Modern monetary theory highlights the important role of the government in creating money when it spends. That process makes sure our money has value. But it's not alone in creating money: banks can do it too. This video explores the implications of that.
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Thanks for this Richard. You kept your promise 🙂
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
The Government also guarantees your deposits up to a certain amount does it not? So unless it can create money to backstop everyones account to a certain level in the case of a massive overwhelming bank failure that could not be possible.
I’m still a bit foggy about what happens to actual money/notes/coins that may be used by an individual to stuff into the bank machine in order to make a payment towards a loan. You say that the “bank destroys” the repayment. I can see how that happens if everything works electronically/digitally but do they really destroy notes and coins? How.. Is there a big bonfire room somewhere in the treasury? Just don’t see how it works or if in fact there is oversight..
Remember they are not money
They are tokens that represent money
Not the same at all….honest
Can you now do a follow up to this Richard to explain what is wrong with UK bank regulation. I am aware that Positive Money have argued that reserve ratios are not an effective regulatory tools as the aim of financial system stability is one of the obligations of the BoE. If I follow their reasoning correctly they argue that where a bank has overextended its lending the BoE will always step in and create new money for additional central bank reserves so the reserve ratio does not act as a brake on commercial bank lending activities.
On this I agree with them
I will add it to the list but it may not be for a week or three ….
This is very true, however the regulation has been appalling in the past. I am not at all confident it will be any better in the future. Banks are always ahead of regulators,they need constant watching like a mother watching her errant children,without adqequate supervison the children are wont to stray out in front of traffic or fall into a fire/pond..insert deathtrap of your imagination.
Meanwhile they pay themselves handsomely,big salaries,big bonuses, for a job that at Martin Wolf described as merely carrying government monetary policy. He describes bankers as “civil servants”,which given what they are doing is entirely accurate. Ergo they should be paid civil servant renumeration and nothing more. The myth they banks perpetuate that these bankers are purely private sector institutions is laughable. They should be brought down to size and tamed. Lending practices are indeed reckless becusae that is what makes them profits, and that lending is of no use to the wider economy ,in fact it is downright destructive economically and environmentally. But that bank lobby is very strong.
Brilliant to see another string to your bow!
I’d always assumed interest on loans was the bank’s profit.
You had mentioned in an MMT reply to someone that that was effectively destroyed upon repayment too.
Is it possible to get a brief response that explains that process?
When I have time…
New graphics! I like the grey backdrop (doesn’t look like it needs colouring in). Looking good overall. And a really good explanation of how the big piles of IOUs work. I’d also be interested in the extended topics suggested by Jim and Zachariah, when you have the time, of course 😉
On the agenda…
Amongst other things
Richard,
I’m sorry if I missed the answer to the question of how does the government create money – as per the money statutes.
I think the question of how banks create the money today is more than adequately covered.
Thanks.
I am sorry, but I am not sure what what you are asking
Thanks, Richard,
The question topic here was on how banks create money, and that was pretty clear – creditworthy borrowers sign promises to repay loans, and they get their accounts credited with what serves as money by the banks..
But I also read that the government creates money just by its spending, and i didn’t see anything specifically on that. How does the act of spending by the government increase the supply of money? Something about appropriations? You know, from an accounting view, Richard.
Thanks.
Look for the video I did on that – it’s on the blog and in the channel’s homepage
Thanks, Richard.
I will look.
I see the HOME page link here.
Is it “How the government creates Money by Spending? or so?
I am sorry – but I have literally forgotten the question and I cannot see the post of other comments when I get comments for review
Richard
From the HOME page about 9 in there’s one titled “How Money Is Made.”.
You say there.”Without exception, it is made by a Bank”.
Then in comments it is written that
“That the government, unlike households, creates money and levies taxes. It can never run out of money, so it can always repay debts.”
I would say the taxing power is preventative against government running out of money, but on the government creating any money ,,, I’ve never seen any evidence in the U,S. beyond paper and coins. Actually, same in UK, far as I know.
Is there a link to your one video / article on that topic?
Since you seem to have engaged the MMT story, then, do you promote the idea that government merely APPROPRIATNG money for spending results in that appropriated money being issued newly into circulation?
And is there a link to any posting on how you think that happens – in an accounting sense?
Thanks?
I am sorry – but without links I cannot see what you are referring to
Richard,
I am more sorry but without links (from you in response to my question) I cannot see what YOU are referring to ……..
If Richard Murphy can’t reply here in two sentences, or provide a link, on how MMT claims money is created by the government – that we might engage in discourse on that meme, then ………….. something really seems askew about the play.
Typical, IMHO, for MMT.
https://www.youtube.com/watch?v=84qY46vm4pM
Been a long time critic.
And because of that, here I go again, out into the ether-sphere.
I am really struggling here
I am still trying to work out what you are saying but have to admit I cannot
If you have a question can you say what it is?
If not, then shall we close this?
Richard,
Sorry, really.
I should have been more clear from the start.
OK to close here.
What I was asking was all about whether and how the government creates and issues new money into circulation. That was mostly raised in the comments, rather cavalierly.
Except for some currency(paper and coins) in some countries, a tiny portion of the money supply, the government doesn’t create any. That I am aware of.
I thought in your postings and related consort with MMT that you were maybe promoting some meme-based construct of government money issuance and was hoping to be able to discuss how that would work.
You know. In accounting terms, maybe.
OK to close.
Thanks.
joeB
No one but the government and its licensed agent has the right to create money
All government spending creates money
Tax destroys it
Richard,
Thanks, but, that seems wrong on all points.
On taxation, first.
Taxation never ‘destroys’ the money, or takes it out of the economy. Only banks do that. Taxation is a national government economic development tool that adds a turn of Velocity to the existing money supply.
The existing money supply (M) is issued by private banks to finance the capital development of the – private sector – economy.
From that money supply and economy, the government “taxes” (I say borrows) about $3Trillion, and in the same year SPENDS (repays to the economy – adding the ‘V’ factor to ‘effective money’) that SAME $3 Trillion, providing for additional Public Sector throughput to equate the GROSS Domestic Product.
Taxation is government’s tool to enhance our economy and takes nothing from, and rather recycles into, the economy.
Then, second point, NO, government spending does not create any money – EVER (without additional authorizing legislation) because Hamilton won the money war – the government is like a household, incomes and expenses. Government income is partly (20-25 Percent) from ta-da BORROWING.
Richard, secret testimony. WHY would a government that either issues the money (Greenbacks) or creates new money by spending (LOL) , have to EVER Borrow from anybody?
Please, Richard. Think on that.
If the government has no money in its TGA (US) then it cannot spend. Period. Go ask the Treasury. Or, read the Annual Financial Reports from Fiscal Services. s/b … end of discussion. Never heard of a government shutdown? Why the crying-eyes over the Public Debt limit if the Guv don’t need to INCREASE the Public Debt in order to spend?
Again, Richard, why did Dr. Kelton not take her Fed Reserve Accounting study-notes from her “Can Taxes and Bonds Finance Government Spending?” research on over to TSY for clarification on how the hell do you guys get money to spend into that TGA?
The first point is also laughable because the qualifier negates the validity of the Primary.
It says nothing.
No one but the government “and its licensed agent” has the right to create money.
Because its Licensed Agent can be anybody, then nobody except anybody can create the money.
I have to think that Richard has never read Silas Adams’ “The Legalized Crime of Banking”.
Nor Dr. John Goodman’s “Monetary Sovereignty”.
A sovereign government has sovereignty over national money. Period. Indeed.
The government COULD just issue the money (Greenbacks). No Problem. ever. Permanent Money. Permanent Circulation. No public debt. No interest.
OR, the sovereign government could decide to join a monetary union and have the EMU issue its money …… however. (Accords) . All EMU sovereigns BORROW from the union’s central bank.
OR the government could turn all of its money issuing powers (monetary autonomy) over to some private institution (FRBS) or other banking cartel, and let them issue the money, profit from its issuance and circulation, and also determine the capital development of the economy.
If they do THAT – and they have done that, Richard – then there is zero role for the government in issuing money, and especially in the capital development of the economy. “Its Licensed Agents” own and operate the national money systems, AND the national economies.
The governments have privatized our monies.
Yes, even in GB. Where BoE issues coins and Notes and Banks issue Money.
Glad to discuss this as you will, Richard
Available for a YT or Podcast.
Thanks.
With respect, your claims are so wrong they are not worth discussing
Almost everything you say is incorrect