Progress towards banking reform

At Positive Money we are making good progress campaigning for a better banking system

At Positive Money we are making good progress campaigning for a better banking system; one unable to wreak the kind of havoc we saw a couple of years ago, that will have no special privileges conferred upon it by government, and will serve, not exploit the public.

Such is the widespread concern that the current setup is not working, Mervyn King, governor of the Bank of England said recently: “Of all the many ways of organising banking, the worst is the one we have today.” This unprecedented criticism is a good sign that real change could be around the corner.

With the current banking setup, when banks make loans, they actually create brand new digital money. In the words of Martin Wolf, chief economics editor of the Financial Times: “The essence of the contemporary monetary system is the creation of money, out of nothing, by private banks’ often foolish lending.”

It is worth thinking about the implications of this for a second. Banks have been responsible for creating 97% of the money flowing around our country today. They create this money every time they make a loan. The money is also destroyed when the loan is repaid. Practically all the money in our economy is created as “temporary money” through a debt.

We live in a system where money is necessary, but in order to use it, we must effectively ‘rent’ it from the banks, borrowing it to create it, and then when the loan is repaid another must borrow it into existence for the money to still be there. There is literally no other way that new money can enter into circulation today.

Is it any wonder that banks are so wealthy and that levels of debt in the UK are so high? We must all collectively pay the banks interest on all the money in existence.

As well as being able to lend money they create out of nothing, banks are the most heavily subsidised businesses in the world. They benefit from a range of guarantees, subsidies and privileges that no other industry could imagine. Banks are allowed to gamble your money away and then get it back from you, the taxpayer, when it runs out – a privilege worth £100bn to the banks every year.

In 2007 the banks had become so irresponsible with their lending, pushing house prices three times higher than their natural level and indebting people who could not afford to repay, that a massive wave of defaults rippled around the globe, resulting in an economic decline that many are still suffering from today.

The good news is that this broken and unfair system is easy to fix. Two simple changes must be made Firstly, the banks should ask for our permission before they can gamble with our money. Secondly, we must remove their licence to ‘print’ digital money and ensure that money can only be created by a transparent public body for the public benefit, not to enrich bankers.

These two simple changes could provide the public purse with up to £100bn of new money each year that was previously used to line the pockets of bankers, paving the way for massive positive change in society. By removing the right of banks to gamble with your money and to lend money they create out of nothing, we remove their power to cause the kind of damage we saw in 2007. We remove the need for any bailouts or state subsidies, and ensure that your money is kept safe or invested without any need for higher taxes or spending cuts.

This debate is entering the public arena. For the first time the term used to describe the process whereby banks are allowed to create money, ‘fractional reserve banking’, was uttered on mainstream television in Robert Peston’s recent BBC documentary, Britains Banks: Too big to Save?

Meanwhile, the Independent Commission on Banking (ICB) has been set up by the government to look into alternatives to the current system. Positive Money, Professor Richard Werner, and the New Economics Foundation – the authors of a recent submission to the ICB – have been invited to present their research findings to the commission.

With the power of public opinion, institutional support and a good bunch of active campaigners behind us, we can bring about the change we need.