Private banks have virtually a monopoly on creating our money. They create the money when they make loans, then charge us interest on it. This means we rent the money we use from big banks. Since the vast majority of us need pound sterling to pay our taxes, our rent, and buy food, we have no choice but to use them.
Their profits come from the privilege they have to create this money, which amounts to about £23 billion each year.
Big banks are shareholder corporations, so their sole motivation for creating new money is profit. This means they’re not guided by any concern for the needs of society or the economy. Rather than lend to the real, productive economy, which provides people with jobs and incomes, they prefer to lend to financial and property markets, which deliver the highest short-term profit. In 2017, 55% of bank lending went to mortgages and bridging loans, 19% to the financial sector and only 10% was directed to the productive sectors of our economy, as can be seen in the graph below.
They can also take big risks because they know that if they fail, they will be bailed out by the government. This means banks aren’t held to account if they wreck our economy.
Positive Money believes that we need to redesign our money and banking system so that it’s fit for the 21st century. The power to create and spend new money into the economy should be brought under public, democratic control. Private banks should become true intermediaries between savers and borrowers akin to peer-to-peer lending. Through this process we could remove bank subsidies and realign risk and reward.
Instead of having our money stored on a big banks’ risky balance sheet, where it’s the legal property of the bank, we would be able to keep it safely at the Bank of England. This change would make our economy safer, by protecting the payments system from financial instability.
New money would be created by the central bank free of debt, creating a more stable economy. The state would regain any profit from creating new money enabling more public spending on the things we need. It could be targeted towards long-term economic goals or used to respond to financial crises, meaning recessions would be a thing of the past.