THE NEW MONEY AMENDMENT
A new method of funding capital expenditure in the
UK
The
New Money Amendment to the 2002 Finance Bill proposes:
“That
HM Government should require the Bank of England to create funds for specific
capital projects – including specified NHS capital projects and the
modernisation of the London Underground – and credit them debt-free to the
Treasury; and that the money should be paid back within a 25 year period and
withdrawn from circulation.”
This amendment aims to create a new option for raising money for
specified public sector capital projects – without the large extra sums
required by the financial intermediaries using PFI or PPP.
This will restore some of the balance between debt-free money issued
into circulation by the state and interest-bearing money created by banks in
the form of mortgages and loans.
Background
“The
process by which banks create money is so simple that the mind is repelled,”
JK Galbraith,
Money: Whence it came, where it went, 1975
As the economy grows, new money is needed to handle the growth of
transactions. Most of the new money in circulation in the UK is issued in the
form of interest-bearing loans. The
growth in M4 demonstrates that up to £80 billion of new money is created in
this way every year. The interest charged on this annual addition to the money
stock gives the commercial banking system an effective subsidy due to the
difference between the value of the new money and the costs of creating it,
and a source of excessive profit from their virtual monopoly over the creation
of new money. With the dramatic decline in the use of coin and note, the
government’s seignorage and the supply of money free from debt has
been replaced by ever more interest-bearing, bank-created credit.”
The problem
The public-private partnership financing of the London underground
illustrates the problem dramatically. The key investors expect to make an
estimated £2.7 billion over the 30-year life of the PPP, due to be signed in
June, in return for investments of just £530 million.
Those figures also hide profits expected by other financial
intermediaries, which may be anything up to a third of the required
investment. A bond issue would be cheaper, but even then the pay-off to
financial intermediaries would be considerable.
The Public Finance Initiative provides many other illustrations of the problem. For example, the costs of a hospital redevelopment in Norfolk using the PFI more than doubled, from its initial estimate of £90m to £270m - and will provide fewer beds than existing buildings.
Officially guaranteed risk protection for private financing also
generates potential windfall gains through ‘refinancing’ deals. But
according to the National Audit Office in only a quarter of PFI deals worth £5.5b
did the public sector have any contractual right to share such gains.
Debt-free money
“The government can and does finance itself to a small extent by the
issue of non-interest bearing money,”
Anthony Nelson, Chief Secretary to the Treasury, 1993
There is an alternative: debt-free money, which is created by the Bank of England without interest and paid-off during the life of the project.
Today the state creates only about three per cent of the money supply as
debt-free cash. The other 97 per
cent comes as interest-bearing debt created by the banks.
The New Money Amendment makes it clear that there is nothing magical
about the current 3:97 proportion. In 1963 the proportion of debt-free money
was 21 per cent. The Amendment
proposes more of the money supply should once again be created this way for
specified projects in the public interest.
Advantages
The New Money Amendment
means that vital public infrastructure projects, which seem so intractable to
fund, are suddenly more possible because they are cheaper.
It
also means that:
·
The projects are less
inflationary – because the amount created is less (and it is withdrawn from
circulation afterwards). If necessary, the Bank can also take a range of other
measures to keep prices stable.
·
The seigniorage is recouped for
the public benefit.
·
The money can be available
·
The Private Finance Initiative
could be used when it works best, rather than forced to provide finance in
projects where it is inappropriate.
-ends-
Published by The New Economics Foundation, Cinnamon
House, 6-8 Cole St, LondonSE1 4YH, Tel: 020 7089 2800. Written by Titus
Alexander, David Boyle, Pat Conaty, Rafiq Manji, James Robertson, Michael
Rowbotham & Andrew Simms.
Email: infoXneweconomics.org.uk. www.neweconomics.org [X instead of @ to prevent spam]
Initiated at a meeting of the Forum for Stable Currencies, Moses Room, House of Lords.
Email: sabineXglobalnet.co.uk
Sources
and further reading:
Bank
of England Statistical Releases
J K Galbraith, Money: Whence it came, where it
went, Andre Deutsch, 1975
Joseph Huber & James Robertson, Creating New
Money, New Economics Foundation, 2000
Michael
Rowbotham, The Grip of Death, Jon Carpenter, 1998
Glyn
Davis, A History of Money, University of Wales, Cardiff, 1994
Bernard Lietaer, The Future of Money, Century,
2001
Edward
Holloway, Government Debt and Credit Creation, Economic Research
Council, 1981,
David
Boyle, Funny Money: In search of Alternative Cash, Harper Collins, 1999
The Macmillan Report (1931)
The
Radcliffe Report (1959