So, let's start at the beginning.
Back in the 1800s through to the 1840s.
Banks, at that time, actually had the ability to create money.
The way they did this was through printing pieces of paper.
When you put your coins into the banks, they give you a receipt
and that receipt would say you've deposited £5
and because it was more convenient to carry bits of paper around than to carry metal coins around,
people used to use the pieces of paper as though they were money.
They'd actually spend the paper in the shop, and so long as the
shopkeeper knew the bank and trusted the bank
he'd accept the paper. So, basically the pieces of paper that banks were issuing
were treated as money, and they became as good as money.
Now, when the banks caught on to this, they realised that
actually if we just issue more pieces of paper,
with more sums of money written on them and people treat them as money,
then effectively we have the power to create money.
So, the more that we issue
the more we can lend, and the more we can lend, the more interest we can get.
So, you can imagine with incentives like these, it didn't end well.
They created too much money and it started to cause instability in the economy.
It caused banking crises, and after
a number of years of this happening, the government of the day
It was a Conservative Prime Minister,
Sir Robert Peel, stepped in and said,
Well, we can no longer allow banks to issue paper money
because of the problems that it's causing in the economy.
So, they passed this piece of legislation
'The Bank Charter Act'
which said from this point on, only the Bank of England
will have the authority to create paper money
but they missed something out,
because paper money isn't the only way that you can make payments
and with the increasing use of cheques
people had a way of making payments using the numbers
that were in the ledger books at the banks,
the accounting entries. So they had this way of making payments
without actually needing the real paper or metal money.
Over time as we discovered electricity, we got debit cards
electronic fund transfers and internet banking.
To the point now where more than 99% of all the money that changes hands
does so electronically.
The shocking thing is that even though our monetary system now is electronic,
this law has never been updated since 1844,
which means that it's just shy of 170 years out of date.
The law that actually governs our monetary system.
Now, the reason that banks can create money
is that the liabilities, the accounting entries that they create
are what we are using as money.
When you use a debit card, there's no £10 notes
moving from your account to somebody else's account
It's actually just accounting entries between the banks
The Bank of England explains this quite clearly.
They say, 'the money-creating sector in the United Kingdom
consists of resident banks and building societies.
Money-creating organisations issue liabilities that are
treated as a media exchange by others.
and those liabilities are the numbers that you see in your account.
Now, what this has meant is with the rise of electronic means of payment
is that we reached the point where,
[Sir Mervyn King] "Most of the money in our economy
broad money, comprises liabilities of banks in the form of bank deposits."
So, most of the money in our economy comprises
liabilities of banks in the form of bank deposits.
When we talk about 97% of the money supply being created by banks
this is what we are talking about.
This chart. The blue line is the bank-issued money supply.
This is cash down here at the bottom.
So, this is 3% of all the money that exists.
and then this is the 97% of the money supply
that is created by the banking sector.
and this 3% is what is covered by the law.
and this is the 97% that is ignored by the current laws.
I always found it curious that there's this
one part of the state, the police, which is responsible for
hunting down and prosecuting anybody who prints their own money
privately; they call it counterfeiting.
Yet, there's a whole other part of the state,
which actually has more resources and more funding
to do everything possible to encourage banks, private companies
to create money.
and I could never really understand why this contradiction was there
and why it was good for electronic money to be created
by the private banking sector, but bad if anybody is printing paper money.
Now, I stumbled across this interview with Paul Fisher on the BBC
[Paul Fisher] "When you start printing money, you create some value for yourself.
If you can issue a thousand pounds-worth of IOUS to everybody,
you've got a thousands pounds for nothing.
And so we do restrict the ability of people to create their own notes in that way."
[Interviewer] "You're protecting us from ourselves?"
[Paul Fisher] "We're protecting you from charlatans".
[Laughter from audience]
He was talking about counterfeiting, but for me the key phrase is this
'If you can issue a thousand pounds-worth of IOUs to everybody,
you've got a thousand pounds for nothing'.
Now, what banks do when they create loans is
they issue liabilities, IOUs. In the last ten years alone,
banks have issued more than £1 trillion of these new
IOUs, these liabilities. Now, the something that they got for nothing
was £1 trillion worth of debt, of interest-bearing contracts.
This is mortgages, personal loans, business loans.
This is debt from us to the banking sector.
As you've seen this morning, the total interest that has to be paid on that debt
is a transfer from society to the banking sector
of between £108bn to £217bn every single year.
Now, of course, some of this comes back to people
through the interest on savings accounts,
and through the bonuses, the commissions and the taxes that banks pay,
but it's still a huge amount of this is creamed off in the middle,
and it's a massive transfer of wealth,
and it exacerbates inequality.
Now, I think, the economists and the people in government who defend this system
and say it's something we should keep and something useful,
I think they do so because they believe it can be controlled.
and they believe it can be controlled because they are taught
certain stories in Economics courses about the money multiplier
and that the central bank has control over how much money there is in the economy.
We really don't believe it can be controlled
and this is one of the reasons why we've settled on this particular style of reform.
but the reason it can't be controlled. For a start this doesn't look like
a money supply that has been controlled. This is something that's out of control.
but even Mervyn King has said that the Bank of England's key role
has always been to ensure the economy is supplied with the right quantity of money
neither too much nor too little.
'For fifty years, my predecessors struggled to prevent there being too much, so leading to inflation.
I find myself in the opposite situation of having to explain that there is too little money in the economy.'
So, this is the most powerful man at one of the most powerful central banks in the world
admitting that for the last half a century, they have struggled to keep the banks under control,
to keep the money supply under control.
And if you get an admission like this, I think it really shows that the system can't be controlled.
The book actually goes into great detail; probably about sixty pages explaining why the mechanism that
economists believe can control the money supply, no longer work.
But, fundamentally it's because you have this battle between the desire of the banking sector
to create as much money as possible to maximise their profits,
because the more money they create, the more they lend, and the more they lend, the more interest they receive,
and the need of the Bank of England to protect the public interest,
to limit inflation and instability in the economy.
And, these two for the last 50 years at least,
it's been the profit motive of the banks that has won out.
So, what are the consequences of this?
Well, firstly we know that banks create too much money.
They create this money for the wrong things.
So, we see the majority of money, when it's newly created it goes straight into the housing market and into the financial sector.
Very little, about 13%, over the last ten years has gone into non-financial businesses.
So, this is the real economy; the jobs, shops, businesses and factories.
And, about 10% has gone into credit cards, and personal loans, consumer finance.
And this has led to financial crises. As Adair Turner said, and as we saw this morning,
Some of the headlines that have been coming out of the last few days are getting worse and worse.
Britain is experiencing a worse slump than during the Great Depression.
For a while, we've been talking about we're in recovery; growth has been 0.1%.
Now, we're back into the double-dip recession,
and then we're back into recovery again, and now we're back into the triple-dip recession.
This is a real rollercoaster.
Global unemployment will reach a record £200 million in 2013.
200 million people. Is there nothing useful for those people to be doing, given the situation we're in right now?
But, there's not enough money. There's not enough numbers in computer systems created by the banking sector
to allow those people to do something useful.
It's led to massive indebtedness because money is created by banks when they make loans.
So, as the money supply goes up, the debt goes up.
And an entire generation has been priced out of being able to buy a home.
The inequality that we discussed.
The instability, which is really really bad for business.
You'll always hear economists and lobbyists for the banks saying that the current banking system is good,
because it provides credit for business and helps the economy to grow,
but actually we believe that on net this current banking system is really harmful for the business economy and for actual wealth-creation.
It's very environmentally destructive as we've talked about this morning.
And, it's bad for democracy as well.
The banks now have more power to shape the economy through their lending than the whole of government.
But, we have all these MPs scrutinising what the government does,
and only about 80 board members paying attention to what the banks are doing.
And the reason the system's got to this point is because every time something has gone wrong with the current banking system,
the government has stepped in with a safety net or a new support measure to allow the system to continue.
And you've seen this at it's most extreme over the last five or six years.
Now, I want to make the point that some people assume that if the banking system is structured in a certain way,
it's because some wise men have sat down and designed it.
But the current banking system is, without getting into the evolutionist debate here,
there is no signs of intelligent design in the current banking system.
{laughter from audience]
It's evolved over time, and every time there's been a crisis
there's been some new package from the government, some new measure from the Bank of England.
Things like the bailouts, the funding for lending; all these different schemes to keep the system going.
Now, sometimes evolution works out really well, and you get something that is quite beautiful and efficient and effective
Sometimes it doesn't work out that well.
There's no prize for guessing which of these two fish represents the banking sector right now.
So, the thing is you know if you build your house on sand, it's going to collapse.
This is what we have at the moment.
We have a banking system that is really built on sand.
It doesn't matter how much reinforcement, or how much support you do.
It's not enough to go to the occupants and say,
'please tred lightly while you're inside the house, because it's a bit unstable,
and if you could lose some weight that would be great too.'
You have to wipe it away. You have to start again and build something on firm foundations from the ground up.
And, this is what we believe we are doing in the book here.
So, we have this very dysfunctional system,
that isn't really working in the interests of the economy or the interests of society.
My colleague Andrew Jackson, who's done, by far, the largest part of the work on this book, found this quote,
which I think really sums up part of the ethos behind the book.
'Our problems are man-made, therefore the may be solved by man. No problem of human destiny is beyond human beings'.
The monetary system is just a collection of rules and laws and computer systems.
And it's actually remarkably easy to change.
The real challenges are the things like the environmental crisis, the water crisis, the energy crises,
the changes that we're going to see over the next 40 years, the growing population;
those are real tangible problems that we need to find real practical ways of dealing with.
This is just an artificial monetary system.
It's a computer system.
We can't let ourselves be distracted from those big challenges by this artificial, broken, dysfunctional monetary system.
So, what do we do?
Well, I'll take you through these quickly.
And, then we'll go into a bit more detail on each of them.
The first thing is that we need to remove the power of banks to create money.
We need to return that power to a transparent and accountable process.
We have money created free of debt.
We create money only when inflation is low and stable.
We make sure that any new money goes into the real economy instead of into the financial markets and property.
And, we give us, as customers of banks and as members of the public, control and transparency over how our money is actually invested.
First one; removing the power of banks to create money.
I don't want to take you through all the technical details of how this is done.
It's explained quite simply in the book.
but we'll also be releasing, in the next month, a series of videos that go through step-by-step if you prefer to see things visually.
But, just a quick overview.
As I said, banks currently have the power to create money,
because the liabilities that they issue are the money that we use in the economy.
So, money-creating organisations issue liabilities that are treated as media of exchange by others.
We use these liabilities to make payments to each other.
In the current system, we're here using the liabilities of these banks to make our payments.
And what we do through the particular reforms outlined in the book,
is that we actually start using money that is created by the Bank of England.
So, instead of you using a promise to pay from a bank as your way of paying somebody else,
you're actually using real electronic money that is being created by the Bank of England.
What this means for you as a customer of a bank is that you have two options when you get your salary.
You can either say to the bank, 'look, keep it safe for me', or you can say to them,
'I want you to go and invest it for me. I want to get some interest'.
And, if you say you want your money to be kept safe, then this money will be put into a transaction account,
which is effectively the same as a current account now.
But, the difference between a current account and these new accounts
is that your money would actually be at the Bank of England.
It would actually be electronic money stored electronically at the Bank of England.
And, that would actually be yours.
It wouldn't be the banks.
They wouldn't be able to play with it, to invest it, to do anything with it.
This investment account, what you're actually doing there is you're giving your electronic money that was created by
the Bank of England to your bank, so that they can then go and lend it to somebody else.
What this does, through the fairly simple rule changes and a few accounting changes,
this makes banks into what people think they are now, which is intermediaries, middle-men between savers and borrowers.
After this reform, what banks will be doing is taking money from savers and investors,
and actually lending it to borrowers, doing exactly what people think they do now.
So, with banks no longer having the power to create money,
we need to return that power to a transparent and accountable process.
I'm sure everybody is here, because they know we can't trust banks to create money for all the reasons that we've discussed.
But, I guess you wouldn't trust these people either,
because the problem is that politicians have the same incentives to abuse the power to create money as the banks do.
The more of it they create, the more of an artificial boom they can create in the economy to get people to vote for them.
And, that's going to end up badly.
So, the absolute key thing that needs to be done is that you have to separate the decision over how much money is created,
and what that money is used for.
Because as soon as the same person or the same organisation is making those two decisions you have a conflict of interest.
So, what we've suggested is that a new committee, the Money Creation Committe,
which would replace the Bank of England's Monetary Policy Committee,
becomes responsible for deciding how much the money in the economy needs to increase or decrease by,
and the government would be responsible for actually deciding how to get that money into the economy.
The really important thing is that you make sure that this money creation committee is sheltered from lobbyists.
Either from the elected government of the day, who will have their own objectives for what they want the economy to do,
which might not line up with the best interests of the economy,
and from the banks as well.
This whole process needs to be transparent, accountable,
accountable to parliament.
We can't have George Osborne calling up the Money Creation Committee and saying,
'Can you put another £100 billion into the economy, because I really need a recovery before 2015?'
Then, you need to make sure that money is only created when inflation is low and stable.
So, let me show you what happens with the current system.
So, banks increase their lending, which means they are creating more money.
This starts to push prices up, and they think the economy is healthy, so they lend more.
And, they say, 'Wow, look at house prices. We should be lending even more'
And, at this point you're in a bubble, but everybody is convincing themselves that it's not a bubble.
And, this is more or less what has happened to the money supply over the last 40 years,
particularly over the last 10 years.
What would happen with the Money Creation Committee is that they start putting into the economy,
and when it starts to cause prices rises, so it starts to cause inflation, then they stop.
When the inflation goes down, they create money again, and then they stop again until things settle out.
Instead of when the banks are creating money, the more they create the more inflation there is,
and the more they want to create,
because they think, 'house prices are rising, so we can afford to lend more to people to buy houses'.
The Money Creation Committee actually has a responsibility to stop creating money when it causes inflation.
So, it's completely the opposite of what the banks will do in that situation.
We often get the question, 'Isn't all money creation inflationary? Isn't all money creation going to push up prices?'
Well, it really depends.
Because, if you put 40% of all new money that you create into housing and into financial markets,
then you're going to expect prices in those markets to go up.
And, we've seen that with housing. We've seen that with the Stock Market.
I don't know if you've seen the newspaper yesterday, but there was a weird headline.
First, it was, 'This slump is worse than the Great Depression',
and beneath that it's, 'Markets hit 4 1/2 year high.'
It's like why is this, why?
It's a symptom of where thie money is going, particularly quantitive easing.
If you instead put money into non-financial businesses, so into the real economy,
then what you're going to do is stimulate that part of the economy.
You know we have 2 1/2 million people at home doing nothing. They can be employed.
What you actually get is economic activity will increase. So, the economy will grow.
So, not all money creation is inflationary.
It can actually, if it's put into the right parts of the economy, it can help the economy to grow faster than any inflationary pressure.
We need to create money free of debt.
Now, this is one of the most fundamental points of this whole book,
because when 97% of all the money we are using is created by banks when they are making loans,
that means that the more money we want in the economy, the more debt we have to have.
If we've just had a crisis, and we need some new money into the economy,
then the only real way to get it in there is to have the banks increase their lending,
which is why you see such an emphasis now on, 'well, we've got to get banks lending again'.
Even though the crisis was caused by people having too much debt.
And, vice versa if we want less debt in the economy, then we have to have less money,
because as you repay your debts that money is effectively cancelled out.
It's just the reverse accounting process of money creation.
We what actually need is less debt, and we need more money in the economy to get out of this current crisis, this current recession.
That's impossible in the current system. As you see here, the two of them are tied together.
As the money supply goes up, the debt does up,
because the money and the debt is the opposite side of the same accounting entry, the same balance sheet.
So, this what we can expect to see happen if we do have a recovery now with the current system, that the debt will rise.
And, eventually this is going to lead to yet another crisis, but it may be much much worse the next time.
What these reforms do is they separate the creation of money from the creation of debt.
So, when banks are lending, they are actually transferring existing money from a saver to a borrow,
but they are not creating money in the process.
So, the money can be created, and that money can be used to pay off a lot of the existing debt.
And, also because of some of the other changes that need to be made to the accounting,
which are explained in the book, it allows us to pay off nearly a £1 trillion of household and personal debt over the course of about 20 years.
Just think about how much of a complete transformation that will make for the lives of most of the people in this country,
to not have this enormous debt. Personal debt is as high as it's ever been.
And, these changes to the system actually allow this debt to be reduced.
So, instead of having this annual interest charge on the entire money supply of £108bn to £217bn a year,
that could be cut down to possibly half of that, maybe even less.
The fifth thing. We need to put money into the real economy.
We talked briefly about this. There are about four options that you could use to get this money into the economy.
So, you can spend more on public services; put the money into the government.
You can cut taxes. You could pay down the National Debt.
Or, you could actually just divide it up between people and give it directly to people.
We talk in the book about the combination of these that you would probably want to use and why.
And actually paying down the National Debt should be probably the last priority.
But the important thing is that all of these things, if they are done right, will get money into the real economy.
Whereas what we have now is we have banks putting most of the money into housing and financial markets.
And, some of this money trickles out of that market into the real economy.
What we'd like to see is that as the money comes in, as it's created, it goes to government,
and then it comes into the real economy first.
and, then the banks need to borrow that money from people and businesses in the real economy
before they can then lend it back to the real economy, back to businesses or to housing and to the financial markets.
One of the things we would like to see is that this flow of money into the financial markets and speculation,
and trading should really be reduced.
So, we need to give ourselves control and transparency over where our money is invested.
Now, I saw this advert the other day, which really made me laugh.
'Ever wondered where your money goes?'
This is Lloyds TSB saying, 'Have you ever wondered where your money goes'.
[Laughter from audience]
I think they weren't aware of the Move Your Money campaign or how much they were falling into their trap there
because, no, most people don't think about where their money goes,
and that's because the bank never tells you.
So, one of the things that we would do as part of these reforms
is require that if you're putting your money into an investment account, you're giving your money up so that the bank can go and invest it,
that the bank will actually tell you ok, 'we're going to use for the arms trade, for the oil industry,
for Tar Sands, for investing in businesses or investing in commodity speculation'.
Some people, we're not naive, won't care about this. They're not going to be bothered.
But it means that the people who do care what their money is used for, have that option to opt out.
To say, 'I don't want my money to be used in this way'.
And to choose different accounts, where their money will be used differently.
Is it going to be easy to get this through? Of course, not!
There's going to be massive opposition. There's huge vested interests.
And, some of the things that we'll hear over the next few years as these things get out into the mainstream,
things like, 'It'll be inflationary'. If you allow the state to create money, that's going to cause inflation.
Really this is quite an easy one to answer.
Well, which of these two is most likely to cause inflation.
You know banks who want to create as much money as possible, because they maximise their profits by creating more,
or a committee that is responsible for stopping money creation when inflation starts to go up.
It's quite a clear choice.
And they you'll get, 'I'll be hyperinflationary'. We'll end up like Zimbabwe or Germany in the 1920s.
Well, the people making that claim, unfortunately, are very ignorant of what actually happened in Zimbabwe
and what actually happened in Weimer Republic Germany.
Now, in the book there's a whole appendix on Zimbabwe and other examples where there have been hyperinflations,
and other examples where states have created money without hyperinflations,
There's a study that we've quoted in there where they go through all 50 recorded hyperinflations in history,
and found that all of them there's been an economic collapse or a political collapse or a war
before the hyperinflation actually started.
It wasn't just because some central bankers started printing money willy-nilly.
There was some fundamental collapse in the economy, before these hyperinflations started.
So, the idea that this will lead to hyperinflation is very misguided.
You'll hear this one all the time. 'It'll drastically reduce the level of credit.'
We actually heard it from the Independent Commission on Banking.
We asked them what they meant by the word drastic.
Did they mean a 10% or a 50% [decrease]? They didn't really know; they didn't get back to us on that.
We also asked them if we could see their calculations or their modelling or the working out that they'd done
to show it would be drastic, and funnily enough they didn't get back to us on that either.
So, this is just a knee-jerk reaction without really understanding the way the system works.
The savings products at the moment where people have said I don't need my money for the next 6 or 12 months,
already today, there is enough money in those accounts, enough liabilities,
to cover all of the investment that is needed in the business economy,
and to keep people being able to buy houses without pushing house prices up.
There's already enough money out there to provide finance to the bits of the economy that we really need.
There might not be enough money to push house prices up at 200% in ten years.
There might not be enough money to fund all this speculation in the financial markets,
and I think that's a good thing.
And, then you'll hear this one. 'Well, you'll kill Britain's best industry'.
You know, we need the banking sector, because the taxes they pay, pay for our schools, our hospitals.
If not we'd all be scratching out a living in the dirt.'
It's not true. The banking sector; in the year that it paid the most tax in history, manufacturing in this country paid three times more tax.
Does anybody want to take a guess at what this number represents?
It's the number of workers in banking relative to the number of workers in the rest of the economy.
Banking only employs one in every 53 people.
So, for every one person in banking, every one person in this industry that we are protecting,
by not asking them to make changes and not asking them to reform the way that they do business,
there are 52 people in the rest of the economy that are negatively affected by the impacts of this banking sector.
So, these reforms are really for the other 98% of the working population.
for the businesses, for the people with jobs outside of banking.
So, I should probably qualify this. There's nothing personal about what we're doing against banks, or the people who work in them.
It's the industry that's the problem. It's the design of the industry and the effects that it's having.
And, it not about the people in them. It's about changing the rules of the game, and the ways these companies can operate.
And, you'll also hear. 'It's too radical',
which is quite bizarre given that we're just proposing that this law from the 1840s is updated.
I can't imagine the Conservatives of the 1840s were really considered to be radicals.
So, the benefits of reforming.
We get stable money. We get this instead of this.
We get debt falling like this.
Instead of house price bubbles we'll have house prices that will stay flat until earnings have actually caught up,
and they become affordable again.
Unemployment, I just want to give you one example of how ridiculous this current system is to wrap up with.
We have 2.5 million people sat at home, doing nothing, desperately looking for something useful to do for a job.
We also have things that need doing in the economy.
We have schools that need rebuilding.
The government has been dilly-dallying over this school rebuilding programme for the last few years,
saying, 'there's not enough money. We're in a recession. We need to get our public finances under order'.
And, they finally came out and allocated £2 billion for rebuilding schools in England.
Now, £2 billion sounds like a lot of money,
and it's so much money that they've had to borrow it from Private Finance Initiative.
So, they are actually borrowing money that is created through accounting entries from banks,
and paying interest on that, because they haven't got enough money of their own to fund rebuilding of the schools.
Now, the reason for that, according to the BBC is that,
'This arrangement will spare the Department for Education's meagre capital budget,
the annual value of which is being halved over this parliament to £3.8 billion.
So, £3.8 billion pounds for rebuilding schools and keeping this whole education system,
the actual physical infrastructure of this, in order.
Again, sounds like a a lot of money, but this green line at the top here
is how much money has been put into mortgages and consumer finance over the last 20 odd years.
In June 1999, the banks created £4.5 billion of new money in one month to put into the property market.
Into buying existing houses and building a few new ones.
In 2005, they created £7 billion in one month.
In September 2007, they created £16 billion in one month to go into property.
So, in the space of one week, they've created as much money as the government is willing to spend on rebuilding schools in an entire year.
Now, this is crazy. If we give banks the power to create money, this is what they are going to do.
They're going to put it into markets like this instead of doing things that we actually need to do.
As I said before, we can't allow this system to continue working the way it is,
given the real challenges that we're going to face over the next 40 years.
So, this is what the book is about.
It can be heavy-going.
We've had to design it partly for the economists who would normally dismiss these ideas,
but we have tried to write it so that if you don't have that background in Economics,
if you start from the beginning, your knowledge will build up and this will really start to make sense.
And, if you get to the end, then you will know more about the monetary system than 99% of professional economists.
So, this is it. This is what we need to do.
The pressure is really on, because of the real challenges that we are facing.
The movement in this country is by far the strongest in the world.
This is the biggest gathering that I know of for reforming the monetary system.
So, if we don't do it then nobody else is going to push it through.
So, it's really down to us. That's what the rest of this afternoon is going to be about.
How we really change the system.