Question Time with Ben Dyson – Quaker Meeting House (Sheffield), 15th April 2013
(Approx 40 people present)
Update on the national Positive Money campaign
Ben gave a presentation showing how the campaign is gathering pace. Recent initiatives include
- “Where Does Money Come From” being used as an economics textbook
- numerous speeches and papers by Lord Adair Turner (former chairman of the FSA), including a pivotal speech to the Institute for New Economic Thinking (see forum thread)
- a gradual shift in the Treasury’s understanding
- IMF working paper ( see here )
- the recent budget permits a “widening of remit” for the Bank of England
Central bankers and financial journalists are increasingly talking about direct creation of debt-free money (which Adair Turner calls ‘Overt Money Finance’), which means that getting the state to create money and spend it into the economy may be an important half-way milestone for the campaign.
The following are non-verbatim summaries of Ben’s responses to the questions posed about campaigning.
Q: how can we beat the banks who can spend millions on lobbying? What about mass public lobbying (38 degrees etc)?
A: We need to raise public awareness, especially through journalists. Then apply pressure on our MPs to counter the banks’ lobbying. We need a bigger grass-roots support before mass petitions would start to be effective.
Q: The Positive Money solution is very prescriptive, and reform seems a long way off. How does PM view things like tax havens, peer-to-peer lending, Islamic finance, local currencies? Is it acceptable for us to include these under the Positive Money banner?
A: Positive Money is a single-issue campaign. It’s not a good idea to dilute the message, it would just increase the workload. We can leave these other things to other groups who are already focused on them – our job is to focus on fixing the monetary system first!
Q: In what ways can a local group like ours most valuably contribute to the campaign?
A: Speak to MPs – but don’t expect instant understanding. Many MPs have (younger) researchers who are more likely to take an interest initially. Keep planting seeds! (see sample letters to MPs here Letters to our MPs )
Write to journalists
Increase the coverage of the supporters’ network; the bigger the network the more weight it carries.
Ben was then asked five prepared questions:
1. Personal impacts of reform
Q: After the reform, there will be debt-free money building up in the economy. People will have more money they will want to invest, but businesses will have less need to borrow it. More people wanting to lend and fewer wanting to borrow would drive interest rates right down. That would mean people who rely on investment income, like pensioners, would be worse off under the reform. Is that right?
A: The reform would not be an overnight change, but would occur gradually over a period of years. Initially, the new debt-free money will allow individuals to pay off personal debt, and banks would have less to lend. If the transition is managed correctly, both the demand for and the supply of credit will fall at a similar rate, so interest rates won’t be driven dramatically down (or up).
2. Impact on small businesses
Q: How would SMEs (Small and Medium Size Enterprises) fare under a Positive Money jurisdiction? Many people worry that SMEs, already starved of suitable loans, will find it even harder to finance set up and expansion. There will still be a level of risk which would discourage investment.
A: Currently, only around a tenth of bank lending goes to SMEs. After reform, many savers will be looking for relatively low risk investment – property is probably the lowest risk, investment in small businesses medium risk, and commodity speculation highest risk. In the absence of extreme boom/bust cycles, the risk of SMEs failing will be lower. Over all, investment in SMEs should go up.
In addition, the Bank of England may create additional money with the restriction that it can only be lent to the productive economy.
Q: Even under ‘emergency funding’ the risks could be high in a recession. You can’t force banks to lend.
A: They won’t make any returns on money they don’t lend, so they would do themselves out of a job!
Q: Bank lending is fixated on growth. How can we achieve environmental sustainability?
A: There is a section in “Modernising Money” about environmental issues. Research is continuing – we need to do a lot more work on this.
3. The proposed solution
Q: I've read very little in the way of a sustained critique of the fundamental idea behind Positive Money. Is there one (other than the notion that public debt free money would be inflationary), and if so, what is it and where is it?
A: The ideas have been around for a long time, but in their present form since the 1930s. Some of the criticisms raised against “full reserve banking” are
- It’s monetarism/Thatcherism (this shows a lack of understanding of the solution)
- It’s inflationary (ditto)
- It’s deflationary (!!)
- There won’t be enough credit (at the moment, credit is our only source of money – debt-free money will end our dependency on debt)
- money has always had its origin in debt (but that was debt to the community, now it’s debt to the financial sector. The argument is no longer valid)
[Note – there is a list of such criticisms on the ‘FAQ’ section of the Positive Money website here]
Q: What about “maturity transformation”? – Adair Turner uses this as an argument for retaining some level of fractional-reserve banking. eg. if investors put their money in an investment account for 5 years, and the bank lends it on a 25-year mortgage, what happens when the 5 years is up?
A: Adair Turner’s argument is based on the current concept of maturity transformation. Our reforms don’t prevent maturity transformation, so there’s no problem here. In the reformed system, the job of the bank is to seek new savers to replace the original ones – if necessary adjusting interest rates to balance the demand and supply of invested money.
Q: What if there was a recession at the end of the 5 years (admittedly, less likely after reform)? People will take their money out of investment accounts and keep it in “safe” transaction accounts – they will prefer to forgo interest rather than risk losing their money
A: Investment account holders can only get their money back at the time they originally agreed to, so it’s not possible for there to be a run on the bank as in the current system. So even if people want to take their money out of investment accounts, the banks should be able to raise interest rates to attract more funds to replace those investors. And even now, when there’s a recession, there are millions of people trying to find somewhere useful to invest their savings.
4. Banking
Q: What is the real value of the banks to the UK. Your book ‘Modernising Money’ quotes the value of the Corporation Tax and employees PAYE and NI contributions to the economy, but Boris Johnson and others want to protect banks from reform by claiming massive values in terms of the banks' foreign exchange earnings. Can these be quantified? How can these earnings be maintained in the post PM changes world?
A: The finance sector only accounts for 3% of UK taxes, and only 1 in 53 are employed in banking. Lobbyists for the banks often use skewed figures.
Do we really want to maintain these foreign earnings anyway, if it means we have a system which depends on extracting wealth from the rest of the world (while UK taxpayers take the financial risk if this activity goes wrong)? Shouldn’t we encourage an economy that depends on the production of real wealth within the UK?
5. Political impact of reform
Q: My question for Ben is his repeated use of the word 'simple' – “a simple solution to the debt crisis”. Surely, the ramifications of banning fractional reserve banking are anything but simple. I think this should be acknowledged more often - without getting bogged down in the political ins and outs of such a reform.
A: Agreed! the reform would be transformational. We tend not to say “simple” any more!
Further questions
Further questions were then invited from the floor:
Q: On the ‘Maturity transformation’ question – Building Societies and Credit Unions have been doing this for over 200 years without a problem
A: Agreed – and the rest of the financial sector does it now with only a few problems.
Q: You say bankers don’t understand, economists don’t understand. How can that be true?
A: It’s partly about a change in language, a paradigm shift. Bankers and economists see how the system works but they traditionally understand it with concepts like ‘base money’, ‘credit’ and ‘leverage’. Changing the words we use – eg. “money” instead of “credit” - gradually changes our fundamental understanding of what is happening.
See also this interview paul-moore-hbos
Q: Pension funds should not be dependent on running a large national debt. It would be better if we reduced the national debt, and replaced pension funds by a better tax-funded state pension, supplemented by income from private investment.
A: Agreed, though paying down the national debt is a lower priority than paying down personal debt.
Q: I’m new to this – where can I go for more answers?
A: The Positive Money website has a forum and an FAQ section. If you can’t find the answer there, just email us (contact details).
Q: Our understanding of the issues is coloured by what’s in our own interest.
A: Does the system just reflect our values, or does it shape them? If we change the system, perhaps social values will change for the better.
Q: On the international aspect, can one country change in isolation, and how would it affect exchange rates?
A: Yes one country can change in isolation. Markets tend to react to perceived risk, and the initial reaction might be to cause instability. However in the long run, it will be seen as a better and more stable system. The danger is that the pound will strengthen rather than weaken, which will be bad for exporters.
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