Key Takeaways
1. The current monetary system allows banks to create money through lending
"When banks extend loans to their customers, they create money by crediting their customers' accounts." - Sir Mervyn King, Governor of the Bank of England (2003-2013)
Money creation process. When a bank makes a loan, it simultaneously creates a deposit in the borrower's account, effectively creating new money. This process accounts for approximately 97% of the money supply in modern economies, with only 3% being physical cash created by central banks.
Consequences of bank money creation:
- Increased purchasing power in the economy without a corresponding increase in goods or services
- Banks profit from interest on money they create, rather than intermediating existing funds
- Money supply is determined by banks' profit-seeking behavior rather than economic needs
2. Bank-created money leads to economic instability and asset bubbles
"The financial crisis of 2007/08 occurred because we failed to constrain the private financial system's creation of private credit and money." - Adair Turner, Chairman of the UK Financial Services Authority
Boom-bust cycle. Bank lending tends to be procyclical, with excessive lending during economic booms fueling asset price bubbles, particularly in real estate. When these bubbles burst, banks restrict lending, causing a contraction in the money supply and economic recession.
Financial instability consequences:
- Periodic banking crises (on average every 15-20 years in developed economies)
- Massive economic costs (estimated $60-200 trillion in lost global output from 2008 crisis)
- Taxpayer-funded bank bailouts to prevent systemic collapse
3. Debt-based money creation exacerbates inequality and environmental issues
"Banking is not money lending; to lend, a money lender must have money. The fundamental banking activity is accepting, that is, guaranteeing that some party is creditworthy." - Hyman Minsky
Inequality. The current system transfers wealth from the bottom 90% to the top 10% through interest payments on the entire money supply. Banks profit from creating money, while the public bears the cost of using it.
Environmental impact:
- Pressure for constant economic growth to service growing debt levels
- Short-term profit focus discourages long-term environmental investments
- Economic instability leads to relaxation of environmental regulations during downturns
4. The power to create money should be transferred to an independent public body
"Of all the many ways of organising banking, the worst is the one we have today." - Sir Mervyn King, Governor of the Bank of England (2003-2013)
Money Creation Committee. An independent body, similar to the current Monetary Policy Committee, would be responsible for determining how much new money to create based on economic conditions and inflation targets.
Benefits of public money creation:
- Separation of money creation from government spending decisions
- Transparent and accountable process
- Ability to create money without corresponding debt
- Direct control over money supply to maintain economic stability
5. A reformed system would separate transaction accounts from investment accounts
"In essence these proposals recognise that if banks undertake risky activities then it is highly dangerous to allow such 'gambling' to take place on the same balance sheet as is used to support the payments system, and other crucial parts of the financial infrastructure." - Sir Mervyn King
Transaction Accounts. These would hold risk-free electronic money created by the central bank, providing a secure means of payment and store of value.
Investment Accounts. These would replace current savings accounts, with clear risks and rewards for investors:
- Fixed terms or notice periods
- No government guarantee
- Shared risk between bank and account holder
- Transparency in how funds are invested
6. New money would be created debt-free and spent into the economy
"In the United Kingdom, money is endogenous—the Bank supplies base money on demand at its prevailing interest rate, and broad money is created by the banking system." - Sir Mervyn King
Methods of injecting new money:
- Government spending on public services or infrastructure
- Tax cuts or rebates
- Direct payments to citizens ("citizen's dividend")
- Paying down national debt
- Lending to banks for productive business loans
Benefits:
- Non-inflationary if matched to economic growth
- Reduces need for government borrowing and taxation
- Allows for public investment without increasing debt
7. The transition to a reformed system can reduce private and public debt
"The financial crisis of 2007/08 occurred because we failed to constrain the private financial system's creation of private credit and money." - Adair Turner
Conversion process:
- Convert bank demand deposits to state-issued electronic currency
- Create a "Conversion Liability" for banks to the central bank
- Gradually repay this liability as existing loans are repaid
- New money creation replaces debt-based money in circulation
Debt reduction potential:
- Up to £1 trillion reduction in UK private debt over 10-20 years
- Significant reduction in national debt without austerity measures
- Lower interest payments for government and private sector
8. A reformed monetary system would enhance economic stability and democracy
"It is the normal monetary system, in which the 'printing' of money is delegated to commercial banks, that needs defending. This delegates a core public function - the creation of money - to a private and often irresponsible commercial oligopoly." - Martin Wolf, Chief Economics Commentator, Financial Times
Economic stability improvements:
- Reduced likelihood of asset bubbles and financial crises
- Stable money supply independent of bank lending decisions
- Ability to allow banks to fail without systemic risk
Democratic benefits:
- Transparent and accountable money creation process
- Public control over a critical economic function
- Reduced power of financial sector in shaping the economy
- Increased funding for public services without increased taxation
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FAQ
What is "Modernising Money" by Andrew Jackson about?
- Critical examination of money: The book analyzes how the UK’s monetary system works, focusing on the fact that private banks create most of the money supply through lending.
- Problems and consequences: It argues that this system leads to economic instability, inequality, and environmental harm, and is fundamentally undemocratic.
- Proposed reforms: The authors propose a new system where only the state creates money, aiming for a stable, democratic, and sustainable economy.
Why should I read "Modernising Money" by Andrew Jackson?
- Reveals hidden truths: The book uncovers that over 97% of money is created by private banks, not the government, challenging common misconceptions.
- Connects money to real issues: It links the monetary system to financial crises, housing bubbles, inequality, and environmental degradation.
- Offers practical solutions: Readers gain a clear, actionable roadmap for reforming the monetary system to address these systemic problems.
What are the key takeaways from "Modernising Money" by Andrew Jackson?
- Private banks create money: The current system allows banks to create money through lending, which drives instability and inequality.
- Systemic consequences: This structure fuels boom-bust cycles, asset bubbles, and rising debt, while undermining democracy and transparency.
- Reform is possible: The book outlines a detailed plan to transfer money creation to a public body, separate payment and lending functions, and stabilize the economy.
How does money creation work in the current system, according to "Modernising Money"?
- Bank lending creates deposits: When banks issue loans, they simultaneously create new deposits, effectively generating new money out of nothing.
- No need for prior savings: Banks do not lend out existing deposits; they create new money with each loan, increasing both the money supply and debt.
- Central bank reserves: Reserves are used for interbank payments but are not a constraint on lending, as the central bank supplies them as needed.
What are the main problems with the current monetary system identified by Andrew Jackson?
- Bank dominance: Private banks’ ability to create money gives them excessive power and distorts lending toward unproductive uses like mortgages.
- Economic instability: The system encourages excessive risk-taking, leading to cycles of booms, busts, and financial crises.
- Inequality and democratic deficit: Wealth is transferred to banks and asset owners, increasing inequality and reducing public control over money.
How does the current monetary system contribute to economic instability and inequality, according to "Modernising Money"?
- Asset bubbles and booms: Most bank lending goes into property and financial speculation, inflating asset prices without boosting productive investment.
- Debt-driven growth: Money is created as debt, requiring ever-increasing borrowing and making debt reduction difficult without shrinking the money supply.
- Wealth transfer: Interest payments and rising asset prices benefit the wealthy, exacerbating inequality and making essentials like housing less affordable.
What is the alternative monetary system proposed in "Modernising Money" by Andrew Jackson?
- State-controlled money creation: Only the central bank would create both physical and electronic money, ending commercial banks’ ability to create money through lending.
- Two types of accounts: Customers would have risk-free Transaction Accounts for payments and risk-bearing Investment Accounts for lending and investment.
- Banks as intermediaries: Banks would act as brokers, lending only pre-existing money from Investment Accounts, stabilizing the money supply.
How do Transaction Accounts and Investment Accounts function in Andrew Jackson’s proposed system?
- Transaction Accounts: Hold state-issued, risk-free electronic money at the central bank, ensuring safety even if banks fail.
- Investment Accounts: Allow customers to invest money for banks to lend, with returns and risks aligned to investment performance and fixed terms.
- Separation of functions: This structure protects payment systems from bank failures and prevents banks from creating money through lending.
Who decides how much new money is created in the reformed system described in "Modernising Money"?
- Money Creation Committee (MCC): An independent, politically neutral body would determine the amount of new money to create, targeting stable inflation.
- Separation of powers: The MCC decides the quantity, while the government decides how to spend it, preventing politicization of money creation.
- Transparency and oversight: The MCC’s decisions are public and accountable to a cross-party parliamentary group, ensuring democratic control.
How would new money be injected into the economy under Andrew Jackson’s reforms?
- Government spending: The MCC could grant new money to the government for public services or infrastructure, stimulating the economy without increasing debt.
- Tax cuts or direct payments: New money could also be used for tax reductions or distributed directly to citizens as a ‘citizen’s dividend.’
- Productive business lending: The MCC could lend new money to banks specifically for on-lending to productive businesses, supporting real economic growth.
What are the expected economic impacts of the reforms proposed in "Modernising Money"?
- Reduced instability: Removing banks’ ability to create money would lessen boom-bust cycles, asset bubbles, and financial crises.
- Debt reduction without recession: Households and businesses could pay down debt without shrinking the money supply, enabling deleveraging without triggering recessions.
- Greater transparency and sustainability: The system would increase democratic control, align investment with societal needs, and support sustainable development.
How would the banking sector and central bank roles change under Andrew Jackson’s proposals in "Modernising Money"?
- Banks as true intermediaries: Banks would need to attract funds before lending, competing for Investment Account holders and managing risk more carefully.
- Safe bank failures: With Transaction Accounts protected by the central bank, banks could fail without disrupting payments or requiring bailouts.
- Central bank control: The Bank of England would directly manage the money supply, simplifying regulation and making the payments system more robust and competitive.
Review Summary
Readers praise the book's clear explanations of complex banking concepts and its bold proposals for monetary reform. Many find the first half particularly enlightening, offering fresh perspectives on money creation and economic cycles. However, some criticize the latter half as overly optimistic or naive in its proposed solutions. Overall, it's seen as thought-provoking and informative, even if readers don't fully agree with all recommendations.
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