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Nationalising Money

November 9, 2011

Throughout this site frequent reference is made to the fact that most of our money is created by commercial banks as credit in the act of making a loan. Under normal circumstances it is only money in the form of bank notes that is created by central banks. There is a widespread perception that for a central bank to create electronic money is inflationary.
Money reformers argue that, on the contrary, if all money creation is carried out by central banks and commercial banks are prohibited from so doing, the money supply and the economy would be more stable.

An ingeneous proposal originating from Joseph Huber and James Robertson [Creating New Money] has been picked up and refined by the campaign group Positive Money http://www.positivemoney.org.uk/. Although their proposals are set out on their website, their submission to the Independent Commission on the Banking System [Positive Money/NEF/Richard Werner] is well worthy of study.

In brief the way it works is as follows:
1. Central banks issue money for governments to spend into circulation as they please.
2. This money (which may be refered to as ‘plain money’) resides in one of two places:
a. Customer Transaction accounts which serve the same purpose as current accounts at present – namely to provide     means of payment.
b. Commercial banks’ operational accounts with the central bank (i.e. reserves).
3. There are two types of Customer accounts
a. Transaction accounts which contain ‘plain money’ and are in formal terms accounts with the central bank but adminstered by commercial banks. Money in these accounts is to all intent and purposes the customer’s property even if the commercial bank goes bust.
b. Investment or savings accounts which work pretty much as now, except that instant access savings accounts  would not be allowed. There would have to be a notice period for withdrawals and penalties for early withdrawal.
4. Only ‘plain money’ (or bank notes) can be used as means of payment. This means that banks when creating a loan, must take money out of their operational accounts and transfer it to the customer’s transaction account.
5. In order to meet inflation targets the Monetary Policy Committee would control the issue of ‘plain money’ directly instead of via interest rates. If necessary the central bank could be required to withdraw money from circulation.

The advantages claimed include:
i a more stable economy
ii Bank runs less likely as customers could not withdraw money instantly.
iii Reducing Moral Hazard: Risk Stays with the Bank & Investor: The Financial Services compensation scheme could be withdrawn. If a bank failed customers would retain money in transaction accounts but could lose money in savings accounts. However a bank could guarantee that the customer would get back at least a defined percentage of the investment in return for reduced interest, thus putting the customer further up the queue in the event of insolvency.

Disadvantages include the fact that customers would have to get used to paying trasnaction charges on current accounts, as used to be the case. They would have to be pursuaded that the benefits of stability would outweigh this. The real barrier to this reform is that it would reduce banks’profits and thus their power (while helping the exchequer), and so it would be difficult politically to introduce.

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