Monetary Reform - Making It Happen
extracted from Chapters One and Two of James Robertson & John Bunzl's Monetary Reform - Making It Happen (2003).
by Bill Totten
Joseph Huber and James Robertson put forth a proposal for mainstream monetary reform put forward by in Creating New Money (2000). {1} Briefly, that proposal is that new official-currency money (pounds, euros, dollars, yen, et cetera) should no longer be created by commercial banks as profit-making loans to their customers. It should be created by central monetary authorities (today's central banks) which should give it as debt-free public revenue to their governments to spend into circulation for public purposes.
{1} Joseph Huber and James Robertson, Creating New Money: A Monetary Reform for the Information Age, New Economics Foundation, London, 2000 - summarised in World Review, Vol4, No 2, New European Publications, London, 2000. See http://www.jamesrobertson.com/books.htm
Their definition of money includes not just coins and banknotes, but also the electronic bank-created money in our current bank accounts. Although some people with pretensions to knowledge of these things say that that is something distinct from money, called credit, it is now clearly recognised to be money, directly and immediately available for spending. {6} That commercial banks still create this official-currency money for private-sector profit has become a glaring anachronism.
{6} Today's official monetary statistics accept this, but raise a different problem. They contain alternative definitions of the money stock, based on confusing aggregates called M0, M1, M2, M3, M3 extended, M4, and so on. These are part of the veil of mystery which shrouds the workings of the money system even in "democratic" countries. The reform Huber and Robertson propose will replace them with one clear definition of money, M.
Our money system needs to be brought up to date. For over two centuries political democracy has been spreading through the world, but our capacity to control the power of money and harness it to the public good has lagged far behind. So much so that failure to bring the workings of money and finance into line with economic justice and the realities of the Information Age is already damaging confidence in political democracy itself.
For those of us in Britain the euro highlights the link between democracy and the money system. In spite of efforts to persuade us that scrapping the pound and replacing it with the euro would be a progressive step, people are increasingly doubtful. Why can't we use the euro as a parallel currency, alongside the pound, rather than a single currency managed by a remote, centralised monetary authority imposing one-size-fits-all interest rates and money supply on millions of diverse people and places? Surely 21st-century pressures to become more globalised and more localised call for a more pluralistic monetary system, allowing different currencies and means of payment to evolve at local to global levels, enabling people and organisations to choose to use whichever currency they find most convenient and useful for different purposes.
So - as well as national currencies, continental currencies and a global currency - we should be encouraging currencies issued by local government authorities for local circulation, and non-official payment systems set up by local community groups (like LETSystems), local social service groups (like Time Banks), and local business groups (like the WIR co-operative in Switzerland). In technical terms, whereas paper money could have been accepted as the new basis for the monetary system at one time, electronic money can now make it convenient for us to use different currencies for different purposes.
That technical factor also points the way to monetary reform at the national level. Dematerialised non-cash money (that is, electronic bank-created money held in bank accounts and transmitted between them by modern information and telecommunication technology) is now overwhelmingly important. About 97% of this country's (Britain's) money supply is created in that form by commercial banks, and only three percent as banknotes and coins issued by the Bank of England and the Royal Mint.
The commercial banks create the non-cash money out of thin air, calling it credit and writing it into their customers' current accounts as profit-making loans. That gives them over GBP 20 billion a year in interest, while the taxpayer gets less than GBP 3 billion a year from the issue of banknotes and coins. Stopping commercial banks creating non-cash money, and transferring to the central bank responsibility for creating it and issuing it debt-free to the government to spend into circulation, will result in extra public revenue of about GBP 45 billion a year. This is the reform with which this book is specifically concerned. {See 1}
It will mean that:-
1) Taxation and government debt can be reduced, or public spending can be increased, by up to GBP 45 billion a year.
2) The value of a common resource - the national money supply - will become a source of public revenue rather than private profit. That will remove an economic injustice.
3) Withdrawing the present hidden subsidy to the banks will result in a freer market for money and finance, and a more competitive banking industry.
4) A debt-free money supply will help to reduce present levels of public and private debt, which are partly caused by the fact that nearly all the money we use has been created as debt.
5) The economy will become more stable. Banks inevitably want to lend and their customers want to borrow more at the peaks of the business cycle and less in the troughs. So, when the amount of money in circulation depends on how much the banks are lending, the peaks and troughs - the booms and busts - are automatically amplified.
6) The central bank will be better able to control inflation if it itself decides and directly creates the quantity of new money the economy needs. It now tries to control inflation indirectly, by raising interest rates (that is, the price at which people borrow from banks). But raising costs in that way actually helps to cause inflation. That partly explains why inflation has to be allowed to rise steadily every year - by 2.5% in the UK - in order to avoid deflating the economy.
7) Environmental stress will be reduced. When, as now, almost all the money we use is debt, people have to produce and sell more things in order to service and repay debt than they would if money were put into circulation debt-free.
In our proposals for this reform, Joseph Huber and I called it "seigniorage reform". Seigniorage was the profit made by monarchs and local rulers from minting and issuing coins. In democratic societies in the Information Age, the proposed reform will restore the prerogative of the state - now on behalf of the people - to capture as public revenue the value of putting the money supply into circulation.
Many people now understand that money is power, and that the institutions of money today negate democracy by using their power to exploit people and keep them dependent. Many people also understand that money is a scoring system - for the game of economic life - and that the way this scoring system works today is systematically perverse: it rewards undesirable activities, penalises desirable ones, and frustrates desirable change in almost every sphere.
The Proposed Reform
The particular reform we are discussing concerns public currencies. These include the pound, the dollar and the yen that belong to nations, and the euro that belongs to a group of nations. In future they will include a genuine world currency that does not yet exist.
National governments are responsible for seeing that national currencies maintain their value and provide an essential public service to the population as a whole. In that respect these currencies differ from the more private kinds of currencies and quasi-currencies used by community groups (like LETS) or groups of businesses (like the Swiss club WIR) for transactions between their members, and loyalty points, Air Miles, et cetera issued by companies to customers or suppliers, who may then use them as a means of exchange.
In the more pluralistic multi-level-currency era foreseen (see above), the principles of the proposed national currency reform will apply to other official currencies. These will include local currencies to meet the need of local communities within their particular localities, and a global currency to meet the need of the world community for a means of transnational exchange. One of the principles is that the profit (or 'seigniorage') arising from creating money of this kind should be public revenue, not private profit. Another is that these public currencies should be created debt-free, not as interest-bearing repayable debt. We will return shortly to the implications of this for international monetary reform.
Meanwhile, to recapitulate from above, the proposed national monetary reform is as follows:
1) As national monetary authorities, central banks should create non-cash money (that is, bank-account money) as well as cash (that is, banknotes and coins). They should create out of thin air at regular intervals the amounts they decide are needed to increase the money supply. They should give these amounts to their governments as debt-free public revenue. Governments should then put the money into circulation by spending it.
2) It should become illegal for anyone else to create bank-account money denominated in the national currency, just as it is already illegal to forge coins or counterfeit banknotes.
This will involve the following changes:
1) The central bank will no longer regulate increases in the money supply by manipulating the interest rates at which commercial banks lend into circulation money they create for that purpose. The central bank will be directly responsible for deciding how much is needed and for creating it and issuing it itself.
2) Commercial banks will be prohibited from creating money. They will have to borrow already existing money in order to lend it, as other financial intermediaries do.
This will parallel what happened with banknotes in 19th-century England. Electronic bank-deposit money has now become real money and it is time to stop pretending it is just credit. As the issue of banknotes became subject to seigniorage then, so the creation of bank-account money should become subject to it now. In other words, the profit from creating it should no longer accrue to commercial banks but be collected as public revenue. The best available estimate is that in Britain this would contribute about GBP 45 billion a year to public revenue, and deprive commercial banks of the 'subsidy' - estimated at over GBP 20 billion a year - which they now get from interest on the new money they are allowed to create.
The beneficial economic and social effects of this reform have been summarised above. They are very great.
Moreover, the reform would be evolutionary, not revolutionary. Since the Second World War the Bank of England has continued to evolve from being a commercial bank with a special relationship to the government, towards becoming a straightforward agency of the state as its central monetary authority. At the same time, the commercial banks have continued to evolve towards being free-market businesses, with fewer public service obligations backed by government subsidies and controls. For both the Bank of England and the commercial banks, the proposed reform is the next step in that process of evolution.
Seigniorage and the Global Economy
Whoever creates new money can either give it away or benefit from putting it into circulation by spending it or lending it at interest. Just as, under the proposed national reform, the benefit from creating national-currency money would go to the national community as a whole, a comparable change at the international level would benefit the world community as a whole. It would replace the present use of the US dollar and other national currencies like the yen, the euro and the pound as 'reserve currencies', by a world currency issued by a world monetary authority, and channel the profit from issuing it into public revenue to be spent on behalf of the world community. This global reform would clearly need simultaneous support from many national governments. That does not necessarily mean that one country could not undertake national monetary reform on its own. But it would clearly be easier for single nations to do it, if the global version of the same reform was on the global agenda.
In 1995 the independent international Commission on Global Governance {12} identified the United States' "unique luxury of being able to borrow in its own currency abroad and then devalue its repayment obligations" as one of the weaknesses of the current international monetary system. It pointed out that "a growing world economy requires constant enlargement of international liquidity", and suggested that issue of the IMF's reserve currency - Special Drawing Rights (SDRs) - should be increased.
In Creating New Money (2000), Huber and Robertson suggested that SDRs might develop into a global currency which would eventually replace the US dollar and other national currencies in that role. Following the model they had proposed for national seigniorage reform, they suggested this global money might be issued - perhaps by a new international agency combining some of the functions of the IMF and the Bank for International Settlements - into an operational account which it would hold for the United Nations. The UN would spend this money into circulation, partly as a contribution to financing its own operations, and perhaps partly by distributing it to national governments according to the size of their populations.
This new international agency, which would in due course come to be seen as an embryonic world central bank, would have to combine accountability with a high degree of independence in its decisions about how much new international money to create. It might report and be accountable for its performance to a UN body , such as a committee of the General Assembly.
In the few years the significance of the 'dollar hegemony' of the United States, and the urgent need for international monetary reform, have become more widely understood.
For example, one report calculates that every American citizen owes the rest of the world $7,333, while every citizen of the developing countries owes it only $500. But, while developing country economies must pay debt service repayments totalling more than $300 billion a year, the US must only pay $20 billion a year to service an almost equivalent amount of debt. Americans have been engaged in a consumer binge, which has led to the largest current account deficit in history, a staggering $445 billion or four percent of US GDP. This deficit has been increasing by fifty percent a year in recent years, and economists predict it will rise to $730 billion by 2006. Given this daily deficit of up to GBP 2 billion, plus capital outflow of $2 billion, the US in effect has to borrow $4 billion from the pool of world savings every day. More disturbingly, it is being financed by the poor through capital flight from poor countries and the forced holdings of high levels of dollar reserves. To build up reserves, poor countries have to borrow hard currency from the US at interest rates as high as eighteen percent; and lend it back to the US in the form of Treasury Bonds at three percent interest. {14}
{14} Romilly Greenhill and Ann Pettifor, The United States as a HIPC (heavily indebted prosperous country) - how the poor are financing the rich, New Economics Foundation, London, 2002; http://www.neweconomics.org/
Another report finds that "ever since 1971, when US president Richard Nixon took the dollar off the gold standard, the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat ... World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world's interlinked economies compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves". {15}
{15} Henry C K Liu, US Dollar Hegemony Has Got To Go, Asia Times Online Co Ltd, 2002.
A third example: "At the root of this new form of imperialism is the exploitation of governments by a single government, that of the United States via the central banks and multilateral control institutions of inter-governmental capital ... What has turned the older form of imperialism into a super imperialism is that, whereas prior to the 1960s the US government dominated international organisation by virtue of its preeminent creditor status, since that time it has done so by virtue of its debtor position." {16}
{16} Michael Hudson, Super Imperialism: The Origin and Fundamentals of World Domination, Pluto Press, 2003, pages 23-24.
Finally, the researches of Richard Douthwaite and the Irish NGO Feasta {17} confirm that the total annual subsidy (or 'tribute') received by the US from the rest of the world as a result of dollar seigniorage is at least $400 billion a year. This is roughly comparable to the annual US balance of payments deficit. It also explains how the US has been able to maintain its extraordinary scale of annual military expenditure compared with all other countries. The huge dollar seigniorage subsidy has even been justified by some US commentators as a payment by the rest of the world to the US as the 'policeman' on whom the world relies to keep order! However, as Douthwaite notes, "given the policeman's record of destabilising or overthrowing governments with which he has had ideological differences and the fact that he would continue to put his 'particularistic national
interests' ahead of those of the rest of the world, I doubt if many countries would be entirely happy with the arrangement".
{17} Richard Douthwaite, Defense and the Dollar, 2002 and Feasta, Climate and Currency: Proposals for Global Monetary Reform, 2002, prepared for the Johannesburg World Summit on Sustainable Development. Details of both from The Foundation for the Economics of Sustainability, 9 Lower Rathmines Road, Dublin 6, Republic of Ireland; e-mail: feasta@anu.ie; web: http://www.feasta.org/
These analyses show up not only the injustice of the present way of creating money for international and global purposes, but also suggest how distorting and damaging it is to global economic efficiency and financial stability. They clearly point to the need for international monetary reform on a similar basis to the proposed national reform - involving the creation of international debt-free money by an agency which serves the interests of the world community as a whole and provides seigniorage revenue to be spent on global public purposes. As international campaigning grows stronger for international reform on those lines it will reinforce the pressure for comparable national reforms.
Dealing with Obstacles and Objections
The following are among the obstacles to national monetary reform and the objections put forward against it:
1) powerful opposition from banking and financial interests (and from associated constituencies of professionals, academics and politicians), and threats that even the prospect of monetary reform would destabilise the economy;
2) public ignorance and confusion about the present arrangements;
3) an elitist belief that ignorance about them is positively desirable;
4) ignorance and obfuscation about what the monetary reform proposals actually are;
5) the claim that they would involve a further centralisation of state power;
6) the assumption that the reform would be inflationary;
7) the assumption that it would 'crowd out' investment in the private sector;
8) the argument that depriving banks of the present seigniorage subsidy would increase the costs of borrowing, would raise the costs of payment services, and would force banks to cut costs, close branches and reduce jobs;
9) the argument that it would damage the international competitiveness of British banks and therefore of the British economy as a whole;
10) the argument that no other country has undertaken, or is seriously considering, this reform.
So how are these obstacles and objections to be dealt with? And how far will they have to be dealt with internationally?
Obstacle/Objection 1. Opposition from powerful banking and financial interests and the threat of economic destabilisation.
This obstacle will be overcome only when the arguments for monetary reform are more widely understood, when opposition to it is more widely recognised as mere defence of private privilege, and when its opponents accept that they risk losing more by continuing to oppose it than by losing the present subsidy. National and international advocacy and campaigning will be needed to bring that situation about.
Obstacle/Objection 2. Ignorance and confusion about how new money is now created.
Many people, even in government and parliament, don't know how new money is now created, and what the consequences are. Most people find it hard to believe, if they think about it at all, that almost all the money in circulation has been created by commercial banks at profit to themselves. In reply to questions, a government spokesman may say that the funds which banks lend to customers "must either be obtained from depositors or the money market, both of which usually require the payment of interest" - thus appearing to deny that banks are allowed to create new money and to profit from doing so. Or that "banks don't print money but create credit". More often, however, the government accepts that banks create money and defends this by saying that "if banks were obliged to bid for funds from lenders in order to make loans to their customers, the costs to banks of extending credit would rise significantly".
People who are in any doubt about how money is created might glance at Chapters 22 and 23 of a current 'students' bible' on economics. {22} It explains "how banks create money" and that "bank-created deposit money is much the largest part of the money supply in modern economies".
{22} David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, McGraw-Hill, 7th edition, 2003, pages 316 and 318.
The action needed is to press Finance/Treasury Ministers and Central Bankers to clarify and publicise
* how almost all new money is now created,
* who benefits and who suffers thereby, and
* whether or not the estimates of an annual hidden subsidy of more than GBP 20 billion to the banks, and a failure to collect more than GBP 40 billion potential public revenue, are broadly correct.
This action need not be international to make some impact. But, if individuals and NGOs in other countries were to press the same demand on their finance ministries and central banks, the impact would be greater.
Obstacle/Objection 3. The view that ignorance and confusion are positively desirable.
It has been suggested that the deflationary crisis in Japan may have reached a depth which requires the government explicitly to create new money. But when a member of the British economic elite wrote publicly on those lines last year, he felt it necessary to accompany it with a warning that that policy should be avoided in Europe if possible, because "ideally we should avoid unconventional approaches. For the conventions of central bank independence, and of non-transparent money creation, are based on well founded fears that governments will abuse direct control of money printing presses."
The specific argument that monetary reform would open the way to uncontrollable inflation is dealt with later. Here we have to overcome the more general argument that the present "non-transparent" system of money creation should be maintained; in other words, that citizens and politicians of democratic countries should be kept in the dark about how money is now created and how the present system might be reformed.
Again, this points to the need to press the authorities to explain how almost all new money is now created, what are the arguments for and against creating it that way, and how much the present system benefits the commercial banks and reduces potential public revenue. The pressure need not be international in order to make an impact on national thinking, but the impact would be greater if it were.
Obstacle/Objection 4. Ignorance and confusion about the actual reform proposal.
The proposed reform would not entail that the central bank should be given responsibility and power to decide how new money shall be used, so making it responsible for fiscal policy as well as monetary policy and depriving the elected government of power to manage the economy! The central bank will merely decide what increases are needed in the money supply, create them, and give them to the government as public revenue, leaving the elected government to decide - as with taxes and other public revenue - how the money is to be used. At present, of course, it is the commercial banks who decide both how much new money to create and who shall borrow it for what purposes.
Those who propagate this error must be publicly corrected. International support, though helpful, will not be strictly necessary for that.
Obstacle/Objection 5. Opposition to supposed increased centralisation of state power.
Linked with the misunderstanding at 4 above is the claim that the reform will increase the centralised power of the state. Opposition to reform on this ground comes from two rather different quarters.
On the one hand there are members of the mainstream economic and political elite who are happy with the present situation in Britain, with the Big Four multinational banks sharing a virtual monopoly of money creation under the Bank of England's central control of interest rates.
On the other hand, there are decentralist monetary reformers who champion the emergence and spread of alternative currency schemes to serve localities, communities, and groups of businesses, and what is sometimes called 'free banking'. Some decentralists doubt "whether it is possible or desirable in the modern day to give the state a monopoly of official currency".
If it is unacceptably centralising to treat new national money as a public resource, to collect its value as public revenue, and to distribute it via public spending programmes, the same principle should presumably apply to the state's monopoly of national taxation and public spending. Imagine for a moment that the history of taxation and public spending had led to them being managed now on a profit-making basis by the Big Four banks. Would decentralists be responding to proposals for reform with the objection that it isn't "possible or desirable to give the state a monopoly of national taxation and public spending"?
Actually there is no contradiction between mainstream monetary reform and decentralised monetary innovation. Both embody the principle that money should serve the needs of people (not vice versa). If you accept that plural currencies are likely to serve people's needs better than a single one-size-fits-all currency for all purposes, both are desirable. There is no reason why support for alternative currencies should mean continuing to accept the present mainstream arrangements, except a wholly unrealistic hope that the new alternative, community, and other private currencies will grow rapidly enough to replace the mainstream system within the foreseeable future.
The practical fact is that in a democratic society, unlike other forms of society, additions to the money supply put into circulation as public revenue will tend to be distributed just as wisely and fairly, if not more so, via increases in public spending and reductions in taxes and public debt than the new money now created by the commercial banks as loans to their customers.
To sum up, there should be no sense of conflict between decentralist and mainstream monetary reformers. Both should work together nationally and internationally to spread wider understanding that radical monetary change is urgent and that their approaches are both necessary.
Obstacle/Objection 6. Monetary reform will be inflationary.
People have learned from history that allowing governments to create new money is a recipe for inflation. So a conventional knee-jerk response to the proposed monetary reform is that it will be inflationary.
It is true that money creation by feudal and monarchical governments in the past and by elected governments more recently has led to inflation. But that does not mean inflation will result from giving an operationally independent central bank responsibility for creating new money directly, instead of indirectly influencing by interest-rate changes how much the commercial banks create. Many people don't yet realise that in 1997 the conduct of monetary policy in Britain was changed. The Bank of England was restructured as an operationally independent central monetary authority. It is accountable to the Chancellor of the Exchequer and Parliament for achieving the published monetary policy objectives which they have framed and approved. But it now carries out this task free from interference by elected ministers and politicians and their staffs. Monetary reform in those new circumstances will enable the Bank to control inflation more effectively, not less effectively, than at present.
The action required to get this more widely understood does not have to be international. But, if it is, the impact may well be greater.
Obstacle/Objection 7. The proposed reform would 'crowd out' investment in the private sector.
This is another spurious conventional reaction. It argues that creating new money as government revenue will 'crowd out' investment in the wealth-creating private sector and switch it to the wealth-consuming public sector.
But of course the proposed reform need not result in allocating resources only to the public sector. Governments could equally well use the new source of revenue to cut taxes and the national debt and so stimulate private investment and consumer spending. Even if new money does circulate via public spending, it will soon reach businesses and citizens who can use it for private sector investment or consumption as they themselves decide.
Although action to demolish this particular knee-jerk objection to monetary reform need not be international, an effective international reform campaign could be helpful in this context, as in others.
Obstacle/Objection 8. Depriving banks of the present seigniorage subsidy would increase the costs of borrowing, raise the costs of payments services, and force banks to cut costs, close branches and reduce jobs.
In fact, this will not necessarily be true. Nor will it be the whole story.
The banking industry will become more competitive when it is no longer subsidised, and the oligopoly of lending to small businesses now enjoyed by the largest banks will be more easily challenged by other banks. That will tend to reduce the costs of borrowing. Furthermore, when money is put into circulation debt-free, the costs of servicing and repaying debt that the use of debt-created money now imposes on every economic transaction will be eliminated, with the result that less borrowing will be needed than now because that element in the present cost of all economic activity will no longer have to be met.
As regards the costs and efficiency of payments services, it is true that if banks are no longer subsidised by the profit they now get from creating money but have to borrow money at interest to lend to their customers, they will no longer be able to cross-subsidise their payments services as much as at present. Initially, costs to bank customers may rise as they have to meet the full costs of the payments services they use.
But, although withdrawing subsidies from any industry initially makes the cost of its products higher, it is generally recognised that this kind of cross-subsidisation between different services is an impediment to competitiveness and economic efficiency.
It is also true that withdrawing the present subsidy will encourage banks to cut costs, perhaps involving further closure of branches and loss of banking jobs. Withdrawing subsidies from any subsidised industry, including coal, steel, ship-building and many others, has had effects of that kind. But subsidies have been withdrawn in the knowledge that subsidies to an industry reduce its competitiveness, by making it more difficult for smaller firms to compete with bigger ones and more difficult for new innovative entrants into the industry to establish themselves. So far as the economy as a whole is concerned, subsidies to particular industries tend to hold back innovation and reduce the growth of efficiency and productivity by distorting the allocation of resources.
Are there any special reasons why the banking and financial services industry should be sheltered from these facts of economic life, except the mystique and power it now exercises over political decision makers?
Campaigning in one country could effectively question whether banking should be treated as a special case in this respect. But international campaigning might have greater impact.
Obstacle/Objection 9. Depriving banks of the hidden subsidy will weaken their ability to compete internationally with other countries' banks.
This view is a favourite with opponents of reform. For example, one politician said he "would not support proposals that gave the State the monopoly on non-cash money. Legislating against the credit multiplier would lead to the migration from the City of London of the largest collection of banks in the world. It would be a disaster for the British economy."
Each part of this statement is questionable. "Giving the state a monopoly of non-cash money" is an exaggerated way of saying that an agency of the state would decide and create the amount of new national money required to meet the objectives of monetary policy, and give it to the government to spend it into circulation, instead of allowing a small group of big commercial banks to create it and put it into circulation as profit-making loans to selected bank customers. See Obstacle/Objections 4 and 5 above for comment on that point. The term "credit multiplier" aims to conceal the fact that new national money is being created for private profit. Whether depriving commercial banks of that privilege would lead to the migration from the City of London of the largest collection of banks in the world, and whether - even if that happened - it would be a disaster for the British economy and society as a whole, are moot points. They need more serious research and analysis, not just knee-jerk assumptions. In fact, it is likely that, after a short period of adaptation by the banking and financial sector, the outcome would prove beneficial to British society as a whole, including the economy's international competitiveness.
Much the same point was made by (British) Treasury Minister Ruth Kelly. She said, "It is evident that this proposal would cause a dramatic loss in profits to the banks - all else equal they would still face the costs of running the payments system but would not be able to make profitable loans using the deposits held in current accounts. In this case it is highly likely that banks will attempt to maintain their profitability by re-locating to avoid the restriction on their operations that the proposed reform involves. Given the desirability of an internationally competitive market in financial (and other) services, it would not be in the UK's interests to insulate itself from such a market."
But why should monetary reform mean the UK insulating itself from an internationally competitive market for banking and financial services? As has already been suggested, far from being a disaster, withdrawing the banks' present subsidy might prove beneficial to their competitiveness and certainly to the competitiveness of the economy as a whole.
The subject needs much more serious analysis and research than it has yet had. That does not need to be carried out in more than one country to be valid. But we must remember, as Machiavelli pointed out in 1532 in The Prince, that "he who introduces a new order of things has all those who profit from the old order as his enemies, and he has only lukewarm allies in all those who might profit from the new". However valid the arguments and the research supporting it may turn out to be, it may be difficult to persuade politicians and the public that, in the context of international competition, the risks attaching to monetary reform by one country alone are worth taking. At all events, an international programme of analysis, research and campaigning will be very desirable.
Obstacle/Objection 10. No other country is seriously considering monetary reform.
In November 2001 Treasury Minister Ruth Kelly wrote, "To the best of my knowledge, no support amongst developed countries or international economic institutions exists" for monetary reform. This brings to mind the joke about the economist who tells his grandson not to bother picking up a GBP 5 note from the pavement, because if it were real somebody else would have picked it up already!
There will probably be no harm, and much gain, in being first to introduce monetary reform, if it will make the economy as a whole more efficient and productive, and society more just and inclusive. However, the special interests of the banking industry are likely to find support from politicians and individuals who feel that the risks of being a pioneer outweigh the possible rewards.
So once again, international efforts to promote monetary reform will clearly be important.
Summing up therefore, it seems clear that, although there is still a great deal of progress to be made within one country such as Britain to mobilise an effective campaign for monetary reform, international research, analysis, advocacy and campaigning will also play a key part.
http://www.jamesrobertson.com/book/monetaryreform.pdf
Bill Totten http://www.ashisuto.co.jp/english/index.html
by Bill Totten
Joseph Huber and James Robertson put forth a proposal for mainstream monetary reform put forward by in Creating New Money (2000). {1} Briefly, that proposal is that new official-currency money (pounds, euros, dollars, yen, et cetera) should no longer be created by commercial banks as profit-making loans to their customers. It should be created by central monetary authorities (today's central banks) which should give it as debt-free public revenue to their governments to spend into circulation for public purposes.
{1} Joseph Huber and James Robertson, Creating New Money: A Monetary Reform for the Information Age, New Economics Foundation, London, 2000 - summarised in World Review, Vol4, No 2, New European Publications, London, 2000. See http://www.jamesrobertson.com/books.htm
Their definition of money includes not just coins and banknotes, but also the electronic bank-created money in our current bank accounts. Although some people with pretensions to knowledge of these things say that that is something distinct from money, called credit, it is now clearly recognised to be money, directly and immediately available for spending. {6} That commercial banks still create this official-currency money for private-sector profit has become a glaring anachronism.
{6} Today's official monetary statistics accept this, but raise a different problem. They contain alternative definitions of the money stock, based on confusing aggregates called M0, M1, M2, M3, M3 extended, M4, and so on. These are part of the veil of mystery which shrouds the workings of the money system even in "democratic" countries. The reform Huber and Robertson propose will replace them with one clear definition of money, M.
Our money system needs to be brought up to date. For over two centuries political democracy has been spreading through the world, but our capacity to control the power of money and harness it to the public good has lagged far behind. So much so that failure to bring the workings of money and finance into line with economic justice and the realities of the Information Age is already damaging confidence in political democracy itself.
For those of us in Britain the euro highlights the link between democracy and the money system. In spite of efforts to persuade us that scrapping the pound and replacing it with the euro would be a progressive step, people are increasingly doubtful. Why can't we use the euro as a parallel currency, alongside the pound, rather than a single currency managed by a remote, centralised monetary authority imposing one-size-fits-all interest rates and money supply on millions of diverse people and places? Surely 21st-century pressures to become more globalised and more localised call for a more pluralistic monetary system, allowing different currencies and means of payment to evolve at local to global levels, enabling people and organisations to choose to use whichever currency they find most convenient and useful for different purposes.
So - as well as national currencies, continental currencies and a global currency - we should be encouraging currencies issued by local government authorities for local circulation, and non-official payment systems set up by local community groups (like LETSystems), local social service groups (like Time Banks), and local business groups (like the WIR co-operative in Switzerland). In technical terms, whereas paper money could have been accepted as the new basis for the monetary system at one time, electronic money can now make it convenient for us to use different currencies for different purposes.
That technical factor also points the way to monetary reform at the national level. Dematerialised non-cash money (that is, electronic bank-created money held in bank accounts and transmitted between them by modern information and telecommunication technology) is now overwhelmingly important. About 97% of this country's (Britain's) money supply is created in that form by commercial banks, and only three percent as banknotes and coins issued by the Bank of England and the Royal Mint.
The commercial banks create the non-cash money out of thin air, calling it credit and writing it into their customers' current accounts as profit-making loans. That gives them over GBP 20 billion a year in interest, while the taxpayer gets less than GBP 3 billion a year from the issue of banknotes and coins. Stopping commercial banks creating non-cash money, and transferring to the central bank responsibility for creating it and issuing it debt-free to the government to spend into circulation, will result in extra public revenue of about GBP 45 billion a year. This is the reform with which this book is specifically concerned. {See 1}
It will mean that:-
1) Taxation and government debt can be reduced, or public spending can be increased, by up to GBP 45 billion a year.
2) The value of a common resource - the national money supply - will become a source of public revenue rather than private profit. That will remove an economic injustice.
3) Withdrawing the present hidden subsidy to the banks will result in a freer market for money and finance, and a more competitive banking industry.
4) A debt-free money supply will help to reduce present levels of public and private debt, which are partly caused by the fact that nearly all the money we use has been created as debt.
5) The economy will become more stable. Banks inevitably want to lend and their customers want to borrow more at the peaks of the business cycle and less in the troughs. So, when the amount of money in circulation depends on how much the banks are lending, the peaks and troughs - the booms and busts - are automatically amplified.
6) The central bank will be better able to control inflation if it itself decides and directly creates the quantity of new money the economy needs. It now tries to control inflation indirectly, by raising interest rates (that is, the price at which people borrow from banks). But raising costs in that way actually helps to cause inflation. That partly explains why inflation has to be allowed to rise steadily every year - by 2.5% in the UK - in order to avoid deflating the economy.
7) Environmental stress will be reduced. When, as now, almost all the money we use is debt, people have to produce and sell more things in order to service and repay debt than they would if money were put into circulation debt-free.
In our proposals for this reform, Joseph Huber and I called it "seigniorage reform". Seigniorage was the profit made by monarchs and local rulers from minting and issuing coins. In democratic societies in the Information Age, the proposed reform will restore the prerogative of the state - now on behalf of the people - to capture as public revenue the value of putting the money supply into circulation.
Many people now understand that money is power, and that the institutions of money today negate democracy by using their power to exploit people and keep them dependent. Many people also understand that money is a scoring system - for the game of economic life - and that the way this scoring system works today is systematically perverse: it rewards undesirable activities, penalises desirable ones, and frustrates desirable change in almost every sphere.
The Proposed Reform
The particular reform we are discussing concerns public currencies. These include the pound, the dollar and the yen that belong to nations, and the euro that belongs to a group of nations. In future they will include a genuine world currency that does not yet exist.
National governments are responsible for seeing that national currencies maintain their value and provide an essential public service to the population as a whole. In that respect these currencies differ from the more private kinds of currencies and quasi-currencies used by community groups (like LETS) or groups of businesses (like the Swiss club WIR) for transactions between their members, and loyalty points, Air Miles, et cetera issued by companies to customers or suppliers, who may then use them as a means of exchange.
In the more pluralistic multi-level-currency era foreseen (see above), the principles of the proposed national currency reform will apply to other official currencies. These will include local currencies to meet the need of local communities within their particular localities, and a global currency to meet the need of the world community for a means of transnational exchange. One of the principles is that the profit (or 'seigniorage') arising from creating money of this kind should be public revenue, not private profit. Another is that these public currencies should be created debt-free, not as interest-bearing repayable debt. We will return shortly to the implications of this for international monetary reform.
Meanwhile, to recapitulate from above, the proposed national monetary reform is as follows:
1) As national monetary authorities, central banks should create non-cash money (that is, bank-account money) as well as cash (that is, banknotes and coins). They should create out of thin air at regular intervals the amounts they decide are needed to increase the money supply. They should give these amounts to their governments as debt-free public revenue. Governments should then put the money into circulation by spending it.
2) It should become illegal for anyone else to create bank-account money denominated in the national currency, just as it is already illegal to forge coins or counterfeit banknotes.
This will involve the following changes:
1) The central bank will no longer regulate increases in the money supply by manipulating the interest rates at which commercial banks lend into circulation money they create for that purpose. The central bank will be directly responsible for deciding how much is needed and for creating it and issuing it itself.
2) Commercial banks will be prohibited from creating money. They will have to borrow already existing money in order to lend it, as other financial intermediaries do.
This will parallel what happened with banknotes in 19th-century England. Electronic bank-deposit money has now become real money and it is time to stop pretending it is just credit. As the issue of banknotes became subject to seigniorage then, so the creation of bank-account money should become subject to it now. In other words, the profit from creating it should no longer accrue to commercial banks but be collected as public revenue. The best available estimate is that in Britain this would contribute about GBP 45 billion a year to public revenue, and deprive commercial banks of the 'subsidy' - estimated at over GBP 20 billion a year - which they now get from interest on the new money they are allowed to create.
The beneficial economic and social effects of this reform have been summarised above. They are very great.
Moreover, the reform would be evolutionary, not revolutionary. Since the Second World War the Bank of England has continued to evolve from being a commercial bank with a special relationship to the government, towards becoming a straightforward agency of the state as its central monetary authority. At the same time, the commercial banks have continued to evolve towards being free-market businesses, with fewer public service obligations backed by government subsidies and controls. For both the Bank of England and the commercial banks, the proposed reform is the next step in that process of evolution.
Seigniorage and the Global Economy
Whoever creates new money can either give it away or benefit from putting it into circulation by spending it or lending it at interest. Just as, under the proposed national reform, the benefit from creating national-currency money would go to the national community as a whole, a comparable change at the international level would benefit the world community as a whole. It would replace the present use of the US dollar and other national currencies like the yen, the euro and the pound as 'reserve currencies', by a world currency issued by a world monetary authority, and channel the profit from issuing it into public revenue to be spent on behalf of the world community. This global reform would clearly need simultaneous support from many national governments. That does not necessarily mean that one country could not undertake national monetary reform on its own. But it would clearly be easier for single nations to do it, if the global version of the same reform was on the global agenda.
In 1995 the independent international Commission on Global Governance {12} identified the United States' "unique luxury of being able to borrow in its own currency abroad and then devalue its repayment obligations" as one of the weaknesses of the current international monetary system. It pointed out that "a growing world economy requires constant enlargement of international liquidity", and suggested that issue of the IMF's reserve currency - Special Drawing Rights (SDRs) - should be increased.
In Creating New Money (2000), Huber and Robertson suggested that SDRs might develop into a global currency which would eventually replace the US dollar and other national currencies in that role. Following the model they had proposed for national seigniorage reform, they suggested this global money might be issued - perhaps by a new international agency combining some of the functions of the IMF and the Bank for International Settlements - into an operational account which it would hold for the United Nations. The UN would spend this money into circulation, partly as a contribution to financing its own operations, and perhaps partly by distributing it to national governments according to the size of their populations.
This new international agency, which would in due course come to be seen as an embryonic world central bank, would have to combine accountability with a high degree of independence in its decisions about how much new international money to create. It might report and be accountable for its performance to a UN body , such as a committee of the General Assembly.
In the few years the significance of the 'dollar hegemony' of the United States, and the urgent need for international monetary reform, have become more widely understood.
For example, one report calculates that every American citizen owes the rest of the world $7,333, while every citizen of the developing countries owes it only $500. But, while developing country economies must pay debt service repayments totalling more than $300 billion a year, the US must only pay $20 billion a year to service an almost equivalent amount of debt. Americans have been engaged in a consumer binge, which has led to the largest current account deficit in history, a staggering $445 billion or four percent of US GDP. This deficit has been increasing by fifty percent a year in recent years, and economists predict it will rise to $730 billion by 2006. Given this daily deficit of up to GBP 2 billion, plus capital outflow of $2 billion, the US in effect has to borrow $4 billion from the pool of world savings every day. More disturbingly, it is being financed by the poor through capital flight from poor countries and the forced holdings of high levels of dollar reserves. To build up reserves, poor countries have to borrow hard currency from the US at interest rates as high as eighteen percent; and lend it back to the US in the form of Treasury Bonds at three percent interest. {14}
{14} Romilly Greenhill and Ann Pettifor, The United States as a HIPC (heavily indebted prosperous country) - how the poor are financing the rich, New Economics Foundation, London, 2002; http://www.neweconomics.org/
Another report finds that "ever since 1971, when US president Richard Nixon took the dollar off the gold standard, the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat ... World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world's interlinked economies compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves". {15}
{15} Henry C K Liu, US Dollar Hegemony Has Got To Go, Asia Times Online Co Ltd, 2002.
A third example: "At the root of this new form of imperialism is the exploitation of governments by a single government, that of the United States via the central banks and multilateral control institutions of inter-governmental capital ... What has turned the older form of imperialism into a super imperialism is that, whereas prior to the 1960s the US government dominated international organisation by virtue of its preeminent creditor status, since that time it has done so by virtue of its debtor position." {16}
{16} Michael Hudson, Super Imperialism: The Origin and Fundamentals of World Domination, Pluto Press, 2003, pages 23-24.
Finally, the researches of Richard Douthwaite and the Irish NGO Feasta {17} confirm that the total annual subsidy (or 'tribute') received by the US from the rest of the world as a result of dollar seigniorage is at least $400 billion a year. This is roughly comparable to the annual US balance of payments deficit. It also explains how the US has been able to maintain its extraordinary scale of annual military expenditure compared with all other countries. The huge dollar seigniorage subsidy has even been justified by some US commentators as a payment by the rest of the world to the US as the 'policeman' on whom the world relies to keep order! However, as Douthwaite notes, "given the policeman's record of destabilising or overthrowing governments with which he has had ideological differences and the fact that he would continue to put his 'particularistic national
interests' ahead of those of the rest of the world, I doubt if many countries would be entirely happy with the arrangement".
{17} Richard Douthwaite, Defense and the Dollar, 2002 and Feasta, Climate and Currency: Proposals for Global Monetary Reform, 2002, prepared for the Johannesburg World Summit on Sustainable Development. Details of both from The Foundation for the Economics of Sustainability, 9 Lower Rathmines Road, Dublin 6, Republic of Ireland; e-mail: feasta@anu.ie; web: http://www.feasta.org/
These analyses show up not only the injustice of the present way of creating money for international and global purposes, but also suggest how distorting and damaging it is to global economic efficiency and financial stability. They clearly point to the need for international monetary reform on a similar basis to the proposed national reform - involving the creation of international debt-free money by an agency which serves the interests of the world community as a whole and provides seigniorage revenue to be spent on global public purposes. As international campaigning grows stronger for international reform on those lines it will reinforce the pressure for comparable national reforms.
Dealing with Obstacles and Objections
The following are among the obstacles to national monetary reform and the objections put forward against it:
1) powerful opposition from banking and financial interests (and from associated constituencies of professionals, academics and politicians), and threats that even the prospect of monetary reform would destabilise the economy;
2) public ignorance and confusion about the present arrangements;
3) an elitist belief that ignorance about them is positively desirable;
4) ignorance and obfuscation about what the monetary reform proposals actually are;
5) the claim that they would involve a further centralisation of state power;
6) the assumption that the reform would be inflationary;
7) the assumption that it would 'crowd out' investment in the private sector;
8) the argument that depriving banks of the present seigniorage subsidy would increase the costs of borrowing, would raise the costs of payment services, and would force banks to cut costs, close branches and reduce jobs;
9) the argument that it would damage the international competitiveness of British banks and therefore of the British economy as a whole;
10) the argument that no other country has undertaken, or is seriously considering, this reform.
So how are these obstacles and objections to be dealt with? And how far will they have to be dealt with internationally?
Obstacle/Objection 1. Opposition from powerful banking and financial interests and the threat of economic destabilisation.
This obstacle will be overcome only when the arguments for monetary reform are more widely understood, when opposition to it is more widely recognised as mere defence of private privilege, and when its opponents accept that they risk losing more by continuing to oppose it than by losing the present subsidy. National and international advocacy and campaigning will be needed to bring that situation about.
Obstacle/Objection 2. Ignorance and confusion about how new money is now created.
Many people, even in government and parliament, don't know how new money is now created, and what the consequences are. Most people find it hard to believe, if they think about it at all, that almost all the money in circulation has been created by commercial banks at profit to themselves. In reply to questions, a government spokesman may say that the funds which banks lend to customers "must either be obtained from depositors or the money market, both of which usually require the payment of interest" - thus appearing to deny that banks are allowed to create new money and to profit from doing so. Or that "banks don't print money but create credit". More often, however, the government accepts that banks create money and defends this by saying that "if banks were obliged to bid for funds from lenders in order to make loans to their customers, the costs to banks of extending credit would rise significantly".
People who are in any doubt about how money is created might glance at Chapters 22 and 23 of a current 'students' bible' on economics. {22} It explains "how banks create money" and that "bank-created deposit money is much the largest part of the money supply in modern economies".
{22} David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, McGraw-Hill, 7th edition, 2003, pages 316 and 318.
The action needed is to press Finance/Treasury Ministers and Central Bankers to clarify and publicise
* how almost all new money is now created,
* who benefits and who suffers thereby, and
* whether or not the estimates of an annual hidden subsidy of more than GBP 20 billion to the banks, and a failure to collect more than GBP 40 billion potential public revenue, are broadly correct.
This action need not be international to make some impact. But, if individuals and NGOs in other countries were to press the same demand on their finance ministries and central banks, the impact would be greater.
Obstacle/Objection 3. The view that ignorance and confusion are positively desirable.
It has been suggested that the deflationary crisis in Japan may have reached a depth which requires the government explicitly to create new money. But when a member of the British economic elite wrote publicly on those lines last year, he felt it necessary to accompany it with a warning that that policy should be avoided in Europe if possible, because "ideally we should avoid unconventional approaches. For the conventions of central bank independence, and of non-transparent money creation, are based on well founded fears that governments will abuse direct control of money printing presses."
The specific argument that monetary reform would open the way to uncontrollable inflation is dealt with later. Here we have to overcome the more general argument that the present "non-transparent" system of money creation should be maintained; in other words, that citizens and politicians of democratic countries should be kept in the dark about how money is now created and how the present system might be reformed.
Again, this points to the need to press the authorities to explain how almost all new money is now created, what are the arguments for and against creating it that way, and how much the present system benefits the commercial banks and reduces potential public revenue. The pressure need not be international in order to make an impact on national thinking, but the impact would be greater if it were.
Obstacle/Objection 4. Ignorance and confusion about the actual reform proposal.
The proposed reform would not entail that the central bank should be given responsibility and power to decide how new money shall be used, so making it responsible for fiscal policy as well as monetary policy and depriving the elected government of power to manage the economy! The central bank will merely decide what increases are needed in the money supply, create them, and give them to the government as public revenue, leaving the elected government to decide - as with taxes and other public revenue - how the money is to be used. At present, of course, it is the commercial banks who decide both how much new money to create and who shall borrow it for what purposes.
Those who propagate this error must be publicly corrected. International support, though helpful, will not be strictly necessary for that.
Obstacle/Objection 5. Opposition to supposed increased centralisation of state power.
Linked with the misunderstanding at 4 above is the claim that the reform will increase the centralised power of the state. Opposition to reform on this ground comes from two rather different quarters.
On the one hand there are members of the mainstream economic and political elite who are happy with the present situation in Britain, with the Big Four multinational banks sharing a virtual monopoly of money creation under the Bank of England's central control of interest rates.
On the other hand, there are decentralist monetary reformers who champion the emergence and spread of alternative currency schemes to serve localities, communities, and groups of businesses, and what is sometimes called 'free banking'. Some decentralists doubt "whether it is possible or desirable in the modern day to give the state a monopoly of official currency".
If it is unacceptably centralising to treat new national money as a public resource, to collect its value as public revenue, and to distribute it via public spending programmes, the same principle should presumably apply to the state's monopoly of national taxation and public spending. Imagine for a moment that the history of taxation and public spending had led to them being managed now on a profit-making basis by the Big Four banks. Would decentralists be responding to proposals for reform with the objection that it isn't "possible or desirable to give the state a monopoly of national taxation and public spending"?
Actually there is no contradiction between mainstream monetary reform and decentralised monetary innovation. Both embody the principle that money should serve the needs of people (not vice versa). If you accept that plural currencies are likely to serve people's needs better than a single one-size-fits-all currency for all purposes, both are desirable. There is no reason why support for alternative currencies should mean continuing to accept the present mainstream arrangements, except a wholly unrealistic hope that the new alternative, community, and other private currencies will grow rapidly enough to replace the mainstream system within the foreseeable future.
The practical fact is that in a democratic society, unlike other forms of society, additions to the money supply put into circulation as public revenue will tend to be distributed just as wisely and fairly, if not more so, via increases in public spending and reductions in taxes and public debt than the new money now created by the commercial banks as loans to their customers.
To sum up, there should be no sense of conflict between decentralist and mainstream monetary reformers. Both should work together nationally and internationally to spread wider understanding that radical monetary change is urgent and that their approaches are both necessary.
Obstacle/Objection 6. Monetary reform will be inflationary.
People have learned from history that allowing governments to create new money is a recipe for inflation. So a conventional knee-jerk response to the proposed monetary reform is that it will be inflationary.
It is true that money creation by feudal and monarchical governments in the past and by elected governments more recently has led to inflation. But that does not mean inflation will result from giving an operationally independent central bank responsibility for creating new money directly, instead of indirectly influencing by interest-rate changes how much the commercial banks create. Many people don't yet realise that in 1997 the conduct of monetary policy in Britain was changed. The Bank of England was restructured as an operationally independent central monetary authority. It is accountable to the Chancellor of the Exchequer and Parliament for achieving the published monetary policy objectives which they have framed and approved. But it now carries out this task free from interference by elected ministers and politicians and their staffs. Monetary reform in those new circumstances will enable the Bank to control inflation more effectively, not less effectively, than at present.
The action required to get this more widely understood does not have to be international. But, if it is, the impact may well be greater.
Obstacle/Objection 7. The proposed reform would 'crowd out' investment in the private sector.
This is another spurious conventional reaction. It argues that creating new money as government revenue will 'crowd out' investment in the wealth-creating private sector and switch it to the wealth-consuming public sector.
But of course the proposed reform need not result in allocating resources only to the public sector. Governments could equally well use the new source of revenue to cut taxes and the national debt and so stimulate private investment and consumer spending. Even if new money does circulate via public spending, it will soon reach businesses and citizens who can use it for private sector investment or consumption as they themselves decide.
Although action to demolish this particular knee-jerk objection to monetary reform need not be international, an effective international reform campaign could be helpful in this context, as in others.
Obstacle/Objection 8. Depriving banks of the present seigniorage subsidy would increase the costs of borrowing, raise the costs of payments services, and force banks to cut costs, close branches and reduce jobs.
In fact, this will not necessarily be true. Nor will it be the whole story.
The banking industry will become more competitive when it is no longer subsidised, and the oligopoly of lending to small businesses now enjoyed by the largest banks will be more easily challenged by other banks. That will tend to reduce the costs of borrowing. Furthermore, when money is put into circulation debt-free, the costs of servicing and repaying debt that the use of debt-created money now imposes on every economic transaction will be eliminated, with the result that less borrowing will be needed than now because that element in the present cost of all economic activity will no longer have to be met.
As regards the costs and efficiency of payments services, it is true that if banks are no longer subsidised by the profit they now get from creating money but have to borrow money at interest to lend to their customers, they will no longer be able to cross-subsidise their payments services as much as at present. Initially, costs to bank customers may rise as they have to meet the full costs of the payments services they use.
But, although withdrawing subsidies from any industry initially makes the cost of its products higher, it is generally recognised that this kind of cross-subsidisation between different services is an impediment to competitiveness and economic efficiency.
It is also true that withdrawing the present subsidy will encourage banks to cut costs, perhaps involving further closure of branches and loss of banking jobs. Withdrawing subsidies from any subsidised industry, including coal, steel, ship-building and many others, has had effects of that kind. But subsidies have been withdrawn in the knowledge that subsidies to an industry reduce its competitiveness, by making it more difficult for smaller firms to compete with bigger ones and more difficult for new innovative entrants into the industry to establish themselves. So far as the economy as a whole is concerned, subsidies to particular industries tend to hold back innovation and reduce the growth of efficiency and productivity by distorting the allocation of resources.
Are there any special reasons why the banking and financial services industry should be sheltered from these facts of economic life, except the mystique and power it now exercises over political decision makers?
Campaigning in one country could effectively question whether banking should be treated as a special case in this respect. But international campaigning might have greater impact.
Obstacle/Objection 9. Depriving banks of the hidden subsidy will weaken their ability to compete internationally with other countries' banks.
This view is a favourite with opponents of reform. For example, one politician said he "would not support proposals that gave the State the monopoly on non-cash money. Legislating against the credit multiplier would lead to the migration from the City of London of the largest collection of banks in the world. It would be a disaster for the British economy."
Each part of this statement is questionable. "Giving the state a monopoly of non-cash money" is an exaggerated way of saying that an agency of the state would decide and create the amount of new national money required to meet the objectives of monetary policy, and give it to the government to spend it into circulation, instead of allowing a small group of big commercial banks to create it and put it into circulation as profit-making loans to selected bank customers. See Obstacle/Objections 4 and 5 above for comment on that point. The term "credit multiplier" aims to conceal the fact that new national money is being created for private profit. Whether depriving commercial banks of that privilege would lead to the migration from the City of London of the largest collection of banks in the world, and whether - even if that happened - it would be a disaster for the British economy and society as a whole, are moot points. They need more serious research and analysis, not just knee-jerk assumptions. In fact, it is likely that, after a short period of adaptation by the banking and financial sector, the outcome would prove beneficial to British society as a whole, including the economy's international competitiveness.
Much the same point was made by (British) Treasury Minister Ruth Kelly. She said, "It is evident that this proposal would cause a dramatic loss in profits to the banks - all else equal they would still face the costs of running the payments system but would not be able to make profitable loans using the deposits held in current accounts. In this case it is highly likely that banks will attempt to maintain their profitability by re-locating to avoid the restriction on their operations that the proposed reform involves. Given the desirability of an internationally competitive market in financial (and other) services, it would not be in the UK's interests to insulate itself from such a market."
But why should monetary reform mean the UK insulating itself from an internationally competitive market for banking and financial services? As has already been suggested, far from being a disaster, withdrawing the banks' present subsidy might prove beneficial to their competitiveness and certainly to the competitiveness of the economy as a whole.
The subject needs much more serious analysis and research than it has yet had. That does not need to be carried out in more than one country to be valid. But we must remember, as Machiavelli pointed out in 1532 in The Prince, that "he who introduces a new order of things has all those who profit from the old order as his enemies, and he has only lukewarm allies in all those who might profit from the new". However valid the arguments and the research supporting it may turn out to be, it may be difficult to persuade politicians and the public that, in the context of international competition, the risks attaching to monetary reform by one country alone are worth taking. At all events, an international programme of analysis, research and campaigning will be very desirable.
Obstacle/Objection 10. No other country is seriously considering monetary reform.
In November 2001 Treasury Minister Ruth Kelly wrote, "To the best of my knowledge, no support amongst developed countries or international economic institutions exists" for monetary reform. This brings to mind the joke about the economist who tells his grandson not to bother picking up a GBP 5 note from the pavement, because if it were real somebody else would have picked it up already!
There will probably be no harm, and much gain, in being first to introduce monetary reform, if it will make the economy as a whole more efficient and productive, and society more just and inclusive. However, the special interests of the banking industry are likely to find support from politicians and individuals who feel that the risks of being a pioneer outweigh the possible rewards.
So once again, international efforts to promote monetary reform will clearly be important.
Summing up therefore, it seems clear that, although there is still a great deal of progress to be made within one country such as Britain to mobilise an effective campaign for monetary reform, international research, analysis, advocacy and campaigning will also play a key part.
http://www.jamesrobertson.com/book/monetaryreform.pdf
Bill Totten http://www.ashisuto.co.jp/english/index.html
posted by Bill Totten at
7:29 AM
1 Comments:
Jct: Sure, there are many examples of governments using their own interest-free credits. I only object to credit creation being restricted to government while I like people people being able to take out their own chips too.
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King of the Paupers, at 6:04 AM, October 07, 2009
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