As the Independent has reported:
David Cameron has invoked Margaret Thatcher's economic doctrine in an election-time push to shore up the Tory core vote.
Speaking in Bristol on Monday Mr Cameron claimed there was “no such thing as public money” — a claim made by Ms Thatcher at the 1983 Conservative Party conference.
“We know that there is no such thing as public money — there is only taxpayers' money,” Mr Cameron said — repeating the late prime minister word-for-word.
David Cameron is straightforwardly wrong. You can see why Paul Krugman could say yesterday:
Britain's economic performance since the financial crisis struck has been startlingly bad.
If Cameron can get basic facts on money wrong then of course he can run the economy startlingly badly.
And he does not have to go far to find that not all money is taxpayer's money. Take this House of Commons Library note on quantitative easing as a start point:
Central banks have the ability to ‘create' money. This happens electronically rather than through the physical printing of extra bank notes.
To explain that let's turn to the Bank of England, who say:
In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money.
The reality of how money is created today differs from the description found in some economics textbooks:
- Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
- In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up' into more loans and deposits.
Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks' activities in order to maintain the resilience of the financial system. And the households and companies who receive the money created by new lending may take actions that affect the stock of money – they could quickly ‘destroy' money by using it to repay their existing debt, for instance.
Monetary policy acts as the ultimate limit on money creation. The Bank of England aims to make sure the amount of money creation in the economy is consistent with low and stable inflation. In normal times, the Bank of England implements monetary policy by setting the interest rate on central bank reserves. This then influences a range of interest rates in the economy, including those on bank loans.
In exceptional circumstances, when interest rates are at their effective lower bound, money creation and spending in the economy may still be too low to be consistent with the central bank's monetary policy objectives. One possible response is to undertake a series of asset purchases, or ‘quantitative easing' (QE). QE is intended to boost the amount of money in the economy directly by purchasing assets, mainly from non-bank financial companies.
So where is the taxpayer in all that?
What's clear is that most money is made by commercial banks - and when it is deposited with them it actually is their property (that's how you can lose it if a bank goes bust). So those banks do not hold taxpayer's money as such, and taxpayers do anyway, as is noted above, actually have a habit of destroying money by repaying loans (yes, that is technically correct: loan repayment cancels money).
Precisely because this system does not always work the government can create money too - using quantitative easing. £375 billion of it, right now, in the UK. That's definitely not taxpayer's money. That is government created money.
And do a though experiment for a moment - look at a bank note. Is it actually yours? Or does it belong to the Bank of England whose promise to pay is what gives it the value you are relying on to give it value? I'd suggest the latter. So that's not taxpayer's money either. You have a claim on that money, but the note is not yours.
In fact, taxpayers merely use money made by other people. And when it comes down to it the 'other people' in the equation comes down, in practice, to the 'other person'. That 'other person' is the government, because as the Bank of England note, regulation restricts how much money banks can create, so they effectively undertake this activity under licence from the Bank of England.
In that case at the end of the day all money is government money - and it is ultimately the right to control a currency that defines a truly independent government - which is precisely why the Eurozone countries are not.
So is David Cameron right to claim there is no such thing as government money and that there is only taxpayer money? He isn't: in fact he got it about as far wrong as it is possible to get it.
And as for the funds the government spends, the idea that this money belongs to taxpayers is absurd. Three examples suffice. First, the law says it belongs to the government. That's why you have to pay your tax. Second, that law is created in exactly the same way as all other law on property rights i.e. through the workings of legislation, which means that the government's claim on this property that it owns is absolute, and not as agent. And third, if it's your money do you really think an election is about providing a specific mandate on how every penny is spent? If so, you're very wrong.
So, the reality is that there is no such thing as taxpayer money, although taxpayers do, very definitely do have good and valid claims on some of the money made by other people, but not all of it. And the government's money is emphatically just that i.e. it's own, and no one else's.
Thatcher was wrong.
Cameron was wrong.
And both failed, completely, to understand what they were talking about.
Unless, of course, they wished to spread a convenient lie that let an elite claim control of funds that rightly belong to government.
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Who does Bitcoin belong to? One could argue that it isn’t money I suppose but I’d argue ‘money’ is only money because we regard it as such.
Bill,
There’s a bit more to money than us just regarding it as such.
Money is an IOU. Which means anyone can create money (you, me, Tescos, M&S, banks, government), the only problem is getting the IOUs accepted enough to become the ‘currency’.
Your IOUs might be more widely acceptable than you think. For example your bank will happily accept money you create (when you sign a loan agreement…i.e. your IOU) and in return hand back money it creates (bank IOUs). In a very real sense both you and the bank together create the £X of (bank) money that suddenly appears in your account as a result of the loan.
The most acceptable IOUs of all are government IOUs – namely £ sterling. Why? Because the government absolutely insists on its taxes (UOIs!) being paid in its own, and only its own, IOUs. Everyone is subject to tax, ergo everyone wants some government IOUs.
Lovely Jubbly!
http://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity
So who does Bitcoin belong to? How is Bitcoin an IOU?
Hi Bill,
I should have mentioned that Bitcoins aren’t IOUs (and consequently aren’t money).
Bitcoins are modelled on gold – which has an intrinsic value due to its extreme rarity and beauty. Bitcoins, being non-physical, have no such beauty and therefore trade solely on the buyer’s belief by that they are worth what he is willing to pay. And if there are enough buyers, their price will chase up and up…..until the bubble bursts.
Its all based on belief, which is very fickle, unlike state money, which is based on something much more substantial – state tax (payable only in said state money).
This blog post by Professor Randy Wray explains more…
http://www.economonitor.com/lrwray/2013/04/16/krugman-does-mmt-again-goldbugs-and-bitbugs/
“David Cameron is straightforwardly wrong. You can see why Paul Krugman could say yesterday:
“
Britain’s economic performance since the financial crisis struck has been startlingly bad.”
Which European economy does Krugman think the UK should be more like? The UK’s economy certainly isn’t perfect but it stands up with the strongest of them and is considerably stronger than many of them.
He’s not saying it should be like another EU economy
He is saying it should be what is possible – which is an economy where austerity is not the aim, which has been universally destructive
Who or what is the government other than ‘we the people’?
I realise ‘government’ (and the various bodies — e.g. Councils, departments etc) are separate legal entities, but that is an abstract concept. Surely the word ‘government’ describes a collective of some kind.
I agree that the use of the word ‘taxpayers’ is misleading. It suggests foreign visitors who pay VAT at a hotel (i.e. they are ‘taxpayers’) are part of ‘we the people’. And it wrongly suggests that those who live amongst us who don’t pay tax (those financially dependent on others, profoundly disabled, prisoners) are not ‘one of us’.
I do not accept the government is the agent of the people any more than a company is agent for its shareholders
Government is a necessary and unique entity that governs, and that is held to account for doing so in a democratic system
But it is not of and for the people – as is proved daily around the world
And as is proved when it does much I clearly would not wish it to do
But who or what is this entity (apart from the abstract legal entity) that governs? You still won’t say.
Are civil servants ‘government’? Is government ‘theirs’? Many of them will make many more decisions of significance than most backbenchers, yet who holds them to account?
“And as is proved when it does much I clearly would not wish it to do”
Am not sure what that proves – you suggest government is not ‘of the people’ simply because it doesn’t do what you like? Is that what you mean?
The government is made up of two house of parliament, the government drawn from their membership and the judiciary. The civil service serve them
“But it is not of and for the people — as is proved daily around the world
And as is proved when it does much I clearly would not wish it to do”
Richard
So if the government does something that YOU Richard Murphy wishes it did not, then that ‘proves’ it is not of the people?
That is absurd.
Maybe it ‘proves’ that what you wish it did is not what the people want. That it is you that is out of step and that as a democrat you should accept this?
KRs
Tim
Oh come on
That’s an observation true for everyone the world over
Even Prime Minister’s don’t always get their way
I will be deleting you of this is the crass level you intend to continue at
Richard
You absolutely must Must MUST make sure your argument that all wealth is created by the state and that therefore all wealth belongs to the state and anything that the state lets you keep after taxation is at the state’s beneficence is more widely known.
Such views may polarise but we need to know which side of the line people stand.
KRs
Tim
Not my opinion, ever Tim
You really must learn to read what I am saying
What you are saying and have always posted is that the State has the right to tax income and wealth as it likes, that private property is second to that right and that the only limit to the amount of taxation is a democratic mandate………
You don’t need to be an arch libertarian to have a problem with that kind of overwhelming state power, only a student of history!
The good news is that although you consider it a fundamental necessity in order to justify your outrageous state and its desire for hammering the wealthy………….most non political people will not agree and see it as the ideological land grab it is………..
Except that is not even close to what I have said
I am a democrat so of course the state cannot tax as it wants to: please do not make up such crass statements
And I have not said private property is second: I have said tax revenues are the state’s private property, which it is and to which it has an absolute claim – which is to the letter legally true, so again stop making absurd claims
Tim, wealth and money–not quite the same thing. A second ship was wrecked on Robinson Crusoe’s island. In it he found a bag of gold coins. He was angry “i would have exchanged them all for half a dozen good English shoes and stockings”.
Wealth is created by both public and private sectors but money is essentially issued by the state.
We have had this discussion many times and the fact is you hold two views that you have posted on this blog over and over again….
One is that private property title is only valid upon payment of the tax that the State considers due……whether that is SDLT, Council tax, rates whatever!
The second is that the State has the right to tax up to any amount in percentage terms that it wants upon the proviso that it has a democratic mandate!
You have stated both of these many times and continue to do so………the problem is that if you look at the combined effect of both then you effectively have no private property rights!…….No title without tax and that tax can be so high as to make title ownership pointless.
If you wish to claim in pragmatic terms that this will never happen then you would have no problem with limiting the State in terms of a maximum tax percentage…….but you won’t so it is safe to assume the worst!
You state two views I hold, correctly
And then draw an utterly absurd conclusion from them
Which makes debate pointless
Not least because my views are legally and pragmatically very obviously true and you are seeking to deny they way our tax and legal system works
Richard
Thank you for clarifying. I have just watched Steven Hail’s Youtube video on government produced money and crises and can highly recommend it.
https://www.youtube.com/watch?v=qBpm5sVmGYc
But I have to say I’m ashamed to admit that I was then confused about where tax income from us and companies plays its part fiscally. You have clarified this for me somewhat – a very timely post.
Perhaps this blog is a putative chapter of your next book? I hope so and if so, I hope you really go to town on this subject alone.
The people of this country have been victims of an immense lie perpetrated by neo-lib economists and thick politicians. Most of the stuff written along neo-lib lines needs to be taken out of the reference sections of libraries and economics sections of book shops and placed firmly in the fantasy section.
By the way – because of bullshit busting blogs like this, I think that you are beginning to take on the mantel of being a national treasure.
Thanks once again.
This issue is dealt with extensively in the new book – which is running late…..
Well, you should never rush a good thing…………….
A thought: how do systems like the Bristol Pound play into this?
The correct answer is, I suspect that they aren’t money. However, on the basis that if it walks like a duck and quacks like a duck it’s more likely to be a duck than a kangaroo with paranoid schizophrenia, you could see why people would argue that the B£ is a form of non-government money.
The Bristol pound is sterling: it exchanges one for one
But I accept it is a special form of money too small to be noticed as yet called complementary currencies
Last time I asked them (ages ago now) they could create new Bristol Pounds but only one in every eleven, if I have that right. I believe this means they can exchange eleven Bristol pounds for ten GBPs.
Richard,
While in complete agreement with the above analysis, as well as the need for more and greater inflation, one element sticks out for me, and possibly other readers too, that being the reality of canceling out money by the repayment of loans. As our combined goal is to increase the supply of money, and thusly inflation, how do we square that with our equally stated goal of canceling debt and debt jubilees? Perhaps it is as straight forward as creating more money, to offset the vital need for debt cancellation, but I am curious as to a more expert view, yours obviously, on this seeming conundrum.
It is a puzzling thought.
If debt is reduced the state has to make more of the money
That’s what Green QE could do….
It’s really rather virtuous
I sense a Venn diagram in the offing!
According to MMT, tax (amongst all the other desirable functions that you have often remarked) is a means of giving money value and preventing inflation by draining the private sector of that which exceeds the potential capacity of the economy. As you make abundantly clear, tax is not some sort of income which limits government spending.
The big neoliberal lie is that countering austerity can only be achieved by cutting, borrowing or taxing. I wish someone would tell the journalists and television/radio interviewers.
I try Sue
I try…..
Yes, of course you do! I should have said ‘… someone (other than Richard) should tell the MSM’ 🙂
Indeed……I think Steve Hails puts it well in the video referred to above:
The only real restraints (for a Government with a sovereign currency) are ‘inflation and the eco-system.’
The populace is being treated like mushrooms: kept in the dark and fed ****
Non of this was seriously challenged in the recent dumbed-down party-leader circus.
Indeed, to his shame, Clegg repeated the myths about ‘balancing books’.
If the state issues new debt-free money and spends it into the economy then, all else equal, is this not a tax on extant money holders? Overall their relative purchasing power is proportionately diminished. Of course if the new money is used intelligently and productively then their absolute purchasing power might not diminish, indeed it might even increase.
If alternatively the state borrows the money then that would be a tax on future tax payers. All state spending must be paid for either by the taxpayer – one way or another, sooner or later – or to some extent by creditors of the state who might get back less purchasing power than they lent.
What is important is the effectiveness and efficiency of state spending, and its fairness, transparency and accountability to the people. The state, among other things, is a mechanism for appropriating purchasing power from its citizens and spending that purchasing power for the common good. This function should not be obfuscated.
Bob,
State money is not ‘debt-free’. All money is an IOU and the ‘OU’ bit tells us its debt.
What does the government then do discharge that debt? It accepts it in payment of tax. When you pay say £10 of tax, both the £10 tax demand and the £10 of money cancel each other out. The government has discharged £10 of debt obligation and you have paid £10 of tax. Everybody’s happy.
Creation of money (either by banks or the state) will indeed diminish relative purchasing power, but only if the economy is at full capacity. Another word for that phenomena is inflation.
Conversely increasing taxes will cool (an overheated) economy and so will enhance relative purchasing power.
Finally you say “All state spending must be paid for either by the taxpayer”. Not one brown penny of state spending uses taxpayers or ‘borrowed’ money. The government creates all of it; every last single penny.
That said, in a sense you are correct. There is a price society pays when the government spends. It is an ‘opportunity cost’ of losing out on the real products and services bought by the government.
Bob-if “All state spending must be paid for either by the taxpayer — one way or another, sooner or later” then way has America not paid off outstanding treasuries since 1791 -have tax payers felt burdened by that for over 200 years and did it stall economic development?
Simon,
Do you think that those who now hold US treasuries are going to recoup their purchasing power on maturity? Will all future holders? Can the exponentially increasing rollover of state debt be continued indefinitely?
No, they do not recoup
UK has rolled over since 1694
Why should it end?
Richard
In concert with inflation of the money supply, carefully rolled over state debt can indeed continue indefinitely to increase nominally, as can tax revenues, prices in general, GDP etc. At least that’s the theory.
However, common sense dictates that, in real terms, someone at some time, and in some way, must pay for all state spending. This happens either through contemporary or future taxation, or through dilution of the currency, or through the loss of creditors’ purchasing power. That is all I am saying, plus that the more subtle transfers of purchasing power to the state should be more clearly acknowledged.
Will the US and UK rollovers actually end in the foreseeable future? I don’t know, but to me some kind of systemic reset is looking increasingly likely.
Bob,
When it comes to the macroeconomics of government spending, ‘common sense’ doesn’t apply. Not at all.
We, as mere currency users, have to run a ‘household budget’ in order to manage our finances. The common sense you speak of very much comes in to play otherwise bankruptcy awaits.
On the other hand the UK government, as the monopoly issuer of £ sterling, operates its finances nothing like a ‘household budget’. For example, because it makes the stuff at will, it can’t run out of money – ever. Excepting counterfeiters, how common an experience – and hence how common sense – is that?
Similarly the UK has no need to ‘rollover’ its debt. Firstly there are no rollovers because there was never a loan to begin with – why would a currency issuer ever need to take out a loan? Secondly, lets say the UK decided it had enough of living the ‘rollover’ lie and wanted to clear the national debt. It could so in an instant by levying punitive taxes (recall I explained in my previous reply earlier that taxation discharges the states debt pound for pound).
So overnight the UK would have paid off the national debt. But in doing so, by definition, there would be exactly £0 in circulation! That means no savings, no spending power and hence no economy. The startling insight from this is that the UK national debt, far from being a burden, is a huge asset. As it exactly equals the combined savings of UK citizens!
Now, do you still think clearing the debt is way to go or should we just accept that we will forever ‘rollover’ the debt?
Forgot to say. Please watch this excellent, very accessible, presentation by Aussie-based Brit economist Steven Hail…
https://vimeo.com/117137212
Government’s have no reason to go into debt, but they choose to. As Richard pointed out, the debt is simply rolled over by issuing more bonds to pay off the previous borrowings. Only the interest is paid by the government.
I believe the old maxim of “too much money chasing too few goods” supposedly caused by the government throwing too much money about is nowadays a myth as nowadays it would be difficult for money to overtake the enormous amount of consumer goods produced. This maxim also suggests supply is somehow fixed, which isn’t the case at all. More money can be absorbed by more production.
Inflation, even reasonably high inflation, is not necessarily a bad thing. It erodes high debt. Deflation is far worse, as the likes of Greece, Spain and Portugal, having austerity thrust upon them know only too well. Also, a high pound never did us much good in 1967 when it caused us to lose out to foreign competition.
Money can either be created via a nationalised banking system or created against future tax receipts.
Another point. neoliberals for around 30 years have stood economics on its head, selling us the myth that treating government spending like a household debt, that is, that if we restrain spending and pay down our debts, all will be well. It has never worked. Al that ever achieves is recession and, in all likelihood, an increase in the national debt as less tax receipts due to spending cuts lead to less money to pay off previous debts and more borrowing needed to make up the difference.
Government investment in the real economy creates the escape velocity needed to pull the country out of recession. It always has done. Austerity has never achieved this and never will.
Neoliberal philosophy *has* worked though, it’s exacerbated inequality, which is what it’s intended to do. The rich are richer, the poor, poorer. Bingo! 🙂 All the rest about what it’s supposed to do is flannel. Let’s not forget the point of money the way the Dutch bankers introduced it here in the first place, the creation and maintenance of an artificial elite. The position of that elite is lately being reinforced, underlined. That’s what neoliberalism does.