The "other side" of my interest in Land Value Tax is the role of land values in the money supply. Remember the money supply? We kept a close eye on it through most of the eighties, thanks to the notion that the inflationary pressures of the seventies were caused by government creating too much "base money" - the cash created, at virtually nil cost, by the Bank of England.

It became the prime target of the monetarists - control the money supply and you control inflation - that song again comes to mind from the 1979 General election campaign - "We'll count our blessings if we apply/Tight control to our money supply".

So who do we think creates the money in our economy? The crinkly stuff we increasingly rarely keep in our pocket or wallet of course is created by the Bank of England. Nowadays it doesn't have any backing in gold. But still, it's in quite short supply. In fact, there's only about £45bn of it in existence. It's the "M0" figure in this table.

So, how do we maintain an economy that turns over nearly 27 times this in GDP? Where is the money, the units of account that actually account for all this economic activity? Well, they're a fiction, existing merely as data in one or other of our banks' computers and pixels on a screen. In fact, there is nearly £1.5 trillions (thousand billions or million millions) of this debt money in the system at any one time. How did it come about? It's all borrowed into existence. All except that M0 figure of about £45 billion.

So only about 3% of the money, the units of account, at any one time existing in bank accounts is this base money. Who creates the rest? Even though you expect it to be converted, if you will, on demand into real green and crinkly stuff, it is actually simply created when someone borrows money from a commercial bank.

So there's the first anomaly. We may believe that the money in the economy is created for us, for nothing but the administrative cost of doing so, by the Bank of England, actually 97% of it is created by private commercial bodies. Banks. And for the privilege of having them create our money instead of the Bank of England, we pay anywhere between about 4% and 20%+ for it each year, in interest. And even though it is created effectively in our name (because it's convertible, seamlessly, with the real stuff), we have virtually no control and certainly no accountability over who it is created for or for what purpose.

Ah, many people cry, but surely the banks' balance sheets balance - they have as much in deposits as they have in loans don't they? Well, on paper they might, but there has to be at least 97% of those deposits themselves that came in turn from someone, somewhere, borrowing. Well, all that tells us is that most of that money supply is in fact permanent. You may borrow it for a few months or years, you may repay it at the end of that period, but in order to maintain the required number of units of account to oil the economy, someone somewhere has to go on borrowing it.

And this is where the speculative value of land comes in. Most of that borrowing is down to us, individuals, and in particular those with mortgages. Mortgage debt makes up about two thirds of this total money supply. And, the sharp eyed amongst you will realize that in order for us to maintain that level of borrowing, over time land values must increase so that we end up being paid more than we have borrowed when we sell our homes. Otherwise we'd all soon be bankrupt. Because vendors have, even if they don't appreciate it, a monopoly on the location they want to sell, the purchasers can be induced into bidding it up - basically in order that the levels of borrowing meet the demand for money in the system.

Yes, you are right, it is a house of cards. More than that, it is a confidence trick. We believe our money is created by the Bank of England, against the "full faith and credit" of the people and economic activity of the UK. In fact, the price we pay for housing, being mostly land value, is talked up in order to ensure there is enough borrowed money in the system. There was a seventeenth century Scotsman, John Law, who was outlawed across half the known world, for trying to pull the same confidence trick on the people of France who needed a new way of backing money in a financial crisis - it was ultimately all tied up in the foundation of New Orleans, incidentally - Law's land based money was used to develop Louisiana.

Why mention this now? Well, in today's Times there's a report that the Bank of England is now a little concerned about the amount of this lending in the economy. That it is likely to fuel inflationary pressures - more money, based on land rather than production, chasing the same amount of production, is inflationary. The requirement to repay that money stock over and over again with interest means that ever more has to be created.

Debt money is more inflationary than base money. Base money used, in the sixties, to account for more than 20% of our money supply. Now its just 3%. All the complaints in the seventies and eighties about money supply growth were focussed on the nasty Labour government creating base money not for funding more production, but for funding more demand by paying workers, mostly public sector ones, higher wages to cope with existing inflation. But the real problem is that creating more base money, in this devil may care world where the commercial banks use that effectively as margin to lend however much they like, means that exponentially more debt money can be created. Which is the real threat to inflation and stability? The debt money of course. There's vastly more of it. It grows faster, both in percentage terms and in absolute terms, and it costs much much more to service. Because base money only costs what it costs to produce - a half a percent for printing if notes, even less for administration if it could be done, as the commercial banks do it, electronically. As opposed to the annual 4% and more for commercially created money.

This debt money erodes our futures. It is why we have to relentlessly pursue growth. And finally, the Bank of England is showing some sort of concern about it - it's grown four times faster than the economy this year alone. But what could they do? This is where Land Value Tax comes into it for me.

If you tax land values, if instead of expecting people to pay 100% of the value of land up front to the previous owner, who did nothing to create that value as a landowner, which creates a need for this vast borrowing just to give us the basics of shelter, and instead collect that value annually over the lifetime of someone's occupancy of that land in the form of land value tax, you would deflate land values, vastly reduce the amount of debt money that has to be created to finance it, and leave a gaping hole in the money supply. A gaping hole that the Bank of England could fill with cheaper base money.

It already does all the sums required to make sure that it doesn't create too much. What does it do with those calculations at the moment? Well, it tries to moderate the amount of money in the system by tinkering with the interest rates at which it is borrowed into existence - the base rates. It is tackling a symptom and not the cause. And in doing so it acts against the economy - just when the economy needs a bit more liquidity in the system to finance "good borrowing" to prepare for the next phase of growth in real economic production, it has to tighten the supply - so companies and others investing before they make new wealth from the results of that investment have to pay more for it. It's quite bonkers really. But it makes a lot of people rich and creates a lot of vested interests. So it goes unchallenged. But it is us that pay for it ultimately, in higher goods prices, in higher land prices, and in all the interest that this debt mountain accumulates.

They could instead use those sums to actually inject real base money into the system, if they would only have the balls to set limits on the commercial banks so that they did not simply take that new money and create 30 times the amount in debt money. None of this would harm the commercial banks particularly. They would have to shift from being creators of money, our money, to being brokers of money, moving it from people who had it to people who needed to borrow it. All stuff they used to do much more of before we set them free to write their own pay-cheques at our expense.

Land Value Tax could be used then to fine tune that system, since any excess would likely find its way into uplifts in land values.

It's a multi-step process:

1. Bank of England works out, as it does now, the total amount of money required for the economy to function, to reflect the liquid wealth of the nation as a whole.

2. Instead of letting the commercial banks do it all, the Bank of England creates that money, and allows the government to spend it into existence. Either as infrastructure or supply side spending, or perhaps as a citizens' dividend - a lump sum entitlement each year to every citizen or resident in the country to spend as they want. Of course one would likely want them to do simple things like pay off the national debt first.

3. Bank of England uses interest rates as now and bankers' reserves as previously to moderate how much of that base money can be used to create more debt money by commercial lenders. All their other lending business has to be financed by matching savers against borrowers, as the building societies had to do until 20 years ago.

Result - we have a more stable monetary base, better controlled, and less speculative land value growth. Putting publicly created money and land value tax side by side, we could probably whittle away at the requirement for taking our earnings off us in the form of tax, such that we could probably quarter, in the end, the overall tax take.

Now, with that on offer, why does nobody want to listen?

Mortgages fuel surge in supply of money - Business - Times Online:

Mortgages fuel surge in supply of money
By Graham Searjeant, Financial Editor

BRITAIN’S money supply is growing at its fastest rate for 16 years, the Bank of England revealed, as mortgage approvals return to boom levels and consumers start to borrow more on credit cards again.
Annual growth in M4, the broad money measure that includes bank lending, reached 14.5 per cent in September, up from 13.7 per cent three months earlier. The surge comes only a week before the Bank’s Monetary Policy Committee (MPC) meets to consider a new Inflation Report and decide whether to raise interest rates for the first time since August.

The MPC ignored money supply for the first eight years of its existence. In recent months, however, some members seem to have become anxious that the relationship between money growth and inflation will reassert itself.