Sovereign and Sovereignty

I am wondering whether I can persuade the cast of Blackadder to assemble for one last hurrah. The plot will revolve around the growth of greed in Regency England. It can make refer askance to the South Sea Bubble. The century is entirely wrong but who will care?

Blackadder has become caught up in speculative frenzy. Being immoral but not irrational he is not a very successful trader. He either cannot understand or cannot accept that liabilities are actually assets and this weakens his ability to trade effectively. Baldrick, by contrast, is making money hand over fist trading turnips, night soil, the future value of Prince George's sock collection, and so on.

Cut to Mrs Miggins's pie shop which is abuzz with talk of the positions her customers are taking. Everybody has abandoned their trade in favour of speculation. Suddenly Shelley, in his big girl's blouse, leaps onto the table to decry the 'irrefragable injustice' of the national debt. He is pelted with old pie crusts.

Conversation moves to gossip about new schemes, with a crescendo of excitement around the potential of investments in a mosquito-infested swamp in South America. Shares are increasing rapidly in value. Baldrick has abandoned his current investments to put all his money into this new colony. Nobody is sure who is behind the scheme but nobody can afford to be left behind. Eventually, Blackadder persuades Prince George to trade the national debt for a share of the swampy settlement.

The inevitable happens and the mosquito coast is revealed to be worthless and everybody loses their shirt, including all the Romantic poets who had not been able to resist a flutter. Baldrick is philosophical about his losses, since he is left with more turnips than he knows what to do with. Prince George has transferred his debts to his subjects and still has plenty of socks. Blackadder is revealed as the eminence grise behind the scheme but can no longer be found in London.

The point of the plot is not complex but then neither is the fraud we have all been subject to. What can we propose in terms of a happy ending? Baldrick sets up his own currency based on root vegetables? The people storm the Bank of England to demand direct money creation? Blackadder is tired for treason and his flat in Cheyne Walk is confiscated? Sadly, this is the point where Prince George wakes up and realises is was all a dream.

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Relieved of Debt

When the decision finally came that the Green Party would be adopting a policy that cuts the link between money creation and the parallel creation of debts it came as a huge relief. Following more than a decade of pondering, discussing, educating and campaigning the party's activists were convinced that they could believe in the possiblity of public credit creation to end the centuries of capitalist privatised money and replace it with money produced for the common good. The motion was passed on Sunday at the annual conference in Brighton by 110 votes to 90.

Key to the change of heart of the Green Party have been two members of Kent Green Party, both of whom might be described as 'outraged of Tonbridge'. Brian Leslie has been a campaigner for monetary reform all his life and he recently recruited to the cause Andrew Waldie, who is a tall, softly-spoken accountant with a Scottish accent - exactly the sort of person you want to be on your side in a debate about money. From this most unlikely centre of radicalism has come what Andrew called the final part of the trinity of radical economics policies, taking its place alongside Land Value Tax and Citizens Income on an economic platform that has the potential to liberate working people from the oppression of wage slavery.

I am reproducing Andrew Waldie's proposal speech in full here: read and rejoice!

'This motion strikes a blow at the heart of financial capitalism by removing from banks their power to create money - and restoring the supply of our national currency to democratic and public control. Through their lending, banks create 97% of the money we use in the form of credit.  This gives them enormous power to direct the economy and shape our society - without any form of democratic accountability.

'Our banking system is also unstable.  History shows that debt-fuelled booms and speculative bubbles inevitably turn to bust.  Governments bail out banks that have become “too big to fail” – and the price of these bail outs are savage cuts in public services. The burden of servicing the debt on which our money is based also increases inequality and drives unsustainable growth.  These are issues which are of fundamental concern to the Green Party.

'Simply bringing the banking system under "Social Control" is not enough - more radical reform is required.  Leading green economists have advocated reform based on the principles set out in this motion. The motion avoids the fundamental conflict of interest that has corrupted the current banking system.  It separates the power to create money from the power to decide how that money is first used.  A National Monetary Authority – NMA - appointed by Parliament, would manage the supply of national currency.  Its decisions would be protected by law from influence by financial or other special interests.

'Elected governments would decide how currency created by the NMA is first spent.  This currency would then circulate freely at all levels of society.  Saving and borrowing would continue.  Local currencies could circulate alongside the national currency.  The major benefit of the system we propose is that people would no longer need to go into debt to keep money circulating in the economy.

'Over a transition period of 20 years, the NMA would convert the stock of debt-based money by issuing the same amount of national currency to the Government as additional revenue.  The value from transferring the endowment of our currency to public control has been estimated at £50 billion per year – that’s enough to fund the construction of 300,000 new homes – for each year of the transition period.

'Restoring the supply of our currency to public control would deliver a huge prize that could finance the transformation of our society.  Today, we have the opportunity to commit our party to seizing this prize by passing this motion.'

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IMF Study Supports Public Money Creation

My post earlier this month reporting that Adair Turner, one of the front runners for the post of Governer of the Bank of England, has suggested that the financial assets the Bank bought in return for its quantitatively eased money should be simply cancelled felt fairly shocking at the time. Around the same time my attention was brought to a paper emanating from the IMF that has the even more surprising proposal that we should return to an effective 100% reserve on the creation of credit. In layman's terms this removes from banks the power to create money and reduces their role to re-lending money that has been deposited with them.

The paper is couched in terms of a re-examination of the proposal from Henry Simmons of Chicago University and later summarised by Irving Fisher in 1936 and is thus called The Chicago Plan Revisited. The report has two authors, a Czech economist named Jaromir Benes who works for the Reserve Bank of New Zealand and Michael Kumhof who is a staffer at the IMF. While the report states clearly that its findings do not represent the policy of the Fund it has been approved for publication.

The authors summarise the Chicago Plan as follows:

'The key feature of this plan was that it called for the separation of the monetary and credit functions of the banking system, first by requiring 100% backing of deposits by government-issued money, and second by ensuring that the financing of new bank credit can only take place through earnings that have been retained in the form of government-issued money, or through the borrowing of existing government-issued money from non-banks, but not through the creation of new deposits, ex nihilo, by banks.'

Fisher argued that such a policy would remove the ability of banks to introduce instability into the monetary system. More crucially in view of the highly damaging consequences of the massive public debts being carried by a number of developed economies, the Plan would allow for the elimination of these debts, since money would be created by public authorities rather than borrowed from banks with interest, which creates a corresponding debt, given that irredeemable government-issued money represents equity in the commonwealth rather than debt'. Fisher forecast a similar reduction in private debt.

The authors of this report test Fisher's theories using an econometric model. Their conclusions are striking: 'We find strong support for all four of Fisher’s claims, with the potential for much smoother business cycles, no possibility of bank runs, a large reduction of debt levels across the economy, and a replacement of that debt by debt-free government-issued money.' They suggest that banks would continue to exercise their role of allocating money between lenders and borrowers and providing high-street banking functions, but they would lose the role of creating money.

The authors write that 'We take it as self-evident that if these claims can be verified, the Chicago Plan would indeed represent a highly desirable policy'. Since their modelling suggests that the claims can be verified in terms of the current economic crisis we must await further policy moves from the IMF with interest, and the kind that doesn't bring debt crises in its wake.
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How to Solve the Eurozone Crisis

Inter-war Germany may not be the place you would look first for advice on tackling tricky financial issues, but on the other hand somebody did manage to move the country from the situation where you needed a wheelbarrow to buy a loaf of bread to the country that could afford to spend so much on arms that it could rapidly conquer the whole continent. That man was Hjalmar Schact: he was not a magician but rather a financial expert who was not in hock to financiers. That is a rare commodity and one we are in desperate need of just now.

What a coincidence, then, that I spent yesterday at a conference with Professor Richard Werner of Southampton University. A modest, self-effacing man, he has nonetheless managed to persuade the Telegraph's City correspondent to suggest something like the Schact Plan to solve the Eurozone crisis. The solution is simple: create enough money through quantitative easing to buy back the bad assets. According to Hurley, Werner then suggests that governments should stop selling bonds but rather 'fund themselves through loan contracts from banks in their countries', which strikes me as rather odd when the more obvious proposal would be simply to continue to issue money as public credit. 

What Richard does not tell us is what backed up the creation of vast amounts of new German money that Schact created. That is a point I covered in my book Market, Schmarket back in 2006. I like this better now, because it reminds us of the importance of land. Effectively, Schacht used the German land and its wealth as collateral:

‘Once confidence in a currency is so severely damaged the only feasible response is to create a new currency, which was a process managed by the Finance Minister Hjalmar Schacht. In November 1923 he created a new parallel currency called the Rentenmark; to create confidence it was backed by land, in this case the most solid asset of the German economy. The Rentenmarks allowed economic transactions to take place within the economy, although they were not legal tender, had no fixed relation to the Reichsmark they replaced, and could not be used for international payments. This made the Rentenmarks speculation proof. Bizarrely, much of the speculation against the currency that had destroyed it had actually been funded by loans from German banks. In The Magic of Money Schacht explains how the Reichsbank made loans to support the speculation against the German currency. Thus the government, which has always been blamed for economic mismanagement and for printing too much paper money, was not primarily responsible for the inflation. By 1924 the Rentenmark and Reichsmark were being treated equally and the Rentenmark could be withdrawn. The lessons of the German hyperinflation are twofold: first, that financial speculators’ only motive is to make profits and that they are unconcerned about the social and political consequences of their speculative activity; but, nonetheless, governments can use political power to control this speculation if they wish, exposing the myth of powerlessness.’

It just so happens that we are looking for an independent and skilful financial expert for a rather important job just now. I have suggested to Richard that he put together an application for the top job at the Bank of England. If he is agreeable we could start an interesting campaign, especially as the man who invented quantitative easing has much stronger credentials than most of the current front-runners.
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Capitalists Defend Capital Against the Banks?

Now here is something you didn't expect to see: a link from my blog to a Conservative one. Although, given the recent suggestions that I am incapable of using the word 'capitalism' in a critical way, perhaps you wouldn't be surprised. Although this post on Conservative Home begins with a childish and laughable indication of the blind hegemony of the pro-market ideology, this is to reassure readers who may be shocked by what follows.

The interesting news you can read between the lines of what follows is that the debate on monetary reform is on the move. This is one of those issues where the old left-right, capital-vs.-labour argument gets thrown into disarray, because those who own the capital appear to be becoming disgruntled about those who 'create' money undermining their holdings. Clearly, I have wildly different reasons for wishing to take the power to create money from banks, and in fact I doubt many Conservatives would agree that this right should lie with the people. But, as this Carswell makes clear, a minority are resuscitating arguments for a return to the fractional reserve system.

On a less cheery note, the policy motion on monetary reform to this year's Green Party conference was not passed, and cannot now be brought back for another two years. The US Greens, by contrast, have included in their policy platform for 2010 a full commitment to monetary reform and for political authorities to reclaim the power over money from the banks.

After the large number of responses to my last post, some of them rather forceful and a little unfair, I wonder whether I dare encroach onto this territory. I will be responding to the interesting debate that ensued in a later post. In the mean time perhaps I should take Harry Enfield's advice and 'know my limits'? Tweet

Putting Capitalism in its Place

Canvassing is always a salutary experience since it teaches you that people are far smarter than the pundits give them credit for. This reminds me of my once-held belief that we would be far better off if we engaged in some sort of periodic job exchange scheme, where every ten years or so our politicians would become hairdressers and vice versa. Except for the quality of our haircuts of course.

This morning, while waiting in a queue at the cashpoint, I had a very interesting conversation with a local voter. He was critical of politicians' reluctance to admit exactly how much our public services were going to be cut. I responded by pointing out that, had we not experienced an extraction of value to our banking sector, we would not be needing to cut at all.

My mention of the word 'capitalism' was not well-received. I had to explain that I was not for a centrally planned system where every bicycle would be made in Conventry and sold through a state-run and utilitarian shop. My concern was rather that capitalism should be pushed onto a socially benign path. Here we were able to agree.

Capitalism needs to be contained within social limits. If the prevailing economic system benefits only a very small proportion of the citizens of a country - or of the world - than that system clearly needs radical revision. Although I might style myself as 'anti-capitalist' it only takes a few moments to consider the history of societies where social ownership is ubiquitous to realise that we may not be ready for that yet.

It seems to me there are three criteria which we can use to examine whether a capitalist business is socially acceptable: its size, the scope of its activities, and the extent of its profits. All three can easily be enforced by a just taxation system combined with an effective Office of Fair Trading. And our economy would also benefit from greater diversity, so that there were more social businesses, social enterprises, and co-operatives.

However, the economic system that dominates the UK in 2010 is not capitalism in any recognisable sense. It is a financialised system of exploitation where, rather than using money as a medium of exchange to facilitate the exchange of goods, a tiny minority are using money corruptly to extract the overwhelming majority of the wealth of the world for their private enjoyment.

My cashpoint friend seemed reluctant to consider how the monetary system might be used to suck our money out of us, so that we will face losing the services we value and the quality of the society we share. The issue feels too big; most do not have the courage even to consider it, much less to dare to argue for something better.

We should resist the intimidating behaviour of the masters of capital, whether exercised in print or via credit-rating agencies. Capitalism is not working: we deserve something better. Just because these issues are not raised as part of the election campaign should not lead us to think that we have no right to debate them. Tweet

Something for Nothing

Yesterday was QE day: the day that the government and the Bank of England proved the justice of the argument for which monetary reformers have been pilloried for decades. It is possible simply to create money as credit when the economy needs it. There is no need to create it as debt whether public (enforcing citizens to work to pay it back) or private (ensuring an automatic transfer of economic value to the banks and the rich who profit from them).

I spent the day in Merthyr Tydfil - the day that was also the 25th anniversary of the Miners' Strike. That strike, and the economic devastation that followed the politically motivated closure of the South Wales coalfield, led to massive levels of indebtedness and I was attending a conference of good people who run credit unions trying to help the victims of Thatcherite capitalism manage their paltry incomes with the help of credit unions.

The £75 billion that was generated yesterday could have been used to wipe out all the debts in the South Wales Valleys - some sort of political amnesty for the local people's refusal to sign up to free-market capitalism. Instead it was used to buy up worthless assets that have been generated by a corrupt financial system.

When the asset bubble was being inflated, the banksters and their mates could price an asset at whatever they could persuade somebody to pay for it. So long as they could sell it on, it was possible to then translate this artificial value into real value, by buying land or gold, for example. Once the bubble bursts these assets have no value and those left holding them are bound to lose out massively. The government is using its ability to produce money to prevent this from happening.

Rich people's debt is repaid by government; poor people's debt remains with them, forcing them into lives of grinding despair. Sending the money to banks is a hopeless strategy in terms of reviving the economy, since it will be sucked into the black-debt hole that has swallowed up all the rest of our money thrown at the problem.

But ideologically it is crucially important that this money isn't given to citizens or spent on the health service. If it were the capitalist mantra that you cannot have something for nothing would be seen to be false. Of course this mantra has only ever applied to poor people and working people. If you are a member of the Bullingdon Club working out smart ways to conceal the fact that you live from something for nothing is your congenital life strategy. Tweet

Don't be fooled by the credit window

The private market banks have failed and the function of banking has moved into the public sector. But, taking one step bank, we see that the function of creating money in the private market has also failed. Reducing interest rates, i.e. making money cheaper to borrow, has not managed to stimulate the money creation system that is privately operated, and relies on debt for its existence.

So this monumental market failure requires the public authorities to pick up the pieces again. As all existing money disappears into bottomless pits of commercial debt, governments are considering exactly how they are going to put more money into the economy. Now is a useful time to learn, because the fact that governments can do this proves the case that has long been made by monetary reformers: that we do not need to go into debt to create money to pay for public services or a citizens' income scheme.

The money that will be created by public credit is plainly and unquestionably our money which gives us an unarguable right to decide precisely where the metaphorical helicopter is hovering when the balding and over-excited economist starts shovelling crisp notes out of the side door. No doubt the bloated beneficiaries of government largesse in the construction and arms industries are gesticulating wildly for attention. My choice would rather be using this opportunity to introduce a Citizens' Income scheme. The money would be much more likely to be spent than saved, and therefore achieve objectives other than simply keeping the capitalist economy afloat.

The image of the economist at the helicopter door is particularly appealing, since I have always believed that most economic theory is analogous to the window that was pushed out of aircraft during the war to mislead radar systems tracking their movements. For those with alert antennae this is a time when the real workings of a capitalist economy show themselves especially clearly. Tweet

Time to Stir it up

My friend Barbara Panvel posts weekly at The Stirrer: 'campaigns that count in Birmingham, the black country and beyond'. Her latest post is addressed to Helicopter Ben - Ben Bernanke of the Federal Reserve who is now following up on Milton Friedman's suggestion that dropping money from helicopters might be a way to deal with deflation.

Nothing could better illustrate the desperation of policy-makers than such an arbitrary and aimless dumping of money into the economy. The language of strategic injections has been abandoned. There never was any attempt to direct the money towards those who might need it.

As Barbara points out, why not simply create money for public projects, along the lines of the proposal from Robertson and Huber? This would allow governments to invest in all the services their citizens need without the need to pay back the debts.

There have been a whole string of Early Day Motions calling for money creation in this form. Such a monetary reform could also pay for the shift towards a low-carbon economy that we so urgently need. It appears to be implicit in the Green New Deal proposal, which is perhaps why that has not gained the attention it deserves.

As Barbara identifies, a key mover in favour of this radical revision of the money creation system has been Austin Mitchell MP. For this he was given the Thomas Atwood Award earlier this year. The reason this proposal is not taken up is purely political, and the political consensus rests of public ignorance. The financial crisis has lit the fuse under this debate. Tweet

Money, money everywhere

I had another horrendous train journey yesterday - I was facing the prospect of a two-and-a-half hour delay on a two-hour journey when I took direct action and cadged a lift. The explanation was 'incidents in tunnels' which has made me think about 'leaves on the line' and, more relevantly, 'the wrong kind of snow'.

Perhaps this is what Marx meant by the contradictions of capitalism? During the floods, which were our local learning experience of last year, we found ourselves deluged and yet short of water. This year our economy is short of cash because of an excess of credit. The recession that we are jointly embarking on has been the result of the uncontrolled creation of the wrong kind of money: debt money.

The link between rail disasters and monetary disasters is that we should not allow control of the most fundamental structures in our economy to be in the hands of privateers. Railtrack, at least, is now back in public hands; the money creation system should follow. This is not to argue for the abolition of private banks, just to suggest, as James Robertson and Joseph Huber do in their excellent book Creating New Money, that they should perform a standard retail function rather than being allowed absolute power over the extent of credit in our economies.

Such a system would not only stabilise the money system, it would have the added benefit that the value of the money created would be in public, rather than private, hands. It would be available to be invested in public projects or used to pay off the national debt and generate tax cuts, depending on the preferences of the government in power.

The debate is now focusing on whether or not the carnage we see around us representss capitalism working or failing. All I can say is that if this is a system working, it just isn't a very good system. Tweet

Credit Crunch or Debt Swamp?

The much-discussed interview with the Chancellor published in this morning's Guardian is intriguing. It is so unusual for a politician to be this honest, or for anybody involved in the neurotic world of finance to say anything even slightly negative, that his assertion that this may be the worst economic crisis for 60 years is very unusual indeed.

The first question is, why on earth did he say that? Rapidly followed by the second: why choose the post-war period to compare with, when the economy was on its knees because of over-exploitation and exhaustion rather than a long debt-fuelled binge. A devastated economy is not a problem, so long as you have able and active people and sufficient resources to rebuild what has been destroyed. An over-indulged, greedy, wasted economy, still leeching off a munificent but abused planet is another matter entirely.

Honing our skills for reading between the news might help to explain what the Chancellor is up to here. Is this the first step towards a 'we're all in this together' approach to economic management, which will involve us all tightening belts, accepting a reduced standard of living, and co-operating rather than competing for once?

This is just the sort of approach a Green chancellor might have to adopt. However, it will never work unless the Chancellor has the courage to reclaim the power of economic management, and especially the finance sector. This power was ceded by the Thatcherites, with New Labour joining in to prove to the City that they were no threat. In the austerity scenario Darling may have in mind, the reduced standard of living would also have to take us to a future of equality--so no good the ordinary employee living on less while the elite can still sup champagne and enjoy foreign holidays.

Most interesting of all, perhaps, is the Chancellor's admission that he did not expect the bubble to burst, or, in his words, 'No, no one did. No one had any idea'. Well that isn't strictly true. In the circles I move in the crash had long been predicted. Could it be that what the Chancellor had not understood is how money is made as debt and how insecure this makes us all? Has he learned that lesson now? Is there any prospect, then, of not only banking reform but even monetary reform?

For those who have been wondering where I have been for the past month, I can let you know that I have been enjoying an enforced absence from cyberspace, thanks to the utter inadequacy of BT, the telecommunications monopolist. While I don't use them for either phone or internet services, they can still manage to make it impossible for my ISP to restore my Broadband. This post has been made via a dial-up connection--hence no pictures. Normal service will be resumed whenever BT can be persuaded to wander to the local exchange with a screwdriver. Tweet