Samuel Britten in the FT on Thursday described an early paper by Milton Friedman which examined a 'Framework for a stable economy': "budget deficits would be financed entirely by the creation of money by the Fed and surpluses used to retire money. This would best be accomplished by adopting the 100 per cent reserve proposal for banks, “thereby separating the depositary from the lending functions of the banking system”."
The following day John-Paul Flintoff wrote on The Times' blog: "With the news dominated this week by ongoing cash shortages, rising joblessness and the need to protect the benefit system against fraud, I'm wondering if the time has come for a Citizens' Income."
While monetary reform isn't Green Party policy (yet - some of us are quite keen), it is radical and has some great supporters. I remain gobsmacked that Greidman considered it though.
Citizen's income is Green Party policy and is a fantastic idea. Paying every citizen a single income that they can top up with income from work removes the stigma and benefit trap associated with the current system. It is cost neutral to the overall tax burden (the tax that you pay gets repaid as CI - obviously if you are on a higher income you'll lose a bit and on a lower income you'll gain a bit). Pensioners should get more than the basic CI level reflecting the lower chances that they con top up their income with work.
Green Party campaigner in Kent. Also a nurse, academic, former manager, writer, Druid, husband and father...
Showing posts with label monetary reform. Show all posts
Showing posts with label monetary reform. Show all posts
Saturday, 6 December 2008
Friday, 17 October 2008
Nationalising money
The monetary system is surprisingly simple yet is shrouded in the mystery of 'financial instruments' to make it seem inaccessible.
All money is created by debt in a method akin to double entry book keeping. When a loan is taken out the bank opens a 'loan' account for that person, debits it with a sum of money (the total loan value) and pays the money into the person's current account allowing them to spend the money. Interest is debited from the loan account each month and credited to the bank as payment, creating further money to enter circulation.
Cash is created in the same way with notes being printed and entering circulation backed by a debit in an account which is in turn backed by government securities. Whether money is created virtually as a figure in an account or as cash, it is balanced by a debit to an account. The Bank of England prints notes and puts an equivalent debit to its cash account, when high street banks need cash they debit their cash account and credit the BoE, the BoE credits its cash account (i.e. reducing the negative balance) and hands the cash to the high street bank. Cash is simply another form of credit which is created through, and backed, by debt.
**What should happen**
1. The power of injecting new money into the economy should be transfered from commercial banks to the Bank of England, with commercial banks banks taking on a credit broker role for customers wanting new loans.
2. Government borrowing should be transferred to the Bank of England.
3. Electronic money should be made legal tender making its creation by anyone other than govt akin to counterfeiting.
4. The Bank of England should control the amount of money it lends to commercial banks to contract or expand the economy.
Government borrowing should be replaced by Primary Credit - credit that forms the money supply. Primary Credit is a simply loan account created by the central bank that attracts no interest and requires no repayment (one account is debited and another credited - the credited account is the money that enters the economy). This is akin to the process by which cash is created. This Primary Credit required no interest repayment by government, which currently pays around £30 billion on the government borrowing (at 2007). Primary Credit can provide a stable constant in the monetary system.
Primary Credit would eventually provide the total money for the economy to function. Retail banks stop creating their own loans based on customer deposits (the Fractional Reserve system) and starts to act as a credit broker only, by borrowing money from the Bank of England and brokering it to businesses and people.
The level of current retail bank loans are gradually wound down as they are repaid or could be transfered to the Bank of England in one block. Either way the money supply stays constant (but could be increased or decreased at the government's request).
Electronic money becomes legal tender. Any bank lending money that it has not brokered from the Bank of England or doesn't already own would be guilty of counterfeiting.
The amount of money in the system is then easily controlled through the amount of Primary Credit. If the government increases the Primary Credit the money supply increases; if it repays the Primary Debt from a higher level of taxation than spending, the money supply decreases.
The government holds the strings on credit - banks have to borrow from the Bank of England rather than through interbank lending... any credit crunch would be the fault of the gov't and within the gift of the gov't to resolve.
I have put this on my new wiki (these are great for setting out one's thoughts).
Much of this is adapted from Huber and Roberson's book: Creating New Money
All money is created by debt in a method akin to double entry book keeping. When a loan is taken out the bank opens a 'loan' account for that person, debits it with a sum of money (the total loan value) and pays the money into the person's current account allowing them to spend the money. Interest is debited from the loan account each month and credited to the bank as payment, creating further money to enter circulation.
Cash is created in the same way with notes being printed and entering circulation backed by a debit in an account which is in turn backed by government securities. Whether money is created virtually as a figure in an account or as cash, it is balanced by a debit to an account. The Bank of England prints notes and puts an equivalent debit to its cash account, when high street banks need cash they debit their cash account and credit the BoE, the BoE credits its cash account (i.e. reducing the negative balance) and hands the cash to the high street bank. Cash is simply another form of credit which is created through, and backed, by debt.
**What should happen**
1. The power of injecting new money into the economy should be transfered from commercial banks to the Bank of England, with commercial banks banks taking on a credit broker role for customers wanting new loans.
2. Government borrowing should be transferred to the Bank of England.
3. Electronic money should be made legal tender making its creation by anyone other than govt akin to counterfeiting.
4. The Bank of England should control the amount of money it lends to commercial banks to contract or expand the economy.
Government borrowing should be replaced by Primary Credit - credit that forms the money supply. Primary Credit is a simply loan account created by the central bank that attracts no interest and requires no repayment (one account is debited and another credited - the credited account is the money that enters the economy). This is akin to the process by which cash is created. This Primary Credit required no interest repayment by government, which currently pays around £30 billion on the government borrowing (at 2007). Primary Credit can provide a stable constant in the monetary system.
Primary Credit would eventually provide the total money for the economy to function. Retail banks stop creating their own loans based on customer deposits (the Fractional Reserve system) and starts to act as a credit broker only, by borrowing money from the Bank of England and brokering it to businesses and people.
The level of current retail bank loans are gradually wound down as they are repaid or could be transfered to the Bank of England in one block. Either way the money supply stays constant (but could be increased or decreased at the government's request).
Electronic money becomes legal tender. Any bank lending money that it has not brokered from the Bank of England or doesn't already own would be guilty of counterfeiting.
The amount of money in the system is then easily controlled through the amount of Primary Credit. If the government increases the Primary Credit the money supply increases; if it repays the Primary Debt from a higher level of taxation than spending, the money supply decreases.
The government holds the strings on credit - banks have to borrow from the Bank of England rather than through interbank lending... any credit crunch would be the fault of the gov't and within the gift of the gov't to resolve.
I have put this on my new wiki (these are great for setting out one's thoughts).
Much of this is adapted from Huber and Roberson's book: Creating New Money
Thursday, 16 October 2008
John Humphries learns how money is created
Three interviews with financial experts on Radio 4 this morning. The first with John Humphries was excellent. The interviewee explained, to the astonishment of JH, that it is commercial banks that create money, not the government.
Many of us have known this for some time (I worked in banking as my first career), but it is only now that people are really starting to question what is happening in our economic system, how it works and why we are in such a mess.
Banks simply create money by lending out money deposited with them while retaining the account balances. If I pay in £100, they credit my account and can lend this money out to someone else who spending it, the money is paid in again and the cycle continues with the account balances and loans getting bigger and bigger. The process is fractional reserve banking and has been in operation for 500 years.
The fact that private banks have created 97% of the £1.7 trillion in the UK economy helps explain some of the problems. If I printed money, I'd be arrested - somehow banks get away with it. Surely it is the government's role to create money.
"The process of money creation is so simple, the mind is repulsed" - JK Galbraith
"What is the crime of robbing a bank compared with the crime of founding one?" - Bertolt Brecht
Many of us have known this for some time (I worked in banking as my first career), but it is only now that people are really starting to question what is happening in our economic system, how it works and why we are in such a mess.
Banks simply create money by lending out money deposited with them while retaining the account balances. If I pay in £100, they credit my account and can lend this money out to someone else who spending it, the money is paid in again and the cycle continues with the account balances and loans getting bigger and bigger. The process is fractional reserve banking and has been in operation for 500 years.
The fact that private banks have created 97% of the £1.7 trillion in the UK economy helps explain some of the problems. If I printed money, I'd be arrested - somehow banks get away with it. Surely it is the government's role to create money.
"The process of money creation is so simple, the mind is repulsed" - JK Galbraith
"What is the crime of robbing a bank compared with the crime of founding one?" - Bertolt Brecht
Sunday, 12 October 2008
Complications
The economic crisis continues to exercise minds as much in the Green Party as every where else. Economics, we seem to be told, is seems is a vast, intangible array of concepts that ordinary people can't get to grips with and best left to the experts. Hmm... hasn't that led us to where we are now? I think many of the concepts are actually rather easy to understand but banksters (and I used to be one...) have invented a whole host of financial instruments with complicated names so that they can create more money.
This short film is fairly useful in its analysis of money, however I think there is a major flaw in one part of its thinking, I think it completely misunderstands what interest is and does. I will come back to that in later blogs and in a wiki I've started to create.
In the meantime, the next wave of problems just crashing down on us is Credit Default Swaps. The fallout from Lehman Brothers means that debts of $360 billion are likely to appear on other banks books very shortly, washing away their money. A bit like a tsunami, or even lots of them.
This short film is fairly useful in its analysis of money, however I think there is a major flaw in one part of its thinking, I think it completely misunderstands what interest is and does. I will come back to that in later blogs and in a wiki I've started to create.In the meantime, the next wave of problems just crashing down on us is Credit Default Swaps. The fallout from Lehman Brothers means that debts of $360 billion are likely to appear on other banks books very shortly, washing away their money. A bit like a tsunami, or even lots of them.
Sunday, 7 September 2008
Nationalising money creation
Hopefully tomorrow I shall be proposing a motion at Green Party conference. The motion is radical and controversial, it amends our detailed Manifesto for a Sustainable Society. It has had two hefty challenges to get through so far at conference and seems to have passed the test. As long as conference doesn't run out of time it will be discussed in full in a plenary tomorrow afternoon.
It is not perfect (no motion or policy ever is), and given the discussions of the weekend so far I have some great ideas on how to improve it.
This conferences notes with concern the recent developments of financial crises involving the 'credit crunch' due to accumulating debts and the exclusive dependence on debt to maintain output and employment within the economy.
This situation arises from the undue influence that the creation of such debt places on the banking and financial sector. This conference further notes that the amount of money created by the state has now reduced to around 3% of Sterling M4, and that this proportion has fallen from around 40% in the immediate post-war years. A return to the proportions of state seignorage prevailing in that period would be a means of reducing the dependency upon debt to maintain economic activity.
Delete and replace EC662 with:
EC662 The current banking system enables commercial banks and financial institutions to exert an unacceptably large influence on the economy as a whole due to their virtual monopoly on money creation. These commercial banking institutions work to a purely commercial agenda in which the desirability of making loans is assessed only in terms of its financial viability to the lenders. The proportion of state seignorage will be increased to 40% to bring it in line with post-war years enabling a greater ability to diret money as required in EC661 and to give greater financial stability to the economy.
------------------
EC661 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.
EC662 The current banking system enables commercial banks and financial institutions to exert an unacceptably large influence on the economy as a whole. These commercial banking institutions work to a purely commercial agenda in which the desirability of making loans is assessed only in terms of its financial viability to the lenders.
EC663 The banking system should be largely brought under democratic control, preferably at a local level. This will allow the process to work in the best interests of the community as a whole, rather than principally in the interests of commercial banks and their shareholders.
EC664 The Bank of England will continue to be the institution for the regulation of the national currency and the setting of base interest rates. However, it will not focus on narrow economic indicators such as the rate of inflation, but instead will take a broader view on the impact of its decisions on the economy as a whole. Final decisions on the setting of base interest rates will be made by a democratically accountable committee made up of representatives selected from the different regions of the country.
EC665 In order to help bring about the democratisation of the banking system, and in pursuit of our policies to support the growth of local economies, a network of local Community Banks will be established. These will be democratically accountable non-profit-making trusts, which will be able to provide low-cost finance both at district and regional levels. Any operating surplus arising from these Community Banks will be reinvested in their local communities. Community Banks will be empowered to create credit in the same way that commercial banks currently do, and will be given favourable conditions for doing so by the central bank. They will also be able to create their own local currencies, to operate alongside the national currency, where this is supported by the local community.
EC666 In order to bring about a more socially equitable society, it is important that poorer citizens have access to affordable credit, which can give them an opportunity to increase their basic living standards. Alongside Community Banks, measures to help facilitate this will include the promotion and support of credit unions and micro-credit schemes in which small groups of people cooperate to provide guaranteed small loans to each other.
It is not perfect (no motion or policy ever is), and given the discussions of the weekend so far I have some great ideas on how to improve it.
This conferences notes with concern the recent developments of financial crises involving the 'credit crunch' due to accumulating debts and the exclusive dependence on debt to maintain output and employment within the economy.
This situation arises from the undue influence that the creation of such debt places on the banking and financial sector. This conference further notes that the amount of money created by the state has now reduced to around 3% of Sterling M4, and that this proportion has fallen from around 40% in the immediate post-war years. A return to the proportions of state seignorage prevailing in that period would be a means of reducing the dependency upon debt to maintain economic activity.
Delete and replace EC662 with:
EC662 The current banking system enables commercial banks and financial institutions to exert an unacceptably large influence on the economy as a whole due to their virtual monopoly on money creation. These commercial banking institutions work to a purely commercial agenda in which the desirability of making loans is assessed only in terms of its financial viability to the lenders. The proportion of state seignorage will be increased to 40% to bring it in line with post-war years enabling a greater ability to diret money as required in EC661 and to give greater financial stability to the economy.
------------------
EC661 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.
EC662 The current banking system enables commercial banks and financial institutions to exert an unacceptably large influence on the economy as a whole. These commercial banking institutions work to a purely commercial agenda in which the desirability of making loans is assessed only in terms of its financial viability to the lenders.
EC663 The banking system should be largely brought under democratic control, preferably at a local level. This will allow the process to work in the best interests of the community as a whole, rather than principally in the interests of commercial banks and their shareholders.
EC664 The Bank of England will continue to be the institution for the regulation of the national currency and the setting of base interest rates. However, it will not focus on narrow economic indicators such as the rate of inflation, but instead will take a broader view on the impact of its decisions on the economy as a whole. Final decisions on the setting of base interest rates will be made by a democratically accountable committee made up of representatives selected from the different regions of the country.
EC665 In order to help bring about the democratisation of the banking system, and in pursuit of our policies to support the growth of local economies, a network of local Community Banks will be established. These will be democratically accountable non-profit-making trusts, which will be able to provide low-cost finance both at district and regional levels. Any operating surplus arising from these Community Banks will be reinvested in their local communities. Community Banks will be empowered to create credit in the same way that commercial banks currently do, and will be given favourable conditions for doing so by the central bank. They will also be able to create their own local currencies, to operate alongside the national currency, where this is supported by the local community.
EC666 In order to bring about a more socially equitable society, it is important that poorer citizens have access to affordable credit, which can give them an opportunity to increase their basic living standards. Alongside Community Banks, measures to help facilitate this will include the promotion and support of credit unions and micro-credit schemes in which small groups of people cooperate to provide guaranteed small loans to each other.
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