The permits I propose would be issued only up to a certain amount - the total amount of credit the government decided on as the target. A 'rent' would be charged for a permit, a charge per year of x per cent of the amount it gave permission to lend. The price would be continually adjusted (for all permits, not only just the ones being issued) so that the total amount which banks etc took up was not significantly below the target, and so that there was no significant unsatisfied demand for further permits when the target had been reached. A bank of course could at any time give back to the government part of its holding of permits, in which case it would cease to pay the rental charges on those given up. And at any time it could take on extra permits at the current rent.
In effect, the limited number of permits would go to those prepared to offer the highest rent, ie there would be a market in these permits. Permits would be allocated not bureaucratically, but by this market. Thus the scheme would provide credit control, but would achieve it by a market mechanism. Note however that there would be no point in starting a private market in permits, because if bank A bought a permit from bank B, the permit would still give only B permission to lend, not A. Note also that very little extra bureaucracy would be required by the scheme, as the government already needs to know the amount being lent, for taxation and other purposes.
In respect of lending between private individuals, a permit would be required if the sum lent was above a certain amount. But even below this amount, if the creditor had no permit, he/she would lose all legal claim to repayment of capital and interest, thus risking default. Thus it is seems likely that few loans would be made without permit - only those between persons able to trust each other, such as friends and relatives.
Any borrowing in the UK financed by overseas money would also require the same permits, and the amount borrowed would count towards the target total national amount.
But how would this target amount be determined? The simplest way would be to start the scheme by issuing permits at zero price for all existing loans. This would determine the initial target (Ed: without giving a pecuniary advantage to the existing lenders, as the price they will later pay for these permits adjusts continuously, remaining an equal percentage charge for all permit holders, old or new). The target would then be continually increased (or decreased) at the rate at which the real national income increased or decreased. This could be expected to maintain stable prices, ie zero inflation, provided that the velocity of money remained stable.
(2) Prices would be stable - ie zero inflation.
(3) The interest rate would be more stable than it is at present, though it would probably be higher than the average of the present highly unstable rates.
(4) The above three factors would contribute to the general stability of the economy, providing a more stable business environment in which downturns in business activity and in employment would be less likely.
(5) The banks etc would pass on most if not all of the rent of the permits, charging the borrowers a rate of interest higher than now. However, the rate paid to lenders would if anything tend to be less than now. Hence, if demand for credit rose, pushing up the rent of permits and the rate of interest to borrowers, this would not in general attract into the country the money of foreign lenders, as it tends to do under the present system.
(6) The scheme would provide a new and substantial source of government revenue - the income from the 'rent' charged for permits to lend. This would come mainly from borrowers in the form of higher interest charged, but perhaps also from banks in lower profits, and from lenders in lower interest received.
Dr David Chapman, Democracy Design Forum, Coles Centre, Buxhall, Stowmarket, Suffolk IP14 3EB (tel 0449 736 223).
'A Firm Foundation for Monetary Policy' by Gordon Pepper (published by IEA, 2 Lord North St, Westminster, London SW1P 3LB, tel 071 799 3745; fax 071 799 2137; L2-50).