Central Bank Digital Currency (CBDC). The Digital Pound - Consultation. A response

The Bank of England asked for comments about its idea for a digital currency: 'The digital pound: a new form of money for households and businesses'. 

My submission was as follows: 

    ''I disagree with the proposal for a digital currency. It will disrupt the current banking model as this will have a tendency to reduce funds deposited with ordinary banks which will reduce banks'  scope to engender loans to customers. The proposal for centralizing normal retail banking implicit in a centrally controlled digital currency is a bad move and against the promotion of the freest flow of money to viable businesses through the relationship a bank has with its customers.

    Many people would possibly completely, or substantially, exit from their normal banking for much of their financial business and the existing banks will thus become weaker players in the promotion of the many local economies that comprise the national economy.

    The nation needs more banks of the normal current retail type and for them to be more localized particularly when they are involved in small and medium businesses who need credit to grow and provide employment.

    The idea of a central digital pound brings a danger that a central authority might, despite the privacy enhancing procedures proposed, in the extreme be able to control the spending freedom of every citizen for ideological or political reasons which is obviously with our current outlook, to be avoided. The banks are good at spotting fraud currently perpetrated and there is no need to use the reason of central surveillance possible through a digital pound as being essential for preventing scams.''  

Charles Bazlinton 30 June 2023

In the Financial Times article 'Central Banks should not be blind to the threats  posed by CBDCs' (25 July 2023) Eswar Prasad author of The Future of Money also warns about digital money.   

Posted by Charles Bazlinton 26 July 2023

Budget alternatives: Richard Werner on Digital Currencies & A New Financial System

UK Chancellor Jeremy Hunt is set to announce 12 regional growth projects with low tax and other investment incentives (ex-PM Liz Truss wanted 200 zones).  The decentralisation idea is a good one to spread new economic growth beyond the south-east into the regions but it misses a key factor in economic decentralisation - that of the money supply.  The ultimate is to have local banks which create money where everyone needs it - where they live in their local area. 

Professor Richard Werner in this new YouTube video discussion 'Why we need a New Financial System'  in discussion with Oliver Studd and George McNee,  says that digital currencies have been around for decades and ordinary licensed banks have been creating digital currency as they create bank loans for their customers.  He also adds to the current debate that central banks should create digital currencies for their monetary system (this starts at 15min on the video). He says that this would be a dangerous development which in giving everyone a current banking account with the Bank of England leads to a possibility of centralised surveillance  and control of their spending.  Do we trust that good central bank governance would always prevent such a move? In setting a centralised bank system for every citizen the normal banking system would be fundamentally changed for ever says Werner.  Such a strong pull towards centralised banking for all would weaken the normal business model of  current banks who need the deposits and relationships of their customers. The  banking currency produced by them was always digital as they did not print bank notes for the loan: Bank Digital Currency - BDC.  The only change now is to add Central to the acronym - CBDC and herein lies a danger.   

Werner says that in earlier times in Germany, monasteries would act as bankers until they were secularised and farmers, for instance, would have difficulty with their credit needs. What happened to remedy this  was the creation of local community banks designed to operate in specified localities. Now, nearly 200 years later the widespread Sparkhassen banks, the co-operative banking system and a sound locally-originating economy is a testimony to the practicality of the solution of locally created money. Britain was also a pioneer of local savings banks around the same time.  

But small local banks grow and are bought up by larger banks who tend to like to deal in large loans for large customers, leaving smaller business customers overlooked. There is a need for many small banks to be created. These preferably will have a common-good profit motive and protected through a majority charity ownership holding which distributes bank profits to local good causes and needs. This ownership model locks in  the common-good theme preventing private predatory takeovers of small successful profitable banks.

Decentralisation is needed more and more and the fundamental way to do it is to encourage the creation of local banks. Growth for special regional zones  is a start but why not target support to enable the decentralisation of the money supply to every 'local zone' by encouraging lots of tiny local community bank start-ups where the small and micro business are? Everyone knows that such businesses create the jobs and wealth. What's not to like Mr Hunt?  

    

Brexit is done. Get Fairness Started

The boring and brilliant 'Get Brexit Done' tag did it for the Tories with Brexit voters gifting the election to the Tories with an extraordinary 80 seat majority for Boris Johnson as Prime Minister. Labour's diligently crafted policies were ignored in the face of the big issue that triggered the winning votes.  Some long established Labour constituencies switched to the Tories. Is this a sea-change or a one-off blip? In five years time will Labour voters revert? Or will Labour fade away as a major party?  For the new Tory administration pressure must be on to do whatever will retain the old Labour seats in an election by 2024. 

Young people voted heavily for Labour in 2017, and also this time; with Remain not being a big enough issue for enough of them to abandon ship for the pro-EU Lib-Dems or Greens. Of these,  full-time students voted massively for Labour with x3 times as many as voted for Conservative. Their manifesto pledge to abolish tuition fees and bring back maintenance grants obviously did it for Labour. The Tories would be advised to do something similar and neutralise the appeal of Labour for students. After all there will be added students next time and some older Tory votes may just not be - both trends will endanger the Tories. How about a lifetime grant for education with created money as proposed by Prof Richard Werner? 

Home renters tended to vote Labour, and owners Conservative. This aligns with the age bias generally, with older people voting Tory. The disparity of home ownership between age groups continues to grow for all income groups. This despite the Conservative Help-to-Buy schemes which become Help-to-Bonuses for house developers . If a carefully designed land value tax scheme gradually replaced income tax, property prices would adjust and affordability of ownership return for the younger, lower earners, and even homeowners might see the fairness of getting their family on the housing ladder as they did for themselves decades ago See this blog Jan 30, 2018.  Does it matter that the home-owning dream is dying in the UK? Are Conservatives still the party of the home owning democracy?  Does this growing unfairness bother them?

The new government is being given advice about spending £billions on infrastructure in the midlands where their new ex-Labour voters live.  The lead time for these is many years and is not a particularly personal vote winner - so why not borrow a Labour proposal and pilot a Universal Basic Income scheme to tackle enduring poverty? What better and fairly quick way to capture and keep voters voting for you? Fairness, particularly for young, poor voters. Use UBI as a basis for Universal Credit reform. 

Incidentally, if spending £billions on infrastructure the Bank of England agrees that it is possible to create money for public spending interest-free and debt-free (no tax cost) and George Osborne (remember him?) agreed too but didn't bother, or dare, to use this monetary tool for the common good.     

And what about promoting local banks to supply credit where needed - locally? Labour were going to do so based on the Post Office network. Dr Plamen Ivanov, a leading proponent of economic benefit through local banks, argues the local case from a new study of the origin of the Bank of England. 

Is the Tory victory to be compared with Benjamin Disraeli stealing Gladstone's Liberal policy of extending the voting franchise in 1867? Not quite in the same way. Brexit as an issue will fade, bringing other election issues. If the Tories come up with 'borrowed,' policies Boris may do a full Disraeli, next time. But don't forget that in 1868 the Tories lost the next election even after 'Dishing the Whigs' having added new voters.             

Posted by Charles Bazlinton:  Author of The Free Lunch - Fairness with Freedom. Also: Promoter of Local Community Banks.  

Plamen Ivanov reveals the strange origin of the Bank of England.

At the pinnacle of our capitalist system is perched the Bank of England which Dr Plamen Ivanov calls 'this key capitalist firm'. An apt phrase given that the Bank has seemed unquestionably authoritative and essential to the economic working of the UK for over 300 years. However, inequality under this system grows despite political efforts to the contrary, so given the premier role of the Bank can it be that it is a cause of the inequality? Or is it just a neutral, disinterested player in a democratic system run by others? Dr Ivanov reveals hidden and barely understood facts around the Bank's origins that befog the truth about the mechanism working our money system even today, and which he does blame for the disparities. He shows that what started in 1694 continues to this day, powerfully unabated through all banks which operate under what amounts to a marketing franchise which originated with the Bank and is regulated by it. The know-how and procedures of banks follow the model, with the result that the loans issued by them brings enrichment to their top managers and shareholders, even today, just as happened for the Bank itself after its formation in 1694 and for 250 years after. But Ivanov is hopeful that all is not lost for fairness, as there are benign banking ownership models for us to follow.   

Dr Ivanov's doctoral paper that explores these themes is The Bank of England: A Socio-Economic Inquiry into Private Money Creation, Public Debt Financing and the Long Run Implications for Inequality in Britain and beyond (Oct 2018) and he acknowledges the insights of Prof. Richard Werner's key credit creation work in the writing of it. It is about how the Bank made waging a long war more possible for the government of the day and facilitated that by taxing ordinary citizens to the huge financial benefit of a small group of Bank directors and shareholders. But he shows how national wealth creation might be made more sustainable and be better spread through logical and proven reforms. Whilst public (government) debt with its constant demand for interest payments is used to this day by politicians as a tactic to impose austerity for citizens, Ivanov questions the need for the national debt at all.

With the takeover of the throne of England by Prince William of Orange of The Netherlands in 1688 a new era of state finance began. For centuries the ancient 'dual policy purpose of a monetary and fiscal tool' - the tally stick system - was a: 'public credit system [which] allowed state bureaucrats to spend beyond the annual tax revenue by obtaining credit from the public via the issuance of receipts of future taxes paid' (p143). The earlier rulers had resorted, apart from this tally stick system, to funding by means including borrowing from goldsmiths, customs levies, other duties and land tax, all of which, contemporary sources acknowledged, had been sufficient to pay for wars. But the new Bank of England introduced a method for government funding through the new national debt specifically secured against new taxation. This relieved the king of money worries in a novel way, and bound the taxpaying people to the enrichment of the Bank's shareholders forever, especially if long wars ensued.

The pressing political scenario preceding Prince William and Mary's English adventure was that Louis XIV of France had been empire-building on the continent of Europe for over two decades. Due to murderous religious intolerance he had caused a mass exodus of Huguenot protestants in 1685 and many fled to The Netherlands and England. As Louis' campaigns grew, unfortunately the Dutch people themselves were losing the inclination to resist and might possibly withdraw from the conflict. William was in danger of becoming isolated from his people in this and engineered to unite his domain with the English so that opposition to Louis would be strengthened with the added clout of another nation in the fight. As it happened  the protestant English were becoming restive about King James II's catholic preferences. So William (conveniently married to his own cousin Mary who was also the current King James II's daughter) saw his chance and invaded Devon with a fleet four times larger than the Spanish Armada - this was to be a campaign for certain victory.  William was rapidly accepted and arrived in London within  a few weeks. James tried to retain his throne but gave up two years later after the Battle of the Boyne (1690). For William the regime change was now complete and within a few months of his arrival in November 1688 as King William had joined an anti-French Grand Alliance of nations on continental Europe that endured as the Nine Years War. England was now locked into the continental conflict.

Ivanov shows how the Bank of England was founded through the influence of the Huguenots behind a marketing frontman, William Paterson. The Houblon family were well established citizens and prime movers with other fellow church people who met in the French Church in Threadneedle Street (the same street as the existing B of E). Their anti-catholic feeling was such that radicals there had been calling for Charles I's head in a sermon in the church four years before the execution. They had been prominent in bringing William across as king, and now, using banking know-how from Amsterdam, they devised the new Bank for the purpose of creating a new national debt for the English to fight the war whilst also bringing benefit to themselves through their personal (merchant) interests: 
         'the state unilaterally appropriates part of the income and production of ordinary taxpaying citizens and reallocates such monetary gains to national debt creditors in order to satisfy interest payments on legal, contractually-binding debt contracts . More precisely, the religious cabal of the French Church at Threadneedle Street, led by the Houblon dynasty, managed to create suitable field characteristics for the erection of a privately-owned banking enterprise to underwrite national debt with the aim of self-enrichment.' p31   

So William secured his new throne, and within a few years, the funds to wage a long war with confidence; the populace were expected to support the idea that the war was a defence of their protestantism; taxpaying citizens paid the interest on the war debt through new taxes; and the Bank shareholders and associated city merchants grew exceedingly rich.  The national debt grew by the end of the Nine Years War to £17m, with taxation guaranteeing the Bank a very profitable future. In 1832 Sir Henry Parnell reported that the then £28m a year in dividends is: 'a transfer of so much money from the pockets of one part of the public into the pockets of another part of it' p107. At that time the interest on the national debt was above 50% of total government expenditure and had averaged nearly 40% since 1700.   Parnell observed the impoverishment of the populace through taxes coincident with the new debt (chart p116) just as Dr Ivanov is showing now. 

Another chart (p133) shows how 'infrequent wars' in centuries prior the late 17th century changed following the start of the Bank. King William's desire to tie England into his continental war adventures and the Bank as a means of funding it, faciliated an increasing numbers of wars since.   

A practice discovered by Ivanov 'this surprising revelation' p72 concerns: a) the amount of the shareholder funds and b) the amount of the loan to the government. Did they match up? The shareholders were to raise £1,200,000 which was to be paid over as a loan of £1,200,000. What Ivanov has discovered is that only 60% of the shareholder's funds were actually subscribed but the full loan was paid over, with the bank issuing banknotes to represent  the entire loan (p31,p72). Ivanov points out this was an act of private creation of credit at will, and out of nothing, authorised by the Crown through Parliament, with the Bank having its monopolistic status made unassailable through a Royal Charter in return for the loan. This monopoly endured for the Bank itself until nationalisation in 1946 and endures to this day for the remainder of the banking industry which grew out of it into the UK and across the globe. 

So part of the loan to the government was 'invented'; there was insufficient gold or silver or whatever stood for acceptable value deposited by shareholders in the Bank to back it entirely; so it was a pretence to the government that it was there. The Bank issued banknotes and did whatever was needed for foreign transfers for the war payments abroad, and the paper money was spent among merchants - some being shareholders of the Bank. Money circulated into general circulation buying food and supplies, guns, gunpowder, horses, bridles, etc, to fight the French. 

Dr Ivanov champions two reforms to start to correct the imbalances of wealth and income that have grown up as the national debt pile has been renewed and grown over 300 years. Prof. Michael Hudson is the leading authority on ancient debt forgiveness in Babylonia which has been shown to have been practised when a new king came to the throne. This was to free indebted peasants from crop debts and maintain a free citizenry for public duties attached to their land holdings.  The rulers recognised that debts needed periodically to be cancelled or perpetual debt-slavery would ensue. Moses stipulated debt cancellation every 7 years and a return to ancestral land every 50 years - the Jubilee, Leviticus 25. 
Ivanov quotes Michael Hudson: 
              'Indeed, what turns out to be ironic in studying the history of Near Eastern legal practices is that precisely those parts of the Biblical narratives that hitherto have been most in doubt – the laws of cancelling debts, freeing debt servants and redistributing the land to its traditional users – turn out to be the most clearly documented Bronze Age legacy.' p156

Ivanov says we must somehow eliminate the debt.  As  'two thirds of the national debt is now owned by commercial banks and firms.' p136 to achieve the ancient feature of debt forgiveness, he advocates:   
             'governments may issue usury-free money to repay those layers of national debt owed to banking concerns without the need to resort to a great public sacrifice.' p157.  
   
The other proposal from his paper is the formation of many local community-owned banks as have been existing in Germany for more than 150 years. 
           'all of these cooperatives strictly followed three fundamental principles: they were self-help institutions, relied on solidarity, and were self-administering small financial intermediaries … These cooperatives, which adopted the common name Volksbanken (people’s banks), mainly operated in urban areas’. p160
         'Since ...the 1970, no savings bank has ever been liquidated and no creditor has ever suffered lossess. Rioural and Dawson-Kropf, 2012 p162

 

Dr Ivanov credits local banks with the success of the Industrial Revolution in the UK:
           'The increasing number of local banks in this Industrial Revolution period were drawing on their knowledge of local customers and their creditworthiness, financing the expansion of entrepreneurial activities and as a result national output (Cottrell 1980). This decentralised industrial planning through the lending policies of the growing number of countryside bank concerns was lost with the commenced centralisation of banking in London-based headquarters towards the latter end of the 19th century. This process gave rise to the domineering transactional lending approach which still troubles the British trade performance' p167
The community bank model does not involve the nationalisation of banks - which introduces the dead hand of central decision making - but moving ownership to new local, community-profiting banks which would manage themselves independently, and create money to finance local businesses and needs.     


This paper is key to the understanding and resolving of economic problems as the wealth and income gap widens. Dr Ivanov's narrative style and his detailed research, convinces. The fundamental rip-off through taxing the people to finance the national debt which was owned by wealthy people (who even invented the money lent out), is almost past belief. Even at the time alternative ownership was proposed by William Paterson who wanted the debt to benefit orphans. But Dr Ivanov gives reasons for hope for us in our day that the slate can be wiped clean and money creation transformed into benign ways. 

The Bank of England at its birth and for centuries was efficient at financing war, so surely its managers can now inspire us all and enlighten the government to direct finance to make a fairer society? They have immense power to create money for the common  good.  

Do not withhold good from those to whom it is due, when it is in your power to act. Proverbs 3.27   

Posted by Charles Bazlinton. Author, The Free Lunch - Fairness with Freedom.
Charles Bazlinton is a director of Local First CIC which promotes local banks 
 

Richard Werner is doing better than Benjamin Franklin

Do you like the idea of the prosperous life which the politicians promise? Last week in Leicester an economist showed an improved way of releasing prosperity. Point by point he showed that the 10 conditions generally deemed necessary for sustainable growth are misleading. He also showed that whilst  this conventional, western, economic set of rules has been  hopelessly unsuccessful, an alternative has been running for a long time and has proved a stunning success. 

Prof Dana Brown, Founding Principal and Dean of the Business School at De Montfort University Leicester introduced Richard Werner, Professor of Banking for his inaugural lecture. DMU supports the United Nations Sustainable  Development Goals, in particular  - G16 Justice and Strong Institutions. The economics and banking aspects of this is what Werner delivered as he took us comprehensively through basic economics and banking principles. 

His argument firstly demolished the assumption that in order to develop sound, sustainable economies governments must follow the 10 policies of the Washington Consensus. These include: austerity, fiscal deficit reduction, privatisation, the opening up of currency flows, free markets (deregulation, e.g. sell your assets to foreign buyers at knock-down prices) and several other items of accepted 'wisdom'. These ideas for promoting structural changes within developing countries in particular are repeated like religious mantras by chancellors of the exchequer, secretaries of the treasury, the IMF, the World Bank and the like. The terms were conditional to IMF 'help' to developing countries in 159 cases from 1973-1994. Werner exposed these conditions as unhelpful to good economic outcomes, and showing that the actual outcomes can include the transfer of power, advantage and control to external entities. His purpose was to show how the most spectacularly successful economy on the planet for the last 30 years tried quite different methods. The title of his lecture was:

Paradigm Shift. How to get sustainable, stable, equitable and high growth. Is everything wrong they ever told us about how economics works and did Deng Xiaoping get it right?  

The bedrock of his talk was how banking works by creating credit (money) out of nothing i.e. how they make the loans.  They don't wait for depositors to bring their money in and then lend it out, they just create the money themselves when asked for a loan and then lend it. As Werner has discovered in studies of Japan and now China, as long as general central direction is given that the loans should go into the productive economy (making things, invention, product improvement, et al) this is not inflationary, and the economy then runs sustainably for as long as the overall policy is followed. 

On the contrary what typically happens in western countries is that banks prefer to lend for speculative investment such as for land and built property (real estate), shares and other financial assets, all of which are outside the Gross Domestic Product (GDP) part of the economy. As he explained the power in such non-GDP lending lies with those who hold assets where there is a shortage; thus with more borrowed money funnelled into a market, prices rise, governed by the fundamental  principle: higher demand & short supply brings price rises. Thus for deals involving land assets (e.g.  existing houses) the land value component rises raising overall house prices; assets such as shares are in limited supply and again, prices rise.  This brings the familiar price boom and bust cycle of western economies - caused by unregulated credit creation for assets in short supply. Eventually the speculative side of the boom gets out of hand and then early speculators sell up and banks find they have too many non-performing loans as the asset prices ease and a crash develops, which brings recession and job losses.

However if investment into the productive side of the economy were encouraged GDP would grow, bringing jobs. Careful management of the financial side of the economy is needed or  inflation can occur as consumers raise easy credit. The sudden demand for limited goods and an inadequate supply can bring price rises. The typical western unrestricted, free-for-all method of the Washington Consensus does not bring sustainable economies, as we all know.       

Werner spoke of his findings on interest-rate-setting by central banks. With a colleague Kang-Soek Lee, he has proved that the western central bank assumption: that  interest rates cause growth is wrong. What happens is that growth drives interest rates, thus high growth brings high interest rates and low growth the reverse.  Thus whilst central bank committees  deliberate for hours over interest rate setting, thinking they will coax the economy into life or damp it down, what they should seek out is what really drives the economy - the  causes and not the effects. Will they heed what Deng Ziaoping  set in train in 1978 when he said China would 'seek truth from facts'. Deng was a pragmatist and gave a new direction to his  country and was prepared to try whatever worked. Werner said what is called in the west 'the Chinese Miracle' is a misnomer, it is nothing of the sort. What China has achieved is sustained growth through clear repeatable policies and actions. A miracle has no naturally observable cause.

Recessions can be ended quickly by central banks. Ben Bernanke actually did this correctly after the credit crisis of 2007/8 as the US FED bought up US banks' non-performing loans at face value (not written down value)  and cleaned up their balance sheets, enabling them to lend.  This happened very rapidly as seen from a chart of the US Federal Reserve's balance sheet , with GDP growing within a year.
   
He examined the idea of equilibrium in markets. Assumptions are made: that markets being perfect, prices adjust instantly, and that markets clear automatically; that there is perfect competition; that all players are rational; that perfect information is available. These are all impossible and it is quite wrong to base policies on them. The Chinese way has been to accept the truth that markets never clear, rationing always taking place, so their government intervention is not a 'distortion', as believed in the west, but an essentially good thing to do, so that bad market outcomes are addressed. Markets are in pervasive disequilibrium Werner stated. He said that believers in equilibrium in markets (he listed 8 'features') were outdoing the Red Queen in the Alice in Wonderland fantasy novel, who sometimes believed '6 impossible things before breakfast'.

He challenged Washington Consensus believers to examine the outcomes of their conditions for sustainable growth. There is not a good track record compared with the Chinese case. One fundamental failing of western economics is the absence of textbook studies on money and clear statements that the creation of virtually a country's entire money supply, is through private banks, out-of-nothing. Until he carried out an empirical study no one had ever checked this money creation out-of-nothing theory. The result can be read here and became a most downloaded paper from Elsevier.    

A hopeful thing is that bank credit creation is a game changer for any country. With their own currency and banking system they have no need to borrow foreign currency. Their own local banks can create the credit needed in their own currency and lend it locally. Indeed, Werner demonstrated that even incoming 'foreign loans' remain in the jurisdiction of the issuing bank's country, and are merely matched by an accounting procedure in a local bank. When gold was shipped around the world in earlier times there were capital flows, but not now. All that flows is the control of the borrower's assets to the lender.  

China has thousand of local small banks so that credit is made available where the new jobs are going to arise, as the central policy of productive investment is encouraged. By contrast the UK has only 4 or 5 huge centralised banks which leaves a hopeless mismatch of the credit supply needed for the thousands of small businesses scattered over the country that will produce the new jobs needed for a sustainable economy. Werner said big banks naturally want big deals, small business need small loans which are proportionately too much trouble for big banks to bother with.   

Japan in 1945 followed the above methods and, hoping for a doubling in national income within 10 years after war, achieved that in 4 years and enjoyed  15% year-on-year growth for decades following. China adopted principles from Japan, of investment directed towards production in the late 1970s and had over 7% growth in GDP in most years for decades. By contrast Soviet Russia tried centralised direction of the economy but having only one main bank it failed to achieve a thriving economy at all.

Werner ended his lecture with a Q & A session and appealing for a local community bank in Leicester patterned on Hampshire Community Bank which is near to achieving its license.  No staff bonuses - just reasonable salaries, a charity is the ultimate owner giving towards local good causes. Such banks should follow the German local bank models which for more than 100 years: 

• have never needed public money to bail them out
• have never failed paying out customer deposits 
• have under 3% non-performing-loans 
• and provide 90% of SME loans in Germany.  

Local community-type banks have a great public appeal as they are based on relationships and trust - as was experienced in earlier times in UK banks. Werner showed that the prospect for new style local high street banks for the UK is good.

So, how do we consider startlingly different ideas that come from another culture such as  the economic success story of China? We are not fussed about buying their  goods, so why would a different way of doing economics from China be any different? UK politics is drifting to the left as Labour advocates more state intervention and as their poll ratings gain, perhaps the time is coming when economic lessons from Japan and China are becoming acceptable. Richard Werner wrote Princes of The Yen which details his findings as to how Japan ran its economy.      

A somewhat parallel story to this from 250 years ago is in The Times on 2nd May Paul Simons: 'Weather Eye.  American sailors discovered the powerful North Atlantic Gulf Stream flowing from America to England. British mail ships faced this as a counter-current on the journey to the America which slowed them. American ships found their voyages to Europe were up to two weeks shorter as they took advantage of the current. Benjamin Franklin, co-founder of the later American Constitution tried to publicise this navigation scenario.  Despite plotting the current on charts and delivering them to the Admiralty in London he was ignored. Franklin's cousin, a whaler who used the current, told him that the captains of the mail ships ''were too wise to be counselled by simple American fishermen''. It is thought that this blindspot disadvantaged the Brits in the following American War of Independence through delays to supplies and communications. The Brits lost that war. 

Werner's audience listened spellbound as his iconoclastic intellectual tornado swept through. Dean Dana Brown seemed impressed. But will there be a Bank of England governor and a Chancellor of the Exchequer who will grasp this economics nettle to reshape the economy with its banking system for the general good? Deng Xiaoping got something right about economics and decentralised banking.  With one community local bank nearly ready for the UK the hope of a more stable and sustainable prosperity might be coming, especially if the wider message from China is heeded. 
  
Posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom. 
Director of Local First CIC - Promoting Local Banks.       

Richard Werner and Kang-Soek Lee. Groundbreaking findings for new economic policy

Central bankers are openly struggling to understand why their low interest rate regime of the past decade has not brought vigorous renewed growth to their economies. This new paper 
Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan   should give food for what rational thought might exist in the high monetary echelons of power.   After all, if there is a startling mismatch between the practical outcomes of your policies derived from your theories then maybe, just maybe, you are relying on baseless assumptions?

Werner and Lee have taken great pains to examine the received classical economics wisdom that 'lower [interest] rates stimulate growth and vice versa' . 

They say there is a paucity of empirical evidence to back up this belief in the level of interest rates determining economic growth.  After examining half a century of data across four major economies involving 'varieties of capitalism' they conclude that the theory that low interest rates cause economic growth is rejected in 6 out of 8 cases and rejected in 8 out of 8 cases when  2 years of leads and lags were considered. However the alternative hypothesis that economic growth determines interest rates, is supported in 8 out of 8 cases.  '..long-term and short-term interest rates follow the trend of nominal GDP, in the same direction, in all countries examined'.

This has huge implications for public policy. The authors suggest that the policy makers drop the theory of price of money (interest rates) and that it be replaced by the quantity of money theory. Thus:

• the quantity of credit (the source of the money supply) should be the key driver 
• the raising of short term rates, to encourage banks to lend due to future higher rate expectations    
• the large scale central bank purchases of bonds should stop - they should be sold  instead (which would raise interest rates)
• the bank sector be structured to deliver credit creation for productive purposes
• the backing of fiscal policy with monetary policy by ceasing the issue of government bonds but instead, borrowing from banks
• that 'green quantitative credit guidance ' becomes a policy to ensure that sustainable projects are encouraged through central bank 'window guidance'  or through a decentralised local banking system

The paper concludes by reaching ahead to the idea of examining the possibility that the existence of interest itself imposes pressure on economies to grow unnecessarily thus depleting natural resources.     

The question is: How such a radical and necessary change Werner and Lee propose could begin to be managed? To take one obvious point: millions have low interest mortgages and the raising of interest rates would threaten the financial stability of many households. Additionally with increasing costs of mortgages reducing available funding, dropping house prices would leave many lenders uncovered by the equity in the property. Safeguards would be needed. There would probably have to be a mandatory fixing of interest rates for existing mortgages for some years. But as central bankers have created this particular property boom with the low interest rate policy they should get along with government and work together to solve it, given the new insights of this paper.

The paper shakes one part of the house of cards that is our economy. As The Free Lunch - Fairness with Freedom points out, our society is built on unfairness. Our treatment of land, houses, banking and monopoly powers have embedded poverty for many and wealth for a few.  Werner and Lee have painstakingly delivered truth as it is and not as it is taught in countless economics schools and universities. Who from the world economics establishment will grasp the implications? Which wise politicians could unite us all - losers and winners - to take a fairer course in the future and redirect us all  towards the common good?
posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom

ECOBATE 2016 Plamen Ivanov & David Ricardo's banking wisdom for the 21st century

Plamen Ivanov's Ecobate 2016 paper (University of Southampton) David Ricardo and Modern Monetary Reform Propositions: A critical Analysis reveals what one of the founders of modern economics thought about banking and banking sytems. Ricardo writing in 1824 understood that banks create the money supply, but until very recently this has not been at all widely acknowledged in academia. Imagine that such a fact, fundamental to all things economic has been hidden in plain sight for nearly 200 years! In the UK it was only in 2015 that the Bank of England acknowledged this openly in its May 2015 Working Paper No. 529: Banks are not intermediaries of loanablefunds — and why this matters  Authors:  Zoltan Jakab and Michael Kumhof .

Up to that point the function of banks has been overwhelming assumed by the ordinary person (and by many who should have been financially more knowledgeable?) that bank lending was merely the passing on of previously deposited money. The function of the creation of money by ordinary banks has not been given its due recognition in economics textbooks. Ivanov cited Werner (Dec 2014): Can banks individually create money out of nothing? - The theories and the empirical evidence, who set out to show in real time how a bank branch created a loan of  €200,000 for him in 2013 which, to prove it was real money, he deposited in another bank  He also proved that a fractional reserve amount representing  his loan at the central bank, was not involved (thus showing fractional reserve banking is obsolete, or at least only a half-truth) and that no already existing money at the bank was involved in making up the loan amount.  

Ricardo wanted a National Bank to be set up by the government to be run by 5 salaried Commissioners. The then existing Bank of England charter would expire and its premises might be purchased and staff transferred to the Commissioners. The Commissioners were to be independent of the government; they should create the money needed to redeem government debt to the Bank of England; they would create the money needed by the national financial system but should not create it for the government to borrow. Government needs were to be met by taxation or borrowing from privately owned banks. Ricardo wanted a full reserve system of banking, as championed by Positive Money . See also Martin Wolf.  

Ivanov thinks we have moved beyond the safeguards which Ricardo expected of full reserve banking. People would find ways to game the system and perform money creation outside the official constraints, and how do you handle new phenomenon such as digital currency e.g. bitcoins? Full reserve banking is likely to be costly and impractical, and it might cause the economy to contract. But we do need a safeguard to keep the economic system safe and Ivanov adopts Ricardo's idea of a nation's banking system divided into districts, where stability arises from many small independent parts rather than a few large players.  With many small banks the failure of one or two, through unwise money creation for their lending, will not wreck the whole system as was the danger in the 2007/8 crisis in the UK, when a very few large banks dominated. But our economic system is still in thrall to its top-heavy banks. However local independent banks of the German Sparkassen type with distinct areas of operation are a practical and realistic safeguard. Plamen Ivanov is involved in the establishment of a local community bank of that type. His paper was a ready made answer to Prof David Llewellyn's Ecobate keynote speech 'Are banks over-regulated today?' with its theme that more types of banking model are needed for safety. 

From the Ecobate 2016 Conference and with additional information.  Posted by Charles Bazlinton Director of Local First CIC which is promoting local banks.    

ECOBATE 2016 Best Paper Awards

ECOBATE 2016 was held in two Winchester locations this year. The academic papers were presented at the University of Winchester Business School in Romsey Road and from mid-afternoon the public session was back in its usual place down at the Guildhall. In a new development for ECOBATE, the morning's academic input of nearly 70 papers was recognised through Best Paper Awards which Sir Vince Cable presented as follows:

1. Category - Banks vs Financial Institutions 
Robert Unger,  Deutsche Bundesbank. 
BEST BANKING PAPER
Traditional banks, shadow banks and the US credit boom - credit origination versus financing  
  
2. Category - Global vs local banking
Sefika Betul Esen, Prof Yener Altunbas, Prof John Thornton, Bangor.
BEST REGIONAL GROWTH PAPER
The effect of banks on regional economic development 

3. Category - Monetary policy 1 
Giorgio Caselli, Catarina, Figueira, Joseph G. Nellis, Cranfield. 
BEST MONETARY PAPER
Monetary policy, ownership structure and bank risk taking: Evidence from Europe 

4. Category - Financial Development
Martin Eihak, Davide S Mare, Martin Melecky. Edinburgh. 
BEST INTERNATIONAL FINANCIAL INCLUSION PAPER
The nexus of financial inclusion and financial stability

5. Category - Financial history 
Konstantin Kiesel, Felix Noth. Halle
MOST INVENTIVE PAPER
When debt spells sin: Does religiosity guard against over-indebtedness?

6. Category - Commodities, Gold & FX
Shubasis Dey. IIMK/Kerala
BEST HISTORY PAPER
Historical events and the gold price 

7. Category - Banking and Risk
Ariel J Sun, Jorge A Chan-Lau. Cass Business School
BEST APPLIED NETWORKS PAPER
Financial networks and interconnectedness risk in an advanced emerging market economy 

8. Money Creation & Eurosystem 
Alexey Ponomarenko. Central Bank of Russia
BEST INTERNATIONAL CREDIT CREATION PAPER
The note on money creation in emerging market economies 

ECOBATE 2016 was organised by ARBE which was founded by Prof Richard Werner (Chair International Banking, University of Southampton). ARBE (Association for Research on Banking and the Economy) is also holding the Oxford Seminars at 15.30 hrs on the next four Fridays 18, 25 Nov; 2, 9 Dec. at Linacre College, St.Cross Rd, Oxford OX1 3JA

Faulty bank lending - the scourge of our economic system. Fred Harrison, Adair Turner & Richard Werner

Fred Harrison, wrote in 2005, 6 years ahead of the depression he predicted for 2010: 
 'The driving force that shapes the business cycle is the pursuit of capital gains from land' 
(p 215. Boom Bust - House prices, Banking and Depression of 2010. Shepherd-Walwyn 2005). Then in 2010:
'When bankers fabricate money (credit) to lend to a borrower whose land is rising in value, they emulate Mr Ponzi. Why? Because the escalating value of land is nothing more than an increase in debt. Value is not being added to the wealth of the nation....In the end that bubble must burst' (2010 The Inquest. DA Horizons 2010)

Adair Turner 12 years later and after the Harrison-forecast property-driven crash of 2007/8 says: 
 '...credit and real-estate cycles are not just part of the story of financial instability in advanced economies; they are almost the entire story.' (www.project-syndicate.org April 6th. 2016).  As he further says, specifically about China, faulty bank-led resource allocation of credit into real estate means much investment has been wasted. He concludes that free market competition, whilst valid for most economic sectors, should therefore not apply to banks. 

Prof Richard Werner in an audioBoom recording on 6th March  with Marie Mc Cahery for Bradford  bcb106.6fm radio gets to the heart of the problems revealed in the above quotes which underlies them: the banking system.  He gives four suggestions to the programme's title strapline question: 'Why don't economists?...   

1. Why don't economists... Find out how the economy actually works?
 He says that contrary to any other discipline such as medicine, economists start with deductive methods involving the assumption of the underlying laws without looking at the facts. They choose axioms such as:  people are assumed to act in a selfish manner to maximise their own satisfaction / they are never affected by outside influences / there is perfect competition and no collusion / perfect conditions prevail. What they should use are deductive  methods which would start with the facts - such as that people are not always selfish but help each other and that they are changed by outside influences.  Werner says that the prevailing engrained-selfishness theory is wrong, as it 'mathematically' proves what is assumed. It is a theoretical dream world and particularly dangerous to society as economists use this model to advise politicians. 

2. Why don't economists... Understand the role of money and banks? 
Werner quotes from a leading economist's textbook which explains why the matters of money and banks are left out of the book because 'it would obscure or confuse the reality'.
The common misconception is that the government or the central banks create money but only 3% of money is produced by the central banks (cash) and the rest by ordinary banks. In allowing banks to do this they are not instructed to create money wisely. 
The creation of money by banks was acknowledged by the Bank of England in March 2014 and Werner had conducted an experiment in August 2013 to prove this fact empirically. Linked to this,  the quantity of credit is, in Werner's view, the driver of the economy and not interest rates. The trend to negative interest rates will achieve nothing for GDP growth. Interest rates follow growth. 

3. Why don't economists... ward off crises caused by asset purchases?
Crises arise now through Ponzi-style housing funding (asset finance).   New money creation from banks should rather go to investment in the productive economy with consumption needs met from 'lenders' whom Werner distinguishes from credit creating banks. Growth will come through the expansion of the money supply through bank credit, but it should be under guidance, and is the most effective policy for growth in the real economy.

4. Why don't economists... create recovery without any extra costs to the taxpayer?
Rather than full monetary reform whereby the government creates the money supply without debt, which would need rather too extensive changes than we are yet ready for, Werner advocates 'Enhanced debt management' carried out through the Debt Management Office by the government. Here money would be raised for the government as it borrowed directly through bank loans (non-tradable, unlike bonds which are tradable) which Werner says would be economically advantageous being less expensive than issuing bonds.      

The interview ends with the case for local community banks which would promote lending to small and medium sized businesses as the German Sparkassen model and as already under way in the UK with the formation of Hampshire Community Bank.  

Posted by Charles Bazlinton.. Author The Free Lunch - Fairness with Freedom

  

Making Money Work: Lord Turner, Steve Keen, Chris Giles & Richard Spencer on Corbynonmics and money creation.

Lord Adair Turner has learnt a bit on the practicalities of speechmaking since we last reported (see ECOBATE 2014, 11 Nov 2014). In Winchester his PowerPoint slides were lost en route and but he did a brilliant job improvising. At the Positive Money event Making Money Work at Central Hall, Westminster on Monday 7th Sept he safely had 2 paper copies of his slides for each of the 200 or so attendees. His talk developed his ECOBATE 2014 theme and gave much detail as to how he thinks government economic and monetary policy technically could, and politically should, develop. 

He said that he did not agree with the extreme radical Positive Money view for the abolition of fractional reserve banking and its replacement with 100% reserve banking. But the 2008 crisis and slow recovery since cannot be understood without a clear understanding of the nature of debt, money and credit. Pre-crisis and for many decades we were far too relaxed about the private credit creation by banks. Post-crisis we are too terrified of the potential of what he termed 'overt money finance' (OMF) of government deficits -another name for this is 'helicopter money'. 

Lord T said there is no reason whatsoever against helicopter money, it was all a question of how much you do. A small amount will stimulate a little with no excessive inflation. He thought it would however be excessive to fund 10% of the fiscal deficit this way as it would bring hyperinflation and destroy the economy. 

In discussion  - Chair: Fran Boait (Positive Money) ; Prof Steve Keen (Univ of Kingston) & Chris Giles (Financial Times) - the matter of the doubtful effectiveness of Quantitative Easing (QE) so far was discussed in contrast to OMF. Chris Giles thought that whilst he would never rule any new idea out (e.g. Jeremy Corbyn's 'Peoples QE') he was sceptical that it is seen as a sort of magic solution which has no cost. He was cautious of using OMF as a monetary tool.  If it was used simply to put new money in everyone's bank account, good, but to use it to spend on infrastructure was fraught with problems - you might have to halt the construction of the HS2 railway unfinished, due to monetary rules.  Money is not the only driver of the economy, in addition there is housing and planning policy and new macroeconomic tools as to how banks should lend; however in the future QE might be seen to have been OMF.  Here Lord T agreed that QE, as started in 2009, might become post-facto OMF. He illustrated this with his view that with the Bank of Japan owning 60% of GDP in Japanese Government Bonds he thought it highly improbable that these would be repaid or sold off by the BoJ. He thinks it will become helicopter money and be shown to be a permanent monetisation of government debt. ''That is going to happen and I would place a bet on it'.

He thinks that we should consider a 2009 UK scenario where a 4% of GDP fiscal deficit was planned and £350bn 'reversible' QE issued. He put it that it might have been announced that 5% would be planned with the extra 1% being OMF money creation and non-reversible. He said that this would send an important signal and be much clearer than the current scenario of whether QE really is reversible.   

Currently the Bank of England is apparently doing two things: 1.Managing interest rates and QE for inflation targeting. 2. Managing bank lending through loan requirements and bank capital requirements, for economic safety and stability all without managing demand.  What he sees as actually happening is that the BoE is starting to manage the allocation capital as seen in the Funding for Lending Scheme to be directed to SME loans.  Five years ago such government allocation of capital was unthinkable! 

The cause of the crisis had been the mis-allocation of capital through private credit creation by banks.  Too much credit chased existing assets rather than to finance productive investment, which Richard Werner calls 'credit for GDP transactions'.   This caused a debt overhang with the danger of deflation.  Beyond the supply of consumer goods to most households,  housing becomes another way to compete between members of society to gain a more attractive home or stay at a hotel. As locations offer varying benefits this competition encourages more debt. Banks encourage this, being biased towards property lending due to the collateral available. Steve Keen pointed out the reverse case of lending to entrepreneurs where, maybe,  four out of five loans might fail with loss of principal. This shows the difficulties that banks can have in lending to productive ventures. 

Lord Turner questioned how widely we might be able to spread a new understanding of the monetary issues being discussed.  In confessional mode, in his new book 'Between Debt and the Devil' he has a chapter 'The crisis I did not see coming'. He had to embark on an intellectual journey to understand themes ignored in his earlier economics education - a frank admission in mid-career from a very high-flying player. He said the very essence of the insight of macroeconomics is that governments and states are not the sum of households. In the personal household economy, books have to be balanced, but the state economy is different. Steve Keen said whilst he was impressed by the new openness at the Bank of England but in contrast the political class think the government should be running a surplus. 'They vie with each other: 'My surplus is bigger than your surplus' ' which is the equivalent of banks believing they should be receiving more loan repayments than they put out in loans. Governments ought to be running a deficit with money creation financing a large part of that.  Clearly from the view of the panel, economics education should be transformed so that these things are understood in universities, but beyond that how easily can the ordinary voter understand it? As to conventional economics theory, the efficient market theory is clearly wrong as no financial trader would get up in the morning if it was, since they would not be able to make any money! But the public needs to know that economics will never give as clear answers in its field as for instance an engineer can give in designing a bridge.

In Q&A I said I was involved in helping to establish a local community bank - Hampshire Community Bank which would lend locally and give its profits to local good causes. Was this a good foil to the problems being discussed that had arisen through centralised, international banks?  By their strong applause the audience clearly appreciated the idea.
Steve Keen thought it was an excellent idea as local knowledge would inform bank decisions on loans. Centralised banking is essentially 'collateral banking' which is dangerous, but as Richard Werner emphasises local banks are the strength of German banking. 

Chris Giles said local banks are obviously good, but that a weakness might be that local firms gain loans merely by being local and not through normal due diligence and good banking practice. (Note: If I had been able to respond a comment could have been that this danger is just as likely with non-local banks! Just look at what happened leading up to the 2008 crisis. Where was careful banking practice by national /international banks then?)  

Richard Spencer, an economist whom Jeremy Corbyn uses to inform his People's QE, said that 5 weeks ago he hadn't heard of Corbynomics but since then he has been credited with writing it!  Jeremy Corbyn asks what does the economy need?  He thinks we need investment in public infrastructure and this needs money and if needed a deficit, and this if fine because people want to buy bonds. However he thinks the banking system is too powerful and People's QE would mean that the bond route would not always be wholly used and banks not needed for some fraction of the money. Corbyn has said that if the economy is booming People's QE would not be needed as the bond route might be wholly enough.  He (RS) largely agrees with Lord Turner's views apart from central bank independence. He said that for politicians to be told by the central bank the amount of OMF needed is not democracy, it would be rather like being told by bankers how much tax is needed. Politician should listen to able technocrats, such as at the Bank of England. But let's not have bankers in charge, let's have democracy in charge. Strong applause.

From the panel: When politicians had control of interest-rate-setting, public opinion (or party opinion) was often targeted very obviously and the high inflation of the 1970's might be seen as a warning that sole political control was dangerous.  'Commitment devices' (e.g. Committee on Climate Change/ Bank of England) agreed by politicians in order to keep a steady course over time ahead even when it hurts, are useful.  However the ECB has been given far too much control as it defines its own terms for price stability, for instance.      

Natalie Bennett the Green MP asked what the money system would look like if consideration for the environment and for addressing inequality (where everyone has enough) were both addressed. Chris Giles thought a monetary system could not create a better society. Lord Turner thinks that money systems are not an appropriate answer to carbon issues - there are enough devices around already.  Progressive taxation is the device to address inequality, not OMF. Steve Keen thinks that money creation is needed to redirect spending to carbon reduction, no-one will do this for a profit.    

Barb Jacobson for the Basic Income Trust asked about the idea of using money creation for cash payments to everyone?  

The panel agreed with the idea: There should be no problem with ensuring a single payment to each person through NI numbers and tax numbers / It should be directed to paying off personal debt first for those who have it / Alastair Darling tried to do it in 2009 but was told it would take 9 months, so he reduced VAT instead / Australia did the same thing in 2 weeks.

Note: 

Chancellor George Osborne understands the subject of the Making Money Work event, as reported in  this blog   Nov 13 2013:
 ' It is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. This would allow governments to increase spending or reduce taxation without raising corresponding finance from the private sector.'   See Treasury document quoted para 3.34:  Here 

See the Positive Money official post for the event Making Money Work: HERE

Posted by Charles Bazlinton. Author: The Free Lunch - Fairness with Freedom