money that banks can then lend to businesses, to ensure that there’s never a shortage of credit for the real (non-financial) economy.

 

How will the reforms affect international trading?

Ideally the UK would not make this reform alone. Positive Money is part of an international movement for reform that hopes to reform the system in many countries worldwide. However, practically there is no problem with using this model of banking within one currency area (e.g. the UK, the US, or the whole of the Eurozone) with the existing foreign exchange systems. There is likely to be a reaction from the markets but any negative effect would be outweighed by the stability, safety and accountability of the reformed system.

Why so radical? Surely regulation is the answer?

History has shown that regulation can too easily be undone, and can quickly become over-complicated, such that loopholes are created. For instance, the US’s regulatory update, the Dodd-Franks bill, now stands at nearly 9,000 pages, and is certain to be full of loopholes. A simpler approach is needed. Removing the power of banks to create money ensures that bank failures do not threaten the payments system on which the rest of the economy depends.

What is the problem with debt? Debt can be a good thing…

Debt and lending can be very useful, especially when people want to take out a loan for a house or a car or starting a business. In the proposed system, there will be no shortage of lending into the economy, access to credit and lending to businesses, but the overall debt burden should be much lower. At the moment we have to borrow all of the money that the economy needs to run on, so for every £1 in the economy, there is £1 of debt. Under the proposed system, money is created free from debt, and money would no longer be ‘temporary’ but instead like a system of tokens that circulate forever, being lent and spent around the economy.

Isn’t the idea of a Money Creation Committee still very much open to corruption?

Currently, the amount of money in the economy depends mainly on the lending policies of a few people at the head offices of the five main banks in the UK. There is no democratic oversight or accountability over these people, and the vast majority of the public and MPs have no idea that these senior bankers even have this power or ability to affect the money supply.

Our proposal would separate the decision over how much money is created, and how that money is spent, so it eliminates a huge conflict of interest. The Bank of England would only be deciding how much money the economy needs to run, but not deciding how that money can be spent. The government could decide that the Bank of England must target full employment when they are deciding how much new money is required in the economy, or they could target inflation, that is a policy decision to be made by the government of the day.

Positive Money believes the national currency should be a public resource.  Imagine that taxation and public spending was managed on a profit-making basis by five big banks. Would people respond to these proposals with the objection that it isn’t “possible or desirable to give the state a monopoly of national taxation and public spending”? Both national taxation and the national money supply should serve the needs of society and the economy as a whole.

It seems logical that in a democratic society, a state-issued money supply would tend to be distributed more wisely and fairly, via increases in public spending and reductions in taxes and public debt, than the new money now created by the commercial banks in the pursuit of short-term profits.

The Bank of England already manipulates interest rates, which is intended to influence commercial banks’ lending decisions and therefore the money supply indirectly. But this is an ineffective tool, as the last few years have shown.  Having the power to alter the money supply directly, within the constraints of the inflation target, has a far more focused and less harmful impact that pushing interest rates up and down economy-wide.

Regarding corruption, the reality is if inflation rates start rising significantly, the Bank of England would need to stop creating money. So there is a natural limit to how much money they could create, and how quickly. Banks do not have that limit, and all their incentives push them to increase the money supply (by increasing their lending), which is why money supply has been able to grow at over 10% a year for the past 30 years.

Isn’t the Money Creation Committee just a way of giving power to a group of unelected bureaucrats?

The target the Money Creation Committee (MCC) is aiming to hit is decided upon by parliament, the members of the MCC are decided upon and approved by parliament (see above), and the MCC, and its decisions, are accountable to parliament. The MCC is also completely transparent – the minutes of the meeting and the voting records will be available to the public. So the MCC is a democratically accountable transparent public body with the remit to work in the public interest.

The alternative is the system we have now, in which the amount of money is decided upon by a group of unelected bankers. (As the financial crisis showed, interest rates are not a particularly effective tool for either constraining or encouraging banks to lend.)

Or, we could give the power to create money directly to politicians. We believe this would inevitably lead to a political business cycle, as politicians would spend too much, particularly in the run up to elections; hence the reason for an operationally independent MCC which nevertheless is still accountable to Parliament.

How will the Money Creation Committee appointments be made?

If the model of the existing Monetary Policy Committee is followed, appointments to the MCC will automatically include the Governor and two Deputy Governors of the Bank of England, as is the case with the Monetary Policy Committee today. Likewise the Governor is still best placed to recommend the two internal members of the committee. However, unlike today, where the internal appointments are referred to the Chancellor of the Exchequer for approval, under the reformed system these internal members will instead be referred to a cross party group of MPs for approval. The intention is to provide democratic oversight and scrutiny of the appointment process by Parliament whilst reducing the powers of the Chancellor. Likewise, for the same reasons, the appointment of the four external members of the MCC will also be decided by a cross party group of MPs. In total, the MCC will be made up of nine members, which, with the exception of the Governor and the Deputy Governors, will serve three-year terms.

However, this structure simply follows the existing format of the Monetary Policy Committee. We’re very open to other ideas that would make such a committee more democratic, representative of society and accountable.

Isn’t the Bank of England a private company?

The Bank of England is wholly owned by the UK government, after being nationalised shortly after the Second World War. It isn’t a private company.

There are often questions about a subsidiary of the Bank of England, known as the  “The Bank of England Nominees”. This subsidiary is owned in whole by the Bank of England and one nominee shareholder, who is also an employee of the Bank of England. As this Hansard record  states, it holds shares on behalf of ‘Heads of State’ and the government. It has less than £1million in assets that it owns itself, as the Bank of England annual report states, which means the company itself doesn’t hold very much at all – it just holds securities in custody for other groups. The Nominees has now been liquidated and no longer functions.

Surely your reforms are not possible under the Maastricht Treaty?

PM reforms might indeed go against of the Maastricht Treaty, which restricts the direct public creation of money (depending on how the law is interpreted).  However, we’re simply setting out what we think is the best possible banking and monetary system, and various groups around Europe (and elsewhere in the World) have proposals similar to PM’s. If PM and the latter groups are right, then Maastricht may need amending. In addition, most of the key principles of the Maastricht treaty have been ignored by European governments throughout the Eurozone crisis.

Why don’t we just nationalise the banks?

If we nationalise the banks this will not change the fundamental way that money is created, when banks make loans. Therefore we will still be left with these problems:

  • Unsustainable indebtedness: Because all money is issued as credit, debt increases at the same rate as the money supply.
  • Financial instability: Money creation is pro-cyclical – too much is created in a boom, and too little in a recession, causing the pronounced boom and bust cycle.
  • Perpetual expansion: In order to service large amounts of debt the economy has to grow, even when markets are saturated and resources depleted

Banks will still have the ability to choose how much money they create when they make loans, and who and what those loans are made to. We propose to nationalise the national money supply, but leave banks in the private sector.  If we did not rely on banks to create our money supply then we could let them fail and go bankrupt just as any other ordinary business.

We’re big fans of mutual and cooperative banks, as well as things like peer-to-peer lenders. But these models still don’t fix the fundamental problem of allowing money to be issued by banks who are chasing their short-term interests.

Are Positive Money’s ideas connected to a political ideology?

The short answer is no. It has been advocated by economists that identify with all sides of the political spectrum. The original idea was put forward by Fredrick Soddy, a Nobel prizewinning chemist. The idea was picked up in the 1930s by several economists working at the University of Chicago, including: Frank H. Knight, Henry C. Simons, Aaron Director, Paul H. Douglas, Lloyd W. Mints, Henry Schultz, Garfield V. Cox, Albert G. Hart. Economists at other Universities also supported the plan, including Irving Fisher at Yale University, Frank D. Graham at Princeton University, Earl J. Hamilton at Duke University, Willford I. King at New York University and Charles R. Whittlesey at Princeton University. Variations of these ideas have since been proposed by Milton Friedman, James Tobin, John Kay, Laurence Kotlikoff, Joseph Huber and James Robertson.

These economists were from all sides of the political spectrum  For example, Fredrick Soddy was considered to be strongly left wing, whereas Henry Simons favoured laissez faire (free market) economic policies. While the Positive Money idea of preventing banks creating money was associated with the University of Chicago in the 1930s, it is important to realise that the economics department at this time was very different to the ‘Chicago school’ that most people know. While the staff of the 1930s department held a variety of political views, by the 1950s the Chicago school had became closely associated with Milton Friedman, free market economics and Monetarism.

Surely the Bank of England isn’t any better than the banks? Aren’t your proposals simply going to replace one problem with a set of others?

Money creation should be controlled in a transparent and democratically accountable manner. The current system leaves control of money creation in the hands of banks. At the moment there is no real democratic oversight when it comes to money creation, and this has to change. The Bank of England may not be perfect, but at least once the power to create money is out in the open, we know who to hold to account for any mismanagement of this power.

 

 

4. Common misconceptions (3)

Is Positive Money reform proposal the same idea as “monetarism” in the 1980s?

No. Monetarists were mainly concerned with inflation, and saw all money creation as inflationary. In contrast, a sovereign money system, in which only the central bank can create money, recognizes that there are situations in which money creation actually raises demand and output rather than simply causing inflation.

Monetarists also saw inflation as the main threat to the economy, and were willing to let unemployment rise in order to keep inflation under control (although in theory this did not work). In contrast, proposals for a sovereign money system have a strong focus on how money creation can be used responsibly to boost employment and output.

Finally, monetarists thought they could control money creation by trying to indirectly control bank lending (and therefore bank money creation). As recent history has shown, the authorities are not able to adequately control what banks do.

Does Positive Money advocate any centralised decision making with regards to loans?

Positive Money does not advocate any centralised decision-making with regards to making loans.

Firstly, under a Sovereign Money system the primary function of the central bank will be to decide on how much new money to create. The decision on how the new money would be spent, would be taken by Parliament.

Secondly, banks still have an important role to play in a Sovereign Money system. They would lend money out but they would do so by borrowing pre-existing sovereign money (originally created by the central bank) from savers to borrowers. This would be different from the current system, where banks simply credit the borrower’s account and create new money in the process. In other words, credit intermediation between borrowers and savers would be the very function of the lending side of a bank in the sovereign money system.

Thirdly, most importantly, it is still banks – and not the central bank – that make decisions about who they will lend to and on what basis. The only decision taken by the central bank is concerning the creation of new money; whereas, all lending decisions will be taken by banks and other forms of finance companies.

Banks would have to look to the private sector for investors willing to deposit their savings into an Investment account. Moreover, when a potential borrower submits an application for a loan, the Bank of England would have no decision making power as to whether it would be approved or not.

To conclude, all decisions about the approval and rejection of loan applications would lay solely with private (or public) banks and any other type of lending facility.

Will this cause hyperinflation?

The examples of the hyperinflation in Zimbabwe or Weimar Republic Germany are often mentioned as a reason why states cannot be trusted to issue currency. However, those making these claims rarely have any in-depth understanding of what happened in Zimbabwe, Germany or any of the other hyperinflationary periods. In reality, each period of hyperinflation happens due to a unique set of circumstances, usually political.

In short, money creation that is undertaken solely to boost government revenue, with little or no regard for the consequences, will be inflationary (as was the case in Zimbabwe). Conversely, printing money to spend into the economy, when performed responsibly and with a view to provide a means of exchange, can deliver a low inflation environment.

Many governments are not known for spending responsibly, particularly when elections are approaching. In order to prevent this conflict of interest, our proposals split the decision over how much money to create from the decision over how that money will be spent, to ensure that money is only created, if necessary, during periods when inflation is low and stable.

A mandate that money is only created when there is not full employment, and that there is a lack in demand would avoid any risk of hyperinflation.

Sovereign Money Proposals – Common Objections and Concerns

 

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