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Monday, August 30, 2010

Creating New Money (2000) by James Robertson

A Book Review

by Alistair McConnachie

Prosperity (August 2000)

Many people today think that the State creates all the money in circulation. It doesn't. Almost all money in circulation, around 97%, is created by the banking sector "out of nothing" and circulates as electronic and cheque book money - see Prosperity, April 2000 for the process by which money comes into circulation:

The three per cent created by the State is the notes and coins, and the only cost to the taxpayer is the relatively insignificant cost of minting. However, taxpayers benefit directly because an amount equivalent to the face value of those notes and coins is spent by the State, into the economy, as a direct, debt-free input.

It would not be practical to return to a state of affairs where everyone dealt in cash. But if the State can issue money debt-free in the form of cash then it can extend that principle and issue electronic money in the same way also.

This would mean that when the State found itself short of money raised from taxes then - instead of printing Treasury Bonds, selling them to the banking and non-banking sector in order to raise money, and then having to pay them back when they become due, and with interest attached, and with money that has been raised from taxpayers and the sale of even more Bonds - it could simply create the money required "out of nothing", in the way that banks create money today, and spend it into society as public revenue.

Instead of the benefits of our money system accruing to banking interests, it would accrue to the whole of society. That is a just and democratic goal worth aiming for.

A new and valuable book from the New Economics Foundation entitled Creating New Money: A Monetary Reform for the Information Age, by Joseph Huber and James Robertson, makes the case that the value created by issuing new money should be a common, not a private, resource. New money should be put into circulation as public spending, not as profit making loans by commercial banks, and that the result would be equivalent to twelve per cent off income tax.

The authors term this seigniorage reform and it is twofold:

1. A Central Bank should create the amount of new non-cash money (as well as cash) it decides is needed to increase the money supply. It should credit it to the government as public revenue. Government should then put it into circulation as public spending. In deciding how much new money to create, a central bank should operate with a high degree of independence from the government.

2. It should be illegal for anyone else to create new money denominated in the official currency. Commercial banks will then be excluded from money creation. They will be limited to credit-broking as other financial intermediaries are - borrowing, but no longer creating, the money they need to lend.

This reform will restore seigniorage, that is, the prerogative of the State to issue money, and to capture the value that arises from issuing it, and use it as public revenue.

This reform will mean that the whole stock of national currency circulating in the economy will have been issued by the central bank, including all money in everyone's current accounts, together with everyone's cash.

They argue that this reform will not only bring benefits in terms of increased public revenue, but will also bring lower interest rates and lower inflation.

It will create greater economic stability, by enabling the central bank to smooth out the peaks and troughs of business cycles more effectively than it does today.

It will have administrative benefits also, as it will be easy to calculate how much money there is. Instead of monetary statistics such as M0, M1, M2, M3, M3 extended, and M4, there will simply be one amount of plain money M.

It will make the system more understandable and transparent and will make it easier for more people to participate in economic policy debate.

The book is a very thorough presentation of the authors' case including chapters on implications for public finance, banking, and, especially useful, replies to suggested objections. At only 92 pages, it is also easily and quickly read.

The authors state that support for money reform will be needed from the following helpful list:

- politicians and public officials, not necessarily connected with banking and financial affairs;

- the banking industry itself, the central banks, and other national and international monetary and banking institutions;

- the community of respected monetary academics, monetary historians and other specialist monetary and banking experts;

- the wider community of individuals, NGOs [Non-Governmental Organisations] and pressure groups, who are committed to the support of proposals for greater economic efficiency which involve a fairer sharing of resources, but who may as yet be unfamiliar with - the relevance of monetary reform; and

- the community of already committed supporters of monetary reform.

Ed Mayo, the Executive Director of the New Economics Foundation writes in his introduction, "We look forward to monetary reform moving to the centre stage of public and policy debate in the way that eco-taxes, stakeholding and debt cancellation have done".

This book is an immensely important and significant step towards that goal.

See also James Robertson's articles:

Creating New Money: Some Frequently Asked Questions

A Summary of Seigniorage Reform

Creating New Money is available for GBP 7.95 from The New Economics Foundation, 3 Jonathan Street, London, SE11 5NH. Tel: 0207 820 6300.

James Robertson's presentation at "The Alternative Mansion House Speech 2000", on 15 June 2000, entitled Financial and Monetary Policies for an Enabling State, is on the web at

Bill Totten


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