Briefing: Monetary Reform

This article is intended as a briefing for those who want to know more about monetary reform. In a later post, I will touch upon the relevance of monetary reform to local currencies and the effect on the local economy.

Why do we need monetary reform?

It has been clear over the past few years that something is very wrong with our economic system.  Income inequality has sky-rocketed, bankers continue to run riot with disproportionate bonuses, and scandal after scandal have been revealed within the sector.  Debt is at an all-time high, both in the private and public sector.  Financial stimulus has failed to achieve the government’s Gross Domestic Problem Book Coveraims of business-as-usual economic growth, and that’s after making the quite possibly misguided assumption that continuous economic growth is a good thing.  Gross Domestic Product still fails to be a satisfactory measure of economic activity, as revealed so eloquently by Lorenzo Fioramonti in the talk that I attended yesterday at the UEA, based on his recently published book, Gross Domestic Problem

If you’re still not convinced that something is wrong, then you’re probably living on another planet, but I will admit that it’s harder to get from “something is wrong” to “our monetary system is wrong in these particular ways”. That’s why monetary reform campaign group Positive Money has been struggling to get its message across over the past few years – there just Where Does Money Come From Book Coverhasn’t been a true understanding of how our monetary system does work, even amongst those at the core of it (most notably the Treasury).  So Positive Money worked with the New Economics Foundation to conduct their own investigation into how our monetary system is currently set up, and published their results in their first book Where Does Money Come From, available direct from Positive Money here.

Give us some highlights, then!

There’s a lot in the book, so I’m not going to cover everything in this summary, and if you truly want to know it all, either buy the book, or trawl through all the great videos and articles on the Positive Money website, but I will try to cover a few things that I hope will convince you that our monetary system urgently needs fixing.

The first question to ask is, how does money actually get created?  And the answer that I’m sure springs into your head is “well, it’s created by the Bank of England – they are the only organisation allowed to issue sterling”, and you’d be right, but only when it comes to notes and coins. Notes and coins, however, only account for 3% of sterling money in circulation.  The other 97% of money is created by private banks when they make loans to companies and individuals.  No, this is not deposits that they have received from savers and investors which are being lent out to those in need, this is brand new money. In the words of the Governor of the Bank of England, Mervyn King:

“When banks extend loans to their customers, they create money by crediting their customers’ accounts.”

Some may argue that what the banks create is not money, it is only credit – the promise of money at some future date. But can you use bank credit to pay for goods and services? Yes, that’s why we have credit and debit cards! Can you use bank credit to pay your taxes, or to settle almost any other debt that you owe?  Yes… so for all intents and purposes, banks create money, from nothing, when they extend loans.

At this point, the question asked by many people, shocked by what they’ve just heard, is “but if banks can create money, how can they run out of money? Why can’t they just create money to offset their own debts?”.  It’s a very valid question, but it is easy to answer – for each and every pound created, there is an equal amount of debt.  Banks, when they loan money to their customers, accept their customers’ promise to pay – their IOU – and credit their account with an equal value.  All they have done is converted a promise from an individual, and converted that into a promise that is acceptable throughout the country as money.

What happens if that money never gets repaid? Well, the loan defaults, and the banks have to have that covered. But, and here’s the disastrous bit, if more people default than the bank have there are reserves at the Bank of England to cover for, as happened in the 2007-2008 crash, the banks fail, and, because of a ridiculous government scheme called the “Financial Services Compensation Scheme”, the costs of these failures are passed on to taxpayers, through vast purchases of financial assets held by the banks (read “bad loans”), commonly termed Quantative Easing. It essentially means that we, as taxpayers, are picking up the tab for banks’ reckless lending to people who couldn’t afford to pay.

What further effects does this system have?

The financial crisis isn’t the only effect of this flawed system. I wish I could explain them all here, but I’ll just have to put links and a brief summary of each, since I don’t want this to be too long a post!

  • Disproportionate house prices: as a result of financial speculation gone into house prices by lending institutions, creating a housing bubble.
  • Growth in material consumption and therefore damage to the environment: because a system based on debt, with interest, demands continual economic growth to feed that interest.
  • A stagnant productive economy and therefore high unemployment: because banks prefer lending into speculative markets, where they get good returns for very little work, than to real companies and productive individuals, who are seen as being a risk, particularly if they are new.
  • Inequality and poverty: because money is effectively redistributed from those with debt (the poor) to those with riches (banks) via interest paid on loans, driving some of our poorest, who are forced to take out high interest “pay day” loans because of their poor credit history, into poverty.
  • Concentration of power in the financial institutions of the City of London: since the bulk of the financial institutions of this country are based in London, and they have a monopoly on money creation as a result.
  • Taxes and government cuts: seigniorage, which is the profit made by the government on the issuing of notes and coins is not received for electronic money, so the government is losing out on 97% of all the seigniorage which it could have received.  On top of that, the government have to pay interest on loans from the banks out of taxes, diverting money from public services to the lining of banker’s pockets.

That’s f***ed up, man! So what do we do?

Modernising Money Book CoverOnce Positive Money had realised that this system is flawed, they were determined to come up with a real viable alternative, the culmination of which is published in their latest book, Modernising Money. I confess that I haven’t finished reading the book, so what I’m telling you here is from the snippets that I have read, from watching their video about their proposals, and attending the Positive Money “Modernising Money” Conference in January 2013. However, with each new snippet I read, an unanswered question is answered.  I still have a few unanswered questions, which I will come in a minute, but here’s my understanding of the proposals.

In short, Positive Money are suggesting that we make our monetary system work the way that most people think it works anyway!  Most people think that only the Bank of England can create money, so we return that responsibility to the Bank of England, and require that private banks hold at least as much money at the Bank of England to cover what are currently called “sight deposits” i.e. account balances that are with-drawable at any time, on demand.  This means that current account balances held with private banks would be converted to “transaction” accounts, which would be 100% backed by reserves at the Bank of England.  Private banks already hold reserves at the Bank of England, so the computer infrastructure for this reserve system is already there, but the difference would be that, rather than only having to hold enough to cover expected interbank transactions for the particular day, there would have to always be the same amount in a bank’s Customer Funds Account (as Positive Money describe it) as the total liabilities owed to customers.

To prevent stagnation of the economy, a small amount of new money creation will be required, but rather than private banks creating this in their own interest, the amount of money created would be determined independently by an equivalent of the current Monetary Policy Committee (which Positive Money name the Money Creation Committee). The money they create, however, would go to the Treasury, where its allocation will be determined by the government, just as taxes are currently, to be used on public services, or any other government policy as desired.  This way, that newly created money really will filter down into the economy at large, through public sector services and their employees, who will then spend their money on local services.

That leaves one question unanswered, which is how banks will provide their saving, investment and lending services, if they are not allowed to lend out deposits left with them.  The answer is that there will be another type of bank account, called an Investment Account in Positive Money’s book, in which deposited money becomes the legal property of the bank.  Customers would only deposit money in Investment Accounts if they understood the risks associated with such investment, which may include losing all the deposited money if the bank goes bust, or at the very least will be subject to a maturity term of at least 28 days, but will more commonly be over a year.  The bank, then, becomes, once again, the intermediary between savers and borrowers, as we all thought they were anyway.  They would lend out money deposited in their investment pools to businesses and individuals, charge interest, and pay back to their investors (although at a lower interest rate to cover their own costs).

This would have the added bonus of investment being much more accountable.  When someone chooses to put their money in an investment account, they can choose whether they will put their money into unethical business practices by keeping tabs on the ethical policy of the bank they choose to invest in.  Local banks could spring up, who take deposits from local people solely to lend back to local people and businesses. The monopoly of big banks would be broken down.

How do we actually implement it though?

Modernising Money goes into quite a lot of detail about the implementation of their system, including analysis of what would happen in the transitional period, just after converting to a new system.  They even detail how government liabilities and assets would be managed.  However, this is the bit that I haven’t finished reading, so will have to let you know if there are any surprises!

So, are there any problems?

I can think of three issues which need resolving, but I believe there are solutions to all of them, we just need to do a bit of thinking about them first (unless they’ve already been covered in a part of Modernising Money that I haven’t read yet!):

  1. How will we ensure that the independent Money Creation Committee remains independent? How can we be sure that they are capable of making the right decisions, and have the means to do so?
  2. In attempting to implement these plans, how can we protect these plans from being watered down by banking lobbyists or other self-interested parties, both before implementation (where they may ask for different proposals altogether) or after (where they may claim that reforms have stifled and damaged the UK banking industry)?
  3. How do we protect those who may lose out from this system, through genuinely no fault of their own?

None of these should stop us pushing forward with the campaign for reform, and can easily be answered as we go along.  The requirement for reform is too urgent to stall on the basis of these questions.

So what can I do about it?

There’s plenty that you can do!

  • Go to, follow the campaign, subscribe to their updates and donate money to keep them going (remember that the banking industry lobby that we’re up against have budgets thousands of times larger than Positive Money’s campaign).
  • Follow and share links on Facebook, Twitter and any other social networking sites to promote monetary reform.
  • If you’re a Green Party member, support motion C23 (which basically proposes Positive Money’s reforms) at Spring Conference in a couple of weeks’ time, details of which are on page 21 of the agenda, available at (you’ll have to log in to access, but may also have access to this document through your local party or on an email from the party).  Once you’ve done that, campaign to bring it to the top of the agenda.
  • Offer to help out with the campaign, join your local Positive Money group (I’m the contact for the Norwich group, which is “in formation” at the moment), and make sure that the media, policy-makers and businesses are kept informed of the implications of the current system and potential of reform.


  1. Adam
    Posted 8 February, 2013 at 8:23 am | Permalink

    Very amusingly my father in law was explaining how he thought the monetary system worked in the 70s when they first got a house and mortgage. He explained almost exactly this system, and i said “that seems much more logical why dont we just do that. The thing that attracted me most was the idea that local banks could start! The lending intermediatories bit i think will become obsolete, i now have a large proportion of our savings in peer-to-peer lending which is paying 18 times what i get in my high street bank (and 5 times what i pay on my mortgage!!!) i think this will really take off!

  2. Adam
    Posted 8 February, 2013 at 8:24 am | Permalink

    Good article though, really glad to have a clear summery of positive moneys goals!

  3. Posted 8 February, 2013 at 5:28 pm | Permalink

    Basically, these proposals prevent money being created by private banks from scratch and therefore all lending would have to come from other individuals. I think there is still a reason to have some institution as an intermediary, because they will be able to do work assessing the worthiness of your investments better than you might be able to on your own, but certainly the size and power of those should downsize so that they’re basically on a par with ordinary, productive business.

  4. Lynda Edwards
    Posted 22 February, 2013 at 2:24 pm | Permalink

    Many thanks, Simeon, for your article!

    My money has been in the Co-operative Bank since late 2005, when the capitalist bank I was previously with, closed a branch near to where I live – with poor excuses of “insufficient footfall” (I was really fed up with long queues in there just for depositing cheques!. The Co-op are more careful with lending and overdrafts – they only allowed me a small amount to overdraw yet the previous bank kept encouraging me to increase my overdraft. Fortunately, I had rather a good cheque arrive when my mortgage policy finished well above my mortgage – so I was able to clear debts – then be in a position to bank with the Co-op!

    I am also a regular saver with Norwich Credit Union who only charge the lowest interest rate they can get away with. They also lend money to those who are regular savers – which is useful as it could be an insurance premium or something we need help with. Their rates are a massive improvement on monthly payment schemes for insurance policies!

  5. Adam
    Posted 22 February, 2013 at 5:36 pm | Permalink

    interesting, what sort of interest rates do you get with the credit union in norwich?

  6. Lynda Edwards
    Posted 22 February, 2013 at 7:27 pm | Permalink

    Norwich Credit Union charge for loans just 1% per month currently. From 1st May it will rise to 2% per month due to something to do with the FSA (Financial Services Authority). Still good rate. I don’t know what rate will be available for savings.

  7. Adam
    Posted 22 February, 2013 at 7:48 pm | Permalink

    if they are charging 24% APR and are not for profit, their saving rates must be pretty good (obviously they have costs and have to watch risk etc.) but this would be definitly soemthing id like to look into as it would be supporting something local and good!

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