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The Power to Create Money in the Hands of the Banks

The same financial institutions that created the financial crisis are now entrusted with one of the most power tools to shape the economy - and many elected officials have no idea, says Ben Dyson of Positive Money - November 20, 14

Ben Dyson is co-author of Modernising Money: Why our monetary system is broken and how it can be fixed. He argues that a design flaw in the banking system, which allowsbanks to effectively create more than 97% of the money that our economy runs on, is responsible for the financial crisis, unaffordable housing and the government's reliance on unsustainable credit-fuelled growth. The proposals were recently featured by the Financial Times. He is the founder of Positive Money, a campaign for a banking system that works for society and not against it.

Positive money--what is it, can it be used in the public's interest for common good--is the topic of our next discussion with Ben Dyson. Ben Dyson is coming to us from U.K., London. Ben is the founder of the U.K.-based campaign group Positive Money and the author of Modernizing Money: Why Our Monetary System Is Broken and How It Can Be Fixed.

Ben, this is your first time joining us. Thank you for joining us.
So let me begin with Positive Money, the organization. Why did you find it necessary to create it?

BEN DYSON, FOUNDER, POSITIVE MONEY: Well, I watched the financial crisis playing out, and there seemed to be some fundamental problems at the heart of the whole crisis that were not being talked about either in the press or in policy circles, or even by professional economists, who should have understood certain issues. And the biggest problem was about the way that money is created in the current banking system.

PERIES: And how is money created in the current banking system?

DYSON: Well, most people, if you ask people on the street, they'll tell you that money can only be created by the government. That only actually only applies to about 3 percent of all the money that exists, and that 3 percent is the cash and the coins. Ninety-seven percent of money just exists as numbers in a computer system, and that money is created by the banks. So every time that you walk into a bank and take out a loan, that money isn't coming from somebody's lifesavings; it's actually new money that is created through a really simple accounting process at the point when you take out that loan. And this is how most of the money in the economy is created when people go into debt.

PERIES: So it used to be that you would deposit money in a bank, they would take your money and put it in the vault and then give it back to you when you need it to buy something. And that doesn't happen. And this transition actually occurred with the ability for electronically transferring money. Explain to us, to an ordinary person, how we are in this situation now of electronic transfer and how that allows banks to actually create money.

DYSON: Well, a lot of people have the idea that when you put your money into a bank and then they go and lend that money out to somebody else, that would only work if the only kind of money that they could use was paper. But because most of the payments that people make now are made electronically, they're actually able to make these transfers using electronic money. It's really just an accounting entry. And it means they can effectively create new money whenever they make a loan through this simple accounting process. There's nothing illegal about it. It's just the way the entire financial system works today.

PERIES: So, Ben, just so that some of our viewers are clear, if this seems a bit abstract for you, it's not only you. You, Ben, recently did a survey among British MPs and found that their understanding of this whole financial sector and how it works is also not that great. Tell us a little bit about that survey.

DYSON: Yeah. So we commissioned a survey of members of Parliament in the U.K., and we asked them, where does money come from, and these questions designed to find out if they understood how the financial system works. And what we found was that 71 percent of MPs came back and said that only the government is allowed to create money, including the numbers in your bank account.

Now, the fact is, about three months before that, the Bank of England released a paper where they explained that it is the banks that create 97 percent of the money in our economy. So most members of Parliament--and I'm sure in the U.S. the same situation applies to representatives--really don't understand that the power to create money has shifted from the government and from the public over to the banking sector.

PERIES: And what has been the reception to your survey? Are people surprised?

DYSON: I think, yeah, there's been quite a bit of surprise. I think people thought that after the financial crisis, members of Parliament would be better informed on how the monetary and financial system works. But this--I mean, to be honest, we weren't surprised, because it's that lack of understanding that means that even though the crisis was a few years ago, we haven't really found a solution to the problems. And we've kicked the can down the road, but we're doing a lot of the same mistakes that we were doing before the crisis.

PERIES: Right. So these are our government authorities, the MPs, and they're not only supposed to help us manage our money, but actually do also oversight and regulate and make sure that it is responsibly done. So how do people who know so little, the MPs in this case, actually govern and regulate this system of money?

DYSON: Well, this is the point that we're making. If Parliament doesn't understand that the government no longer has power over the creation of money, then it cannot understand a lot of the things that have gone wrong, you know, things like the housing bubble, the huge rise in personal and household debts, the growing inequality. None of that really makes sense unless you understand the way that the monetary system works, because underneath the entire economy, it's fundamentally about money. And if you have the power to create money, then essentially you have the power to shape the economy. At the moment, that power to create money sits with the banks, the same banks that caused the financial crisis.

PERIES: Right. So you, the Positive Money, and this whole movement of positive money is really against the authority that banks have to create money. You want the banks stripped of that power. And this is not a crazy idea. I mean, you had sent me an article from Financial Times that actually takes this up as an issue. Martin Wolf takes it up as an issue, and he's an economist. And so this is not, like, a crazy idea being proposed. Tell me a little bit more about that. What would that mean if banks were stripped of their right to create money?

DYSON: So this is an idea that's been around since the Great Depression of the 1930s. And the idea is really that you take the power to create money away from the banks. The banks have shown that they can't be trusted with this power because of all the crises and the problems that it's caused. And you take that power back to the government or the state. Now, you don't want to give it to politicians, because there's a good chance that they'll abuse the power to create money as well. But what you need is a public body working in the public interest, completely transparent, accountable, and democratic, and they would be responsible for creating the money that needs to be added to the economy, but they'd be doing it in the long-term interests of the economy rather than the short-term interests of one of the big banks.

PERIES: Isn't that the role of the Bank of England?

DYSON: Yeah, it could be the role of the Bank of England. At the moment, the Bank of England has really delegated that power to the commercial banks and then failed to control how they use it.

PERIES: Right. And what did you think of the $4.3 billion in fines that major banks received for their fraudulent activity in terms of the foreign exchange system and the ways in which they manipulated it? Recently the--what is it?--the British Financial Conduct Authority actually issued this fine. What is it? What do you think about it? And will this be able to rein in the banks?

DYSON: Well, I don't think anybody's really surprised at these fines anymore, because there's been so many of them. For me, it really shows why banks are not suitable institutions to have this power to create money, because fundamentally, no matter how good the people in them might be, they are driven to chase short-term profits. You know, it's the nature of the business. And if you give the power to create money to people who have behaved in the way that we've seen and to institutions that function in this way, then you cannot expect that to come out with the best outcome for society.

PERIES: Right. And for our listeners who want to learn more about this, Ben, tell us a little bit of what you do at Positive Money to broaden the understanding people have and where people could go in order to get more information about this whole movement.

DYSON: Sure. So we're campaigning mainly in the U.K., but also there's a movement now that's growing internationally. And what we try and do is really make it easy to understand how this monetary system works and the changes that we need to make to deal with problems like unaffordable housing, the rise in household debt, the growth and inequality. And so if you go to the website, there's a load of videos on there that make this really simple, take a lot of the jargon out of banking, because fundamentally this isn't such a complicated issue. It's about who should have the power to create money and to decide how that money is used.

PERIES: Ben, I thank you so much for joining us today, and I hope that you're going to be a regular contributor to The Real News in terms of this issue of positive money and that it's actually a solution to some of the financial crises we are facing. And we'd like to continue that dialog with you.
DYSON: Thank you. Looking forward to it.

PERIES: And thank you for joining us on The Real News Network.


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