1: Monetary Reform Motion to Conference
In November it was decided that we could not submit the proposed Monetary Reform voting paper to the Spring Conference, as it had not been published in that form in the last First Agenda; instead, however, we could submit a simple Monetary Reform motion, so I hurriedly drafted and circulated one to those, mainly who attended the Leicester meeting, whose email addresses I had, and by post to a few others.
After further discussion, it was decided that we would refine it to submit, instead, to the 2001 Autumn Conference, and meanwhile try further to get the Party members to study this vital issue. Michael Rowbotham has agreed to address a fringe meeting on it, at the Spring Conference.
Below is the motion I submitted, interspersed with comments on it from Andrew Waldie. Further views and comments would be welcome, to produce the final version for submission in the Autumn.
The essential aim is to commit the Party to the principle of having the national money supply spent into existence by the State, replacing the present supply of debt-money created by the commercial banks and in the process eliminating the debts it has generated.
Delete all EC661-663, and replace with:
EC661 Today, nearly all money is created by the banking system, generally from the simultaneous creation of loans to government, private individuals and corporations. Under the present banking system, this gives an enormous amount of profits and power to commercial banks and financial institutions to influence and control the economy as a whole. These commercial banking institutions work to a purely commercial agenda in which the desirability of making loans (and thereby creating money) is assessed only in terms of its financial viability to themselves. This form of money creation, as interest-bearing debts, also causes the mushrooming of debt throughout the world, which is a root cause of the destructive nature of the present world economy.
EC 661—I like the way that the motion brings out the political significance of monetary reform right up front in its first clause.
Monetary reform is an essentially political matter—the economics and technical execution of the reform are second order issues (all be it very absorbing ones to people like myself—with an economics degree and two accounting qualifications). The key commitment we are asking the Green Party to sign up to is: does it want to take on the political power of the international investment and commercial banks? Is the Green Party ready for, strong enough, to take on such a challenge?
EC662 Formerly, most money was created by governments, and spent into circulation. This not only gave those governments the "seigniorage"—the value of the money created, less its cost of manufacture—but also meant that once issued, it could continue to circulate indefinitely as a medium of exchange, without being also an interest-bearing debt. With the rise of banking over the last 3-4 centuries, the banks have increased their share of money creation to the point where now only about 3% of our money supply—the notes and coins—is created by our government.
EC 662—I agree with Chris that the seignorage point—there is a Free Lunch—needs to be linked with some beneficial policy objective. Chris suggests funding a worthwhile Citizens Income—good idea. However recapturing the benefits of seignorage for the public good is a one-time deal, that is, once debt-backed money has been replaced by "common wealth" backed money, there should—in the steady-state sustainable economy we aspire to achieve—be no need to create further money and thus no source of "free lunch" funding to sustain the higher levels of citizens income. An alternative would be to use the "free lunch" to fund the upfront investment that many Green policies require to be politically acceptable. For example—investment in public transport; energy-efficient housing; new smaller schools, shops, manufacturing and distribution facilities to meet the needs of more community oriented economies—before green taxation and regulatory measures are introduced to discourage/penalise excess consumption of carbon based fuels; ecologically inefficient or destructive production methods and long-distance transport.
Either way, the policy motion could usefully spell out how monetary reform could enable other Green policies.
[I replied: Good point—though I deliberately did not do this, for the sake of brevity.]
EC663 Reform of this situation is urgent. To this end, the banking facilities of the Central Government will be provided by a reconstituted Bank of England, as a trustee-governed, non-profit-making Central Bank. A Currency Commission will constitute a new department of the Bank of England, and will possess the legal right to create, or cancel, national currency. (See also EC666-7.)
EC 663—"Reform of this situation is urgent"—why? In my opinion, it is not sufficiently compelling to argue that debt-created money is the main driver of environmentally, ecologically and socially destructive growth. This may well be true and I trust that such a conclusion can be drawn from analysis of what I presume is a complex system of cause and effect. However, I often find in monetary reform literature that this conclusion is usually asserted rather than argued. (Can you point me in the direction of literature where this conclusion is clearly argued? I don't buy the argument that more money needs to be created to pay the interest on the debt which created it. As long as the recipients of interest spend the interest payments they receive and re-lend debt that is repaid—then a constant stock of money can keep circulating, with the creators of that money enjoying a permanent, but stable, rent in the form of interest payments generated by the labour of others.) To my mind at least, the linkage between debt-created money and destructive economic growth is not self evident. If this is true for other Green Party members, this may explain their apparent preference for policies which address the effects of economic growth rather than the alleged cause.
[I replied: Mike Rowbotham's "The Grip of Death". The point is that the money system is the key, neglected/hidden underlying cause; certainly, not the only problem, but one which must be resolved before the other causes can be effectively tackled.
Two points here. First, the growing debts create growing desperation to survive against equally desperate competition—the basic drive for "economic growth". It makes necessary the cutting of workforces and wages, deteriorating conditions, etc. Second, " As long as the recipients of interest spend the interest payments they receive and re-lend debt that is repaid"—but only part is used this way. Some goes to increasing reserves; some to abroad—investments or tax havens—and some to inflated "upper level" spending on antiques, works of art, etc.—perhaps eventually returning to the cycle of current production and consumption, but with a delay. And, of course, much of the money is used for currency speculation and stock-market inflation, rather than for commerce. Interest is also the prime cause for the growing gap between rich and poor—see for example Margrit Kennedy, "Interest and Inflation Free Money".]
So, what is the "burning platform" that makes this change so imperative? Given that monetary reform means going head to head with the international banks and their vast institutional power (e.g. control over the media—through their investments/positions on the Board of multi-national corporations; control over politicians through corporate funding of political parties etc.)—why is it so vital that the Green Party take on this challenge now—rather than wait until it is stronger or has achieved more readily attainable objectives?
[I replied: Precisely because of the near-total control over politicians and media—and the urgency of reversing current trends. It has little prospect of significant effect without monetary reform. The monetary reform movement is growing rapidly, though still small, and if the Green Party took it on board and related it to its other policies, it should be in a position to gain rapid support. The potential is huge.]
In my view, were the Green Party and the wider environmental movement to seriously adopt monetary reform as a primary plank in its platform—and I believe it ought to—then it can expect to meet savage resistance from those who benefit from the current regime—the banks and the shareholders of multinational corporations who profit from debt-driven global economic growth. At the moment the multinational corporate world appears to be content to negotiate with, adapt to, and generally attempt to dilute the impact of the environmental movement rather than destroy it—as long as it manifests itself primarily through NGOs rather than democratically elected sovereign governments, and doesn't threaten its essential power bases. Also, in many respects, the environmental agenda suits big corporations: "Organic or environmentally friendly" products generally command a higher profit margin. Environment protection regulations can create valuable barriers to entry for large established corporations who can afford to comply with such regulations, to the disadvantage of smaller competitors or potential new entrants to their markets who cannot; and banks can create yet more money by lending to enterprises seeking to restructure their manufacturing processes and products to become "energy-efficient/environmentally friendly". However, the moment that monetary reform is seriously proposed—then the gloves will come off.
[I replied: Agreed; but disillusion with these efforts to buy off protest is growing rapidly, and the position of the powerful is growing weaker. People are realising that far more drastic action is required.]
So why take on this fight? In the 1930's there was a compelling reason for monetary reform—the need to reflate the economy to deal with economic depression caused by the collapse of the money supply due to massive debt liquidation—particularly in the USA. Looking at the debt fuelled balloon economy of the USA today—history may yet repeat itself, but—so far—world-wide investors seem to have an inexhaustible appetite for US Dollar-denominated debt and securities. This drives up the prices of such assets—providing yet more collateral and consumer confidence to enable more lending and money supply creation. Such a virtuous/vicious circle (depending on your point of view) could perhaps carry on indefinitely—until such point the investors lose confidence in the US economy, or decide the time is right to liquidate their US dollar denominated securities to buy real assets such as land or mineral extraction rights (the price of which would conveniently tumble in the consequent debt deflation).
[I replied: Many informed observers see a collapse of this bubble as imminent. The Asian, Russian, Japanese crises were "saved" by massive bail-outs of mainly Western financial institutions' investments at Western taxpayers' expense as their bubbles burst!]
In my view, the compelling argument is a political one. The simple fact that the power of banks to create money allows them to direct investment and to extract a rent for that privilege from the labour of others is politically and morally unacceptable. This practice—which is essentially legalised fraud—should not be tolerated by a political party dedicated to creating a socially just as well as an environmentally sustainable society.
The political messages flowing from this argument are also straightforward, easy to understand and hopefully attractive to voters: the reason there is no money for better schools or hospitals is that banks will not create money for that purpose; the reason taxes are so high is that government has to pay interest on debt it borrows; the reason our incomes don't stretch very far is that we have to pay interest on the excessive loans we must take out to get access to decent housing—the price of which is artificially fuelled by bank lending on the basis of salary multiples. We are being systematically defrauded—all the Green Party needs to do is make people aware of the fraud (not easy I admit—the sheer simplicity of it makes it hard to accept. I suspect there is an element of denial in those who resist monetary reform: it's hard to face the question, "how could we have been so stupid to be fooled by such an obvious con trick for so long?") and demand that it be stopped.
[I replied: As JK Galbraith put it, "a method so simple the mind is repelled"—but there has been a concerted avoidance of discussion of it, both in the media and in economics courses since the last world war.]
EC664 The Currency Commission will be responsible for the creation and regulation of the money supply on the basis of an ongoing monitoring of the national economy. It will be publicly accountable and open to scrutiny, and ultimately answerable to parliament. The Commission will require the government to spend into circulation the monies it creates (in the form of credit or cash, as required), or to withdraw some from circulation for cancellation, in order to maintain the money supply, as a circulating medium of exchange, to meet the needs of society, and at the level needed to avoid undue inflation or deflation, or for beneficial expansion or contraction of the economy.
EC664—in guiding decisions on the optimal size of money supply, who determines whether or not—and to what degree—economic expansion or contraction of the economy is "beneficial"—the trustees of the Currency Commission, Parliament or the Government? Also, is it desirable for all money created by the Currency Commission to be disbursed solely by central government? Could it not also be credited to the accounts of regional or local governments or to individual citizens or a mix of the above? These are essentially political questions which could be left open at this stage—to be the subject of later policy. In order to focus debate on the central policy of publicly created money—perhaps the motion should just state that the Currency Commission will be publicly accountable and that money created by it will be disbursed in the form of public expenditure, grants or directly to the public in the form of a public dividend.
[I replied: Yes, this seems fine to me. The essential point is that it should be of public benefit. The central government could itself choose to distribute it in any such way, of course.]
EC665 The Commission will also manage the sterling exchange rate on the basis of Purchasing Power Parity with other currencies and the settlement of any international trade imbalances (see also EC727).
EC665—Given that money can also be held overseas as an investment asset, trying to manage its value so as to maintain a PPP exchange rate and equilibrium in trade may result in the addition and removal of money from the money supply being driven by potentially volatile capital flows. This could be destabilising. It may be preferable to let the exchange rate float freely. I think further thought also needs to be given to the need for exchange controls, or a publicly created international currency to fund international trade (as proposed by Richard Douthwaite—in his Schumacher Briefing—The Ecology of Money), to ensure the stability of national money supply. Perhaps at this stage—to allow further consideration of such technical issues—the motion could simply state—"The Currency Commission will also monitor and, where judged necessary, take steps to regulate the exchange of Sterling with other currencies, or make market interventions to ensure that stable and sustainable economic conditions are maintained."
[I replied: Thanks; I am not committed to this proposal, and welcome your input. You are probably right.]
EC666 In consequence of the above, commercial banks must be restricted in their ability to create money. This may be achieved at a stroke, on a given date, by making all current accounts as from that date the property of the depositors, managed by the banks, and no longer part of the banks' assets; at the same time making it illegal for banks to lend out more than they have on deposit or reserve. Existing liabilities to their current-account customers at that date will become liabilities to the central bank. (See the detailed proposals in "Creating New Money", by James Robertson and Joseph Huber).
EC667 Alternatively, the change-over may be made more slowly, by progressively increasing restrictions on lending by re-introduction and increases in the statutory reserve requirements, or by increasing restrictions on borrowing, for hire-purchase, mortgages, etc.
EC668 With this alternative, the extent of lending and borrowing money into existence could be used as a guide for managing the money supply. Given the natural inclination to avoid debt where possible, the general level of borrowing may become a useful indicator of the adequacy, or not, of the general level of money supply.
EC666—668—These cover how the policy will be executed. I am not sure that the wording in EC 666 is correct. Credit balances in customer current accounts are shown as liabilities, not assets, on the balance sheets of banks, and are liabilities due to the holders of those accounts who can show them as assets on their financial statements. Therefore they are already the "property" of the current account holders.
[I replied: Correct;—but they form part of the banks' balance sheet. The reform would take them out of it, to become simply customers' money deposited for safekeeping and managing, but the liabilities at the date of the reform would be transformed into liabilities to the central bank, to be redeemed as outstanding loans are repaid.]
To move overnight to a 100% reserve asset:deposit ratio based system —all loans and other debts payable to banks, and shown as assets on their balance sheet, would have to be assigned to the Central Bank, which in return would credit the deposit accounts those banks held at the Central Bank with an amount equal to the value of the assigned loans. (The banks could continue to administer the assigned loans on behalf of the Central Bank—remitting principal and interest paid on those loans to the Central Bank.) It would then be a matter of policy as to how much, if any interest, the Central Bank paid to the banks on the deposits they held with it. As the loans assigned to the Central Bank were repaid, and debt-free money was introduced to the system, the amount of interest paid to banks on their Central bank deposits would be reduced—this would allow a period of transition for the banks to adjust their business model so that their revenues were based solely on: current account money transmission service charges, management fees for operating pooled savings and loan/investment funds, profits from brokerage and trading in non-money financial instruments, and professional fees for raising capital and managing complex financial transactions. All current account balances (gross of any temporary overdrafts) would have to be matched exactly by the value of deposits held by each bank in its account at the Central Bank (plus the value of its cash holdings). To settle net balances from cheque clearing and other money transfers between them, banks would transfer deposits between their Central Bank accounts. Under such a scheme banks would not be permitted to lend money at all since to allow them to lend is to allow them to create money. (Although, to ensure that the spending of newly created money is targeted more precisely at local community needs, community banks could be given a license to lend and create money—with the level and rate of interest of such lending being regulated by the Currency Commission.) Lending for home purchase or even consumer spending would have to be funded through pooled savings and loan schemes, where the money deposited by savers in such schemes would be lent to borrowers. Subject to the terms of each savings and loan scheme, savers could withdraw their money but would bear a measure of the liquidity and credit risks faced by the overall scheme—the larger the scheme the greater the pooling and reduction of risk faced by individual savers. "Shares" in such schemes could be exchanged and traded, but at market value. Only money held in current accounts would retain a certain cash value. In return for that certainty, a tax on current account balances could be levied and collected by the banks on behalf of government. Such a tax would discourage the hoarding of money and encourage its circulation.
[I replied: In January I'm publishing a talk given by John Tomlinson with some alternative ideas I think you will find interesting.]
It also follows in such a scheme that with all debts being transferred from commercial banks to the Central bank, Government could also decide to forgive some of that debt and/or reduce the rate of interest charged on the remaining debt. Such a policy would be a means of accelerating the liberation of the nations' money supply from the burden of the debt that originally created it.
In short, bringing the nation's money supply back under public control overnight would require the nationalisation of the debt which created it. Would the banks ever allow that to happen—or would there be a massive flight of capital or liquidation of debt before any political party proposing such a policy could win an election, assume power and get the necessary legislation on the statute books?
[I replied: Robertson and Huber follow Irving Fisher and Henry Simons in proposing to make current accounts—"sight deposits"—legal tender money, and having banks separate these from deposit accounts—"time deposits"—which they would be able to use for loans. In general, loans go into current accounts, and these are used as liquid assets—money—more directly than the contents of savings accounts, which have to be transferred into current accounts before they can be spent.]
The alternative slower change-over set out in EC667 and EC668 would allow some political compromise to be reached with the banks—but how effective would the necessary controls on lending be—particularly in the absence of exchange controls? If such controls are not effective then the creation of government controlled money, alongside inadequately controlled bank lending, could result in inflationary conditions which encourages consumers and house buyers to borrow more rather than less—in expectation that they will enjoy holding gains in asset prices and reduction in the real value of their debts as a result of inflation. I am sceptical that the level of borrowing in a mixed monetary economy would provide an indication of the adequacy of the level of the publicly created money supply as suggested in EC668. I think that creating such a feedback loop would result in an unstable system. Is there any real evidence to support the hypothesis that the level of borrowing would decline as more debt free money was created?
[I replied: We used to have strict legal controls on hire purchase borrowing, as well as on mortgage levels. These could be reintroduced, and with mortgages currently forming about 64% of the money supply, even without reintroducing and increasing reserve ratio requirements, should effectively reduce the banks' power to loan by limiting the public's power to borrow. (I do not suggest that the level of borrowing should form the only basis for deciding the needed level of money supply.)
I believe that the means by which monetary reform should be executed needs further thought and debate. Perhaps the motion should just state that—"...the banks must be restricted in their ability to create money through lending. The extent, method and timing of the introduction of such restrictions needs careful consideration to ensure that they can be introduced without disrupting economic activity or destabilising economic conditions."
[I replied: Yes—worth considering.]