How to Fix Banking - Ben Dyson at Positive Money Conference 2013

Summary

The video script discusses the historical evolution and current issues with the banking system, particularly its ability to create money. It outlines how banks originally issued paper money and later transitioned to electronic means, which constituted over 99% of money transactions. The speaker criticizes the outdated legislation from 1844 that governs money creation and the fact that banks can create money through loans, leading to economic instability and crises. The talk emphasizes the need for reform, suggesting the removal of banks' power to create money and proposing a transparent, accountable process for money creation. It also addresses misconceptions about potential inflation and the impact on credit, advocating for money to be directed into the real economy rather than speculative markets. The summary calls for a significant shift in how money is created and used, to benefit society and the economy at large.

Takeaways

• 🏦 **Banks' Money Creation Power**: Historically, banks had the ability to create money by issuing paper receipts, which later became a form of currency.
• 📈 **Economic Instability**: Excessive money creation by banks led to economic instability and banking crises, prompting government intervention.
• 🇬🇧 **Bank Charter Act of 1844**: The UK government passed legislation to restrict money creation to the Bank of England, but this did not account for all modern forms of money.
• 📊 **Electronic Money Dominance**: Over 99% of money transactions are now electronic, yet the law governing money creation hasn't been updated since the 19th century.
• 💡 **Money as Debt**: Most money in the economy is created as liabilities by banks when they issue loans, which leads to debt.
• 🌐 **Rise of Electronic Payments**: With the advent of technology, payment methods evolved from cheques to debit cards and online banking, all based on electronic accounting entries.
• 🏢 **Banks as Middlemen**: Banks function as intermediaries between lenders and borrowers, but the current system allows them to create money through lending.
• 💔 **Wealth Inequality**: The current banking system contributes to wealth inequality by extracting interest from the economy, which is then partly returned through savings and taxes.
• 🌳 **Environmental Impact**: The focus on lending for housing and financial sectors to the detriment of the real economy can be environmentally destructive.
• 🏛️ **Democratic Concerns**: Banks have significant power to shape the economy, often more than government, which can be undemocratic with little public scrutiny.
• 🔄 **Systemic Reform**: It is proposed that the power to create money should be removed from banks and given to a transparent, accountable process that is free of debt and focused on the real economy.

Q & A

What was the primary method banks used to create money in the 1800s to 1840s?

Banks created money by printing pieces of paper, which were receipts for deposited coins. These receipts were used and accepted by the public as a more convenient form of money.

What led to the government's intervention in the way banks could issue money?

The government intervened due to economic instability caused by banks creating too much money, leading to banking crises. The Bank Charter Act was passed, limiting the power to create paper money to the Bank of England.

How has the use of cheques and the rise of electronic means of payment changed the monetary system?

Cheques and electronic payments allowed for transactions without the need for physical money. This led to a system where over 99% of money changing hands does so electronically, with banks creating money through accounting entries.

Why is the Bank Charter Act of 1844 still a problem according to the speaker?

The Bank Charter Act is outdated and does not account for the modern electronic monetary system. It has not been updated for nearly 170 years, failing to regulate the majority of money supply created by the banking sector.

What is the current percentage of the money supply created by banks?

Banks currently create approximately 97% of the money supply in the form of liabilities, which are treated as money.

How does the speaker describe the current banking system's impact on wealth inequality?

The current banking system is described as exacerbating wealth inequality by transferring a significant amount of wealth from society to the banking sector through interest payments on loans.

What is the role of the Money Creation Committee proposed by the speaker?

The proposed Money Creation Committee would replace the Bank of England's Monetary Policy Committee and would be responsible for deciding how much money the economy needs to increase or decrease by, separate from the decision on how to get that money into the economy.

How does the speaker suggest banks should function after the proposed reforms?

After the reforms, banks would act as intermediaries between savers and borrowers, transferring existing money from savers to borrowers rather than creating new money themselves.

What is the main argument against the current system's ability to stimulate the 'real economy'?

The current system is criticized for not directing enough money into the real economy, such as non-financial businesses and job creation. Instead, it inflates asset prices, particularly in the housing market and financial sector.

What are the key areas the speaker believes money should be invested in, to improve the economy?

The speaker believes that money should be invested in the real economy, including non-financial businesses, job creation, and public services, rather than in speculative financial markets or the housing sector.

Why does the speaker argue that the current banking system is not the result of intelligent design?

The speaker argues that the current banking system lacks intelligent design because it has evolved over time through a series of government interventions and safety nets in response to crises, rather than being thoughtfully designed to serve the economy and society.