It is the flawed economic paradigm that is holding us back
On 6th February this year (2013), Adair Turner, the former chairman of the Financial Services Authority gave a breakthrough historic speech at Cass Business School on the way in which our economy might be brought out of recession. He focused in particular on a proposal to spend newly created money directly into useful parts of our economy where it can be circulated amongst businesses and the general public.
Lord Turner's suggestions differ hugely from rescue mechanisms such as Quantitative Easing (QE) that we've heard so much about time and time again since the banking crisis in 2008. Under his proposals, newly created money could go directly where it is needed - on public services, loans for small-to-medium enterprises, or directly to individuals in the form of reduced taxes - and would not be funneled straight into the hands of failing banks and other financial businesses to be squandered away on speculation or pumping up the next property bubble.
If managed carefully this form of Overt Monetary Financing will, over time lead to a more stable economy as well as a more democratic approach to how wealth is distributed - reducing the need for public sector cuts and allowing for investment in new and more ethical industries. Lord Turner is not the first to suggest this type of approach. A shift in power away from banks to the general public is part of a set of proposals that UK-based campaign organisation, Positive Money, has been advocating since 2010.
Positive Money is a fast growing and highly focused organisation that is filling fundamental gaps in knowledge that prevent the public, politicians and policy makers from making sense of the mess our economy has found itself in. As well as playing an educational role, Positive Money campaigns for new legislation that will remove the ability of banks to create money. This would be done by making a few technical changes to the way banks do business and transferring the power to create money to a democratic and accountable body that can then invest new money into the economy free of debt.
The founder of Positive Money, Ben Dyson explained, "Our campaign focuses specifically on money, who creates it; how they decide how to use it and how that relates to the broad social, economic and environmental issues of today."
According to Ben and his colleagues at Positive Money, it is the pervasive and seriously outdated assumptions about money that prevent us from seeing where the real problem lies, "Most people sense that there's something deeply wrong with the way that our financial system works, but very few people have been able to figure out what it is."
Positive Money helped expose common misconceptions about the way our economy works through a documentary released in 2012, which drummed home the main message that 97% of money used by people and businesses is created as debt by the private companies we refer to as banks when they make loans. "This has produced the highest-ever levels of personal and government debt, made houses unaffordable and driven the short-termism which is destroying the businesses and ecosystems on which we depend."
Positive Money has achieved a huge amount in the short time it has been going with over 11,000 supporters, nearly half a million viewings of the documentary and even a talk broadcast on Radio 4. Its success can be attributed to a combination of rigorous research to back up the campaign's claims, plus a clear interpretation of complex financial issues presented in plain English.
"Positive Money's message appeals to wide sectors of political and social thinking. It is not cluttered by other agendas but has huge consequences for us all," says Neil May who volunteers for Positive Money as Chair of their board of directors. Neil has been running a small sustainable construction business for 15 years and chose to invest time and energy into supporting Positive Money after realising there were bigger issues limiting the impact he could make in the workplace and elsewhere,
"Aside from my main job I've been involved in a number of environmental campaigns. A few years ago I started to question why there are so many good-hearted people struggling to make a positive change through the work they do. I realised that it is the flawed economic paradigm that is holding us back. We cannot be successful in useful businesses or in sustainability campaigning unless something is done about this."
There are, of course, lots of groups in the arena of new and alternative economics all with designs for a new monetary system that our society could adopt. Yet, so often it is the gulf between where we are now and the construction of a completely new system that feels like too mammoth a task to take on board. Whilst Positive Money's campaign to change legislation is still a big ask (and will be viewed as a threat to parts of the banking industry), it is well within the realms of possibility. As Neil May stresses, "People who understand the deep-seated problems of modern economics and their intimate connection to our dysfunctional money system need to come together to resolve this issue - otherwise a lot of other big issues cannot be addressed. We have shown that we can still address the problems with the current money system but only hrough the clear actions outlined by Positive Money."
Ben Dyson is also quick to point out that many of the changes Positive Money are calling for are not radical at all but would merely update law so that the banking sector works in the way that most people already think it does. "In 1844 the Bank Charter Act was passed in the UK to prevent banks from creating paper money after this had led to boom and bust cycles in the economy. Unfortunately the development of electronic banking left a major loophole in the Act, which means that today banks are able to create electronic money."
Open-minded economists have made similar proposals in the past, most notably the recipient of the Nobel Prize in Economics, Milton Friedman in his 1948 paper, ‘A Monetary and Fiscal Framework for Economic Stability' and in the mid-1930s by Irving Fisher and Henry Simmons who reflected on the causes of the 1929 financial crash and subsequent Great Depression. Adair Turner concluded (from Fisher's work) that "the central problem lay in the excessive growth of private credit in the run up to 1929 and its collapse thereafter... made possible by the ability of fractional reserve banks simultaneously to create private credit and private money."
Adair Turner's speech shows that the timing is right to kick start the debate again and push for legislative change. Whether or not Positive Money can create a loud enough voice to penetrate the walls of Westminster is yet to be seen. The ability of Positive Money to secure funds during the next six months will determine whether or not it can move to the next phase.
"Now is the time to get behind Positive Money. We need to grow the campaign, build credibility, and continue research," says May who has ambitious plans for the organisation during the next remainder of the year. "An important part of this is to model mathematically what the road map will look like if these policy changes are implemented."
The banking crisis of 2008 drove more than 100 million people into poverty. Paul Moore, former Head of Group Regulatory Risk at Halifax Bank of Scotland, turned whistleblower for the bank's ignorant and unruly ways, warned of the consequences of this in an interview with Positive Money: "the mortality statistics of people who go into poverty, rise hugely... So, the banking crisis wasn't just about becoming poorer, it was about killing people as well."
And responses to the recent Cypriot banking collapse have shown that there is still a huge lack of understanding from the media and decision makers about how banks work and therefore a lot more educational work and awareness building to be done.
It's up to all of us to educate ourselves and seize this opportunity to make money positive again. What part will you play?
Modernising Money is available from the Positive Money website
Ian Tennant works for Peterborough Environment City Trust