The UK election, monetary policy and the Common Good

TL;DR: the UK election is finally over, and it brought some surprises. One of the policies suggested by the Green Party raised questions about the nature and purpose of money – a conversation that cryptocurrency is well-placed to comment on.

If anyone has managed to miss it, the UK had an election recently. I’m actually writing this on polling day, which means by the time the article is live the election itself will finally be over, very likely giving way to days or weeks of horsetrading in the frantic scrabble to cobble together a stable government (or not).

It’s been a protracted and thankless election, with polls remaining stubbornly stuck firmly in the ‘hung parliament’ zone for months. So firmly, in fact, that it’s hard to grasp how a workable government could be formed. Unlike our European counterparts, from whom so many Brits want to secede, we never learned how to do coalitions. The First Past the Post system engenders a winner-takes-all mentality that means the party with the most seats doesn’t like playing nice with any junior partner (and in this case, it may well need to be partners, plural). Unfortunately, it’s also a critically important election, and not just because the outcome will decide whether we take that vote on EU membership. There’s the awkward question of whether the Scottish National Party, after a meteoric rise catalysed by a failed referendum last autumn, will end up calling the shots – holding to ransom the government of a country that is its stated objective to tear apart. Aside from those two questions of independence, there’s the standard quandary of austerity vs tax and spend; how and if we fund our sacred and cash-strapped National Health Service; and whether a nuclear deterrent is worth the £100 billion investment when a rising number of people rely on food banks to get them through the week, to name a few.

It’s more complicated still because the political landscape has splintered over the past five years, since voters returned no overall winner and we ended up with our first full coalition in living memory – a dysfunctional marriage that held together only for the sake of the children (and the Fixed Term Parliament Act, which effectively served as a cast-iron pre-nup). Ten years ago we could be practically assured that one party would govern with a majority. Today a majority is less likely than ever before, and instead of two main parties and the odd interloper we have two parties with dwindling support and half a dozen others shored up by protest votes.

For the Common Good

The Greens are one of the minor parties that has enjoyed a resurgence in popularity due to vanishing confidence in the bigger players. At the time of writing they have only one MP and it’s likely to stay that way; their support is spread too evenly across the country to achieve the concentrations of votes needed to win in a constituency under the First Past the Post system. But party membership has risen sharply in recent months, and they are enjoying greater prominence on the national stage. Their slogan is ‘For the Common Good’ – a phrase that will sound familiar to anyone who has encountered Catholic Social Teaching. (For what it’s worth, it’s unlikely to have come directly and unadulterated from that source, since the Greens are far more liberal on matters like abortion to want to make that religious association.) It’s something that they Greens take seriously, along with their emphasis on the environment, in that they propose some fairly radical policies to level the playing field and reduce inequality.

Whilst the economy has featured big in this election, there was an intriguing note tucked away in the Greens’ manifesto that touched on something none of the other parties had mentioned: how money is created. The section Regaining control of our money reads:

One of the most fundamental tasks of government is maintenance of the currency. Without stable money accepted by all we can’t buy and sell things or plan for the future. Inflation in particular makes it hard to take the long-term view that the environmental crisis demands.

Most people believe that our money is currently created by the nationalised Bank of England. It isn’t. A pound in your bank account is no more than a promise by the bank to pay you that pound; you don’t actually own any publicly created money. In fact, commercial banks create new money (in the sense of money in bank accounts) whenever they make loans, and that money disappears when the loan is paid back.

The fact that the size of our money supply – the total amount of money in circulation – is dependent upon millions of separate commercial lending decisions by banks makes it hard to maintain economic stability. During the great recession of the past few years, the unwillingness of banks to make new loans and the desire of people to pay down their debts has meant that the money supply has shrunk, and the government has had to resort to the emergency policy of printing money (called ‘quantitative easing’) to prevent an even worse slump.

We believe that the time has come to recognise that the creation of currency and the control of the money supply is far too important to be left to profit-seeking private sector banks and should be brought back under the democratic control of the state. Quantitative easing was but a first step. Commercial banks should be no more than the custodians of publicly created money in current accounts, and the creation of that money should become the function of a new monetary authority, independent of day-to-day government control. This policy would protect ordinary bank accounts, and

  • allow banks to fail safely

  • separate ordinary and investment business

  • provide some control on overall lending and debt

This would be a massive and complex change to our banking system, with many ramifications, and its implementation, involving many years of consultation, legislation and the creation of transitional arrangements, would not be appropriate for one Parliament. But we would take the first steps of preparing detailed proposals and consulting upon them, and Green MPs will press this issue in the next Parliament.

It’s a bold and bizarre policy. Nothing like it appears in any other manifesto. It’s worth taking a closer look at some of the ideas and assumptions that lie behind it, because the same background – albeit with different conclusions – underpins the cryptocurrency ecosystem.

Central banking?

Firstly, like central banks all over the world, The Bank of England (the UK’s central bank) doesn’t quite play the role that people imagine it does. The Bank of England is responsible for the creation of physical cash – coins and notes – but this represents just a small amount of the total money circulating in the economy. The rest is bank deposits, which are simply numbers on private-sector banks’ electronic balance sheets. The Bank of England is not responsible for these. The other kind of money it creates is central bank deposits, which are a kind of special IOUs used to move money around within the banking system. Individuals and non-bank firms only use cash and commercial bank money, rather than these dedicated IOUs. The idea behind Quantitative Easing was to free up money for the real economy (to stimulate activity) by the Bank of England creating central bank deposits and using them to buy up bonds from pension funds and insurance companies. The bonds move to the Bank of England from the pension fund; the pension fund’s bank is credited with the central bank deposits and the pension fund’s account is credited with ‘regular’ money, which can then be lent out to other customers. This process is explained in a Bank of England document about Quantitative Easing, as well as on the Positive Money website (well worth a read).

However, it is private-sector banks, not the nationalised Bank of England, that creates the vast majority of money in the economy (that is, everything excluding physical coins and notes). It’s hard to be certain of the proportion, not least because the definition of ‘money’ itself isn’t clear. One reasonable estimate, though, is that regular banks bring into being something like 97% of money. They do it by lending. When a bank grants a mortgage or another kind of loan, it simply creates an entry in its books and lends that money into existence. The customer accepts it, uses it and, in most cases, pays it back with interest. When that happens, the created money in the bank’s ledgers is gradually cancelled out. In a strong economy, there are few limits on the number and size of loans a bank can grant, since it all gets paid back fairly reliably.

The result is money creation on a vast scale, which has almost nothing to do with the Bank of England or with the amount of money held in reserve by banks. ‘Fractional reserve banking’ (to be explored in more detail in a forthcoming series of articles to be published on nxter.org about the fiat monetary crisis and its possible solutions), means different things according to which school of banking theory you subscribe to but what seems reasonably clear in practice is that banks lend first and then seek to regularise their reserves’ positions afterwards. It’s only when, following a financial crisis or economic downturn, a critical mass of loans can’t be paid back that the problems of largely unconstrained bank lending become apparent. When there’s uncertainty about repayment, banks become wary about lending and there is (as there was) a credit crunch. Thus central banks stepped in to provide liquidity in one way or another – lowering interest rates, buying up bad debt and, ultimately, quantitative easing.

The Greens propose that private-sector banks, driven by profit motives and subject to moral hazard, should not be left to provide the vital function of money creation. Instead, this should be entrusted to a state body, at arms’ length from the government, that would be able to take a more circumspect view of the process – perhaps acting a little like people inaccurately assume central banks do at the moment.

In other words, the Green party currently sees the process of money creation as dangerously distributed – the responsibility of ordinary, profit-driven banks – and seeks to centralise it for the common good. These ordinary banks would then simply become ‘custodians’ of centrally-created money – once again, what most of us always assumed they were in the first place.


The proposal is an intriguing one, not least because it raises questions about the nature of money, who really controls it and what purpose it is meant to serve. But it’s also raises an interesting political question. The Greens are not known for their love of centralisation. Take this paragraph from page 68 of their manifesto:

All countries deserve a voice in global decision-making, and we want to use ours to support… A fundamental restructuring of our global economy, with power held at the local and regional level and only passed upwards when international cooperation is necessary. We call this ‘subsidiarity’ – this principle is the basis of our approach to the European Union and other international organisations.

Subsidiarity is, like the Common Good, another term that will immediately be familiar to those with a knowledge of Catholic Social Teaching, in which it is explored in some depth. It can be summarised as appropriate (de)centralisation. No group is given a task that might better be performed by a lower – more local, more devolved – group. The reason for this is that centralising power away from local groups entails taking decisions on their behalf, rather than involving them in the decision-making process. It reduces their agency and participation in the matters that affect them the most. Unnecessarily centralised power is, at best, inefficient and neglectful; at worst, it is abusive and coercive.

There are, of course, activities that must be undertaken by a centralised authority, because such a concentration of power represents the best organisation for the task. National defence and dealing with organised crime are obvious examples – and legitimate purposes of a state or super-state organisation such as the EU. But subsidiarity holds that no organisation should seek to intervene if the activity can more effectively be carried out by a lower body.

The $64,000 question is, where on that spectrum of centralisation should the creation of money lie?

The purpose of money

It’s likely that there can never be a universally satisfactory answer to that question, not least because it may be one of ideology as much as practicalities. But it seems that Subsidiarity and the Common Good may point to a solution that is far less centralised than the Green party propose.

Consider the purposes that money is supposed to serve. It is typically held to involve at least three basic functions:

  • A medium of exchange

  • A store of value

  • A unit of account (measure of value)

There are other properties that are desirable, such as fungibility (capable of mutual substitution – one dollar is the same as another dollar), divisibility and resistance to counterfeit, but these simply enable the chief functions.

Cryptocurrencies are excellent at the first function, and currently notoriously poor at the second and third, due to their volatility. In ancient times, money took the form of precious metal – typically pieces of gold or silver of agreed weight. As time went on, these were forged into standardised coins. Its basis in precious metals meant that money could not simply be created into existence, like fiat money (an apt term; in the Vulgate, the Latin translation of the Bible, God creates day and night with the words fiat lux, ‘let there be light’). These tokens were traded directly between people in return for goods and services – the original peer-to-peer money, free from centralised control. It was possible to charge interest, and people did. What was not possible was the creation from nothing of large amounts of money, on which interest could be demanded. Money was tangible. It could not simply be conjured from nothing, whether by an individual or a commercial enterprise or a state.

This is a far cry from what money has become to us. Money is still a medium of exchange, a store of value (imperfect, due to inflation) and a unit of account. But its centralisation and ease of creation has turned it into something else as well. It no longer serves these purposes alone. The control over the money supply represented by the money-creating loans of private-sector banks means that money is also – inherently – an instrument of inequality. Its purpose is not confined to transferring, storing and measuring value.

Firstly, it intrinsically requires a flow of wealth from borrower to lender. The justice of a debt and interest-based economy is a separate question, but the scale of that flow of wealth is leveraged by the banks, who effectively have no limits on the amount of money they can will into existence. Secondly, there is an inequality in who can create money. It is a function left to the banks alone – most of which operate for profit and to reward their shareholders rather than for the Common Good.

That ownership over money creation underpins our economy. Such a free market for money – easily available credit – is fundamental to capitalism, but the result of the tacit decision to push money creation onto the private sector is not capitalism as we would typically understand it. The ‘too big to fail’ problem that arises means that the system rewards the money creators in good times but pushes the cost of their failure onto a third party – the government/taxpayer – when things go wrong. This is extortion, not capitalism, and allowing banks to fail is a critical part of a healthy system.

The Greens’ solution to this issue is to centralise money creation and control in a single state body, removing that ability from private-sector banks. Cryptocurrencies take a radically different approach.

Algorithmic money creation

No cryptocurrency operates like either a central or private-sector bank, taking unilateral decisions about the amount of money that will be created at any given time. Instead, the money supply is rigidly governed by mathematics. A coin may be permanently inflationary (like Dogecoin or Peercoin), inflationary for an initial phase (like bitcoin), static in supply (like Nxt), or arguably deflationary (like Nxt or bitcoin in the long term, since some coins will be lost or sent to inaccessible addresses). But the supply is always predictable and, so long as the protocol functions as it should, beyond intervention.

Whilst the supply is ‘centralised’ in the code and the intention of the developer, control of that money is anything but. It is a network-wide activity. In bitcoin and other proof-of-work systems, control is given to miners, who may or may not hold coins. In Nxt and proof-of-stake currencies, everyone with a working balance controls the network. Distribution may be skewed, as it is with any currency (including the US dollar – the 80:20 rule), but control over money is not subject to absolute centralisation or a single point of failure.

If the purpose of money is to act as a medium of exchange (amongst other things), the principle of subsidiarity suggests that it makes sense to place control over that function in the hands of those who have the greatest interest in its effective functioning. Centralisation moves that function away from people who want to make ordinary transactions – exchanging goods and services for money – and risks introducing new functions that do not serve those ends. It is interesting that the Greens note in their manifesto:

The change to the new system would create a new and substantial cash flow for the government, which could be spent on social and environmental priorities and assist in paying down the national debt.

This statement is not explained further, but it must, at the very least, raise a few eyebrows.


Crypto has a few major stumbling blocks. One is its volatility, which puts off new entrants – why put your money in something that could lose 10 percent of its value overnight? On a more theoretical level, the automation of money creation is another problem. There is no centralised body to make decisions about the money supply, but instead it is fixed. Is this the best way to go about addressing the problems that led to the financial crisis? Maybe, maybe not. We’re only just starting this grand experiment into the meaning and function of money.

Finding a way to stabilise the value of cryptocurrency will go a long way to addressing its current shortcomings – allowing it to be used as a unit of account and store of value, as well as a means of exchange. There are various proposals for how to go about this, though none have been properly implemented and tested. The holy grail is a currency that is both backed by real-world assets and pegged to the value of a real-world currency, but that is also decentralised. This apparently impossible task is being explored by SuperNET developer James Lee, who hopes to create such a stable cryptocurrency – enabling crypto to be used by anyone without fear of it losing its value.

James’ ‘shorting the box’ solution involving BTCD sidechains should help to protect the participating cryptocurrencies from changes in value caused by speculators trying to manipulate the currency markets artificially. There remains the question of whether it is desirable for more of a currency to be created (or destroyed) in response to broader economic events – and if so, how this should be decided? This is where subsidiarity may again become relevant. Perhaps that decision should taken at a higher level, if not the highest. A truly decentralised approach would devolve responsibility for inflation/deflation right down to the level of miners/stakers – the users and custodians of the currency – but what would the likely result be? History suggests a tragedy of the commons, as individuals look after their own interests to the detriment of the ecosystem as a whole, thereby ultimately negatively impacting themselves.

A Tragedy of the Commons: a fitting summary of both the question of monetary policy and the UK’s election.

Update: Exit polls are out and the indication is so different to the pollsters’ predictions as to be almost unbelievable. Conservative 316, Labour 236, SNP 58, Lib Dem 10, Green 2, UKIP 2. If accurate, it looks like the outcome will be a good deal less messy than expected by just about every single poll in the last 4 months.

Update #2: Unbelievably, even the exit polls underestimated the scale of the victory, as the Conservative Party surged to a surprise win with a borderline majority.

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