The Solution to the Financial Crisis
Here’s How We Solve The Problem
As long as banks are able to create money, we will have financial crisis after financial crisis. Unless we change the system very radically right now, the next 20-30 years will be very miserable for everyone.
The solution is remarkably simple – so simple that most economists overlook it. We need to:
a) make it illegal (and impossible) for the banks to create money, and
b) give the responsibility for creating money back to the state (through the Bank of England, under strict controls to prevent abuse)
Doing this – and doing it soon – is the key to escaping from this recession without further tax hikes, further redundancies, further bankruptcies, and further unnecessary misery.
The Solution is Easy and Free…
The current banking system is no more stable than a house of cards. Fortunately, reforming the system is easy and far far cheaper than the government's proposed 'way out' (borrow trillions and make us pay for it through 20 years of higher taxes).
In fact, the reform is so simple, so astoundingly easy to implement, that the average person in the street will not know that anything has really changed.
An Act of Parliament is required to alter the way the banking system works. The change would be implemented overnight, instantly preventing the current crisis becoming any worse, and averting the depression that would follow this recession.
High-street banks will continue business ‘as normal’ – with only a few subtle changes to the services that they provide.
It may take 5 or 10 years to untangle ourselves from the mess of debt, obligations and financial contracts that we have created over the last decade, but we will soon start to see a new era in the world economy – one of economic stability and incredible possibilities.
How Economists Got It Wrong
Now, whenever it is suggested that the government should create money, an army of economists will stand up to warn of the devastating inflation that would follow. These economists are wrong (and not for the first time).
The fact that economists start panicking at the mention of ‘quantitive easing’ (creating money) by the government, whilst overlooking massive and regular money creation by high-street banks, stems from ignorance of how the system really works. Here are some key facts that the economists tend to ignore:
a) the total amount of money in the UK has already been growing by an average of 10% a year for the last 30 years!
b) this ‘new’ money is money that has been created by the banks, which is matched by the exact same amount of debt.
c) this 10% year-on-year growth in the money supply has led to a 6-fold increase in house prices, a 6-fold increase in national debt, and inflation that is far beyond the official figures published by the government.
In other words, bank lending and bank money-creation already creates considerable inflation. The government could actually reduce inflation by re-taking control of the money supply and increasing it at a much slower rate.
At this point, the same economists may tell you that the banks haven’t created any money – they have just created credit. But this is just an academic trick of terminology – if there are numbers in my bank account or your bank account, we both know that they represent money. Those numbers in my bank account are accepted for payment of goods in shops and for payment of taxes to the government. They are as good as the paper banknotes, and therefore it is money. No further discussion needed.
Let The Bank of England Create Money
The solution to all our current problems is to prevent high-street banks from creating money, and for the Bank of England (or another agency of the state) to reclaim the responsibility for creating money for the economy. How we can do this is outlined in detail at Positive Money.
How much money should they create? We know from the last 20 years that increasing the money supply by 10% a year leads to huge inflation and a monumentally destructive financial crisis, so it should be significantly less than this. The exact level will be discovered through a period of trial and error, with small corrections, which will be no more severe than the current trial and error manipulation of interest rates that is undertaken by the Bank of England.
How Would They Distribute The Money?
When high-street banks create and distribute money, they do it by creating debt. They effectively make people poorer by getting them further into debt.
This creates an artificial boom in the economy (by allowing people who don’t have money to buy things today) but in the long run actually slows the economy down, because a borrower’s future income now has to be spent on interest payments rather than being spent in the shops. Allowing banks to create money is bad for the economy and bad for society as a whole.
In contrast, when the Bank of England creates money (after the reform), it can do so by giving the money to the government (as an interest-free, non-repayable grant). The government would then use this to a) reduce the national debt; b) reduce the debt that has been incurred as a result of the financial crisis, and c) fund better government services.
It could also use the money to reduce taxes. Clearing the current national debt would allow taxes to be reduced by over £700 per working adult per year! The money saved would go towards creating a buoyant economy, rather than shoring up the profits of the financial sector.
Once the national debt has been brought back under control, newly created money can be used to fund government services. This money ends up in the bank accounts of public sector workers and suppliers to the government, where it adds to the total money supply and helps to keep the economy going. It can also fund infrastructure improvements, such as new schools, hospitals and so on.
