Moving Forward with Practical Reform – from Positive Money

Positive Money is a growing campaign for ‘Honest Money’, although I suspect that some readers on this blog may challenge our definition of honest money. I wanted to outline our position, and show why we’re taking a particular route towards reforming the money system.

We make a separation between the academic debate – which could go on indefinitely, with no chance of a consensus – and the politically feasible steps that could make a real improvement to the existing system. The academic debate is good, as it helps to refine our arguments and figure out how money should work in an ideal world. But if we wait to come to a consensus before moving forward with practical steps to reform the system, then we might find that Rome has already burnt to the ground while we’ve been locked in the debating chamber!

The economic situation is deteriorating, and we need to find the fastest way of stopping the entire system collapsing. While many proposals from the Austrian school would have been a better foundation for the economy over the last couple of centuries, some of them are politically impossible to reach from this starting point, so we have to look at what is politically possible and move towards that as quickly as possible. We’ve outlined our own proposals at the end of this article.

Nationalised vs Denationalised Currencies

The mindset of ‘managing’ the economy is so ingrained that quite simply, there is no possibility of any government in the next decade choosing to give up its power over the country’s currency. No chance, regardless of how strong an academic argument is put forward. Without a pretty advanced understanding of money, the proposal for denationalisation, when filtered through the press, will sound like “Let’s abolish pound sterling and give the banks that caused the crisis a license to print money”. You and I know that this is inaccurate, but it is the way that the proposal will be interpreted.

This means we’re looking at a state-issued currency for the foreseeable future.

Full Reserves versus Free Banking

The free banking argument suggests that we should allow banks to engage in fractional reserve banking, but let them live and die by the sword. This means that they could promise instant access to demand deposits (as they do now) even though they can only repay a fraction of those depositors at the same time. Deposit insurance would be removed, and any bank that was subject to a run and became insolvent would be allowed to fail.

In the context of a state-issued national currency, this proposal is an absolute non-starter. When the average bank can only repay £71 for every £1000 in a customer’s bank account, removing deposit insurance today would almost certainly trigger a run on the banks, with customers withdrawing as much physical cash (notes) as possible. With the risk of the UK returning to a cash-only economy in a matter of days, deposit insurance would be immediately re-instated.

Consequently, with a state-issued currency, fractional reserve banking can only exist with deposit insurance in place. In other words, there is no way of removing deposit insurance and keeping fractional reserve banking, as long as we have a state-issued currency.

This then means that full-reserve banking is the only realistic option with a state-issued currency. As denationalisation is a political impossibility – at least for the next decade or two – this means that if you want deposit insurance removing, full-reserve banking is the only option.

Return to a Gold Standard?

A gold standard with state-issued currencies creates problems of its own, and shifting back to a gold standard now is not considered as a credible solution to the crisis among the people who would make such a decision. One advantage of a gold standard was to limit the growth in the money supply, but there are legal and practical ways that we can limit that growth with a fiat currency system.

So let’s assume that there’s no political chance of returning to a gold standard.

Fixed Money Supply?

With full-reserve banking, it’s entirely possible to have a state-issued fiat currency, in the form of coins, paper notes and digital ‘tokens’ in computer systems, and fix the supply of money at a specific number (when looking at money that can be accessed on demand). A fixed money supply would remove inflationary pressures, and likely lead to deflation (assuming that our productivity grows). It would also make manipulation of money impossible – there would be a set quantity, and that would never change. In a sense, this would be a more secure currency than gold!

So at this point, do we start to argue the case that deflation is not always a bad thing? No. The inflation debate is another one that will never be resolved. The dominant position seems to be that ‘low and stable’ inflation is the ideal target. In addition, central banks and governments are attached to the idea of ‘managing’ the economy, and would be unwilling to give up their tools to do so.

So, let’s accept that we won’t have a fixed money supply, and that there will still be some manipulation of the money supply. In this case, let’s get that manipulation out in the open.

Our Proposals

Bearing all that in mind, I think the proposal put forward in Positive Money’s submission to the Independent Commission on Banking is the best politically possible ‘next step’. This is what it does:

  • Implement full-reserve banking so that deposit insurance and state guarantees can be withdrawn and banks can be allowed to fail
  • Ties investment to real savings again
  • Provides the economy with a stable money supply
  • Keep the power to create money away from both profit-seeking bankers AND vote-seeking politicians
  • Put the power to create money with an independent MPC, who are tasked with keeping inflation at zero (or whatever target they set, say 2%).
  • We tie the creation of money into inflation, so that if inflation starts rising (beyond the target) then no new money can be created
  • For the first time in history, there will be complete transparency and accountability over the creation of money, and we’ll be able to see exactly how much the money supply has been increased, and why. (There will of course need to be mechanisms to ensure the accountability of the Monetary Policy Committee).
  • Note that under this framework, if the actions of the MPC correlate to instability in the economy, then you know exactly where to point the finger of blame, and can start arguing towards a fixed money supply.

It’s not perfect, but at the moment we genuinely think it’s politically the best solution that has a chance of being implemented. The academic debate over the best money system for the long term can continue, but right now the system is collapsing around us, so we need to call for a reform that is politically feasible.

Our Campaign

If these proposals do start to get attention then the lobbyists will swing into action. The only way to get around that is to make it something that masses of ordinary people will campaign on.

Understanding the denationalisation of money requires a fair bit of an understanding of money and also a bit of a mindset shift, so it’s not something that can be used to start a mass movement. So, here’s the angle that we’ll be taking:

  • Everyone knows that only crooks and criminals print their own £5 or £10 notes
  • The laws that make it illegal to print your own money have never been updated to take account of the fact that almost all money now is digital
  • Because there’s no law against creating digital money, banks have been able to get away with creating up to ¬£200bn of this digital money each year
  • In fact, we’ve now reached the situation where very nearly every pound in the economy was created by the banks, for their own benefit
  • As a result, banks now have a complete monopoly on supplying money to the economy/society
  • If we want money in order to live or do business, then we have to borrow it from the banks
  • They benefit from this monopoly to the tune of tens of billions a year at our cost, and we all end up in ever-growing debt

People have an intuitive idea that counterfeiting is a criminal activity designed to somehow rip people off. I suspect they also have an intuitive sense that they’re being ripped off by the banks, particularly considering the bailouts, the tax rises, spending cuts and rising national debt. By tying the two together we can grow a massive public campaign to get control of the creation of pound sterling completely out of the hands of the banks and into a transparent process, where we know exactly who is creating money, and who to blame if things go wrong.
Getting to full reserve banking with a state-issued currency is a massive battle, but once we’ve got that far, the economy and the system generally should be stable enough to allow a more relaxed debate about how money should work.

Read the proposal at: [ ]