This is a guest post by Daniel Key who is a member of Compass Youth and member of the Policy Committee of the Green Party of England and Wales. He tweets at @danieloliverkey.
Other party conference season: the Green Party of England and Wales made history by joining the United States Green Party in calling for an end to the private creation of money by banks. After a debate on the motion at the Autumn Conference in Brighton, the Green Party has collectively decided to instead place this power with a democratically accountable National Monetary Authority at the Bank of England. This represents a huge change in Green Party policy, as we are now calling for full reserve banking, alongside other radical policies such as a citizen’s income, land value tax and of course the decarbonisation of the entire economy as we move to a post carbon and equitable world.
To recap: currently private banks create money as debt when they make loans. This electronic bank money now represents 97% of the UK money supply, with only 3% being created debt-free by the government in the form of notes and coins (a good place to start to understand the UK money system is the one hour documentary 97% Owned). This money is allocated by the lending decisions of the high street banks, and so we see money pumped into the housing market (putting house prices way beyond the means of young people) instead of small businesses, as banks receive collateral if mortgage holders default on their loans. This is massively undemocratic, as control of the banks’ power to create money is in the hands of its board members, who are only accountable to the bank’s shareholders.
Money creation is pro-cyclical – too much is created in an economic boom, whereas we are currently living through a period where lending is restricted and money is therefore destroyed when debt is paid down. This is why the Bank of England has introduced quantitative easing to indirectly get money into the economy, and the government has introduced the Help to Buy scheme to encourage the public to take on more debt, creating a housing bubble in the process.
From an environmental perspective, the biggest problem with the current money system is that the level of debt is constantly growing. This in turn means the economy is compelled to grow, even when this leads to environmental destruction. This is the engine behind such environmentally damaging innovations such as planned obsolescence (designing products with a limited useful life to perpetuate consumption), as Michael Rowbotham recognised in his book The Grip of Death over a decade ago. The current debt-based system of creating money is incompatible with the goal of a sustainable, steady-state economy, as pointed out in the recent green economics book Enough is Enough.
To achieve a steady state economy we must eliminate the growth imperative that is built into the existing banking system.
Full reserve banking is recognised as the missing link in the move to a sustainable economy by a number of leading green economists and thinkers. These include:
1.Herman Daly ( grandfather of green economics and the author of Steady State Economics)
3.Tim Jackson (former Economics Commissioner at the Sustainable Development Commission and author of Prosperity Without Growth )
4.Richard Werner (banking and economics lecturer at the University of Southampton and former Researcher at the Bank of Japan)
6.And of course the Green Party’s very own Finance Speaker Molly Scott Cato (Green economist, lecturer and author of The Bioregional Economy). Indeed, party policy now reflects Molly’s vision for a multi-layer money system, with local currencies, regional currencies and a national currency all working alongside one another.
As Caroline Lucas points out in this video, the best way to use the debt-free money created as a result of these reforms (estimated at £1 trillion over 20 years) would be to spend it on the Green New Deal in an effort to build the green economy. This way we can get unemployed people into labour-intensive jobs, with more taxes paid by a larger workforce, creating a virtuous circle for government revenues and society as a whole.
The potential transition scenario to a full reserve banking system, as well as the finer details of the reforms, are laid out in the book Modernising Money. We have adapted these proposals to suit Green Party principles.
With the Icelandic parliament looking into the potential of introducing full reserve banking, we may have a working example of these reforms in the years to come. As the proposer of the motion, Andrew Waldie, puts it, “This motion strikes a blow at the heart of financial capitalism by removing from banks their power to create money”. We may have improved our policies, but the real battle will be taking this power back from the banks when our movement reaches a critical mass.
Read the Green Party Banking Reform Motion here
Read the Background Paper to the motion here
Check out some Frequently Asked Questions about full reserve banking here