How the Bank of England might create new money to pay into the economy as a Basic Income
In televised debates during the recent general election campaign, several politicians made reference to there being no “magic money tree”. When in fact, there sort of is. This, together with a survey in 2014 that showed that only one in ten MPs know where money comes from, exposes a huge education gap amongst our most powerful elected officials, on one of the most important aspects of our economy: money.
Money is something that is often taken for granted, but in fact how it is created and allocated is a political, cultural and economic choice – with huge implications on our society. Most people – including economists, politicians, and journalists – do not know where money comes from, and are shocked when they find out. There’s a proverb that says: ‘The fish is the last to know water.’ Money is all around us, playing a role in almost everything we do, yet it can be difficult to pin down. We are swimming around in a society that depends on money—that’s become obsessed with money—but few of us know where it comes from or how it works.
Currently, private commercial banks create most of the money in our economy when they make loans. This money is simply created out of thin air, typed into a computer. And since it is created as a loan, it means that for every £1 in our economy, there is also £1 of debt.
Furthermore, 82% of the newly-created money by private banks is lent into the financial and real estate markets. But most of us only operate in the real economy – businesses, shops, jobs – where only a small amount of bank lending goes. So most new money created reaches only a very small number of people in society – the richest.
Along with private banks, the Bank of England also has the power to create money in our economy. In fact, when asked to guess, most people think money comes from the central bank. But this only accounts for roughly 3-5% of the money circulating in our economy – the notes and coins in our wallets.
But after the financial crisis, and again after Brexit, the Bank of England started a money creation programme worth billions of pounds to try and help the economy resist any shocks. The Bank has created a total of £445bn in this way, and decided to spend it into the financial markets. This is known as Quantitative Easing, or QE.
And the impact of QE? Like most private bank lending, it simply pushed up property prices and stock markets, making the richest 5% £125,000 richer, and barely reaching the real economy and most people in society.
This is the crux of the Positive Money argument. Known as monetary financing, we argue that there is no reason why the £445bn of new money created by the bank of England through QE should not be directed to the real economy. This would go much further to boost wages and create jobs. The Bank of England has the power to create money and spend it on things society needs. Forward-thinking economists are gathering around two main ideas for how this money could be spent into the real economy.
The first is via government spending on infrastructure. The Bank of England would give new money to the government who would spend it on infrastructure needed in society: for example, affordable homes, a green energy programme, or schools and hospitals.
The second method has been termed ‘helicopter money’, where every person in the UK receives money directly from the government. This could be done in a number of ways. For example, it could be facilitated by HMRC through tax, or the government could enable a digital cash transfer to every person in the UK. If the £445bn created by QE was spent in this way, every man, woman and child in the UK would have received £6000. And research shows that this method would have been up to 14 times more effective than QE at boosting GDP.
Positive Money argues that monetary financing should be ongoing, and that when the Bank of England’s Monetary Policy Committee meets every month to set interest rates and consider doing more QE, they should scrap QE and instead consider how much new money to create for the real economy.
Helicopter money can be confused with another policy, known as Universal Basic Income. They are two related proposals that have gained a lot of attention over the last year.
The difference between a universal basic income and a helicopter money cash transfer to households, is that helicopter money is a solution to broken monetary policy and challenges the idea that we should ever have a recession. It also takes us a step towards radical reform of the monetary system. The amount given out to households, and the timing of it, would vary depending on the needs of the economy. Universal basic income, however, is a solution to problems of social security, work, and brings forward the idea of economic rights. It would be a fixed amount of money transferred regularly to individuals.
Positive Money’s role in the basic income debate is to debunk one of the main arguments often used against the idea of a universal basic income. That is: ‘we can’t afford it’, or where would the money come from?’. Because if the government decided it wanted to provide a universal basic income, it could. There’s much work been done to show that a low-level basic income would be affordable based on current government tax income. And we have shown that the state could fund part of a universal basic income through monetary financing, or ‘helicopter money’. Once you understand where money comes from, the lack of money argument does not stand up.
Positive Money has always argued, however, that it would be dangerous to fund a universal basic income entirely through helicopter money, because the latter is a monetary policy tool, focused on financial stability and keeping inflation stable, so the amount created each month would vary. And this would be no good for a basic income, because people would rely on a basic income for their basic needs, so it needs to be constant and certain, and not dependent on the macroeconomic outlook of the economy. But, monetary financing could form part of the initial funding solution for a universal basic income, whilst we transfer to such a system. Government income from taxes could and should form the majority of the funding.
There is huge misunderstanding around how money is created, and the idea that it’s a finite resource. Positive Money does research and campaigns for a money and banking system that supports a fair, democratic and sustainable economy. We don’t have all the answers, but we believe a significant issue is how money is created. Currently it’s being created in the interest of private banks, and keeping stock prices and property bubbles pumped up. Instead, money should be created in the public interest and spent in way that is beneficial to all of us. If the government knew how to and wanted to, it could build enough affordable homes, transition to a greener economy, and build a fairer society.
Article written by Rachel Oliver 14th September 2017
You can read more about Positive Money’s campaign and research agenda at www.positivemoney.org.uk