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Monday, August 02, 2010

The Proposed Bank of England Act - Part Three

How It Works

Addressing the Root of the Problem

To find a solution, you have to start by looking at the root of the problem. In this case the root of the problem is the creation of new money (as debt or 'credit') every time a loan is made. As explained in the section before, this happens thanks to the fact that we permit banks to lend 92% of all the money that they receive from depositors, whether the depositors actually wish for their money to be lent, or would have preferred for the money to be kept safe and away from risk. When this money is lent and returns to the banking system via other depositors, it is recorded as new money, and can then be used to fund yet more loans.

Preventing Banks Creating Money

Our first step then is to prevent banks from creating money each time they issue a loan. This step is actually remarkably simple - we just set a 'universal rule' that banks can only credit (put money into) an account if they simultaneously debit (take money out of) another account by the same amount. As is explained in this guide, this prevents money being created (or destroyed) within the banking system.

Creating a Public Source of New Money

However, up to now the banking sector has been increasing the money supply by an average of eight per cent each year. While this growth rate is almost certainly too high, a growing economy does still require an injection of new money each year, in the same way that a car requires the regular addition of oil to keep everything running smoothly.

Consequently, our second step is to give the Bank of England the power and responsibility to manage the money supply and create new money as and when the economy is judged to need it. We implement strict measures to separate control of the money supply from any political influence, and further strict measures that significantly reduce the risk of inflation, compared to the existing system.

With new money now being created debt-free by the state, we need to ensure that this money is distributed by the most economically efficient and socially beneficial method possible. We recommend that the money be given to the government as a non-repayable grant, and used to reduce the overall tax burden, phase out the national debt and invest in public infrastructure. Phasing out the national debt has its own complications, and we have made recommendations to deal with these.

Further Info:

Best read in order, starting with Creating New Money, but you can skip to the section that interests you most.

Section 1: Creating & Distributing New Money

Creating New Money

Guarding Against Inflation

Distributing Newly Created Money

Clearing The National Debt

Section 2: The Required Changes to the Banking System (Technicalities and Details)

Two Types of Customer Account

Transaction Accounts

Investment Account Guarantees

Investment Accounts

Three Accounts at the Central Bank & The Payments System

Making Loans

Ensuring Stability In Banking

Overdrafts & General Liquidity in the System

Bill Totten


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