Positive Money – What’s the Problem with Money? & Sovereign Money Creation

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Positive Money is a movement to democratise money and banking so that it works for society and not against it.Our current financial system has left us with the highest personal debt in history, unaffordable housing, worsening inequality, high unemployment and banks that are subsidised and underwritten with taxpayers’ money. We believe that these problems have a common root: money.

What’s the Problem with Money?

Many of the big social and economic problems that we’re facing today are connected to money. If we want to solve these problems, we have to change the way that money is created. Most of us learn that only the government can create money, but in reality more than 97% of money is created by private banks – the same banks you see on the high-street every day.

The money banks create isn’t the paper money you keep in your wallet. It’s the electronic money that flashes up when you check your balance at an ATM.

Find out How Banks Create Money…

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Sovereign Money Creation: Paving the Way for a Sustainable Recovery

By fuelling our economy through ever-rising levels of household debt, we are repeating the mistakes that led to the 2007-08 financial crisis.

Ever since that crisis, the Government and Bank of England have tried to encourage further consumer borrowing via further lending by banks. As former FSA chairman Lord Turner put it, this was a “hair of the dog” strategy for economic recovery, treating the cause of the financial crisis – excessive borrowing – as though it could also be the solution.

However, household debt can only grow faster than salaries for so long before the weight of the debt becomes excessive. With household debt already close to its highest level in history, and set to rise further as a result of Government policy and easier lending by banks, we believe the current economic recovery is unsustainable. Just as the economy is running on borrowed money, the recovery is running on borrowed time.

There is therefore a need for an alternative strategy for a more sustainable economic recovery. This paper proposes this alternative, a new solution called Sovereign Money Creation (SMC).

SMC offers a way to make the recovery sustainable. In a similar way to Quantitative Easing, SMC relies on the state creating money and putting this money into the economy. But whereas QE relied on flooding financial markets and hoping that some of this money would ‘trickle down’ to the real economy, SMC works by injecting new money directly into the real economy, via government spending, tax cuts or rebates. Our analysis shows that by getting spending power directly into the hands of the public, this new solution could be up to 37 times more effective than Quantitative Easing in boosting GDP.The pivotal advantage of SMC is that unlike the Government’s current growth strategies – which all rely on an over-indebted household sector going even further into debt – SMC requires no increase in either household debt or Government debt. In fact, SMC can actually reduce the overall levels of household debt. It would also make banks more liquid and the economy fundamentally safer.

Similar ideas have recently been proposed by Lord Adair Turner, under the name Overt Money Finance. The March 2013 budget included a review of the monetary policy framework, which expressly permitted the Bank of England to use ‘unconventional policy instruments’ to support the government’s objectives for growth and employment, meaning that SMC could be used within the current operating framework.

The creation of money by the state often leads to concerns about inflation, but there is no reason why it should be more inflationary than the creation of money by bank lending (which typically creates inflation in the housing market). In addition, whereas most money created via bank lending goes into the property market, the money created via Sovereign Money Creation would go directly into the real economy, boosting GDP and employment.  By boosting the capacity of the economy, SMC should actually be less inflationary than consumer lending, and the use of SMC can be restricted should it start to be inflationary.

We believe that ultimately, it is a matter of when, not if, this policy will need to be implemented for the long-term sustainability of UK economic growth.

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I-OPEEN is Sovereign Money Creation
based on filings of the
One People’s Public Trust
which makes you the Bank!