By Ed Mayo
Iceland suffered first from the crash of financial markets and is perhaps first to champion the cause of a new financial system.
A proposal commissioned by the Prime Minister of Iceland, authored by Frosti Sigurjonsson argues for a new system of money, created at source by the state rather than the banking system. The proposal credits in particular the landmark 2001 report by the New Economics Foundation, A Monetary Reform for the Information Age, by James Robertson and Joseph Huber, for which I happened to write the foreword.
Monetary reform is a vital but complex cause, one whose advocates, however brilliant, tend to obscurity and which covers a range of sometimes competing proposals, including: reform of seigniorage, which is the issuing of money; the role of interest; the case for linking money systems with energy and resources; complementary currencies, digital currencies and co-operative systems of exchange, such as the Swiss WIR. One slide show which offers a quick tour of this is by Pat Conaty, Co-operatives UK Associate, up here.
Re-reading my foreword, I think it remains a reasonable introduction to the case for some such monetary reform.
“For all the prominence and sophistication of share dealing and financial services in the new economy, it is rare that we ask questions of our money system itself. The way that we issue and use money seems so ingrained that it’s hard to question. It is, in the words of George Orwell “the air we breathe”. Like air, it’s everywhere, we are dependent on it, and perhaps most important, until it is really dirty, it cannot be seen. We see the money system as something natural. But it’s not.
The rules of the money system have shifted. The majority of money that now changes hands does so electronically. As a result, far more than ever before, new money is not issued by the state but by banks. Ninety seven pounds in every one hundred circulating in the economy will now have been issued by banks (in the form of sight deposits, printed into customers’ accounts as interest-bearing debts). Only three pounds are cash, issued by the state (in the form of banknotes and coins, issued at no interest). The cost to the state of issuing new money is only the cost of producing banknotes and coins. The cost to the banks of issuing new money is virtually zero. The state receives public revenues from issuing cash, but banks make private profits. The benefits of the money system are therefore being captured by the financial services industry rather than shared democratically.
The loss of this privilege is equivalent to an extraordinary twelve pence on income tax in the UK. In effect it has become a subsidy to the private banking sector – a nice little earner, but one that should always have been for public benefit rather than private gain. This is likely to grow as as we move further still towards a cash-free economy, perhaps to a point where coins and notes represent less than 1% of money in circulation. Unless we find creative alternatives, the benefit of issuing new money will have transferred entirely from public benefit into private corporate gain.
This report offers a practical and clear step-by-step agenda on the essential first step of restoring the right of issuing new money in a modern economy to be of benefit for the common good. In the terms of the new thinking that is emerging about the creation of sustainable and inclusive economies, this is an achievement that ranks high. It fits directly into a new theoretical model, combining socio- and ecological economics, in which market actors are located within common property resources rather than allowed to free-ride on the back of them. In short, the market meets the commons; and new economics, whether through eco-taxes or monetary reform, concerns the achievement of a fairer and more sustainable balance of cost, risk and return between the two.
This report addresses the issues and the complexities of how new money can be created. I encourage you to engage with it in full, because the analysis and prescriptions are landmark achievements and I am proud to be associated with it.
There is no better time for an idea such as monetary reform to flourish. The democratic state is being eroded in the face of global markets. In many parts of the world, concerns about market failure now have to be put alongside concerns about state failure. Issuing new money in the form of public expenditure enables the public purse to go further – whether for public transport, environment or regeneration. Restoring democratic control over how new money is issued is an important step towards a global economy in which unpayable debts are reduced and resources can be freed up for sustainable development.”
With Iceland looking at options for change, monetary reform at last is coming in from the cold.