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MANAGING THENATIONALMONEY SUPPLY
by
JAMES ROBERTSON
This is the draft of Chapter 3 of a book I am writing for publication byGreen Books with the title
FUTURE MONEY: BREAKDOWN OR BREAKTHROUGH?
. I hope I may be able to complete the text of thebook in time for its publication later this year.Meanwhile Green Books have agreed to my circulating this draftchapter for possible interest now, before the expected publication inSeptember of the final report of the UK Independent Commission onBanking.Please feel free to forward this pdf to anyone you think might beinterested in it.To be notified when the book is published, pleasesubscribe to my occasional email newsletter here-http://www.jamesrobertson.com/subscribe.htm.(Please forgive me if I don't have time to reply to comments in the nexttwo or three months.)
James Robertson, July 2011
www.jamesrobertson.com
© James Robertson 2011
(v4–Jul28-11)
Managing the National Money Supply
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CHAPTER 3. MANAGING THENATIONALMONEY SUPPLY
Draft July 2011
Start with the Right Questions
Impartial spectatorsvisiting usfrom anotherplanet wouldstand aghast athowwe create and manageournationalmoney supply. You can imaginethem saying to one another:"These people must be absolutely crazy". To us they mightsay, more tactfully, "We wouldn't start from here if we wereyou".We must start by asking the right questions. They includequestions about facts and questions about what should bedone.Theimportant factualquestions are:
who createsthemoneysupplyand puts it into circulation?
in what formdo they create it, as debt or free of debt?
who gets first use of it?
for what purposes?The important practical questionsare:
who
should
create it and putit into circulation?
in what form
should they create it
,asdebt or free of debt?
who
should
getfirst use of it?
for what purposes?Ifthe way we now manage our national money supply had notgrown up bit by bit, century by century; if it had not becomethoughtlessly accepted asthe status quo; and if we were nowstarting from scratch to arrange how money should besupplied to a democratic society-nobodyin their right mindwould dreamofsetting it up as it is now.Anyone with aninkling of how to manage anything would know that mergingthe twoconflictingfunctionsof
providing the public money supplycompetentlyand fairlyon behalf of society as a whole, and
encouraging commercial banks to competefor profit inthemarket for lending and borrowing money,would destroytheefficiency and reliability of both functions.
Managing the National Money Supply
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Therootquestionis: what is the best way to create andmanage the national money supply in a democracy? It isnotprimarilya questionaboutbanks, as politicians and expertstake for granted, as they struggle to decide what should nowbe done.
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Nobody denies that reforming how the national money supplyis provided and managed will, in today's circumstances, havevery serious consequences forthe banks. Those must berecognised. But, as with most practical problems, it will besensible to put the horse before the cart.
The Present Arrangement
In the UK-and the same is true in other countries too-weallow our governments to make usdependenton commercialbanks to create 97% of our national money supplyas debt.Our governments don't have to do that; no law says theymust; and, even if a law did say it, we could change it.Most people don't yetrecognisethat the banks create themoneybywriting it out of nothing into ourbank accounts asinterest-bearing loans.The experts call it "creating credit",obscuringthe fact thatactually-as shown in the officialstatistics-the banksare being unnecessarily allowedto createalmost allthenational money supplyas bank-account moneyfor their own profit.They do it under what is known as "fractional reservebanking".It requires commercial banks to keep in reserve onlya fraction of the moneythat has beendeposited with them.For example,if the required fraction is 10%, a deposit into thebanking system of £1,000 would allow it to create an additionof £900 to the money supply by lending it to customers as"credit", and then a further90% of £900, and then a further... and so on.Meanwhile the Bank of England and Royal Mint,asnationalagencies still providing national money as a public service in
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Anexample ofpresent conventionalthinking isthat theterms of referenceof theUK Independent Commission on Bankingdon'tinclude"Who should create thenational money supply, and in what form?"-http://bankingcommission.independent.gov.uk/bankingcommission/.
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