 Even the best, the most honourable and the most honest, do things which would land the rest of us in jail. Nemihaus in France is a large grain silo. After the harvest, farmers deposit grain in it. The silo gives them a certificate for every ton of grain that they deposit. They can withdraw that amount of grain whenever they want by presenting that certificate. If the silo owner issued more certificates than the grain he kept in his silo, he would go to jail. But that is effectively what bankers do. They keep as reserves only a fraction of the money deposited with them, which is why we call the system the fractional reserve banking system. Murray Rothbart, a much-neglected Austrian economist in this country, therefore said very flatly, banking is fraud. Fractional reserve banking is fraud. It should be outlawed. Banks should be required to keep 100% reserves against the money they lent out. Now, I actually reject that conclusion because I think there is a value in what banks do in transforming short-term savings into long-term investments. That is socially valuable and that is the function banks serve. But we need to recognise the second distinctive feature of banks which arises directly from the fact that they only have a fraction of the reserves against the loans they make. That is that banks individually and collectively are intrinsically unstable. They are unstable because they borrow short and lend long. I have been constantly amazed throughout the financial crisis hearing intelligent people say that the problem with Northern Rock or RBS or H-Bars or the German banks or the Swiss, French, Greek and other banks which ran into problems was the result of them borrowing short and lending long and they shouldn't have been doing it. As if this was a deviation from their normal role. But of course banks borrow short and lend long. That is what banks do. That is what they're there for. If they hadn't done that, they wouldn't be banks. Banking works so long as too many depositors don't try to withdraw their funds simultaneously. But if depositors retail or wholesale withdraw or refuse to renew their short-term deposits, a bank will fail. Now if normal companies fail, there's no need for the government to intervene. Their assets will be redeployed in a more profitable use or taken over by a better managed company. But if one bank fails, depositors are likely to withdraw deposits from other banks about which there may also be doubts. And a bank facing a run, whether or not initially justified, will be forced to call in loans or sell collateral causing asset prices to fall, thereby undermining the solvency of other banks. So the failure of one bank may lead to the collapse of the whole banking system. The third distinctive feature of banks is that which was highlighted by my Honourable Friend that banks create money. The vast majority of money consists of bank deposits. If your bank lends your company £10 million, it does not need to go and borrow that money from a saver. It simply creates an extra £10 million by electronically crediting your bank account or the company's bank account with £10 million. It creates £10 million out of thin air. By contrast, when you repay an existing bank loan, that extinguishes money. It disappears into thin air. So the total money supply increases when banks create new loans faster than old loans are being repaid. And that's where growth in the money supply comes from normally. It's the normal situation in a growing economy. Ideally credit should expand so that the supply of money grows sufficiently rapidly to finance the growth in economic activity. But when a bank or banks collapse, they will call in loans which will reduce the money supply which in turn will cause a contraction of activity throughout the economy. So that respect banks are totally different from other companies, even companies which also lend things. If a car rental company collapses, it doesn't lead to a reduction in the number of cars available in the economy. Its stock of cars can be sold off to other rental companies or to individuals. Nor does the collapse of one rental company weaken the position of other car rental companies. On the contrary, they then face less competition which should strengthen their margins. So the collapse of a car rental company has no systemic implications. Whereas the collapse of a bank can pull down the whole banking system and plunge the economy into recession. That's why we need a special regulatory regime for banks and above all a lender of last resort to pump in money if there is a run on the banks or a credit crunch. Yet this was barely discussed when the new regulatory structure of our financial and banking system was set up in 1998. The focus then was on consumer protection issues and systemic stability and the lender of last resort function was scarcely mentioned. That's why the UK was so unprepared when the credit crunch struck in 2007. Nor were these aspects properly considered when the euro was set up as a result established a currency and a banking system without giving the new central bank the powers to act as lender of last resort. It had to usurp such powers more or less illegally. That's their problem. This analysis is not one of those insights which come from hindsight. Some while ago Michael and our noble Lord Howard reminded Parliament and even me I completely forgotten that I was shadow chancellor when the bill that became the Bank of England Act 1998 was introduced. He pointed out that I then warned the House of that and I quote with the removal of banking control to the financial services authority it's difficult to see how the Bank of England remains as it surely should responsible for ensuring the liquidity of the banking system and preventing systemic collapse. And so it turned out. And I added setting up the financial services authority may cause regulators to take their eye off the ball leaving spivs and crooks to have a field day. And so that turned out too. I could foresee that then because the problem was not deregulation but the regulatory confusion and proliferation introduced by the former chancellor resulting from failure to focus on the inherent stability of the banking system and to provide for it. This failure to focus on the fundamentals was not a peculiarly British thing. The EU made the same mistake in spades when setting up the euro and at the very apogee of the world financial system they deluded themselves that instability was a thing of the past. In its global financial stability report in April 2006 just less than 18 months before the crisis erupted the IMF the international monetary fund no less said and I quote there's growing recognition that the dispersion of credit risk by banks to a broader and more diverse group of investors rather than warehousing such risk on their balance sheets has helped make the banking and overall financial system more resilient. The improved resilience may be seen in fewer bank failures and more consistent credit provision. Consequently the commercial banks may be less vulnerable today to credit or economic shocks. Supreme irony is that the pinnacle of the world regulatory system believed the very complex derivatives which contributed to the collapse of the financial system would render it immune from such instability. So we need constantly to be aware that banks are unstable that they're the source of money that if they are that instability lead instability leads to a crash we lead leads to a contraction in the money supply and that can exacerbate and intensify a recession. I give way too many books and I thank my honorable friend for giving way and I'm listening very carefully. Does that mean that the banks are also uncontrollable as things stand? No, they can be controlled. They should be controlled. They're controlled both in being required to have assets and ultimately in the measures government should take to ensure they don't expand lending too rapidly and that's the point I want to come on to because the other thing that are failure to focus on the nature of banking and the nature of money creation the other confusion it's caused is a confusion about the causes inflation and the role of quantitative easing. Because we don't understand or too many people don't understand where money comes from there is confusion about quantitative easing and to some extent the monetarists of which I am one are responsible for this confusion. For most of our lifetimes the basic economic problem has been inflation. There have been great debates about the causes of inflation. Ultimately those debates were won by the monetarists. They said inflation is caused by too much money money growing more rapidly than output and if that happens inevitably and inexorably prices will rise. The trouble was all too often monetarists use the shorthand phrase inflation is caused by government printing too much money. In fact of course it isn't government's printing the money it's banks lending money and creating new money a too greater rate for the needs of the economy. We should have said inflation follows when governments allow or encourage banks to create money too rapidly. The inflationary problem wasn't who created the money but the fact that too much money was created. We're now in a situation where the banks are not lending enough to create enough money to finance the growth and expansion of the economy we need. And that's why the central bank steps in with quantitative easing. And that is often described as the bank stepping in and printing money. And those who've been brought up to believe that printing money was what caused inflation think that quantitative easing must by definition cause inflation. It only causes inflation if there's too much of it. If you create too much money at a faster rate than the growth of output and therefore drive up prices. But that isn't the situation in which we find ourselves oppressive and give way to people. He's making a very good explanation of the different circumstances of the money creation. When it comes to a situation when there is a demand required and he's spoken about the morality and he's spoken about quantitative easing what is his view on the theory of helicopter money and where does money then get spread? Well, I'm rather attractive as a disciple of Milton Friedman, the idea of helicopter money. I think it was he who introduced the metaphor that it would be just as effective if the money were sprayed by helicopters if it were created by banks. And hopefully, since I live quite near the helicopter route to Barsie I will be a principal recipient. But I don't think there is a mechanism available for us to do that but I'm not averse to it in principle if someone can come up to it. But the point I'm making is that either the banks spontaneously or the banks encouraged by the central bank through quantitative easing must generate enough money to ensure the economy can grow steadily and stably. I give way. Given way, it isn't a form of helicopter money. It could be argued that increasing welfare payments because the people are more likely to spend money and that people with very little money and the economic multiplier of putting money in the pockets of those who have little money actually is very positive as it gets spent and it circulates very quickly. Well, I think there are far better reasons to give money to poor people than the idea that their money will then circulate more rapidly. Actually, there's no evidence for that. I invite the honourable member to read Milton Friedman's theory of the consumption function which showed that that's all nonsense. But there are good reasons for giving money to poor people, namely that they're poor and they need money. And whether or not the money should be injected by the government spending more than it's raising rather than the central bank expanding its balance sheet is a moot point. But all I want to argue today is that we should recognise that the economy is as much threatened by a shortage of money as by an excess of money. For most of our lifetimes, the problem has been an excess of money. Now it's a shortage of money and we therefore need to balance in either occasion the rate of growth of money with the rate of growth of output if we are to have stability of prices and stable economic activity. And I congratulate my honourable friend again on bringing to the attention of the House these very important matters. Austin Mitchell