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As the title suggests, the book explains why the current monetary system is broken, and explains, in more detail than ever before, exactly how it can be fixed. The product of three years of research and development, these proposals offer one of the few hopes of escaping from our current dysfunctional monetary system. Detailed but accessible to non-economists.
At the heart of the ongoing economic crisis is the fact that governments across the world have given the power to create money to the private corporations that we know as banks. Today, over 97% of all of the money used by people and businesses is created by banks when they make loans. This way of creating money has led to economic instability and a financial crisis. It has produced the highest-ever levels of personal and government debt, made houses unaffordable, and driven the short-termism which is destroying the businesses, and ecosystems, on which we depend.
Detailed, but accessible to non-economists, Modernising Money is written for anybody who wants to know how to create an economy that serves people, businesses, society and the environment.
SummaryOur banking system is fundamentally broken, yet for all the millions of words of analysis in the press and financial papers, very little has been written about the core of the problem. While there are many problems with banking, at the root of the issue is that successive governments have ceded to the banking sector the responsibility and authority for creating new money and managing the money supply.
The years following 2007 have clearly shown that we have a dysfunctional banking system. However, the problem runs deeper than that. It is not just the structures, governance, culture and incentives of banks that are the problem; it is the fundamental method of creating the nation’s money supply. We believe it is this process of creating and allocating new money that needs fundamental and urgent reform. This book lays out a workable, detailed and effective plan for such a reform.
In a practical sense there are five main objectives of the reforms outlined in this book:
- To create a stable money supply which is not based on debt, not issued by private banks and not dependent on the lending behaviour of banks. This money supply would be created by a transparent, accountable, democratic body, in accordance with the needs of the economy as a whole. The process of creating money should be done only in the interests of society as a whole and protected from abuse by either politicians or financial interests. Making these changes would protect the economy from the credit bubbles and credit crunches that have caused so many problems over the last few years, and would limit inflation.
- To create an economy where entrepreneurs, innovators and the real economy can thrive by – as much as possible – ensuring that investment goes to businesses, science and technology, rather than into asset price bubbles or financial market speculation. We hope to see money used for wealth creation rather than simply wealth extraction.
- To reduce the burden of personal, household and government debt, by creating new money, free of corresponding debt, and spending it into the economy to replace the outstanding stock of debt-based money that has been issued by banks. By directing new money towards the ‘roots’ of the economy – the high street and the real (non-financial) economy – we can allow ordinary people to pay down their debts and stimulate the real economy.
- To re-align risk and reward, so that those who stand to gain from the upside of risky investments also stand to take the downside. Whenever there is a misalignment between the risk and the reward, there will be ‘moral hazard’ (discussed later) and excessive risk taking by whoever stands to gain from the upside. This problem is rampant in the banking sector and was another major contributor to the crisis. The proposals in this book seek to remove this misalignment of risk and reward.
- To provide a structure of banking that allows banks to fail, no matter their size. With the current structure of banking no large bank can be permitted to fail, as to do so would also bring down the entire payments system, leaving millions of people with no access to money. Simple changes outlined in this book would ensure that banks could be liquidated whilst ensuring that customers would keep access to their current account money at all times. Of course, the changes outlined actually reduce the likelihood of bank failure, providing additional protection for savers.
Whilst inspired by Irving Fisher’s original work and variants on it, the proposals outlined in this book have some significant differences. Our starting point has been the work, in the year 2000, by Joseph Huber and James Robertson (Creating New Money; A monetary reform for the information age, 2000), which updated Fisher’s proposals to take account of the fact that money, the payments system and banking in general is now electronic, rather than paper-based. Over the last two years we’ve developed these ideas even further, strengthening the proposal in response to constructive feedback from a wide number of people. We have also improved the proposal in response to downright hostile criticism, for which we are equally grateful!
Taken together, the reforms end the practice of ‘fractional reserve banking’, a slightly inaccurate term used to describe a banking system where banks promise to repay all customers on demand despite being permanently unable to do so. Abolishing this practice is an idea that, in other forms, has caught the eye of the Governor of the Bank of England, who in late 2010 said that:
“For a society to base its financial system on alchemy is a poor advertisement for its rationality.”
There are very real challenges facing the world over the next few decades, including likely crises in food production, climate, energy, and natural resources (including water). To focus on dealing with these extreme challenges, it is essential that we have a stable monetary system and are not distracted by crises that are inevitable in the current monetary system. The monetary system, being man-made and little more than a collection of rules and computer systems, is easy to fix, once the political will is there and opposition from vested interests is overcome. The real challenges of how to provide for a growing global population, a changing climate, and increasingly scarce natural resources, require a monetary system that works for society and the economy as a whole. For that reason, our current monetary system is no longer fit for purpose and must be reformed.