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Positive Money’s Submission to the Independent Banking Commission

By On · 36 Comments · In Independent Commission on Banking, Options for Banking Reform

Positive Money, nef (the new economics foundation), and Professor Richard Werner of the University of Southampton,  have just made a joint submission to the Independent Commission on Banking. The Commission will be reporting back in September 2011, and the government should – in the absence of lobbyists – be prepared to accept and implement their proposals.

What Have We Recommended?

We’ve recommended the implementation of full-reserve banking for the UK, with power over the issue of the nation’s money supply kept out of the hands of both vote-seeking politicians and profit-seeking banks. It is a proposal that could be implemented quickly (comfortably within 12 months) and that would have huge benefits for the economy as a whole. It may not be perfect, but it would be many times better than any banking system that we have had in the last 500 years. Download the submission below and let us know what you think.

Download the ICB Submission here (PDF, 1.1mb)

But Will They Listen?

Is the Commission really independent? Will they be sufficiently radical to address the real problems, or just patch up the existing system? The signs so far are pretty encouraging.

Firstly, one of the members of the Commission is Martin Wolf, Chief Economics Editor of the Financial Times. Here’s what he had to say about fractional reserve banking (the current business model used by almost every bank globally) just a few days ago:

“The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending.”
Martin Wolf, Financial Times, 9th Nov 2010

Martin Wolf has also been promoting John Kay’s Narrow Banking proposals and Laurence Kotlikoff’s Limited Purpose Banking, both ideas which would abolish fractional reserve banking. And guess who the other main proponent of these ideas is? None other than current Governor of the Bank of England, Mervyn King, whose take on the current banking system is pretty clear:

“Of all the ways of organising banking, the worst is the one we have today. …eliminating fractional reserve banking explicitly recognizes that the pretence that risk-free deposits can be supported by risky assets is alchemy. To work, financial alchemy requires the implicit support of the tax payer…For a society to base its financial system on alchemy is a poor advertisement for its rationality.”
(Mervyn King, 2010, p17)

So if the top guy at the Bank of England, alongside one of the most respected economists in the UK, both believe the current banking system is ‘a poor advertisement for rationality’, we might hope that the Commission’s final recommendations do not simply involve patching up the existing system.

But most encouraging of all is the fact that the Commission’s remit already includes two proposals that would eliminate fractional reserve banking. Those of Kay and Kotlikoff both make it impossible for commercial banks to create money out of nothing through their “often foolish lending”. These two proposals were a late addition to the Issues paper, and we believe may have been added at the request of either Martin Wolf or Mervyn King himself. Fingers crossed that the Commission will be radical and take on board the points outlined in our submission:

Download the ICB Submission here (PDF, 1.1mb)

About The Author

Ben Dyson (Positive Money)

Ben has spent the last 4 years figuring out what's wrong with the financial system. He now spends his time working on the Positive Money campaign, working with MPs, think tanks, charities, academics and unions to promote a better understanding of the real issue with debt-based money and fractional reserve banking. Ben spends his free-time looking at how Irving Fisher's 100% reserve solution could be implemented in the digital-age UK (see Positive Money's joint submission to the Independent Banking Commission for full details) and intends to regain a social life once the money/banking issue is fixed (2015?).

Visit Authors Website →
  • http://www.darkoptimism.org/ Shaun Chamberlin

    Exciting developments. Let’s get enough public pressure on this to make sure they don’t dare not be radical!

  • Barry Thompson

    Hi Ben,

    Great work. Three comments.

    Firstly, I spotted one logical inconsistency in the paragraph that begins:

    “For clarity, under our proposal for full–‐reserve banking, it is inaccurate to think of money as being in either a Transaction Account or an Investment Account.” (page 26)

    This is not correct. Some money would be in the investment account because not all of it would always be lent out to borrowers transaction accounts.

    Secondly, you propose that the BoE can still act as lender of last resort to the banks, which may be essential to supply banks with sufficient money to satisfy the need for lending in the economy. You should make this clearer in the ‘all new BoE money is to be spent into the economy by government’ section. It is therefore the decision of the BoE how much of the new money it creates enters the economy as lending (because the BoE transfers new money to Banks’ investment accounts) or as spending (because the BoE transfers new money to the Government’s transaction account). Making this point clear may be essential to the political feasibility of your proposal.

    Thirdly, below is the email I sent to the commission in reply to their question – which proposes that same answer you do in much more brief terms.

    Best wishes,

    Barry.

    Question 2.2:
    Which (if any) of the reform options identified in the above framework most
    deserve further development, specification and analysis?

    Answer:
    Narrow banking and limited purpose banking

    The report dismisses these forms of banking chiefly because: “There would be a reduction in the economic value added from intermediation.” (para 4.11) In other words, because these forms of banking do not create money as credit.

    As the report observes, credit creation is essential to supply the modern economy with money: “Unless (as with narrow banking) banks are required to have their deposits 100% backed by safe assets, this process of bank lending allows banks to create money – a fact of fundamental importance for the monetary system and the role of banks within it.” (Annex 1, para 6)

    Thus, narrow banking or limited purpose banking can only operate if central banks take full responsibility for supplying the economy with all newly created money, which is a possibility worth considering. Central banks would then have direct control over the money supply, instead of indirect control through, for example, setting interest rates. Central banks would then also be in a stronger position to regulate the activities of commercial banks. Finally, central banks could more easily conduct counter-cyclical policy, for example, supporting demand during recessions by supplying funds directly to the treasury.

    Yours sincerely,

    Barry Thompson.

  • mtperu

    I found this a fascinating proposal. I’m not an economist and I do not have enough knowledge to criticise the idea, although it seems to make a lot of sense. I do have one comment and one question:

    The document has not been properly proof read – it contains various grammatical and typographical errors. This definitely detracts from its impact. I would say that any proposal submitted to the Independent Commission on Banking that wants to be taken seriously should not contain a single error of this kind.

    My qustion is this: you explain that the MPC would be the only entity able to increase or decrease the money supply and you suggest that the way new money would be fed into the economy would be via extra government spending on services, infrastructure, tax reductions or even payments to citizens. Could you explain the mechanism by which the money supply would be reduced by the MPC?

    You quote Martin Wolf on several occasions (as well as Mervyn King). I would be very interested to hear his (their) opinion on this proposal.

    Best wishes

    • http://www.bendyson.com/ Ben Dyson

      @mtperu – the money supply could be reduced by the government taxing more than it spends, and some of that money being removed from circulation. However, it may not be necessary to reduce the money supply, so long as the Monetary Policy Committee did not over-react to any slow-down in the economy by printing too much new money. We’re hoping that this new banking framework would encourage them to move beyond ‘stop-go’ or ‘manic-depressive’ management of the economy.

      • mtperu

        Hi Ben,

        Thanks for your reply. I’m still trying to imagine how a transition to the system you propose would work…

        If when a bank creates new digital money it also creates a corresponding debt, what would happen to the bank’s balance sheet if depositers’ current accounts became ‘transaction’ accounts and were shifted off balance sheet?

        • http://www.bendyson.com/ Ben Dyson

          Hi Mark,

          The transaction accounts would be shifted on balance sheet. The bank’s liability to the customers would then disappear. We don’t want this to happen, as it would give the banks a windfall profit, so the easiest solution to this is to replace the liability with an equal liability to either the Bank of England or the Treasury. In effect, we’d be ‘selling’ the banks real money to replace the ‘funny money’ they’ve created via fractional reserve banking.

  • Mike Crees

    Well done Ben….this could me light at the end of the tunnel Mike

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  • http://tek.jp/p/ Seiji Ono

    Thank you for your mail.
    It is very encouraging to hear you have submitted your proposal to ICB. I think we should do the same here in Japan. On November 25 AJER is going to have a meeting and we will talk about positivemony there. We will try to persuade diet members. We need similar discussion. The merit of the reform based on positivemoney will be tremendous for Japanese economy.

    Good luck!

    Seiji Ono

  • Cole Stone

    Hi Ben, pretty excited by this and thanks for the update. As for the content it’s great, makes perfect sense to me and the more I understand full reserve proposals the crazier the present system appears to be. Let’s hope the changes will come..

    Best Wishes,

    Cole.

  • K Miller

    Yet to read all the way through but well done. Its unlikely to be perfect but compared to what we have currently, it can only be better. With the sovereign debt crisis getting worse by the day, I can only hope that the politicians are not leaving it too late.

    • http://www.bendyson.com/ Ben Dyson

      @K Miller – absolutely. It won’t be perfect, but it will be many times better than the existing system, in the same way that buildings that stay up are many times better than buildings that fall down, even if they’re not always aesthetically pleasing. Passing a reform like this creates the foundation for further, much-needing reforms in the economy.

  • http://www.sustecweb.co.uk Brian Leslie

    Well presented; the Commission should give it careful attention.
    Small points:
    1) On page 11, you comment that ‘it is desirable that this money is used
    for transactions that are productive and contribute to GDP”, without questioning the validity of the concept of ‘GDP”.
    2) You advocate using ‘inflation’ as the target for the MPC. I would suggest that, apart from the controversy over how this should be measured (e.g. by CPI or RPI, or …), the general welfare of society, as measured by yet-to-be-developed means, may in the long run in fact be accompanied by general *reductions* of prices. The MPC should be charged with the development, under public scrutiny, of such measures to guide it. ‘Inflation’ should be no more than an interim guide.
    3) “By failing to update the 1844 Bank Charter Act to cover the creation of ‘digital money’ in the form of bank deposits’.” — This leaves out the growth of the cheque system, which predates ‘digital money’ by over a century!
    4) “… full‐reserve banking would therefore treat state-issued currency as an asset of the state (or Central Bank) and an effective liability of the public to be retired when taxes are paid.” (P.36) — I question this. When the state spends it, it adds to the total of the medium of exchange in circulation, to be ‘retired’ only in the event of the MPC deciding that that total has grown too great.

    • http://www.bendyson.com/ Ben Dyson

      @Brian –

      1) GDP – we agree that GDP is a very poor measure of how much economic activity adds to (or takes away from) the quality of life. However, to open that debate in this particular submission would detract from the core argument, which was about banking reform.

      2) Valid points, but again, possibly a level of detail beyond what the Commission would want at this point. If they take this reform further and ask for further research, there will be space for a deeper discussion of inflation targeting.

      3) Technically, cheques are not money – they are just instructions to one bank to transfer money to another bank account. However, it’s true that bank deposits used to be created by banks in the form of ledger book entries, even before everything ‘went digital’.

      4) Agreed. We do need to do further work on explaining the accounting side of this proposal, as those people who are schooled in the current accounting set-up have a hard time understanding that money does not need to be created as debt.

  • Barry Thompson

    One more point. The central bank must also have knowledge of the total amount of debt held by each commercial bank/financial institution. Since your proposal breaks the double-entry accounting link between creation of debt and money, commercial banks could in principle create vast amounts of debt in excess of the creation of new money by the central bank. There is a danger that debt could end up exceeding the total supply of money, because the same dollar or pound could be re-lent may times over by banks.

    Thus, the central bank would need to monitor total debt levels to ensure that new debt-free money is created whenever debt levels become too high. Hopefully, excessive debt won’t be a real risk under postive money, but it is important to be a aware of the possible danger.

    • http://www.positivemoney.org.uk Ben Curtis

      Hi Barry,

      Under full-reserve banking, the only money that banks could issue to people as a loan would be money that had been given up by depositors in an investment account to be invested. Banks would not be able to create debt in excess of the amount of money in their “investment pool”. It will be the prerogative of banks, and a good measure of their performance, to ensure that the maturities of investment account liabilities and incoming debt payments are matched. As there will be no bailouts for institutions that fail, investment account holders will have to recognise that upon investing their money, they are subject to risk, and their rate of interest will reflect this.

      • Barry Thompson

        Hi Ben,

        Think about it this way: if a pound is deposited in an investment account, then lent out, then re-deposited in another investment account, then lent out again, you have two pounds of debt for only one pound of money in circulation. Thus, lending and re-lending of the same units of currency can, in principle, lead to more debt than money – a danger to be aware of.

  • Meg Howarth

    Any way of speeding up the findings of the commission? A year is a lifetime in the ongoing crises of capitalism and its banks.

    • http://www.bendyson.com/ Ben Dyson

      @Meg – unfortunately not, that’s the schedule that the government has agreed. And agreed – the next year definitely will seem like a lifetime, and may make it fully apparent to the authorities that the current system can’t be rescued. In the meantime, we’ll be working to get this proposal in front of key government figures as well, since they certainly don’t understand the way the system works right now or why everything is collapsing. The proposal that we submitted to the Commission is one of the few that could really help to deal with the crisis.

  • jaspersopaque

    In order to get this campaign going it is essential to attract public awareness. The comments section in the Daily Telegraph is a good vehicle to do this. I post there on a regular basis in the Finance section and attempt to raise awareness but, I need to get some replies in an attempt to start a debate on this media. Any volunteers?

  • Schofield

    Excellent document. Well done! My only criticism in the light of the Irish casino bank debt problems is whether more thought should be given to stopping banks using investment accounts for casino capitalism.

  • Michael

    I agree with jaspersopaque for the need for far greater publicity. May I suggest approaching the Federation of Small Businesses as I am sure they would be interested in a more stable economy.

    213,000 Members so could be a good ally.

    Thanks for great work.

  • Georgina Winkley

    The ICB submission reads like common sense to me. Until quite recently, I naively assumed this was how banking did work. I’ll do what I can to see this change takes effect. Thanks to all who have taken the trouble to think it through.

  • mtperu

    What about the Today programme? This morning there was a feature on the crisis in Ireland which inlcuded discussion on ideas for a separation of ‘high street’ banking from ‘casino’ banking. There was also mention of the Independent Commission on Banking. This would have been a perfect space for your proposal to be mentioned and discussed.

    Have you contacted the Today programme? Are they aware of the proposal and of Douglas Carswell’s bill?

    I’d be more than happy to send an email to them to help encourage them to give some airtime to your proposal. With everything that is happening in Irleand just now, it’s more relevant than ever…

  • mtperu

    From the point of view of an individual customer, the present system is comfortable and convenient. Since from 1 January 2011 the compensation limit rises from £50,000 to the sterling equivalent of 100,000 euros, it is also ‘safe’ (not many people have more than £80,000 of cash sitting in the bank). Admittedly it is only as safe as the government’s ability to cover the losses which these days could be questionable, but deposits below the threshhold are at least as safe a government bonds.

    If your proposal were to be adopted, the public would need to become much more active and engaged in managing their money and budgeting. As the transaction accounts would not pay interest and would actually incur admin charges, most people would want to keep as little cash in them as possible, particularly those people who depend on interest (or some kind of return on their money) to live, like pensioners.

    Since the proposed investment accounts would not offer instant access, people will need to have a clear idea about their short to medium term cash requirements and would also have to keep assessing their situation in these terms as lock in periods expired and their invested cash returned to their transaction accounts.

    Also, banks would need to offer clearly differentiated investment products with different risk profiles so that customers could choose an appropriate risk/return level to suit their needs. This would present another set of tricky decisions for the customer.

    Forcing everyone to think a bit more about their future cash requirements and the appropriate level risk for their investments would certainly be a good thing in general since it would likely make us all more financially responsible, but it would also make things much more complicated for the average saver.

    The ability to keep cash balances in an instant access saver account where there are no charges and the net interest earned is (generally) no lower than the rate of inflation is extremely convenient. No thinking or planning necessary.

    Even if the adoption of your proposal would make the economy more stable, it could be very difficult to sell it to the electorate.

  • AlanL

    Interesting document. It certainly takes us back to the days when one unit of money was backed by gold/silver (i.e you couldn’t just copy it).

    However, I have one big concern. I am a net depositor, happy leaving some of my funds tied up for, say, 1-3 years, but not the 25-30 years a mortgage borrower would want. I don’t think any depositor will want that. If I am prepared to commit funds for longer, I choose an asset class other than cash, for obvious reasons.

    So either we stop offering long term mortgages or the bank has to take the same systemic term mismatch risk that drives the current system (borrow short, lend long).

    Equally, unless we move to a world where almost everyone rents their house (like Germany), people will still want long term borrowing, without the threat of a call on the debt with, say, 6 months notice.

    The paper seemed silent on 25 year mortgages and ALM.

    • http://www.bendyson.com/ Ben Dyson

      @Alan – maturity transformation (borrowing short to lend long) will still take place under full-reserve banking, and there’s no reason why it shouldn’t. One 25-year mortgage could comfortably be funded by many 12-month or 3-year investment accounts. Maturity transformation under full-reserve banking is a lot safer than under fractional reserve banking because the length of investment is known up front, and funds can’t be withdrawn rapidly in a mass panic.

  • Dr Mike Haywood

    I applaud and welcome the NEF proposals. The recent speech by Mervyn King was historic and highly encouraging. Fractional reserve banking (FBR) is one of the root causes of the financial crisis
    but not the only one. Some of the other reasons are

    • The credit expansion has been driven by investors (e.g. pension funds) who want high yields to pay benefits to a burgeoning baby boomer population
    • The payment of debt interest requires economic growth
    • Growth requires energy which is increasingly expensive because of peak oil. Rising fuel prices will suppress economic growth
    • Changes in social attitudes towrds acceptance of debt
    • Powerful Vested interests wanting to maintain the status quo

    The seeds of the current crisis have been sown over decades, possibly centuries. The crisis is still in progress and has some way to go. Changing to a full reserve banking system will not affect the progress of the current crisis but may help prevent a future one. But this is closing the stable door after the horse has bolted.

    How can the current crisis be halted? Here are a few miracles which might happen.

    • A new form of sustainable energy is discovered which replaces oil
    • Investors, including baby boomers accept big drops in pension and investment income.
    • New huge oilfields are discovered, and climate change is proved not to be manmade
    • The Masters of the Universe with powerful vested interests eat humble pie, admit they have been wrong

    The charging of any interest is prohibited in Modern Islamic Banking as Muslims consider it akin to usury. This seems a much better alternative banking system to me but I am not a banking expert.

  • John Palmer

    At last this issue is being tackled professionally, after more than 300 years. Very few people understand the potential weaknesses in our banking system and this education process is essential.

    The international bankers who control BIS, WB, IMF, ECB, the credit rating agencies etc, have great power and influence and it is hard to imagine that they will relinquish any access to income without a fight.

    But we must try! The lecture by Prof Huerta de Soto was most interesting

  • jaspersopaque

    Historically the fractional reserve system of banking was a good invention, by a Scotsman known as John Law, which propelled the industrial revolution; without it, the world economy would not have evolved to the extend it is today but, and it is a big but, there is a fatal flaw in the system. and that is the problem of unrepayable debt, in that for every £100 created approx £110 is demanded in return; anyone with a good understanding of the power of the exponential function will recognise that forever expanding debt cannot be sustained. One only needs to look at any exponential chart showing the expansion of the money supply since the the total abandonment of the money supply in the early 70′s to see that the expansion is now well round the “hockey stick” curve, and it is shocking to realise now that if all debt currently in the system were to be re-paid there would be a shortfall of at least £300b.

    It is quite obvious to me, and I hope to politicians as well, that the current system MUST be reformed. The government owned BoE, with the power to create debt free money for the government, will not only free the government from its debtor relationship with the banking industry, but will also allow a financially independent government to reduce taxes (it will no longer be burdened with interest payments) and to spend money into existence on essential infrastructure projects and other essential services whilst, at the same time, creating jobs and prosperity for the nation as a whole.

    I wish all those involved in the campaign for monetary reform good luck, It is reform I have been advocating personally for many years.

  • http://None Bill Clarke

    Congratulations on the submission to the Independent Commission on Banking.

    Its main points need to be presented to the general public in a format they can easily inderstand.

    Therefore, we need a much shortened version of it which we can send to MPs, journalists and anyone we think we can win over.

    Do you such a version in mind?

    • http://www.bendyson.com/ Ben Dyson

      @Bill – yes, it’s definitely on the list for this month (December). We have a couple of talented graphic designers who may be able to put it into a visual format as well, to make it ultra-accessible.

  • mtperu

    Hi Ben,

    Is this kind of reform something that the UK could implement unilaterally? What would the implications be with regard to its relationship with the global banking system?

  • james armstrong

    “Of all the many ways of organising banking, the worst is the one we have to-day.” Mervyn King (New York, October) wants more regulation . But how is that to be imposed on corporations of which three UK banks each have a larger capitalisation than the GDP of the UK?
    I suggest the answer is to set a variable termination date for each corporation. They have been given legal personality by society and by an oversight, someone forgot to set a TD. Human rights have been abrogated.
    Errant corporations will have their TD brought forward. This will hit their share price. and encourage compliance with necessary regulatory
    measures. James.

  • http://forensicstatistician.wordpress.com/ Russell Bradshaw

    I’m glad that I’m not the only person to submit a contrary position to the ICB. Here is my recent submission:

    http://forensicstatistician.files.wordpress.com/2010/11/icb-submission-nov-2010.pdf

    Rather than tackle the very foundation of monetary reform, I have taken a slightly nearer target, that of securitisation. I’m attacking the ediface of pure “credit creation” rather than “money creation”. The advantage being that I’m merely asking our regulators to revert back to the model in plcae only 15 years ago.

    Comments and feedback welcom

  • MNichael

    Hello Ben,
    First, I would like to thank you for what you are doing to reform your current cancerous banking system. Thank You Sir.
    The problem is this. We have the same if not greater insanity going on here in the former colonies, dealing with the Federal Reserve. They have pretty much impoverished this nation and destroyed our economy. This is intolerable to most Americans here, and we have lost a few great leaders because of this problem. Until now, all we could do was lament the situation and HOPE there would come along a leader who would do as President Andrew Jackson did, and get rid of the Central Bank (Federal Reserve ). President Kennedy tried, but alas…..
    I have downloaded the ICB Submission and I have to say, Excellent work Sir. This should be the model for ALL economies laboring to survive under the yoke of a central bank. This would easily adapt to the current situation here in the U.S.
    I am deeply interested in following your progress. Please add my mane and address to your mailing list, so I may stay informed on all developments.
    I am hoarse from yelling from the rooftops for the past 8 years, and being called an alarmist, conspiricist, etc. Your proposal is clear and concise and indisputable. It will also save your economy.

    Michael

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