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Article in the Schumacher Newsletter, July-December 2004

"MONETARY REFORM - Making it Happen!" by James Robertson and John Bunzl, 80pp, International Simultaneous Policy Organisation (ISPO, PO Box 26547, London SE3 7YT), 2003, £5.

John Bunzl and I thought of this as a possible Schumacher Briefing, before deciding to start a new ISPO "Making it Happen" series with it. It takes forward the case for monetary reform in Schumacher Briefings on "The Ecology of Money" and "Gaian Democracies".

Money provides the scoring system for economic life - global, national and local. This scoring system is now perverse. It rewards the activities of people, organisations and nations that take from the common wealth, and penalises those that add to it. It encourages economic behaviour that should be discouraged, and vice versa.

Monetary reform is about one vital aspect of this - the way new mainstream money (state-backed currencies like the pound, dollar and euro) is created.

The value of new money created and put it into circulation, minus the cost of producing it, provides a profit. Today the production cost for almost all new money is virtually zero. It simply involves making computer entries in bank accounts.

In a democratic society many people naturally assume that the public money supply is created by the state, with the profit going to public revenue. Unfortunately they are wrong. 97% of new money in the UK is created by commercial banks, simply writing it out of nothing into their customers' bank accounts as profit-making loans. This gives the banks a hidden subsidy of over £20bn a year and deprives UK taxpayers of potential public revenue of over £40bn.

Moreover, when almost all the money we use starts off as debt, indebtedness becomes systemic. In most countries this increases hardship and misery for large sections of the population. It restricts most people's freedom to some extent. It has damaging economic, social and environmental effects. Only a well-off minority benefit from the creation of money as debt.

The international economy doesn't yet have a global currency corresponding to a national currency. So the US dollar is mainly used for international transactions. For this, other countries, including the poorest, pay the US a hidden subsidy totalling at least $400bn a year.

National monetary reform will mean the following changes:

  • The central bank - as the national monetary authority - will itself create the amounts of new money it decides are needed, instead of changing interest rates to influence how much the commercial banks create. It will give the new money to the government debt-free, to be spent into circulation on public purposes.
  • Anyone else, including commercial banks, will be prohibited from creating, not just coins and banknotes as now, but new electronic money too. Bank lending will become what most people think it is now - arranging loans between people with spare money and people who need to borrow.

International monetary reform will mean bringing a genuine global currency into existence, to serve the needs of the global community fairly and to provide a regular source of funds for global spending, e.g. on UN activities.

The briefing explains these reforms and their significance in a national and international context. For example, we show that:

  • 19th century controversy led to recognition that paper banknotes were not just credit notes but real money like metal coins. The Bank of England, as central monetary authority, was then given the sole right to issue them. Just so, the 21st century must accept that electronic bank-account money has become real money, not just credit, and that only the central monetary authority should create new money in that form too.
  • Most of the many objections to monetary reform are merely self-interested. But politicians and public opinion find this hard to accept. Michael Portillo, for example, as Conservative Shadow Chancellor, has said that monetary reform could "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".

That is one of many examples of where Simultaneous Policy comes in. I believe it can help us to build international support for necessary reforms - without, in fact, making us wait for every country to accept them.

James Robertson, June 2004

 

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