Thursday, 31 May 2012

Democratise the money supply to save the planet

It seems like nowadays that every person and every country in the world is in debt. Ever since the financial crisis in 2007-8 which began with the collapse of investment bank Lehman Brothers, world leaders have been frantically trying to save other private banks and financial institutions from failing by pumping trillions of dollars onto their balance sheets and the wider economy. In the United Kingdom, Gordon Brown spent a total of over £1 trillion, which was the same as 31% of GDP in March 2010. In the United States of America, the government at the time committed an incredible £9 trillion to support Wall Street (source New York Times). By socialising the losses of the private finance sector, there are now sovereign debt crisis across Europe, which threatens the membership of the Euro currency and even the European Union itself.

Which begs the question - why did we have to spend all this money, which would have been better used on preventing the looming catastrophes of peak oil and runaway climate change? What makes private banks so special?

To cut a long story short, we are in this debt crisis because of our deeply flawed banking and monetary system. In 2012, private banks create 97% of the money in the economy as debt, whilst the government only creates 3% in the form of coins and paper money. Until this system is fixed, we will continue to spiral further and further into a debt crisis, instead of focusing on fixing the environmental crisis and other problems facing our country.

In the United Kingdom, the publicly owned Bank of England has a monopoly on creating coin and paper money, which it prints each year and circulates into the economy. This is good news, as the Bank of England, and by extension the Treasury, earns 'seigniorage', the profit difference between the cost of the paper and its value (i.e. twenty pounds for twenty pound note). In 2008, the profit to the Treasury from this was £2.33 billion, money which gets spent on public services or reducing tax. 

However, the Bank of England does not have a monopoly on creating electronic money, which private banks can legally create every time a customer opens a current account with them or applies for a mortgage. As Martin Wolf, the chief economics editor at the Financial Times puts it, 'The essence of the contemporary monetary system is the creation of money, out of nothing, by private banks’ often foolish lending.'

This is bad news! Private banks are owned by private shareholders, and are run for profit. It isn't in their interests to make sure that money is spent on productive businesses, good jobs, environmentally friendly projects, etc. It's in their interests to create as much money as they can and invest it in the most profitable sectors they can, which tend to be property (hence the housing bubble and subsequent crash) and environmentally destructive but very lucrative projects such as coal power plants, oil rigs, the tar sands projects in Canada and other nefarious schemes. As customers, we have no say over where our savings, or what should be *our* money supply, is invested.

Luckily, there is a solution. The monetary reform campaigning group Positive Money have been raising this issue for several years, and have even drafted legislation which would take the creation of money away from private banks and put it back under the democratic control of the government. You can learn more about this issue on their website, as well as on this one hour documentary called '97% Owned'.

Even better, as you are (hopefully!) a member of the most democratic political party in England & Wales, you can make it Green Party policy today to reform this system. I have submitted a motion to SOC to amend current Green Party policy EC661 to the following motion:


97% of all money in the UK is created by banks. Our government prints bank notes and coins, but private banks create electronic deposit accounts. This state of affairs drives unsustainable growth and is the root of our debt crisis. This is damaging and unnecessary, and should be changed.

Amend Policies for a Sustainable Society EC661 in its entirety with the following motion:


The Green Party will remove the ability of banks to create money and lodge the power and responsibility of creating new money solely with the state. New money will be created when necessary by the Bank of England, as determined by the politically-independent Monetary Policy Committee, and credited to the Government for use as Parliament sees fit (see EC676). Banks will not be able to lend money in customer's current accounts, effectively moving to a full reserve banking system. Customers current account money will be 100% safe, as opposed to the current fractional reserve banking system where we have to bail out banks. Banks will be permitted to lend money in savings accounts that they hold on deposit for a fixed term, but only for the duration of that fixed term or notice period. The emphasis in monetary policy will be to control and redirect the creation of money towards socially and environmentally sound areas of the economy, and away from unsustainable and consumption-driven areas.

If you want to support this motion, please email today and write something like:

"I would like to support the motion below proposed by Daniel Key. 

Text of motion (above)

Local Party:
Membership Number (if you have it)"

Please do this ASAP and ask your colleagues/friends to do this, and together we can regain control of our money.

Please use the comments box below to ask any questions you may have about this issue or the policy motion.

Written by Daniel Key
Haringey Green Party


One of 99% said...

It's about time !! I'm really pleased to support this motion . I hope it will also help us develop a sound and coherent range of economic policies which will help us convince the electorate that 1, they don't have to put up with being ripped off by the banking elite and 2, that The Green Party are a very real credible alternative. See you at conference !

Anthony Smith said...

"Banks will be permitted to lend money in savings accounts that they hold on deposit for a fixed term, but only for the duration of that fixed term or notice period."

Does that mean banks will still be able to "create money" as they do now, but just not so much of it?

Anonymous said...

Hi Anthony,

Under these proposals, private banks wouldn't be able to create money, as all the money deposited in current accounts with them would be available at any time to the customer, effectively moving to a full reserve banking system in the UK.

The money in saving accounts would be held for a fixed term, say 3 years, and at the end of those three years the bank would return the money to the customer plus interest. They could then use this money to fund the construction of an airport, or a car manufacturer, or a wind turbine manufacturer - but they would have to ask your permission before investing it with a company/government/etc. This way you would be given more democratic influence over how your money is used. The interest on this money would come from the profit of the investment.

I hope that makes sense! I'm hosting a screening of 97% Owned at Passing Clouds on 1st July (see details here ), so if you would like to find out more, please come along!

Anthony Smith said...

Hi Dan,

Thanks for the reply. I think that's a "yes" to my question, but do correct me if I'm wrong.

If I put £1000 in the bank, then I think I have £1000. But then the bank lends my £1000 to someone else, who also thinks they have £1000. So now £1000 + £1000 = £2000 "exists" (at least on my bank statement, and in the wallet of the borrower). I think that is what you mean when you say banks "create money".

Your proposals sounds much more stringent on how banks can "create money", but in the example you give, I still think I have £1000 in my savings account, and the company still thinks it has £1000 that the bank has leant it (for a fixed period of 3 years). So I don't see how you can say that no money is being "created".

Or are you basically saying that banks should become stock brokers? E.g., if the investment of my savings results in a loss, would the amount in my savings account decrease? (I don't think that would be a bad thing, by the way - I don't like the current system where the saver get the reward but the tax payer carries the risk.)

Anonymous said...

Your point at the end about stockbrokers is one way to describe the new situation - people who put money into a savings account (under Positive Money's proposals) earn interest BUT also share the risk with the bank. So, if the investment in the airport construction is unprofitable because of building delays, lack of passenger demand, lack of airline demand, new government legislation, etc., then both the bank AND the customer who had put money in the savings account could lose some money.

Although some people may be put off by having to share this risk when they don't have to in the current system, bear in mind that we have to provide bank deposit protection to the tune of £100 billion a year, as well as bank bailouts when things go wrong. This money should be used on dealing with climate change and other more pressing issues.

Your first point about banks still 'creating money' - well, the way I interpret it, because there would be only one fixed set amount of money in the savings account, which the customer couldn't touch while the bank was investing it in a company, then they aren't creating money like in the first example, where we have the "money multiplier effect" of fractional reserve banking, plus the new freedom of banks to create digital money first and then find reserves later.

Anthony Smith said...

Thanks for that. Okay, I think the essence of your proposal is (1) full-reserve banking for current accounts, and (2) abolish deposit protection for savings accounts. I think that would be enough stop people thinking that "£1000" written on a statement for a bank savings account is the same as £1000 of money.

Anonymous said...

Would any one 'investing' their money have a say in the type of project of investment that their money is used for ?