By the Treasury’s own admission some money really doesn’t need to be paid back…

Another interesting letter from H M Treasury:

(Double click to really enlarge)

They say:

….the Treasury does not require the Bank to create money, neither does money created by the Bank of England need to be paid back via taxation. Rather, the Bank creates money to supply notes to the economy as well as creating money under its monetary and financial stability objectives. In all cases, the creation of money is backed by assets.

So we have some money created by the Bank of England which does not need to be paid back via taxation. Just simply for monetary and financial stability…

Presumably we could increase the ‘national debt’ purely on the basis of “money created by the Bank of England [which does not] need to be paid back via taxation.”

That is surely progress.

So that indicates, I suggest, that at least some money is not part of the supposed ‘national debt’.

That again is progress (if philosophically dubious!)

But backed by which assets?

What are these?

Unsurprisingly, I have asked for further clarification.

All in all this rather looks like an eighth reason why we never tax and spend...


  1. Schofield -

    Is it just me but the letter seems to reflect a department that is amateurish or for some reason thinks it’s part of MI5! Hence your need to make further effort to get clarification. They used to say civil servants worked for the public. I think that’s only ever been partly true. Old Etonian arrogance at work!

  2. Peter May -

    Agreed – it’s a bit like pulling teeth….

  3. Schofield -

    Further reflections on the Treasury mandarins being out of contact with the real world by William Keegan in today’s Observer:-

    “I have read suggestions that Sunak has become a prisoner of the Treasury, which, except for a period when Gordon Brown was chancellor, has always wanted to cut public spending. But Sunak is a willing prisoner. He is so un-Keynesian that he wishes to cut public spending even at a time like this.

    He may have receded as a candidate to replace Johnson immediately. But I suspect that his reluctance to use fiscal policy to counteract recessionary forces bodes ill for Johnson’s government.”

  4. Pingback: The government is claiming that all the money it issues is asset backed, and that is complete nonsense
  5. Schofield -

    After Richard Murphy’s informative article today on your post it would be interesting to also ask John Glen if the Treasury Department agrees with the Gimm’s explanation of government money creation where almost all government expenditure proceeds from recourse to the Consolidated Fund by virtue of parliamentary authority. And, of course, if not why not!

    1. Peter May -

      I would ask my MP to ask as you indicate but as I said to Richard he doesn’t really understand finance and so I need to keep it simple if I can.
      I’m already suspicious of treasury intentions to obfuscate because I always ask simple questions, because I think MP Ben is more likely to get the questioning right that way. Treasury replies don’t even seem to be simple….

  6. Schofield -

    I would clarify that the “government guarantee” Richard Murphy mentions in his post is actually Parliamentary authority enshrined in the laws that the Gimm’s paper lists. This takes us back to Christine Desan’s central finding that money is a legislative project.

    1. Peter May -

      I agree. Desan, difficult to read and follow though she is, is very good on this.

  7. Jim Osborne -

    Whilst I fully accept that fiat money created by the central bank on the authority of Parliament is not backed by “assets” it still leaves the question of what is the government’s promise to pay (the government guarantee) backed by? What is the trust in that promise based on?

    1. Peter May -

      The government promise to pay is based surely on the idea that it issues the promise.
      If they hadn’t issued the promise they wouldn’t be liable for it just as you or I wouldn’t, but as they have they both issued the currency, the promise and created the law that enforces the promise.
      Surely those ‘assets’ or guarantee are enough?!
      It does need a functioning state – and I do wonder about ours…

      1. Jim Osborne -

        how does it redeem the promise to a “bearer”? With a fiat currency it can’t be redeemed in gold or any other commodity/asset so how is it redeemed? If it cannot be redeemed then it is worthless.

        I agree that it needs a “functioning state” but the necessary functionality is based on trust in the state. How can there be trust if a fundamental promise cannot be redeemed? There has to be an answer to this question otherwise fiat money is based on a sleight of hand

  8. B. Gray -

    The value of any money is based on what it can be exchanged for. Under the old gold standards money could be exchanged for a fixed quantity of gold; however, in a fiat currency regime that is no longer the case.

    Fiat currencies are fundamentally based on the productive output and capacity of the economy under which the currency is used. As long as there is productive output, and capacity to increase output, then the fiat currency will have value, irrespective of how much currency the government issues. This is a central argument of MMT.

    As an illustrative point, hyperinflations are not caused by “printing too much money”, that is merely a by-product. Hyperinflations, rather, are caused by a collapse in the productive output and tax base of an economy due to war, natural disaster, civil unrest, corruption, etc.

    I suppose one could argue then that the “asset” that backs a fiat currency is the health and productive output of the sovereign nation’s economy, which or course requires a functioning stable government and laws that regulate the economy and protect private assets (which includes government issued money/obligations). Money is essentially a product of laws and it’s value is based solely on the confidence of currency users and investors that the issuing government can uniformly enforce those laws.

    1. Peter May -

      I agree and I suggest that you have answered Jim’s point – better than I earlier tried to do….

    2. Jim Osborne -

      I agree with B Gray. I was intending to answer my own question in due course and this answer is in line with what I would have said.

      I particularly like this paragraph: “Fiat currencies are fundamentally based on the productive output and capacity of the economy under which the currency is used. As long as there is productive output, and capacity to increase output, then the fiat currency will have value, irrespective of how much currency the government issues.”

      I’d put it this way: the holder of fiat money (the “bearer”) has a claim on the collective wealth of the society/economy commensurate with the quantitative value of the currency he/she holds.

      It is the function of the state to ensure that real wealth (stuff people need to live well – “use values”) is produced. Maslow’s “hierarchy of needs” applies here – if the state is to be viable it must at least ensure that the basic needs for food and shelter are met – which implies food and energy security. Top priorities are food, energy, housing, education, health. If these needs are met then the state has fulfilled its basic obligations and citizens pay tax in return.

      Of course “trust” in the state can be manufactured by vested interests who manipulate opinion by propaganda and by establishing a hegemonic ideology – this may well allow a state to continue even when failing to ensure that essential needs are met. This, it seems to me, is how the UK state is managing to limp on, but the emerging crises in UK food and energy security and in the provision of health and education services suggest that the UK state is on a slippery slope – not at the bottom yet but slipping down in that direction.

      Whether Scotland can break free and become independent will depend upon its political leaders setting out the basis for a new state which can meet the needs of its people better than the UK is doing. To succeed Scotland’s “promise to pay” will need to be more persuasive and reliable than the UK’s broken promises.

      1. Peter May -

        Excellent summary – thanks, Jim.
        Especially like the third para.
        Collective wealth is definitely an asset!
        Be interesting to see if John Glen thinks so….

  9. Graham -

    I believe the original “promise” was to pay in gold. Nowadays that “promise” would be met with more of the same – a £5 note with 5 £1 coins, for example – so the “promise” is a piece of nostalgia (to put it politely).

    1. Peter May -

      Arguably it is – but it is transformed when you can pay your tax – when you pay VAT as you purchase goods – and all in government promises – for example…

  10. Schofield -

    The government’s promise lies in its “redemption” namely that it will tax and charge other fees. This is usually misconstrued as being a full automatic redemption of all that it creates from thin air like the licenced private sector banks. It clearly cannot be this because the non-government sector wants to lay its hands on some money to save. Again Desan is worth reading up on because she starts at the beginning when originally citizens were tithed in terms of real resources including labour by their government to contribute to the common weal. The invention of money allowed government to tithe in an abstract unit both in advance and this also allowed flexibility in timing its spending.

  11. Schofield -

    I don’t think on reflection I really hit the nail on the head in explaining what the government “promise” is. One of the main things that people look for in using money is that it holds its value for as long as possible. There is an expectation that government will use its powers to try to achieve this by guarding against deflation and inflation. Clearly the government has a wide variety of powers to do this including the important one of taxation on the combined creation of money by itself and licenced banks. The government “promise” can therefore be regarded as the willingness to act to stabilise the value of the nation’s medium of exchange at least for domestic purposes. If the currency is a floating fiat currency then the foreign sector will obviously have a say in its value for foreign trade purposes.

  12. Schofield -

    Even simpler the prevalence of Market Fundamentalist/Libertarian ideology results in the ignorance that stabilising the value of created money requires a “leader of the orchestra” and that can only be government with its legislative powers.

  13. Jim Osborne -

    Peter – I suppose you could call the collective wealth an “asset” but if so we need to be clear that collective wealth is not a financial asset. What Glen seems to be saying is that money is backed by a financial asset (government bonds) which is just plain nonsense. How on earth can an non interest bearing instrument (money) be backed by an interest bearing instrument (a bond)? It can only be the other way round – and the non-interest bearing instrument (“money”) is “backed” by the productive capacity of the economy – its collective wealth..

    1. Peter May -

      I agree – I was suggesting that not all assets are financial and that would be Glen’s way out of his fix!

  14. Schofield -

    Glen really needs to do some homework and so do the other Treasury Department mandarins! The ignorance is inexcusable like a third rate banana republic! The foundation of the Bank of England along with its ability to issue bank notes was based entirely on Parliament’s legislative ability to impose taxes. That is the true asset (in other words a process not a thing!) and obviously treasury bonds are no different than bank notes!

    1. Jim Osborne -

      I would question that – the ability of the state to impose taxes is conditional on the state fulfilling its part of the social contract – its obligation to ensure that human needs can be met. If the state fails in that obligation it may still be able to enforce taxation by violence of one degree or another but if the level of compulsion required to enforce tax obligations gets to the point of authoritarian violence then the state is on the slippery slope to failure. So it seems to me that the “asset” which gives fiat money its value is not the power of taxation but the capacity of the economy to create collective wealth and it is that which also underpins the power of taxation. Again its a yin-yang relationship.

  15. Schofield -

    Here’s the core sentence in the paper I referenced:-

    “Instead of trying to explain behaviors that are not easily identifiable as self-interested as “really” self-interested, we advocate that theorists should acknowledge that people sometimes are not self-interested.”

    It’s core because it explains the historical drive to parliamentary democracy. It also helps explain that this is not understood by some UK voters or at least forgotten by them and they’ve delivered the disfunctional government we currently have, increasingly disfunctional that is for many not just the poor.

  16. Peter May -

    Thank you, both – and broadly agree with both…

    But @Schofield I don’t understand the idea of assets described as “(in other words a process not a thing!) ?

    Of course, further, the ‘asset’ of tax paying may explain Ann Pettifor’s disinclination to endorse MMT?

    1. Schofield -

      Sorry Peter again it’s back to Desan. When the BoE was set up in 1694 it was set up to do various things but one thing was to create bank notes for the government to spend (of course at the time these notes could be swopped for specie such as gold and silver) but what was making these banknotes acceptable by the public was taxation (the old MMT argument). Taxation is a process because it’s simply cancelling out what has been created from nothing, a balance sheet activity if you like.

      Sure owning a bank note is an asset but it’s the process that led upto the creation of that asset from an acceptability point of view that’s important. Here we can also feed in Nicholas Dorn’s argument about indirect taxation helping in this “value acceptability” process:-

      Hope this helps.

  17. Peter May -

    Thanks for that @Schofield.
    Very intrigued that “people sometimes are not self-interested.”….Need more

    I’m afraid have to sign off now as tomorrow (actually – no – today) is a driving/visiting/cooking day for a mere 102 year old Mum….Still decidedly coherent, fortunately – although, a bit deaf so not always!

    1. Schofield -

      This will push you even further back when not being constantly self-interested became “recognised” to have evolutionary advantages:-

      Of course the new science of hologenomics will tell you this has been there all along. If you accept that a fundamental feature of consciousness is differentiating then the opposite of not doing too much differentiating with your offspring especially by mothers was an inevitable experiment because of the advantages it gave in physical brain development which in itself enhanced passing on learning.

      1. Peter May -

        Thanks for the link – more to read!

  18. Jim Osborne -

    There are two ways of understanding fiat money. It can be a “promise to pay the bearer….” or a credit against liability to pay tax. In either case the money only has value if it enables the holder to acquire goods or services which meet their needs (i.e. to acquire “use value”). So whilst the state can enforce payment of tax in its own currency the value of that currency is derived from the collective wealth created in the economy and not from the process of taxation.

    1. Schofield -

      What is this nebulous wealth you talk about in terms of the processes of how it’s valued? I use the word “nebulous” because from a domestic valuing point of view it has to relate to several valuing processes. So there’s the one of whether you have a situation of real resources being under or over bid at the time in the country. Then there’s the one of what demand there is for the country’s exports. Then there’s if foreigners want to invest in the country or interest rates are high relative to other countries that will push up the currency value.

      Secondly, in all these situations the government to obtain stable value of the medium of exchange will be using the tools at its disposal. So a key one is taxation. Even a tax credit or stimulus cheque can be construed as a tax break. Government spending alterations is obviously another one but as MMT argues much of that spending is automatic, the stabiliser of unemployment benefit for example just as tax revenue increases when the business cycle is at high output. This helps iron out fluctuations in the value of the medium of exchange but it doesn’t entirely stop it.

      Then there’s the a government buying the treasury bonds of target export countries like the UK buying US treasuries. I think from memory it’s the third after China and Japan. The effect of this of course is to push up the value of the American dollar.

      All told there are various processes that affect the value of a country’s medium of exchange both domestically and externally I chose to concentrate on the domestic one concerning the powerful tool of taxation in my original post. I certainly I don’t believe you can simply declare it’s “use value” alone. Here’s another argument to support this contention why are many things so much cheaper in the United States than the United Kingdom? Why don’t they have the same comparative “use value” prices?

      1. Jim Osborne -

        Because “use value prices” are set by markets; demand and supply factors, productivity levels etc.

        If a currency cannot be used to acquire use values (to satisfy needs) then it lacks use value itself. If something lacks use value then it has no monetary value. If people cannot acquire what they need by spending money in the form of a particular currency they swap it for another, which makes the other currency more “useful”.

        We know from history that when the productive economy fails to produce things its people need then the currency fails and the state fails with it – Weimar Germany is a classic example.

        So for a currency to have use value it has to be purposed to produce things which meet the needs of the people who use it. If this seems like a circular argument that is because use value and monetary value have a yin yang (dialectic) relationship.

  19. Schofield -

    “Because “use value prices” are set by markets; demand and supply factors, productivity levels etc.”

    You are completely missing the point they are set by other processes which I’ve tried to explain to you!

    You quote Weimar yet Hjalmar Schacht in his book “The Magic of Money” says the privately owned central bank was actually lending to enable currency speculation against the mark! A driving factor behind the hyper-inflation. That is one of the processes that affect value!

  20. Jim Osborne -

    Earlier you said: “So there’s the one of whether you have a situation of real resources being under or over bid at the time in the country. Then there’s the one of what demand there is for the country’s exports. Then there’s if foreigners want to invest in the country or interest rates are high relative to other countries that will push up the currency value.”

    Aren’t these “processes” all related to markets?

    Wasn’t the speculation against the mark because it was a failing currency in the first place? Wasn’t it losing value (in both senses) because the German population couldn’t buy enough with it to meet their daily needs since the economy was oriented towards paying off the war reparations imposed on Germany?

  21. Schofield -

    I thought you were MMT Jim but you appear to be a Market Fundamentalist Tory. I’ve just finished reading Richard Vague’s book “A Brief History of Doom” where as a former banker he provides copious evidence that outside of wars the vast majority of recessions over the last two hundred years have occurred because politicians have allowed bankers (either licenced or shadow) to over-inflate assets resulting in inflationary bubbles which ultimately burst triggering recessions. The Great Depression was caused by “lending at margin” and so was the Great Recession. These inflationary bubbles were nothing to do with markets discovering value by normal processes it was a process of speculative gambling fuelled by unrestrained private sector money creation from thin air!

    Want another example of a process distorting market value through gambling at the margin or even licenced banks using subsidiaries to do so? Try the Asian currency crisis. China responded by making sure all foreign currency exchange took place through state owned banks. The state then skimmed off value which the state primarily used to buy US treasury bonds (its primary export market). This process pushed up the value of the dollar allowing American consumers to buy more Chinese exports. How exactly would you claim this to be normal market value discovery?

    Lets go on shall we whilst we’re on the subject of China which massively supports state enterprises through state owned banks where loans are regularly written off or rolled over. Janos Kornai is the economist who has pioneered work on this particular distorting process calling it the “Soft Budget Constraint”:-

    As for speculating against the German mark it was fairly obvious to anyone who thought seriously about the matter like Keynes that the allies’s war reparations debt imposed on Germany after the First World War was unworkable. Yet another process that distorted market value discovery processes. Indeed there’s belief by some historians that the German state deliberately created hyper-inflation to reduce the value of the reparations debt. If so that’s yet another market value distorting process.

    Try another one and go back to Hjalmar Schacht’s book were he accuses Hitler of stoking abnormal inflation by reckless government creation of money. When Schacht objected Hitler fired him! No sensible market value discovery was obviously Schacht’s argument. Hitler no doubt would have irrationally argued back why did you come up with the MEFO certificate scheme. Schacht would have argued that value for money was carefully monitored in that scheme an argument that Hitler would have ignored because imperialistic power was his over-arching goal!

    Anyway I’ve had enough telling you about value distorting processes. The penny won’t drop. We’re done!

    1. Jim Osborne -

      I didn’t say that prices are set in free markets. I made the general point that prices are set in markets. There is no such thing as a “free market”. I am not a free market fundamentalist… quite the opposite. What I am saying is that the state must regulate in order to ensure there is collective wealth which meets the needs of the population since that is ultimately what “backs” the currency.

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