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Our Proposals: Left-wing or Right-wing?

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The kind of proposals that we’re advocating are neither left wing nor right wing. They get support from both sides of the political spectrum, sometimes for different reasons, and sometimes for the same reasons.

The proposal denies the commercial banks their power to create money. It is pure common-sense, and it should be welcomed by all. If you are a socialist on the left you should welcome the fairness and possibility of better public services, and if you are a capitalist business owner on the right you should welcome the easier access to cheap, affordable credit! If you believe in free markets then you should welcome the removal of subsidies for the huge corporations that we know as banks, and the removal of the distorting influence that this has. And everyone should welcome the ending of a situation where the interests of banks overrule the interests of democracy.

Those on the “right” and “left” alike ought to be equally as disgusted by the shocking waste of public money involved in borrowing our nation’s money supply from banks when it could be created debt-free. All we hear about these days is ‘cutting out the waste in public spending’. This proposal addresses the biggest, most fundamental source of wasted public money – including the £100bn in hidden subsidies given to the banking sector each year.

We are not against free market, not against lending or interest. We are against mixing the two activities of providing society with a medium of exchange, and intermediating money between savers and borrowers. We believe, that only if we give the free market a nationalised money supply, can it really work for the public benefit.

The proposed reform would bring the important advantage of separating control of how much money is in circulation from decisions on how the money is used. The way commercial banks now create money involves their controlling its use. In deciding whether to grant a loan they decide whether to invest in businesses, property bubbles or other forms of speculation. But, in a market economy which aspires to be free, open and efficient, decisions affecting the monetary order itself – including the amount of money in circulation – should not be part of the money-making process.

Our reform will not restrict the freedom of the banks to give and take loans against interest. Far from being a step on the road to any kind of inefficient, centrally planned economy, it will contribute to freer, more open and more efficient functioning of the market economy – for banks as for everyone else.

If after this reform a bank should fail, only the bank’s own money will be at stake. Customers’ money on current accounts will no longer be part of its balance sheet.

 

A debt-free money base, a less indebted government, a better balanced government budget, a lowered tax burden, a better moneyed civil society – all these will contribute to a higher level of net income and a larger capital base for both businesses and private households.

This will help to make them less dependent on subsidies and allowances and external capital, and better able to provide for themselves and one another.

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What we do want to achieve is to abolish fractional reserve banking – and this is something that many economists from the both sides of political spectrum in the past and today strongly criticized and strived to achieve.

In this post we would like to introduce the most well known, important and famous economists calling for the end of fractional reserve banking.

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Let’s start from the right – the Austrian school of economics, which is associated with libertarian political perspectives. They argue for an extremely limited role for government and the smallest possible amount of government intervention in the economy.

Ludwig von Mises was the first twentieth-century economist to propose the establishment of a banking system with a 100-percent reserve requirement on demand deposits.

Nobel Laureate Friedrich.A. Hayek also speaks of establishing a banking system based on a 100-percent reserve requirement.

Professor Murray N. Rothbard (in 1962) develops his proposal for a pure gold standard based on a free-banking system with a 100-percent reserve requirement. Rothbard compares the banker who operates with a fractional reserve with the criminal who commits the crime of misappropriation.

In Europe, the Frenchman Maurice Allais, who received the Nobel Prize for Economics in 1988, has championed the proposal of a banking system subject to a 100-percent reserve requirement.

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On the other side of political spectrum there is the old tradition established by some members of the Chicago School. While with different theoretical roots and with totally different objectives, they came to the same conclusion – the call for abolishment of fractional reserve banking.

(The Austrian theorists see the 100-percent reserve requirement as an imperative which is vital for the correct functioning of a market economy. Economists of Chicago school proposed a 100-percent reserve requirement to make government monetary policy more effective and predictable – to assist governments in administering a stable monetary policy by preventing the elastic, distorting credit expansion which all fractional reserve banking systems generate from nothing.)

They suggested monetary reforms, including a call to end the fractional reserve banking and impose 100% reserves on demand deposits in memorandum that came to be known as the “Chicago plan”. The Chicago plan was a proposal to radically change the structure of the financial system.

Supporters of the plan were: F. H. Knight, L. W. Mints, Henry Schultz, H. C. Simons, G. V. Cox, Aaron Director, Paul Douglas, and A. G. Hart.

The memorandum generated much interest and discussion among lawmakers but the suggested reforms were set aside and replaced by watered down alternative measures.

When after an apparent recovery in the mid-1930s, America was again in recession in 1939 economists circulated a draft proposal titled  “A Program for Monetary Reform” calling once more for an end to fractional-reserve banking. It resurrected proposals for banking and monetary reform from the Chicago plan.

The program was sent to the most complete list of academic economists available at the time. General approval of the program was expressed by 235 economists from 157 universities and colleges; another 40 economists approved of it with some reservations; only 43 economists expressed disapproval.

A Program for Monetary Reform was coauthored by six notable economists: Paul H. Douglas, Frank D. Graham, Earl J. Hamilton, Willford I. King, Charles R. Whittlesey and  Irving Fisher (a celebrated American economist and professor of economics who is best known for his work on the quantity theory of money. Fisher was a true celebrity and one of the major influences on Milton Friedman’s monetarism. Friedman called Fisher “the greatest economist the United States has ever produced)

There is one more outstanding economist who has backed monetary reform. It is our Nobel Prize winner Milton Friedman, is known now as one of the most influential economists of the 20th century. He wrote a book in 1960 called, A Program For Monetary Stability. On page 65 he stated that he was in favor of what Henry Simons and Lloyd Mints were advocating, that is, 100% reserve. In other words, he advocated that governments, rather than private banks, issue the money supply. Dr. Friedman also praised american Monetary Reform Act  (http://www.themoneymasters.com/monetary-reform-act/) – which is similar to the proposal of Positive Money.

 

In more recent years there is an increasing number of economists who are advocating a sound and stable monetary system based on 100% reserves: Laurence Kotlikoff, Josef Huber, James Robertson, James Tobin ( who received the Nobel Prize for Economics in 1981, has proposed a “deposit currency” system which incorporates many aspects of the Chicago Plan for a 100-percent reserve requirement.), John Kay, Jesus Huerta de Soto etc.

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Jesus Huerta de Soto is today’s leading Austrian school economist, who in his book “Money, Bank Credit and Economic Cycles” published a proposal of a reform of banking system. He suggests a transition from the most controlled systems (those with central planning in the banking and financial sector) to the least controlled ones (those in which the central bank has been abolished and complete freedom prevails) which consists of 5 stages.

What is really interesting and what could be seen as a connecting link between “right” and “left” is the third stage of the transition, in which

“the central bank would remain independent, and a radical step would be taken in the reform: a 100-percent reserve requirement would be established for private banks. This step would necessitate certain legislative modifications to the commercial and penal codes. These changes would allow us to eradicate most of the current administrative legislation issued by central bankers to control deposit and credit institutions. The sole, remaining function of the central bank would be to guarantee that the monetary supply grows at a rate equal to or slightly lower than the increase in productivity in the economic system.”

This stage is actually very similar to Positive Money’s proposal of reform.

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Finally, we want to conclude our list with such very important persons of financial world as:

Mervyn King, the governor of the Bank of England, who said in 2010…
“Another avenue of reform is some form of functional separation. The Volcker Rule is one example. Another, more fundamental, example would be to divorce the payment system from risky lending activity – that is to prevent fractional reserve banking”

and

Herman Daly, former Senior Economist at the World Bank, who strongly endorses full reserve banking:

“I think we can really do a whole lot for our economy if we would just move away from fractional reserve banking and go back in the direction of 100% reserve requirement.”

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Reform of the monetary and banking system is not about being on left or right side. It is about fixing what is fundamentally wrong.

Our proposal is not about giving government more or less power. It is rather about taking this “magic box of money creation” from the hands of both – private banks and governments – and putting it on a transparent place in the centre of the society, so that everybody knows where it is and how exactly it is being used and nobody can abuse it.

About The Author

Mira Tekelova (Positive Money)

Mira has a background in economics and has spent the last 3 years doing independent research into the problems with our current monetary system. She works on the Positive Money campaign trying to promote the awareness about our debt-based money by the public. She became interested in the monetary reform ideas after she realized that the way money is created is the root underlying cause of poverty and most of our social problems today.

Visit Authors Website →
  • RJ

    “a less indebted government, a better balanced government budget”

    I assume you are going to balance the budget by treating new money as revenue.

    As explained in this article

    Coin Seigniorage and the irrelevance of the debt limit

    Because it will not be possible to balance the budget just from tax revenue. Govt will either run deficits or increase revenue by printing money and treating this money printing as revenue

  • RJ

    “Those on the “right” and “left” alike ought to be equally as disgusted by the shocking waste of public money involved in borrowing our nation’s money supply from banks when it could be created debt-free”.

    Could you also explain this shocking waste of public money comment. I assume you are referring to Govt borrowing.

    But Govts borrow to cover a deficit that has not been covered by tax receipts. This can be financed by either BoE or a Govt bond.

    Lets assume they go the bond route. Which is really just a piece of paper. And what does the Govt get in exchange for this piece of paper. Real goods and services. So far not too bad for the Govt and taxpayer.

    What about a commercial bank if they finance this bond (say 100 million)

    Their balance sheet changes as follows

    Assets

    Govt bond held £100 million

    Liabilities

    Customer Deposit £100 million (this si the customer asset)

    So the bank holds a bond that might earn say 3% and pay interest on the customer deposit of say 2%. Are you referring to the interest differential

    Banks make their profit on the interest difference so I can not see how this is sufficient to call it a shocking waste of public money. And as the Govt gets goods and services in exchange for a bit of paper that really can be just rolled over and never paid back it seems like a very good deal to me.

  • Jack Sadie

    Why have I not heard anything about Positive Money on BBC radio programmes such as Money Box ? Would not that be a good target for spreading the message?

    It makes such good sense to eliminate fractional reserve banking that I would have thought it would attract some attention.

  • RJ

    I’m all for a fairer society. I was attracted to positive money to achieve this aim. (But have only just recently understood the importance of Govt debt).

    But the way to do this is easy. Its for the Govt to run larger deficits and use this money / credit to help the poor (say by increasing unemployment benefits). This is so simple and the economic logic sound that most completely miss this point.

    Why? Because the majority of people are locked into the flawed belief that Govt deficits are bad. And Govt surpluses are good.

    Yet from a macro economic viewpoint this rule is without dispute:-

    The ONLY way to INCREASE overall non Govt savings (money deposit or assets) is for the Govt to run deficits and INCREASE Govt debt. (They could print money to pay off the debt of course)

    But the key point is the need for Govt deficits. Without ever paying this money back by Govt surpluses.

    NB. Lets say person A buys a house for £10,000. And the house value increases over time to £1 million. It’s easy to think person A is better off. He or she is but society is also equally equally worse off from a money asset viewpoint. Because to spend this money person A must sell the house and if they do this will create an equal monetary liability (loan to buy the house) and asset (deposit by person A). So overall it cancels out.

    Positive money I believe is trying to achieve this (a fairer society) in an indirect way rather than going the direct route. But no matter what way it is done Govt must spend more and finance either by Govt deficit or money printing (and treat the money as revenue).

    This achieves two aims

    1 Allows Govt to either spend more or tax less to achieve fairness aims and
    2 Allows the non Govt sector to achieve real monetary assets / saving. This is critically important in an ageing population.

  • RJ

    Correction

    Govt must spend more OR TAX LESS.

    In this way it can appeal to both the left and right

    The key is the size of the Govt deficit not the size of Govt.

  • Nic the NZer

    RJ the government deficit is a problem solely because people perceive it to be a problem. A politically unpopular policy is a problem because it prevents politicians from acting (i.e. it might get them unelected).

    For example in the US, at the moment the Democrats are trading an expansion of the deficit with the Republicans for tax cuts (not tax cuts across the board mind you). Does not seem like a balanced trade to me, but politically it is.

    What you can see is that Barack Obamas hands are tied because of a politically unpopular though not widely well understood policy. Even if the MMT economic ideas worked exactly the same as the positive money policy (they don’t by the way), debt-free money is still better because it is simpler to understand.

    • Steve

      Nic – I think it’s probably a typing mistake rather than an understanding mistake but they are discussion increasing the debt limit not the deficit. Both sides are proposing to cut the deficit, they just disagree on the means, with the democrats wanting to increase tax and introduce spending cuts, while the republicans wanted sharp spending decreases with no tax increases (or even tax cuts).

      I can’t agree with either of you on the solutions – both of you essentially say thar we can have something for nothing just by creating more money.
      RJ on a previous thread I have outlined that MMT would either result in direct debasement of currency, or worthless government bonds.

      • Nic the NZer

        Yes. I meant the debt limit and government debt, not the US economic deficit.

      • RJ

        Steve

        Your comment on creating something for nothing shows a lack of understanding about money and debt etc.

        The problem at present in the US is there is not enough money in circulation to achieve full employment.

        One way to achieve this (more money or bank credit) is for the commercial banks to issue more credit (to the non Govt sector). This however results in an increase in debt liabilities. NB there will obviously be an equal debt asset and debt liability at both the commercial banks and the commercial bank customers. This will continue until the debt liability limit is reached (ie now). Another problem with this approach is a lot of this extra commercial bank credit will go into areas like housing rather than employment generating areas.

        The other way to generate more commercial bank credit is for the Govt to run Govt deficits and finance by either Govt bonds, Fed (BoE) credit or new notes or coins.

        This option allows the Govt to direct money / Govt spending into the areas that they want to. And also results in more commercial bank credit without the offsetting debt liability. This is because the commercial bank hold a Govt bond or Fed credit rather than customer debt as their asset to offset the extra deposits.

        So it is not creating something for nothing. It is just the only way to generate extra credit in the non Govt sector without extra debt.

      • Nic the NZer

        I don’t think either myself, positive money or RJ have implied that there is something to be had for nothing.

        There is however a privilege which allows some people or group of people to expand and contract the money supply. If this is power is wielded poorly this can either cause unnecessary poverty or debase the currency, or perversely both at the same time.

        All of myself, positive money and RJ want this privilege to be placed in the hands of a branch of government, like the judicial system, absolutely not in private ownership.

        • John Baker

          You have implied that something can be had for nothing. You say that you are not against interest but isn’t interest the very essence of money for nothing? Loaning at interest is very different from investing in something productive and then taking a share who’s returns will always relate to actual real economic activity and variable natural circumstance (i.e. a bad harvest means a smaller share). Things inevitably expand and contract whereas interest doesn’t it only expands. Time and interest are constant so do not relate to reality or a tangible activity at all. It is a denial that to invest you need to share the risk that all human endeavors and real world situations naturally involve. We often use other words for this such as greed and selfishness i.e. you are not willing to account for real needs of circumstance. Any sustainable future economy must account for circumstance. Otherwise the only alternative is obsessive growth to the point of suicide.

          This is not even counting the fact that if you did this with credit money creation (not actual loans but often misrepresented as such by banks) the problem is exponentially amplified. I agree that the banking system should separate real loans (of something stored) from money creation. Think about it, if we got rid of inflation, there would be no need to expect interest on savings. You wouldn’t need it.

          Interest is more like a religious belief in that you cannot logically justify it (it is simply irrational) but people want to believe in it desperately. It can only ever work in an ideological fantasy universe. Maybe the one which economists spend a lot of time in with their imagination. However, this idea definitely has become so ingrained in our cultural mindset that people don’t even see it anymore. Anthropologists, historians and philosophers might see it because they take a wider context socially and across time. Modern economists don’t for some weird reason. I am not sure why apart from maybe trying not to upset greedy people they will inevitably have to deal with and may even end up paying their wages. As the saying goes “its hard to see something when your paycheck requires you don’t”.

          • Nic the NZer

            Not sure what to make of this comment, you seem to be both for and against.

            Charging interest for the use and associated risk of money is perfectly valid, as far as I can see. Interestingly however the Islamic banking system does not believe in charging interest on loans of money. Islamic banking as a result works in quite a similar way to the positive money system, though its not strictly full reserve.

            What is quite dubious about the fractional reserve system is that the lenders of the money do not hand over their spending power when a loan is made. I feel this makes fractional reserve credit particularly dubious. If there is no temporary loss of spending power and no associated apparent risk, then charging interest for these loans is much more like trying to get something for nothing.

          • John Baker

            That is because I am both for some of your arguments and against others. I don’t see any problem with no agreeing 100%. Its more like science, you keep the good bits and chuck away the rest.

            I want the interest on creation of money stopped i.e. fractional reserve as you do. I am very glad you are fighting this. However, it is only one piece in a larger problem.

            I also want all interest stopped. There are good logical, philosophical, anthropological, historical and ethical reasons why various societies banned interest such as happened in Islamic banking. In fact the period they did this in Islam was then followed by a very prosperous period as people with capital were then forced to become business investors instead and use their money productively in a venture they had an interest in being successful over the long term. Christians did for many centuries too until conceding under pressure from the rich, armies and kings eventually. That concession was followed then by a period with most people losing everything and becoming renters of their previously owned land and continuous debtors for reasons of interest as soon as there was a period of bad conditions. This will inevitably happen in reality. Interest legitimized asset stripping and so the rich always win on a downturn. Win interest when things are good, win assets when things are bad. Many civilizations have spotted this and so became popular in many religions.

            Interest is simply institutionalized greed. It is inherently one sided for reasons I have already stated. It is a type of economic violence. Some christian theologians even as late as the middle ages considered it a theft of time, charging others for something that can only belong to god.

            People need credit to function and be productive. After all that is what money is. You could create non interest based systems and they have been done. Others have simply accepted it explodes and worked around it by periodically resetting the economy every 7 years by wiping all the slates and interest counts back to zero. A kind of regular reboot to clean up the mess. Not a proper solution but a way to prevent escalation.

            Unfortunately, it is so engrained in our mind set that people now just accept it, including economists. People can no longer see that anything else is possible. They think this is how is and has to be. They forgot that we created this mess and allowed these rules to be put into law, many of which are dysfunctional.

            So although I applaud your attack on fractional reserve, I think it is only a single step in the right direction.

            Though, I don’t hold out a lot of hope in people questioning these things in time to prevent the collapse of yet another civilization eaten up by writing legitimized greed into its laws.

            History seems to show that it descends into a lot of chaos and violence before people are willing rethink and reinvent these things but they do eventually. I think we will have to see much bigger destruction yet to get any real reform. I don’t see many examples of those who have gained power through these things just giving it up because it is the right thing to do for the sake of everybody and even capitalism itself. It is set to self destruct.

            I see a weird conflict of interest in economics that needs to also be solved, in that often the pay check requires simply accepting many things without challenge (such as interest). That is not a real science. Other fields where the paycheck does not rely on this such as anthropology and history have no problem in noticing and questioning the validity of these things. It seems that politicians and bankers hire economists for their ideology rather than their critical thinking. Its like they would rather rely on astrology than astronomy to predict the flight of a space craft. That to me seems like we are doomed.

  • archibald gruntfuttock

    all very well thought out comments above, but there’s one small problem. they all need the ‘permission’ and ‘integrity’ of the banks to work. good luck with that, as history demonstrates. time for something completely different. but the banks will not let that happen. which is why we are dead in the water. as yet so called financial experts cant even admit the real problem. ask peston what he thinks of FRB and he’ll clam up because its not in his interest to suggest change or blame the banks.

    • John Baker

      You are right. Throughout history, there are only rare exceptions of people giving up power or means of unfair gain due to conscience alone. Usually, they hold on tight until total collapse of the current civilisation. Then people do reflect on what needs to change. They rebuild. All is fine for a while. They get complacent and do the same mad things, build greed into their laws, everyone falls for the same tricks again. This is boom and bust on scale never before possible we are watching. Its like being stuck on a plane with a small group of nutjob hijackers taking us down. They think they are doing the right thing of course. Its all about the ideology really. Petty things like maths, common sense or historical lessons will never get in the way of a good dream.

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  • Austrian89

    What do people think of Ron Paul’s proposals regarding the issue of banking reform?

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In general: similar to a loan. To extend credit is to provide resources to a party without immediate repayment. In accounting: a record of the value transferred from an account by a journal entry