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Rachel Oliver of
Positive Money

"I think if you have any passion and fire at all and care about changing the world then go use whatever skills you have for a cause that means something to you because I can’t think of anything more valuable to do with your time."

Until the economic crash of 2008 I, like many other people, had done my level best to avoid the subject of money and money creation all together. It was a topic for economists, government ministers, financiers and other people with an unhealthy relationship to Microsoft Excel. It wasn’t for me and I wasn’t for it, a mutual understanding that served both sides well. So after the crash, like many others, I was left in a position of knowing something catastrophic had happened, but not really knowing what, why or how…and I wasn’t alone.

It was in the void left by this lack of public knowledge that Ben Dyson decided to start a blog in an attempt to  try to answer peoples questions. In particular he sought to redress what he saw as a distinct lack of understanding about the actual mechanism by which money in a modern economy is created.

The blog gained some popularity and eventually Ben founded Positive Money, a not for profit organisation campaigning for a fair, democratic and sustainable money system.

To understand what Positive Money are trying to achieve you need to understand some widely unknown basic information about our current financial system. These basics are covered brilliantly and in more depth on their website (here and here) but the gist is as follows:

As Positive Money describe it there are three dominant ideas about how banking works in the UK which break down as follows…

Piggy bank

You put your money in and it sits there waiting for you and when you want to spend it you go and get it out again.

Middle man

The bank takes the money you deposit with them and lends it to people who need to borrow money, charging the borrower interest on the loan and paying some of that interest to the saver. This implies that the bank is reliant on the deposits of it’s savers to make loans. If the bank doesn’t have any deposits it can’t make any loans.  

The Money Multiplier

The previous two models form the basis of the majority of people’s beliefs about how banking works, but a more sophisticated understanding, taught to most economics students, centers around the money multiplier model.

This is the idea that, rather than only being able to lend a pound out for every pound that is deposited, instead a bank can make as many loans as it wants as long as it has a specified fraction of the amount on loan in its cash reserves. For example, if the law states that a bank must have 10% of a loan amount in its reserves and that bank made a loan of £1000, then it must have £100 (10%) of cash (base money) in its coffers.

This model means that the money supply can grow without the central bank printing more money. Imagine that a loan of £1000 is then used by the person who borrowed it to buy a car from a dealership. That dealership might then deposit that £1000 in their own bank account. This allows the dealership’s bank to make another loan of £900 (because they have to keep 10% of the money in their reserves) even though there is no new base money in the economy. Essentially money has been created out of nothing. The process continues with the amount of money available to lend by the banks getting smaller and smaller each time. When the process is complete, for that original £1000 of base money that was added to the economy the money supply has increased to nearly £10,000.

The Money Multiplier Model

The Money Multiplier Model

In this model the Bank of England (the state) have two mechanisms by which they can control the money supply and the amount banks (privately run entities) can lend.

Option one is to print more base money and add it into the economy, which would mean banks could make more loans.

Base money

Increasing base money leads to more total money in the economy.

Option two is to change the percentage of base money the bank is required to have in reserves for every loan it makes. For example, if a bank was required to hold 20% in reserves then the money supply would only increase to £5,000 for every £1000 of base money as opposed to £10,000 for a 10% requirement.

Reserve ratio

Decreasing the reserve ratio increases the total money in the economy.

As stated above, this is the model still taught to most graduate level economics students…which is fine but for one small thing…

According to Positive Money, this model represents a complete misunderstanding of how modern money creation works.

Why is it wrong? Well, there is no reserve ratio in the UK anymore and there hasn’t been since it was abolished in 1981. This means that if a bank is under no obligation to have a certain amount of money in its reserves then there is no upper limit on the number of loans they might make. With no reserve ratio, adding or removing base money from the economy by The Bank of England no longer has a direct relationship to the size of the overall money supply.

In light of this it’s Positive Money’s assertion that, the power to control the money supply and thus the economy of the UK has been taken from the the Bank of England (representatives of the people) and ceded to the banks, meaning that control of our economy is now in the hands of commercial entities motivated by short term profits and not necessarily the needs of society in general.  

We sat down with Rachel Oliver, Lead Organiser at Positive Money to discuss these ideas in more detail and learn why we should all be paying attention.

Rachel Oliver of Positive Money

Tell us about Positive Money. What inspired the organisation and what are its aims?

Positive Money is a movement for a fair, democratic and sustainable money system with the aim of making money work for society. We are a not for profit campaign and research organisation.

Through our supporter base of 35,000 people, 60,000 followers on Facebook and 30 active local groups we work together to raise awareness of how, currently, money is created by banks, why this is a problem and how we can create a monetary system that works for and not against society, business and the environment.

What are the aims?

With the abolition of the reserve ratio in the 80s, the power to create money is now in the hands of commercial banks motivated primarily by profit and not the betterment of society. This has contributed to all sorts of problems, such as high personal debt, government debt, unaffordable housing, high unemployment, growing inequality and ultimately the 2008 financial crisis itself. We believe that instead, the power to create money should be put into the hands of a democratic, transparent and accountable body, a sovereign money creation system. This body could then insure that money created into the economy would be used for the benefit of society as a whole rather than just the financial sector.

Positive Money’s three key aims, are:

  1. Prevent the private creation of money or money substitutes.
  2. Transfer the power to create money from the banking sector to a democratic, transparent and accountable process working in the public interest.
  3. Ensure that new money can either be spent into the economy free of corresponding debt. Alternatively, if required, newly created money could be lent in, for on-lending into the productive sector.

Can you explain the distinction between the real economy and the financial economy?

When we talk about the ‘financial’ economy we use the acronym FIRE which stands for Financial, Insurance and Real Estate. The ‘real’ economy centres around things like ordinary businesses, housing, schools, hospitals, places people live, etc.

A commercial bank is motivated by generating profit for their shareholders which they do by investing in areas that will give them the largest return but not necessarily areas that benefit most people.  

Property for example, doesn’t move, it doesn’t create a job, nothing happens to it, there’s no change there, but the value of it is going up because we’re not building any more houses.

So technically it will seem that the economy is growing, but it’s growing in a world that is completely disconnected from most people’s experience, it’s just pumping up those bubbles. So this growth is not having any positive impact on people’s lives aside from the very few people who work in the financial sector or who are hedge fund managers or who depend on bonuses.

Creating a wind farm, which would create jobs and help us tackle climate change, doesn’t generate quick profits for the people who have the power to create money, the whole system is driven against society’s interests and for the interests of the financial sector.

"We polled MPs and 70% of them thought that only the Bank of England could create money. But as we’ve explained, the vast majority of money in the economy is created by commercial banks."

Why do you think it’s important that people understand money creation better?

Fundamentally if we’re to avoid another financial crash, solve the housing crisis, reduce inequality, tackle climate change and move towards a more sustainable environment, it’s vital that we change the way that money is created into our economy. The more we can get people talking about money creation, economists, the media, politicians, civil servants, ordinary people talking to their friends, the sooner we can start to have a conversation and come to a collective realisation that these changes needs to happen. It’s then much more likely that the government of the day will feel compelled to make the changes that our society so desperately needs.

For me, when I learned about Positive Money, it was a bit of a light switch moment. It’s something that so many of us don’t think about…where does our money actually come from or who’s got the power here? I think people have this sense that something’s not right, the banks seem to have an awful lot of power. They didn’t get punished that much after the crash and yet it was a lot to do with what they were doing. If you just unlock it that little bit, you see that actually it’s because this is where most of our money is coming from and going and you realise, if we don’t want to head towards environmental disaster, if we don’t want to fall on hard times because people feel so economically disempowered and angry at the growing level of inequality, it’s a relatively simple change.

How do you explain complicated ideas?

I think talking in analogies is often a helpful way, if you can compare a concept to something that people are more familiar with. Also, trying to remove the jargon, so words like bonds, assets and liabilities etc. I think that that’s something that Positive Money is trying to shift towards.

We’re getting to the point where we really need to start appealing to a more populist, mainstream group. We’re doing a piece of work at the moment where, rather than starting with the issue, we’re trying to communicate by starting from where people are at. So if someone is really angry because they can’t afford their rent, or there are no homes being built or they’re riddled with debt because they’re a student, we can use that as a starting point for a conversation about money creation.

Why do you think there so much misinformation and misunderstanding as regards money creation?

I think there are a few reasons. One of them is that an accurate description of money creation has completely disappeared from economics courses at schools and universities over the last 30 years so most economists don’t actually understand how it works.

This is starting to change, there are groups such as Rethinking Economics which is an international network of student organisations who are challenging their institutions to teach them alternative forms of economics rather than just this one model. The fact that money creation was not something that was on the syllabus was actually documented in a Bank of England paper, so you’ve got economics students leaving university that don’t even know this stuff.

Neoclassical economics is the dominant economic school that is being taught and that has an awful lot to do with the position we’re in now in terms of huge debts, an over reliance on the financial economy, huge levels of inequality. Couple that with the financial deregulation that happened at the end of the 90s and early 2000s and that’s when you get an economic crash. Rather than rethink the model, it seems like the answer to that crisis was more of the same. More neoclassical economics because that’s what both sides of the political spectrum have bought into. That is what needs to change, we need to build a consensus of a new type of economics and make sure other forms are being taught.

Another reason is that the topic of money creation is seen as taboo, so most people don’t talk about it. There’s a sense of secrecy about how money is created. Positive Money has been working to pull this conversation into the mainstream for the past six years.

Also, we know that politicians don’t understand money creation that well either. We polled MPs and 70% of them thought that only the Bank of England could create money. But as we’ve explained, the vast majority of money in the economy is created by commercial banks.

If you ask where money comes from, I think most people wouldn’t know. Money is like a promise from me to you, we both agree that this £5 has value, it’s something we use every day, it’s so fundamental to our existence but we take it for granted. A lot of the jargon that surrounds economics and finance in the media results in people just switching off and not wanting to engage in the topic.

"A lot of the jargon that surrounds economics and finance in the media results in people just switching off and not wanting to engage in the topic."

Do you see a link between the state of world politics at the moment and the issues Positive Money seeks to address?

There are an awful lot of issues that have contributed to, say the Brexit vote or the Trump vote, so we have to answer this question sensitively. There are a lot of competing ideas about what caused these results. However, I believe that, yes, there is a link between world politics and what we’re trying to address and a very strong one.

There’s a growing sense that the ill feeling that many people have at the moment stems from an economic and democratic system that isn’t working for them but is working extremely well for a very small amount of people, many of whom seem to not play by the same rules. People feel a lack of power over their lives, unrepresented by our current politicians and political establishment. They know that our economy is skewed towards an oversized financial system and property bubbles but they feel powerless to change that.

So if you look at the example of quantitative easing, essentially money being created out of thin air and pumped into financial markets, whilst simultaneously communities across the UK are having austerity imposed on them, it seems hugely unfair. If the Bank of England can create money for the richest it can create money for the rest of society too.

The changes that Positive Money are campaigning for would lead to a democratic money creation system, one where the sovereign money body can create money in a way that works in the interest of the people and society and work against a lot of the forces that are making people feel so disenfranchised and angry right now.

What have been the biggest hurdles in getting to this stage?

Initially, one of the biggest hurdles was being thought of as credible. Because nobody was talking about money creation after the financial crisis, we were labelled as radicals so it was quite hard to pull that topic into the mainstream. It’s that thing isn’t it, of being able to go against the grain and say this is really important, we should be talking about it, when nobody is. People don’t like to be told that they’re wrong.

What are the main challenges going forward?

I think it’s convincing ordinary people, civil society organisations, politicians, media, journalists, commentators, columnists that this is an issue that they need to engage with because the changes that Positive Money are proposing are so fundamental to the changes that a lot of those people agree are necessary for a stable and sustainable economic future.  

As we talked about before, one of the biggest challenges is in finding communication tools that resonate with people, especially in a time of huge information overload. I feel like if you try to explain Positive Money in 10 seconds you get a look on people’s faces like, what? But if you explain it in 30 seconds, you get a ‘penny drop’ moment. So part of the challenge is the fact that we all want immediate answers and a quick fix and this requires a bit more time to engage with properly.

What have been the highlights for the organisation so far?

One of them was getting the Bank of England to admit that money was created by commercial banks. In March 2014 the Bank of England released a report, this is on our website, called ‘Money Creation in the Modern Economy’. That was a breakthrough because it was an actual recognition of where most of our money comes from.

We helped instigate the first debate on money creation in parliament in over 70 years which is fab. In the last couple of months we’ve done two events at the Labour and Conservative party conferences and that was a real sign that talking about monetary policy has broken into that mainstream discussion.

In February (2016) we hosted an event in the European Parliament on the Eurozone campaigns, QE for people in the Eurozone. And again, it’s just a sign that if you can get important people along to a debate you realise that it’s something worth talking about.

We’ve also got 30 local groups around the UK who regularly meet to discuss and take action on the issues that Positive Money promotes, so that’s amazing, that people want to talk about this stuff and they’re really active.

This year as well we trained a network of 25 speakers who are all trained to give talks on this topic around the country, so they’re out and about as well. There’s definite progress happening.

"People feel a lack of power over their lives, unrepresented by our current politicians and political establishment. They know that our economy is skewed towards an oversized financial system and property bubbles but they feel powerless to change that."

What are your future plans?

At the end of the day our goal is to grow and spread our message as much as we can. More specifically we are going to be continuing to call for a kind of Quantitative Easing for people. This is an opportunity for us to be saying, you are giving money to financial markets, why on earth are you not giving it to projects and people and communities that need it? Trying to change the money creation system is quite a tall ask for where we’re currently at, so if we can bridge that to a policy that is happening right now, we can use that as a stepping stone to the ultimate aim.

With our globalised financial system we’re unlikely to be able to go at it alone so we’re also building an international movement. We have a member of staff dedicated to campaigning in the Eurozone and we have set up the International Movement for Money Reform, which has 22 countries in it, so that’s groups of volunteers in other countries who are working on similar campaigns to us.

In October our Executive Director went to Washington for a week and did a lot of scoping about work that might develop in the US which is exciting. There’s a campaign out there called Fed Up which is worth looking at, which is about the Fed, the US equivalent of the B of E.

What does an inspiring Britain look like?

For me, an inspiring Britain is one that champions individual and societal happiness and environmental sustainability for the many and not the few. A Britain that doesn’t accept high levels of inequality and a lack of representation in our institutions but rather creates institutions that are democratic and operate for the wellbeing of the individuals within that society and our environment. That to me is an inspiring Britain because it says we care about each other, we care about our happiness, we care about protecting our environment for future generations. Monetary reform plays a huge part in realising that vision.

Do you have any advice for your 21 year old self?

So many friends that I talk to about what I do, might look a bit baffled at first because they’re unaware that this kind of work exists and explaining the monetary system isn’t the easiest thing to do, but the majority of them really appreciate that I do something that is meaningful and I care about.

So many people in their early 20s feel compelled to get into a career and don’t necessarily think about the bigger picture and what it is they’re contributing to or whether it has any meaning at the end of it. I think it’s a huge privilege to work in something I care so much about.

As a 21 year old I was just really angry at the state of the world and I needed to channel that into something and came across good organisations doing good stuff. It can be draining and disheartening sometimes but it can also be hugely rewarding. I think if you have any passion and fire at all and care about changing the world then go use whatever skills you have for a cause that means something to you because I can’t think of anything more valuable to do with your time.

Positive Money

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137-149 Goswell Road
London EC1V 7ET
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