Positive Money : Explaining How “New Money” Is Made Through Debt

Positive Money : Explaining How “New money” Is Made Through Debt

Article written by Paula Newton and Maria Fonseca

Where does money come from ? How does the system of money work ? What is money after all ?  Positive Money is a movement that tries to investigate some answers for these questions, and that searches for a money and banking system that works for society and not against it, which the organisation asserts that the current situation has the unfortunate disadvantage of doing. Positive Money suggests that the current financial system that we are in has left people with the worst debt levels through history, a level of inequality that is worsening and unaffordable housing. The organisation affiliated with sister organisations in almost 20 other countries and is, as it puts it:

 “…campaigning for the power to create money to be used in the public interest, in a democratic, transparent and accountable way, rather than by the same banks that caused the financial crisis.”

Positive Money has set itself up as a not for profit organisation, and it is currently based in London. The organization was founded by Ben Dyson in 2009, resulting from Ben Dyson´s disillusionment with mainstream economics. Ben decided to actively look for solutions, which lead him to campaign for a proper understanding of how money works as the first step in fixing a failed banking system. That was the reason who caused him to found positive money, as he explains in a podcast published in BBC 4.

Through Positive Money, Ben now spends his time working with MPs, think tanks, charities, academics and unions to promote a better understanding of the real issue with debt-based money and fractional reserve banking. Ben is a co-author of Modernising Money along with Andrew Jackson. He originally studied Development Economics at the School of Oriental and African Studies (SOAS, University of London) before spending two years collaborating with other three people and growing a start-up business in the financial sector.

The way that the organisation sees it, money is created by banks who make loans in order to achieve this. This leads to a situation where the only way to get extra money into the economy is to rely on borrowing from banks, which has led to a situation where we are faced with mortgages and sizeable personal debt. When people get loans they spend the money that they took and this leads to the idea that the economy is doing well, meanwhile, debt is going up. Indeed Positive Money argues that if there is £100 in your bank account then someone else will be £100 in debt. Positive Money asserts that when debts are paid off money disappears. This has the consequence of leading to a recession, and an encouragement of personal debt in the economy to avoid this.

House prices are another major issue according to Positive Money. They explain that while this has partly been brought about by there being more people than houses, in fact house prices have also been elevated due to the new money that banks created in the run up to the financial crisis. House prices increased faster than wages. This leads to more people renting and those that are poor passing their money to those that are already richer. The winners in this situation according to Positive Money are the banks, since they will benefit from larger mortgages given over longer periods.

According to Positive Money, in the years prior to the financial crisis, banks created a lot of money by making loans, and in only seven years they doubled the amount of money and debt in the economy. This money was used to push up house prices (31% went to residential property and 20% to commercial real estate). Most of the rest went to the financial sector and to markets that imploded when the financial crisis hit. This led to the debts becoming unpayable and the financial crisis. Jobs are also affected. That is because according to Positive Money, when banks create money it leads to a boom, and people get jobs and feel as if they are getting richer due to credit and loans. This can lead to untenable levels of debt. At the same time, Positive Money argues that when banks are able to create the money of a nation everyone ends up paying higher taxes. The reason for this is that the proceeds from creating new money go to banks not taxpayers. Taxpayers end up in the position where they pay for the cost of the financial crises that banks cause.

What needs to be done ?

Positive Money seeks to change the growing gap between the richest and the poorest people in society. It also aims to reduce the destruction to the environment due to lower resource consumption. Fundamentally, allowing banks to create the nation’s money is considered to be un democratic by Positive Money. There are three steps proposed for Positive Money to be able to change this situation. The first is taking the money to create power away from banks and giving it back to a democratic, transparent and accountable process. The second is creating money free of debt.Positive Money’s proposal is that the state could create money, free of debt. Finally, the third is to put any new money created into the real economy and not back into financial markets and property bubbles. The following animated video explains these three proposals :

It is a valiant cause and it remains to be seen whether Positive Money is able to drive the change it seeks. If it does we could be in a very different financial situation, one that may just benefit us more than our current system.