NEW REPORT: Banks can be stripped of money creation power without starving economy of credit
Positive Money – a movement campaigning for the democratisation of money – has today released a report showing that stripping the banking sector of its ability to create money, a proposal endorsed by e.g. Martin Wolf, Chief Economics Commentator of FT, would not result in a shortage of credit.
Some economists, journalists and politicians have claimed that Sovereign Money proposals, in which banks are not permitted to create money, would result in the economy suffering from a shortage of credit. Therefore, proponents of this argument state that this would result in high unemployment, low levels of economic activity, and potentially a deflationary disaster.
The report released today deconstructs the underlying assumptions behind the criticisms with empirical evidence.
The report begins by demonstrating that bank lending is neither the largest nor most significant source of credit to businesses. Next, the report shows that contrary to many mainstream assumptions, businesses need greater spending by customers before they need banks to increase their respective lines of credit.
The key finding of the report is that the recycling of loan repayments that would only be possible in a Sovereign Money system, coupled with savings, would be sufficient to fund business lending and a non-inflationary level of mortgage and consumer lending.
The report ends by showing that money creation under the current system does not provide an appropriate (or optimal) amount of money to the economy, and the vast majority of newly created money does not contribute directly to growth in GDP.
Ultimately, a convincing case is made for a Sovereign Money system, which would be able to provide an adequate (but not inflationary) level of credit to the economy.
Please contact Frank van Lerven, Researcher at Positive Money – 0207 253 3235, frank.vanlerven@positivemoney.
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 48,000 followers, 30 groups around the UK and 19 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.
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