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Modernising Money: Why Our Monetary System is Broken and How it Can be Fixed
At the heart of the ongoing economic crisis is the fact that governments across the world have given the power to create money to the private corporations that we know as banks. Today, over 97% of all of the money used by people and businesses is created by banks when they make loans. As Financial Times economist Martin Wolf writes, "The essence of the contemporary monetary system is the creation of money, out of nothing, by private banks' often foolish lending." This way of creating money has led to economic instability and a financial crisis. It has produced the highest-ever levels of personal and government debt, made houses unaffordable, and driven the short-termism which is destroying the businesses, and ecosystems, on which we depend. But it doesn't have to be like this. The way money is created can be changed. Modernising Money shows how a UK law implemented in 1844 can be updated and combined with reform proposals from the Great Depression, to provide the UK with a stable monetary and banking system, much lower levels of personal and national debt, and a thriving economy. Detailed, but accessible to non-economists, Modernising Money is written for anybody who wants to know how to create an economy that serves people, businesses, society and the environment.
336 pages, Paperback
First published January 1, 2012
13 people are currently reading
325 people want to read
About the author
Andrew Jackson
298 books5 followersLibrarian Note: There is more than one author in the GoodReads database with this name. See this thread for more information.
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Displaying 1 - 6 of 6 reviews
June 4, 2020
the first four chapters are great to shed light on how banking activities create money into the society and how - to some extent - the central bank 'controls' the amount of money in circulation. but, from chapter 5 onwards, the proposal is too good to be true, I suppose. the idea of 'injecting' money supply to the real economy by implicitly burgeoning the newly minted money to the government's account at the central bank is , in practice, as obsolete as the proposal per se. more ideas proposed in this book, without spilling the beans further, have been abandoned by countries and authorities for fueling moral hazard.
November 11, 2016
I loved reading this book. It was a breath of fresh air. Despite the young age of the authors (or perhaps because of it) the first four chapters (pages 1 to 154) are as good a primer on the history, purpose, inner workings and current failings of banking as I’ve ever read. Perhaps it’s the best I’ve read. If a friend asked me for one book to read about money and one book only, I’d order this book, tear out the first four chapters and give them to him.
There are ideas there that had never occurred to me and I’ve spent 23 years in banking. Example: kings who minted new coins made sure the new currency became “legal tender” by only accepting payment of tax in the new coins. Example: the 1974 oil embargo was mainly about reacting to the fact that the dollars the Arab states had accumulated over the years were no longer convertible into gold, much as these days we ascribe the formation of OPEC to political events in the Middle East.
The book is chock full of insights of this nature. A bit like Tarantino’s first proper movie had every funky piece of dialogue he’d ever dreamt of, “Modernizing Money” is packed with everything the authors know, from an appendix on the recent economic history of Zimbabwe to a fantastic description of how an economy will react to fiscal and monetary measures and an unmissable extension to Irving Fischer’s MV=PX that goes a long way toward explaining how QE is only really pushing up assets (p.119 onwards) . It’s great stuff.
From chapter 5 onward, however, it gets very naïve.
Scandalized by the discovery that most money is created by banks (coming ten years after their parents told them how babies are made, give or take) the authors next attempt to design a banking system that will end boom and bust. Their main idea is that the general public will have two choices when it goes to the bank. Either (i) stick the money in a 100% safe piggybank that the bank gives up to the central bank, while retaining (and charging for) its basic administration, such as giving its clients access to a debit card, cash machines etc. or (ii) stick it in fixed time deposits that pay an interest because the bank can lean on the time deposits to make loans to the real economy. These accounts would not be guaranteed by any type of deposit insurance and would be the only source of “bank credit” to the economy. No time deposits, no loans.
The authors do brilliant work in terms of taking the reader through the intricate accounting repercussions of moving to such a system and provide a step-by-step sketch of how we’d move from the current system to the new one. Much as I was shaking my head throughout this bit, it was a fantastic mental exercise. I truly enjoyed going through it.
Bottom line, however, the authors fail to recognize that what we have here is a problem with human nature rather with the banking system. This is not to say our banking system is flawless. Far from it! If you had to design the banking system from scratch you probably would not design it the way it looks now. With no doubt, today’s banking system evolved from a set of historical circumstances that are no longer relevant. But the problems we face are of our own doing. The banking system is not where I’d start, especially if there was a twenty year transition period to be negotiated.
So the authors mention somewhere that fully 69% of UK households own their dwellings. But they think it’s the fault of the banking system that there is a housing bubble. Erm, no! In a system called democracy the majority will attempt to elect itself rich, impossible as that sounds. And it will use the banking system to enforce its will. The counterfactual can be observed in countries where ownership is below 50% (Germany and Switzerland spring to mind) where there is no housing bubble, because no politician thinks he’ll benefit from hare-brained ideas like “help to buy.”
The authors also mention Hyman Minsky’s favorite aphorism that the “fundamental instability of capitalism is upwards,” but have the arrogance to think they can design a system that works around this problem. It can’t be done. Whatever system we design will next be watered down by politicians as they succumb to the will of the electorate.
The US, for example, did once have a system with separate banking and investment banking, current accounts that paid no interest, capped interest on time accounts, banks that could only operate in a single state and thus never become too big to fail, a Fed that wilfully brought about a double dip recession in 1980 and 1982 to fight inflation, a system, in short, with more than half of the things the authors would like to see. My BayBank card did not work in New York and my Citicard did not work in Boston and neither bank would grant me credit, let alone allow me to punt stocks.
But Don Regan (Ronald Reagan’s treasury secretary and former CEO of Merrill Lynch) gave us the right to bank out of our stockbroking account, Bob Rubin (Bill Clinton’s Treasury secretary and former CEO of Goldman Sachs) helped us get rid of that annoying Glass Steagall act, Angelo Mozilo singlehandedly changed everybody’s home into an ATM, Alan Greenspan underwrote the value of the stock market and so on and so forth until a short thirty years later the entire legal, regulatory, operational and business landscape has become totally unrecognizable. To say nothing of the shadow banking system, which has grown to be larger than the banking system.
So to say that there is something we can do to change everything shows naivete of the highest order. The way this gets fixed is through a proper crash of the kind nobody can contain. Then we’ll get serious, make all the necessary reforms, perhaps even adopt some of the authors’ ideas, and of course get back on track toward instability. That’s how it works.
There are some further technical points I feel need to be made here:
1. The authors assert that money is not a means of exchange, a unit of account and a store of value as per all economics texts out there, but is first and foremost a number that appears in your bank account when you get a loan. They mention at least ten times in the book and on the back cover and on their website than 97% of all money arises in this fashion from loans banks make; they make this sound like some sort of betrayal. Does not bother me, personally, one bit, provided somebody out there is counting all this money, keeps an eye on the total and tells them to cease and desist when they have hit some type of limit. Call it a leverage limit, call it a reserve ratio, call it what you like. If this failsafe is in place and if it’s enforced, you’re cool. And if it’s not being enforced, more importantly, don’t blame the system. Blame human nature.
2. The authors don’t like the fact that the central bank holds government bonds against the money it issues. Why not? Government bonds are a claim on future tax. Indeed, a claim on future tax that can only be paid in the currency of the state in question. I cannot think of a better asset for a central bank to hold. If the government is in charge it will collect tax. Unlike gold, whose quantity is exogenously determined, the tax a government can collect is a straight function of GDP. That’s what I call full faith and credit. Moreover, if a country has its budget under control and invests for the future it will find that it’s exporting goods and services that make its currency desirable relative to other currencies, further underpinning the value of this debt. And vice versa, obviously, but that’s a good thing!
3. Others have pointed out to the authors (and they admit as much on page 197) that banking is about maturity transformation: we all stick our overnight cash in the bank, but since my purchase of a car from the car dealer merely moves deposits from my account with Megabank to his account with Microbank, the banking system as a whole is A-OK and they can sort out their imbalances with interbank loans. Therefore, the banking system as a whole can turn around and lend this money for term. Why we would ever want to restrict this miracle to the amounts people specifically allocate to risky time deposits is totally beyond me. It really sounds like an unnatural distinction. Once upon a time, when the system was healthy, we had vigilant central banks that kept the lenders on the straight and narrow via (i) enforcement of reserve ratios (ii) the threat of higher interest rates that would move old loans into the red (iii) restrictions on risky activities. These and other measures meant depositors enjoyed deposit insurance without imposing a risk on society and could go about their daily business without the whole population being mini credit officers. It’s called division of labor and it’s a very good idea.
Despite these criticisms, I will repeat that I thoroughly enjoyed the book. It was written with passion. It kept me entertained, it taught me lots and it made me think. But the main argument is far too flawed and regrettably I can’t recommend that you lend it to a gullible friend, lest he reads past page 154. And that’s a shame.
There are ideas there that had never occurred to me and I’ve spent 23 years in banking. Example: kings who minted new coins made sure the new currency became “legal tender” by only accepting payment of tax in the new coins. Example: the 1974 oil embargo was mainly about reacting to the fact that the dollars the Arab states had accumulated over the years were no longer convertible into gold, much as these days we ascribe the formation of OPEC to political events in the Middle East.
The book is chock full of insights of this nature. A bit like Tarantino’s first proper movie had every funky piece of dialogue he’d ever dreamt of, “Modernizing Money” is packed with everything the authors know, from an appendix on the recent economic history of Zimbabwe to a fantastic description of how an economy will react to fiscal and monetary measures and an unmissable extension to Irving Fischer’s MV=PX that goes a long way toward explaining how QE is only really pushing up assets (p.119 onwards) . It’s great stuff.
From chapter 5 onward, however, it gets very naïve.
Scandalized by the discovery that most money is created by banks (coming ten years after their parents told them how babies are made, give or take) the authors next attempt to design a banking system that will end boom and bust. Their main idea is that the general public will have two choices when it goes to the bank. Either (i) stick the money in a 100% safe piggybank that the bank gives up to the central bank, while retaining (and charging for) its basic administration, such as giving its clients access to a debit card, cash machines etc. or (ii) stick it in fixed time deposits that pay an interest because the bank can lean on the time deposits to make loans to the real economy. These accounts would not be guaranteed by any type of deposit insurance and would be the only source of “bank credit” to the economy. No time deposits, no loans.
The authors do brilliant work in terms of taking the reader through the intricate accounting repercussions of moving to such a system and provide a step-by-step sketch of how we’d move from the current system to the new one. Much as I was shaking my head throughout this bit, it was a fantastic mental exercise. I truly enjoyed going through it.
Bottom line, however, the authors fail to recognize that what we have here is a problem with human nature rather with the banking system. This is not to say our banking system is flawless. Far from it! If you had to design the banking system from scratch you probably would not design it the way it looks now. With no doubt, today’s banking system evolved from a set of historical circumstances that are no longer relevant. But the problems we face are of our own doing. The banking system is not where I’d start, especially if there was a twenty year transition period to be negotiated.
So the authors mention somewhere that fully 69% of UK households own their dwellings. But they think it’s the fault of the banking system that there is a housing bubble. Erm, no! In a system called democracy the majority will attempt to elect itself rich, impossible as that sounds. And it will use the banking system to enforce its will. The counterfactual can be observed in countries where ownership is below 50% (Germany and Switzerland spring to mind) where there is no housing bubble, because no politician thinks he’ll benefit from hare-brained ideas like “help to buy.”
The authors also mention Hyman Minsky’s favorite aphorism that the “fundamental instability of capitalism is upwards,” but have the arrogance to think they can design a system that works around this problem. It can’t be done. Whatever system we design will next be watered down by politicians as they succumb to the will of the electorate.
The US, for example, did once have a system with separate banking and investment banking, current accounts that paid no interest, capped interest on time accounts, banks that could only operate in a single state and thus never become too big to fail, a Fed that wilfully brought about a double dip recession in 1980 and 1982 to fight inflation, a system, in short, with more than half of the things the authors would like to see. My BayBank card did not work in New York and my Citicard did not work in Boston and neither bank would grant me credit, let alone allow me to punt stocks.
But Don Regan (Ronald Reagan’s treasury secretary and former CEO of Merrill Lynch) gave us the right to bank out of our stockbroking account, Bob Rubin (Bill Clinton’s Treasury secretary and former CEO of Goldman Sachs) helped us get rid of that annoying Glass Steagall act, Angelo Mozilo singlehandedly changed everybody’s home into an ATM, Alan Greenspan underwrote the value of the stock market and so on and so forth until a short thirty years later the entire legal, regulatory, operational and business landscape has become totally unrecognizable. To say nothing of the shadow banking system, which has grown to be larger than the banking system.
So to say that there is something we can do to change everything shows naivete of the highest order. The way this gets fixed is through a proper crash of the kind nobody can contain. Then we’ll get serious, make all the necessary reforms, perhaps even adopt some of the authors’ ideas, and of course get back on track toward instability. That’s how it works.
There are some further technical points I feel need to be made here:
1. The authors assert that money is not a means of exchange, a unit of account and a store of value as per all economics texts out there, but is first and foremost a number that appears in your bank account when you get a loan. They mention at least ten times in the book and on the back cover and on their website than 97% of all money arises in this fashion from loans banks make; they make this sound like some sort of betrayal. Does not bother me, personally, one bit, provided somebody out there is counting all this money, keeps an eye on the total and tells them to cease and desist when they have hit some type of limit. Call it a leverage limit, call it a reserve ratio, call it what you like. If this failsafe is in place and if it’s enforced, you’re cool. And if it’s not being enforced, more importantly, don’t blame the system. Blame human nature.
2. The authors don’t like the fact that the central bank holds government bonds against the money it issues. Why not? Government bonds are a claim on future tax. Indeed, a claim on future tax that can only be paid in the currency of the state in question. I cannot think of a better asset for a central bank to hold. If the government is in charge it will collect tax. Unlike gold, whose quantity is exogenously determined, the tax a government can collect is a straight function of GDP. That’s what I call full faith and credit. Moreover, if a country has its budget under control and invests for the future it will find that it’s exporting goods and services that make its currency desirable relative to other currencies, further underpinning the value of this debt. And vice versa, obviously, but that’s a good thing!
3. Others have pointed out to the authors (and they admit as much on page 197) that banking is about maturity transformation: we all stick our overnight cash in the bank, but since my purchase of a car from the car dealer merely moves deposits from my account with Megabank to his account with Microbank, the banking system as a whole is A-OK and they can sort out their imbalances with interbank loans. Therefore, the banking system as a whole can turn around and lend this money for term. Why we would ever want to restrict this miracle to the amounts people specifically allocate to risky time deposits is totally beyond me. It really sounds like an unnatural distinction. Once upon a time, when the system was healthy, we had vigilant central banks that kept the lenders on the straight and narrow via (i) enforcement of reserve ratios (ii) the threat of higher interest rates that would move old loans into the red (iii) restrictions on risky activities. These and other measures meant depositors enjoyed deposit insurance without imposing a risk on society and could go about their daily business without the whole population being mini credit officers. It’s called division of labor and it’s a very good idea.
Despite these criticisms, I will repeat that I thoroughly enjoyed the book. It was written with passion. It kept me entertained, it taught me lots and it made me think. But the main argument is far too flawed and regrettably I can’t recommend that you lend it to a gullible friend, lest he reads past page 154. And that’s a shame.
May 5, 2017
Accessible
Few realize that most of the economy's money is loaned into creation by private commercial banks. This book reveals why fractional reserve banking has likely outlived its usefulness.
Few realize that most of the economy's money is loaned into creation by private commercial banks. This book reveals why fractional reserve banking has likely outlived its usefulness.
April 27, 2013
This is a book that everyone should read, especially people in high positions. Anyone who has a pulse can see that our current banking system (or monetary system as they are basically same thing) doesn't work. We need something different and this book offer a credible solution.
Ben Dyson and Andrew Jackson build a solid case for full reserve banking and also describe how to get there without any drastic measures. Through out the book all of their findings are well rationalized and backed with empirical studies. The book is mostly easy to read and person with no economic background will find it easy to follow. Also most common critique is answered (a whole appendix for the claims of hyperinflation).
My only complaints are that it doesn't describe all of the more serious effects our current banking system has on our economy, that it repeats itself at points and that it is little technical at times, though the last one can't be avoided when writing about monetary system.
Ben Dyson and Andrew Jackson build a solid case for full reserve banking and also describe how to get there without any drastic measures. Through out the book all of their findings are well rationalized and backed with empirical studies. The book is mostly easy to read and person with no economic background will find it easy to follow. Also most common critique is answered (a whole appendix for the claims of hyperinflation).
My only complaints are that it doesn't describe all of the more serious effects our current banking system has on our economy, that it repeats itself at points and that it is little technical at times, though the last one can't be avoided when writing about monetary system.
July 10, 2013
If the solutions to the inherent problems in the banking system (and the creation of private money) are as straight forward as the arguments put forward in this book suggest then we should all be out on the streets demanding that they be implemented.
It starts with an eye-opening explanation of why the current banking crisis is not an aberration but rather and absolutely predictable consequence of the private money creation process that the generation and sale of mortgages and loans by banks created.
The underlying figures of the book are based off the UK economy but I would imagine this would apply as much to the European or US economies.
It starts with an eye-opening explanation of why the current banking crisis is not an aberration but rather and absolutely predictable consequence of the private money creation process that the generation and sale of mortgages and loans by banks created.
The underlying figures of the book are based off the UK economy but I would imagine this would apply as much to the European or US economies.
June 21, 2017
It's a bit of a mixed bag. The history is great, some new info and learnings for me. As so often is the case though, the "what next" is sorely lacking.
Key issues:
The creation of investment accounts will increase mortgage rates. This maintains the wealth transfer from rich to poor, particularly given the risk premium attached to non tradeable instruments.
Does not address the issues associated with Securitisation and more importantly global capital flows.
Creates additional solvency concentration risks at the BoE, and places a huge burden on them to know how much money the economy needs. Given all the money they would now issue would be hot money, this has the potential for huge inflationary swings.
This fails to address shadow banking.
It's a nice try, but a bit luddite. Mervyn King's End of Alchemy proposes a far more effective system in the pawnbroker for all seasons model.
Key issues:
The creation of investment accounts will increase mortgage rates. This maintains the wealth transfer from rich to poor, particularly given the risk premium attached to non tradeable instruments.
Does not address the issues associated with Securitisation and more importantly global capital flows.
Creates additional solvency concentration risks at the BoE, and places a huge burden on them to know how much money the economy needs. Given all the money they would now issue would be hot money, this has the potential for huge inflationary swings.
This fails to address shadow banking.
It's a nice try, but a bit luddite. Mervyn King's End of Alchemy proposes a far more effective system in the pawnbroker for all seasons model.
Displaying 1 - 6 of 6 reviews