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Money is much funnier stuff than you ever imagined. Photo: Doug Wheller via Flickr.
Money is much funnier stuff than you ever imagined. Photo: Doug Wheller via Flickr.
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Making money - the state must reclaim its sovereign rights

Charlotte Jackson

22nd May 2014

Where does money comes from? In the 97% of the money we use is created by commercial banks out of thin air, as they advance credit. Charlotte Jackson argues that this system costs us all dear - as citizens, debtors, taxpayers, and as victims of economic instability

For decades we've allowed the power to create money to be used to blow up property bubbles and financial markets. Now it's time to use that power in the public interest.

The way money is currently created is fuelling many of our economic crises including a house price bubble. Here we propose a simple and effective solution that will create jobs and boost the economy.

The ability of banks to create the money we use was a root cause of the financial crisis. Through their lending, banks create 97% of the money we use in the form of bank deposits (the electronic numbers in your bank account).

This gives them enormous power to direct the economy and shape our society - without any form of democratic accountability.

In the decade leading up to the financial crisis, this money was directed primarily into the financial and property markets with only 13% going into the businesses that make up the 'real' economy - that is, everything outside of the world of finance.

This has left us with an economy based on debt and speculation.

The failure of Quantitative Easing

Because our money is created by banks when they make loans, we depend on them to keep lending to keep the economy going. But when the financial crisis hit, banks stopped lending, and so stopped creating new money.

The Bank of England quickly stepped in by creating £375 billion of new money through a process known as Quantitative Easing (QE). But instead of going into the real economy, this money was used to buy financial assets, mainly Government debt.

The effect was to flood financial markets, artificially increasing stock and bond prices by around 20%. The idea was that the people who owned these financial assets would feel wealthier and start spending more, boosting the real economy.

However, there are two major problems with this. Firstly, 40% of assets are owned by 5% of the population, while the majority don't own any stocks or bonds. So only the wealthiest actually gain from Quantitative Easing, and inequality grows.

Secondly, rising prices in financial markets encourages people to invest more, rather than spend more. So money gets trapped in financial markets and does not 'trickle down' to the real economy.

Result - we now have:

  • more billionaires than ever before;
  • a massive property bubble, with some of the most unaffordable housing we've ever had;
  • a booming stock market;
  • mounting personal debt - the poorest 10% currently owe four times their household income;
  • and an ever-increasing reliance on services such as food-banks.

An alternative to the status-quo

But there are different ways of creating money. Positive Money have advocated using 'sovereign money' to boost the real economy without relying on increasing national and household debt, and further bank lending.

Under current Treasury rules, when the Government wants to spend more money than it is pulling in in taxes, it has to borrow the money on financial markets - and then pay interest on it. It's a great deal for the banks, who create 97% of that money out of thin air - but rather less good for taxpayers who have to service the debt.

Sovereign money uses the Bank of England's power to create money (as it does with QE) - but instead of putting the money into financial markets, it advances it to the Government, which can then spend it in the real economy.

The government can use the money in three ways: direct spending on capital projects such as housing, infrastructure, green technology; tax cuts; or citizen dividends, where everyone gets an equal share of the new money.

All of these have their pros and cons, but direct government spending is likely to have the biggest impact on jobs.

The £375bn created through QE was more than the government spends in 6 months, but whilst all this money was being created, the government was cancelling flood defence projects and school rebuilding plans because they were short of money.

Using the sovereign money approach, just £10bn of newly created money, spent into the real economy, would have had a greater effect on employment and jobs than the entire £375bn of Quantitative Easing.

Different ways of using new money

There are many potential uses for the newly create money. For example, we are currently building 100-150,000 fewer homes than we need. The government could spend some of the newly created money building more affordable and sustainable housing. This would increase supply and create 200,000 jobs in the construction industry.

An alternative proposal would be to spend the money on retrofitting current homes to make them more energy efficient. Energy bills are high and fuel poverty is a serious problem, in large part because houses in the UK 'leak' a vast amount of the energy used to heat them.

It would take around 200,000 workers over the course of 10 years to bring the UK's existing homes up to standard, reducing energy bills for the wider population.

For decades we've allowed the power to create money to be used to blow up property bubbles and financial markets. Now it's time to use that power in the public interest.



Charlotte Jackson is student on the Masters in Leadership for Sustainable Development at Forum for the Future, and currently undertaking a placement at Positive Money.



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