A new method of funding capital expenditure in the UK


The New Money Amendment to the 2002 Finance Bill proposes:


“That HM Government should require the Bank of England to create funds for specific capital projects – including specified NHS capital projects and the modernisation of the London Underground – and credit them debt-free to the Treasury; and that the money should be paid back within a 25 year period and withdrawn from circulation.”



This amendment aims to create a new option for raising money for specified public sector capital projects – without the large extra sums required by the financial intermediaries using PFI or PPP.


This will restore some of the balance between debt-free money issued into circulation by the state and interest-bearing money created by banks in the form of mortgages and loans.




“The process by which banks create money is so simple that the mind is repelled,” JK Galbraith, Money: Whence it came, where it went, 1975


As the economy grows, new money is needed to handle the growth of transactions. Most of the new money in circulation in the UK is issued in the form of interest-bearing loans.  The growth in M4 demonstrates that up to £80 billion of new money is created in this way every year. The interest charged on this annual addition to the money stock gives the commercial banking system an effective subsidy due to the difference between the value of the new money and the costs of creating it, and a source of excessive profit from their virtual monopoly over the creation of new money. With the dramatic decline in the use of coin and note, the government’s seignorage and the supply of money free from debt has been replaced by ever more interest-bearing, bank-created credit.”


The problem


The public-private partnership financing of the London underground illustrates the problem dramatically. The key investors expect to make an estimated £2.7 billion over the 30-year life of the PPP, due to be signed in June, in return for investments of just £530 million.


Those figures also hide profits expected by other financial intermediaries, which may be anything up to a third of the required investment. A bond issue would be cheaper, but even then the pay-off to financial intermediaries would be considerable.


The Public Finance Initiative provides many other illustrations of the problem. For example, the costs of a hospital redevelopment in Norfolk using the PFI more than doubled, from its initial estimate of £90m to £270m - and will provide fewer beds than existing buildings.


Officially guaranteed risk protection for private financing also generates potential windfall gains through ‘refinancing’ deals. But according to the National Audit Office in only a quarter of PFI deals worth £5.5b did the public sector have any contractual right to share such gains.


Debt-free money


“The government can and does finance itself to a small extent by the issue of non-interest bearing money,” Anthony Nelson, Chief Secretary to the Treasury, 1993


There is an alternative: debt-free money, which is created by the Bank of England without interest and paid-off during the life of the project.


Today the state creates only about three per cent of the money supply as debt-free cash.  The other 97 per cent comes as interest-bearing debt created by the banks.


The New Money Amendment makes it clear that there is nothing magical about the current 3:97 proportion. In 1963 the proportion of debt-free money was 21 per cent.  The Amendment proposes more of the money supply should once again be created this way for specified projects in the public interest.




The New Money Amendment means that vital public infrastructure projects, which seem so intractable to fund, are suddenly more possible because they are cheaper. 

It also means that:

·                 The projects are less inflationary – because the amount created is less (and it is withdrawn from circulation afterwards). If necessary, the Bank can also take a range of other measures to keep prices stable.

·                 The seigniorage is recouped for the public benefit.

·                 The money can be available

·                 The Private Finance Initiative could be used when it works best, rather than forced to provide finance in projects where it is inappropriate.



Published by The New Economics Foundation, Cinnamon House, 6-8 Cole St, LondonSE1 4YH, Tel: 020 7089 2800. Written by Titus Alexander, David Boyle, Pat Conaty, Rafiq Manji, James Robertson, Michael Rowbotham & Andrew Simms.

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Initiated at a meeting of the Forum for Stable Currencies, Moses Room, House of Lords.

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Sources  and further reading:

Bank of England Statistical Releases

J K Galbraith, Money: Whence it came, where it went, Andre Deutsch, 1975

Joseph Huber & James Robertson, Creating New Money, New Economics Foundation, 2000

Michael Rowbotham, The Grip of Death, Jon Carpenter, 1998

Glyn Davis, A History of Money, University of Wales, Cardiff, 1994

Bernard Lietaer, The Future of Money, Century, 2001

Edward Holloway, Government Debt and Credit Creation, Economic Research Council, 1981,

David Boyle, Funny Money: In search of Alternative Cash, Harper Collins, 1999

The Macmillan Report (1931)

The Radcliffe Report (1959