Money creation should only be used in the public interest


The same banks that caused the financial crisis currently have the power to create 97% of the UK’s money. They’ve used this power recklessly, putting most of the money they create into property bubbles and financial markets. And now they’re back to their old ways.

We need a change. The power to create money should only be used in the public interest, in a democratic, transparent and accountable way. The 1844 law that makes it illegal for anyone other than the Bank of England to create paper money should be updated to apply to the electronic money currently created by banks.

Banks create new money, in the form of the numbers (deposits) that appear in bank accounts, through the accounting process used when they make loans. In the words of the Bank of England:

“When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.” (Bank of England Quarterly Bulletin, 2014 Q1)

Conversely, when people use those deposits to repay loans, the process is reversed and money effectively disappears from the economy. As the Bank of England describes:

“Just as taking out a loan creates new money, the repayment of bank loans destroys money. … Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.” (Bank of England Quarterly Bulletin, 2014 Q1)

When new money is created, it should be used to fund vital public services or provide finance to businesses, creating jobs where they’re needed, instead of being used to push up house prices or speculate on the financial markets.


Creating a Sovereign Monetary System


This proposal for reform of the banking system explains, in plain English, how we can prevent commercial banks from being able to create money, and move this power to create money into the hands of a transparent and accountable body.


It is based on the proposals outlined in Modernising Money (2013) by Andrew Jackson and Ben Dyson, which in turn builds on the work of Irving Fisher in the 1930s, James Robertson and Joseph Huber in Creating New Money (2000), and a submission made to the Independent Commission on Banking by Positive Money, New Economics Foundation and Professor Richard Werner (2010).

Taking the power to create money out of the hands of banks would end the instability and boom-and-bust cycles that are caused when banks create too much money in a short period of time. It would also ensure that banks could be allowed to fail without bailouts from taxpayers. It would ensure that newly created money is spent into the economy, so that it can reduce the overall debt burden of the public, rather than being lent into existence as happens currently.

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Problem: Around a third of the money created by banks goes towards mortgage lending (and a further significant proportion goes towards commercial property). This creation of money to buy pre-existing assets (i.e. houses in limited supply, and the underlying land which is in fixed supply) leads to prices rising. Rising house prices make banks even more confident about lending further amounts for mortgages (since rising prices mean that they are unlikely to lose money even in the event of a default and repossession). This becomes a highly pro-cyclical process, leading to house price bubbles.

Sovereign money as a solution: There is a need for a number of policy and tax reforms to address the problem of unaffordable housing (particularly in the UK). However, removing the ability of banks to create money will remove much of the fuel for house price inflation. House prices that rise at a lower rate than growth in wages will mean that housing becomes more affordable over time.


Problem: House price bubbles have the effect of transferring wealth from the young to the old, and from those who cannot get on the property ‘ladder’ to those who can. This is a significant channel through which wealth inequality is further increased.

Furthermore, the fact that the nation’s money supply must be borrowed from banks means that we are having to pay interest on the entire money supply. Household income data surveys show that this has the effect of transferring income from the bottom 90% of the population to the top 10%. (See Chapter 5 of Modernising Money for further details).

Sovereign money as a solution: As discussed above, removing the ability of banks to create money should have a dampening effect on house price rises, which in turn will reduce the rate of growth in wealth inequality.

The creation, by the central bank, of money that has no corresponding interest-bearing debt, means that there is a stock of money that is effectively ‘debt free’, and no need for members of the public to borrow simply to ensure that there is money available in the economy. The resulting lower levels of private debt will mean that less interest is paid overall, and therefore less income is transferred to the top 10% of the population. Again, this will slow the rate of growth in inequality.




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