Who should be responsible for creating money anyway?
The debate about money creation and who should be responsible for it in the economy has been an issue that NEF has worked on for over 20 years. Historically the public debate in UK has been more muted, but recently, there has been a resurgence in the debate regarding who should have the power to create money. A parliamentary debate earlier in the year on Money Creation and Society was the first time money creation was debated for almost 200 years, while support has also come from influential economists like Martin Wolf of the Financial Times who has written about stripping banks of the power to create money.
Currently commercial banks create 97% of the UK money supply. However the ultimate decision on whether to change the monetary system rests with our elected politicians who are in no rush to understand how it could work better, let alone change it. A recent survey revealed that only 10% of MPs understand the UK’s monetary system.
In Switzerland the democratic process is different, and they still have some elements of direct democracy where if an initiative collects over 100,000 signatures, then a national referendum is held on the subject. There have been 567 referendums in Switzerland since monetary legislation was introduced in 1848. Recent topics have ranged from more progressive arguments – like removing the army, instituting a basic income, and raising the minimum wage – to the more conservative, like restricting the number of immigrants or the building of mosque minarets.
On Tuesday I was in Switzerland at the invitation of the MoMo to hand in a petition with 111,819 signatures to remove the power that banks currently have to create money when they make loans to the Swiss Parliament. MOMO are behind the Vollgeld Initiative – which can be translated as ‘sovereign money’ – and seek to amend the Swiss constitution so that commercial banks are no longer able to create money out of nothing.
Banks can create money through the double entry accounting they use when they make loans. The numbers (money to you and I) that you see when you check your account balance are just accounting entries in the banks’ computers. These numbers are a ‘liability’ or IOU’s from your bank to you, but in the real economy are treated as money. Swiss banks, like their counterparts around the rest of the world, currently operate in this way and these newly created funds currently account for 90% of the money of the Swiss economy.
This was a momentous day for the monetary reform movement and NEF along with other key groups. Positive Money (UK), Gode Penge (DK), Copenhagen Business School (DK) and Monetative (Ger) also joined the MoMo in Switzerland to celebrate handing in the petition and to begin planning a strategy for the referendum. The referendum process is complex: the vote will happen in between 1 and 4 years and will almost certainly be opposed by the political establishment, as well as the large and powerful financial and banking system.
Although the battle to get the Swiss parliament to acknowledge the current problems with the Swiss monetary system will be hard, the referendum offers perhaps the greatest opportunity we’ve seen in Europe for a fundamental rethink of the current monetary system and a genuine debate about the future of economics. Economist Steve Keen added that “whatever the outcome of this proposal, the debate it will allow over our monetary system is one that we have to have”.
Come along to our Conference this April where we will be discussing the different details regarding Money Creation and it’s implications..