Monetary Reform

At the moment most of the money in the UK economy is created by private banks, in their own interests. A great deal more money is tied up in buying and selling of financial assests than is used in the “real economy” (businesses and services). In our current monetary system, which has developed at a much faster pace than the system to manage and safeguard it, banks lend money where they expect to make maximum, short-term profit, regardless of what is good for the economy and people.

We also have a system called deposit insurance, which means that our government has promised to pay each account holder up to £85,000 in the event that their bank becomes insolvent. Thanks to this, combined with the fact that we only have a few, very large banks, it will almost always be cheaper for the government to bail out banks than to pay up this deposit insurance to all the bank’s creditors – hence the term “to big to fail” (also refers to banks which would cause all the other banks to become insolvent if they themselves went solvent). Since banks know that they are “too big to fail” there is currently nothing to compel them to be cautious when lending money, because if the investment goes sour, then the taxpayers will foot the bill and the bankers in question will be largely untouched.

This is a terrible system, and many experts in the field agree, including the former head of the Bank of England!

Our terrible system is applied similarly across much of the world and is undoubtedly the single biggest reason why it feels like everything we do in the real economy is futile because so much of the money in circulation is simply sucked up into financial markets (generally in the form of mortgages for over-priced housing) where it is out of reach for businesses and services who could be useful and productive, providing jobs and building infrastructure.

Thankfully, financial experts have been proposing better systems for decades, the most well thought through and furthest developed of these is the Sovereign Money system proposed by Positive Money. This is not some head-in-the-coulds reform idea which could never work in reality. It has been carefully considered of a number of years and has been checked and endorsed by some of the most experienced and influential figures in finance.

For the account holder the system is simple. You have a transaction account where money comes in and goes out for day to day banking needs of individuals which, on the surface, is similar to a current account. The big difference is that this money is actually held by the Bank of England, does not pretend to earn interest but is thus, zero risk. The bank you use to administer this account charges a minimal fee for this service, or the order of £5 per month. Then, if you have money to invest which you want to earn interest on, you can place it in an investment account where it will earn interest related to the level of risk the bank will take lending it on for investment, i.e if you only take a minimal risk, you will only recieve modest interst. In this way, we actually have control over how much risk the banks take with our investment account money and because we have consented to them taking this, deposit insurnace is no longer required and they do not need to be baled out by the tax payer if they make bad investment decisions. (I actually thought this was the case in our current system, but currently as soon as you deposit money in a bank none of it is safe and they can do absolutely whatever they like with it – such as fund drilling in alaska, selling weapons to dictators…)

There are many other benefits to the Soverign Money system as well, such as control over which secotr of the economy your money would be invested in. You could, for example, specify that it is invested into the real economy, thus providing credit to develop businesses and boost employment, instead of fueling housing bubbles as the recent Quantitative Easing has ended up doing. There would not even be a horrendoue set-up cost to society.

This is particularly exciting because it would be a huge help in building a sustainable financial recovery, create more jobs, allow businesses to develop and expand and fund government’s projects more effectively.

But rather than reading further about my interpretation, here is their report on implementation of the system: Report: Creating a Sovereign Money System and a handy infographic summary, enjoy:



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