The big questions on money and banking we should all be asking
December 12, 2012 // By: Josh Ryan-Collins
“When banks extend loans to their customers, they create money by crediting their customers’ accounts.” Mervyn King, Governor of the Bank of England
Private banks monopolise the creation and allocation of money in most modern economies, including the UK's. This simple fact has been consistently ignored by policy makers and economists in all those banking reforms proposed and implemented since the financial crisis.
For this reason we published a comprehensive guide to the workings of the UK banking and monetary system: Where Does Money Come From? Since its release last autumn, the first edition has sold thousands of copies and been included in university courses, even as a core text on a City University undergraduate economics course. We have also received positive feedback from regulators and policy makers, such as the Bank of England’s David Miles:
“Refreshing and clear. The way monetary economics and banking is taught in many – maybe most – universities is very misleading and this book helps people explain how the mechanics of the system work.”
Four years after the beginning of the crisis, there are signs nef’s message may be getting through. Questions are being asked at the highest levels about the whether un-regulated fractional-reserve banking can ever be the basis of a stable and sustainable financial infrastructure, a key argument that runs through WDMCF. Last month in a speech to the South African Central Bank, Lord Adair Turner, Chairman of the Financial Services Authority, argued that:
“The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money…the existence of banks as we know them today – fractional reserve banks – exacerbates these risks because banks can create credit and private money, and unless controlled, will tend to create sub-optimally large or sub-optimally unstable quantities of both credit and private money.”
Turner’s speech comes just a month after a working paper by the International Monetary Fund (IMF) similarly concluded the current monetary system was inherently unstable. The paper proposes instead a government controlled ‘full-reserve’ system, as nef did to the Vickers Commission in Spring of last year. Michael Kumhof, one of the author’s, presented the findings at a nef seminar at the London School of Economics last month and showed how, using the IMF’s latest modeling, such a system could wipe out US debt and lead to significant increases in growth, reduction in unemployment and long term stability.
It would appear that the momentum towards a much more fundamental reassessment of the basic structures of our monetary system is building.
For this reason, we are delighted to be launching the second edition of Where Does Money Come From? today. It includes brand new sections on Quantitative Easing (QE), The LIBOR scandal, The European Sovereign Debt Crisis and also a new concluding section which lays out some alternative options for how money could be created and allocated in a less ‘sub-optimal’ manner. The second edition is in hard-back but at the same price as the original and we will also be making it available in an e-version next year. All proceeds from sales will go towards supporting nef's continued work on monetary and banking reform.
In the coming year nef will be developing further what these alternatives might look like, focusing in particular on how the Bank of England’s power to create money could be harnessed more effectively to support the real economy than is being done through ‘orthodox’ QE. Exciting times lie ahead.