Photos by Cintia Rezende / Positive Money.
Local currencies for local economies. Since the launch of the Bristol Pound there can be no doubt that it’s been a tremendous success in raising awareness of shopping local, supporting independent retailers and strengthening connections between local businesses and people in Bristol. But what about the national economy?
In any realistic vision of the future there will always be a practical need for a national currency. What that currency might look like is a question monetary reform campaign group Positive Money have been thinking about since they launched their campaign in 2010.
The problem with how we issue money
The crux of the problem, according to Positive Money, lies in in the way we let our money be created – not just in the UK but all over the world.
Currently private banks actually create a staggering 97% of our money supply here in the UK – leaving just 3% to be created by the Bank of England as physical notes and coins. If you think this sounds a bit like being allowed to have a printing press in your spare room, you wouldn’t be far wrong. But there is a catch.
Money as debt
Private banks can’t just credit their own accounts, they can only create new money as debt; meaning they have to make loans to make money. Contrary to popular belief and urban myth, when you go in and apply for a new mortgage, the bank manager isn’t checking his system to see if he’s got that money in the vault to lend you, he’s simply typing new numbers into your bank account – to be repaid with interest.
Providing you don’t default on your mortgage, this interest is pure profit for the bank – since they should already have at least some money in the proverbial vault to cover the risk of potential losses. Set up in this way, our money creation system just incentivises banks to create ever more money – and ever more debt.
The recent government announcement that the UK economy has started its inevitable slide towards a triple dip recession is testament to how serious the problem with our monetary system really is.
Modern banking system: 19th century laws
Sitting in a packed London hall at this year’s conference and listening to Director and Founder of Positive Money Ben Dyson explain all this, it’s impossible not to wonder how policymakers didn’t see this problem coming a country mile off. Turns out, they did.
Ben tells us that way back in the middle of the 19th Century policymakers actually passed a law prohibiting banks from creating new bank notes. The problem? Policymakers from the 1840’s didn’t foresee the rise of cheque books and internet banking. Never mind actual bank notes, banks could just create electronic money – but they could only create it as debt. The rest, as they say, is history.
Monetary reform and full reserve banking
But instead of just criticising the way things are, Positive Money has a positive solution: stop letting private banks create money and enforce a policy of full reserve banking. What this means in practice is that the Bank of England would have sole responsibility to create money, and private banks wouldn’t be allowed to lend out any money they didn’t already have in savings. They would literally have to use the money in savers deposit accounts to be able to make loans (the way many people think the system already works).
New money created by the Bank of England would then be transferred directly to the Government who could use the money to supplement tax revenue, support government spending or they could even give it back to citizens through tax cuts (we can but hope).
Positive Money have put their proposals into draft government legislation, addressing any problem you can think of from how to insulate the new process of money creation from political influence to how you protect citizen’s current accounts.
Questioning the very basis on which our economy is based seems a bit like economic blasphemy in many circles, and getting prominent politicians and bankers to even consider their proposals has been an uphill battle for Positive Money. But now with over 10,000 supporters, which include MPs and leading academics, plus thousands more on Twitter and Facebook, they are definitely making progress.
Launching and supporting local currencies is a great way to support our local economies, but if we want to address the problems at the heart of the wider UK economy, we also need to think national.
Printing press, anyone?