The Big Four banks have been creating up to $14 bn of new money every year, causing massive inflation (especially in housing) and saddling the public with debt. We can't trust profit-seeking bankers or vote-seeking politicians to create money, as the temptation will always be for them to create too much.
So instead we need an independent, transparent and accountable body that is responsible for creating money and keeping inflation low. We suggest that the Monetary Policy Committee should have this task.
While some commentators have criticised the Government's 'Quantitative Easing' scheme as 'printing money' and being inflationary, these same commentators are usually ignorant of the fact that the money supply has increased by an average of of 9% per annum for the last 20 years - almost entirely as a result of the money creation within the private banking system.
Since this newly created money was all matched by the same amount of debt, it laid the foundation for the recent financial crisis.
Our modernised system would make it impossible for commercial banks to increase the money supply in order to maximise their own profits. However, that's not to say that the economy will run smoothly on a fixed amount of money - we may need to increase the money supply in line with rises in population, productivity, or other fundamental changes in the economy.
There are also issues as we make the transition from a debt-fuelled economy that requires new money to avoid collapsing under the weight of the debt, to the stable, low-debt economy that this modernised system would create.
Consequently, in the absence of money creation by commercial banks, we need an alternative source of new money. Detail on what this source of new money should be, and how it will work is contained in Solution Detail - Creating New Money.