How is money created? It’s a question I’d never asked myself before my conversation with Fran Boait, director of Positive Money. This is the organization who’s most fundamental aim is to help people to understand how our monetary system works, and, by doing so, to engage with its failures.
Boait tells me that most people instinctively feel that our current financial system isn’t working, “The sense I get from doing this kind of work is that there is an underlying feeling that the financial sector isn’t serving society. But most people aren’t able to put their finger on the root causes of our broken system. No one asks themselves how money is created.”
So, to return to my initial question, I ask Fran to summarize how money is created. “In our current system, most of our money is created only when banks lend; any money created in our economy is offset by debt. But the financial crisis was caused by an unsustainable accumulation of private debt, so we think that allowing that debt to increase even further could lead us into another financial crisis.”
Boait goes on to tell me that Positive Money has its roots in the 2008 financial crash, and the search for a meaningful response and solutions to the greatest economic crisis in living memory.
“We were founded in the aftermath of the 2008 crisis. Ben Dyson, our founder, had studied Economics at university, and he wondered why, post-2008, there wasn’t anyone talking about the way money is created. So he wanted to found an organization that was going to start this debate — a debate that no one else was having.”
Boait’s involvement with Positive Money was the result of a very different personal journey: after postgraduate study in carbon capture, her commitment to climate change activism led to “a frustration that a lot of action on climate change was being shelved [as a result of the recession]. And so I began to see that the root cause of this inactivity was our economic system.”
Positive Money propose a system of full reserve banking. This would prevent banks from lending money that they do not physically have backing for (as in our current system of fractional reserve banking).
This takes back the ability to create money from private banks and gives it purely to the state. This would, they say, stabilize a boom-and-bust system, because the banks would no longer be in control of the amount of money in the economy. From 2002 to 2009, banks increased the amount of money in the UK by £1 trillion through lending (with every new loan creating new money). Positive Money also make the case that money created by a central bank would result in much greater government revenue, and therefore greater public spending. Their system was recently adopted as the economic policy of the Green Party, their most high-profile endorsement to date.
The three aims of Positive Money are simply stated. They are: “1) Take the power to create money away from the banks, and return it to a democratic, transparent, and accountable process; 2) Create money free of debt; 3) Put new money into the real economy rather than financial markets and property bubbles.”
Boait summarizes these aims in her own way. “We shouldn’t be increasing the complexity of our debt-based monetary system. We should step back to examine its flaws, and ask ourselves how we can create a new system.”
However, their end goal of creating a new system is clearly only possible if there is sufficient public interest in, and importantly engagement with, this issue. I ask Fran how she combats popular apathy — how she makes abstract economics feel real to those who come across Positive Money’s website or social media output.
“It’s definitely a challenge. The majority of people don’t really care about understanding how the economy works. But they do care about how it relates to them in their everyday lives. We try to quantify, for example, the impact that it has on house prices, on rising levels of personal household debt. We try to demonstrate the root cause of these boom-and-bust cycles and the ways in which they lead to inequality, the way they impact on jobs and businesses. Nobody wakes up and thinks, actually, I should find out how the banking system works, because they just want to get on with their lives, and so a lot of our time is spent finding various ways of making [monetary reform] relevant.”
Reducing the national deficit has arguably been the coalition’s most fundamental policy in government. Fran tells me that Positive Money actually sees reduction of the deficit rendered futile in our current monetary system. Like other economic problems, the deficit, for them, can only be addressed with systemic change.
“What is frustrating for us,” she says, “is that all of the political rhetoric is around the national debt, which is nothing in comparison to, and is partly caused by, private debt. Household debt, business debt, personal debt, are all at a historically high level, and that is the root of a fragile economy. If interest rates rise, people may default on their loans, which could precipitate a run on banks and a national crisis, as we saw in 2008.”
For Positive Money, instead of ever more extreme austerity measures, the deficit might easily be reduced by the revenue generated by state-created money. Because the profits from creating money currently go to the banks instead of to the government, the government has to borrow much larger amounts of money to make up for this lost income. Fran claims, “To focus on the national debt is missing the point, and ignores how the current system causes these financial crises, by accumulating massive amounts of private debt.”
For Positive Money, greater regulation of banks does not offer any meaningful solution. “Regulation ignores the larger issues at play. As we’ve seen in the limited scope of reforms since the crisis, what happens is that you get thousands of pages of complex regulation. But the bank lobby has huge resources, millions of pounds, to spend on lawyers to water down these changes. And there’s nobody fighting that battle on the side of society.”
“If we keep going down the regulation route, change is going to be incredibly slow. If we want to tackle the big issues like climate change, we don’t really have time to go down that road.”
Positive Money is a campaign notably motivated by this urgent need for change, by a desire to challenge unquestioned assumptions about the economy which are reinforced by the status quo. “Most politicians, and most of the general public, generally have faith that economists understand how the system works. And we’re saying, actually, no they don’t.