16 May 2012

Money Creation without Debt is possible

One of the main insights that I got from reading Ellen Brown's "The Web of Debt" is that it is perfectly possible to create the money needed for the economy to function without taking on debt. The trick is to use central banks to create the money and to use it exclusively for financing activities that are in the public good.

Currently, nearly all money creation is done by commercial banks. And the logic that governs the use that gets made of the money is simple - the money gets used for whatever maximises the profits for the banks. Sure, some money is currently being created by Central Banks. For example, the Bank of England has created £325 billion of Quantitative Easing in the last few years. But this money has gone exclusively to commercial banks. Similarly, the European Central Bank, under the direction of its new head Mario Draghi (ex European Director of Goldman Sachs), has recently printed over €1 trillion - but again, the only ones to benefit were commercial banks.

So, effectively, the commercial banks have a complete monopoly. Furthermore, whenever they lend (read create)  money, they insist on being paid interest.

Imagine a different world. A world in which commercial banks can only lend money that they have taken in as deposits. But a world in which the money creation process is entirely under the control of the central banks, and where the choice of use for the newly created money is determined not by the need to maximise profit, but by the interest of citizens.

Suppose that we decide that the economy is not functioning at full capacity. That is certainly the case at the moment. With tens of millions of unemployed across Europe, it is clear that there is enormous potential for doing more. How far below full capacity are we? Suppose that we decide that the number is 10% (because roughly 10% of people are unemployed). How much money could you inject into the economy without resulting in inflation?

While some economists might try to argue that any direct injection of credit by central banks would be inflationary, Ellen Brown convinced me that this is not the case. Inflation occurs when there is too much money chasing too few goods. But, if the effect of injecting central bank money is to increase the supply of goods and services, then there should be no effect.

Unless I've missed something vital, when capacity for production is 10% down (because unemployment is around 10%), it should be possible to inject 10% more money into the economy without having an inflationary effect. The important rule is that the money has to be used to for production of things for which there is a real demand.

For example, in most European countries, there is a very serious lack of inexpensive rented housing. Thus, creating central bank money that is provided to city councils for financing the construction of public housing schemes that can be used to provide people with decent housing at affordable prices would be an excellent use of central bank funding. Note that the Central bank doesn't even need to charge interest on the loans - it would literally be a donation. The city councils who provide the housing could charge rents which could be used to finance further housing developments and so forth.

Another area where central bank money could be used very efficiently would be in the financing of construction in the educational area - the building of schools, colleges and universities. Here again, this sort of use for newly created money is good for everyone in the long run, because well educated citizens can easily provide major returns in the future by starting their own businesses and so forth.

The same goes for the financing of research. Currently, the EU puts a lot of money into research. But the money comes from the tax payer via contributions from individual countries. There is actually no reason why this should not be paid for directly with newly created central bank money. 

Renewing the transport systems is another area which would be an excellent use for central bank money. Again, it would provide massive returns in the long term, because an efficient transport infrastructure would mean that businesses would be more cost effective - they would not have to pay their workers so much to get to and from work everyday.

Finally, it is clear that we need to be moving towards renewable energy sources to replace oil, coal and gas power stations. Here again, direct central bank investment could be very efficient.

Note that the use of central bank money does not mean that all the work needs to be done by the public sector. Any private sector business would be well placed to take advantage of the funds. Indeed, the massive building programs would be a veritable boon for the construction sector.

The money paid to the companies would all filter through to other sectors of the economy. The people building the new houses would want to spend their money buying other goods and services (clothes, food, restaurants, theatre, vacations). But there is no need for central bank finance to be used for these secondary targets.

In the end, we could end up with a Utopian society in which everyone has a chance to do something. There would be no need for unemployment, since there are always new useful things to do with central bank money that could require more workers.  Since there are no interest payments to make on the central bank money, there is no need to stick with the current orthodoxy that growth is essential. And, finally, it should be possible to get the whole system to work with no need for taxes at all.

Am I completely mad? I don't think so. But I do have a dream....


  1. Good Lord, man! This is downright communism!

    You know I'm kidding. Bless you. This again is a perfect solution. Tag my little bit on about national debt abolishment and there's only one reason not to implement it: greed.

  2.  Hi Michael,

    Well, I suppose that it does have some links to what you might call communism. And in general, I go out of my way to try and avoid being labelled. For instance, my proposition of replacing the current tax system by a flat rate FTT is good for business and for citizens. The only people who would lose would be speculators. So, in that case, it really is neither left wing or right wing - just sensible and simple.

    As for this latest proposal, it's true that debt free money creation by central banks under the control of a democraticly elected governments is an option that never gets discussed. The question is why. Is it because it's stupid? Or is it because there are massive vested interests who would lose their power? I suspect that it's the latter....

  3. This is what Rep. Wright Patman said about the un-democratic money creation … in 1941!:


  4. Can you discuss how quantitative easing will affect the actual currency? for your case the Euro and how to balance the accounts after each printing. Thanks

  5.  The effect of printing Central bank money depends entirely on what the money is used for. If the money is given to commercial banks, they can do precisely what they want with it. It can be used for speculating on currencies, creating housing bubbles, you name it.

    If however the money is used intelligently there is no need for there to be inflation. First, if the money is used to pay off government debt, the "money" disappears in a puff of smoke. The fictitious central bank money simply cancels out the fictitious commercial bank money that was lent. In that case there is no inflation. There is maybe one risk, which is that since the commercial bank will be less extended, they may feel in a position to start pumping lots of fresh money into the system. For that, it would be worth setting a more stringent limit on the minimum reserve level (or preferably remove their ability to create money altogether).

    The other use is stimulating the economy by building houses, transport systems, energy etc. This will also have no effect, because demand is stimulated at the same time as demand. I'll get back on this....

  6. Hello Simon, I agree with your development of support for: positive money, citizens income and flat transaction tax - but I believe people should also be able to provide themselves with accommodation which they can own (at every stage of life) - planning law currently favours rentier landlords who buy up properties - forcing people into rent paying cash cows, whilst landlords keep all the assets and asset growth.

    I am pushing in Britain, that youngsters should be able to live in a cardboard or canvass shelter - rent FREE, to be able to keep their earnings, instead of giving the capital to someone else. Britain, FREE from rent and FREE from tax payer supported social housing or housing benefit payments - would discourage investment of money in buy-to-let property, would see all the rentier owned properties come onto the market, and property prices would find a fairer level for all.

    Do you agree that people should be free to live in a boat, cabin, caravan, tent, trailer or van - if it gave them control of their money, to save and put into their own lives - rather than keeping commercial money lenders, big builders, building land investors and fluctuating property prices AGAINST the average persons interests?