| Max Rangeley: | The cover of your book is adorned with the image of Faust and Mephistopheles. In Goethe’s Faust, the Emperor is granted the right to create money ex nihilo, whereas we currently have this Faustian pact with the banks, so before we get into the technocratic, economic aspects, does this create any moral issues? |
| Lord Turner: | I don’t know whether I would use the word “moral”, because I don’t think that the banks are guilty of a sort of deliberate conspiracy to create money without the populace understanding it. Indeed, it’s noticeable that many individual private bankers do not understand that, collectively with all other bankers combined, they create credit and money ex nihilo. However, while I would not use the word moral, I do think it’s striking that we have, as it were, outsourced an inherently social function, which is the increase in the level of aggregate nominal demand, and we have, relied on the banking system to do that for us, without asking searching questions as to whether, and under what conditions, they will perform that crucial macroeconomic function effectively. |
| Max Rangeley: | So should there always only be a small number of credit institutions that have the right to create money in such a fashion? |
| Lord Turner: | If we’re going to grant this power to banks, we should very tightly regulate how they are able to use it, and we can regulate the amount of money that banks create, for instance, by having reserve requirements which limit the size of the money supply relative to the size of the monetary base : and since the government and central bank together determine the size of the monetary base, if you have a system of minimum reserve requirements, you can constrain and control the ability of the banks to create money. |
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