HM Treasury says MMT is correct

It was almost a year ago that I originally wrote to my MP to ask him to enquire of the Chancellor ‘Where does money come from?’

I have, at last, received a reply (click to enlarge):

It reads rather as though the writer, John Glen, Economic Secretary to the Treasury, has received intensive training from the Ministry of Circumlocution. Or maybe that’s just the way they teach them at Oxford.

So we get: ‘While it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money, allowing governments to increase spending or reduce taxation, without raising corresponding financing from the private sector, there is a risk that money financing could rapidly undermine the stability of inflation expectations.’

Which is just the old canard that printing money causes inflation.

But, interestingly, this is the sole argument against government money creation.

And when the letter continues: ‘the majority of money in the modern economy is created [my italics] by commercial banks.’ it indicates that the rest of the money is created by the government itself, of course.

‘Long term price stability is recognised as being complementary to the efficient allocation of resources in the economy, and so is an essential prerequisite for economic growth.’ seems simply to mean too much inflation can throw an economy off course.

But we still have the non sequitur that money creation by commercial banks, which the Treasury admits is the majority, doesn’t create inflation, but creation of the minority of money by the government itself, would somehow lead to undermining of the economy by inflation.

This reasoning failure or, perhaps more likely, sleight of hand, allows the Treasury to suggest that the magic money tree is a dangerous species liable to undermine the economy, when of course it is actually the species that is of unique benefit to it.

So the Treasury knows there is a Magic Money Tree but through involuntary (or voluntary) intellectual blindness misunderstands the role of tax in preventing inflation.They have already admitted in this letter that tax is not required to pay for anything.

I feel a reply to John Glen coming on.



  1. Pingback: The Treasury admit that tax does not fund government spending – as modern monetary theory suggests
  2. Mike Hall -

    Well done Peter, always nice to have evidence from the horses mouth 🙂

    1. Peter May -

      You’re right – that is what I was trying to elicit!

  3. Nell -

    Thanks for sharing. I would like to know how Glen answers the question you posed re private money creation not inflationary, government money creation is inflationary. It will be fun to see the kind of hoops that are jumped through to hide the fact that this is an ideological stance.

  4. Peter May -

    I have now asked Ben Bradshaw to pose exactly that question to John Glen. I hope it doesn’t take another 10 months to get a reply!

  5. brian faux -

    Of course the answer to `why is private money not inflationary?` is that it IS inflationary: you only need to look at the stock market and property prices to see this.
    The `causes inflation` argument is basically sound.
    Arguing against it (can be controlled, we need a little bit of inflation etc) needs careful thought.
    It`s a necessary debate that should be front and central in any government`s thinking.

    1. Mark talbot -

      But the things that private money creation inflates are deliberately excluded from the normally used metrics. The inflation targets are based on metrics that effect labour costs and not capital returns, so there has been massive inflation allowed in assets. Even cpih hides large amounts of monetary supply inflation as it only better covers living costs but still excluded most asset inflation as it only adds housing costs.

      1. Peter May -

        Good point. If I get a proper reply they should point this out!

    2. Alexander Kurz -

      I understand what brian faux says about private money being inflationary. What interests me is that this inflation seems to be limited to certain sectors of the economy (stock and property prices), but does not spill over to, say, cars and butter. Actually, I think I see why this is the case for property prices: Mortgages can only be spent on property.

  6. paul mawer -

    This has actually been known by many people for sometime(all economist at PHd level have been taught it) the next part is to move the debate on should be why inflation isn’t the enemy! why prices to income is! and yes do we actually need taxation other than to rectify the pricing to income problem???

    1. Peter May -

      I doubt we can get away with reducing taxation by much overall without some inflationary problems.
      But we certainly need to rejig it and properly tax what used to be (rightly) called unearned income. Reducing VAT and other service/goods taxation/charges would also help with living costs for everyone.

  7. Kevin -

    An important note here is the fallacy that bank loans “create” money, it merely moves money that has already been created by the Gov, it is not created new.

    1. Kevin -

      That would be counterfeiting.

      1. Alan McGowan -

        Creating bank notes would be counterfeiting. But creating credit they do all the time. Banks do create most money it is not a fallacy. That is one of the most important facts spelt out by MMT

    2. liz fox -

      I think there is a distinction to be made between actual bank notes (that the gov/Mint) prints and electronic transfers of virtual money put into accounts by banks.

  8. Jim Green -

    Re ”the fallacy that bank loans “create” money, it merely moves money that has already been created by the Gov, it is not created new”

    If banks actually lent out savers deposits, then you could say they are merely moving around already existing, maybe govt-created money. But they don’t, do they? When a bank makes a loan it credits an account with ‘cash’/digital blips that hitherto did not exist., n’est pas? So both banks and the government are responsible for adding to the overall money supply.

    1. Peter May -

      Absolutely right – banks create money out of nothing when they grant a loan. Hence the expression ‘credit creation’. Somehow this is always preferred to ‘debt creation’, which of course it also is. But there’s nothing to back it up except the actual promise to repay. Similarly pounds sterling which the government issues as it promises to accept them back in payment of taxes

  9. Pete Cuthbert -

    I suspect that Kevin may not have suffered the experience of undergraduate Economics teaching. We clearly learned that banks create money by taking deposits from savers and, knowing that savers will only ever want to withdraw (on average) (say) 10% of their cash, use the 90% to make loans. That money will circulate through the economy back to the bank as more savings which can again be lent on. If my aged memory is correct, it was the money creation multiplier. Too bad that back then nobody had spotted that the MMT actally exists.

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