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Making banking a genuinely free market

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You wish to buy a house, but can’t afford one – a predicament many face. You approach the bank for a loan, repayable over 25 years. You’d think that the money the bank has loaned is actually other customer’s savings that is held in some ‘physical’ form, yet you’d be wrong. In reality, when the bank made this loan they created the money by inputting numbers into a spreadsheet; bank-created money accounts for over 97% of money in circulation today.

Effectively this means 97% of our money is also debt. When times are good people pay down their debts and the amount of money in circulation shrinks, along with the economy. Government desires to rid household debt is almost impossible; to do so would shrink our economy and wipe out almost all of the money in circulation.

Moreover, history has shown banks are not fair distributors of money; they create too much money (through reckless lending) in a push for profits and most of the money they create is speculated on financial markets and asset bubbles, fuelling the housing crisis. Regulations have proven to not be worth the paper they are written upon, because banks know that no matter how recklessly they lend, they must be bailed out because many people would lose their savings and no government could allow this. Thus the banking sector is a neither free, nor fair, market; its lending is largely monopolised and it is people outside the financial sector that pay the price for its reckless decisions.

This is why the task we face is clear: make banking a genuinely free and fair market. To do this the solution is straightforward – take the power to create money away from high-street banks and put it in the hands of an independent body that is accountable to the government. The money this body creates would be debt-free, and thus could be genuinely invested into infrastructure and jobs, without adding to the pre-existing insurmountable mountain of debt.

I won’t go into the quirks of how such a system would work as a) I’m no expert  and b) that would go beyond the word limit of this site, but of course this change would have profound effects for banking. It would not mean banks cease to be important; they are a legitimate means of distributing money in our economy, but they would now have to do so within the limits of the money they hold. To do this, whilst preventing banking remaining a ‘too big to fail’ market, you would have to create a type of bank account that enables money to be stored without gaining interest but without being loaned out, so the money would always remain the customer’s property. If the bank went bust the customer’s money would be safe. There would also be an ‘investment’ account; where deposited money would accumulate interest, with the risk that this money could be loaned out and the customer could get no return, or even suffer a loss on their investment. This would allow the banks and financial speculators to speculate, without risking the savings of those who could least afford to gamble.

Clearly there are benefits in creating a free market for banking, and this article cannot claim to explain them all. I intend to explore these benefits more fully in a future article, and am keen to hear other Liberal Democrats’ opinions on this policy. I would highly recommend reading Modernising Money by Andrew Jackson and Ben Dyson to see a more elaborate description of our current system and what it should be replaced with; most of this article is based upon their recommendations. Positive Money UK is also running an excellent campaign calling for this change to the banking system.

But, for now, recent history shows us the current banking system is neither a free, nor fair, market; something that any liberal should deplore. Taking the power to create money away from banks is the only way to make banking a genuinely free, and fair, market.

 

* Callum Gurr is a member of the Thanet Liberal Democrats branch and the Policy Officer of the University of Birmingham Liberal Democrats.


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