Earlier this week, we saw the first tentative sign that monetary policy might be heading back to normal. By incrementally raising rates, The Federal Reserve began a long process which, it hopes, will eventually see the US economy wean itself off cheap credit.
Bank of England Governor Mark Carney has promised that the UK economy will soon follow suit, and markets expect a rise at some point in 2016.
But while all the talk in the financial world is of a return to normal, it seems that hardly anyone has stopped to ask what “normal” really means. The longest period of price stability and moderate rates was brought to an abrupt end by the financial crisis of 2008.
While more and more economists highlight the role of our money and credit system in precipitating that crisis, it’s striking that our pre-2008 monetary policy arrangements have been subject to so little political scrutiny.
If monetary policy does eventually return to normal, it’ll be returning to a system where around 97% of money in the economy is in the form of bank deposits, which are created when banks create loans. It will be a situation similar to that of 2007, when the majority of new money entered the economy as lending for mortgages and financial speculation.
The UK has not examined how its money and credit system operates since the Macmillan Commission in the 1930s, and a growing number of people are saying that it’s time for another comprehensive, government-backed investigation into whether our current arrangements are working.
Nearly 6000 people around the UK have signed a petition for a Money Commission to investigate whether our monetary system serves financial stability and social wellbeing.
Only when we truly understand the social and economic effects of our current monetary system will we appreciate what “normal” really means.
We are calling on the UK government to set up a parliamentary investigation into the impact that money creation by commercial banks has on society.