The following speech was delivered by Alistair McConnachie at the American Monetary Institute’s 2005 Monetary Reform Conference, at the Essex Inn, 800 South Michigan Avenue, Chicago, on Thursday 29th September 2005, at 6pm. It was published in the September 2005 issue of Prosperity.
Thank you. I have been asked to speak about the Bank of England, and its place within the monetary system of the UK. After that, I want to tell you about the monetary reform which we in the United Kingdom are proposing.
Tomorrow we are going to be hearing about the US Federal Reserve, from Mr William Hixson — author of the two wonderful books, Triumph of the Bankers and A Matter of Interest, and one of the founders of COMER, the Canadian-based Committee on Monetary and Economic Reform, from whom we will also be hearing this evening.
Now, the Federal Reserve is differently constituted from the Bank of England, but given the political will, both institutions are able to be reformed to deliver the results which we as Money Reformers are seeking.
“Given the political will” — creating that political will, is the real challenge for us.
THE BANK OF ENGLAND
The Bank of England is Britain’s Central Bank. Just as individuals and businesses keep accounts at commercial banks, so commercial banks and government keep accounts at the Central Bank — in our case, the Bank of England.
The Bank of England began in 1694 when King William needed money to fight a war against France. A company promoter by the name of William Paterson came up with the idea of a bank. It would raise £1.2 million and then lend a million to the Crown, at a high rate of interest. In return for the loan, it was incorporated by Royal Charter as the “Bank of England” which became the government’s banker. Thus began the British national debt.
It wasn’t until 1946 – 252 years after it was first established – that the Bank was nationalised and brought more firmly under the control of the British government. In practice this didn’t change very much although it meant that the State acquired all the shares, and that Governors and Directors were to be chosen by the Sovereign on the advice of the Prime Minister. Further, the Chancellor of the Exchequer reserved powers to give the Bank formal directions.
Richard Greaves has written a very good article, which I commend to you, in the January 2005 issue of Prosperity, Shedding some Light on the Bank of England”. Copies are at the back of the hall, and I’m using his research when I tell you that:
Today, operating as it does as the bankers’ bank, it is to the commercial banks (ie the High Street banks) what the commercial banks are to the public.
Just as we may deposit money with commercial banks, so commercial banks in turn keep deposits with the Bank of England. The amount of cash that a commercial bank can buy up from the Bank of England to meet its customers’ cash withdrawals is limited to the amount of deposits it has in its account at the Bank of England and/or what it can borrow from the Bank of England or from other banks. Commercial banks borrow from the Bank of England in exactly the same way that individuals and businesses borrow from commercial banks…
However, it is much more significant to note that whilst the Bank of England is now state-owned the fact is that our money supply is once again almost entirely in private hands, with 97% of it being in the form of interest bearing loans of one sort or another, created by private commercial banks.
Indeed this is now where the real power resides — with commercial banking.
The Bank of England is now essentially a regulatory body that supports and oversees the existing system. It is sometimes referred to as “the lender of last resort” in so far as one of its functions as the bankers’ bank is to support any bank or financial institution that gets into difficulties and suffers a run on its liquid assets. In these circumstances, it is not obliged to disclose details of any such measures, the reason being so as to avoid a crisis in confidence – confidence being something on which the current system is very dependant.
However beyond that, it is no longer a major player in the lending/money creation market. Its annual accounts reveal that its loans and profits are only a fraction of those of a major commercial bank such as Barclays, and it only holds a very small amount of government stocks, so it is no longer really lending to government either – that function has largely passed to the merchant banks.
Most of its profits come from what is known as the “issue department” –
– the department of the bank which is responsible for printing and distributing bank notes and coins. These are purchased by the high street banks to meet their customers’ demands for cash and the various banks have their accounts at the Bank of England debited accordingly. Basically, the profits from this operation belong to the state and are transferred to the Treasury, thus being added to the public purse.
THE PROFITS FROM THE NOTE ISSUE GO TO THE PUBLIC PURSE
The Bank of England Annual Report 2005 states that for the year 2004/2005, “the profits of the note issue were £1,618 million (2003/2004 £1,234 million). The change was the net effect of more notes in circulation on average during the year and higher interest rates. These profits are all payable to HM Treasury.” (p.34)
So we see here that the Bank of England is quite open about the fact that the profit from its note issue – that is, the difference between what it earns by selling the notes at face value to the commercial banks, minus its cost of printing, minting and distributing them – goes to the Treasury.
That is, the profit goes right into the public purse as an effective debt-free input — this benefit is traditionally termed “seigniorage”.
Now imagine if everyone was using notes and coins instead of electronic forms of money. The debt-free benefit to the public purse would be immense! It would be in the billions and billions of pounds, and taxes would fall massively.
Indeed, in 1948, around half of all money in circulation (46%) was notes and coins which were created debt-free by the government, with the profits going directly to the public purse.
However, as the demand for electronic, cheque book and credit card money has risen, the demand for notes and coins has fallen.
This means that most money circulating in society is now private bank debt-based money in electronic and cheque book form – around 97% of money circulating.
As a result, the private banks are making vast profits from this situation. And because the government has an ever-declining source of seigniorage revenue, our taxes go up to repay the money which the government has to borrow from this private banking system!
At the same time, more and more people are swallowed up in ever-rising levels of private debt.
Over the years, the Government has simply ignored what has been happening to the money supply. It has ignored the fall in the demand for notes and coins and its subsequent loss of seigniorage.
In other words, it has shamefully abdicated its traditional responsibility to create a supply of money, publicly, and debt-free, for the people.
As Money Reformers, we are saying that in addition to regulating the banking system, it is the responsibility of government to maintain a basic stock of money in circulation which is free from debt at its point of creation.
If society enjoyed 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 – although this doesn’t necessarily have to be in the form of notes and coins. It can be in the form of electronic money, created debt-free for public purposes.
Otherwise, we will continue with the situation today where the private banking system is acting as the national money supply mechanism and levels of debt will continue to go through the roof, along with bank profits, and our taxes!
FOCUSING OUR MESSAGE
So what do we propose to do about all this?
If we want to take an idea into the mainstream, we need to concentrate on one of the core issues, and we need to come up with a practical policy to apply it, which is politically workable … in the circumstances of the moment.
Focusing in this way is a core strategy of the American Monetary Institute.
If we don’t have focus, then the message won’t take off and fly. So, while I am not going to speak about the specific reforms suggested by the American Monetary Institute, I want to tell you about what we in the UK are proposing.
THE POLICY WHICH WE PROMOTE IS …
what we call The Prosperity Proposal: Publicly-created Debt-free Money. Slogan: “Money for the People, and by the People: The Democratic Imperative”.
SO, WHAT IS PUBLICLY-CREATED DEBT-FREE MONEY?
It is money created by the government of the day, debt-free.
That is, debt-free! Not “interest-free”. Not “low-interest”. But debt-free – money which does not have to be paid back.
Money Reformers say the government has the power, indeed the duty and the responsibility, to create money debt-free, instead of running to the private banking system for it.
We have seen that it already does this via the note issue.
It needs to extend that principle to other forms of money, such as electronic-based money.
We call this money, “publicly-created money” since it is created on behalf of the people of the nation by their elected government. It belongs to the people of the nation, and it works for the benefit of the people of the nation.
It is not intended to benefit the banking system or any private interests – as so much government borrowing does today.
INSTITUTE A PUBLIC MONEY DEPARTMENT AT THE BANK of ENGLAND
Practically speaking, our innovation proposes an extension to the Bank of England — which we could call the Public Money Department – which would be chartered to create debt-free money for the exclusive purpose of financing investment in Public Fixed Assets – that is, in things like maintaining the schools and hospitals.
This “publicly-created money” would be a debt-free input of money to the Treasury, just like the production and sale of the notes and coins represents a debt-free input to the Treasury — of, as we have seen, somewhere around £1.6 billion last year.
The means is innovative, but the principle of debt-free seigniorage enjoyed by the public purse, is long established.
As we have seen, it has simply been eroded by the evolution of the private banking system whose bank-created money has come to exist primarily in non-cash form. That is, in electronic form, transmitted by information 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.
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.
WHY WE CALL IT “PUBLICLY-CREATED MONEY”
We don’t call it “government-created” or “state-created money” because some people have an aversion to the words “government” and “state”. Such aversions can lead to bogus objections on the basis of a misunderstanding of words alone. “Oh, you can’t let the government create money”, such people will say in a knee-jerk manner.
SOME OBJECTIONS WE HAVE FACED
Indeed, one of the main objections which we have encountered and which is found across the political spectrum is that we should not be giving this power to the government because the government, it is claimed, “cannot be trusted”.
We would answer this in several ways. We answer it Technically, and we answer it Philosophically.
A technical answer would be that we could ensure that the amount of publicly-created money was limited to a certain amount or percentage each year, which would be objectively measured in some way. For example, it could be the amount necessary to pay off the interest on the national debt, or it could be an amount equivalent to the difference between the rise in the overall money supply from one year to the next – as was suggested by Michael Rowbotham in his book, The Grip of Death.
The point here being that there would be an objective measure. With this specific amount there could be strict limitations imposed upon its allocation. Perhaps only to be spent on Fixed Public Assets such as schools, hospitals, and roads, or public sector projects decided by the elected Parliament or Congress.
Of course, these spending choices will create controversy, but such political debate is at the heart of our democratic system.
A MODEST PROPOSAL – DEMOCRATIC CONTROL
Philosophically though, we would answer the question by saying that at the heart of our Reform is a modest proposal – democratic control!
Money for the People and by the People! Money Reformers, highlight the fundamental monopoly power of money creation enjoyed by the few to the detriment of the many.
We highlight the fundamental question of who has the power to create the money in the first place.
We say, our money supply is a public resource, which should not be exploited for private profit. The creation of money should be a public service, under public control for the public good.
We point to the fact that many of the economic and social ills which beset society and the world today are due to the power to create money being concentrated in the hands of a tiny minority, rather than democratically distributed in the hands of the People.
So, “If”, as James Gibb Stuart has written, “we can break the Monopoly of Credit — the control over the 97%, and rising, of our money supply, presently created by the banking system — then we have established the right of government to create more, on behalf of the people.” (Prosperity, June 04 — also see James Gibb Stuart in March 2001, May 02, June 03, Jan 04)
MONEY REFORMERS ARE QUESTING FOR REAL DEMOCRACY
Now some others will say, “Well, that is all very well and good but best not talk about that until we have the democratic changes in place which will allow us to implement these reforms safely.”
However, life doesn’t work that way. You don’t start doing something until every other little thing around you is perfect. That would be neurotic.
Rather, you begin as soon as you can and you engage with the reality that is around you, which will always be less than perfect!
So, let us seek Money Reform at the same time as we seek Democratic Reform.
Let us not wait for one before we promote the other.
Let us be clear to locate our programme for reform — and to locate our opposition to the present monopoly of the banking system — within a wider struggle for democracy and for social justice, for Americans, for Canadians, for Australians, for British people, and for all the people of the world.
In closing, let me wish the greatest success to the American Monetary Institute and to the valuable and inspirational work which Stephen Zarlenga and his colleagues are doing here.
We have such a powerful truth on our side. Let us tell it widely.
We have such a powerful light on our side.
Let us shine it brightly upon the darkness of the debt-ridden international financial system which enslaves so many.
And by so doing let us, and the American Monetary Institute, bring freedom from debt slavery to America…and to the world.
Postscript: We are pleased to say that since this Conference, 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.