 Welcome to the RSA and to forethought. Tonight's speaker, Ben Dyson, specializes in money and banking. He spent the last five years researching the current monetary system and trying to understand the impact it has on the economy and on society as a whole. He founded and is the director of Positive Money, a not-for-profit organisation which aims to raise awareness of problems with our monetary system among policymakers, academics, unions, charities and the public at large. He's also the co-author of a forthcoming book, Modernizing Money, which sets out to explain how, in his opinion, our failing monetary and banking system can be fundamentally reformed. Ladies and gentlemen, Ben Dyson. Ten years ago, I made the decision to study economics. Now, psychologists have found that studying economics can make you less charitable, less willing to cooperate and generally more selfish. But despite all that, I thought that economics would help me understand the world. And if I could understand the world, then I could figure out how to change it. But what I learned about economics left me feeling uneasy. There was something decidedly odd and unrealistic about the subject. Whenever a textbook or a lecture explained how humans are supposed to behave according to economics, my first reaction was, well, I don't think like that and I don't behave like that. But I wondered if I was the exception and that actually everybody else did behave like homo-economicists. But the more I read, the more I realised that the textbooks were describing this world full of rational, calculating people that I had never met in real life. Now, for anybody who hasn't studied economics, let me tell you what the textbooks say about you. The mainstream school of economics assumes that humans rationally weigh up all the options available to them before making a decision about what to buy. Now, at first that might sound realistic, especially if you're the kind of person that does your research before buying a new car or mobile phone. But economics assumes that you do this whenever you buy anything. So, when you walk into a supermarket, your mind supposedly weighs up the benefit you'll get from eating or drinking each product in there before coming to a calculated decision about what is the best combination of products to give you the most happiness or satisfaction or utility, as economists call it. But we all know from personal experience that that isn't really what happens. You know, we fall prey to the impulse purchases by the checkout or we go for the special offers. We buy the donuts and the discounted beers and then we get home and realize we've forgotten the pasta that we really needed to cook dinner this evening. There are countless examples like this where economics ignores reality. Now, the deeper I got into the subject, the more frustrated I became. But studying economics wasn't a complete waste of time. There was one day when I did learn something useful. I was searching through the library for a textbook when I was distracted by the words, the grip of death on the spine of a book. Now, I used to work in a bookshop. So when I see something that's been mis-filed, it really annoys me. So I took the book out to try and see where it should go. And I was trying to think where the crime thriller fiction would be filed in this academic library when I spotted the subtitle, which was a study of modern money, debt and destructive economics. And I thought, well, this might actually be slightly more interesting than the textbook I was supposed to read. So I sat on the floor on the aisle with annoyed students stepping over me, reading through the first two chapters and discovered that, amongst other things, the title, Grip of Death, was a literal translation of the French roots of the word mortgage, to be engaged in the contract until death, which is ironic given today's house prices. But what was so interesting to me was that this book actually gave me the missing piece of the puzzle that made economics seem so abstract and so irrelevant to the real world. That missing piece of the puzzle was money. Now, you may find this hard to believe, but money is the one part of the real world that economists ignore more than anything else. And I know how absurd that sounds. I mean, how can economics ignore money? Isn't the entire subject about money? Well, economists concern themselves with how people spend their money, how businesses make their money, and how traders in financial markets make their millions. But there are some very basic questions that are almost completely ignored. One of these key questions is simply, where does money come from? Who actually creates it? Now, for most of us, where does money come from is a question that we never think to ask, even though in one way or another, money affects almost every aspect of our lives. If you give the question a few seconds' thought, the answer should seem obvious. If you take any 10 or 20-pound note out of your wallet, you'll see the words the Bank of England printed on the side. But the twist in the story is that the Bank of England only creates a small percentage of all the money that exists. In fact, they just create the cash that's in your wallet. And that cash makes up just 3% of all money. So where does the other 97% come from? Now, the surprising fact is that the vast majority of money these days is just numbers in computer systems. Money now is electronic. And these numbers are created through an accounting process whenever a bank makes a loan. In fact, the number that you see at the bottom of your statement or on the screen of an ATM doesn't represent some pile of money that's in the bank. That number is the money. So when we borrow from a bank, new numbers are entered into our account. We're not borrowing from somebody else's life savings. That's actually new money. In fact, brand new money is created by banks every time somebody agrees to take out a loan, mortgage or credit card. Now, I'm naturally a fairly skeptical person. So the first time I read this, I found it very difficult to believe. I mean, after all, we all know that if you start printing money at home, you can expect to visit from the police at 2 AM early one morning. If creating money was so harmful that the police would spend their time trying to stop people doing it, it seemed unlikely that there would be a loophole that would allow new money to be created. Almost as an accident of accounting every time somebody agreed to take out a loan. But the more I read, the clearer it became that this really was how money is created. Looking through the Financial Times one day, I found an article that explained it in black and white, saying that the essence of the contemporary monetary system is the creation of money out of nothing by private banks often foolish lending. The author was the paper's own economics commentator, Martin Wolff. But still, the skeptic in me wanted to hear it from the horse's mouth, the horse in this case being the Bank of England, who wrote in 2007 that, by far, the largest role in creating broad money is played by the banking sector. When banks make loans, they create additional deposits for those that have borrowed the money. Now, for me, the discovery that every new loan by a bank creates brand new money was a revelation. It made sense of one of the things that had been puzzling me for ages. Why were house prices going up so quickly? I'd always assumed that banks were taking money from savers and just lending them to borrowers. But if that was the case, where was all the money coming from to fund these ever-larger mortgages that banks were providing at the time? Now, I soon found the answer to this question. In the 10 years running up to 2007, the banks had collectively created over 417 billion pounds of new money in the form of ever-larger mortgages. With every new mortgage creating an equivalent amount of new money and new debt. And this is what was behind the huge rise in house prices over the last decade. Now, understanding why house prices were rising so quickly wasn't just an academic question for me. I am one of the millions of people that weren't on the housing ladder before the house price bubble started. And as a result of this huge credit bubble, people in my generation will see our income swallowed up by enormous mortgages and ever higher rents. So by this point, I'd accepted that undergraduate economics was not going to explain how the world worked after all. So in 2007, I finished my second year and then left to join some friends who were starting a business. I spent my free time trying to understand the monetary system by reading papers and reports from the Bank of England. I probably should have got out more. I watched the first two years of the financial crisis playing out and it seemed obvious to me that the crisis had been fueled by the creation of huge sums of money through this process of bank lending. In just eight years, bank lending had doubled the amount of money in the economy. Something seemed very wrong about the system and yet the questions in the media and in policy circles were all about the symptoms, the risky lending, the speculation and the huge increase in personal debt. Nobody seemed to be asking the question that I thought would lead to the root of the problem. Where had all the money itself actually come from? So out of frustration, I started writing about this on my own website in 2009 and then in 2010, I started an organization called Positive Money to get policymakers, academics and the general public talking about these issues. And we soon discovered that some economists have been talking about this problem with the monetary system even since the Great Depression, with Irvin Fisher, Milton Friedman and James Tobin being just some of the more famous examples. Within just a couple of months of launching, we got a call from the producer of a television documentary who was asking for an explanation of how money was created by the banking system. So we explained how we thought the process worked from our research, but like myself, she wanted to hear it from the horse's mouth. So she called up the Bank of England and asked them, do you have a simple document that explains how money is created by the banking system? And the answer was, well, no. Okay, so can you send me the training manual that you provide to your new members of staff? We don't really have one. Right. The problem was that the information was spread throughout hundreds of documents. A paragraph here, a rule change there. We realized it would be difficult for journalists to provide any accurate commentary on the financial crisis when the information was so difficult to find. So we teamed up with the New Economics Foundation to hunt through these documents and find definitive answers to how the monetary system works today. When that painful process was complete, we called the book Simply Where Does Money Come From? And the book has already been used as a cortex in some universities. But does it really matter that we don't understand money? Isn't this just some boring technical issue that we can leave in the hands of economists and financiers? Well, let me tell you, this really does matter because the nature of the monetary system that we have and the money we use determines the nature of the society that we live in. If the vast majority of the money that we use is created only when somebody takes out a loan or a mortgage, then sooner or later we'll end up with a society that is deeply dependent on debt. And we've all seen the very clear consequences of this dependency on debt over the last few years. What we may not have realized is that there is actually no other way as long as we have a system where money is only created when somebody goes into debt. But the good news is that the laws of money are not fixed. Unlike the laws of nature, the laws of money can be changed. If we decide that our monetary system is not working well for us, then we can change it. In fact, we've already done this in the past. In 1844, a law was passed to stop banks printing their own paper money. Yet that law has never been properly updated since 1844 to cover the electronic money that now makes up 97% of all the money we use. And as a consequence of that, while it took all of history for banks to create the first trillion pounds of money in debt, it took just eight years for them to create the second trillion. And we now find ourselves with a monetary system that evidently isn't working. So we all need to be asking these fundamental questions. Where does money come from? Who creates it? Who decides how much will be created and how that money will get used? Is the system of money that we have today working in the best interest of society? And if not, isn't it time that we start to think about how we can change it? Money isn't ruled by laws of nature. It's a product of human design. And with our system of money being as dysfunctional as it is today, now might be the perfect time to go back to the drawing board and redesign money so it works for us all. Thank you. Ben, that was fabulous. Now, you're in Radio 4 with the RSA, the audience, live studio audience here, imbued with the power of Radio 4 to make you Chancellor. Congratulations. What are you going to do now? What's the next step if you were suddenly in charge of the banking system, the monetary system here in the UK? What would be your solution to these problems? Well, I think the problem that we have is if you give the power to create money to people who will profit the more that they create, then you're going to end up with too much. And that's what we had in the last decade is we had the money supply doubling faster than it's ever done in the past. So I think the first thing we need to do is actually remove that ability of the financial sector to create money in the way that we did back in the 1840s. And that's actually remarkably easy to do. I think if we did that, we'd have a lot more stability and we wouldn't have seen the problems that we saw over the last few years. But doesn't the situation we're in at the moment with people in large amounts of debt and with this need for growth to get us out of that situation, doesn't that sort of necessitate banks being able to do that? Or somebody at least to be able to create this wealth somewhere in order to stop everybody in this room from going bust? Isn't it fundamentally necessary right now? I can see if you'd started in 1840, it would have been a good idea, but we're in 2012. How do we get out of today's problem? Well, this is precisely the problem that we have. We had a crisis that was caused because there was too much debt. And the policy response to that was we're lower interest rates to make it cheaper for people to borrow more. Now, the situation we have, we need people to borrow more to get more money into the economy. And yet we also need to reduce how much debt we have. And you can't do both of those things at the same time. So we have a system that has actually driven us into a complete catch-22 situation where there is no way out until we change the whole system. As a dinosaur banker, one in which the things that bankers are allowed to do today were actually criminal in my day back in the 70s, how would you suggest that the bankers can actually be stopped from this money creation, which I don't really understand at all, even though I was trained in credit analysis, where you could only lend the funds that the depositors had put in the bank. You're saying that they're actually lending money out of thin air, not what the depositors have put in. Can you explain that a bit more because I'm lost? Well, the system has changed. And most of us would assume that the bank cannot make a loan without actually having some savings from somewhere. It's kind of morphed into a system where if they can find somebody to lend to, they'll agree to lend. And if they haven't got enough money at the end of the day to settle with all the other banks, then they can borrow it from another bank or the Bank of England. And that was why the interbank market, which was so central to everything in the middle of the crisis, was so important because that was how they stopped running out of money, was because they would always lend from another bank. The market worked for a while, but it was fundamentally unstable. It was going to collapse sooner or later anyway. It was just a matter of time. And behind the pillow that? I think there is a solution. And it actually is quite a fundamental economic solution to actually revisit the quantitative theory of money and actually question Urban Fisher and Milton Freeman because it stands to reason that the velocity of money is actually a key issue that through their theories of actually rate that as just it should be a constant. I think rather than throwing lots of money at the system, it's actually the velocity of money that should be looked at. Without getting too technical, there tends to be a lot of people until you get deep into the subject assume that if you create money, it will immediately cause inflation. But the money causes inflation where it goes. So if it goes all into property, that's when you get inflation in property. If it goes into buying bonds from the financial markets, which is why the financial markets are doing well now, whereas the real economy is struggling. And not all kinds of money creation is a bad thing. If it goes into productive stuff, if it goes into creating jobs, it can actually be quite useful. But less than a tenth of all bank lending actually goes into that job creation and that investment in real businesses. Final question from the audience at the back. Given that we live in this international global financial system, I mean, is it possible for a single country like the UK, big as its financial system is, to sort of do this alone? Or do we have to wait for multinational agreements, in which case that's forever? Yes, yeah. No, we don't have to wait for multinational agreements because you can reform your own currency. You can reform pound sterling without waiting for every other country to do the same. If you have any other sort of reform such as taxing banks and they have an incentive to get up and leave, but if they want to get up and leave when you reform this pound sterling currency, then it's a case of saying, okay, well, you won't be able to do business in the UK anymore because you won't be able to do business in this currency. So it's one of the few reforms that you can do without the banks being able to say they can travel and go abroad. Ladies and gentlemen, Ben Dyson.