Explaining how money works on the doorstep in 220 words

I’ve previously suggested that I think it unlikely a realistic progressive reform agenda will succeed before there is a proper understanding of where money comes from.

So when someone says something like ‘we cannot afford it, we cannot spend like that – the government doesn’t have enough money…. ‘ what do you say?

This is my suggestion. It uses the government as a household analogy but tries to differentiate it, because I think people will have a better initial response to the usual agreement this entails. So here goes:

Who is in charge of your household expenditure? Is it you, or your partner or a joint effort?

(Response is one of the three).

Well I’m sure you (both) know that you need to be careful that you must match income and expenditure as far as possible – otherwise you’ll need to borrow, and borrowing isn’t usually at very afforable rates especially if you look to max out the credit card. It is often a problem, I’m sure you’d agree.

The government is similar – except in one very important respect, which is, I suspect, different from your household and certainly, mine:

Our government owns a bank. If you take out a fiver – I’ll get one out – it says ‘Bank of England’ on it. That is money issued by the Bank of England which is a bank wholly owned by the government. Only it can print money that you and I use.

So the government is a household that owns a bank. The government’s bank, because it issues money, never needs to borrow, but in order to safeguard (mostly) private pension investments it can choose to. In fact currently it borrows for an interest rate that is less than inflation. Everyone really likes lending to the government because it, as we’ve acknowledged, creates money, so it can never actually run out of it.

That is unlike any household I know.

There may or may not be a response to this but if there is, it will usually be:

Ah yes, but what about inflation? If the government creates too much money we end up like Zimbabwe.

Next up, I’m going to try to summarise a short doorstep response to this, too..

If anyone has spotted any major flaws so far, I’d love to hear them!

Comments

  1. Richard Bond -

    Peter – not disagreeing, playing devil’s advocate.

    “Only it can print the money that you and I use”? I’d say ‘Most money is digital and is created by commercial banks, we don’t need government printed cash thanks.’ You probably need something on how all commercial banks are backed by government eg in 2008 they’d have all crashed and burned without government intervention, but I don’t know how you say it simply.

    The bit on private pensions, will go over the head of most people. Again I’d derail you with ‘Why?’ and you’ve lost simplicity. How about “govt can choose to borrow as a safeguard”? You can still be derailed with ‘Why?’, but I think its less of a hook.

    1. Peter May -

      That’s a fair point but the short answer is that I don’t believe most people know that banks create money! If they do I suggest they’re probably well on the way to the knowledge that government spending creates money. They are Positive Money true believers if they think commercial banks create money but government doesn’t!

  2. Charles Adams -

    I think people can cope better with borrow to invest. The government is big and owns the Bank of England so can borrow more cheaply than you and me. Government invests in the security health and education of its people and this investment more than pays off because healthy skilled people are more productive and earn more for themselves and spend more which both pays into the government account and those of everyone else.

    1. Richard Bond -

      Charles – Yes, much better.

      Peter – I forgot to add “so, you’re saying that all the politicians and all the media and all the economists have been lying to me for the last xx years? Why should I believe you, instead of them?” because… You’ll need a short doorstep response to that too, Good Luck!

      1. Andrew (Andy) Crow -

        “…all the politicians and all the media and all the economists have been lying to me for the last xx years? Why should I believe you, instead of them?” ”

        Because they get paid to go a long with the lie. It makes them very wealthy and YOU and I are paying for that. (?)

    2. Peter May -

      Borrow to invest is certainly good – thanks, Charles

      1. Peter May -

        And good point, Andy, about being ‘paid to lie’…
        It’s similar to that old saying which is something like mothing persuadesa man to blind to the truthe so much as his livelihood depending on it. In the end you might have to tell them that you cannot pay tax in £Sterling – and that is all you can pay it in – unless the government has first created the Sterling with which to pay it. And that’s just logic.

  3. Paul Mayor -

    A much more simple question could be that how can you be taxed on the money you earn unless a government, through spending, issues it in the first place. The problem with any moneys issued by banks is that is all loans have to be paid back, albeit over varying timescales, whereas that money issued by government does not and a varying deficit on the government’s books is what is left within the economy after taxation, which reflects the decisions by government which SHOULD maximise our economic potential based on any current situation. Quite obviously you need the raw materials and labour etc. but you also need the money retained in the economy through government expenditure to provide the medium of exchange.

    1. Peter May -

      I quite agree. I hope I’ve addressed this in the next post – on Zimbabwe/ inflation?

  4. Rob -

    Another possible angle/question: where does the mortgage come into the comparison?

  5. Peter May -

    I suggest a mortgage would be the equivalent of a government ‘borrowing to invest’

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