Richard Taylor on a fantastic opportunity to take back control of our money from the commercial banks which could be key to indyref2. Positive Money is part of IdeaSpace in Glasgow this week.
Scotland is on the brink of a great economic opportunity, below our radar. If you care about inequality, fairness or living in a prospering economy then this opportunity is hidden in plain sight. It’s foundational to so much in our society, and to so much that is wrong.
It involves finance, monetary policy and Quantitative Easing – not topics that stir much passion. But once you grasp these ideas, you’ll see the economy in a whole new way.
Most of the money we use day to day is in the form of bank deposits. Cash transactions are declining, and physical notes and coins are a tiny part of our economy. Although the Bank of England ultimately controls the amount of cash in circulation it doesn’t have direct control of the total quantity of money in bank deposits — that’s almost all money. In 2014 the Bank of England confirmed what many, including Positive Money, had been arguing for some time. Most electronic bank-deposit money is created when banks make new loans. These loans are not savers’ money recycled, but brand new money that increases the total quantity in circulation and creates new spending power. This debt-based money comprises 97% of all money in circulation. So that is what our precious pound really is — circulating, privately-issued debt, rented from banks.
If the Government and Bank of England don’t issue money directly, they must have tight control of the quantity – right? Well, no. The mechanisms are very indirect. Hence the near exponential growth of money, and therefore of debt, just before the banking crisis, and now a sustained period where the money supply has flat-lined despite the desperate attempts of the Bank of England to get people borrowing again. This is our problem. With our debt based money system the way we are trying to stimulate a recovery is by creating more debt – not the smartest of moves.
The commercial banks have two great powers. They control the amount of money in the economy. And then they say where that money should go. The banks have turned into machines for lending against property and other financial assets. This simply drives prices up, and starves the productive areas of the economy such as smaller enterprises that create the most employment.
The commercial banks have two great powers. They control the amount of money in the economy. And then they say where that money should go. The banks have turned into machines for lending against property and other financial assets. This simply drives prices up, and starves the productive areas of the economy such as smaller enterprises that create the most employment. Only the banks win, as we pay more of our income to them directly or indirectly. Nor is this fair — those on the lowest incomes pay the highest proportions.
I first got involved with the Positive Money campaign group a few years ago when searching for an explanation of the financial crisis that made sense. Positive Money has by far the clearest, well-thought-out and best-researched explanation of our money problems. They campaign for a banking and money system that actually works for all of us. We need to debate whether our money system should work this way at all. Positive Money believes that the creation of new money should be a public good that should be used to directly serve the public interest.
Recently there has been more Quantitative Easing to the tune of £70 Billion. This is on top of £375 Billion created immediately after the banking crisis. That’s more than £6,000 per person. The Bank of England creates new money and indirectly loans it to the Government, in the hope that this stimulates spending and persuades the banks to invest in the real economy. We certainly needed some of this after the crash but the positive impact now is slight. By the Bank of England’s own admission, this action increases inequality, making the rich richer as they are more likely to hold shares that benefit. At the same time it is depressing returns for pension funds.
And we now have the curious situation that the Government effectively owes a quarter of the national debt to itself.
Positive Money advocates that this new money should go more directly into the economy in a way that could actually work in a fairer way.
Why is this so important for Scotland? If we have a second independence referendum, then an independent Scottish currency is sure to be centre stage. This is a fantastic opportunity to take back control of our money from the commercial banks. As Henry Ford famously said, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning”. With more widespread appreciation of our current system perhaps we can have that belated revolution and embrace the benefits of a reformed monetary and banking system. We can do so much better than just replicating the broken UK system we currently have.
IdeaSpace is an exhibition of Scotland’s most innovative and exciting social, economic, cultural and environmental thinking. Over 40 participating organisations and campaigns will have stalls and hold a total of 17 fringe meetings over 3 days on a wide range of the most important issues facing Scotland just now.