Money creation affects almost every aspect of our lives and is directly connected to almost all public policy, including public and private debt levels, house prices, and rising inequality, but it’s very poorly understood. A recent poll found that 7 out of 10 MPs believed that only the government can create money, when in fact 97% of money is created by banks when they make loans, as recently confirmed by the Bank of England .
The majority of our MPs do not understand where money comes from. This leaves them ill-equipped to predict another financial crisis, deal with rising debt, housing bubbles or understand a fundamental driver of inequality.
‘I believe that this is a problem that is absolutely at the heart of our society and what is wrong with our economy. The organisation Positive Money has helped me to campaign on this issue… I want the debate to be on money creation and society to flesh out both the problem and the range of possible solutions.’
In a letter to a constituent, Ed Miliband, Labour party leader said:
‘I do welcome that such fundamental questions are being asked about how the money in our economy is being created and used, how our financial system can be more transparent and accountable and work for the benefit of the country as a whole.’
Nick Clegg, Liberal Democrat leader and deputy prime minster, wrote:
‘I do accept that there is a problem that not enough people, including policymakers, understand how new money is created. This is a problem for a number of reasons, not least that it can hamper attempts at effective reform of the banking system. The creation of money is a matter of significant public interest and we need to make sure it does not become an obscure and technocratic debate.’
The Treasury released a ‘Review of the Monetary Policy Framework” alongside the government’s 2013 budget.
Lord Adair Turner (former Chairman of the Financial Services Authority) delivered a speech in February 2013 entitled, ‘Debt, Money and Mephistopheles: How do we get out of this mess?’ In this speech Turner discussed an alternative to Quantitative Easing, which he termed Overt Money Finance (also known as Sovereign Money).
Martin Wolf, chief economics commentator at the Financial Times, wrote an article on 24th April, called “Strip private banks of their power to create money”. He wrote: “Printing counterfeit banknotes is illegal, but creating private money is not … [and that the latter] could – and should – be terminated.”
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 100 MPs were polled through Dods Monitoring in July 2014. MPs were asked to read a number of statements and indicate whether they were true or false. They could also select “Don’t know”.
In response to the statement “Only the government – via the Bank of England or Royal Mint – has the authority to create money, including coins, notes and the electronic money in your bank account.”, 71% said this was true, 20% said it was false (the correct answer) and 9% said they didn’t know. There was no significant difference between the parties.
In response to the statement “New money is created when banks make loans, and existing money is destroyed when members of the public repay loans.”, only 12% of MPs gave the correct answer: true. 64% of MPs said this was false, while 24% said they didn’t know.
Total responses came from: 39 x Conservatives; 45 x Labour; 10 x Lib Dems; 6 x Others. The full results can be found here: http://bit.ly/1qTZHHa The Bank of England released two articles explaining the money creation process – “Money in the modern economy: An Introduction” and “Money creation in the Modern Economy” – in their flagship Quarterly Bulletin of March 2014. Here is an extract:
‘In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood. The principal way in which they are created is through commercial banks making loans: whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money…. 97% of the money held by the public is in the form of deposits with banks, rather than currency.’
uk/publications/Documents/ quarterlybulletin/2014/qb14q1. The IMF working paper lays out proposals to prevent the creation of money by the banking system along the lines of Irving Fisher’s proposals following the Great Depression. The paper’s “full reserve banking” reform aims to return the control of the supply of money to the state and prevent financial crises from occurring: The Treasury review explicitly permits the Bank of England to use “unconventional policy instruments” in order to help the government meet its policy objectives to “achieve strong, sustainable and balanced growth that is more evenly shared across the country and between industries”. This opens the door to alternative methods of creating money and getting it into the economy, and provides the opportunity to stimulate a wider public debate about the monetary system.
publications/review-of-the- monetary-policy-framework Wolf advocated the proposals called for by the campaign body Positive Money, arguing that they “would bring huge advantages”. Martin Wolf states that private banks’ ability to create money, and pump most of this money into house price bubbles and financial market speculation, is ‘the source of much of the instability of our economies’ and argues that ‘it could – and should – be terminated.’ As a result of this change, “it would be possible to increase the money supply without encouraging people to borrow to the hilt. It would end ‘too big to fail’ in banking. It would also transfer seignorage – the benefits from creating money – to the public.”
7f000b18-ca44-11e3-bb92- 00144feabdc0.html# axzz32zxNSitCABOUT POSITIVE MONEY
Positive Money is a movement to democratise money and banking so that it works for society and not against it. Founded in 2010, we work to raise awareness and understanding of the fact that most of the UK’s money is created by banks as they issue loans. Our research has resulted in two books (Where Does Money Come From? and Modernising Money).
We have over 30,000 followers, 30 groups around the UK and 17 international partner organisations. The campaign is coordinated by a small London-based team. Our Board of Advisors includes economics professors, authors, entrepreneurs and professionals from the financial industry.
More detail about Positive Money is available here: http://www.