Our monetary system isn’t working. Only around 10% of new credit creation by banks goes to productive activity. The current ‘recovery’ is being driven by increased and unsustainable lending for household consumption and mortgage lending – writes Josh Ryan Collins, Senior Researcher at New Economics Foundation in this excellent article.
Here are few highlights:
NEF’s Creating New Money: A Monetary Reform for the Information Age, published in 2000 and written by NEF founder James Robertson and Joseph Huber, was the first detailed study of how we might reform the UK’s dysfunctional monetary system. Far from being backed by gold or created by the Central Bank , Huber and Robertson revealed how 95% (now 97%) of UK money was created by private banks when they make loans, via simple computer entries.
The work of Joseph Huber and James Robertson was the starting point for reform proposals outlined here and in more detail in the book Modernizing Money (2013). The reform presented here developed Huber and Robertson’s proposal further, building on a submission made by Positive Money, new economics foundation and Richard Werner (University of Southampton) to the UK’s Independent Commission on Banking in 2010.
Civil servants we were invited to speak with back in 2011 didn’t understand that banks create money and the final report fell in to the ‘banks as intermediaries recycling our savings’ myth.
But three years on, the Bank of England has now clearly stated that banks do indeed create money, backing completely the analysis in our 2011 book “Where Does Money Come From?” Taking as his cue the Bank’s publications, Martin Wolf is the latest influential voice to come out in favour of full-reserve banking.
His article last week also represents a breakthrough for our close friends Positive Money, whose book Modernising Money is heavily referenced. This is the most detailed examination of the how reform could be carried out in the UK today – at virtually no cost to the taxpayer – and complements Michael Kumhoff’s IMF working paper for how it could be implemented in the United States.
Wolf’s article has led to something of an explosion in economics circles with many expressing concerns that sovereign money creation would lead to a drying up of credit. But we need to be careful here. Sovereign money proposes simply that the unit of account – £sterling – that most people prefer to use for payment transactions (a result of it being the unit we must pay our taxes in) should not be created by private companies. It would not stop people from issuing private credit contracts nor stop companies issuing lines of ‘trade credit’ to each other in lieu of sterling for the exchange of goods and services.
We recommend to read this excellent article in full.