With debt levels increasing in Europe and the US, should we consider taking the power of credit creation away from large private banks? Perhaps the time has come to give Full Reserve Banking a try
If you have been struggling to lose your waist line since Christmas, spare a thought for our international leaders who cannot lose their ‘debt lines’. Those debt graphs just keep going skywards.
Sadly no New Year’s resolutions are evident in G7 economic policy. The world needs a new approach to its money supply. With debts of trillions of dollars continuing to sink the major economies of the US and UK, consumers and governments are left desperately gasping for air while rumours abound that corporates are lined with cash. Stock markets bounce upwards – but only City traders seem excited. Governments sell debt while central banks buy it back. It doesn’t inspire confidence.
Ordinary people in the US, UK and Europe don’t expect much to change: the fundamentals for 2013 remain stagnant wages, commodity inflation and decreasing pension pots. The public know their standard of living is on the way down, not on the way up.
If someone could really convince those of us in the rich world that poorer countries were getting richer from the new electronic money, they might feel the suffering was worth it – but, for the moment, the TV pictures of war and terror in Africa and the Middle East suggest otherwise. At least in the West, if we live in debt, we are living in peace: for the moment.
Bank scandals continue to appear on a periodic basis, becoming as regular as the world’s apologetic weather events. What used to be unusual is the new normal. Banks in the UK are alleged to have missold insurances against interest rate rises. Goldman Sachs is reported to be up to its old tricks in the US. We should be shocked but instead we are sad.
There is talk of a quiet revolution that will take the power of credit creation away from large private banks and give it back to the people. It’s not coming from socialism, communism or an authoritarian top-down military regime, but it is the stirring of a simple idea that will scare the pants off international banks. It is the quiet money revolution that no one is noticing in the headlines.
There is a simple idea being debated that might just work. The campaign label is Positive Money – the geeks call it Full Reserve Banking. I came across it in two different places. A growing popular bipartisan campaign group in London, called Positive Money, and an academic paper from the International Monetary Fund.
A recent Positive Money campaign meeting in London felt like a steering of ordinary people determined to make a difference by ignoring politicians and the media and using their brains instead. The crowded conference floor was a creative mix of hundreds of business people, teachers, scientists, academics and community groups and the like.
It was led by new money men and women, reformers who pay themselves a minimal living wage from a collective fund, but look like young City suits. Rather different to those in private banks who continue to pay themselves millions in bonuses from the monies they create rather than earn. The conference announced its growing international links, like the German organisation Monetative.
The ideas communicated appeared too easy, too straightforward. The audience chilled by the five-year flat lining of the UK and European economy welcomed the new policy model: that private banks would not be allowed to create credit, but would have to borrow it first. So future credit will come only from central banks.
Newly empowered central banks will make well informed decisions about where to put money: with a curious choice of giving it away (helicopter money), putting into public investment or reducing taxes. Central bankers would be open and transparent, driven by the system rule to reduce credit supply when inflation was rising, and increasing supply when the economy was stagnant. This will certainly make a change from just playing around with base rates!
A personal decision to save in banks would be a fixed investment, so you and the bank knew how long the investment was for, and for what percentage gain (this gives both saver and bank borrower maximum stability). You couldn’t take your money out before the agreed point of maturity. Interest rates on loans would be stable and predictable. Current accounts would be firewall protected and simply transaction accounts. The downside: the bank would charge you for them.
The catchphrases get better: ‘positive money replaces negative money’. So total societal debt (personal, corporate and government) gradually goes down over time. That certainly appeals in a world where the US and UK governments cannot find a way to put the brakes on the debt spiral, and the debt graph just keeps going up. At last a world where the debt balloon deflates, slowly but surely.
Full reserve banking... I wonder if this is idea will catch on? Someone really is offering us a New Year diet that will work.
Philip Haynes is professor of public policy at the University of Brighton and the author of Public Policy beyond the Financial Crisis: An International Comparative Study
