Sunday, 23 March 2014

Reforming the Banking System

Monetary reform has to deal with a number of issues. There are a number of things that need to change. These include stopping banks creating money but it also involves implementing new ways to ensure the money supply matches demand. I would also argue that we need to change attitudes of people toward money and chasing wealth. However, not everything can change at once so changing the way money is created by stopping banks from creating money is a starting point. This is the focus of chapter 6 of “Modernising Money” (Jackson & Dyson, 2012).

There are quite a few issues that need to be addressed if depositors are to have confidence that they will not lose their money or they are aware of the degree of risk in their investment. It is also preferable that banks can fail rather than being bailed out by the government. How can you set up a banking system so that banks really do become intermediaries and not creators of money.

Positive Money's proposals as outlined in this chapter is through changing the banking system so that there are two types of accounts. These are Transaction Account and the Investment Account.

The Transaction Account

The Transaction Account replaces the current Current Account with the major difference being that instead of the money deposited in a Transaction Account becoming owned by the bank, it remains the property of the depositor. The bank simply manages the transactions for the depositor but otherwise it cannot use these funds. They are deposited with the bank of England.

Under this strategy, banks no longer hold reserves for settling interbank transactions. This isn't needed as the money is already held in the Bank of England. Also if the bank fails then the depositor still has access to their money and can transfer their account to another bank of their choosing. This sounds positive so what are the drawbacks? Banks will not pay interest on these money held in current accounts (no change really) and may decide to charge for transactions. There would be no savings accounts offered as current accounts.

Each bank will hold an account, their Customer Funds Account, at the Bank of England that represents the funds held by depositors in their Transaction aAccounts with the banks. The balance held in this account will not appear on the banks balance sheet.

The Investment Account

The Investment Account is where investors would place their money if the are seeking a return. However, the investor gets to choose the risk that they are prepared to take. The bank may offer some guarantees but these would not be backed by the government. The banking would be from the banks own operational funds. The money becomes the property of the bank and it is able to use it to offer loans to borrowers. The bank can lend money that has been placed with it for investment or from its own operational money that it has placed into the investment pool. The bank is not able to loan money that it doesn't possess.

There is another restriction in that investors are not able to use investment accounts to conduct transactions. They either have to wait for maturity of the investment or if allowed by the nature of the investment give notice of their intention to withdraw investment funds.

To manage the amount of money that the bank has available for lending holds an Investment Pool account with the Bank of England. This account represents the total of the investor investment accounts minus the current loans that the bank has made. The bank needs to manage the funds in this account to ensure that it is able to meet its obligations in repaying investors as their investments mature. If they bank were to fail then investors would become creditors of the bank and have to wait for the completion of liquidation proceedings. Preference in the liquidation proceedings should go to the investors who took the lowest risk.

Other Details

The book chapter discusses the accounts that banks would hold with the Bank of England and the way that these would be used to settle payments and to manage investments. I am not going to deal with these in this blog. If you really want the underlying technical details then I would suggest getting a copy of the book and reading the details.

Does this solve the problems?

The development of the current banking system came about through trying to meet a perceived need for funds to exact business transactions. To ensure that banks and other financial institutions do not generate new forms of money after these reforms there is a need to ensure that mechanisms in place to ensure that adequate money is maintained in the system. Insufficient money in the system would mean that businesses and individuals would look for alternative mechanisms to obtain the necessary funds for business. Excess money would put inflationary pressure on the system.

Consequently, just reforming the banking system is not enough. There needs to be a new mechanism form managing the money supply enabling new money to be created if required and money to be destroyed if excess money is in the system. The next chapter of the book deals with these issues.


Andrew Jackson and Ben Dyson (2012) Modernising Money: Why our monetary system is broken and how it can be fixed. London: Positive Money.

Saturday, 8 March 2014

Greed vs. Need

I attended the launch of End Hunger Fast campaign for lent at St Phillips Cathedral in Birmingham on Wednesday afternoon. I am not a big fan of this giving up something for lent since I believe we should always be living with an attitude of “enough is enough” but the issues raised by the End Hunger Fast campaign deserve our attention. In what is claimed to be the seventh richest nation in the world, why do we have so many people relying on food banks for their basic survival? Why is it that the wealthy continue to increase their wealth while the numbers in poverty continue to increase?

A Quaker speaker stimulated my thinking. She talked of Jesus feeding the five thousand (Matthew 14:13-21) without concern for their status or whether they were hungry or whether they had a supply of food. I agree with the emphasis that she placed on the story but it says something more profound to me.

The disciples where concerned that there was inadequate food to feed the people and were seeking for Jesus to send the people away. Get them to go and find their own food. Jesus tells them to feed them but they plead that they have inadequate supplies. However, after Jesus insists, the people eat and the baskets gathered in exceeded what was originally distributed.

The usual assumption in interpreting this story is that there was a miracle in which the quantity of food multiplied. I have another take on the story. The people who sat there including the disciples were all concerned that they may not even have sufficient for everyone and possibly for themselves. They didn't want to share because that would mean they wouldn't have enough to eat. However, once the loaves and fishes began to be passed out, people realised that they needed to satisfy need rather than their own desires and so brought out what they thought were meagre supplies. When it was all pooled together not only was there adequate for everyone, there was an abundance of food.

The story speaks strongly to me about our attitudes especially in the Western world. We are so busy trying to protect what we have and what we think we might need that we are making resources scarce for everyone. Despite what we see in great celebrations of giving, the overall emphasis in western society is hoarding and protecting for self. Even more so by the increasingly small percentage of people who possess the bulk of the wealth in the world. If we were to see the basic message of the feeding of the five thousand as meeting need and ending with abundance then maybe we wouldn't have the scarcity that is argued to exist. We might also look for alternative for those that are not renewable.

This isn't the only story that I see emphasising this theme. Jesus told a parable of the labourers who were hired at different times during the day but were paid the same amount by the land owner at the end of the day (Matthew 20:1-16). The difference between this story and our economic thinking is easy to illustrate. The labourers had the same need and this is what the landowner satisfied. He never sat down and worked out what each labourer was worth. He knew that if he didn't pay the workers a denarius, they wouldn't be able to pay for what they needed to live so he made sure that they were all paid the denarius. In our society, we would then argue that those who worked longer or who had the greater skill level should be paid more but in reality we neither practice what the landowner did or practice what we preach ourselves. In reality, we believe that it is fine to pay someone less that what they need for a day's work and to reward some more simply because of their status. Our system is designed to generate inequality. Hard work by the lowly paid will never enable them to overcome the disparity in how they are paid. Add to this that we are actively pursuing a policy of making the least able pay more when they don't have any resources nor are we providing them with the opportunity to obtain the resources to do so. It is about time that we heard Jesus' message and began to ensure that basic needs are meet and not that our own greed is being satisfied.

Jesus did tell some other parables that appear to contradict what I have just said. Possibly the most notable is the parable of the talents (Matthew 25:14-30). Here, the master is praising his servants who earned more with the gold that he had entrusted to them and takes away from the man who doesn't utilise what he was given. I don't see this as a story of making riches for ourselves but rather a story of utilising what we have been given. What I mean is that we shouldn't expect to be able to sit around and do nothing and be given what we need. We need to utilise the skills and resources we have been given for the work of God's kingdom. We should note that in our society there is much essential unpaid work done by people who have inadequate incomes. Unpaid work is not the same as meaningless work that many are actually paid to do. That doesn't mean that we should judge others and remove from them what they need to live because we believe they are not working in the best interests of the society that we want to create.

The key issue I believe of these stories is that we should not build our society on greed or accumulation of assets and resources. Rather we should focus on need, ensuring that needs are meet, and enabling people to fulfil their potential. This is both locally and internationally. If we do this, then I believe our management of resources will be more sustainable as the focus on growth for improved profit will vanish. As a result, we may find that the earth brings forth abundance.

Sunday, 2 March 2014

Social and Environmental Impact

What is the impact of the current economic system? Jackson and Dyson (2012) describe what they see as the social and environmental impact of the current economic system. There discussion focusses on inequality, private debt, government economic decisions, environmental impact, and democracy.


The key issue here is that the system by default causes a transfer of money from the poor to the rich. This isn't taking into consideration that those on higher salaries (i.e. managers) are receiving higher wage rises than those on lower pay rates. The system relies on money being rented from the banks. This results in a transfer of money to the banking sector through interest. The reported figures show that there is a net transfer to the banks but that the wealthy, particularly the top 10%, lose less to the banks while the bottom 10% loss more than any others. This is partially a result of the lower income bracket relying on more borrowing to survive but it is also that interest charges make up a greater percentage of their expenditure. Lower income earners also have less disposable income available. Those with investments in multiple properties also benefit from rising property prices.

Also because the centre of banking is based in London, there is also a net transfer of wealth to London. The net location transfer of wealth will always be to where the highest salaries are paid or to the centre of banking.

Because of the renting of money for anyone to have a positive balance, someone else has to be in debt. This could be a company or an individual or government. The distribution of debt is a major influence on the stability of the system. As debt increases in the lower income groups, there is greater rise of failure to repay and the driving of the system into recession.

Understanding the system may help us to see how to reform it but we need to help everyone understand the system and how to change it. The problem is that as long as we see ourselves in an overall positive cash flow, we don't see that the system needs change. We even tolerate recessions and austerity if it doesn't take away the prosperity that we may have built up. What we need is a simulation or game that would allow people to see the actual consequences.

Private Debt

As I indicated in the previous section, any positive balance has corresponding negative balances. However, banks tend to lend on assets but such loans push up the prices of these assets causing an increasing level of debt. As debt increases there is a greater risk of a bubble burst and a recession.

However, increasing debt increases the money supply and repaying debt causes a shrinking of the money supply. Traditional economics suggests that as the money supply shrinks, the velocity increases but the evidence suggests that the opposite occurs. During 'boom' periods the velocity tends to increase and during 'bust' periods, the velocity tend to decline. The result is that during 'boom' periods the increasing velocity tends to increase the effect of the boom and during a 'bust' period the slowing velocity causes an increase in the decline.

Public Debt

Jackson and Dyson don't talk about the balance between private and public debt but there is a relationship there. Attempts to reduce public debt will put pressure on to increase private debt otherwise there will be a decline in the money supply. Looking at current reports, this is what we see happening as the government endeavours to control the increase in its debt, there is an increase in the private debt.

Possibly a lot more difficult to show is the impact of transferring public costs to private sector. Other than through increasing debt to the banking sector, the private sector has no way to generate additional money in the system even though it is generating product value (It could be argued that alternative currencies offer the public an alternative way of generating money. It is beyond the scope of the current discussion to deal with these and how they impact our current economic system). Charges for education, social services, health services, etc. put additional pressure on the private sector to borrow to meet these costs. The debt grows further through the interest charges putting more pressure on the money requirements of the private sector. Increased taxes also puts pressure on the private money supply further accentuating the the pressure on private monetary resources and the transfer of money from those less able to meet their monetary commitments.

What Jackson and Dyson do discuss is the way that the government profits from seigniorage when cash is created and sold into the system. When money is created by the banks, this profit is lost to the government. The banks profit from this operation is through the interest charged on the debt created. Note: Economists prefer to talk about this debt created by banks as 'credit' simply because it doesn't carry the same negative connotations and allows them to ignore issues of debt in their conversations. Jackson and Dyson estimate the loss to the government caused by allowing banks to create money and the consequences in terms of higher taxes caused and reduced public services caused by this loss of income.

If the government is obtaining the income through money creation then there would be a reduction in costs to the government through interest charges, lower taxes on the public sector, and a reduction in the transfer of public costs to the private sector. What seems like a logical argument that users of public facilities should pay for them only makes sense if those having to pay are actually generating the monetary wealth to enable them to pay for such services. It is the process of monetising wealth that is at the heart of the economic problems and the need for monetary reform.

Environmental Impacts

The issue here is that environmental goals are more long term than economic goals. As a consequence, during times when governments seek to reduce their monetary expenditure (austerity measures), environmental projects tend to be cancelled. However, it isn't simply the monetary expenditure. Short term business goals focussed on meeting profit targets also take precedence of the long term sustainability promoted by environmental goals. The consequence is a failure to invest in environmental projects, and a restriction in the nature of research conducted by universities. Although the government in the UK is currently talking about climate change as a result of the recent flooding, there is a continued emphasis on research aimed at innovative products to generate economic growth rather than research on sustainability and resolving the inequality in society and destruction of the environment.

The need to continually grow the economy also pushes society to a point where the 'carrying capacity' of the natural environment is exceeded. This wouldn't happen if there was a steady state economy. Under the current system, it is not possible to have a steady state economy. Growth is required and through it operation the system is unstable.

Although 'natural' disasters put pressure on governments to pursue longer term environmental goals, the basic pressure of the system is to discard these in favour of short term economic growth and company profits.


The monetary system also reduces the operation of true democracy within society. Because money deposited in banks is owned by the banks and banks make decisions over who should receive loans, they have the power to shape the economy. Banks with their profit motive will tend to support productive businesses during a thriving economy with a gradual shift toward speculative and non-productive investment. Investing in non-productive activity tends to stagnate the economy leading to recession. Decisions of banks is not dictated by market pressures. Their decision is focused on making a profit. Therefore the banking sector has a big influence on investment in society and the direction of development.

Jackson and Dyson contend that the banks receive huge subsidies as a result of their ability to create money and that the payment of taxes on bank profits is only a small fraction of the total tax take. More significantly, the impact in world output as a result of a recession caused by banking activities far exceeds any benefits received as a result of banking activity during boom periods. Overall the banking sector gains more benefit from the public sector than it contributes and because of its control over where money is initially spent into the economy has more influence over the direction of society than any government. The number of people who have influence over bank behaviour is insignificant compared with the total population and these people are not accountable to the public for their actions.


This chapter doesn't paint a very positive picture about the current monetary system and its impact on our economy. Showing direct correlations from data is more difficult to show. It is also difficult to tell from an individual perspective the impact of the current system. If we want to highlight these issues to the general public, we need better ways of demonstrating the impact of the current system and the alternatives that we want to propose. Ideally these demonstrations need to grip the attention of the general public more than other issues that influence the public's decision making.

Jackson and Dyson do not argue for sustainable local communities but if we are to restore democratic power to the people then it needs to include grass root change in the system as well as pressure to change the operation of the monetary system.


Andrew Jackson and Ben Dyson (2012) Modernising Money: Why our monetary system is broken and how it can be fixed. London: Positive Money.