The 5 Minute Overview:
Firstly, the rules governing banking are changed so that banks can no longer create bank deposits (the numbers in your bank account). Currently these deposits are considered a liability of the bank to the customer – after the reform, they would be classified as real money and only the Bank of England would be able to increase the total quantity of them.
The Bank of England would then take over the role of creating the new money that the economy requires each year to run smoothly, in line with inflation targets set by the government. In order to meet these targets, the decision on how much or little money needs to be created would be taken by the Monetary Policy Committee. To maintain international credibility and avoid ‘economic electioneering’, the MPC would be completely separate and insulated from any kind of political control or influence – in other words, the elected government would not be able to specify the quantity of money that should be created.
The Monetary Policy Committee would decide how much money needs to be created in order to meet the inflation targets by analysing the economy as a whole – not the spending needs of the government, nor the needs of the banking sector. They would use ‘big picture’ statistics to judge whether meeting the inflation targets requires more or less money injecting each month. They would also have access to all the research resources that they require to make an informed decision.
Upon making a decision to increase the money supply, the MPC would authorise the Bank of England’s Issue Department to create the new money by increasing the balance of the government’s ‘Central Government Account’. This newly-created money would be non-repayable and therefore debt-free.
The newly-created money would then be added to tax revenue and distributed according to the elected government’s manifesto and priorities. This could mean that the newly-created money is used to increase spending, decrease the national debt, or replace taxation revenue in order to reduce taxes, although the exact mix of these options would depend entirely on the elected government of the day.
Consequently, the decision over how newly-created money is initially spent would be made by the government, but the government would have no control or influence over how much money is created.
Implications for Customers of Banks
To the average person, banks will appear to operate very much as they do now. However, the necessary ‘behind the scenes’ changes required to prevent banks from creating money will mean that there a few subtle changes to the terms of service on current accounts and savings accounts:
Implications for Current Accounts (known as Transaction Accounts after the reform):
Post-reform, banks will not be permitted to lend the money held in Transaction Accounts (the equivalent of today’s current accounts). Instead, any money held in these accounts will be held in ‘fiduciary trust’ by the bank on behalf of the customers, and in practical terms will be considered to be held in a ‘Customers’ Funds Account’ at the Bank of England – the equivalent of putting the money into a safe-deposit box with the customer’s name written on it.
These Transaction Accounts would then be 100% safe – since the money is technically held at the Bank of England, the customers are guaranteed to be repaid, even if their bank was to become insolvent. This guarantee does not expose either the government or the Bank of England to any financial risk whatsoever, and also means that the government’s guarantee on deposits can be withdrawn, since Transaction Accounts are inherently risk-free for the customer.
The implications of this for the customer as are follows:
- Money in their Transaction Account is 100% secure and can never be ‘lost’
- Transaction Accounts will not pay interest, because the banks are unable to lend this money. As the rates of interest on current accounts are rarely higher than 0.5%, this is not a significant loss.
- There will probably be monthly or annual fees for the use of a Transaction Account, since the bank needs to recoup the cost of providing payment services. However, competition for market share between the banks will keep those fees as low as possible, and many banks are likely to ‘swallow’ the costs and waive Transaction Account fees completely in order to attract customers who are then more likely to take out mortgages and other products with the bank (a loss-leader approach to marketing). These fees will in any case be outweighed by the significant financial benefits to every individual that arise from preventing the privatised creation of money as debt.
Implications for Savings Accounts (known as ‘Investment Accounts’ after the reform)
In order to lend money after the reform is implemented, banks will need to find customers who are willing to give up access to their money for a certain period of time. In practice, this means that the customer will need to invest their money for a defined time period (1 month, 6 months, 2 years, for example) or set a minimum notice period that must be given before the money can be withdrawn (e.g. 7 days, 30 days, 60 days, 6 months).
Banks will then operate in the way that most people think they currently do – by taking money from savers and lending it to borrowers (rather than creating new money (deposits) whenever they make a loan, and walking a tightrope between maximizing profit and becoming insolvent).
For customers of the bank, this means they will only be able to earn a rate of return (interest) if they are willing to give up access to their money for a certain period of time.
Note that this policy completely eliminates the risk of a bank run and gives the bank much more stability, as it is able to plan its future outgoings up to 12 months into the future (a much greater degree of stability than they have right now).
We realise that the need to give up access to the money could dissuade some people from investing, which would unnecessarily reduce the total amount available for lending. We have made detailed and well-considered provisions to allow customers to withdraw a portion (probably 20%) of their invested funds on demand, to allow for emergencies. These proposals are outlined in full in the act, and strike a good balance between maximising flexibility for customers whilst limiting the amount of risk that this flexibility re-introduces to the banking system.
The Details:
(Best read in order, starting with Creating New Money, but you can skip to the section that interests you most.)
Section 1: Creating & Distributing New Money
- Creating New Money
- Guarding Against Inflation
- Distributing Newly Created Money
- Clearing The National Debt
Section 2: The Required Changes to the Banking System (Technicalities and Details)
- Two Types of Customer Account
- Transaction Accounts
- Investment Account Guarantees
- Investment Accounts
- Three Accounts at the Central Bank & The Payments System
- Making Loans
- Ensuring Stability In Banking
- Overdrafts & General Liquidity in the System
Well done! This is real progress for UK Monetary Reform. I have posted links to it on both housepricecrash.co.uk and Bill Still’s Money Reform website, with some interesting responses.
Bob
Hi There.
Your site is a great idea. Thank you.
Improvement Suggestions you might consider.
1. Do you want most ordinary punters to “get it” instantly?
Yes?? O.K. So “How” ?
S I M P L E G R A P H I C S
Example: Watch the “two briefcases” graphic in the Zeitgesit documentary.
– absolutely clear and lasting images of inflation.
2. How do you get a punter involved instantly?
A suitable question.
Examples: i) How are y o u really feeling today?
ii) What do you feel about the progress of your “Call4Reform” project?
iii) Resistance to your C.4.R project makes you feel what?
Simple explanation of what money “is” and that we need it, and Asking suitable questions of “punters” in a survey will help get many punters “on-board”.
Good luck with your valuable C.4.R project.
Hi a.vox,
Thanks for the suggestions – we’ll be releasing videos and more visual explanations very shortly (next 3-4 weeks), and the campaign will pick up speed over the next month as well.
[...] and Financial Security Act or the Bank of England Act is the only real permanent solution. How It Works | The Bank of England Act 2010 __________________ "…Money exists not by nature but by law." Aristotle (Ethics, [...]
Dear sir – I have read through part of your proposal and agree mostly.
In ‘how it works’ you say ‘Banks lend 92% of all money they receive from depositors’. That does not seem true. Surely, Banks lend a great deal more than the receive in deposits. That legalised fraud is the problem. As you say it is OK for the Bank of England to do this but not private commercial banks.
Preventing Banks creating money – I agree but it needs to be done gradually to enable the financial sector to adjust. The reserve ( or whatever it is called) needs to go from ?10% to 100% over 5 years.
Creating new money – It is a good idea to have a system to create new money but the ideal is a steady state economy without inflation or deflation. Growth of money supply in a finite world is not sustainable.
Hi John,
Thanks for your comment.
The 92% is the amount of money that can be initially lent out, limited by fractional reserve requirements. This is then redeposited in another bank, or even the same bank, and then 92% of the original deposit is then relent. So yes, Banks (or more accurately, the banking system) do collect interest on more than they receive in deposits initially in the first instance.
We are looking into varying methods of transition, there are several options open to us, we are just ironing out the creases and thoroughly researching them, please remember we are still in the pre-launch stages of our campaign.
One person’s ideal of a perfect economy is his opinion. We are providing the means for governments to “tax” the public through inflation, to an upper limit defined by the MPC, whether they choose to do so is up to them, and you as a voter, we seek only to provide the means, not to advise on spending policy. The effects of inflation have been debated since the beginning of Economics, and the various schools of thoughts all think differently. One thing we can be certain of, though, is that inflation happening as a result of the banking system creating new money, and reaping the benefits, is wrong, the benefits of money creation should go to the government, and hence, the people.
I honestly find it hard to believe this will go anywhere. The Bank of England is at the root and center of the entire system of world wide fiat currency, which is the cause of the problem. But, I am listening, and hopeful. You’ve apparently got part of it correct. The banks should not be in charge of printing out money. But I don’t see the real issues properly addressed. Our money must be backed up by tangible assets; not created out of thin air. And, most important, it is imperative that the ‘rule of fractional reserves’ be abolished. Quite simply, those two issues are the backbone of their control over us.
Hi Bruce,
Our money currently is backed up by debt. We look to reverse this trend, and to bring back full reserve banking. Under our reform the backing up of money with tangible assets would not be necessary, or desirable, the wealth of an economy is defined by the value of the goods, services, knowledge, and infrastructure contained within it, after our reform. Hopefully this addresses your two concerns, we do end fractional reserve banking with this reform, and asset backing no longer becomes necessary as a result (bank runs are no longer possible)
Brilliant!!! I’ve been ranting about this stuff (not so clearly or well as here) for years!
It’s really brilliant that you’ve got together and put down a clear, practical better alternative proposal -and it’s well formulated enough to unite people behind and worth digging in for a long campaign (which no doubt it will be, think minimum 5yrs people, or probably more like 50yrs (two generations, since radical political change actually in practice goes by the rate of death of politicians, not by the rate of elections every 4 yrs). Even if it takes a thousand years this is worth fighting for!
I’m with Bruce on this one, I’m afraid. The problem is money = paper = debt. How insane are we to work for bits of paper? It only has value because we believe it does. This is what the markets term as confidence, which partly drives exchange rates. Anyway, point is, paper has no intrinsic value, thus, the need to return to a commodity-backed money system.
Secondly, he’s right that banks should not be allowed to create money from nothing as the currently do. But I understood that depositors money is supposed to be safe, and un-touchable by banks, and insured in some way. Probably not the right wording there – but depositors money is meant to be safe.
Inter bank lending should be abolished except by the rules you set out above. Remember, with Fractional reserve banking, you might borrow 1000, so if that’s your reserve (which never moves) you effectively create debts of 10,000 against that inter-bank loan.
Lastly, if you check out the law of contracts, you’ll find the world is in a pretty bad mess, as probably 999 out of every 1000 contracts (yes, including loans and morgages) fall on a number of points. The most obvious being failure on their behalf to provide full disclosure of the fact that when you signed the loan agreement, they didn’t lend you any money – no, they used your good credit to “create” that money – which comes into existence, and – straight into their coffers to be lent out 10 x over. So you see, it was your money to begin with – how then can you pay them for what is already yours? You actually did the banks a big favour in that alone. So why do you want to pay back a loan to them which was actually your money in the first place? Take them to court, and get them to explain to a judge how they got the money for your loan in the first place.
That’s the second way in which thy fail. Equal weighting. What do you stand to lose? Years of your life and labour paying the debt. What do they lose or bring to the table? YOUR MONEY. They were never at risk of losing anything! So the contract fails on that account too.
By LAW (which is different from being legal) you can escape those debts. But do you have the guts to try?
Hi Simon,
Thanks for your comment. Fractional reserve banking is allowed by law, by banks. We don’t see the need to mount a legal challenge, bankers are operating within the law when they create money through the fractional reserve system. What we do need to do, is change the law, to prevent this happening. Our frustrations should not be directed towards bankers, who do not even see the problems the laws they operate under create, but with the government, until such time as they adopt our reform. We seek clear, systemic change, not to circumvent the negative effects of the fractional reserve system through legal challenges or incorrect contracts.
I understand, and perhaps you can confirm this, that an act of parliament was passed in 1976 or 1977 which prevents the public knowing whom the nominee shareholders of the Bank of England represent. Do we even know who the nominees are? If, as is the case in America, the shareholders are private institutions or individuals, surely this is treason, to say nothing of grand larceny. Shouldn’t be any problem nationalizing the Bank of England if this is the case. But, as somebody has mentioned, where do we find the politicians with the guts to expose this and do the right thing?
Hi David, thanks for your comment,
The Bank of England is not “owned” by anybody – it’s a public entity. We don’t aim to reform the banking system on notions of treason or grand larceny, we aim to reform it on the grounds we have laid out in this website. The reasons why it is like this are of no concern to us, we seek change, not blame.
I would be interested in a link, a reference or some other way of esatblishing for myself your comment that “The Bank of England” is not woned by anybody – it’s a public entity”.
Can you help please?
Thank you.
http://www.bankofengland.co.uk/about/parliament/index.htm
Some aspects of this sound promising. There does appear to me to be one slight problem.
Growth is the problem. (I refer you to the exponential function http://en.wikipedia.org/wiki/Exponential_function ) The current financial system embeds growth because it loans money into existence then charges interest on it. Work must be done to pay back the loan and interest which causes the economy to grow. Bad idea. Sooner or later you start hitting the physical limits of the world in the form of peak oil, peak copper, peak gas, peak uranium… the list goes on.
When you can no longer grow the system no longer functions because the economy can no longer grow to pay back the loans and the system collapses.
You’ll see it happen over the next few months. Collapse is inherent in capitalism.
You cannot create new money. It’s a fatal flaw.
The reality we will face is that resources (energy and the materials required by industrial civilisation) will be (are) declining in availability and the money supply (If we are foolish enough to continue such a thing) must shrink to match.
A negative interest rate sggests itself as a soltion perhaps but in any case the point is moot. It is quite obvious that the tiny minority that controls the worlds resources have no interest in harming their power so nothing of consequence will be done and the whole mess will disappear in an orgy of war, violence and death because people are too thoroughly embedded in the current system and are incapable of imagining anything else.
I really do hope I’m wrong but sociopaths aren’t very good at dealing with reality if what they desire goes counter to it and we live in a society controlled by organised psychopathy. Nothing will be done until people are starving. I do hope the public try and behave rationally in the end but I suspect it will take a severe shock to do it.
Joe
Hi Joe,
Whether to stimulate growth through money creation or not is not an issue for our concern, we have put safeguards in the reform in place to keep money creation to a maximum upper limit. Our goal is for the sole beneficiaries of money creation to be the public. This is a much better situation than we have now. True sustainability can be achieved through our reform, and it absolutely cannot through the current fractional reserve model. Whether to aim for true sustainability is a decision for future governments to make, and we would not want to model an economy to be so inflexible as to reverse this trend, if the public no longer desired it.
I can agree that this type of ‘artificial printing of money can inflate its value
It has also created wealth in more than one way. New methods of employing technology, development of infra structure ( to mention a few )
If these improvements have not provided sustained value to repay the value of debts – where have we gone wrong ?
Over utilisation of these new ideas and unsustainability of the new developments ?
Hi Kumar,
The fact is that the value of the debts cannot ever be repaid, as their value exceeds the principle, that is, the total amount of debts exceeds the total amount of money, so the only way the economy can attempt to repay is to borrow more, which eventually causes mass defaulting and a recession, as history has shown us. I would also disagree with your statements on how money creation has created wealth, it has created debt, not wealth. New technologies and infrastructure would have been created much more easily under government money creation. How much more infrastructure could we afford with £200bn more to spend on it, and no money spent on repaying the national debt!?
Is the existing Bank of England legal structure similar to The Federal Reserve in that there exists a private corporation that benefits private interests at the expense of the tax payers?
Hi Mark, the Bank of England is officially wholly owned by the government and has no private shareholders. It splits any profits from its activities 50/50 with the Treasury (ie. government). For the last couple of years that profit was around £200m a year. The rest of the profit goes back into the Bank of England as part of their own capital (they obviously have expenses – staff, maintenance of the building, IT infrastructure for all the settlement systems).
So in short, quite a different structure to the Federal Reserve and not really comparable.
I Dont see any negatives in the act whatsoever except people afraid of change, It will be a marvelous thing when it is and will be applied sooner the better. It will literally be a New Dawn for the presently Dis-United Kingdom. The act alone will be a mercy for 97% of society. Its the best idea since the unforgeable tally stick. Dont get distrACTed by the naysayers. This ACT will come into Force because Truth Always Prevails. This Act is the Equivellent of putting Joseph in charge of the Upcoming Famine we all know is on the Horizon under this current Debt Slavery situation. Any body opposed to this act can surely want nothing good for the 97% of those it will benefit. Smith talked about the invisible hand meaning as I understand the 3% who control the 97% of all economies through Banking. This Act is as clear as water it is not invisible It actually benefits 100% of the population even the invisible 3% It benefits All. This Act will long be remembered in the Peoples History so as not to forget it like they did in 1698. It will be a Great Relief when it is Finaly Achieved. The Government should make it a public bank holiday the day the Act is signed into Force.
Keep up the Great Work
Many thanks for the clear explanations.
If this Act came into force, what would be the unintended consequences? Firstly, if the UK were to implement this unilaterally, would it still work, or would we need a new Bretton Woods? Secondly, what would happen to The City? Would it mean a collapse in the gambling sector of the banking industry, and what would that imply? Thirdly, what difference would the ordinary guy see the following day?
Hi Ian,
This wouldn’t be a problem for the UK to implement unilaterally, the pound would still be a pound, foreign banks would have to operate under the new legislation here when operating in pounds, and our banks could still operate under foreign legislation abroad.
The effect our reform would have on the city can be found in the “The Benefits of the Reform” section of the website.
The ordinary guy would wake up to positive headlines, a renewed sense of optimism in the streets, and perhaps ask himself “What next?”
We would also predict a positive effect on the strength of the pound, as it’s transition to a stable currency would have been initiated.
This video gives the best explaination of “Money as debt” I’ve ever come accross. Even my 11 year old could understand it…
http://rewtube.com/money-as-debt/
“Creating money to reduce the amount of taxes people need to pay” makes people believe that governments can spend for free if you just create money to fund the expenditures. This is misleading: Creating money will always lead to inflation destroying the value of people’s savings (equation of exchange: nominal money*spending speed=price*real value of expenditures). Moreover, the proposal does not tackle the other source of money creation. What the act abolishes is only a part of what is known as ‘fractional reserve banking’, just by making people do time deposits instead of checking deposits the same number of loans/mortgages can be issued (although time deposits are certainly preferable in terms of banking system stability because bank runs are impossible if people are unable to ask back money that has been lent). The second part of the problem is that banks can really create money instead of just lending deposits with an ‘instant maturity’ as decribed on top of this page: For every pound of banknotes in the vault, banks can create say 9 pounds through the borrower’s checking account. An improverment to the act would be to tackle this problem too. Further, instead of giving the central bank more power, one would rather limit the money supply also by making it backed by hard assets such as commodity index in order to prevent inflation altogether and deleverage the system. Yet, the act as proposed is a big step in the right direction compared to what whe have now.
End fractional reserve banking – correct.
A car might well need oil, but can you please explain why the government should retain the power to increase the money supply at any given point in time given that increases in the money supply are inflationary?
Thank you
Hi Perry,
We believe that inflation is a bad thing when the beneficiaries are private banks. However, when you create inflation through increasing the money supply, you could think of it as a form of tax. (There are a multitude of other negative effects when creating debt-based money, but for now we’ll focus on the inflation).
So, we’re creating money in our current system, and this is inflationary, but the sole beneficiaries are the private banking companies. When we give this power to the Bank of England, we are removing the power the private banks have to tax the public, and giving this power back to the government, so the money becomes available to benefit the public. For a more detailed description of the benefits of doing this in a debt free manner, please look at the relevant section of the website. Please note that if we took away the power to create money completely, and stopped fractional reserve banking, the economy would crash due to a contraction in the amount of available lending, and we would never be able to pay down our debts as 97% of the money supply exists as debt. Debt free money creation is a necessity for the early post-reform years.
I signed on with avaast to sign a petition recently and since then have found myself signing several petitions I would have otherwise missed, but they make it so easy to be involved:
http://www.avaaz.org/en/contact
Obviously a petition with lot of signatures would back up the chances of this bill being taken seriously and I recommend to try and engage their attention on this.
I think there are more people who know this is a problem than is generally realised but there is a tendencey to feel disempowered in the face of such direct corporate interests that prevents people from acting together.
Avaast have , a great model for getting attention and spreading their messages.
They have proven useful in national as well as international campaigns and similar reforms need to happen throughout the world.
[...] A new economic order? Posted on 4 August 2010 by Rhonda Riachi A friend has sent me a link to this Bill regarding the UK money supply. This makes for fascinating and shocking reading. It really is time that all of us tried to understand what is going on with our money – especially the politicians… More info can be found here. [...]
[...] what is going on with our money – especially the politicians… More info can be found here. This entry was posted in What's going on. Bookmark the permalink. ← [...]
“With new money now being created debt-free by the state, we need to ensure that this money is distributed by the most economically efficient and socially beneficial method possible. We recommend that the money be given to the government as a non-repayable grant, and used to reduce the overall tax burden, phase out the national debt and invest in public infrastructure.”
What you’re talking about is illegal under the Treaty of Maastricht. The only way it could be done is to leave the EU.
Taken from: http://news.bbc.co.uk/1/hi/business/7924506.stm
“EU member states are not allowed to finance their public deficits by printing money. That is one reason why the Bank of England will buy government bonds from financial institutions, not directly from the government.”
Article 123 (Chapter 1, Economic Policy) of the Lisbon Treaty (ex Article 101, Treaty Establishing the European Community) states: “1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.”
This clause prohibits the Bank of England from lending money to the government or any agency of government. It also prohibits the Bank from buying debt instruments directly from the government. This is the reason why Quantitative Easing monies have been used to buy debt instruments from the private sector, rather than directly from the Treasury. However, this prohibition does not prevent the Bank creating money and granting it to the government, as this Bill proposes.
What do the Govt. and individual MPs think?
We’re working with various MPs now, and many are favourable to the reform once they understand the issues with the existing banking system. The main issue is that very few MPs do understand the issues, so it’s a case of meeting them one by one, explaining the issue and giving them time to get their heads around it.
The government will naturally not endorse anything along these lines until the argument has been won among academics and other experts first. However, Mervyn King (Governor of the Bank of England) is broadly in favour of narrow banking / limited purpose banking, which has very similar results to this proposal i.e. preventing commercial banks from creating money.
I am just a bit puzzled by the fact that you are in favour of giving it to the same Bank of England which is run broadly by and for an international cabal that has been deceiving and robbing the masses for the last couple of centuries. Why not have a completely new institution set up which is truly transparent and run by a body of people who will be TRULY answerable to the taxpayers of this country. The old Bank of England lot will just come up with a new set of scams to get round the new Act if they are given any level of control, in my humble opinion. From what I have learned of the banking system world wide it is completely controlled by a few super wealthy individual families and their extended relatives. Surely this is just going to give them the cooking pot with a new and potentially more high tech cooker with which they can continue to manipulate legislation and laws in order to rob the working people of the country.
Hi there Ann,
The reformed Bank of England will be an entirely different institution than it is at present, with a completely different role. There is no way it effectively could exert any control over the banking industry other than to make sure that the legislation is adhered to. The Monetary Policy Committee will be the institution given the power to decide how much money can be created, and we intend for this to be designed in as transparent and democratic a manner as possible.
Quite simply, the banking system will not be designed in such a way as it actually can be exploitative, it’s original intention of being an intermediary between borrowers and lenders will be restores, and the right to create money by the public, for the public, will be restored to the state, kept in check by the Monetary Policy Committee.
@Frederick – you can get all this data, including the exact amounts that need to be repaid in each particular year, from the government’s Debt Management Office at http://www.dmo.gov.uk