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For a Civic and Constitutional Republic 


Issue No 79 Friday 16 September 2011

This Week

  • Republican Party Meeting. Saturday, 1st October 2011

  • Will Having the Government Create the Money Lead to "Statism"?

News Stories

Highlighting news stories important to the Civic Republican view, particularly those that are overlooked or little covered in the main media.


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"A Vision of a Republican Party"
- Address by Peter Kellow

2pm . Saturday . 1st October 2011
Conway Hall
25 Red Lion Square
London WC1R 4RL
(Nearest Tube . Holborn)


The address will be followed by a general discussion and the setting up of a Steering Committee to initiate the Republican Party

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  • Will Having the Government Create the Money Lead to "Statism"?

Peter Kellow writes

In Republican Party Newsletter No 70 Friday 10 June 2011 I talked about the how we need to take money creation out of the hands of speculative banks and give this function to the people, i.e. to the government. But I noted:

" ... you cannot hand over the business of money creation to the government run under the current constitutional arrangements. If democratic politicians were to hold the levers of money creation, all sorts of short term wheezes and plots would be brought into play. And you cannot at present create an independent committee or board for its independence would be an illusion. Only a republican constitution can confer the necessary constitutional permanence, authority, objectivity and independence that the Monetary Control Board will need.

This is why the Republic and the Banking Revolution must go hand in hand."

This issue of how we manage the money supply is crucially important to running the economy under the new economic model. This is why the design of the institution of the Monetary Control Board is so vital. You could argue that things could not be worst than the situation we currently have, but let's be more ambitious than that implies. Let us aim for a system par excellence that will streamline our reinvigorated economy to be a world leader once again.

On the Repubican Party Facebook page pledged member, Michael Crahart, asked a very pertinent question concerning the monetary management. It lead on to a discussion which explains a little more how the MCB would deliver the required results. This discussion is now reproduced here:


Michael Crahart Isn't your idea that only the government should create money, a form of financial communism?

Republican Party of Great Britain Very good question. I would prefer to ask: is it a form of financial statism? I think that is basically the same question, and is what you mean, that is, does this give the state too much power and effectively limit private enterprise?

I am totally committed to free enterprise and competition as a way of running an economy. The problem is we do not have this at the moment. The power of the financial services means that free enterprise is much compromised. We have seen thousands of businesses go to the wall in the last three decades. Some say this is just a natural Darwinian competition and cannot be avoided. I would say that the economy is too distorted in favour of the banks and so we effectively have a dysfunctional market economy producing unnecessary bankruptcies. By putting the power to create money with the government, free enterprise will be liberated to created wealth. It will not be hampered by excessive interest payments and taxes will fall as the debt burden of government declines to zero. 

Whoever has the power to create money has an enormous hold over all participants in the economy. With the proper institutional structures, the government should have this function, not the global speculative banks that have it at the moment. 

This would not mean an end to private banking – far from it. The government will not lend as a bank would. It must not for this would open up the dangers of unregulated lending with all the damage that could do. Lending will be done by private banks and so they can assume the role that many people think they have at present. 

But they will not be able to create money. They only lend what they have as deposits. This will lead to a proper functioning of the private enterprise economy in which success and failure carry financial consequences. There are those that argue that this would not work as the banks could not make a profit. What they do not understand is that, without banks creating interest bearing money, businesses (including private banks) would find it easy to be profitable and households would not need to borrow very much at all. Much lower corporation and income tax are an important part of this picture.

Government controlled lending will mean that asset bubbles will be avoided and so the burden of inflated assets will simply not exist allowing money to flow into productive activities. The amount of debt and borrowing will thus be reduced and what remains will be at high interest rates compared to now allowing private banks to make a profit. This incidentally will return benefit to savers who are unnaturally disadvantaged under the current economic model.

At present we fear higher interest rates, but that is only because under the current economic model the debt burden is so collosal. Higher interest rates however are natural to an economy where overall debt is low, savings for the future corresponding high, the money supply is well managed and where asset prices relate properly to the real economy having not been inflated by "Ponzi" money as now.

The essential thing to grasp is that the operation of banks at present totally distorts and crucially damages the free enterprise, free market, economy. Taking over their money creating function would not lead to communism, or “statism”, but rather the promotion of a real, productive, enterprise economy. The first country that goes down this road will create a power house of opportunity and innovation.

August 17 at 9:18pm · 

Michael Crahart Yes I can see where you're coming from I'm an anti-corporatist libertarian but I tend to think that a freer market can come from regulation-light government policy. The financial crisis originated with heavy-regulation which compelled banks to lend to minorities unlikely to repay, sub-prime mortgages. This was compounded by speculation in the same area and when things went awry governments bailed the banks out! It's because of state tampering with the market that got us in this mess and is keepng us in it. It seems to me that the way out is for the state to gradually back out of the market and regulate only in order to provide a level playing field for free enterprise.

August 17 at 9:31pm ·

Republican Party of Great Britain In my view the big mistake that neoliberals/libertarians made was to treat banks like any other business. They are not, because they have this one great privilege that no other business has. They can create money, supposedly under a limited fractional reserve ration, but now virtually under any reserve ration that financially jiggery pokery with allow. If we want to be truly libertarian why not give this privilege to every business? I think I could manage to make a profit running Woolworths if I could do my accounting as banks do.

August 17 at 11:05pm · 

Michael Crahart Every business has a product that it creates and profits from, with banks it's money.

August 17 at 11:18pm · 

Republican Party of Great Britain I am aware that that is the classic neoliberal/libertarian view. It is one that over the last three decades has wreaked havoc on western economies and the lives of the individuals and productive businesses that try to survive within them. It was certainly Margaret Thatcher’s view. 

Money is not a good or service that banks create just as normal businesses create goods and services. The latter involves the creation of value-added whereby materials and labour are input and products result that have more value (hopefully) than the input. The creation of money has no comparable process. It is simply a paper manipulation. This is why it is a grave error to view it as a simple commodity like any other. And it is why banks are not true productive industries. If money were produced like a product it would, of course, be subject to VAT! But if you inspect the Custom and Excise rules you will find no VAT rate or exemption specified for “money”.

You say you are anti-corporate, but the neoliberal economic model, that controls policy making by all the main parties, has produced a regime that is wholly profitable to giant corporations who have flourished under it. Mega global businesses that are not actually banks take on some of the aspects of banks as they also control mega sums of money. The absence of restrictions on capital movements that the neoliberal/libertarian model insisted on favours large businesses to a disproportionate degree. All the evidence before your eyes confirms this trend. The idea that you can be at the same time libertarian and anti-corporate is a contradiction in terms.

August 18 at 8:57am ·

Michael Crahart Surely this has already been tried at various times in history the Bank of England and the US Federal Reserve are government agencies that create money. What you appear to want to do is tighten the relationship between the government and the central bank?

August 19 at 10:29pm ·

Republican Party of Great Britain  The answer is definitely not to have a body like the American Federal Reserve. It is supposed to be a central bank like the Bank of England and does perform some of the same functions but the big difference is that it is made up of the private banks themselves whereas the Bank of England is state owned and so at a remove from private banks. 

I think the question you are driving at is: who or what is going to manage the money supply? Until the Great Crisis of our times began this was almost exclusively in the hands of private speculative banks, but since then governments on both sides of the Atlantic have also done the job. Both America and Britain have indulged in quantitative easing which is printing money (out of thin air) and using it to buy back government bonds from the banks to restore liquidity to their balance sheets. The theory (or hope) was that the banks would then lend to businesses to boost the ecomony, but it is becoming increasingly clear that the banks have used the money to improve their balance sheets. America has in addition employed Keynesian methods of boosting the economy by public spending on infrastructure. So governments even now do create money. What is different with what I am proposing?

Your latest post reads: “Surely this has already been tried at various times in history the Bank of England and the US Federal Reserve are government agencies that create money. What you appear to want to do is tighten the relationship between the government and the central bank?"

I think you have hit the nail on the head about what monetary reformers such as myself have to answer. The banks have been irresponsible in their role as creators of the money supply. Why should the government be any better at it? 

The first part of the answer is that even if the government’s management of the money supply were to be appalling, things would still be better because the money created would not be interest bearing. All private bank money is interest bearing and so, as the money supply increases, the interest that is borne by individuals, businesses and governments increases yearly. This is why the question of debt is something that is in the news everyday. The debt has increased every year since banks were created 300 or 400 years ago but recently this increase has been exponential and so the burden has become so colossal that even governments are becoming insolvent. As I said before I am passionate about free enterprise as being the engine that drives the economy, but we don’t have that today as the banks suck the lifeblood out of the economy with interest payments.

What I have just said is what you will hear from all monetary reformers who wish to see the government, not the banks, create the money. The second part of the answer you won’t hear elsewhere as in my view the dangers in just handing over money creation to the government are generally underestimated. Just imagine a character like Gordon Brown getting his hands on this function! This is I think a crucial point you are driving at. 

My answer which I wrote up in Republican Party Newsletter No. 70 is that we have to enshrine the institution that is responsible for money creation in the constitution to give it true independence and authority. That way it is aside from the political fray and can be objective and impartial. I won’t repeat the whole argument here but to see how that works you have to see how republican institutions can truly work in this way. There has to be a democratic element in determining the overall policy and in the appointment of this institution, which I call the Monetary Control Board, so that republican checks and balances can operate. Again that is in the newsletter.

In the end you have to put your faith somewhere. I understand you are suspicious of too much statism whereby we rely on governments too much to be wise and just. Some may prefer to put their whole belief in the operation of the free markets. But I would say to that (1) there is no such thing as a free market (and any economist will tell you as much) and (2) we have tried that for the last 30 years and we are now wrestling with result. And we will be, in my view, for a decade and more to come.

I put my faith in civic republicanism which means I believe it is possible to design institutions in such a way that they serve us well. But I will repeat what I have said before in this discussion. The aim of this is to enable individuals and businesses to be free, prosperous and productive. Banks can be that as well but only by redesigning the framework they work under. The aim is not to create a massive state machinery but a machinery fit for purpose. We are a long way from that now.

Those are the arguments. Ultimately it is for you to decide where you want to put your faith.


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