Neither profit-seeking bankers nor vote-seeking politicians can be trusted with the power to create money

Jeremy Warner claims in his Telegraph article “Bankers have done a good job of creating money” from 2nd May 2014 that transferring the power to create new money from banks to the state would mean that “politicians can print money to their hearts’ content”:

 In a system of 100 per cent reserve banking, the ability to create money is removed, and vested entirely with the central bank and the government. The iniquities of the credit cycle are abolished, governments become the only source of money creation, and the politicians can print money to their hearts’ content to wipe out public debt, pay for healthcare, fund infrastructure and all the other worthy public causes that private bankers are reluctant to finance.

But this is a serious misrepresentation of our proposals. Nobody is proposing to give politicians the keys to the printing press. As we write in Modernising Money, neither vote-seeking politicians nor profit-seeking bankers have the right incentives to manage the power to create money:

Banks profit from making loans, so incentivise their staff to maximise lending through sales targets, bonuses, commissions, the opportunity of promotion, etc. During periods where economic conditions are relatively benign banks and bankers profit by increasing their lending and by implication increasing the money supply as fast as possible. In theory the risk management depart- ment of banks should place some kind of limitation upon this increase in lending and consequent increase in the money supply, but history has shown that risk management and prudence is often forgotten in the chase for profits. Besides, while the percentage increase in the money supply was most extreme in the years running up to the recent financial crisis, the average growth rate in the M4 money supply between 1970 and 2010 was still a significant 11.5% per annum. This growth rate in the money supply bears no relation to the growth in GDP or the needs of the economy as a whole; it is driven purely by the need of banks to maximise profit by maximising lending.It is also reasonable to assume that vote-seeking politicians would be little better as managers of the money supply. An important rationale for taking monetary policy away from the Treasury and handing it to the Bank of England was that it was assumed that politicians were liable to abuse this power, particularly in the run-up to elections, often leading to recurrent cycles of boom and bust (the so-called ‘political business cycle’). Similarly, there would be significant temptation for the Chancellor or Prime Minister to sanction the creation of new money in order to ‘buy’ the goodwill of voters prior to an election.

In short, neither profit-seeking bankers nor vote-seeking politicians can be trusted with the power to create money, as the incentives both groups face will lead them to abuse this power for personal, party, or company gain. Instead, we must ensure that the creators of the money supply do not personally benefit from creating it. This requires the separation of the decision on how much new money is to be created from how that newly created money is to be used. 

We do this by giving these two decisions to completely separate bodies. We recommend that an independent body, the Money Creation Committee (MCC), should take decisions over how much new money should be created, while the elected government of the day should make the decision over how that money will be spent. Alternatively, the MCC may lend money to the banks to on-lend into the ‘real’ economy, in which case the decision over where the money is lent will be made, within broad guidelines, by the banks. 

I have emailed Jeremy Warner and thanked him for engaging in this crucial debate. But I’ve also suggested that the article should be updated for accuracy. This discussion is too important for journalists to muddy the waters with hyperbole and inaccuracies.