An easy solution to the financial crisis

If you read the daily papers it may seem like we’re heading back into another global financial crisis. This may be true but there’s a simple solution that could be implemented within 12 months, which could lead to a long-term fall in poverty, debt and inequality. It would also stabilise the economy, making low-paid jobs more secure.

The financial crisis was caused by excessive debt. With banks lending too much and pushing up house prices, eventually ordinary people could no longer afford to keep up with the burden of debt. A logical conclusion is that the answer is simply to pay it off; to tighten our belts and gradually repay the people we borrowed the money from.

But as outlined in our previous columns, the vast majority of money in the economy is created as digital money by high-street banks, in the form of loans. So the only way to get more money into the economy is to borrow more from the banks. No one wants or can afford to do this.

To end the debt crisis, we simply need to remove this power to create money – as debt – from the banks, and return it to a democratic power, such as the Bank of England. Then, instead of new money being lent into the economy, which increases our total debt, it can be spent. This new money could be used to increase public spending, reduce taxes, reduce the national debt or even make payments directly to citizens. With the exception of paying off the national debt, these methods all get money back to ordinary people and businesses, rather than pumping it directly into the banks and hoping that the banks are then confident enough to lend it to us.

“The current crisis is unnecessary and easier to solve than it appears. But first we all need to understand more about where money comes from and how it affects our lives.”

If the money was used to cover existing government spending, it would mean that the government would not need to collect so much via tax. The government could then reduce taxes on the poor, so that no one earning an income of less than say, £12,000, would pay a penny of tax (this could even apply to VAT). This would immediately raise the living standards of the poorest in society. Once the new money makes its way into the hands of the public, it can be used to pay down the existing debts.

The current crisis is unnecessary and easier to solve than it appears. But first we all need to understand more about where money comes from and how it affects our lives. To make this happen, nine Positive Money volunteers are working flat out to show how reforming the banking system could help us deal with poverty, debt, inequality and the environmental crisis. And this activity is starting to spread across the country.

In the next couple of months, we have meetups in London, Edinburgh, Belfast, Glasgow, Bradford, Brighton and Bristol, with more in the pipeline. And on Saturday 29 October around 350 of us will gather at a conference in London, where guest speakers will explain why the financial system needs to change. We’d love you to come along to any of our events and find out how we can fix the money system.

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