Would stripping banks of their power to create money stagnate the economy? New report from Positive Money

London, Thursday 15th January 2015

Would stripping banks of their power to create money stagnate the economy? New report from Positive Money

Positive Money – the campaign body calling for fundamental reforms of the banking system – today publishes a report that shows an economy where banks are stripped of their power to create money can be as flexible (or inflexible) as the authorities want it to be.

Some economists and commentators have claimed that Positive Money’s proposals for a sovereign money system, in which banks are not permitted to create money, would leave the economy with a money and credit supply that is rigid, inflexible and unresponsive to the needs of the wider economy. According to Ann Pettifor, such a system would result in “a shortage of money, high unemployment and low economic activity”.

The report responds to those criticisms, by laying out the range of policy options that would ensure a sovereign money system (in which only the Bank of England can create money) would be more stable and responsive to the needs of the economy than the current system.

In the current system, new money is created every time a bank issues a loan, and is destroyed whenever part of the principal is repaid. The resulting ‘flexibility’ in the supply of money and credit has translated not into greater economic growth, but into speculative bubbles in property and financial assets and a financial crisis. After the crisis, this flexibility lead to a contraction in the supply of credit to the real economy, which the Bank of England attempted to offset through Quantitative Easing.

Clearly more flexibility is not always better. A sovereign money system is designed to provide a more stable (and counter-cyclical) supply of money and credit to the real economy, as an alternative to the highly pro-cyclical supply of money and credit that results when banks are responsible for creating the nation’s money.

The paper adds depth and detail to the ongoing debate about whether banks should be stripped of their power to create money. It is availablehere.

ENDS-

CONTACT

Please contact Ben Dyson, Head of Research – 07986823361, 0207 253 3235, ben.dyson@bsd.wpenginepowered.com

ABOUT 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). In March 2014, the Bank of England released two articles in its Quarterly Bulletin confirming the explanation of money creation that we outlined in Where Does Money Come From?

Our proposals for reforming the creation of money were picked up by Financial Times chief economics commentator Martin Wolf in his article “Strip banks of their power to create money” (April 24th, 2014)

We have over 40,000 followers, 30 groups around the UK and 20 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.bsd.wpenginepowered.com/about/