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Can Positive Money help fix a fatally flawed banking system?

Sarah Bentley

17th August, 2011

A new campaign group is trying to push through reforms that would give customers a choice in investments and make banks more socially useful. But can it break through the banking bottleneck?

The financial crash in 2008 might have taken the experts by surprise but not Ben Dyson. The 26 year-old novice campaigner behind new banking reform advocacy group, Positive Money, claims to have predicted the crash, know what's wrong with the financial system and to have a plan to make it socially useful and supportive of environmentalists' goals.

Banking reform might sound like something of a departure from the green agenda but Dyson believes it underpins everything ecologists hold dear. Tackling climate change, corporate responsibility and transitioning to a post-peak oil, low-carbon society are all, he believes, virtually impossible without reforming banking. 'If what we're campaigning for was implemented,' he asserts while trotting about the group's London office in his socks, 'it would free up the billions needed to transition to a green economy and banks' investment portfolios would reflect the interests of society as opposed to short term profits.'

Ethical banking

One of the reforms Positive Money is pushing for is for customers to have a choice in how banks invest their money or to opt out of investment altogether. 'When you put money in the bank it becomes the banks' legal property to do as they like with,' he explains. 'Regardless of your ethics this money is used to invest in ventures such as large scale oil and gas infrastructure and weapons manufacture that give the banks short-term profits. Our proposals would give customers a choice in how their money was invested.'

So bank customers could choose to invest in renewable energy, green tech or organic farming? ‘In essence yes,' says Dyson. 'You'd either choose what sector your money is invested in or just use your account like a safety deposit box. Those that invested would get a higher rate of interest because they'd be the ones taking the greater risk. At the moment anyone who puts their money in the bank is taking that risk but we don't have a choice.'

Despite being the new kids on the economics block, Positive Money's ideas have reached lofty places. They've met with the Treasury and have ideological allies in Parliament including Conservative MPs Steve Baker, Douglas Carswell and Labour MP Michael Meacher. 'Had we been doing this during the height of the boom nobody would have listened,' says Dyson, who became privy to the workings of the city while working in financial recruitment. 'Now we know the system is fatally flawed. The experts didn't see the crash coming, so everything is open to question.'

The green pound

The thoroughness of the research compiled by Dyson and his nine-strong team of volunteers (predominantly but not exclusively made up of disillusioned economics graduates) earned the group immediate recognition. Their website cross-references all of its claims with Bank of England documents so although their interpretation could be debated, their facts can't.

The New Economics Foundation (NEF) have partnered with them and the fruits of their combined labours will be published in September in a new paper - How Money Is Created In The UK - that they're hoping will have a substantial impact on the monetary reform debate. Positive Money's first collaboration with NEF and Professor Richard Werner of the University of Southampton, was a submission to the Independent Commission on Banking - the board tasked with devising new bank regulations by the end of September. Despite what they believed to be a productive three-hour meeting with the Commission, none of their proposals were included in the ICB's interim report, a setback that  Dyson dismisses as 'a step in the right direction - if you're a bank.'

But it's not just Positive Money's proposal of making banks ‘socially useful' that might have been perceived by the commission as too radical, but their entire precis of the banking system. Volunteers at Positive Money undergo a week of intensive training on the numerical gymnastics and systematic skullduggery that is the present set-up, where they face the hard truth, according to Dyson, that most of what they've learnt at university is out of date. ‘It's a bit like being told the world is round instead of flat in the times of Galileo. It's a bit of a headache.'

How banking works

The Positive Money analysis of how the monetary system works today goes thus. Although notes continue to be printed by the Bank of England, the ‘money' in your account isn't currency but an electronic accounting entry in a computer system maintained by your bank. According to the Bank of England, this electronic money or 'bank deposits' now make up just over 97.4 per cent of all money in the economy, with actual cash standing at only 2.6 per cent.

So what's the problem? With this system new money only enters the economy when banks give a loan which means new money, or ‘funny money' as Dyson calls it, is actually new debt. As the majority of money in the economy is now digital, the heads of lending at banks - not the government - are essentially in control of the money supply.

You might assume there are legal mechanisms to stop this happening. There were. The 1844 Bank Charter Act made it illegal for anyone other than the Bank of England to print pound notes but this vital piece of legislation hasn't been updated to include digital money which is why, Dyson conjectures, prior to the crash, banks were able to engage in such rampant, unchecked lending.

'Bank employees are motivated to create short-term profits for their employers and earn promotions and bonuses for themselves - not to maintain a steady inflation rate of two to three per cent which is what a healthy economy needs,' says Dyson. 'Yet these people are in control of the money supply and that's what caused the crash. It's madness. Our major task now is to help policy makers, economists, journalists, academics and the general public understand this.'

Consequently in addition to being a pressure group, one of Positive Money's chief aims is education. Their website is a portal where graphs, diagrams and blogs guide people through the most crucial findings of the acres of Bank of England documentation they've waded through to comprehend the nuts and bolts failures of our current system. 'It's been obscured in complexity for so long people had given up trying to understand it,' says Dyson.

Never has the stage been more perfectly set for a group to lift the lid from the seemingly impenetrable complexity of the finance sector. The far-reaching fall out of the crash has created a hunger for such information. Animated film Money As Debt by Canadian Paul Grignon has been viewed over 900,000 times on YouTube and in 2010, American director Charles Ferguson won an Oscar for The Inside Job - a documentary about the crisis. Even the Governor of the Bank of England, Mervyn King, is scathing on the subject of banks. Last October he said: 'Of all the ways of organising banking, the worst is the one we have today.'

Regardless of the potentially epic impact banking reform could have on ecologist's goals, a campaign with debates about the dangers of fractional reserve and fiat currencies at its core will never win hearts as easily as a call out to save the pandas, stop gas fracking or halt tar sands. 'Capturing interest is a major challenge,' agrees Dyson. 'We're hoping to ally with advocacy groups working in poverty, debt, inequality and climate change to help get the message out how important banking reform is.' For a rookie campaigner it's a titanic task. 'It is, but when I saw no one else was going to campaign on it specifically, I realised I had to,' he says. 'If things don't change, they'll be another crash.'

Further information: Positive Money

Five Ways To Get Involved In The Campaign For Banking Reform

Read: Read the information on the Positive Money website and PM's, NEF's and Professor Richard Werner's submission to the ICB.

Watch: The three minute tutorials on the Positive Money website and films Money Is Debt and The Inside Job

Community: Attend or organise a Positive Money meet-up to learn about, discuss and hatch plans for banking reform campaigns

Donate: Become a donor to Positive Money to keep their vital campaign going

Talk to your MP: Attend your local MP constituency meeting to discuss banking reform. If confident with the facts attempt to re-educate your MP on how the monetary system works

Switch banks: Change your bank accounts, mortgage or insurance schemes to more ethical banks such as the Co-operative and Triodos. Ensure you tell the switching team at the bank you're leaving why you're moving your account.

Ask Positive Money

What is fractional reserve banking?

A banking business model whereby banks promise to repay most of their customers on demand whilst only having enough money to repay a fraction of them at any one time. This business model relies on the fact not everyone will want their money at the same time. But if they do (think of Northern Rock) then the bank quickly becomes insolvent and will need rescuing by taxpayers.

What is the Financial Services Compensation Scheme (FSCS)?

It sounds like a great idea. If a bank goes through the government guarantees it's customers get their savings back. In reality, or so Positive Money argue, it means banks - unlike any other businesses - have no incentive to behave responsibly as they'll always be saved by the tax payer as it's cheaper for the government to bail out a bank than to reimburse all it's customers savings. It was implemented to stop bank runs but in reality it has meant the taxpayer - via the austerity cuts - is footing the bill for bankers reckless behaviour. Positive Money say, 'It's not freemarket capitalism nor effective state intervention.'

Sarah Bentley is a freelance journalistAdd to StumbleUpon

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