Currently the commercial banks create about 97% of our money. They do this when they make loans. The money loaned to the customer is created via an account entry.
This system results in money being directed within the economy based on decisions made by private banks. This mechanism resulted in the 2008 financial crash, when the private banks over inflated a house price bubble.
A much better system would be to entrust the authority to create money to a state-managed committee. This committee would be tasked with calculating how much money needs to be injected into or withdrawn from the economy.
The benefits of this system would be:
- Crashes would be almost impossible, since inflation would be watched carefully.
- The money created would be used for public spending or tax cuts.
- The government would be able to target funds at specific sectors of the economy. This would cause:
- Unemployment to be reduced.
- Unused resources to be brought into action.
- Publicly beneficial development to take place.
This new monetary system would result in the role of private banks changing. People would hold two types of bank accounts with them, similar to but distinct from those currently held. They could be called savings accounts and current accounts, in line with current terminology. Money in savings accounts the banks would be allowed to invest, thus earning the savers interest. The saver would be able to decide on the risk level of any investment made with their money, with the return reflecting this.
Current accounts would be removed from investment activity so every penny in these accounts would be fully accounted for at all times. This would remove the threat of customers losing their money should the bank fail. If a bank were to fail, the balances of its current accounts would be transferred to healthy banks. The balances of its savings accounts would be reimbursed to whatever level agreed by the contract entered into when the customer transferred funds into the savings account.
The main argument leveled against this type of proposal is that it would cause runaway inflation. Inflation would not be a problem in this system because a major aim of those managing it would be to mobilise unused resources, which would increase productivity. As long as productivity rises along with the money supply inflation does not occur. The committee tasked with deciding how much money should be in the economy would be watching inflation closely.
This proposal is based on Sovereign Money Creation, as developed by Positive Money.
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