Money’s golden connections

A recent email from Positive Money posed an interesting question:
“How is it that lack of money, the only resource that can be created at will, forms the main obstacle for addressing effectively society’s problems?”
If we presume that the resources they refer to are labour, land, energy and money, then it is delightfully true that only one of these is unlimited – and that’s money. And indeed only one of these has been completely invented by man – and that’s money.

How, when we’ve invented it, can we ever even think that there is no money – or even that there is not enough money? Who is limiting it and why?

Prevailing received wisdom seems still to be that money can be limited. And people don’t think of who is limiting it but what is limiting it. So the politician’s and banker’s most powerful weapon is actually there in the collective and individual minds of the electorate – all are still pretty much on the gold standard. Richard Nixon may have moved the world off the gold standard in 1971 but most people are still on it in their minds. And it is telling that the expression still forms part of the language as indicating the absolute best. For some purposes it could be – but it never can be for money.

When money is the preferred method of accounting for society’s resources then we don’t need to count by thinking it is irredeemably attached to a limited commodity.  At its most basic the world clearly has more resources than just gold. Gold makes good jewelry, is fine for filling teeth, is useful in electronics and sometimes compounded in medicine. But that’s about it, so why use it then to limit artificially both the quantity and allocation of your entire range of resources? It is not logical and certainly constrains an economy  – and that’s why we no longer do it.

A further disadvantage is that there is not much opportunity for river panning for gold these days so it is generally mined and refined using mercury or a cyanide compound – both pretty dangerous and dirty procedures. So you really would want to use it only for a beneficial purpose. It is crass stupidity to dig it up from one hole in the ground and refine it, only then to put it into another hole in the ground – probably thousands of miles away – under a bank.

So it needs to be properly recognised that money is society’s invention for the benefit of society and money’s use rests on confidence in its issuers. When people are told on the one hand that money makes the world go round and on the other that there isn’t enough of it that only helps to undermine that same confidence. Increasing private debt and increasing fraud are just two indications that money’s distribution is too limited.

Once we understand that money is created by society for the useful benefit of all its members we can arrive at the conclusion that its creation can be seen as a simple franchise scheme.

This seems to me rather a comforting suggestion and one that might be more understandable by the general public. The private banks are a bit like McDonalds franchisees and we are all partners in the franchisor. Indeed this is an additional reason to ask banks for extra tax – oh alright franchise fees – for having the right to produce almost all of our money.

To ensure the public and the banks get the message I think we should call it the seigniorage tax.

And please beware of anyone who flashes their gold.

The quantity of money

After considering what is money and how it is created, the next step is to look at how much there is, how the quantity changes over time, and what this is telling us. We are in luck because we can look at real data.*

Below I plot the amount of money in circulation in the UK over the last 3 decades. Money is a bit difficult to measure because it depends on what counts. This plot is for the broadest measure called M4 which includes credit and bonds. You can read about it and download the data from the Bank of England website.

When I saw this data I was shocked. Yes we all know that the global financial crisis was a big event and we are still reeling but I had not fully appreciated how dramatically things changed around 2008. Is this the end of neoliberal capitalism as some are suggesting? Look at the curve before 2010. The money supply keeps on growing. This could be regarded as normal. [Note added 17/08/2017: The growth in the money supply is demand driven. Money is created by households, business and governments borrowing on the basis of a promise to do something.] During the Lawson boom of the late `80s, the money supply was growing so fast that inflation rose to 8 percent and interest rates were increased to 15 percent in order to slow the rate of increase which led to the 90-92 recession. A classic boom and bust. But even during the bust, the money supply kept on growing – just at a slightly slower rate. And after 1992, the money supply kept on growing. As Raghuram G. Rajan said in his book Fault Lines, the policy was to “let them eat credit”, and we did. But then in 2008 everything changed.

The phase transition

In 2007-08 we knew we were in trouble and in 2009 the Bank of England decided to inject new money via quantitative easing (indicated by the black bars). The amounts were big – £200 billion in 2009 – but in terms of the total money supply it was a drop in the ocean and did very little. After 2010 the money supply began shrinking again – this was not normal. In 2011 and 2012 the Bank of England did more quantitative easing. Again the amounts were big but it had no noticeable effect. There was a bit of a pick up in 2016, then we had the referendum, more quantitative easing, but still the rate of money growth was no better than the ’90-92 recession.

Looking at the graph as a whole, the difference, before and after 2010 is stark – physicists call this a phase change, economists might call it a complete failure of monetary policy. So what exactly did change? The best explanation has been given by the economist Richard Koo (this is one of my favourite economics talks of all – my favorite moment is when Koo says “we live in a very strange world”). He calls our debt hangover a balance sheet recession and it works like this: For money to be created there needs to be borrowers but after 2010 there were too few borrowers, because rather than borrowing, people, companies and government were all trying to pay down debt, destroying money in the process. Consequently, rather than the normal phase where the money supply grows exponentially over time, after 2010 we observe an anomalous phase where the money supply is at best flat and at worse actually falls. It could have been fine if only households had decided to save but when individuals, companies and government all decide to pay off their debts at the same time then the economy stalls. Keynes called this, the paradox of thrift – saving is a virtue unless everyone does it.

Exactly the same kind of debt overhang or balance sheet recession happened in Japan after 1990. The lesson from Japan is that there is no quick fix. You can move the debt around, from private to public but the only way out is growth. Japan at least has a relatively strong manufacturing base, and relatively low inequality which both help growth.

What did not work?

In the UK, the government had hoped that by reducing corporation taxes they would encourage companies to borrow, to invest, to raise productivity and grow the economy, but it did not happen. At the same time they were trying to reduce government spending.  The Oxford economist Simon Wren Lewis calls this, “the most damaging UK macroeconomic policy mistake in my lifetime”. The problem is that if households are paying down debt and governments are reducing spending then comsumers have less surplus money and there is a lack of demand. If there is no demand, companies have no incentive to invest and the virtuous circle of rising production, rising wages and rising demand cannot begin. Also, by lowering corporation taxes, companies can increase profit without trying. If you look at the graph in Follow the money you can see that only corporations are sitting on a surplus. Households are back in the red which cannot last long.

End game

To end I will switch to a recurring theme. Throughout history, empires or economies fall not because the workers stop working, but because the elite become lazy, greedy, or corrupt. Economies stall when the elite focus on rent extraction rather than production. The historian Mikhail Rostovtzeff sums up the problem in this passage:

The prevailing outlook of the municipal bourgeoisie was that of the rentier: the chief object of economic activity was to secure for the individual or for the family a placid and inactive life on a safe, if moderate, income. The creative forces which [….] produced a rapid growth [….] suffered a gradual atrophy, which resulted in an increasing stagnation of economic life.

Rostovtzeff, M., The Social and Economic History of the Roman Empire, OUP 1957.

Sound familiar? The rentiers of today are the CEOs, the banks, the buy-to-let landlords, the stock market investors. They have no need to innovate, no need to find new ways to create wealth, because they are doing just fine while the rest are struggling. Until we rebalance tax incentives away from rent extraction towards production, until we switch power away from the financiers and back towards entrepreneurs and small business, and address the failing ratio of wages to capital, until then we cannot expect a more favourable outcome.

*In science there is data. Sometimes there is a theory – a hunch. Scientists test hunches by collecting data and then decide if a theory is useful. A theory without data remains no more than speculation. If economics wants to be a science, it can only do so by focusing on the data. Repeat after me. “No science without data.”

Positive Money – a good campaigning organisation, but with a missing link

‘Positive Money’ have a decent idea. Money should be created with the consent of the public. Governments that have served the financial sector must look instead to serve the public.

In this endeavour they want to set up a commitee to create it – rather like a Monetary Policy Commitee with extra powers, although in this case directly answerable to Parliament.

They point out that creating money is absolutley essential to society. It is.

And at the moment the big banks that create about 90% of it are self serving and do not have any view of how they should serve society. True again.

There is little doubt that Banks tend to create crises because they are so all embracing – every financial possibility is considered to be also their interest. The ill conceived idea that they should be kept absolutely as they are is rather like planting one variety of potato and supposing that blight will affect only an infinitessimal amount of the crop. You’d have to be delusionally confident or else just simply lucky. This is not a policy.

So Positive Money suggest that creating money should be considered one of the ‘separate’ powers:  Legislature, Executive, Judiciary  – and Money Creation.

This is certainly an arguable case.

So create the money independent of private PLC banks. Itself an interesting idea.

But if money creation is a separate power shouldn’t taxation be a separate power too? Or is there too much concentration on the money creation at the expense of the money destruction?

Should we further revise the Separation of Powers to give us the Legislature, Executive, Judiciary, Money Creation, and then also Money Destruction (this means, in effect, Taxation).

Yet shouldn’t the Department of Money Creation and Department of Money Destruction -surely basically the same department, perhaps be merged?

If they should, then surely we end up with Parliament? They’re in charge of tax and spend – or as we now know, spend and tax.

Parliament’s members are the people who really need to know where money comes from.

Positive Money propose doing another survey of MP’s, which is certainly good news, but is it not also time for an Ofsted style report on all prospective MP’s? Surely if MP’s are unaware of where the nation’s resources come from they shouldn’t be allowed to stand?

And of course Positive Money need themselves to understand that ‘Positive Tax’ is their corollary and also equally essential –indeed perhaps  more so.


‘Euro scritturali’ and why Italians shouldn’t issue them

Times seem hard in Italy.

Recent statistics show that those unable to purchase basic essentials, reached 4.7 million last year, or 7.9% of the Italian population and up from almost 1.7 million in 2006.

Two banks have been bailed out but by the Italian taxpayer rather than by the European Central bank, which has proved once again that the ECB has no intention of being a lender of last resort. And means that Italy’s government is operating without a sovereign currency. The reason for the Italian government taking the pain seems to be that the bank bondholders comprised mostly small individual savers who were perhaps too numerous to lose all their savings.

With all this troubling news it is less of a surprise to read that Italians have been creating their own money. Yes, they have been creating ‘scriptural’ Euros in such quantities that the Banca d’Italia has had to ask them to desist!

The Bank says that writing Scriptural Euros or “scriptwriting, is an activity allowed by law only to authorised persons, such as banks, electronic money institutions and other payment institutions. “

It seems that the Euro writers rely on the fact that there is a copyright symbol “©” on every Euro note which is a private, not a government symbol in Italian law. (They also appear on UK notes in case anyone was wondering. But that too is odd – people are unable to copy notes because they are copyright seems an odd control for counterfeiting money – but perhaps they think people would like to steal the pictures?)

So in effect scriptural Euro issuers were trying to include citizens as ‘authorised persons’.
Allegedly only one payment has been made: 25 Euros to Facebook for advertising – I’m unclear how it was accepted, but it was on the basis of ‘just this one occasion’….

Curiouser and curiouser.

And ironically, if the Banca d’Italia really had the right to create money it wouldn’t have to rely on Italy’s taxpayers.

Let’s hope that at least the admonishment to the citizenry helps more people to realise where money really comes from.

Zero Hours or Zero Cash?

Matthew Taylor’s report on the so called gig economy seems worryingly conservative.

He seems quite happy with zero hours contracts although as I always point out this transfers the onus of success from the swashbuckling capitalist onto the employee, who is rarely entitled to the rewards for success, but seems firmly gripped by the system in the event of any failure. 68% of zero hours staff were apparently happy with the number of hours they worked on a zero hours contract – which means very nearly a third were not – but nobody seems to have enquired if they were happy with the way zero hours contracts work? Continue reading “Zero Hours or Zero Cash?”

Clubcard Money

I was in Tesco the other day.

Not something I’m wont to do – I abhor the place, having worked for a short time in a previous life for their opposition and supplied them for an even shorter time. It is not somewhere I feel particularly at home. But Tesco exists.

And of course, having acquired a size nationally and locally to enable them to shut down the opposition, I have to respect a close relative’s point of view: there is no (realistic and local) alternative. (I will still always dislike sending some of the purchase price 200 miles away to their head office in Welwyn Garden City.)
Continue reading “Clubcard Money”

The undisclosed importance of the Barclays Bank prosecutions

Amid the seeming surprise of the Serious Fraud Office opting to prosecute Barclays Bank personnel (at last) there is one particular aspect that we should try to draw attention to.

The BBC says that Barclays may have ‘given’ the money to Qatar to buy its own shares. If Barclays had the money in the first place there would presumably be no reason to give it to anyone – they already had it!

But Barclays didn’t ‘give’ it, they created it.

What should become crystal clear in the prosecution is that Barclays could create the money only by making a loan.

Barclays didn’t have the money but they could create it as a loan for a willing party – out of thin air.

Indeed Professor Richard Werner has always maintained that this is exactly what happened.

The serious Fraud Office obviously thinks along the same lines. Let us hope the fact that it is a criminal trial does not prevent the public from learning that this system of money creation is going on all the time and creates 97% of money in the economy.


The Co-operative Bank is not Co-operative at all, but real Co-operative Banking is now possible in the UK

It is a fact not universally acknowledged that the Co-op Bank never has been itself a Co-op. It was a bank originally owned by the CRS as a way of providing economical banking for their own retail operations.
This was a surprise discovery made after attending a recent lecture by Tony Greenham who looks after ‘new’ banking for the RSA.

Continue reading “The Co-operative Bank is not Co-operative at all, but real Co-operative Banking is now possible in the UK”

How are we going to pay for it?

When you listen to all the discussion about balancing the budget, about how any increase in spending needs to be matched by an increase in tax, why does no one mention that an increase in spending automatically generates extra tax?
There is no need to raise tax rates!

Continue reading “How are we going to pay for it?”