Impartial spectators visiting us from another planet would stand aghast at how we create and manage our national money supply.
You can imagine them saying to one another: “These people must be absolutely crazy”. To us they might say, more tactfully, “We wouldn’t start from here if we were you”.
We must start by asking the right questions. They include questions about facts and questions about what should be done. The important factual questions are:
- Who creates the money supply and puts it into circulation?
- In what form do they create it, as debt or free of debt?
- Who gets first use of it?
- For what purposes?
The important practical questions are:
- who should create it and put it into circulation?
- in what form should they create it, as debt or free of debt?
- who should get first use of it?
- for what purposes?
If the way we now manage our national money supply had not grown up bit by bit, century by century; if it had not become thoughtlessly accepted as the status quo; and if we were now starting from scratch to arrange how money should be supplied to a democratic society – nobody in their right mind would dream of setting it up as it is now.
Anyone with an inkling of how to manage anything would know that merging the two conflicting functions of
- providing the public money supply competently and fairly on behalf of society as a whole, and
- encouraging commercial banks to compete for profit in the market for lending and borrowing money,
would destroy the efficiency and reliability of both functions.
The root question is: What is the best way to create and manage the national money supply in a democracy? It is not primarily a question about banks, as politicians and experts take for granted, as they struggle to decide what should now be done.
Nobody denies that reforming how the national money supply is provided and managed will, in today’s circumstances, have very serious consequences for the banks. Those must be recognised. But, as with most practical problems, it will be sensible to put the horse before the cart.
An example of present conventional thinking is that the terms of reference of the UK Independent Commission on Banking don’t include “Who should create the national money supply, and in what form?”