London, 24th November 2014. Parliament debated ‘Money Creation and Society’ last week. It was the first time this topic had been debated in over 100 years. This is an incredibly important topic and it was good to see MPs discuss it, although it was a shame that the issue was not discussed by more of them.
Michael Baxter, economist and co-author of the new book iDisrupted, says that money creation will become even more important over the next few years, as technology disrupts the economy in ways that few people are appreciating.
Currently, money is created by banks via their lending in what some call a fiat money system, or fractional reserve banking. This has been subjected to fierce criticism for many years, and, as the crisis of 2008 showed, it can create dangerous credit bubbles.
Michael Meacher MP proposed that the legislators should strip banks of their ability to create money. He said that the role of money creation should be handed solely to the Bank of England instead, as part of its role of targeting a given level of inflation (currently two per cent). Mr Meacher said that the money created by the central bank should then be lent to commercial banks for the sole purpose of funding business activities concerned with wealth creation, and not speculative purposes.
This proposal has considerable merit, but there is an even more important issue that no one is discussing yet.
Baxter says: “Technology is set to change the economy profoundly. In an economy in which new technology creates huge potential, and then overcapacity, the priority needs to be to find ways to increase demand, not increase investment into business.”
Describing the economy, Baxter says: “If we see a rush of innovation, unless we see a corresponding rise in demand, the result, paradoxically, can be a recession and deflation. So for example, the greatest era of innovation we have seen up to now occurred between 1861 and 1914. Yet the period after saw the economy perform poorly. The US had a Great Depression in the 1930s. After World War 2 we learnt how to make better use of technology, and we had an economic boom. We are now set to enter a new, even greater era of innovation.”
John Straw, co-author of iDisrupted, said: “In the age we are about to enter, we will see more free products. We have already seen photography as an add-on to a smart phone, and Facebook as a means to show photographs to friends. We are also seeing the emergence of the sharing economy, which will mean consumer needs could be met from lower production. At the same time, new technologies – such as robotics, the internet of things, and new materials – combined with cheaper energy will lead to rapid advances in productivity.”
Straw says: “This sounds exciting, but there is a danger the result will be job losses and economic depression. Such an outcome would be a tragic waste of potential, but unless demand rises in tandem with these advances, this unfortunate fate will result.”
Baxter added: “This is why money creation is so vital. The economist Milton Friedman once said that under certain circumstances it would be appropriate for a central bank to print money and scatter it across the land from a helicopter. I am not so sure about a helicopter drop, but if technology creates the potential of plentiful supply, and results in deflation, one possible solution might be for governments to cut taxes and increase tax credits as well as invest in infrastructure, all funded by money creation.
“It is possible that the economic crisis of 2008, and today’s threat of deflation are both dry runs of the challenges we will face in the next few years. But such challenges can be turned into wealth creation for all if only policy makers understood the potential that new technologies are providing.”
iDisupted, changing the human race forever, is available now. See: www.idisrupted.com