Money is power. By giving banks the power to create money we hand over incredible economic influence to banking directors who’s tendency is to prioritise corporate profit and personal wealth over the stability of the economy. They decide where in the economy this new money is directed, most of it going into mortgages, credit cards and financial speculation. Mike Edwards investigates.
Day by day, more and more of us understand that big banks are at the heart of the UK’s failing economic model and have an unhealthy influence over our political system. But still too few of us understand exactly how the banks have become so powerful and why they are so toxic. Banks and finance didn’t just take control of our economy and society out of nowhere. So how have our banking institutions and “too big to jail” bankers come in to being? The major contributing factor is that they have been allowed to take control of the power to create money. Most people don’t understand this simple fact – to our great peril.
Our MPs have the power to change the current situation, but worryingly, even they are mostly in the dark about this issue. A recent survey found that nearly three quarters of UK MPs, (71%) answered incorrectly when asked about the technical workings of our monetary system. Little wonder: it is 170 years since a debate was held in Westminster about the rules that govern money creation. This is about to change. In a few days time, on Thursday 20th November, for the first time since 1844, MPs will attend a three hour debate about ‘Money Creation and Society’.
If you – unlike our MPs – are up to speed with the mechanics of money creation and the economic, political, social and environmental consequences of the current process, you might want to skip the next few paragraphs and read about how we can take advantage of the up coming parliamentary debate. To find out how three basic factors have combined to create our banking industry and subordinate our political institutions to banking and The City of London, read on…
How is money created?
Three factors have combined to create our monetary system. Each factor, on its own, is not necessarily a problem, but combined they are a toxic mix. These three factors are: firstly, that almost all money is created as debt; secondly, that interest payments are owed on this debt (money), and; thirdly that private commercial banks currently have the power (and unwarranted privilege) to create almost all our money (debt). Sir Mervyn King, former Governor of the Bank of England, put it like this: “When banks extend loans to their customers, they create money by crediting their customers’ accounts.”
So, although money creation is governed by a highly complex patchwork of rules and regulations, in essence, as King makes clear, understanding our monetary system is remarkably simple. Essentially, money is created out of nothing by commercial banks making loans that must paid back with interest – that’s it! Simple!
The obvious catch twenty two here is that almost all money is debt plus interest. So each year we as a society have to take on more debt to pay previous years debts and interest.
What are the consequences of the way that money is currently created?
One obvious consequence is that the current monetary system leads to economic instability and a boom and bust economy. Or as Lord Adair Turner, former chairman of the UK’s Financial Services Authority (FSA), and former member of the Bank of England’s Financial Policy Committee pointed out in 2012, “The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money.”
What Turner failed to highlight however, is that under the current arrangements there are no effective ways to constrain banks’ creation of private credit – i.e., money. Detailed work by Ben Dyson, founder of the Positive Money campaign, and Andrew Jackson, at the New Economics Foundation, in their 2013 book, Modernising Money, clearly establish this fact.
Killing the golden goose
A second obvious consequence is the corporate take over of our high streets and monopolisation of almost every area of our lives. Put yourself in the shoes of a banker who has the power to create new money out of nothing and loan it to whoever he or she likes. The only thing you have to worry about is that the people you make the loans to, keep up with their interest payments – because if a significant number of people stop paying the interest payments, your bank becomes insolvent and eventually goes bust. You’ve killed your golden goose.
So who are you going to lend to?
You’re not going to lend to risky innovative businesses are you? Neither are you going to want to lend to small and medium size businesses that have to compete with each other, in case they go under.
The sensible and rational choice is to lend to big businesses to help them expand and monopolise local, regional and national markets. Big businesses that have a monopoly control can stifle competition, force prices up, force costs down and by doing so guarantee increasing profits to make their interest payments. It’s a sure bet. If you back a corporation and provide it with access to an almost unlimited supply of money it can do whatever it needs to push competition out and establish a monopoly position. This is not good for the rest of us because, as any economist worth his salt will tell you, jobs and innovation are created by small and medium size businesses that contribute to local economies, whereas, corporate monopolies drain wealth out of our communities and corrupt our political systems.
A third consequence is the mathematical inevitability (barring some well thought out and implemented tax regime) of increasing wealth inequality. This is because currently, the way that money is created transfers wealth, in the form of interest payments and profits, from the productive economy into the hands of bankers, their shareholders and their corporate partners. The evidence of this is there for all to see in the UK’s economic figures and in study after study of wealth distribution.
Distribution not growth
The key point here is that under the current monetary system, economic growth must be sustained at all costs to keep our banking institutions from collapse. The question of whether continued growth – or what kind of growth – is of benefit to society, is of almost no consideration.
Of course, it is true to say that economic growth has brought huge benefits to many. However, the real issue of our time is how to more equally distribute the huge amount of wealth that we have now accumulated, without further depleting the world’s natural resources.
Taking advantage of the up coming parliamentary debate
The up coming debate about ‘Money Creation And Society’, on Thursday 20th November, provides an opportunity to do something about our monetary system, hidden in plain sight, at the heart of our economy. For a start, just getting this topic on the agenda is a great achievement.
The Positive Money campaign suggests that we take this opportunity to educate our MPs by contacting them with the following important questions and suggesting that he or she tables them for debate.
These questions include:
Who should create money?
Should high-street banks have the effective right to create money every time they make a loan, given the recent consequences for the economy?
How should newly created money be used?
Do we want banks to have the power to create money when this leads to unaffordable housing and financial instability?
Should we have allowed the Bank of England to create £375bn with little scrutiny from parliament, and use this money to inflate financial markets? Were there better uses of this money?
Positive Money also suggest that you:
1) Invite your MP to the historic debate on money creation. You can do this in just 2 minutes using the link here.
2) Phone your MP. This is the quickest way to let them know the debate has been announced and find out if they are planning to go. You can simply phone the House of Commons switchboard on 020 7219 3000 and ask for your MP by name. You will be able to leave them a message or speak to a member of their staff.
3) Tweet your MP. Include the hashtag #sovereignmoney in your message so we can follow your conversation. You can find your MP’s twitter handle here – Remember to include their handle in your tweet. Here is an example tweet: Historic backbench debate ‘Money Creation and Society’ > http://ow.ly/DRxpd > @yourmpshandle will you be there? #sovereignmoney
4) Tell your friends, family and colleagues. We need as much support as possible. Share our campaign with your contacts via social media. Email them, or share this.
5) Watch the debate LIVE on Live Parliament TV. On Thursday 20th November you can watch the debate live online here. Approximate expected start of ‘Money Creation & Society’ debate is around 2pm.
For more information, Positive Money has also published a full briefing for the money creation debate that can be read here.
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