The way our money is created contributes to several major issues that affect local communities: rising house prices; increasing inequality; and environmental degradation. Positive Money held a workshop “Its Our Money” on 29 Oct 2011 that explained the problems and proposed solutions. Here are some highlights.
In a nutshell (Ben Dyson, Positive Money):
Banks have monopoly power to create money out of nothing when they issue loans by writing lines in a ledger. As soon as borrowers spend the money that they have borrowed that money exists. Banks create up to £226 million of new money each year in this way.
Many people believe that governments print money but Maastricht Treaty rules actually prevent EU governments from creating money. “Many people would be surprised to learn that even among bankers, economists, and policymakers, there is no common understanding of how new money is created.”
Banks must balance out the money taken out with money coming in at the end of each day, but they do not need any capital reserve apart from this. “Reserve ratios are old textbook model, has not applied in UK for twenty years.”
Bank staff have to meet sales targets for lending. These are the people deciding how much money to create. “The supply of money is determined by the demand of borrowers to take out loans and on how confident the banks are”. (Charles Goodheart).
Political choices have caused the crisis. Before 1975 housing booms and busts did not happen. Then tax subsidies kicked in. In the early 70s banking was deregulated and mortgage funding flooded into the market. In 1971 The Competition and Credit Control Act freed bank lending, removing cash reserve requirements, liquidity requirements, and all controls on credit. This was followed by the Big Bang deregulation in 1986, demutualisation of building societies in the 80s and 90s, deregulation of housing finance, and the Maastricht Treaty 1992 removed power of money creation from nation states, removed all measurement and monitoring of money and credit allocation.
It’s a trap – if we all pay down our debt and don’t take out more loans, this will slow the system causing recession and unemployment.
Debt based money causes rising house prices (Toby Lloyd, Shelter):
The incentives for bank lending staff are to sell. They prefer to lend against collateral so tend to lend to house buyers. Because of this 92% of all UK bank lending is to house buyers for unproductive assets and only 8% to businesses for productive activity.
House prices reflect what people can be persuaded to borrow. The average house price is now 6 times average earnings. A whole generation is priced out of the market. Rents are increasing above affordable threshold of 35% of average earnings. Two thirds of households are owner occupiers but many are under enormous debt burdens.
Debt based money increases inequality:
There is never enough money in the system to pay back all the debt plus interest. The system creates the boom bust cycle. A stable money supply would stop this.
There is far more poverty in the system than you would have if banks did not create the money. Some people inevitably default.
There are redistributions (interest payments) from the poor to wealthy owners of capital, from the rest of the UK to London where the financial sector and wealthy owners of capital are clustered, and from the productive economy to the financial sector. Everyone goes into debt and has to repay. The misallocation of capital into housing and away from productive assets increases structural unemployment and blocks economic development.
Debt based money worsens environmental degradation (Beth Stratford, Friends of the Earth):
The debt based nature of money makes us structurally dependent on growth. If the economy is not moving forward at a rate of around 2%, it becomes unstable, like a bike. If the money supply were fixed there would be no way to pay the interest on debt. This leads to perpetual exponential growth being a requirement of the banking system. Growth does not create greater wellbeing and contributes to environmental degradation.
Solutions? (Michael Meacher, MP)
- Separate retail from investment arms. Basel3 capital ratios have increased to 10%, but these are not adequate to control the banks and won’t come in for years.
- Control of the money supply must come back into public domain.
- Credit controls (these are used by successful countries),
- Control financial instruments and discourage offshore hedge funds
- Give priority to productive sectors in allocating finance
- Increase the powers of public institutions to control credit in order to avoid busts
- Reconsider Maastricht: governments should create money (avoids interest payments, restores democratic accountability for money)
- The public sector must create jobs, improve infrastructure
- Set up special banks for research and development, green technology, mortgages
Useful refs:
- Where does money come from? New Economics Foundation: http://www.neweconomics.org/publications/where-does-money-come-from
- Creating New Money by James Robertson and Joseph Huber (free download) http://www.jamesrobertson.com/
- The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics Michael Rowbotham
- Centre for the Advancement of the Steady State Economy. http://steadystate.org/
