The Solution - Overview
The following is an overview of how the new monetary sytem would work. More detail, with worked examples, is available under: Solution Detailed
Firstly, the rules governing banking are changed so that banks can no longer create bank deposits (the numbers in your bank account). Currently these deposits are considered a liability of the bank to the customer - after the implementation of a modernised system, they would be classified as real money and only the Reserve Bank would be able to increase the total quantity of them.
The Reserve Bank would then take over the role of creating the new money that the economy requires each year to run smoothly, in line with inflation targets set by the government. In order to meet these targets, the decision on how much or how little money needs to be created would be taken by an independent body called the Monetary Policy Committee (MPC). 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.
Upon making a decision to increase the money supply, the MPC would authorise the Treasury to create the new money by increasing the balance of the government’s ‘Central Government Account’. This newly-created money would be non-repayable and therefore debt-free.
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.