By Alistair McConnachie
Here is an original and innovative change in the monetary system which, if implemented, would provide significant additional financing for public investment in society, leading to social and economic benefit throughout Britain.
To summarise: Our economies are divided into Private and Public Sectors. The private sector operates primarily on the basis of self-interest and its public counterpart exists for the common weal. The former is financed by bank lending — and the latter by taxation and government borrowing.
This innovation stems from the observation that in today’s world we measure virtually every activity in money terms. It is a convenient and universal measure of affordability — but it ignores the latent capability of our society. It is undeniable that we have untapped capability to build schools and hospitals, railways, and environmentally sustainable power generation systems.
Our research has revealed that a serious flaw has developed in our money system — over the past fifty years.
In 1948, with the country financially broke after WW2, the State was able to finance vast outlays in schools, hospitals, housing and similar social investment, yet kept inflation at lower levels than today.
In those days, the government issued almost half our money supply in cash — notes and coins. The other half was bank-created money — created by the private banking system “out of nothing”.
This is significant because when banks purchase their notes and coins from the government, an amount equivalent to the face value of the notes and coins is deposited as an effective debt-free input to the public purse at the Treasury.
Seigniorage is the name given to the profit which accrues to the public purse in this way — after you have deducted the government’s cost of printing, minting and distributing this cash, from its face value.
This debt-free profit is an established fact, but with a decline in the proportion of cash circulating, governments have made no effort to establish an alternative means of creating and circulating debt-free money for the public good.
HOW MUCH MONEY IS BEING LOST?
In 1948, for example, 46% of our entire money supply was issued by government in the form of notes and coins, and the seigniorage credited to the public purse, debt-free. We call this 46% the “seigniorage rate”. The rest was bank-created money, created as an interest bearing debt.
In today’s largely cashless economy, the proportion of the money supply which is government-created cash is only around 3% of the entire money supply.
However, if that 1948 seigniorage rate of 46% still obtained today, government would, in this year alone, have an additional £30 billion effectively debt-free, to invest in social infrastructure — that is substantially more than allocated to Fixed Capital Formation in the current fiscal year, which is the investment in the fixed assets, such as the maintenance of schools and hospitals.
THE INNOVATION: PUBLICLY-CREATED, DEBT-FREE MONEY
Our innovation proposes an extension to the Bank of England, which should be chartered to create debt-free money for the exclusive purpose of financing investment in Public Fixed Assets.
This “publicly-created money” would be a debt-free input to the Treasury, just like the production and sale of the notes and coins represents a debt-free input to the Treasury.
The means is innovative, but the principle of debt-free seigniorage enjoyed by the public purse, is long established. It has simply been eroded by the evolution of the private banking system whose bank-created money exists primarily in non-cash form, that is, in electronic form, transmitted by information and telecommunications technology.
Similarly, our innovative “publicly-created money” can be created as non-cash money. It does not have to be in the form of notes and coins.
If the people could get the benefit of a 46% debt-free money stock in 1948, then there is no reason why we shouldn’t continue to enjoy such a benefit today.
People should not have to suffer in an increasingly usurious and debt-soaked society just because the demand for notes and coins has fallen.
It is the responsibility of the government to maintain the debt-free money stock for the benefit of the people.
No other innovation could benefit so many and harm none. The basic research is done and recorded. What remains is to generate credibility and overcome the inertia within government and the civil service establishment.
Early Day Motion 323 entitled Public Credit for Public Purposes promotes this idea and is presently before the House of Commons. It is available for MPs to sign until the end of this parliamentary year in November 2004. Its progress can be followed at http://edm.ais.co.uk/weblink/html/motion.html/ref=323
Postscript: Since this article was written, a proposed draft Parliamentary Bill entitled, “The Bank of England (Creation of Currency) Bill” – which delivers reform on these lines – has been published. It can be found here and purchased in hard copy at the link immediately below.