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Strip the private banks of the power of money creation

Banking trade screensThe House of Commons held a very important debate this last week on the creation of money, a process which the Big 4 banks have monopolised and thus privatised the money supply.   The abuse of this power over the last 3 decades has been enormous, and I used this debate to propose an entirely different system which would remove this power from the present banking cartel in order to ensure that what was maximised was the national interest, not the banks’ own selfish interests.   I said this:

On lending to businesses, the experience that we have had in the past half-decade has been very unsatisfactory. Under a Sovereign Monetary System, however, the central bank would be empowered to create money for the express purpose of that funding role. The money would be lent to banks with the requirement that the funds were used for productive purposes, whereas lending for speculative purposes—for example, to purchase pre-existing assets, either financial or property—would not be allowed. The central bank could also create and lend funds to other intermediaries—the hon. Member for Wycombe referred to this—such as regional or publicly owned business banks, which would ensure that a floor could be placed under the level of lending to businesses, which would be a great relief to British business, guaranteeing support for the real economy.

To avoid misunderstanding, I should add that within the limits imposed by the central bank on the broad purposes for which money may be lent, lending decisions would be entirely at the discretion of the lending institutions, not of the Government or the central bank.

I believe that a Sovereign Monetary System offers very considerable advantages over the current system. First, it would create a better and safer banking system because banks would have an incentive to take lower levels of risk, as there would be no option of a bail-out or rescue from taxpayers and thus moral hazard would be reduced. Secondly, it would increase economic stability because money creation by banks tends to be pro-cyclical, as I explained, whereas money creation by the central bank would be counter-cyclical. Thirdly, sovereign money crucially supports the real economy, whereas under the current system 83% of lending does not at present go into productive investment. I underline that three times.

Photo of Ann McKechinAnn McKechin (Glasgow North, Labour)

My right hon. Friend said that the aim would be to reduce risk and for banks to be more cautious, but if we are to encourage innovation in manufacturing, would we not require an investment bank at state level that could fund the riskier levels of innovation to ensure that they get to market, because they are not at the point where they would be commercially viable?

Photo of Michael MeacherMichael Meacher (Oldham West and Royton, Labour)

That is an extremely important point and, again, I strongly support it. The current Secretary of State for Business, Innovation and Skills has been struggling to introduce a Government-supported business investment bank and has recently announced something along those lines. I think that should be greatly expanded. The book by Mariana Mazzucato, which I hope most of us have read, The Entrepreneurial State, shows the degree to which funding for major innovation, not just in this country but in many other countries which she cites, has been financed through the state because the private sector was not willing to take on board the risk involved. One understands that, but one does need to recognise that the role of the state is extremely important, and under a Labour Government I would like to see something like this being brought in.

Photo of Ian MurrayIan Murray (Shadow Minister (Business, Innovation and Skills); Edinburgh South, Labour)

My right hon. Friend makes a tremendous case for money creation and what we should be considering in this House, but I wonder whether there is also a cultural issue. Many businesses and lenders tell me that there is a cultural problem in the United Kingdom for businesses, particularly entrepreneurial businesses that we have heard about from my hon. Friend Ann McKechin, with regard to giving away equity rather than creating debt—funding businesses through equity rather than debt. Other countries throughout Europe that are incredibly successful at giving away equity rather than creating debt have much more growth in their entrepreneurial economy.

Photo of Michael MeacherMichael Meacher

That is perfectly true, and my hon. Friend makes an important point. The proposals that I am making would support that. There is a very different climate in this country, largely brought about by the churning in the City of London where profits have to be increased or reach a relevant size within a very short period, such as three or six months. Most entrepreneurial businesses cannot possibly produce a decent profit within that period, so the current financial system does not encourage what my hon. Friend wants. These proposals would make money creation available to those we really want to support much more fully than at present.

Fourthly, under the current system, house price bubbles transfer wealth, as we all know, from the young to the old and from those who cannot get on the property ladder to existing house owners, which increases wealth inequality, while removing the ability of banks to create money should dampen house price rises and thus reduce the rate of wealth inequality.

My fifth and last point, which I think is very important, is that sovereign money redresses a major democratic deficit. Under the current system, around just 80 board members across the largest five banks make decisions that shape the entire UK economy, even though these individuals have no obligation or mandate to consider the needs of society or the economy as a whole, and are not accountable in any way to the public: it is for the maximisation of their own interests, not the national interest. Under Sovereign Money, the money creation committee would be highly transparent—we have discussed this already—and accountable to Parliament.

For all those reasons, the examination of the merits of a Sovereign Monetary System is now urgently needed, and I call on the Government to set up a commission on money and credit, with particular reference to the potential benefits of sovereign money, which offers a way out of the continuing and worsening financial crises that have blighted this country and the whole international economy for decades.

Image Credit: 123RF.com  Stock Photo ID : 11147445 by Thomas Becker 

2 Comments

  1. Barry Ewart says:

    Interesting points and I also believe we need more democratic socialist social enterprise. Neo-Liberalism just wants to maximise profits and I would argue at the expense of quality. The rich and powerful simply want to make as much as possible by giving as little as possible in return. Perhaps as Castro is reported to have once said to Hugo Chavez (we should) “just do socialist things.” Take some airlines for example, they cram in as many passengers as possible to make maximum profits when a democratically publicly owned airline (with staff electing qualified boards) could have less seats with more comfort for passengers and at reasonable prices and we could even have creches in the sky – they would make a smaller return but would offer a better travel experience and service plus quality. I recently had a tour of a brilliant new concert arena which is leased to a private company but ticket prices are sky high (often pricing out ordinary families) and it is £5 a pint of lager (the only choice) in the bars. A democratic socialist social enterprise/cooperative could offer cheaper tickets and real ale at £3 a go! We should also have more democratic public ownership in general (there is nothing socialist about nationalisation) and again with staff electing the qualified boards and communities having a say but whilst rail and mail could be allowed to break even, publicly owned public utilities could pay a community dividend (like the old Coop dividend) which could be taken as money or offset against bills (which could help to address fuel poverty). People would feel that they were theirs and they would be more nailed down if Right wing carpet baggers tried to come for them. We should also have free public transport which as well as being more efficient would also help the environment, working people, transport staff, and the transport poor. So perhaps democratic socialist need to focus on service and quality and use our imaginations – I think it is time for democratic socialist social enterprise.
    Yours in solidarity.

  2. Mitchell & Goldsmith in UK “Great Money Creation Debate” http://youtu.be/bfR5kBcJS24
    Jct: The best of of Austin Mitchell and Zac Goldsmith from the “Great Money Creation Debate” in the UK Parliament on the most important issue on the planet, who controls creation of our credit, private banks or government utility, the whole debate I posted with commentary at http://youtu.be/k6bLZl697fY

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