‘In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.’
Bank of England 2014
Money Creation in the Modern Economy
This is a campaign to transfer the power of money creation from commercial banks to the state.
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The Current Situation
While there are regulations and limitations on commercial banks’ ability to create money, it is an immense power to wield and plays a fundamental role in shaping the economy.
The majority of banks’ lending goes into the non-productive real-estate and financial sectors. About 10% goes into the real (productive) economy, which contributes to GDP.
The reason for this bias away from directly funding productivity is that lending against things that already exist and have established value is generally preferable for banks, who are weighing risk and reward.
While this system functions to an extent, it is far from perfect. Sir Mervyn King, former governer of the Bank of England (BoE), said in 2010:
Of all the many ways of organising banking, the worst is the one we have today.
He is gesturing toward the mismanaged power of money creation and ensuing public costs. Since the crisis, regulations have been tightened, but not by much.
The nation has paid the price for bank incompetence. House prices have nearly tripled since 2000, while the average wage has not even doubled. Home ownership is down 10% since 2008. Subsequent to the crisis the Government bailed out the failing banks to the value of £133bn, of which £46bn is still invested. This investment is unlikely to be fully recouped, since the remaining ~£40bn of RBS shares purchased by the state are now worth half that.
The state is capable of creating its own money. This has been demonstrated with Quantitative Easing (QE). The process of QE involves the purchasing of financial assets using newly created central bank reserves, resulting in an inflow of money into the financial markets.
National Money would be similar to QE, in that the creation of new money would be authorised by the Treasury and carried out by the BoE. However, it would be used to pursue both fiscal and monetary policy, rather than just monetary policy.
If the £445bn created for QE was used to fund public spending (fiscal policy) the austerity program could have been avoided and economic stimulation still achieved.
Under National Money, money would enter the economy most likely primarily through public spending, although this would be up to the government of the day.
The mechanics of the system would be that the Monetary Policy Committee (MPC) of the BoE would calculate the money supply required to meet the monetary policy set by the Government. If an increase in the money supply was needed, money would be credited to the Exchequer.
Currently, the MPC sets the base interest rate to influence the money supply.
Hyperinflation through unleashed money creation would not be a risk in this system. It would be more stable than the current system due to its counter-cyclical nature. Commercial banks lend more when inflation occurs in order to seize the profits to be made from higher prices. This is pro-cyclical and leads to more inflation. Under National Money the MPC would seek to counter inflation if it began to balloon.
Monetary policy would be fulfilled through the economic effects beyond the first usage of new money. For example, injections of new money would stimulate the wider economy, as with QE.
The Treasury and BoE would continue to be accountable to Parliament via the Treasury Select Committee.
Under National Money the role of commercial banks would change. They would become what most people assume they are: Intermediaries between savers and borrowers. They would only be able to loan money that had been deposited by customers in savings accounts. The funds in current accounts would be fully accounted for at all times, but earn no interest.
This system would remove the label of too big to fail, since if a bank did fail, the current accounts held with it would simply be transferred to a healthy bank. Savers would lose a proportion of their investments, dependent on the scale of the failure and their investment terms.
Rather than being a weakness, however, this risk would encourage savers to scrutinise the stability of banks. This should, in turn, incentivise the banks to make an effort to maintain greater stability than they currently do.
The Financial Services Compensation Scheme, which insures customers’ bank balances up to £85,000 in case of bank failure and is backed by the Government, would no longer be necessary due to the balances of current accounts being fully accounted for at all times.
National Money could be implemented overnight, with the accounting changes taking place entirely behind the scenes.
True Free Market
The re-routing of money from the financial markets to the real economy would lead to the market becoming truly free. The current bias toward the financial markets is not based on the free market principle of a level playing field, but on a system that is built to favour those trading in pre-existing assets as opposed to those contributing to the productivity of the country.
It would be more natural for the wealth creators—traders in the real economy—to be ahead in the queue for new money.
 Bank of England statistics
 National Audit Office figures
 van Lerven, F. 2016 A Guide to Public Money Creation p.29
This proposal is based on Sovereign Money Creation, as developed by Positive Money.