Financial regulator acknowledges need to reform money

Economists from the Financial Services Authority and the International Monetary Fund are among new voices to acknowledge that the ability of private banks to create money was at the heart of the financial crisis

It’s been an eventful few months for Positive Money. After two years of campaigning, our argument that the financial crisis was caused by the ability of banks to create money was vindicated by none other than the UK’s chief regulator.

On 2 November 2012, Lord Adair Turner, chairman of the Financial Services Authority (FSA), said: “The financial crisis of 2007/2008 occurred because we failed to constrain the private financial system’s creation of private credit and money.”

More bold words came from the Governor of the Bank of England, Sir Mervyn King who, on 23 October, took the opportunity to explain to a group of businessmen exactly how money is created. “When banks extend loans to their customers, they create money by crediting their customers’ accounts,” he said. “But a damaged banking system means that today, banks aren’t creating enough money.”

And surprisingly, two economists at the International Monetary Fund (IMF) released a paper critiquing the current privatised monetary system and arguing that reforms – similar to those proposed by Positive Money – would help the economy and create jobs.

This is exactly what we’ve been saying since Positive Money was founded: that if we allow banks to create money, effectively out of nothing, in the way that is happening at the moment, then sooner or later we’re going to end up with a financial crisis, a debt crisis and the situation that we find ourselves in today.

When that system breaks down, banks will refuse to lend, and since lending creates the money that our economy runs on, the economy will suffer. Turner and King’s statements above are the clearest signs yet that the people in charge recognise this fact. Our fingers are crossed that this will lead to discussions of reforms to the monetary system that go beyond simply ‘getting banks lending again’.

In October we made our first appearance on the BBC, when a 15-minute talk that I gave at the Royal Society of the Arts was broadcast on Radio 4’s Four Thought programme to around 300,000 listeners. I explained how I discovered (by accident) that the vast majority of money in the economy is created by private banks, and why this simple fact shapes the society and economy we live in.

We’ve also been at events around the country too. In Cardiff we spoke at the Welsh Assembly to a group of around 50, including seven Assembly Members, a number of researchers and members of the public. There is now a new Cross-Party Group on Monetary Reform at the Welsh Assembly, which will continue to discuss these issues on a more regular basis.

In Newcastle, the local team organised an event entitled Where Does Money Come From?, which was part of the Economic and Social Research Council’s Festival of Social Science. Over 100 people turned up to listen to Professor Mary Mellor and Dr Alberto Montagnoli talk about the problems with the current monetary system and the need for reform. Meanwhile, the Cardiff and Sheffield meet-up groups both celebrated their one-year anniversaries.

Finally, we’re gearing up for our next big conference on Saturday 26 January 2013, where around 250 people interested in reforming money and finance will meet to make plans and get trained by professional campaigners, journalists, lobbyists and academics on how we can campaign to fix our monetary system.