The Budget 2012: Let's rearrange those deckchairs boys!

Budget day today, however, this is not the place for a full analysis of the ongoing deckchair rearrangement.

We here at Positive Money just wanted to remind Osborne, Cameron and Clegg that there is an alternative to selling off anything not nailed down (motorways don’t need nailing).

In 1844 a Conservative government, lead by Sir Robert Peel, passed the 1844 Bank of England Bill. This Bill outlawed the creation of money by private banks, after they unsurprisingly went a bit nuts with the privilege and almost wrecked the country. Unfortunately, the private banks eventually found their way around these regulations, and unsurprisingly went ‘nuts’ again, leading us to the mess we currently find ourselves in.

In the UK today, 97% of the entire money supply was created by private banks as debt.

Of course, no one noticed them going nuts – after all, who could expect the Treasury or the Bank of England to notice a small thing like the money supply doubling in 7 years? (This was an increase of £1 trillion between 2002 and 2009). To put this increase into some kind of perspective, it took just over 300 years from the founding of the Bank of England for the money supply to reach its first £1 trillion (in 2002).

More money was created by banks in each month of 2007 than was created throughout the whole of the First and Second World Wars.

Of course, if the government had the sole right to create money everyone’s taxes could be reduced without having to increase the national debt or reduce spending on hospitals and the like. And no, we are not advocating Zimbabwe style money printing to finance expenditure – rather that money is created by an independent body in line with an inflation target and granted to the government. If inflation is expected to be above 2%, then there would be no new money created (or some could be removed).

Of course, we could stick with the current system, where banks create money in line with their profit motives, and we essentially have to rent the money supply off them, then bail them out when they mess it all up – essentially a form of socialism for the rich.

Maybe allowing banks the power to create money wasn’t the best decision ever?

Source: Capie and Webber (2006), A Monetary History of the United Kingdom 1870-1982. And Bank of England statistical database