Modernising Money

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:

1. Government spending on public services or infrastructure
2. Tax cuts or rebates
3. Direct payments to citizens ("citizen's dividend")
4. Paying down national debt
5. 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:

1. Convert bank demand deposits to state-issued electronic currency
2. Create a "Conversion Liability" for banks to the central bank
3. Gradually repay this liability as existing loans are repaid
4. 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