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.
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Posted in: 3. The Positive Money proposals