Strip the private banks of the power of money creation

The House of Commons held a very important debate this last week on the creation of money, a process which the Big 4 banks have monopolised and thus privatised the money supply.   The abuse of this power over the last 3 decades has been enormous, and I used this debate to propose an entirely different system which would remove this power from the present banking cartel in order to ensure that what was maximised was the national interest, not the banks’ own selfish interests.   I said this:

“On lending to businesses, the experience that we have had in the past half-decade has been very unsatisfactory. Under a Sovereign Monetary System, however, the central bank would be empowered to create money for the express purpose of that funding role. The money would be lent to banks with the requirement that the funds were used for productive purposes, whereas lending for speculative purposes—for example, to purchase pre-existing assets, either financial or property—would not be allowed. The central bank could also create and lend funds to other intermediaries—the hon. Member for Wycombe referred to this—such as regional or publicly owned business banks, which would ensure that a floor could be placed under the level of lending to businesses, which would be a great relief to British business, guaranteeing support for the real economy.

To avoid misunderstanding, I should add that within the limits imposed by the central bank on the broad purposes for which money may be lent, lending decisions would be entirely at the discretion of the lending institutions, not of the Government or the central bank.

I believe that a Sovereign Monetary System offers very considerable advantages over the current system. First, it would create a better and safer banking system because banks would have an incentive to take lower levels of risk, as there would be no option of a bail-out or rescue from taxpayers and thus moral hazard would be reduced. Secondly, it would increase economic stability because money creation by banks tends to be pro-cyclical, as I explained, whereas money creation by the central bank would be counter-cyclical. Thirdly, sovereign money crucially supports the real economy, whereas under the current system 83% of lending does not at present go into productive investment. I underline that three times.

Photo of Ann McKechin

Ann McKechin (Glasgow North, Labour)

My right hon. Friend said that the aim would be to reduce risk and for banks to be more cautious, but if we are to encourage innovation in manufacturing, would we not require an investment bank at state level that could fund the riskier levels of innovation to ensure that they get to market, because they are not at the point where they would be commercially viable?

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Michael Meacher (Oldham West and Royton, Labour)

That is an extremely important point and, again, I strongly support it. The current Secretary of Statefor Business, Innovation and Skills has been

struggling to introduce a Government-supported business investment bank and has recently announced something along those lines. I think that should be greatly expanded. The book by Mariana Mazzucato, which I hope most of us have read, “The Entrepreneurial State”, shows the degree to which funding for major innovation, not just in this country but in many other countries which she cites, has been financed through the state because the private sector was not willing to take on board the risk involved. One understands that, but one does need to recognise that the role of the state is extremely important, and under a Labour Government I would like to see something like this being brought in.

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Ian Murray (Shadow Minister (Business, Innovation and Skills); Edinburgh South, Labour)

My right hon. Friend makes a tremendous case for money creation and what we should be considering in this House, but I wonder whether there is also a cultural issue. Many businesses and lenders tell me that there is a cultural problem in the United Kingdom for businesses, particularly entrepreneurial businesses that we have heard about from my hon. Friend Ann McKechin, with regard to giving away equity rather than creating debt—funding businesses through equity rather than debt. Other countries throughout Europe that are incredibly successful at giving away equity rather than creating debt have much more growth in their entrepreneurial economy.

Photo of Michael Meacher

Michael Meacher (Oldham West and Royton, Labour)

That is perfectly true, and my hon. Friend makes an important point. The proposals that I am making would support that. There is a very different climate in this country, largely brought about by the churning in the City of London where profits have to be increased or reach a relevant size within a very short period, such as three or six months. Most entrepreneurial businesses cannot possibly produce a decent profit within that period, so the current financial system does not encourage what my hon. Friend wants. These proposals would make money creation available to those we really want to support much more fully than at present.

Fourthly, under the current system, house price bubbles transfer wealth, as we all know, from the young to the old and from those who cannot get on the property ladder to existing house owners, which increases wealth inequality, while removing the ability of banks to create money should dampen house price rises and thus reduce the rate of wealth inequality.

My fifth and last point, which I think is very important, is that sovereign money redresses a major democratic deficit. Under the current system, around just 80 board members across the largest five banks make decisions that shape the entire UK economy, even though these individuals have no obligation or mandate to consider the needs of society or the economy as a whole, and are not accountable in any way to the public: it is for the maximisation of their own interests, not the national interest. Under Sovereign Money, the money creation committee would be highly transparent—we have discussed this already—and accountable to Parliament.

For all those reasons, the examination of the merits of a Sovereign Monetary System is now urgently needed, and I call on the Government to set up a commission on money and credit, with particular reference to the potential benefits of sovereign money, which offers a way out of the continuing and worsening financial crises that have blighted this country and the whole international economy for decades.

12 thoughts on “Strip the private banks of the power of money creation

  1. The current monetry system is fraud. Money is created out of thin air. The IMF document the chicago plan revisited (type into google to get pdf) clearly states that no bank borrows anybody money. Infact all of us are accessing our credit line. If people understood how money is created then there would be riots because it is basically fraud being perpetrated. How can a privately owned bank run for profit which the bank of england is, have control of making our money? Making money should be in the control of the tax payer.

    The whole money system is fraud!

  2. I followed most of this debate and heard your excellent and most informative speech. The main point that really struck (and even shocked) me, was that only 8% of money raised (plus another 8% in consumer credit) goes towards enterprises that add to our GDP. No wonder we’re in trouble!

    So, certainly, the banks need to lend more money to ventures that would benefit the country (rather than safer projects that would generate more profit for themselves). However, I am aware that, under the current system, many successful enterprises have had great difficulty in obtaining investment from the banks.

    I think Sir James Dyson had a big problem raising money for his vacuum cleaner enterprise , and certainly successful film makers have had difficulties. The late great Sir Richard Attenborough had to wait for many years and mortgage his own home before he could obtain enough finance for his hugely successful film on Gandhi, and George Lucas ran out of money whilst filming Star Wars. (He only managed to finish it because Sir Alec Guinness waived his fees in exchange for a percentage of the profits which, at the time, no one thought would actually materialise. In the event, it was so successful that Sir Alec became a millionaire)! So banks have never been keen on taking risks.

    I also can’t see Whitehall Mandarins backing riskier enterprises. Sir Frank Whittle was dismissed out of hand by the MOD, when he tried to get backing for his invention of the Jet engine. He ended up having to design and develop it with his own money, in his own time and in his garden hut (I think)!! There must be loads of more examples.

    Hence I’m not sure how banks could be expected to lend money to riskier enterprises should they also be expected to take lower risks and the safety net of tax payers’ bailouts be removed, as I believe has been suggested…..?

    Have I missed something? If not, then I hope a solution can be found.

    It appears to be the case that Britons have had many excellent ideas and have come up with world changing inventions, but it’s other countries that seem to have made the most profit from these, probably because they were unable to obtain the required level of investment here, as both the banks and the government were too cautious when it came to lending them the money they needed to get these off the ground.

  3. Here’s a novel idea, a totally new concept in banking whih seems to be working, but could it also work here? Quote:

    “Yunus is the man who created an anti-bank bank called the Grameen Bank in Bangla Desh which broke every rule of traditional banking. As he put it : ” I went and talked to the banks and did precisely the opposite of everything they told me.”

    His bank was only interested in lending money to the poorest in Bangla Desh – those with nothing so they could start tiny micro businesses. His ideas have now been taken up in developed economies notable the United States in New York and elsewhere.”

  4. Very interesting debate – although not much of what was said regarding Money Creation was a surprise to me as I have followed PositiveMoney since 2010.

    Douglas Carswell made a speech in 2010 regarding Full Reserve Banking which was mainly ignored but now, as people suddenly wake up to the fact that Private Banks create 97% of our money, and most of it gets directed at: Housing, Commercial Property and Financial Speculation with a trivial 8% actually going to what might be considered the productive economy, and our National Debt and Deficit will have to increase no matter what Government is in Power.

    Why should we care that Banks create our currency – because they also destroy it when loans are repaid. As we now know that 97% of our money is created as debt, it should also become obvious that when we pay down our credit cards, Mortgage debt, Business Loans, Car Loans and Holiday Loans (as we are now all living on the Never Never), the Money Supply would dry up, meaning that there would be no means of exchange – or unit of account in which to pay ourselves and buy the things we need to survive. Banks control the means by which we can pay for food, shelter, fuel, heat and light.

    So when David Cameron said that we should alll pay down our debts – what he almost caused was a meltdown in the Economy due to the fact that he did not understand that when someone pays off a debt to a Bank (who just create Bank Deposits at hte time of the loan) the Money gets destroyed. When the money supply shrinks, people lose their Jobs and the requirement for someone else to get in debt increases.

    It is scary to remember that Banks are still pushing for a cashless society. That would mean all money would be Bank Deposits which means that ALL Money would be debt. We would be paying rent to the Banks for; doing business, buying food, paying wages, travelling, paying rent/mortgage payments, heating & lighting. Nothing we would do would not be known by Banks and that Banks would not profit from. If the Banking System didn’t like us or made a mistake and cancelled our cards, we would be severed from Society – unable to pay our way.

    So Michael Meacher’s proposal for Soveriegn Money and Steve Bakers proposals for Alternative Currencies are both welcome and the reason why people who work in the Financial Sector – or who have worked in the Financial Sector and still have friends there, will argue against such propoals and state that all is needed is a bit more regulation – the more complicated the better.

    The Financial Sector provide 51% of Campaign Funds to the Conservative Party and they want something for their investment. Big Salaries and massive bonuses are fed through Tax Payer contributions.

    The Naitonal Debt is a big source of revenue as the interest payments on our 1.26 TRILLION POUNDS of debt is 47.4 BILLION POUNDS (in 2010, it was 30.66 BILLION).

    It is not possible to pay off this debt without cancelling out the money supply. and the Government Debt and Deficit could only be paid off if there is capacity in the Private and Commerical Sectors for increased debt – which there isn’t as Total UK Debt is around 800% GDP. In 2011 the total UK debt was 950% of GDP according to Morgan Stanley Research.

  5. Anybody know what casued the Weimar Republic Hyperinflation that led to Adolf Hitler taking over in Germany?

    1. Government Money Printing ?
    2. Foreign Investor Speculation selling the German Mark short?
    3. The Privatisation of Reichsbank ?
    4. Private banks were allowed to create German Marks out of nothing and lend them at 5. interest ?

    All the above EXCEPT ITEM 1 – The Government did not instigate the huge quantity of marks by printing them. they actually had to step in and take control back of the currency by creating a rentenmark and stop Banks creating money. But it was too late, the damage had been done.

    We have been led to believe for decades that it was the Government who printed too much money when in fact it was private Banks creating money out of nothing at interest and foreign exchange speculation – Foreign Investors who trashed Germany of the 1920s for a few extra bucks. Was it worth it? For JP Morgan it certainly was as they made an even bigger killing during the War trading War Bonds and financing weapons deals.

    Unfortunately, the middle classes savings had been totally destroyed and it took a build up of ten years for this anger to be funnelled into the NAZI Party.

    We are at the point just before the hyperinflation. We are already seeing the rise of Far Right Wing Parties and Governments – our own UK Government is supporting one in Kiev, Ukraine.

  6. Yes, Conrad –
    The similarity between what happened in 1930s Germany and our present situation has also been noted by others. However, we never seem to learn from past mistakes. Perhaps it’s something to do with the way history is taught?

    I watched tonight’s Panorama –
    “Did the Bank Wreck My Business.” Mon 24thNov 2014

    These were the closing statements:

    “The Government has referred RBS to the Financial Conduct Authority. It’s due to report in the new year.”

    “For far too long we had a handful of banks exercising control of the business lending market for small/medium sized companies. The relationship was a very unbalanced and unfair one.” (Vince Cable)

    “Business people need to know banks won’t turn on them when times get hard.”

    “Our fathers, forefathers and people who have come before have seen the bank and the bank manager as a trusted relationship. You can no longer trust that relationship. They’ve taken advantage of it.”

    “Our economic recovery needs businesses, and businesses need banks they can trust. Right now, that trust is in short supply.”

  7. Wanda: Thank you for the reference to the BBC Panorama program about Banks – I saw a clip about the ‘businessman ( Lawrence Tomlinson) who wrote a government report that criticised RBS has been told he can no longer remain a customer of the bank, Panorama has learned’.

    “In the 2013 report, Lawrence Tomlinson accused RBS of systematically wrecking viable businesses.”

    Unfortunately there’s a link between Government and RBS through Deloitte who audited RBS’s accounts just before RBS fell apart. Deloitte also provided free services to Government Ministers. The public supposedly owns 83% of RBS but who actually controls it? If RBS is wrecking small businesses then what does that tell us about the attitude of the Government towards small businesses – Labour, Conservative and Liberal Democrats ?

    Vince Cable may talk of the need for change in the Banking Sector, but he is actively promoting more influence over our Government from Foreign Corporations through TTIP, which will promote more pro Nationalist Parties as TTIP will be like the EU on steroids, reducing the ability for Parliament to pass laws and forcing them to first ask large Corporations whether a particular law might affect their profits. Many Groups – including a German association of Small Businesses, have raised concerns that Small Businesses will be put at even more disadvantage as a result of large international corporations flooding the markets with cheap shoddy goods and services from Countries where employment rights are a distant dream and environmental concerns are ignored in favour of profits. People tend towards cheaper goods and services when debts become larger so restricting their disposable income.

    An alien visiting earth might analyse our global economy and think “why are they making weak, flimsy goods of low reliability and longevity in one part of the world, then shipping it half way around the World to be used for a few months, at which point it breaks and a new replacement is then re-made on the other side of the world and shipped half way back around the world again when they are running out of resources and oil which they are prepared to go to war for and which the imported goods increase local unemployment? Why don’t they make the goods locally and make them last? It makes no sense.”

    Michael Rowbotham’s talk on the Financial System:

    Boris Johnson said “There’s nothing not to like about TTIP”, he obviously hasn’t studied the Economic Model which produced all the glowing figures and the unrealistice assumptions made in order to dream up the favourable figures. One of the benefits of the NAFTA trade deal was that it would benefit Mexico so much that no Mexican would ever want to leave – or words to that effect. Twenty years on and Mexicans are still running for the Californian and Texas borders and is still a big issue – especially for The Republican Governor of Texas.

  8. Conrad:
    A propos TTIP :-
    The 11th October issue of The Week printed a letter which originally appeared in The Independent:

    Quote: “Simon Perrin’s suggestion to raise the minimum wage to a living wage in order to eliminate the need for working tax credits and thus help plug the £25bn hole in Britain’s finances is an excellent one. But it is unlikely ever to be put into practice in view of the current negotiations in respect of TTIP between the EU and the US.

    A particularly disturbing part of the deal is that it would allow corporations to sue governments for changes they feel might harm their profits.

    This appalling rule is embedded in many existing agreements, and companies are already using it. For instance, Egypt is being sued for nearly £50m for raising the minimum wage in a response to the Arab uprisings.

    If TTIP goes ahead, any increase in minimum wage to a living one here could result in a similar scenario, and big business would have succeeded in completely replacing the idea of a state run for the benefit of the people with one totally controlled by what is best for corporations.”

    by Norma Lee, Bolton, Gt Manchester

    My MEP has a wonderful cartoon ref TTIP on her Facebook Page. It’s of a mincing machine where the NHS, Food Safety, the Environment etc., is pushed in at one end, and blood spattered money comes out of the other!

  9. Wanda: A few cartoons about TTIP. The Trojan Horse cartoon is probably quite an accurate one.

    Vince Cable lost one billion pounds on the Royal Mail ‘sell off’. Guess who is negotiating for the UK on TTIP and saying how it will put more money in our pockets and increase employment?

    Vince Cable also used NAFTA to encourage more support for TTIP failing to understand the results of NAFTA and the fact that American workers on the Border of Mexico lost their Jobs becasue their employment rights were higher than Mexican employment rights. With the loss of import tariffs it made no economic sense for an American company to continue paying for expensive american workers when they could close down their American operations and save a bundle in salary payments. NAFTA used the same CGE Economic model to promote the benefits of NAFTA which have not materialised.
    “Instead of adding jobs, NAFTA resulted in a net loss of jobs in the United States, according to both the U.S. Labor Department and private economic studies.”

    That’s right! Even Texans understand that these Trade deals don’t work.

    With TTIP we are all being sold a dead pony. I used to think Boris Johnson was an intelligent fellow. I am now convinced – through his support for TTIP – that Boris is rather less than the sharpest pencil in the box.

    This is a perfect storm of a debt based monetary system – where profits are partly used to pay off interest payments to Banks – and the lowering of regulations, tariffs and other restrictions of cross border business activity which not only encourages large companies exploiting advantages of low pay and cheap materials abroad, but forces companies to act in the same way as the most aggressive and least ethical organisation. Losing Tariffs also reduces Income to the Treasury which will further put pressure on reducing funds to public services like the NHS.

    If you get a spare 22 minutes then you might be interested in the Canadian perspective on CETA – their Trade deal with Europe.
    Jim Stanford is the Chief economist with the Canadian Auto Workers (CAW):

    PositiveMoney proved that only one in ten MPs even understand that Banks create money out of nothing then charge us for the use of it (still sounds crazy to me), and then pass legislation on Bank Regulation and issue statements like – “we must all pay off our debts” failing to realise that our money system is debt.

    It is possible that the same proportion of MPs are equally ignorant of the implications of TTIP and are gullible enough to believe that the Economists CGE Model is more than just manipulated methematical opinion and is not legally binding. The small print of the CGE Studies usually have a lot of provisos and assumptions which are always grossly optimistic towards a favourable outcome, but have not materialised for the genral public – only in terms of Corporate Profits.

    NAFTA and CAFTA also had calls for a single North American Currency: The AMERO (like the EURO).
    But in order to work, it would require a Brussels style Commission and reduce the Governments of the US, Canada and Mexico to mere local Administrations enforcing the laws of a central North American government.

  10. In addition to my previous comments regarding TTIP:
    I believe that a good analogy of how TTIP is being proposed by Vince Cable would be the ‘Child Catcher’ scene in “Chitty Chitty Bang Bang”:
    with the child catcher (Vince Cable) luring little children towards him with the promise of many sweets.

    Not an unfair analogy after he undervalued the the sale of Royal Mail.

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