New money should be directed to the real economy, not the financial sector

The economy needs more money, but it’s not as straightforward as simply printing more. Positive Money’s Ben Dyson explains the challenges of creating money, and how they can be used as opportunities for positive change

Not-for-profit research and campaign group Positive Money is to launch a campaign calling for a better way of creating money, in a way that would generate jobs, address the shortage of affordable housing and help deal with the energy and climate crisis.

‘Creating money’ is often seen as a dangerous policy only used by desperate governments. However, all the money in either your pocket or your bank account has been created by someone initially. Cash is created by the Bank of England, and electronic money in your account – which makes up 97% of all the money in the economy – is created by banks, through an accounting process that banks use when they make loans.

Right now the government wants to get more money into the economy. They have two ways to make this happen: either get banks to lend more (because every new loan will create new electronic money, which can then be spent), or by getting the Bank of England to create more money.

The challenge is that the economic crisis was caused when families, individuals and businesses created too much debt. When banks lend, it does increase how much money there is in the economy, but it also increases how much debt there is. So if banks start lending more, it could eventually lead to another financial crisis in the future.

In contrast, when the Bank of England creates money, it can spend it into the economy rather than lending it. That means that it can increase the amount of money in the economy, but without increasing the amount of debt that families and households have to take on.

“We can take advantage of the need to get new money into the economy and to create jobs, and also use some of this money to switch the UK towards clean and renewable energy”

To date, through the process of quantitative easing, the Bank of England has created money and used it to purchase financial assets (such as bonds) from pension funds and other players in the financial markets. Unfortunately, this money has boosted stock markets but not helped the real (non-financial) economy or created many jobs.

Positive Money argues that there’s a better way of spending the money that the Bank of England creates. In January 2013 we sent a paper to the Treasury Select Committee – a cross-party group of MPs responsible for keeping an eye on the Treasury and economic policy. We explained that spending money directly into the real economy would have had a much better effect on creating jobs than putting the money into financial markets. Just a month later, the then-chairman of the Financial Services Authority, Lord Adair Turner, gave a speech arguing the same thing. In his suggestion, the Bank of England could create new money and give this directly to the government, who would then spend it into the economy.

How could this money be spent? We have a real shortage of housing stock in the UK, so one obvious idea is to use the money to build affordable housing. With this money we could boost the number of houses built from the 119,000 that are currently being built each year, towards the 233,000 that need to be built to stop house prices rising further out of reach.

Because house building is very labour intensive, this would create many more jobs and help to reduce the level of unemployment (which currently stands at 2.5 million). And because the companies and employees involved in this building all pay tax, every £10bn that is created by the Bank of England and spent into the economy would lead to an extra £5.6bn of tax revenue for the government, helping to close the deficit and reduce the need for some of the most damaging spending cuts taking place at the moment.

But house building is not the only thing we need right now. We can take advantage of the need to get new money into the economy and to create jobs, and also use some of this money to switch the UK towards clean and renewable energy.

We have a lot of work to do to win the argument that there are better ways of creating money than either leaving it to banks or putting new money into financial markets, and we’re keen to work with other organisations, charities, campaigns and individuals who want to get involved. But the good news is that the idea hasn’t been dismissed out of hand: the government’s recent Review of Monetary Policy, which was released with the last budget, explicitly permits the Bank of England to use what they call “unconventional policy instruments” in order to help the government “achieve strong, sustainable and balanced growth that is more evenly shared across the country and between industries.”

The review also mentioned Lord Turner’s proposals for spending newly created money directly into the real economy. Although it’s not explicitly stated, this is opening the door for a better use of the power to create money.