We need Money Reform, not Quantitative Easing

With the Bank of England base rate fallen now to 1%, the Bank and the Government are fast running out of ways of stimulating lending in order to get more money into the economy.

This has been recognised for some time, indeed, if base rate reductions were going to work at all, they would have worked when the rate was 2% or 1.5%. So it is that the frightful phrase 'quantitative easing' has entered the vocabulary of economic commentators.

This has been explained by some as 'printing money', but in fact it might not involve any increase on the Royal Mint's normal annual increase of one to two billion pounds-worth of extra legal tender. Instead, it might just involve the Bank of England issuing bonds in exchange for some of the commercial banks' rather more dubious assets – their toxic sludge.

With some nice AAA rated Bank of England bonds as assets on their books rather than the loans and mortgages of their more insolvent customers, so the theory goes, the commercial banks will be more willing to lend to each other and so facilitate their lending to their retail customers. There is a widespread belief that the commercial banks are currently unwilling to lend.

This is not quite the full picture. In truth, the commercial banks are more than willing to lend, but only to people and businesses with good-credit ratings and little risk of default. This is nothing more than we should expect of our banks. They should only lend to good risks. Indeed, the phrase 'to bank on it' rather implies that a total lack of risk should be the foundation of banking practices. The commercial banks have been roundly, and rightly, condemned for lending to risky borrowers over recent decades.

Unfortunately, both in this country and around the world, the supply of credit-worthy, low-risk borrowers has almost totally run dry. Never mind about an oil shortage crippling the economy at some point in the future, a world-wide shortage of solvent, prudent and obedient borrowers is crippling our economy now.

So quantitative easing in the form of Bank of England bonds is unlikely to get things going. It will doubtless be tried, as the powers-that-be run through their diminishing range of options, but it will fail. So the next step could indeed be the rolling of the printing presses.

This will get the economy functioning again, but the cost will be high. The cost will be high levels of inflation with all the insecurity and industrial action that we experienced during the 1970s and 80s.

The cause of this inflation will not be the extra bank notes themselves, but the fact that for every £1 of legal tender issued, the commercial banks will be able to conjure into existence £30 of bank credit. In other words, with the banking system unchecked, the commercial banks will be able to cause massive inflation through their current standard banking practices.

The current money supply serves to illustrate this. The total amount of sterling legal tender in circulation within the economy (including Scottish and Northern Irish notes) is about £50 billion pounds. However, the total UK money supply (M4), as reckoned by most economists and the Bank of England's own statistics, is in the region of £1,700 billion, over 30 times as much.

Without the capacity of the commercial banks to create credit, our money supply, along with prices, wages and savings deposits would be 3% of what they presently are. In other words, we would not have had the inflation of the past 40 years.

The Money Reform Party advocates that our money supply should be created solely by a public agency as legal tender and that commercial banks should be limited to lending only the legal tender in their possession. This is called 100% reserve banking to distinguish it from fractional reserve banking. (Although, for the 10 countries of the Basel Capital Accord, fractional reserve banking has been replaced by capital ratios.)

To cover all the existing debts, this would indeed involve creating a lot more legal tender, although it might only need be in the form of billion-pound bank notes, or it could probably be done electronically. This extra money would not flow into the wider economy, because only so much would be created as would have to be borrowed by the commercial banks to cover their existing loans. So it could not be used for further lending. Thus a cap and control would be placed on the money supply. There would be no risk of inflation.

Indeed, it is the view of the Money Reform Party that the public agency that is charged with creating and issuing the nation's money supply should be charged with maintaining inflation at 0%. Inflation is a necessary feature of a money supply consisting of bank credit, hence the current Government target of 2% and not 0%. It would not be necessary with a debt-free money supply, and only a 0% inflation rate is fair to both savers and borrowers.

The economy would be revived not through increasing the money supply, but through stripping out hundreds of billions of pounds worth of debt, both public and private, together with increasing Government spending, notably through investment in environmental protection measures, and reductions in taxation on low and medium incomes.

This is totally different to quantitative easing which is designed to keep the debt-based system largely in place and is deliberately intended to increase inflation. A low level of inflation is regarded as an essential aspect of a dynamic economy by conventional monetary theorists.

The current, debt-based money supply has been described as a form of slavery, debt-slavery. Quantitative easing is akin to a slave owner who, having flogged his slave nearly to death, decides to lay off the lash for a while to enable his property to recover sufficiently to be set to work again. Money reform is akin to abolishing slavery and giving each former slave a trade with which to support themselves in freedom and prosperity.

Both of these actions are intended to ease the lot of the slave, but their difference is quantitative.