How to reduce debt and unemployment

Some intelligent redesign of our money system could give us a way to deal with the current crisis of debt and unemployment, says Ben Dyson

When money drives almost all activity on the planet, it’s essential that we understand how it works and how it could be made to work better. Our current money system serves the needs of banks but is extraordinarily harmful for the rest of society. A bit of intelligent redesign however, could give us a way to deal with the current crisis of debt and unemployment.

First, a quick recap in case you missed our previous columns in Positive News: right now, 97% of money in the UK is in the form of electronic numbers in people’s bank accounts. This digital money is actually very different from the cash in your pocket because it is created by private companies that you and I know as ‘banks’.

When someone takes out a loan, the money isn’t taken from anyone else’s account, it’s simply typed into a computer system. Almost all of our electronic money was created in this way, out of nothing, by banks.

Currently if we want more money in the economy, the only way to get it is to borrow more from the banks. While you personally might be able to rein in your spending and get out of debt, it’s impossible for the public as a whole to pay down our collective debts. We have to borrow all the money we need to run the economy from the banks and if we didn’t go into debt the economy would grind to a halt.

So we need to fundamentally change the money system if we want to deal with our mountain of personal and household debt. Instead of banks having a licence to electronically ‘print’ money as debt, we need a source of debt-free money. This money would need to be created by a transparent and accountable organisation that is required to consider the best interests of society as a whole.

The money would still be created out of nothing but instead of creating this money and lending it to the public as banks do, this democratic body would create money and spend it into the economy. The first way increases the total amount of debt; the second way reduces it, because the newly created money can be used to pay down existing debts.

How would we spend this new money? One option is on infrastructure, for example, making the necessary switch to renewable energy before oil prices get out of control. It could be used to cut taxes for the poorest 20% of the population, for example by cutting VAT, which is paid even by pensioners and the unemployed whenever they buy anything in a shop. Alternatively it could just be distributed in equal shares to every adult in the country to spend as they see fit.

The important thing is that this debt-free money gets to ordinary people so that it can be used to either pay down the debt owed to the banks or spent on the high street and in local businesses, creating jobs.

Compare this to what happens when banks create money, where most of it gets trapped in the housing or financial markets. Only 8% of bank lending actually goes to businesses; the bulk of the rest is used for mortgage lending, which pushes up house prices, or speculation on financial markets.

Of course, we need to make sure that this newly created money doesn’t start causing inflation (i.e. pushing up prices). But for the last 40 years, the amount of money in the economy has increased by an average of 11.5% a year, because banks have found that the more they lend, the more interest they can collect and the more profits they make.

So if we want to control inflation we need to stop banks creating money, and ensure that the public body that takes over from them doesn’t create money at anything like the same rate.

With new money being created debt-free by a publicly accountable body, it could be used to pay down existing debts, and falling personal debt means that individuals and families have more money left over to spend with real (non-financial) businesses. This would create jobs and reduce the current all-time high level of unemployment.

More jobs means less poverty and fewer of the problems that come with it. And the bonus is that the technical changes needed to prevent banks from creating money also makes them far safer, so that the taxes we pay to government can be spent on things we need, rather than on rescuing toxic banks.

Think of it like quantitative easing, but for people rather than the financial sector. Some economists see this as a radical and dangerous idea but in reality it is the only realistic answer. After all, we can’t solve a debt crisis with more debt.