Real Solutions to the Financial Crisis
There is an easy solution to the financial crisis, but it involves exposing a problem that governments and economists have ignored for decades.
Financial Crisis Headlines
Much of the poverty in the world is due to the design on the banking system used in most countries, which allows 97% of money to be created by profit-making banks, and only 3% of money to be created by the government. Money created by the banks benefits the banks; money created by the government benefits everyone. This might sound difficult to believe at first, but it is accurate.
If we change this system so that money can only be created by the government (acting on behalf of the people), we could:
- phase out national debt and significantly reduce corporate and consumer debts (in both the US and the UK)
- reduce taxes by around 30%, permanently, or increase government services with no increase in taxation
- find the money needed to solve the energy crisis
- enjoy higher disposable income, or take more time off from work
- avert the oncoming pensions crisis
- wipe out the debt of poverty-stricken nations
- Save 60% on the cost of public infrastructure projects (such as schools, hospitals and public transport), by removing the need to borrow this money and pay interest over 30 years
We are currently standing at a fork in the road. One road leads to poverty for almost everyone, while the other leads to greater wealth for everyone. Politicians and economists are taking us down the road to poverty, because they don’t know that any other option exists. If we want them to change track, and do everything that is listed above, then we – the public – need to show them that the other road does exist.
Start by reading A Quick Introduction to the Real Cause of the Crisis for a beginner-friendly explanation of the problem, the consequences, and the solution to the recent financial crisis and our current financial problems.
Dear Ben, Your article makes many excellent points.. However, would it not be appropriate that a nation’s money supply match its supply of goods and services to the public, so that at all times there would be a balance between the costs and available purchasing power. Friedman’s suggestion of a money increase of 3 percent annually would be way out if production from one year to the next was considerably higher or lower than a 3 percent increase.
Thanks, Bill Daly
Dear Bill,
Thanks for your comment. You’re right – Friedman’s suggestion probably isn’t appropriate now. We’re treading in slightly unchartered waters now, simply because, post-reform, we will be able to create money without simultaneously creating debt (unlike the current system). We don’t know what effect an outright increase in ‘wealth’ (new money not canceled out by new debt) will have on the economy – it might even need only a tiny increase each year, far less than 3%. Alternatively, it could be more. Either way, rest assured that whatever we do after the reform, the risk of inflation will be lower than under the current system – under the current system, we must constantly keep pushing our prices up to repay the interest on the 97% of all money which is debt.
“We don’t know what effect an outright increase in ‘wealth’ (new money not canceled out by new debt) will have on the economy”
I’m glad you put ‘wealth’ in quotes, but it’s still misleading, and I expect many readers will get the wrong idea.
Real wealth, as Bill Daly suggests, is the goods and services in the economy. Ask any Zimbabwean billionaire
Expansion of the money supply, whether perpetrated by the banks or the government, simply redistributes existing real wealth. It allows the recipients of new money to purchase real goods and services without offering anything in return. It is legalised counterfeiting, and the cost is borne by everyone who isn’t in on the game, as the purchasing power of money inevitably decreases.
Our peculiar system of money, founded on debt, is dangerously unstable, and your reform would address some fundamental problems. Deflation, in particular, would no longer represent such a menace.
Like James Stephenson, I find it frightening that you would even consider increasing government spending, at a time when the state accounts for half of our GDP, but you are right to treat the question of how we divide the proceeds of the reform as separate from the need for a more stable monetary system. As many people have said, this reform should be supported across the political spectrum.
After your reform, inflation would still be a stealth tax, but at least the blame for it would lie squarely with the government, rather than being hidden in a tangled web of corruption and collusion between the government and the banks.
Likewise, it would still be possible for the government to wreck the economy through run-away inflation and market distortion, but the link between government action and economic catastrophe would be much clearer, and there would be more democratic pressure for them to behave responsibly.
It will be interesting to see how the politicians of all parties react to these proposals. I suspect John Martin is right that “resolving this problem to the benefit of mankind in general holds no benefit to them”.
Though my economic views aren’t fully aligned with yours, and you seem to have much more faith in the benevolence of government than I do, I wish you the best of luck in your campaign. It is essential that we awaken the public to the foulness of the current system.
PS. To Mark Haynes, I must say that “cheap, affordable credit” is not a good thing. Government manipulation of interest rates does serious harm to the economy. Artificially low rates are a big factor in the ongoing housing bubble, and they lead to all kinds of malinvestment (businessmen pursuing marginal ventures that would not be justifiable if interest rates were determined purely if the time preferences of investors).
Ben,
Thank you for your work. I received your chain-mail and have forwarded it to as many people as I could. It is an excellent summary of the problem.
One point. You say that the BOE should create money (correctly) and with it, we could reduce debt and have better government services.
Why would government services be better. Part of the issue we suffer from is the massive size of government. A sprawling behemoth that does nothing well. A massive army of public workers – many of whom are simply not needed (Street Football Coordination Officers on 30K+). The money the government pumps into its (often PC) social program is non-productive and does not help create more money. Obviously there are many services we need the government to fund for us, but modern governments are out of control with their quangocracies.
Whilst you are rightly asking for banking reform, it would be useful to mention the need for a reduction in the size of government.
Thanks again,
James.
James, thanks for your comment. I agree with you that there is a lot of waste in government, and a tendency to interfere in things that would be left alone. However, I wouldn’t be proposing that government needs to be involved in more areas of society – rather that we could afford to have better healthcare, no more ‘NHS postcode lotteries’, smaller class sizes in schools, better public transport and so on.
Ben, hearty congratulations. I think The Proposed Bank Of England Act 2010 is a great piece of work.
As well as greatly benefiting our society as a whole, the proposed reform offers something important both to socialists and to supporters of a free market.
Socialists should welcome the transfer of responsibility to a public agency for providing the public money supply in a way that serves the public interest better than the present way of providing it.
Genuine free market supporters should be pleased that, by removing the subsidy (special profits) the banks now get from being allowed to create the money supply, the reform will motivate them to meet the borrowing and lending needs of their customers and the economy more efficiently and less expensively in more competitive money markets than today’s.
I hope a lot of people support you. They should do.
Best wishes, James.
Hello Ben
I’ve just sent an email to James Robertson and asked him to forward it to you. I’ve been through everything on the Bank of England Act 2010 website and have proof-read it using track changes in Word for windows. I’d like to send the file to you so you can improve the text on the website.
I think that your proposed Act is a brilliant piece of work.
James Robertson is absolutely correct when he says that those on the political left should go for it.
Equally, those on the political right should, too.
Everybody except the bank(st)ers would be better off!
Somebody should write a poem titled Bankster Angst.
I hope to hear from you soon.
Sincerely
Peter J. Morgan
This proposal is neither left nor right wing. If it has to be characterised at all it might be considered a populist measure, denying the private financial elite their power to create money.
Those on the right and left alike ought to be equally as disgusted by the shocking waste of public money involved in buying our nation’s money supply from banks when it could be created interest and debt free.
All we hear about these days is ‘cutting out the waste in public spending’. This proposal addresses the biggest. most fundamental source of wasted public money.
Thanks Jim, I’m in full agreement with everything you said there!
Hi Ben,
Great to see this reform campaign is up and running. I have looked at the proposed act and have to say I’m impressed, and am in full agreement and support, and wish it every success. Well done for all the hard work that has gone into this.
The tough part will now be getting this proposed legislation accepted and implemented by the politicians, which I can see being a hard task, as I tend to think the ‘vested interests’ banking fraternity have a lot of them in their pocket, maybe I’m too cynical, but we’ll see?
I have to say when I hear the Chancellor of the Exchequer Osbourne or our new Prime Minister Cameron talking about the need for cuts, and we are all in this mess together, it gets me really annoyed, as i know their is no need for cuts or indeed tax rises, and these place-men won’t suffer any hardships, unlike the general population.
If the money-supply was created by or on behalf of the government debt-free, and with no need to tax people extortionately to pay the interest, and commercial banks hadn’t usurped this privilege, we wouldn’t be in a mess, and most importantly people’s lives would have a chance of being a lot more free, and prosperous.
This idea and reform is pure common-sense, and apart from the tiny minority of banking oligarchs and their lackeys, this should be welcomed by all, if you are a socialist on the left you should welcome the fairness and possibility of better public services, and if you are a capitalist business owner on the right you should welcome the easier access to cheap, affordable credit!
I really hope this reform gets enacted, and I just hope we can breakthrough the controlled media’s stranglehold on information, as this is certainly the right time to convince the people of the benefits of such an essential reform!
The best of luck
Mark
Hi Ben,
You stated that the members of the government are not aware of the alternative road that you offer as an alternative to the ever growing debt cycle.
However, there are many members of governement whom have studied economics and I am almost certain that they are aware of the issue and the hopeless situation that it puts society in.
So surely the question we should be asking ourselves is; not what is the alternative road out of this but instead WHY are the government not interested in searching for this alternative road in the first place. I hazard a guess that resolving this problem to the benefit of mankind in general holds no benefit to them. And this is the real problem here.
Once we tackle this fundamental question then I think we will be able to make some progress with this new Act that you are proposing.
Like many other controversial subjects in which educating the public is key, one path forward could be to involve celebrities in the cause (as undesirable as this may seem).
I will be spreading the news as much as I can.
Keep up the good work.
John
We are living in very interesting times. There’s a lot going on, from crop circles, to 9/11 and 7/7 conspiracy ‘theories’. Things that have been wrong for many years need to be put right. The wrong people are running the world, but some believe their time is running out – hope so. I see your effort as part of the whole, but a very basic part, wish you every success, but a ‘new birth’ is a painful process and the status quo will not be easy to shift. Every success, Joe
This seems rather like a return to an earlier period. Currency supply was backed by real gold deposits and banks and building societies only loaned when they had deposits to cover their loans. No country has absolute control of their own currency as it has to have exchange with other currencies. I am not sure on what basis you would control the quantity of money in existence in any particular country. I agree that we need to get away from the present system but I am not sure that you have covered everything.
I agree with your synopsis – but wonder if there are alternatives to creating another large central money-issuer at the National level?
To me, the root of the banking problem stems from the dissolution of local currencies into National and Supra-National currencies.
Re-creating the Bank of England as the only issuer of money supply is one option – but I think there are others – like allowing local councils and local authorities to create local currencies.
In this debate, I would like to challenge the assumption that re-enforcing a National entity is the only (best) solution.
In this time of coalition government, we seem to be in an economic cycle where Local is increasingly going to become the primary way to get anything done. We should align money supply to local need by re-creating local currencies that keep value much closer to the need. It would take away the need for crazy schemes like the Titan Prison idea and other national monsters of muddled-thinking that the last regime was so keen on.
Looking to the future, networks like the Transition Town Movement are surely going to drive a lot of local behaviour.
In summary, I agree it is time to challenge and re-design. But, as Einstien said “Perfection of means and confusion of ends seem to characterize our age.”
For this redesign, let’s keep the means and ends separate so we can explore the very real alternatives to fixing something that was merely a end-product of generations of muddled-thinking economic theory.
I fully support this campaign. The current banking system is nothing more than a pyramid scheme. Although this reform will not reduce the risk of bad management of the economy by the government at least blame can be directed at that single source. The current system can do nothing but fail due to it requiring perpetual growth of the money supply, to service the debt, whilst diluting the value of the currency. There is evidence that it causes the exponential expansion of the money supply. The need to maintain the correct quantity of money in supply at all time is paramount. I recommend reading the Dying of Money by Jens O Parsons. It also supports removal of fractional reserve banking, plus a lot more. Chris Martensons web site and his crash course is also worth a look, he highlights issues such as peak oil, and the additional impact that it will cause. There is no doubt we are in a fork in the road. We need money reform, because sustainable environmental decision making is being prevented by a constant persuit of economic growth.