So what can be done about our systemically flawed monetary system? Well I’m afraid if you’re looking for easy solutions you’re in the wrong place – and I don’t mean you’re in the wrong place reading this blog, I mean you’re in the wrong place in your head. The mindset of Western civilisation has taught us that we should be able to attain what we desire – that the individual is heroic, able to achieve his dreams if s/he just works hard enough. We expect life to slide into place. We expect to be able to go and buy whatever we need. And why do we deserve it – to coin an adverstising slogan, “Because we’re worth it”.
The truth is that no-one has any “answers”. Because there are no answers. There are just interesting lines of enquiry; approaches that look fruitful. We fundamentally need to change how we approach these issues as a society. Instead of demanding answers, and shying away from anything that seems like hard work to understand, we need to accept that creating a better society is going to take dedicated effort, with many setbacks along the way, and that we need to learn, together, collectively. But can you imagine a politicians saying: “This is a highly complex issue that no-one fully understands, so we’re going to try the approach that looks most promising. It won’t be fully successful but we will learn a lot along the way and will be able to improve our policies in the light of experience.? Yet this is exactly the approach that is needed.
But while there are no solutions, there are interesting ideas and approaches grounded in a dispassionate analysis of the economic system rather than political ideology. There is economic research conducted according to scientific principles.
Since the 2008 crash, campaigning organisations have sprung up in many countries, educating the public on the monetary system. These organisations now cooperate as the International Movement for Monetary Reform. These organisations simply didn’t exist before the crash – now they have developed an infrastructure, a network, experience at campaigning and lobbying, and of course numerous contacts in media and government. When the next crash comes, all this is ready to leap into action immediately – the campaigning and educational materials exist, the contacts are made – they are ready to say, “We told you so”.
This is the hope I was talking about 2 weeks ago. The next crash is inevitable, and it will take that crash to shake people up, but when it happens this time there are organisations ready and prepared to immediately get the message across about what is going on.
To demonstrate that they have concrete proposals for reform, the UK organisation Positive Money have actually drafted the legislation necessary to implement their proposals. I know two paragraphs ago I argued against feeling a need for easy, off-the-shelf “solutions”, but I also admire the pragmatism of Postive Money’s approach. Equally, I haven’t read the legislation, or the book they’ve published on their proposals – “Modernising Money” – at the moment I want to understand the system better before having opinions on what needs to be done. (Why do people always say “you’re entitled to your opinion” – why should you be entitled to an opinion when you haven’t made efforts to fully research and investigate a subject?) They’re on my reading list and I’ll get to them eventually.
In essence, their proposal is that we should take away from banks the power to create money – that banks should only be allowed to loan out deposits they’ve received, for example by encouraging savers to have long-term time deposits, which then become the source of loanable funds as described in economics textbooks. Money creation would solely be by the Central Bank, with new money funding tax cuts or public spending (including investment in infrastructure).
The term “Sovereign Money” has been coined for this approach – that only the sovereign government can create money – and is used throughout the international movement. There is an interesting parallel between these proposals and the 1844 Bank of England Act. Prior to 1844, private banks could issue their own banknotes, as a promise to pay the bearer gold. They would issue far more notes than their stocks of gold (genuine fractional reserve banking). But banks were terrible at judging the safe level of doing this, and the public became so sick of constant bank runs that the 1844 Act banned this practice, and stated that only the Bank of England could issue notes. As a result, cheques emerged as an important means of payment, and today we have digital money – banks rediscovered a way to create money, and there have been continuous crises and crashes ever since.
I absolutely support and applaud these organisations, but ultimately I’m not endorsing any of their specific proposals. I’m not presenting Sovereign Money as the answer to all our problems, I’m pointing out the people who at least understand the problem and are making efforts to campaign for reform in this area. I think after the next crash they will come into their own and you will be thankful that they exist.
But there are other approaches as well to consider, and next week I will look briefly at some of these.