There's a very good letter in the Guardian today, which I share in full in the hope they and the author will forgive me (feeling fairly confident about the latter):
Your editorial (Negative shock, 28 February) refers to the possibility of direct financing of the deficit by "made-up" money. It is important to recognise that the banking system also creates made-up money as loans. The majority of our money is now issued in this way. There are only two sources of money — state-issued currency and bank-issued debt — and the latter outstrips the former by nearly 10 to one.
Effectively, our money supply system has been privatised. However, in a crisis, the public makes no distinction between the two forms of money, and states have ended up responsible for all money issued in their currencies. The problem with bank made-up money is that it is only issued as debt, which must continually expand if it is to be repaid with interest. Eventually the system can take no more debt. The only source of debt-free money is the state, hence quantitative easing, but under neoliberal ideology this has been given to the banks to lend rather than being issued directly into the economy. Think what wonders £375bn would have done to the real economy. This would have been no more inflationary than bank-issued money and arguably would have been much easier to tax as it would have been spent in much more transparent ways.
Public made-up money is the only money supply system than can be responsive to the democratically expressed needs of all the people. Instead, public services and vulnerable people are being punished through austerity for the sins of "leveraged" (ie borrowed) speculative finance feeding off its control of the national money supply.
Mary Mellor
Emeritus professor of sociology,Northumbria University
All very true.
There's much more on this in The Courageous State.
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Thank you for this post – you have identified the core corruption from which all the other corruption follows. there can be no democracy and no improvement for the people until this core corruption is addressed. The debt based money system makes slaves of the people and makes kings of the criminals.and is supported by all three of our corrupt political parties.
Adrian, I agree fully, as does The American Money Institute in the US (see http://www.monetary.org/ for the AMI).
Stephen Zarlenga, founder of AMI and author of “The Lost Silence of Money” ends all his e-mails with the tag “Over time, whoever controls the money system,controls the nation.” – Stephen Zarlenga, Director
Here in the UK, Positive Money (see http://www.positivemoney.org/) takes a similar view.
Alas, the public has been completely hoodwinked as to the nature of money, allowing themselves to be taken in by the totally misleading and erroneous “household budget” model of debt and money, which Richard has demolished every time it raises its head. It IS, alas, the model peddled by the Coalition – “maxed out on credit cards” being the fatuous, populist slogan upon which they rode to power, and on the back of which they have knackered the real economy.
All we can do is work, hope and pray that the great British public comes to its senses – and soon! Having more agressive truth-telling by our political class would help. Some hope!
I agree in principle but I’m not sure I agree wholeheartedly. We’re in the post-commodity-backed era of finance and many still believe money has to be backed with something, no matter how intangible. I agree. Money does have to be backed with something to make people believe it. Gold’s useful because we all respect it (just why we do is possibly another story). Silver or diamonds would probably do. The mortgage value of Germany has been known to serve in a pinch; that’s what ‘Hitler’s banker’ Hjamald Schacht told the German people the rentenmark was backed with. They believed him and using it he successfully helped Weimar Republican Germany recover from crushing hyperinflation of the day. As you’ve said yourself, Richard, money is a confidence trick. To make people buy this particular trick we need to use the newly created money to create proportionate wealth, tangible, visible wealth so people can still believe the money in their pockets and their accounts is backed with something. For example, it’s recently been declared by the relevant authorities we must expect extreme weather as a norm now. This means we’ll be seeing more flooding, no doubt, so instead of chucking that £375bn from a chopper why not put it towards flood defences? That way the money’s in circulation which was the point of the exercise and we’re better off as a nation as we’re wealthier overall. Win-win. Rinse and repeat. Do we need more sewers? More bridges? More roads, schools, hospitals, railways? Take the other utilities back into national ownership and away we go then…
Money is always and can only ever be a promise to pay
Gold never did add value to it
It merely restricted its supply
And that was horribly counter productive
Absolutely right. Gold has the value we give it. Money is a ticket to demand resources or,as you say,give others the right to transfere resources from me to you.
Lords of Finance By Liaquat Ahamed deals with the heads of the French, British, American and German banks in the 20s and into the 30s.
It is a good but rather long read. His conclusion is that the Great depression was caused by a failure of intellectual will,a lack of understanding about how the economy operated.
Agreed
One of the very curious things is that some members of the public do make a distinction. In discussion about the financial problems we have I have frequently been told that if the government prints money we will very quickly become Zimbabwe, for that is the proven route to hyper inflation, as history shows. Although I have asked why money produced out of nothing by government has that effect, while money produced out of nothing by banks does not, there is never an answer.
The story told by plutocrats has taken a very strong hold in the public mind: the analogy with a household budget is easy to understand and hard to dislodge. It is also oft repeated, like the “big lie”.
Sometimes I find myself regretting a committment to truth: for truth is usually messier and less easy to package as a story than big lies. 🙁
Most people don’t properly understand that banks make money from nothing. We aren’t brought up to think like that. Also of course there’s the basic premise that banks anyway are only creating money as loans, money which returns to the nothingness from which it came once the loan is paid back. That’s not the same thing as accepting that there won’t be inflation if the government creates money from nowhere which will stay perpetually in circulation.
I agree that people do not seem to agree that banks make money out of nothing. Yet this seems to be so clearly true that I do not understand why it is not hammered home by all the media outlets which purport to inform the public about what is going on: the financial journalists must know this yet there is hardly any discussion about that and no balance when the financial trouble is discussed: the talking heads all agree that the debt is real and must come down; that the deficit it too high and must come down. The only discussion appears to be about how fast that has to happen, and how much austerity we must suffer to achieve it. In course of that we keep hearing about “maxed out credit cards” and “paying ourselves more than we earned and now paying the price”. Nobody I know attended that party, and the rewriting of history is astonishing to behold.
I do not really understand your point about banks only creating money as loans and that money disappearing once the loan is paid back. It is never going to be paid back: there isn’t enough money in the world. And I don’t see how you can have it both ways: either money is real, as the mainstream story say: in which case the public cannot possibly believe it disappears when the loan is repaid: or it is not real in which case it does not matter whether it is unreal government money or unreal bank money. The banks can make it disappear into a computer: and the government can burn it in just the same way
The difference, Fiona, in this case anyway, is who the interest goes to. If we have a publicly owned banking system then that interest goes back to us. If, as now, most money is created into the actual living breathing economy by privately-owned banks as a ‘loan’ which we then have to pay interest on, that interest goes to enrich a handful of bank owners and shareholders. The minority cream off profit from the efforts of the majority, effectively we work for them. Read Web of Debt (Ellen Brown) and Grip of Death (Michael Rowbotham) for a fuller picture. you should read both really (as should most regulars here). One’s American one’s English so you get both perspectives. Try to get edition five of Web of Debt as she improved there on the earlier editions.
Fiona
how often do we read statements like ‘relying on printing money’ (as though it was an obvious evil)in the media?
I notice a growing number of people referring to the ‘made up money’ in the comment sections of on-line papers. I have often asked the question on the Independent and Guardian comments as to why the papers will not, at least, discuss the issue.
There has never been a response by the journalists.
Polly Toynbee’s written about the banks creating money from nowhere before now, a few months back in fact. I was surprised to read it and SFAIA it didn’t raise any controversy. I suspect it just went straight past people. I had a letter published in Mensa magazine back in 2010 in which I detailed the advantages of a publicly-owned bank like the one at North Dakota (guess who I cribbed from! :-)). I went into some detail, and suggested we try something similar here, with banks run by councils. There was no response at all, nothing. Both editor Brian Page and I were surprised. It seems there are some things so far outside expectation that should they occur people just don’t have any reaction to them except to move on. In educating the public in regard to the realities of banking and money creation, we have an uphill battle.
Indeed. Since at least some of the journalists do understand this it cannot be an accident that it is not discussed. It surely does not make it any easier for people like me to get to grips with how this works. Thought that was what the media were for, at least in part: what with fact being sacred and all that 🙂
It’s like a priesthood, if you tell tales outside of school then you’re banished. Don’t forget media commentators rely on being able to interview banking insiders to be able to earn their living. If they got excluded from those magic circles they’d be out of a job. They have an uneasy balancing act to maintain.
@ Bill Kruse. I do understand where the interest goes, and what is wrong with the system in the terms you outline. My point was more about what the public understand about this, and the reason that puzzles me is because it seems to me that they hold two contradictory notions at the same time.
If you consider that the economy works like a domestic household, as is widely promoted in the media and by the banks and politicians, then all of the debt is real, just as issued currency is real. If you also believe that increase in the money supply causes hyperinflation (which is the bogeyman trotted out in opposition to governments printing money) then there is no rationale for the idea that bank created money does not have that effect, but government created money does. On this narrative it is the increase in the money supply which is the problem, and there is no reason I can see to suggest that there is a mystical difference between the two.
I have seen it argued that either has a cost: if the banks issue money out of nothing the interest is the price we pay. If governments issue money out of nothing a fall in the exchange rate is the price we pay. Those who seem to think that everything comes into balance automatically in an economic system appear to believe that the price will be the same either way, and so there is no reason to prefer one over the other. I don’t believe in all this magic equilibration but mainstream economists appear to: and so the demonisation of government created money makes no sense within that mindset: yet it is presented as a much worse alternative. And that is what I mean about having two contradictory ideas at the same time
“However, in a crisis, the public makes no distinction between the two forms of money, and states have ended up responsible for all money issued in their currencies.”
I think it is a little harsh to blame the public and I think the public does make a distinction – that’s why, when a crisis hits, you see a bank run, with people deliberately converting their bank money into state issued cash.
We should also remember that part of the problem is that the EU requires that member states ensure that a significant level of speculation in banks (euphemistically referred to as “savings”) is guaranteed.
“The problem with bank made-up money is that it is only issued as debt, which must continually expand if it is to be repaid with interest.”
There are two problems with this statement:
1. State issued money is also issued as debt, so the same argument applies to it.
2. It is factually inaccurate. The repayment of debt with interest does not require the expansion of the money supply.
Paul
Respectfully, you’re wrong ion the last
Indeed, repayment of debt with intrest cancels the money supply
That’s been a major reason for needing QE
I hope you’re not planning to start posting your misinformation here again
Richard
Richard
I don’t disagree with the points you made it that reply, but they are addressing a slightly different issue to the one I was referring to.
You are correct, repayment of debt with interest cancels the money supply. More specifically, if all the bank held debt were paid down, you would be left with just the state issued debt, the M0 money supply. My point was simply that it is perfectly possible for that to happen without a continual expansion of the money supply.
Now, it may well be the case that, after such a paying down of bank debt, the state may feel that the overall money supply is too low and issue more debt of its own, but that is a separate issue. That issuance of state debt is not a precondition of the debt pay down, but a reaction of the state to deflationary pressure.
Thanks for posting this Richard. It’s the best, most succinct argument for nationalising our banks. We need to promote this idea: that the government creates money free of interest, while the banks charge us for it. Who or What gives them this right? And more importantly, why do we need them?
Mary Mellor is certainly not alone in her ideas.If people are interested, economist Bill Mitchell has been promoting these kind of ideas: that a nation with its own currency can and should use its currency/money to create employment and build a nation’s infrastructure.
These are 3 recent posts: “Ratings firm plays the sucker card … again” (http://bilbo.economicoutlook.net/blog/?p=22809), “Spain is not an example of reform success” (http://bilbo.economicoutlook.net/blog/?p=22745) and “The British government can never run out of money” (http://bilbo.economicoutlook.net/blog/?p=18386).
Some are beginning to question in the msm not just the internet thankfully.I suspect the right (given by the state) to create money by private bankers will jealously protected. Now where do political donations come from again?
http://tvnz.co.nz/seven-sharp/paying-interest-loan-never-existed-video-5336329