 Mc關fer, Arf độ Caerdydd ar ddigon ni yn ddâniaid. Y r Luciwn icyfnu wahanol i'r ysgolach oddi, mae unigodwch bugslu mewn cawer yn cafeidlu irthynnu i'r gloups. A bod vierol�no'i gwiselltu, nad y ydyn yn cael ei chyfrdd sorr wedi'i rhad maidenbu mewn syniadau o d Clearstone, ergynydd persunio ni weithio i Henry Ford. He said, it's well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. Well, let's hope we don't have a revolution, Mr Speaker, because I feel sure we're all Conservatives on this side. How's it done? Well, the process is so simple. The mind is repelled. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account thereby creating new money. Many times I've been told that this is ridiculous even by one employee who'd previously worked for the Federal Deposit Insurance Corporation in the United States. The explanation is actually taken from the Bank of England article Money Creation in the Modern Economy. It seems to me rather hard to dismiss. Today, while the state maintains a monopoly on the creation of notes and coins in central bank reserves, that monopoly has been diluted to give us a hybrid system because private banks can create claims on money and those claims are precisely equivalent to notes and coins in their economic function. It is a criminal offence to counterfeit bank notes or coins, but a banking licence is formal permission from the government to create equivalent money at interest. Now there are a wide range of perspectives on whether this is legitimate. The economist, the Spanish economist, Jesus Huerta de Soto explains in his book Money, Bank Credit and Economic Cycles that it is positively a fraud, a fraud which causes the business cycle. Positive money of British campaign group are campaigning for the complete nationalisation of money production. On the other hand, free banking scholars George Selgin, Kevin Dowd, others would argue that what should happen is that perhaps the state might define money in terms of commodity like gold, but then banking should be conducted under the ordinary commercial law without legal privileges of any kind. They would allow the issue of claims on money proper backed by other assets provided that the issuer bore all of the risk. Now some want the complete denationalisation of money. Cryptocurrencies are now performing the task of showing us that that is possible. This argument that banks should not be allowed to create money has a honourable history. The 1844 Bank Charter Act was enacted because banks issue of notes in excess of gold was causing economic chaos, particularly through reckless lending and imprudent speculation. Once again, I'm minded that the only thing we learn from history is that we learn nothing from history. Absolutely right. I think it would be a wonderful thing if the history curriculum covered the 1844 Bank Charter Act in particular. It would be a delight. I'd be full of joy, but of course we would need to cover economics too in order for people to really understand it. One of the problems with the Bank Charter Act was that it failed to recognise that bank deposits were functionally equivalent to notes, so it didn't succeed in its aims. There was a massive controversy at the time between the so-called currency school and the banking school. It appeared the currency school had won. In fact, in practice, the banks went on to create deposits drawn by check, and the ideas of the banking school went forward. But the idea that one school or the other won really ought to be rejected. The truth is we've ended up with something of a mess. We're in a debt crisis of historic proportions because for far too long profit maximising banks have been lending money into existence as debt with too few effective restraints on their conduct and all the risks of doing so forced upon the taxpayer by the power of the state. A blend of legal privilege, private interest and political necessity has created over the centuries a system which today lawfully promotes the excesses which capitalism is so frequently condemned for. It is undermining faith in the market economy on which we rely not merely for our prosperity, but for our lives. Thankfully, the institution of money is a human social institution and it can be changed. It has been changed and I believe it should be changed further. Even before QE began, we lived in an era of chronic monetary inflation unprecedented in the industrial age. Between 91 and 2009, the money supply increased fourfold. It tripled between 97 and 2010 from £700 billion to £2.2 trillion accelerating into the crisis. You just cannot increase the money supply at this rate without profound consequences. They are the consequences which are with us today. Just to return to where I wanted to go, where did all this money that was created as debt go? When I look at the sectoral lending figures, I see that some went into commercial property, some went into personal loans, credit cards and so on. Actually the rise of lending into real productive businesses excluding the financial sector was relatively moderate. Overwhelmingly, where this new debt went was into mortgages and into the financial sector. Now, exchange and the distribution of wealth are part of the same social process. If you buy an apple, then the distribution of apples and money changes. If money is used to buy houses then we would be at all surprised that if you increase the supply of money into houses you boost the price of those homes. It's a great debate. When you talk about ordinary people and their labour, because that's money as well, their labour. To them it's like looking for the end of the universe when you're talking about money and capitalism and how it works. To them it's just a matter of I need money to survive and anything else is the end of the universe. I welcome the spirit in which he's asked the question. The vast majority of us live upon our labour. It's absolutely true of all sides of the house. The vast majority of us live upon our labour. What do we do? We work in order to obtain money, in order to obtain the things we need on which to survive. He's preempted another remark I wanted to make, which is that there's a categorical difference between earning your money through the sweat of your brow and making money by just creating it when you lend it to somebody in exchange for a claim on the deeds to their house. It's fundamentally categorically different and it goes to the heart of how capitalism works. I appreciate very little of this he's going on an election leaflet, but I think it nevertheless matters very much indeed. Perhaps I'll have to ask my opponent if he's followed the debate. But the point I'm making is this. If a great fountain of new money gushes up into the financial sector, we should not be surprised that we find that the banking system is far wealthier than anybody else. We shouldn't be surprised if financings, housing, London and the south-east are far wealthier than anywhere else. Indeed, I remember when QE began, when QE began, house prices started rising in Chiswick and Islington. The point is this, Mr Speaker, that money is not neutral. It redistributes real income from later to earlier owners, that is, from the poor to the rich on the whole. Now this distribution effect is key to understanding the effect of new money on society. I think it's the primary cause of almost all conflicts revolving around the production of money, the relations between creditors and debtors. Having lived through this era where the money supply tripled through new lending, of course the whole system blows up. The real world catches up with this fiction of a monetary policy and so QE was engaged in. Now a paper from the Bank of England on the distributional effects of monetary policy explains that people would have been worse off if the bank had not engaged in it. It was of course an emergency measure. But one of the things the paper says is that asset purchases by the bank have pushed up the price of equities, at least as much as they've pushed up the price of gilts. The bank's Andy Haldane said, I paraphrase, we've deliberately inflated the biggest bond market bubble in history. I wonder what the Honourable Gentleman's view is about quantitative easing. How does he see that fit into the great scheme of finance? I think it's quantitative easing. As I'm explaining, quantitative easing is a great evil. It's a substitute for proper reform of the banking system. But this is the point. If the greatest bubble has been blown in the bond markets and gilts and equities have been pushed up by the broadly the same amount, then that is a terrible risk to the financial system. I will. Surely there's a difference in where the quantitative easing goes to. In an economy that has a demand deficit and is needing demand stimulated, surely if quantitative easing is going to the pockets of those who are going to spend the money, quantitative easing can actually create some more emotion in the economy. But if quantitative easing is going into already deep pockets and making them bigger and larger and deeper, that's a very different thing. He again touches on a very interesting issue. Once the bank legitimises the idea of money creation and giving it to people in order to get the economy going, the question then arises why not give it to other people if you're going to create it and give it away? Well, this goes to what is money? Well, I think money is the basis of a moral existence because we should be in our lives, we should in our lives be exchanging value for value. One of the problems with the current system is we're not exchanging value for value. Something's being created in vast quantities out of nothing and given away. Now the bank explains that 40% of the assets bought, the assets that have been inflated are held by 5% of households. 80% by people over 45%. It seems then very clear to me, if you'll allow me, seems to me very clear then that QE, a policy of the state to deeply intervene in money is a deliberate policy of increasing the wealth of people who are older and wealthier. Give away. In short, after prices have been up through, been bid up by a credit expansion they're bound to fall when later the real world catches up with it. It's why economies now are suffering this wrecking ball of inflation followed by deflation and here is the rub because throughout most of my life the way that the monetary policy authorities have responded to these corrections has been to pump more new money. Previously it's been through ever cheaper credit, now it's been through QE. This raises the question of where this all goes. Back to the point my Uncle friend for Stone provoked in me, I might actually be pointing towards an end of this monetary order. Now that is not necessarily something to be feared because the monetary order changed several times in the 20th century. I'll finish by saying, well what's to be done? A range of remedies are being proposed. They range from positive monies proposal to completely nationalise the production of money. Some want variations on a return to gold perhaps with free banking and some want this spontaneous emergence of alternative monies like Bitcoin. Order. The question is that this house has considered money, creation and society. Mr Michael Meacher. I too very strongly congratulate the Honourable Member for Wickham on securing this debate which I think everyone recognises is vitally important and which has not been debated in this house I believe for 170 years since the Robert Peels Bankcharta Act of 1844. I remember the Honourable Member drawing my attention to that when we were both last speaking in a similar debate. That act prohibited the private banks from printing paper money and in the light of the financial crash of 2008-9 and the colossal expansion of money supply that underpinned it no less than an increase of 22 fold in the 30 neoliberal years between 1980 and 2010. I think the issue today is whether that prohibition should be extended now to include electronic money. It is unfortunate as the Honourable Gentleman referred to that it is so little understood by the public that money is created every time by the banks that they make loans. In effect they have a virtual monopoly, something like 97% over domestic credit creation and it is the banks therefore, the banks which determine how money is allocated across the economy. That has led to the vast majority of money being channeled into property markets and into the financial sector. According to Bank of England figures for the decade to 2007, 31% of additional money created by bank lending went towards mortgage lending, 20% towards commercial property and 32% to the financial sector including mergers and acquisitions and trading and financial markets. Those are really extraordinary figures. On the basis of what he has just said, does he not think there is an argument for the Bank of England to intervene in that particular situation where you've got unlimited credit from banks? My Honourable Friend anticipates really the main line of my argument so if you could be patient I think I will satisfy him very fully. This is a crucial point. It means that only 8% went to businesses outside the financial sector with a further 8% funding, credit cards and personal loans. It is only this last six, the two 8%, lending to businesses and consumer credit that has a real impact on GDP and economic growth. Only that 16%. The conclusion I think is unavoidable. We cannot continue with a system where so little of the money created by banks is used for the purposes of economic growth and value creation and instead, I'm picking up the point that the Honourable Gentleman made a moment ago, the overwhelming majority of the money created has the effect of inflating property prices and therefore pushing up the cost of living. In a nutshell, the banks have too much power and they have greatly abused it. Firstly, they have been granted enormous privileges since they can create wealth simply by writing an accounting entry on a register and they decide who uses that wealth and for what purpose and they have used their power of credit creation to hugely favour property and consumption lending over business investment because the returns are higher and more secure and thus the banks maximise their own interests but not the national interest. Secondly, if they fail to meet their liabilities, they are not penalised. Someone else pays up for them. The first £85,000 of deposits are covered by a guarantee underwritten by the state and in the event of a major financial crash they are bailed out by the implicit taxpayer guarantee. Just let me finish and I'll of course give way. They've been encouraged by this into much more risky even reckless investment, especially in the case of exotic financial derivatives. It's beginning to queue up but just let me finish. Even to the point where after the financial crash of 2008-9 the state was obliged to undertake direct bail-out costs of nearly £70 billion to provide a further near £1 trillion in support for loan guarantees, liquidity schemes and asset protection arrangements. Of course I give way. I wholly agree with what he's just said. The moral hazard problem here is absolutely enormous and one of the most fundamental problems. I just would share with him that the British Bankers Association picked me up when I said it was a state-funded deposit insurance scheme. They told me it was industry funded. I think the issue now is that nobody really believes at the moment that this scheme will not be backstopped by the taxpayer. As always, very grateful for the intervention. I was going to say with my honourable friend that on this I think he probably is. Given that I think it raises the question at the heart of this debate, who should create the money? I just asked this question. Would Parliament ever have voted to delegate power to create money to those same banks that cause the horrendous financial crisis on which the world is still suffering? I think the answer to that is unambiguously no. So the question then that needs to be put is how should we achieve the switch from unbridled consumerism to a framework of productive investment capable of generating a successful and sustainable manufacturing and industrial base which can securely underpin UK living standards. Now the two models which have been hitherto used to operate such a system. One was the centralised direction of finance used and I have to say extremely successfully by several Asian countries, especially the south-east Asian so-called tiger economies after the Second World War to achieve take-off. But I'm not suggesting that that method is appropriate for us today. It's not suited to advanced industrial democracies. The other was to bring about through official guidance guidance in inverted commas the rationing of bank credit in accordance with national targets which were necessary through quantitative direct controls. This was a policy which did work well for a quarter of a century in the UK in the post-world period until the 1970s when it was steadily replaced by the purely market system of competition and credit control based exclusively on interest rates which has in our experience of the last 30, 40 years proved deeply unstable, dysfunctional and profoundly costly. I'll give one moment. Since then there have been sporadic attempts to create a safer banking system but these have been deeply flawed. Either regulation under the dictates of the neoliberal ideology has been ever so light touch and I have to say by new labour just as much as by the other government that it has been entirely ineffective. All the regulation is so detailed. Basel 3, I would remind the House has more than 400 pages and the US Dodds Franks Bill has a staggering 8,000 pages or more that it is impossibly bureaucratic impossibly bureaucratic and almost certainly full of loopholes. All the regulation was so cautious like the Vickers commission proposal of Chinese walls between the investment and retail arms of a bank that in my view frankly really missed the main point. Or whatever route was tried and this is actually significant it faced the regulatory arbitrage at the hands of the phalanx of lawyers and accountants in the city earning their ill-gotten bonuses by unpicking or circumventing whatever regulatory safeguards the authorities put in place. Against that background there are solid grounds I think for examining and this is where I do come to my proposal the creation of a sovereign monetary system as recommended by several expert commentators recently Martin Wolff who is everyone in this House will know is an influential chief economics commentator of the FT wrote an article a few months ago on the 24th of April to be precise entitled strip private banks of their power to create money this is a Martin Wolff recommending switching from bank-created debt to a nationalised money supply also Lord Adair Turner who was the former chair of the financial services authority delivered a speech about 18 months ago in February 2013 discussing an alternative to quantitative easing which he turned overt money finance which is also known as a form of sovereign money now such a system and here I will describe its main outline such a system would restrict the power to create all money to the state via the central bank changes to the rules governing how banks operate would still permit them to make loans but would make it impossible for them to create new money in the process the central bank would continue to follow the remit set by the Chancellor of the Exchequer which is currently to deliver price stability which is defined at the present time as inflation target of 2% the central bank would be exclusively responsible for creating as much new money as was necessary to support non-inflationary growth decisions on money creation will be taken independently of government by a newly formed monetary creation committee or by the existing monetary policy committee either of which would be accountable to the Treasury Select Committee and I think that accountability to the House is crucial to this whole process Yes, I give way to my little friend again Coming back to the original question I asked them earlier on what role would the Bank of England have in this? The Bank of England has an absolutely crucial role if he listens to the last bit of my speech he will get a full answer to that question A sovereign money system thus offers if I may say this a clear thermostat to balance the economy which is notoriously lacking at present in times when the economy is in recession or growth is slow the money creation committee will be able to increase the rate of money creation to boost aggregate demand If growth is very high and inflationary pressures are increasing they can slow down the rate of money creation Now that is a crucial improvement over the present system whereby the banks will either produce too much mortgage credit in a boom because of the high profit prospects which produces a housing bubble and raises house prices or they produce too little credit in a recession which exacerbates the lack of demand Now, as to lending to businesses which I think is essential to this whole debate Will you open the window to the good work? Yes I'm sorry, I just want to second back just a few moments because he mentioned accountability to Parliament and I think he said the select committee I just wonder whether without just really enlarging that a little bit and say when he says accountable what powers would Parliament have to ensure that this was followed through in a proper way in which the reals that's been made down? The purpose of accountability to the Treasury Select Committee is to enable Parliament fully to explore the manner in which the money creation committee or the monetary policy committee is working and I would anticipate a full three hours discussion with the leading officials of those committees before the Treasury Select Committee and if necessary they could be given a hard time Certainly, these persons who I would see as the most competent persons in this house to deal with the matter would make clear what their priorities were would make clear where they thought the money creation committee was not giving sufficient attention to the way in which it was operating and would suggest changes they wouldn't have the power formally to compel the money creation committee to change but I think the whole point about Select committees which I'll televised and discuss within the media would have a very big effect but it's a major change compared to what we have in the present time it's like all systems if it is inadequate it can be modified, changed and increasingly enforced Now if I could really get on to this question of lending to businesses which after the experience we've had in the last decade or war, last half decade has been very very unsatisfactory the central bank under a sovereign monetary system would be empowered to create money for the express purpose of that funding role the money would be lent to banks with the requirement that the funds are used for productive purposes whilst lending for speculative purposes for example to purchase pre-existing assets either financial or property would not be allowed the central bank could also create and lend funds to other intermediaries and the Honourable Gentleman for Wickham referred to this such as regional or publicly owned business banks which would ensure that a floor could be placed under the level of lending to businesses which would be a great relief to British business today guaranteeing support for the real economy and I should add that within the limits imposed and this is again I say this to avoid misunderstanding within the limits imposed by the central bank on the broad purposes for which money may be lent lending decisions would be entirely at the discretion of the lending institutions not of the government or the central bank now I conclude that I believe a sovereign monetary system offers a very considerable advantage over the present system it would create a better and safer banking system because banks would have an incentive to take lower levels of risk since there would be no option of a bailout or rescue from taxpayers and thus moral hazard would be reduced second it would increase economic stability because money creation by banks tends to be pro cyclical as I've explained whereas money creation by the central bank would be counter cyclical thirdly, sovereign money crucially supports the real economy when under the current system 83% of lending does not at the moment go into productive investment I underline that three times the fourth point and I've only got five in case members are wearying the fourth point under the current system house price bubbles transfer wealth as we all know from the young to the old and from those who can't get on the property ladder to existing house owners which increases wealth inequality whilst removing the ability of banks to create money should dampen house price rises and thus reduce the rate of wealth inequality my fifth and last point which I think is a very important one sovereign money redresses a major democratic deficit under the present system around just 80 board members across the largest five banks make decisions that shape the entire UK economy even though these individuals have no obligation or mandate to consider the needs of society all the economy as a whole and are not accountable in any way to the public it is for the maximisation of their own interests and not to those of the national interest under sovereign money the money creation committee will be highly transparent we've discussed this already and accountable to parliament so for all of these reasons I believe that the examination of the merits of a sovereign monetary system is now urgently needed and I would call on the government to set up a commission on money and credit with particular reference to the potential benefits of sovereign money which offers a way out of the continuing and worsening financial crises that have blighted this country and indeed the whole international economy for decades 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 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 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 Austin Mitchell I welcome this debate and congratulate my honourable friends on securing it because it is time that we debated this issue we haven't done so for well over 100 years so it's nice to be able to do so this house and the government are obsessed with money and the economy but we never debate the creation of money creation of credit and we shouldn't do because that's what it comes to our present economic situation and the way the banks are run and the way the economy is run the elephant in the room it's time to think outside not the box outside the banks and to think about credit creation and money Martin Wolfen interesting article cited by my honourable friend has argued that credit the central bank should create new money and it should be regulated by a public credit authority rather like the monetary policy committee I think that would be a solution and a possible approach why shouldn't we regulate the issue of credit in this kind of fashion it brings us back to the old argument about monetarism whether money is credit creation is exogenous or endogenous the monetarist thought it was exogenous so all you have to do is cut off the supply of money or cut the supply of money into the economy and you bring inflation under control well of course that was a myth because you can't actually control the supply of money it's endogenous and the economy like a plant sucks in the money it needs but that can be regulated by a public credit authority so that the supply matches the needs of the economy rather than being excessive as it has been over the last few years so I think that kind of credit authority needs to be created to regulate the flow of credit if we create money, quantity of easing go on and create more money channel it through a national investment bank into productive investment into contracts for house building new town generation infrastructure massive infrastructure work I won't include HS2 in that let's say massive infrastructure work then we can stimulate the economy stimulate growth and achieve useful purposes which we haven't been able to achieve this is a here's a solution to a lot of the problems that's bedeviled the Labour Party how do we get investment without private financial initiative and the heavy burden that imposes on the health service, on schools on all kinds of activities well why not through quantitative easing contracts for housing or infrastructure work which have a payoff point and which produce an investment which produce an asset for the state so that's my proposal allocated by the monetary policy creation policy sorry committee which I advocated earlier under the article from Martin Wolf that's the way we should approach it that's why I welcome today's debate because it has to be the beginning of a debate in which we open our minds to the possibilities of managing credit more effectively for the better building of the strength of the British economy that goes and I'll speak very briefly I want to record my gratitude I suppose to the honourable member for Wickham for having initiated this debate and his co-sponsors from the various parties and I must say I'm having heard his speech or most of his speech I apologise for being late even more satisfied that when I cast my vote for him to join the Treasury Select Committee it was the right thing to do because he's introduced an incredibly important debate and as has been mentioned already this is an issue that has not been debated for a century and I think we wouldn't be having this debate if it wasn't for the fact that we are still in the midst of tumultuous times we had the banking crash we had the corresponding crash in confidence in the banking system and in the wider economy and now we have a problem of underlending partly as a consequence particularly to small and medium-sized business so this could not be more important and the member for I'm going to say my honourable friend that this is an issue that is not well understood by members of the public and I think he could mention later on his speech but if he didn't I'm going to add that this is an issue which is also not well understood by members of this House by members of Parliament and I would include myself in that and I suspect most people here would be humble enough to recognise that this is such a complex issue this banking wizardry we're discussing today that very few people really properly understand it and if, yeah please I thank the honourable gentleman and I totally associate his comments about ignorance and I include myself in that but it seems to me that the system is really broken the system is broken because the banks won't lend money because the government has told them they've got to keep reserves we don't like quantitative easing because that means the banks aren't lending therefore quantitative easing has to be so there's something very wrong with the system it is not if the system isn't broke don't fix it the system is broke and someone's got to fix it he makes a valuable point and in my very brief remarks I'm going to come to that but the point I was just about to make that if members of Parliament don't really understand how money is created and I really believe that is the majority position and discussions I have been having how on earth can we be confident that the reforms we brought in over the course of the last few years are going to work, are going to prevent repeat-repeat collapse of the sort which we saw before the last election and my view is that we can't be confident that it's the impulsive position of ignorant members and again I'm not intending to be rude to be I include myself in that bracket but the impulse of ignorant people has been to simply call for more regulation as if that's going to magic away these problems but as my own noble friend mentioned there were 8,000 pages of guidance in relation to one aspect of banking that he discussed in his speech the problem is not lack of regulation it's the fact that the regulations that exist miss the goal in so many respects and the problem has become so complex so complex, so convoluted that we need an entirely different approach and I would say the majority of people outside of Parliament when you talk to them about banking have a fairly simple view that the bank takes deposits and then lends and that's the way it's always been and of course there is an element of that but it's so far removed from where we are today that it's only a very tiny element and many people at least understand factional reserve banking but even factional reserve banking is just the start of the story because as we've heard and I'm not going to repeat in detail but banks themselves create money they do so by making advances and with every advance they make a deposit and this is something which I think is so poorly understood by people outside and inside of this house and this has conferred extraordinary power on the banks and necessarily and naturally and understandably banks will use that power and have used that power in the interests of banks but it's created extraordinary risk and the risk unfortunately because of the size of the banks and because of the interconnectedness of the banks the risk is on us which is why I'm so excited by the challenges that my friend has just described but as I said this is fringe this is right on the edge I mean it's an extraordinary thing to imagine that at the height of the collapse that for every £1.20 that the banks held just £1.25 for every £100 they had lent out so we are in a very precarious situation I remember when I was very very much younger and I was listening to a discussion and not understanding most of it between my father and various people who were asking his advice he had a pretty good track record in terms of anticipating turbulence in the world's economy and he was asked when is the next crash going to happen he said the last person you ask is an economist or a businessman you need to ask a psychiatrist because so much of it is around confidence and I think the point was proven just a few years ago is that we have become extraordinarily unhinged, detached from reality and I think in a debate at another time I'd like to elaborate on this extraordinary situation where it is possible to imagine economic growth even as the last of the world's great ecosystems, the last of the great forests are come down the economy is no longer linked to the reality of the natural world which is a world on which all goods eventually derive is probably a debate for another time and I'm not going to dwell on that but we did have, yes please I think the honourable gentleman makes a point there that we should remind ourselves of and it was one that was brought to me by an Icelandic publisher Bjorn Ionis and appointed it that we're not in a situation where any volcanoes have blown up, we're not in a situation of huge natural disasters of famine sort of catastrophe brought on by war it is as was alluded to by a couple of his honourable colleagues it is worth keeping that in mind and in some ways while we have much gloomer on the banking system that in itself should give us some hope at the same time The honourable member is right but there are a growing number of commentators and voices out there who are anticipating a much larger crash than anything we've seen in the last few years and I'm not going to add or detract from the credence of those statements but it's possible to imagine how that might happen so we were talking about the banking system here and the two are not entirely separate but we did have a wake up call just a few years ago just before the election my concern is that we haven't actually woken up that it seems to me that we haven't introduced any significant meaningful reforms which go to the heart of the problems we're discussing today it seems to me that we've been tinkering on the edges and I don't believe Parliament has been as closely involved in that process as Parliament should be partly because of the ignorance that I've described at the beginning of my remarks so I just want to put on the record my support for a meaningful monetary commission of some sort to be established or an equivalent of where we are able to actually examine the pros and cons of shifting from a factional to something closer to a full reserve banking system as a number of members have discussed today this is something we need to understand what are the pros and cons of such a move how possible is that, who wins, who loses we fully understand the answers and I think we need to look at quantitative easing it's been accepted I think by everyone on all sides of the house that quantitative easing is not objective there are those who believe it's a good and those who believe it's a bad but no one believes it's objective and if there is a majority view that quantitative easing is necessary then we need to ask the question why not use those funds inject those funds into the real economy into housing into energy projects using the mechanism in such a way that clearly only benefits very few people within a financial banking wizardry world that we're discussing today so I think these issues need to be explored and I think it is time for a monetary commission to be established and for parliament then to become much more engaged than we have been this is a very small step in that direction I'm very grateful to the sponsors of today's debate I wish there were more people here today I was intending to listen, not speak but there aren't that many speakers unfortunately at the beginning and I hope we'll have many more such debates The Honourable Member for Oldham West had made the point that the whole approach to quantitative easing which many members have have questioned at a number of levels but one thing that it does prove is that in many ways the underlying logic of the concept of sovereign money creation is actually feasible and workable so those who dispute that it is strange that some of those who would dispute and refute the case that is made around sovereign money creation sometimes are people who then defend quantitative easing in the form and with the features that it has actually had and in many ways what quantitative easing has shown is that if we are going to use the facility of the state and this situation obviously is the Bank of England to alter the money supply to prime the money supply in a particular way then we could have chosen much better way of doing it than the form that was chosen by quantitative easing because in a sense while it is meant to have achieved increases in the money supply where have people felt that in terms of business credit in terms of wages in terms of consumer power and the stimulus that that is able to provide and so we basically look back on the financial crash and its aftermath and we see evidence and it's not just in the UK it's in Ireland and it's in other places as well where a lot of what we were being told up until the crash was the worth and the wealth of particular sectors in the economy has turned out to be a vacuous but the poverty that lays in its trail is actually vicious so the wealth and the worth hasn't been real but the poverty is and so people then rightly question people like positive money UK or sensible money in Ireland are saying well maybe how we treat the creation of money and how politics and those of us who are charged with meant to be overseeing public policy as it affects the economy need to have a more basic look at how we're treating the banking system and the very nature of money creation. Thank you Madam Deputy Speaker I wanted to start very much by congratulating the honourable member for Wickham on his very thoughtful and thorough opening speech but also the honourable member for Oldham Weston Brighton my honourable friend for his speech from this side of the house also but also now in the absence the honourable member for Brighton Pavilion and Clacton for securing today's very important debate it has been this debate comes following a significant campaign by positive money who have been raising some extremely important issues about how we ensure financial stability or how we as parliamentarians and indeed how members of the public can gain a far greater understanding of the way in which our economy works and in particular how money is supplied. Not just in this country but around the world as well. We've seen from today's debate that some very important questions have been highlighted and I think not all have been answered in this debate. Questions about how our money is created how that money or credit is used by banks and others how our financial system can be more transparent and accountable but particularly how it can actually benefit the country as a whole and it's on that later point in particular that I know particularly this side of the house have been acutely focused on how we rework our economy whether it's in the field of banking whether it's in relation to jobs whether it's in relation to wages so that it does actually work for the country as a whole. I think though it would be worth reflecting just for a moment on the system that we currently have in this country and what it means for money creation because as the Honourable Member for Wickham sat out very eloquently in his opening speech we know that currency is created in the conventional sense of being printed by the Bank of England but commercial banks can create money by ways of account holders depositing money into their accounts or by issuing loans to borrowers which obviously increases the amount of money that's available to borrowers and within the wider economy and as the Bank of England made clear in an article accompanying their first quarterly bulletin in 2014 this year when a bank makes a loan to one of its customers it simply credits the customer's account with a higher deposit balance so that instant new money is created so bank loans and deposits are essentially IO used from the banks and therefore a form of money creation however we know that commercial banks do not have unlimited abilities to create money monetary policy, financial stability and regulation all influence the amount of money that commercial banks can create in that sense they're regulated by the Prudential Regulation Authority part of the Bank of England and the Financial Conduct Authority and these regulators some of which are quite rightly independent are the stewards of safety and soundness in financial institutions especially regarding banks money creating practices and it remains our view that the central issue here the instability of money supply within the banking system is less to do with the powers that hold and the way in which they create money effectively but more to do with the way the banks conduct themselves and whether they actually act in the public interest in other ways as well so we believe that the issues here are about the incentives that are in place for banks to ensure that loans and debts are repaid that they're only granted when there is a strong likelihood of repayment when the money supply increases rapidly with no certainty of repayment then that is when real risks emerge in the economy Thank you Madam Deputy Speaker and I would like to also add my congratulations this has been a really fascinating debate and one that is very long overdue and that is to actually consider not just what more we can do to improve what we have but whether in fact we should be throwing it away and starting again and I do genuinely welcome the debate and I do hope that there will be many more to follow and I'd also like to pay tribute to the Honourable Member for Oldham for his good explanation of the positive money agenda which is certainly an idea worthy of thought and I will come on to that so I want to start by saying money creation is a very important and complex aspect of our economy that I do agree with members is very often misunderstood so I'd like to very quickly set out how bank deposit works at present the money held by households and companies takes two forms currency which is bank notes and coins and bank deposits the vast majority, as my Honourable Friend for Wickham pointed out, is in the form of bank deposits a my Honourable Friend is right to say that bank deposits are primarily created by commercial banks themselves each time they make a loan whenever a bank makes a loan it credits the borrower's bank account that creates new money however there are limits to how much new money is created at any point in time when a bank makes a loan it obviously does so under the expectation that this loan will be repaid in the future households repay their mortgages out of their salaries businesses repay their loans out of income from their investments in other words, banks will not create new money unless they think at the time that new value will also in due course be created enabling that loan to be paid back so ultimately, money creation depends on the policies of the Bank of England changes to the bank rate affect market interest rates and in turn the saving and borrowing decisions of households and businesses and the idea is that prudential regulation is used if excessive risk taking or asset price bubbles are creating excessive lending but first, I just want to briefly set out why we don't believe that the right solution is the wholesale replacement of the current system by something else such as a sovereign monetary system under a sovereign monetary system it would be the state not banks creating new money the central bank via a committee would decide how much money is created and this money would mostly be transferred to the government lending would come from the pool of customers investment account deposits held by commercial banks such a system would raise a number of very important questions how would that committee assess how much money should be created to meet the inflation target and support the economy if the central bank had the power to finance government's policies what would the implications be for the credibility of the fiscal framework and the government's ability to borrow from the market if it needed to what would be the impact on the availability of credit for businesses and households wouldn't credit become very procyclical wouldn't we incentivise financing households over businesses because in the case of businesses banks would presumably expect the state to step in wouldn't we be encouraging the emergence of an unregulated set of new shadow banks and wouldn't the introduction of a totally new system untested across modern advanced economies create unnecessary risk at a time when what people need is stability I will give way so I don't actually support positive money's proposals as they know I'm glad to work with them because I support their diagnosis of the problem but in 1844 of course they could have advanced this argument and they didn't but the final point really is to say that I of course haven't proposed throwing away the system and doing something radically new I've proposed getting rid of all of the obstacles to the free market creating alternative currencies I'm grateful to my honourable friend for pointing that out and I must confess before this debate I was rather puzzled by the fact that such an intelligent and extremely sensible person as he should be making the case for what I would see in a sovereign monetary system for an extraordinarily state interventionist new proposal so I'm very glad to hear that that's not what he's proposing and of course bearing in mind our current set of regulators we would presumably then be looking at a committee of middle aged white men making the decision on what the economy needs and that also would be a significant concern to me were that to happen so my own position which I will of course give way to before the Minister leaves the whole question of sovereign monetary system which obviously he's totally opposed to and raised several objections which I cannot in an intervention answer but does she not believe at the present time that the system of bank money creation is highly post cyclical and has enormously benefited property and financial sectors to the disadvantage of the vast range of industry outside the financial sector as I said at the beginning I sincerely congratulate the honourable member for raising this issue it is certainly one that's worthy of discussion I look forward to him coming back on some of the arguments that I've raised but very specifically yes I also agree with him that where we were in the run up to the financial crisis was entirely inappropriate and I will come on to some of the steps that we've taken to improve not throw away the baby with the bathwater but to improve what we have now rather than throw it away and start again so I know that in addition some of my honourable friends and members opposite have a particular concern about quantitative easing as I'm on the record as having made clear that I do too and specifically how you might unwind it but they should surely agree that at least quantitative easing can be unwound unlike the proposal of helicopter money which seems to me to be a giant step beyond quantitative easing a step where money would be created by the state with no obvious way then to rein it back if necessary so Madam Deputy Speaker if the tap in my bathroom breaks rather than wrenching the sink off the wall I would prefer to fix the tap I think as Martin Wolff said last week nobody can say with confidence how a monetary system should be structured and what laws and regulations it should have given that and also the tumult going on economically across the world we should be devoting our energies to fixing the system we have mending the problems but keeping what works so in conclusion this government's belief is that the current system modified and improved with far greater competition is the one that will serve the economy best reform is vital again as Andy Haldane puts it historically flexing policy frameworks has often been taken as a sign of regime failure quite the opposite ought to be the case we need banks to lend to young families wanting to buy houses and repay them out of future labour income rather than relying on the bank of mum and dad or for businesses wanting to seize opportunities gain new markets and create jobs and growth our existing system offers a forward looking and dynamic framework in which tomorrow's opportunities are not wholly reliant on yesterday's savings and it builds on the expertise of banks in assessing risks and making the lending decisions that we badly need in 25 years myself in the heart of the financial sector I saw it at its best and sadly sometimes also at its worst we are trying to remedy the worst but Madam Deputy Speaker let's also keep the best thank you