Economics of Independence Westminster Mismanagement

Is it time to end the private banks money monopoly?

Screen Shot 2015-12-18 at 10.37.22THERE is a fundamental flaw at the heart of our economic system, one that makes the system simultaneously unstable and prone to cyclical recession whilst also distributing wealth unevenly thus damaging economic growth and encouraging economic exclusion.

Ninety seven per cent of all money circulating in the economy is created not by the Government but by private banks through loans. Banks don’t lend the money they have on deposit (there isn’t enough of it) they effectively create money out of thin air in order to meet the lending demand and when you pay the loan back they delete the money they created to lend you, but keep the interest as profits. Given that banks can charge interest on money they don’t actually have it follows that the more money they create in the form of loans the more interest they get paid and the more profit they can make. The system therefore encourages banks to lend at levels that are unsustainable, allowing people to consume more causing inflation and to out-bid one another for houses, causing property bubbles and inevitable crashes. Every so often the market realises that lending has reached an unsustainable level and the banks panic, stop lending and the boom-and-bust cycle goes around one more time.

Money is a socio-economic construct, a complex IOU system that we believe in because it is convenient to do so. Bank notes are nothing more than IOUs and money transferred electronically and agreed as debts, such as mortgages, don’t really exist either, it’s just an electronic promissory note from an organisation which doesn’t actually have that money. Have you ever wondered why your £10 note states that “The bank promises to pay the bearer on demand ten pounds sterling at their head office”. In the late 80s I walked into the HQ of the Bank of Scotland, handed over a £10 note and demanded sterling to see what would happen, the lady behind the desk smiled sweetly and turned to her colleague and said: “We have another first-year economics student here”. If money doesn’t actually exist outside of a statement of trust then the big questions this raises are why do we trust banks? Indeed why do we trust in money? And what would happen if only governments were able to create new money?

The boom-and-bust cycle is a horrendous problem and can cause significant stress and hardship for those that lose jobs and their homes when the busts come. It is often argued that many of the world’s most successful companies were founded in the teeth of recession and took advantage of choppy waters to introduce new business models and cost, saving technologies but that doesn’t make the boom-and-bust cycle necessary, just an opportunity for a few. Making the claim that they could “end boom and bust”, Gordon Brown and Alistair Darling decided to de-regulate much of the financial sector allowing banks to lend more freely and to create more money from loans. This, as we all now know, led to a bigger, longer boom as people were able to easily access personal credit and then, not unsurprisingly, to a bigger, longer bust. This mistake by Brown and Darling may be viewed in generations to come as the biggest UK regulatory mistake of all time. This bigger, longer bust means that we may not have completed the required recovery before the next natural bust or major housing bubble burst and if the London housing bubble reaches critical mass in 2017, as I have previously warned, then there just won’t be any way out.

Screen Shot 2015-12-18 at 10.39.53Following the crash the need to inject confidence back into the banking sector meant that governments all over the world had to borrow to bail out the banks and create massive interest charges on the government. A crucial element of the refinancing measures was the use of quantitative easing which is often described as printing new money but actually just means issuing government bonds, mainly to pension funds, to increase the money in circulation, in the hope that it will have a knock-on effect of increasing bank lending. However, there is a huge flaw in QE. Using QE to buy gilts meant that government interest payments on debt fell, the banks became more solvent, and stock market prices were forced upwards – all good. However, increased asset prices boosted the wealth for private owners of assets with the top five per cent of households holding 40 per cent of assets, increasing inequality – a major cause of economic instability.

So the fact that privately owned banks are allowed to almost magically create money in the form of deposits every time they arrange a loan, that they are not just limited to lending their reserves, means that the system encourages unsustainable “stupid lending”. Add to that the fact that they are guaranteed to be saved from failure by the tax-payer and that the government’s main way of creating new money in a crisis increases the net wealth of the rich means that the system not only creates cyclical recessions, it encourages the distribution of wealth from the poor to the rich. This makes many people economically inactive and dependent on credit, slowing economic growth and trapping people in debt.

Screen Shot 2015-12-18 at 10.59.20

70% of GDP is driven by consumer spend – who’s economy is it anyway?

The economic system is broken: not just taking a dip or struggling to recover, the fundamental flaw is now a crack that can’t be papered over and major reform is needed now. There are two ways to respond. We can tighten regulation, separate casino banking divisions from high-street deposit operations, curb bonuses and increase the link between loan book and reserves – pretty much the very least that can be done, though these mini-reforms won’t solve the bigger problem.

But if we really want to make a difference, we have to start gradually moving towards creating a state monopoly on money creation. If the state creates all money on behalf of the people then banks can lend money that they have on deposit, and charge a fee for managing people’s money.

The banks can also profit from stock market investments that are lower risk and longer term and therefore more beneficial to building long-term business growth and employment. Government spending could be higher without costing billions a year in interest, it would significantly reduce business cycles, stabilise the economy, massively reduce government debt, make quantitative easing for the people a highly effective economic stimulus tool, make a basic income paid to all more affordable and, basically, democratise the finance system.

Why do we need such radical change? Well – if there is another major shock soon it won’t be a bust before the boom, it will hit more like a thousand-year storm. If we haven’t restructured our economy from the outdated 170-year-old banking system that we use… we won’t be ready.


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About the author

Gordon MacIntyre-Kemp

Gordon MacIntyre-Kemp is the Founder and Chief Executive of Business for Scotland. Before becoming CEO of Business for Scotland Gordon ran a business strategy and social media, sales & marketing consultancy.

With a degree in business, marketing and economics, Gordon has worked as an economic development planning professional, and in marketing roles specialising in pricing modelling and promotional evaluation for global companies (including P&G).

Gordon benefits (not suffers) from dyslexia, and is a proponent of the emerging New Economics School. Gordon contributes articles to Business for Scotland, The National and Believe in Scotland.


  • A very good piece, the only strong money system is one where the power to create money rests solely with the state. Hopefully the state will also be democratic and well managed to complete the picture. The underlying history of money creation is portayed well in the Bill Still 2009 documentary “The Secret of Oz”. Unfortunately a watch of this will also convince you that the power of money creation is not one the banks will willingly or easily relinquish. The first step is to raise public awareness that banks magic-ing money out of thin air is actually the elephant-in-the-room problem of our bubble economy.

    Bill Still concludes that there is a simple and easy solution to the global debt problem or that of any currency-issuing nation state. That is to monetise the debt. You first create a state bank with the sole power to create money. All government debt to private institutions is paid off by this bank. Private banks are also told that from now on, all loans on margin that are not actually covered by reserves must be covered by loans from the state bank. Thus instead of banks pocketing interest on money they never had, they now have to go cap in hand to the state and pay back at least the base rate interest on any extra money they lend out. These combined measures have the effect that everything can carry on as normal, except that private banks no longer have the gravy-train of interest on loans of margin-money. Neither does the Government have to come up with interest payments on the national debt, since they just took out a loan from themselves for that amount. Finally, it is important to realise that with state-controlled money creation comes great responsibility. There is a sweet-spot, a “right” level of annual money creation, probably a low single-digits percent of the total money supply. Getting that right would be considerably easier than trying to pay back the £1.6 trillion we don’t have.

  • Good article however during the last indy ref it be ame apparent that aSTRONG CASE WAS NOT MADE REGARDING SCOTLANDS ABILITY TO FINANCE AND MANAGE OUR COUNTRY.
    It is time for all the financial organisations in Scotland who are likeminded in Scotland gaining
    Independence to pull together a monetary policy to put before the Scottish People at the coming Election

    • I disagree on your first point a strong case was made it was just shouted down by the No campaigns negativity which was presented as fact by the media when it would not have stood up to any fair scrutiny. As for the need to go further than simply showing that Scotland can afford independence I agree wholeheartedly that we need to create a positive economic vision for Scotland and that is the key goal of our Scotianomics project that we announced last month. Watch this space.

  • Agree with this piece. Very interested in what the group ‘Positive Money’ are saying on this and other issues and hope they can get a proper hearing at some point.

  • Why do English notes not say sterling? Just promise to pay the bearer X pounds. Pounds of what? Mud? Potatoes?

    • In order to print Scottish notes the Scottish banks use a price of legislation that dates back hundreds of years (1844 off the top of my head) they can print notes as long as they state that it is sterling that the note will be redeemed for, as the Bank of England is nominally the only printer of sterling. They also have to deposit gold with the BOE to the same value as the total sum of notes printed. In other words the deposits guarantee the Scottish banks promissory notes. Also if the Scottish banks were to be told to stop printing sterling then the BOE would have to give gold back to the Scottish banks to the value of all notes in circulation.

      • That is a sobering thought. There is a certain reputation for rectitude in the Scottish way of doing things that is quite absent from the slippery spin of English political thought. I would like to have known more of the Scottish way of life, particularly with regard to the priority goals of education, social emancipation. commitment to green energy and the implementation of the COP 21 conference outcomes. I’m very much interested in the ideals of solid investment in the future as opposed to the English model of exploitation and grab or bust today.

        I’ve been an ex pat for nearly 12 years and am saddened to see the predicted decline in English policies. I’d like to see if there are correspondence and university degree courses in further and higher education, available for online students world wide as with the free online courses from the American and Dutch universities. It is so important now for people to be educated in order to take responsibility for our common future and to protect themselves from unscrupulous, lying governments, that any move to equalise opportunity globally would be very welcome, and could itself generate income in the future. As an example, see the development of
        Thanks for making these articles, and your tjoughts, available in the public domain online.

  • Great article. Part of a short-term solution could be the ScotPound proposal from the NEF. They suggested a debt free digital currency which could run alongside the £. There were definite benefits on offer for businesses in terms of lower transaction costs.

    • The think is that if we maintain a conservative approach to economics overall then ideas such as parallel e-currencies, real QE for the people (not Corbins increased capital spend version) and basic income will clash against the base system, a bit like trying to run cutting edge graphics programmes on PC with a chip form the 90s – we need to look at the whole operation system and bring a suite of changes in together of they will not be fully effective. It may be that another big crash will start people thinking that a new economic system is required.

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