Why the Republic and the Banking Revolution Have to Go Hand in Hand
Peter Kellow writes
Ever since the first Republican Party Newsletter appeared on Friday 5 September 2008 I have been advocating monetary reform whereby the creation of money should be the job of the government and not, as now, the private speculative banks. I am not going to repeat here the reasons for this which I and others have covered elsewhere.
The arguments are set out better than I could ever do in Ellen Hodgson Brown’s Web of Debt published on 15 Jan 2008 and on the website of the Positive Money campaign launched in 2010.
A Well Known Quango
There is a head of steam building on both sides of the Atlantic for reform of banking and the means for creating money, and people are starting to consider it as a realistic possibility at some time in the future. After all, the present system has monstrously and demonstrably failed us. Policy makers and mainstream economists are resolutely putting their heads in the sand determined to perpetuate the current system of allowing the private speculative banks to create interest bearing money according to their commercial priorities and nothing else.
However, there has been one big monetary policy initiative that has resulted in government created money in volumes that only states can play with – this is called "quantitative easing". In this the central bank creates money and buys back government bonds from holders. The result is that there is more liquidity in the economy. Just imagine you are a bank sitting on £100 million worth of government bonds that you are quietly keeping as an investment on which you collect the interest. These bonds are liquid to an extent as you can in theory sell them on the open market for cash but that depends on your liking the price on offer as well as other factors. On the other hand if the government come along and then buys these off you, instead of relatively illiquid bonds you now have highly liquid cash – well nothing is more liquid than cash! This is then available to lend – so there is more liquidity.
So with quantitative easing (QE) it is the government creating the money, not the banks. Is this not what monetary reformers are advocating? Technically the creation of the money from thin air by writing it into a government account is exactly what money reformers are advocating, however, there are two major problems with QE.
- The way the decision about creating the money is made
- What is done with the money after it has been created
I want to consider mainly the first question here, although we cannot entirely divorce it from the second. Let us imagine that some way down the line we are going to abolish the ability of the speculative banks to create money and return this function wholly to the government. Exactly how is the government to address this question about deciding how much should be created at any time, if any? Positive Money has an answer to this. They write:
… the decision on how much or little money needs to be created would be taken by the Monetary Policy Committee. To maintain international credibility and avoid ‘economic electioneering’, the MPC would be completely separate and insulated from any kind of political control or influence - in other words, the elected government would not be able to specify the quantity of money that should be created.
The Monetary Policy Committee would decide how much money needs to be created in order to meet the inflation targets by analysing the economy as a whole - not the spending needs of the government, nor the needs of the banking sector. They would use ‘big picture’ statistics to judge whether meeting the inflation targets requires more or less money injecting each month. They would also have access to all the research resources that they require to make an informed decision. …
The newly-created money would then be added to tax revenue and distributed according to the elected government’s manifesto and priorities. This could mean that the newly-created money is used to increase spending, decrease the national debt, or replace taxation revenue in order to reduce taxes, although the exact mix of these options would depend entirely on the elected government of the day.
Consequently, the decision over how newly-created money is initially spent would be made by the government, but the government would have no control or influence over how much money is created.
I am broadly in agreement with this and it has similarities with the idea for a “Monetary Policy Board” that I set out on the Civic Republican Manifesto website in 2008. However, I believe that Positive Money is ignoring a big problem and it is one that stems from the constitutional arrangements that we currently have. This is why I believe that the revolution (for that is what it is) in money and banking must go hand in hand with the adoption of a Republican constitution. To appreciate why this is so we need a little of the theory of Civic Republicanism (which again is included in the Manifesto).
There are essentially three type of organization by which the business of government is run.
- Democratic institutions
- Civil institutions
Democratic institutions are made up of members who are elected by popular elections. Civil institutions are made up of members that are appointed on the basis of merit, achievement or qualification (all, or one, or two of these). The membership of a quango is all or in part in the gift of the government executive, often the head of government, i.e., in the Kingdom, the Prime Minister. In fact, the quangos themselves are usually the creation of the executive and for this no act of parliament, and certainly no constitutional change, is required. The vital point about quangos is that their existence is totally dependent on the executive and the executive alone.
The distinction between these different types of organization is fundamental to the theory of civic and constitutional republicanism. As an example, the most important democratic institution is, of course, the House of Commons. An example of a civil institution is the new Supreme Court of the Kingdom, as its members again are appointed according to the same three criteria. Here all three, merit, achievement and qualification come fully into play in view of the delicate legal judgments that the members have to make.
It is instructive at this point to make a slight diversion here to consider the different ways in which the members of the UK Supreme Court and the US Supreme Court are chosen. The former is chosen by a committee of lawyers, the latter by the US President. Because appointment to the US Supreme Court is for life (as it must be) there is a vacancy only occasionally and so it seldom falls to any one President to choose very many during the maximum period for a President of eight years.
However the difference in the method is important. The American Founding Fathers had no doubt that the Supreme Court had to be above the day to day polity and so there was no question of it being democratically elected. However, according to the theory of checks and balances upon which the US Constitution is built, they considered that, nevertheless, there should be a democratic element in its construction – hence the President’s role. Undoubtedly this does create hoo-hah’s from time to time as Presidents are accused of stuffing the Supreme Court with their own people, without sufficient regard to merit, achievement and qualification.
But,in spite of this, the Founding Fathers were surely correct to insist that a democratic input somehow, somewhere, exist in the Supreme Court. The British system puts all faith in the professional bodies to come up with the right choices with not the least influence from anyone who has been democratically elected.
Now, having dealt with democratic and civil institutions, what can we put forward as an example of a quango to illustrate the point? It so happens in this discussion of monetary policy there is an obvious choice – the Bank of England Monetary Policy Committee. This is partly appointed by the executive. and, indeed, was wholly created by the executive. Just a few days after Gordon Brown was installed in No 11 Downing Street in 1997, the creation of the MPC was announced. Days later, it was appointed and up and running. People who live in properly constituted republics can only gasp at the power of the British Prime Minister to conjure into existence overnight such a powerful body.
But power to create is also power to destroy and so the other side of the coin is that the Prime Minister can abolish it just as quickly. This latter aspect calls into doubt the so-called independence of the newly made quango for it lives and breathes by the say-so of its creator. In fact few people now really believe that Mervyn King pursues a policy that is not dictated by the government. The world “independence” is now much less used in respect of the MPC than it was in the hay days of New Labour.
This fly-by-night aspect of quangos does not apply to democratic or civil institutions for these require parliament in order to come into being or to be removed. Both can derive their position by virtue of two possible authorities: either by the constitution or by statute. The new UK Supreme Court was brought into existence by act of parliament and the lengthy process that that entails. It owes its existence to statute. The US Supreme Court on the contrary exists by virtue of the Constitution.
Now ask yourself two questions:
- Which gives an institution the most permanence and authority: statute or the constitution?
- How many government institutions guaranteed by the constitution do we have in the Kingdom?
The answer to the first question is pretty obvious for what was created by statute can be overturned by statute. So if a future UK government decides it does not like the Supreme Court, perhaps because its decisions are going against its wishes, it can pass a new statute to abolish it. This threat is real and effectively undermines the authority of the court. As an example a recent ruling on bank practice, to the surprise of many, went in favour of the banks and it was considered suspect. (No prizes for guessing what decision the government wanted.) The point remains: statutory authority is nothing like constitutional authority.
The answer to the second question above is of course: none. We have no written constitution and so nothing can be guaranteed by one. (The only exception to this you could argue is the monarchy as it exists as of right above parliament and above the law and needs nothing to guarantee it.)
Let us now return to the proposals, by Positive Money, that the Monetary Policy Committee should be in charge of money creation. They say “To maintain international credibility and avoid ‘economic electioneering’, the MPC would be completely separate and insulated from any kind of political control or influence”.
It is here that we need to bring to bear the Civic Republican analysis. Remember the MPC is a quango. It therefore cannot be “completely separate and insulated from any kind of political control or influence” for it will depend, as now, on the government for its existence. It is fantasy to say it will be independent from government just as it is fantasy for George Osborne to say his newly created quango, the Office of Budgetary Responsibility, is independent from government.
We could give it a bit more authority by enshrining its existence in statute, but as with the present UK Supreme Court the idea that it would maintain total independent is an illusion. The only way any body can achieve true independence and objectivity is by being created by the constitution. That way it is most truly above democratic concerns and pressures and can make its decisions truly objectively.
I expect by now my conclusion is obvious. You cannot have money creation by the government without a Republican constitution for only such a form of government can guarantee the necessary independence and objectivity of the decisions made by the board in charge.
What about the appointment mechanism for the Monetary Policy Board I propose? Thinking of the difference between US and UK Supreme Courts, should we have a democratic element in the appointment or do we leave it to professional groups? I would definitely side with the former. Although appointments to the US Supreme Court can create allegations of political favoritism, at least, it is all out in the open - where it should be. The deliberations of committees of professionals will be shrouded in mystery. The US Founding Fathers, as usual, got it right.
However, having opted for a democratic element in running the MPB, I would do it differently from the example of the US Supreme Court, which after all has a completely different function. Instead of relying solely on the input of the head of state (the new office of President) we should bring in the legislature as well. I propose that the appointment to the board should be done by a House of Commons Committee whilst overall policy (e.g. inflation, employment targets) should be set by the executive, the President.
Thus there will be a three way arrangement between the Civil Institution of the Board and the Democratic Institutions of the Executive and the Legislature guaranteed from meddling by the overriding authority of the Constitution. This should provide the checks and balances necessary to a properly designed Republican Constitution
Even without the bubbles created by the current speculative private banks there will still be need for a certain amount of money creation. This is, partly, a function of money necessary for trading and, partly, to finance asset price increases and partly a function of withdrawals of money to go abroad. Yes, there will still be asset price increases for these are a natural product of a successful economy and, without the burden of the speculative banks siphoning off their unwarranted interest payments, a successful economy is what we will definitively have. The difference will be that asset prices will be a function of the real economy, not the speculative creation of Ponzi money as now.
Also the creation of money will have to be coordinated with the management of public services, and the quote from Positive Money rightly refers to this. The two cannot be considered independently. There is not space to go into that here but I have set out how this could work in detail elsewhere.
To emphasise the point of this piece, 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 Policy Board will need.
This is why the Republic and the Banking Revolution must go hand in hand.
COMMENTS ON LAST NEWSLETTER NO 69
A fascinating, thought-provoking and almost poetic bulletin, this week.
I have to admit that my interest in "existenzphilosophie" initially came
from Astrid Kirchherr! I'm really more of a Camus than a Sartre but the
latter was quite an icon and it does no harm to stir up debate, sometimes.
In the past, I couldn't understand why so many people portrayed Thatcher
as a disciple of Hayek, when she was so much closer to Rand.
Perhaps it was because, when Thatcher rose to power, Rand was still around
and she seemed to be an extremist. As well as that, the Tory Party was not
converted to chauvinistic, anarcho-capitalist corporatism [aka
"Thatcherism"] until the mid-1980s (and some "wets" remained on the
Conservative benches, long after that).
Today, Rand's ideas are almost mainstream in US politics (or, more
accurately, they are not too far removed from the rhetoric of some
right-wing politicians) and she has various "apostles", who are probably
more effective in keeping her ideas in the public consciousness than she
was, when she was alive.
You say, quite rightly (in my opinion),
"we need to recognize that some radical changes are necessary. Those who wish to tinker with the present political and economic systems will achieve precisely nothing".
The root of all political decisions is controlled by the unconscious slavery to the Bank of England! Those who control and manipulate the distribution of monies within our (the common peoples) societies are the ones who should be removed from the equation first!
The only problem with this World is that no one wants to face up to the truth - capitalism rules!
Recommended article of the week
George Osborne Plan Isn't Working, Say Top UK Economists
As predicted in Newsletters of July 2010, the austerity programme is not working. The nation is going to pay a massive price for the Conservative ideological experiment.
Except the plan is working in its real objective. This is to maintain the price of the kingdom's bonds. These bonds are held by speculators, global banks and hedge funds throughout the world. These are the people whose interests the Conservatives wish to protect, not British citizens and businesses.
Why? Because these are the people who finance the Conservative Party and guarantee lucrative jobs when political careers are washed up.
And, incidentally, the consequences of economic failure for the LibDems could be terminal. Only a few weeks ago after their disastrous showing in the May elections the LibDems were saying they formed the coalition to permit the austerity plan to be put into practice - an act of self-sacrifice to save the economy. It is more and more looking like an act of self-sacrifice to ruin the economy. They may pay the ultimate price for this betrayal of their friends and supporters in pursuit of political office.
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