[Book Review] Modernising Money | Positive Money

Positive Money launched their book Modernising Money at the conference with the same name, which took place on January 26. The book is on sale from now on, I have had the opportunity to read and review an early copy of the book.

Modernising Money (MM)’s core thesis is that the financial crisis is actually a monetary crisis. MM endeavors to explain why this is so, and proposes monetary reform. MM is written by Ben Dyson and Andrew Jackson, founder and head of Research of the NGO Positive Money, the UK organisation who campaigns “…to raise awareness of the connections between our current monetary and banking system and some of the biggest social, economic and environmental challenges that we face today.” The book is inspired by the book Creating New Money (2000).

MM was much needed because it draws attention to the extreme differences between the historical reality of money and the textbook story which is taught to high schoolers as well as students of economics. In 2011, anthropologist David Graeber also pointed to this difference in his brilliant book Debt: The First 5.000 Years. Furthermore, MM raises awareness of ‘money myths’, namely that 1. the way most people perceive banks is way different from how banks actually operate, and; 2. how the textbook theory of money creation by means of the fractional reserve is incomplete. Furthermore, MM points to the tendency of economists to leave the money system out of their analyses, is if it is ‘neutral’ and has no effect on the economy Money is not natural, it is not neutral – it is a (political) choice. This point is also raised by Graeber and later by Ruskoff in his book Monopoly Moneys. In other words, the current model of money is a powerful default.

Many people think of a bank as a pure intermediary, taking in money from one person and loaning out that same money to another person, while in actuality banks create a new amount of money each time a loan is made, something that MM calls the privilege where society ‘rents’ the money supply from banks. The accounting principle by mean which banks create new loans (and money) is based on fractional reserve banking, the principle which is in most economics textbooks. However, MM points out that this theory of so-called ‘high-powered’ central bank money, the fractional reserve banking practice and the money multiplier is incomplete. It seems to suggest that the central bank is neatly in control of the money supply, where it is not according to the endogenous money theory, which leaves more room for commercial banks in creating money.

MM continues by explaining the adverse effects of deposit insurance as the government insures money deposited at commercial banks up to a certain amount. Furthermore, MM mentions the moral hazard that results, as this insurance has an effect on both the people who deposit money as well as the banks. MM states that the government support for banks in the financial crisis has lead to a ‘bank subsidy’ of 300 billion pound in the UK alone (2012, p. 150). As the book progresses the authors link the money system to democracy, as the (pre)allocation of money accounts for power differences. On a more practical level, MM explains that banks have an unevenly distributed power to shape the future direction of the economy via their privilege of creating loans and allocating this new money to businesses (or not).

MM also proposes actual monetary reform, where it wants to:

• Create a stable money supply based on the needs of the economy
• Reduce the burden of personal, household and government debt
• Encourage investment in the real (non-financial) economy
• Re-align risk and reward
• Provide a structure of banking that allows banks to fail

In short, the authors of MM propose to end the privilege granted to commercial banks where they create money through deposits. In the reformed system, the central bank creates the money supply, and commercial banks offer both Transaction and Investment accounts. This would allow banks to fail, as the Transaction Account information is held at the central bank and investors would deliberately allocate money in Investment Accounts for investing. In other words, making payments can no longer be endangered by investments gone wrong.

What I like about MM is how it has a good professional tone, where it both does not make things too simple and also refrains from raging against ‘those evil banks’. With over 300 pages, the book has limited space for tackling such a hard subject, but it is also quite broad because it goes into related things like housing, mortgages and speculation. A point of improvement would be to stick to money. MM is quite similar to the content of the book that inspired it, Creating New Money as well as the book Where Does Money Come From?, which is not surprising given that Andrew Jackson co-authored both books.

A point of discussion remains the content and direction of monetary reform. The authors propose a system which is more centralized than the current system, with the central bank in control and a special Money Committee given the task of managing the money supply. This further centralization is debatable, given that this centralization would not necessarily bring the best democratic results. In this light it is worth looking at how the digital currency Bitcoin actually distributes the creation and management of the ‘money’ supply via its user community. We already have seen the success of Kickstarter – why not actually ‘Kickstart’ the creation and allocation of money according to the will and wisdom of the crowd?