This Twitter thread, published this morning, took about four hours and 40 years of thinking to write...
I keep hearing people complain that the ‘mainstream media' does not understand economics and that we're talked down to as if everything must be explained as if the economy is a household. In this thread I explain all you (and they) need to know. Economics in one thread then....
Very few people seem to understand how money is created. Mainly that's because when they're told it seems so simple that they can't believe something that's so important that we're willing to pay a lot to get it is created so easily. This thread explains how money is created.
What this thread also explains is that if we understand money we can completely reimagine how the economy really works, which is the pathway to rebuilding from the mess we are in. Which makes this a pretty big deal. I make no apology for its length as a result.
Let's start at the very beginning. A person goes into a bank and asks for a £1,000 loan. The bank checks them out, and agrees. And that is all that it takes to create new money. Money is just a promise to pay. That simple exchange of promises is all it takes to create it.
Most people think there must be something that backs up the value of money. Gold, most likely. But there isn't. Money is just a promise to pay, and has been for almost 50 years now. Mutual promises to pay creates all the money we have.
So in the example of that £1,000 loan, the customer promises to pay the bank. So the bank opens a loan account for them. That records their promise to repay. And the bank puts £1,000 in the customer's current account. They promise to let the customer spend that how they want.
Two promises. Two accounts. And as a result we get new money. That is how all money is created. It is as simple as that.
There is no one else's money involved in this process. The bank does not lend out the money saved with them. And there are no notes and coin moved from one pile to another pile to back this all up either. There are just two promises. And then there is new money.
Making money really is as simple as promising to repay it. So why is it so expensive for some people to get hold of it? That's not because the money itself is expensive. Clearly, it isn't. That's because there's a risk that they will break their promise.
Money itself is really cheap. The pure price of borrowing money has been falling for hundreds of years. It is now officially 0.1% per annum in the UK. That's the rate set by the Bank of England. Or just £1 a year for every £1,000 borrowed. Which is staggeringly cheap.
That's the rate the government pays. Around £800 billion of money deposited by UK banks and building societies with the Bank of a England gets interest paid on it at 0.1% a year. And if the Bank decided the rate could be 0%, or even negative.
So the reality is that money is almost free. Allowing for inflation, which is higher than this interest rate, money is free to the government. In fact, in reality people are paying the government to hold their money.
But the government borrows more cheaply than anyone else. It creates the currency - the pound - and declares it legal tender. And it has its own bank - the Bank of England. This means the government can lend to itself. So it can never run out of money. It is risk free.
The rest of us don't have a bank, and can't declare the money we make to be legal tender. So all other lending is riskier. Including the money that you lend to your bank, which is exactly what you are doing if you have a bank account that's in credit.
If you think you have ‘money in the bank', think again. You have not. You just have a promise from the bank to pay you money if you demand it. And if they can pay it, of course. You're now the banker. They're the borrower. And you have the risk they won't repay.
And that risk is real. Remember Northern Rock? The government stepped in. This is why all bank deposits in the UK have to be guaranteed by the government to a limit of £85,000. If they weren't it's likely no one would trust the banks to repay.
But what this means is that for most people (not the wealthiest, and not big business) the government guarantees all the money that we have. And it even, by implication, guarantees that the banks exist so that they are there to lend if and when we require it.
How is it possible that although all money is made by promises - including yours, and mine - the government is so important? First, it alone creates the currency. Secondly, as I noted, it has its own bank. So it can always repay, because it will always lend it money.
So, it's the government and it's Bank of England, and their promise to pay that is actually behind the real value of our money. Not gold. Not notes. Not coins. Not how strong the rest of the UK banking system is. The promise that the government makes is what matters.
But why is its promise so good? Because it has the means to back it up. Having a bank is not enough. Having the means to tax changes everything. That, and the ability to pass law to make sure tax is paid. And then only in the currency the government chooses - the pound.
Tax is what gives the pound its value. If the government could just create money without limit it would soon be worthless. But it does not do that. Tax ensures that the government can control the amount of money in the economy.
A lot of that money is created by the government. Every time it spends it tells the Bank of England to pay whoever is required. And it does that, because it trusts the promise the government makes to repay it. Well it would, wouldn't it? After all, the government owns it.
But what the Bank of England does not do is check whether it's got money available to lend the government to spend. It does not need to do so, after all. All it need do is trust the government's promise to repay. And then it creates the money that the government wants to spend.
This is really important though. What it means is that tax does not need to be collected before the government spends. Instead the government always spends the money its bank creates for it when instructed to do so.
But that means something else. It means the government never spends taxpayers' money.
It also means that tax does not fund spending. That can happen without tax.
So what does tax do? It does something really important. It recovers the money the government has spent into the economy. Enough has to be collected to control inflation and make good on the promise that the government gives when it guarantees all our money.
Does that mean the government has to balance its books? No way does it mean that. Controlling inflation is the goal, and what we've learned is we can run deficits, and control inflation.
But that has come at a price. That's been unemployment, low wages and lots of crap jobs that add little value to society or the lives of those who do them. To be polite, that's the economic policy of a callous government that does not care.
Forcing people into meaningless, low paid work is a price too high to control inflation, even if that also means lower taxes and that deficits do not threaten to create economic instability. There has to be a better way to manage the value of money than this.
And there is. We could have a government promise full employment. It could create the jobs we need. It could force up the minimum wage by guaranteeing local work for anyone who wanted it. And we could improve benefits too. All using government made money. Not tax.
But would there be inflation then? Not if we then taxed enough and cut spending a bit. But people at work in good jobs do pay more tax. And they claim fewer benefits. So that condition is easy to meet. And if we still needed more tax? Well, we could do that, if needed.
But that need would not be to fund the spend. Tax is never needed to fund spending. Always remember that. It's needed to control inflation. And to redistribute income and wealth, and other social reasons. But not to fund spending. Ever. Money does that.
So, I hear you say, why do governments borrow then? After all, if they can create all the money that they need why do they have to borrow other people's money? Doesn't the fact that they borrow prove me wrong? No, it doesn't. Because they don't need to borrow.
The government did have to borrow when money was in short supply. That was when it was backed by gold. That system ended way back in the last century. Since then, remember, all money is just a promise to pay. But also remember, the government has by far the best promise.
So, people who are cautious, like big pension funds, large companies, the wealthy and banks themselves want somewhere as safe to save as ordinary people - those with less than £85,000 in their bank account - have right now. And that means they want to save with the government.
But they can't not in ordinary bank accounts. Because the government has set a limit in them. So the government has adapted, fairly surreptitiously, a gold standard era savings mechanism to meet this need for a safe savings account in the modern world of money.
That mechanism is ‘the gilt'. Gilt, of course, is gold. Once, these gilts were gold backed savings products. Not any more they are not, of course. Remember, everything about money is just a promise to pay now. Gilts, or government bonds, are like everything else in this regard.
And money is not scarce for the government now, either. It could have all it needs on overdraft at the Bank of England if it wanted. And it need not pay interest on that. So why doesn't it go for this cheapest of all funding options? Because people need safety, that's why not.
So, just as the government guarantees most people's money in the bank, it also offers gilts (or government bonds) for those with millions or billions to save because they too want guarantees on their money. And they will accept a low rate of interest to get it.
Government bonds are not, then, real borrowing by the government. They are instead a savings mechanism. Sure, they look like a loan. But then so too is a building society bond a loan to a building society. But it's also a savings account in reality.
And that's what government bonds are: they are just savings accounts. That's all. And, as I noted when I explained how money is created, savers' money is not involved in money creation by lending, at all.
In the same way, government borrowing is not in involved in the funding of its spending. Sure, the government borrows. But then all savings institutions do, all the time. But they don't lend savers' money out. And the government doesn't fund spending with borrowing either.
And before questions are asked about quantitative easing (QE) and where this fits in, let me address that one. QE is a process that involves the government buying back gilts. So, it is a mechanism to control the amount of savings it makes available. That's it. No more.
QE also controls the amount of money in the banking system. QE forces money out of government gilts because the government buys them back, making them more scarce. The flip side is that government pays for these bonds using free money that the Bank of England creates for it.
This money creation puts more money into commercial banks, backing up the government guarantee that they will be solvent. That money injection is pretty important in that case.
But just to add to the list of what QE does, it also shatters the myth that governments are under the thumb of bond markets, for good. Now if bond markets get uppity about anything the government simply has the power to buy its debt back and bond dealers are left high and dry.
And another QE fact; by controlling the money supply into commercial banks the government gains almost complete control of short term interest rates, and through QE it has a massive influence on long term rates too. QE delivers protection from economic shocks as a result.
I'm not saying QE is a universal good, by the way. It's forced money into the stock market, and overinflated it. That has increased inequality. Neither is good news. But it does add a powerful weapon to the government armoury for controlling the economy.
So, the government can now create money at will, control how much of that is in commercial banks and in government backed savings accounts at any time, control inflation through the tax system and deliver full employment if it wants, all if we understand money. Pretty cool, then.
But to make sure this is clear, where does this new knowledge that comes from the very simple understanding of how money is created (not printed, or made - created is the right word) leave us?
First, it says the government underpins the value of all our money, because whilst all money is a promise to pay, the government's promise is the best, and our banks could not function without the support of that promise. We need to remind arrogant bankers of that, often.
Second, whilst cash saving is important to people it's also pretty important to realise that it is much like dead money. It is not used to fund bank lending or to pay for government spending. That does really mean the state should not be subsidising it with things like ISAs.
Third, spend comes before tax, always.
Fourth, the government always spends its money, and not taxpayers'.
Fifth, tax does not fund government spending. Tax is instead used to control inflation, redistribute income and reorganise the economy, but never to fund spending, and that's true in any country with its own central bank and currency and that never use another country's currency.
Sixth, the government does not need to borrow because it can always create the money it needs on overdraft at the Bank of England.
Seventh, the borrowing it does do is a favour to those who want to save with the government. It does never need the money people save with it.
Eighth, that means we need never have a debt crisis. If we don't need people's money, because the government can always create its own, where's the debt crisis? Especially when a government can always repay on demand, simply by asking the Bank of England to make the payment?
Ninth, the amount of savings a government wants to accept, and the interest rate it now has to pay on it, can always now be controlled through the QE system. All this does is regulate the government backed, cash based, savings system. Nothing more, and nothing less.
Tenth, I stress, that means all interest rates are now heavily influenced by the government and many are under its direct control. So where is the interest rate panic?
Eleventh, inflation is not now controlled by interest rates - because we don't want them to rise. It's going to be controlled by tax. I admit, right now no one has an ideal tax to achieve this goal. I am working on it. It is possible. And it's progressive, and so fair.
Twelfth, we can have full employment at fair wages, and it pays for itself.
Thirteenth, there is no need for austerity, at all in that case.
Fourteenth, please go and talk about this. By really understanding something as simple as how money is created - and by being aware that it is never in short supply as a result - we can rebuild from the mess that we are in. We can have the sustainable world we want.
Sorted. The End.
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One of your best. In the same mould as Stephanie Kelton – simple straightforward language, no jargon, no off-putting maths or graphs and lots of repetition of the crucial points. Hope it’s widely disseminated.
Thanks
I was just about to say that’s basically Stephanie Kelton’s ‘The Deficit Myth’ book in just one page. Very well summarised. I’ll be pointing others too it when my explanations get too convoluted.
As Nietzsche once said: “It is my ambition to say in ten sentences what others say in a whole book – what everyone else does not say in a book.”
Although Stephanie Kelton does actually say it in her book. But the second part of the quote is too often left out, and it’s perhaps the most important part.
Thanks
Actually, it’s almosy 2,800 words
And that’s a goop sized essay, at least
But there you go….
Richard this post is a splendid example of a distilled carefully honed thought process. I am always amazed at how succinctly and fluently you are able to express yourself in written and oral form. It avoids technical jargon and crucially it offers hope for the future. I am sending to anyone I know. Thankyou
Thanks
I am not sure why I decided I had to write that when I woke this morning, but by lunchtime it was done
Your argument in the ‘thread’ is invitingly structured, pellucid and well modulated for the audience you need to reach. This is how to communicate to a new, necessary audience, albeit at – I surmise – the maximum viable length.
I would love to make it a sort book
Thanks
A book? I have a possible title – ‘Creating money: forty years in four hours’.
You can explain it in the Introduction.
🙂
Excellent, thank you. It’s clear and concise.
I’ll send a copy to my MP. As a Brexit, Johnson, austerity supporter, I’m sure she’ll enjoy reading it! Hopefully, it might make her think. I know her mind can be changed, I managed it with the Badger cull a few years ago.
Good luck
Lots there, and as often happens with your posts it prompts questions for me.
So to offer just one: why do you think the government shouldn’t incentivise private savings (ISAs)? I find liberating your explanation that tax doesn’t need to be levied to “pay for” (numerically balance) government expenditure but only to limit the inflationary consequence of money creation, and that thus it is desirable (arguably a responsibility) to apply tax in such a way as to achieve societal benefit. I would see encouragement of people to have modest savings as a social good that a government might legitimately want to be a feature of tax structures – after all the individual cannot create money like the government or banks can, and their bank is least likely to create that bank loan in your example when the customer is in debt and most needs it. Reducing people’s risks of financial difficulty by incentivising saving seems like a good thing.
Actually, writing that, a related question has occurred to me. You describe savings as “dead money” – doesn’t that mean that in the short term at least it has the same anti-inflationary effect as taxation? In which case a government might encourage build-up of private savings as one of their fiscal tools.
Apologies if those questions appear naive, or have been answered in a previous blog I haven’t read.
Sorry – this slipped through the net
I know all the reason for saving – I am a natural saver – being a cautious sort of person
What I want is to see sab=vings linked to use e.g. as here https://www.taxresearch.org.uk/Blog/wp-content/uploads/2019/12/GNDFunding1219.pdf
Thanks, what you suggest seems to be a bit like what I understand War Bonds to have been. But the proposal slightly confuses my curious mind: in this instance you seem to have accepted the conservative economic model that any new expenditure needs balancing receipts by the government (granted, savings rather than taxes) whereas I thought one of the whole points was that the government could create that money anyway if it wanted to. And if green investments generate employment at a time people are losing their jobs it isn’t clear that any balancing receipts would be necessary at all for inflationary control if I have understood your arguments correctly.
But I am not sure the two ideas are mutually exclusive. It seems reasonable that a government might decide that savings (and pensions) are a general social good it wants to use the tax system for to incentivise, and also that at some particular point it might create a tax-advantaged savings opportunity around some specific aim.
My argument is that savings will happen
So treat them as capital
And capital is real in the private sector
My suggestion is to provide a government guarantee to a flow of capital to that sector
That’s, I think, something very different to what you imply
Why do you not try to set up a debate on this subject between say yourself and Stephanie Kelton on one side and George Osborne and Mark Carney on the other?
There is obviously merit in efforts to convince other parties of one’s conviction point of view.
I doubt they would take part….
Really very good. Very, very good.
I don’t want to be seen as a nit-picker (but I will anyway)…… The term “gilt” is short for “Gilt-edged Security” and refers to the fact that “back in the day”, in paper form, the certificates used to have gilt around the edge. It is not that they were backed by gold reserves.
Now, how do we get it more widely read!!
I know …. but I think the link is good…..
Wow, this is impressive Richard!
I like the bit at the start ‘and 40 years of thinking’, and then I get to paragraph/tweet no.15 and I think, now THAT’S why you’re better saving money as cash under the mattress! Yes, yes, addressed in para 16, gov’t guarantees savings, just kidding.
And I didn’t spot this before making a reply to PSR elsewhere earlier; just musing about how we address the issue of ensuring the tax payer still feels as entitled and as important as before, to get everyone to accept that it isn’t the tax money that the government spends. And this goes a long way, if not all the way, to addressing that – I don’t even know what made me think of the subject in the first place, but find it remarkable you were already addressing it! I will come back and read the thread at a later date to see if I feel suitably entitled and important still, and will let you know if it’s a winner 🙂 .
I’ve just had a quick look at the actual Twitter thread – really positive reactions – but yes, one question re tax (from Colin Dunn, and attempt by Craig Dalzell to answer, which just confused the issue,,, I do think Craig is lovely, but,,, and, in fact, I’ll just say it, the Common Weal too, for all the excellent work they do, they just don’t know how to communicate with the great unwashed). So – the aspect of how to make people still feel important for paying taxes is probably still an issue. If we can get this right, I think a widespread acceptance will be much easier.
Anyway – a very, very worthwhile use of 4 hours, clearly set out, accessible to the majority of people, and can be used repeatedly. Will you be submitting it to any newspapers as a letter (too long?) or see if they’d publish as an article? It could really go a long way to the voting public objecting to any austerity plans – and that is a very good thing!!
This is aimed at MPs really
But I am also sending it to my literary agent
Yes, I have one
And thanks for your comments
MPs are people too – Well, so I’ve heard – but yes, good target audience.
Contrary –
This clear expression of the truth shouldn’t affect people’s virtuous position on meeting their tax liabilities. One thing that this article doesn’t make clear is that there is a very clear relationship between taxation and spending. Lemme expand.
Firstly, Richard is 100% right… tax doesn’t pay for spending. Spending does that. Governments don’t need to put the begging bowl out to rich folks to get the money for schools and hospitals etc etc. But stop and think about the natural constraint on money creation – the capacity of the economy. MMT states that full employment is the line at which money creation should stop… I suspect it’s a WEE bit more nuanced than that, but nevermind. Accept for a second that full employment = the limit of the value of “stuff” in the economy. Create money beyond that point and you’ve got inflation (too much money chasing too few resources).
If “R” is the value of the economy (call it the Full Employment Line) and “N” is the amount of money currently sloshing around in the economy… then as long as N is less than R, you’re golden. Create more money at liesure… you’ve got the capacity in the economy to warrant it. If N is greater than R… WARNING. Stop. We don’t have the stuff to justify the amount of money in circulation. So far, so good.
The difference between N and R is where the political argument lies. R is just so damned hard to quantify and, to make matters worse, it keeps shifting. The more cautious say that getting too N close to R would be catastrophic, so let’s stop creating money whilst we know there’s no inflation risk, cos inflation is The Devil (and my own view is that this is a flawed statement in itself… but that’s a whole new conversation!). Others say “We’ve got loads of unemployed people… more by the minute when the final effects of COVID are known… let’s just let fly with money creation. The economy can take it!”. The argument is around who is is more right or more wrong as to the space between N and R… and I don’t propose to offer any suggestion on that here.
What taxpayers have to know is that whilst their tax doesn’t actually pay for anything, what it undeniably DOES do is increase the distance between N and R. It takes money OUT of the economy. That frees the government up to put more money INTO the economy without scaring the horses too much. In short, paying tax (inter very much alia) creates a space into which it is undeniably safe for government spending to happen without risk of inflation.
Also, as Oliver Wendell Holmes famously said… “I like to pay taxes. With them, I buy civilisation”. That remains true. (and let’s overlook the many and varied utterly reprehensible personality traits of OWH Jr… cos he was truly horrible in many ways… but he was right about tax).
Thanks
That’s worth developing…
One thing that is true is that when N = R the money creation stops
At that point G = T
Very good Richard.
Easy to follow/understand and flows well.
A small booklet (with illustrations?) Would work really well.
I will share it far and wide.
Thanks
I will try to find a publisher
What about- ‘Modern Monetary Theory For Beginners’
(after working in factories I needed to start my education and read a number of books from this series)
George
Let’s see…
Very good exposition. Thank you. You clearly take apart the neoliberals’ cry “ but the markets won’t stand for it!” MMT must always emphasise the currency issuer’s commanding power over the markets and banks and their entitled supporters.
Wonderful.
Not just for broader distribution to others but for myself. Concise, jargon-free, flowing explanation. Almost a ‘story’ of money in the economy; and it is stories which we are ‘wired’ to understand.
As an aside – I’m not concerned about finding a replacement way to make tax-payers feel connected/relevant/important as I think it all rather neatly hobbles the pernicious implication that only those who pay taxes ought to have a real voice (or those who claim to represent them), rather than simply by virtue of being a citizen in society. An implication most obviously abused by lobbyists and think-tanks e.g. “The Taxpayer’s Alliance”.
The genuine disconnect (manufactured imho) between citizen and democracy is what needs a reconnect.
Good point
Need to think about that
But the answer revolves about making the ballot box great again
Excellent summarisation of a complex topic which might otherwise simply appear to be too complex for many people to understand. I’ll share this with family and friends as well as my MSP and MP if that’s OK. Wider understanding of economic matters must help better understanding of politics and politicians and will clearly identify politicians who either don’t understand macroeconomics or do understand it but are seeking to deceive the electorate. Either way, it can only improve our democracy if the electorate can spot the incompetents/phonies.
My only comment is that, for newcomers to MMT and economics, it’s quite a lengthy work to ready and properly understand. To make it easier, I’d like to copy it into Word, insert headings so that readers can read and re-read a topic until it’s fully understood (without ploughing on and betting more confused), number the paras to aid navigation so readers can easily find where they left off, and sort a few typos (mainly missing commas that would help general understanding).
Outstanding, take a bow!
Ken
I have begun that ‘translation’
And thanks
Richard
A good piece, succinctly put.
I can’t help going back to the fact that the real message here is being missed.
You are describing here how democracy is delivered in the real world. People get we vote and elect a Ruler. That is representative democracy.
What they don’t get is how that vote is actually delivered.
They see no connection between Government and how much the pension is or welfare support for mentally ill, other than it’s a zero sum game. If there’s not enough tax then these things need to suffer as, even if there is another government, that is all the money there is!
What you are saying here is that all these things are a policy choice.
What you describe here is how our rulers deliver what we voted for.
Thanks
How do we get people to understand this though?
Do politicians even understand it?
A few….
Unfortunately it’s not about understanding as much as it is about whose interests depend on treating the government like a household. In the US we have major donor groups who profit from austerity policies that support rent extraction. Legislators vote not on their correct understanding of economics but on their correct understanding of their elite constituencies.
But am still in favor of understanding the realities
Well, on this third Sunday of Advent, you surpassed yourself. I was still pondering all the angry letters in The Tablet when you turned up. Between your blog and John Lanchester’s extraordinary “Whoops” macroeconomics and banks have been laid bare.
Thank you, I will ensure every member of the Yorkshire Socialist Health Association gets it.
Thanks John
Could you clarify, “There is no one else’s money involved in this process.” . I had thought we used a system of fractional reserve lending, my understanding being that banks could only lend a percentage of deposits. If we didn’t have fractional reserve lending then I guess the alternative is cash in safety deposit boxes and my savings couldn’t be used by others more productively. Yes fractional reserve lending has a multiplier effect on money but it’s not created our of thin air but as a natural property of saving and borrowing.
We have not had fractional reserve banking for 50 years
As the BoE said in 2014, the problem was every text book said we had, and every text book was wrong
The suggestion I have made is wholly BoE consistent
Money is made as I describe it
And to be useful savings have to be invested in real activity
So is this put out by the Bank of England https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/1971/reserve-ratios-further-definitions.pdf not true? I quote: “All banks in the United Kingdom have agreed to maintain minimum reserve ratios of
12% and finance houses at least 10%”. This would imply not that banks can create money out of thin air but that they can only loan out a fraction of their reserves. I accept that the Government can create unlimited money.
That was 1971, for heaven’s sake, and from what was in effect styill the gold standard era
Try this from 2014:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy
The BoE has said all that was taught in the meantime was wrong
Hi Richard, ignore my prior post, having read a little more I can see the BoE have scrapped formal reserve requirements and adopted “incentive targets”! I know it must be frustrating to deal with the mass of uniformed opinions that must be presented to you. Maybe it would help normal folk like me if you provided (current!) web links to sites like BoE that can be read alongside your postings – this makes it clear what might be contentious from what is accepted understanding.
Noted!
I came to them in order
See the reply to that one – which indicates current (but still out of date) thinking
A link to the 2014 Bank of England article mentioned by Richard: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy
Reading this has at last made the penny drop in my mind. For years I have had to settle for my gut feeling about all this, without being able or confident to explain it to people like me. I just knew the post-war consensus I grew up in was affordable and good for us citizens. Thank you! I will print a copy and put it in my Labour MP’s Christmas card. A docile junior shadow minister but not without heart or intelligence.
Thanks
a suggestion for three more chapters for you book please:
1. the role of Collateral (before Credit) in obtaining a bank loan & the creation of money
2. the Quality of money created, be it for productive, non-productive or consumption uses
3. the Necessity of the taxes of business rates & council tax in financing councils & devolved govs.
Noted
Richard,
I know you are already developing ideas about new tax systems that you’ve yet to reveal to us, and that I essentially know nothing about tax (no, I still haven’t read your book), and I know you think there should be millions of complex taxes to make things work and won’t hear otherwise, but:
Is there any mileage in considering – for personal taxes (you can create as many as you like for businesses and goods) – one big income tax, let’s call it ‘investment tax’, which you can make as complex as you like, and would need to be. What this tax takes into consideration is the level of investment that government (at all levels) makes in your life – so if you get tons of public services you’ll be paying a higher rate of tax, less and a lower rate (roughly) – but also dependent on earnings, and how worthwhile to community your job is, stuff like that (ceo of a multinational oil company gets taxed to death, nurse or bin man gets taxed least, for example). Complicated, yes, but once the rules and rates and formulas are set out on various sliding scales, we can have one income-type tax.
The Investment Tax is then dependent on how much worthwhile investment the government makes – and the ‘worth’ of any investment plan could be reportable – setting a budget or spending plan will determine tax, and people can see the value of each action in balance.
This came from thinking about how I can stay important and entitled as a taxpayer when I know my taxes are not the thing that’s spent. By calling it ‘investment’ and directly relating it to economy spending – you get a direct link that make my taxes extremely worthwhile, and in theory influences actual public spending (democratic control throughout a term), and so it makes everyone paying tax hugely important and more in control (probably not quite what any government wants though!!).
Unfortunately this is a ‘change’, so I’ve still to have ideas on how to best describe what taxes do right now (without mentioning it’s all just destroyed when you give it back to the treasury) – but ‘investment’ was a first step in thinking – thats when I thought it would be better to have something more obvious, and direct. Just throwing it out there!
Noted, but I fear too complex
This is that new tax https://www.taxresearch.org.uk/Blog/2020/11/05/its-time-for-a-new-financial-transactions-tax-if-its-fiscal-policy-thats-going-to-control-inflation-in-the-future/
Noted 😉
I’m sorry I missed your post on your financial transactions tax! (busy busy) That is a very elegant solution indeed, for a progressive tax that can be slotted into existing systems, quite brilliant. Liklihood of being adopted by government? Is there interest? (I haven’t been keeping up with where and for what you are publishing – so I can wait for outcomes in answer to those questions)
For a NEW, improved system, taking a holistic approach, one that should give a truly elegant choreographed balance to any economy – not patching holes in the clunky disparate system we have – several taxes integrated into one so they always balance and give obvious value to the tax system, would be ideal. Necessary complexity, yes, but it’s a complexity that should revolve around making the whole simple – no more disjointed systems that only vaguely seem to relate at the moment (I’m thinking of council tax in particular – resolve the issues by incorporating an equivalent into a balanced whole).
But, yes, you are far too busy on other things, and the idea is far too theoretical for any kind of practical application considerations any time soon, so despite your lack of outright condemnation (in my own mind – never give wriggle-room to some people!) of my Investment Tax idea; I won’t keep pushing on this as its just a distraction 🙂 – I should be focusing on how to keep my inflated sense of entitlement (as a taxpayer) intact right now anyway!
I cant even get funding to work in this right now…
Hello Richard, I enjoy your any articles, but, this one is one of the best ever written. Thank-you for all the time and effort you put in. Mel Mignot
Thanks
In a sense I wish I had spent more time on it
Instead it was just what to do on a rainy Saturday morning
Maybe it was best that way
But Richard.
You can spend more time on it.
Why not see it as your first draft.
(Not much needs changing though)
For what this comment is worth, I suggest you leave it as it is. Look at the responses. It is well designed for its purpose. It is fresh, it flows and its expresses the core ideas.
Is it perfect? No, but what is ever written that stands up to all scrutiny? Your opponents will pick holes anyway, because they have to; even those who agree will have different, biases, interests, nuances, preferences or priorities that they think more important; but you will likely end with a defensive, ‘wordy’. overlong, turgid, box-ticking, cover all the angles, tedious text that nobody wishes to finish; more pedestrian manual than illuminating insight.
I can think of many outstanding writers who have edited their works to “improve” them in later editions; but so often in the republic of letters, it is the first statement that lasts the test of time.
Noted
As someone who has filled people’s Xmas stockings with Ms Kelton’s opus this year (which is now in paperback at long last please note), and who will buy a copy for a friend or family member once a month in 2021, I heartily recommend that you can get this published somehow as a pamphlet or whatever.
That hot bed of progressive politics ‘The Guardian’ might want to publish it under its ‘Long Reads’ series (note the sarcastic tone aimed Katherine ‘Lifestyle Guru’ Viner).
Just a thought on point 7: what are the benefits to the economy of encouraging markets/the very rich to invest in Government money as debt? I thought that saving and taxation both ‘destroyed money’ (took it out of circulation) and this helped to curb inflation and asset bubbles as a policy aim of Government? If so, is it worth mentioning?
In an edited version, yes
An edited version would need more time than this got
Hey!
I’m not being critical – it’s a superb effort – you do not give up.
But this Government choice about deciding to sell its money as debt needs to be in there given recent conversations here.
Isn’t it?
Great stuff, I’ll be spreading this to everyone I know. I will also send it to my MP. I have even been to see her at her office regarding all this in the past, not that I found her particularly responsive which was a tad concerning seeing as she is a senior Labour MP.
She firstly asked “why I was interested in this” and after a lengthy discussion as to why I was concerned, she then announced that “it all made her head spin”. For sure at first introduction of this idea of money creation the mind is overwhelmed, but she has no excuses now.
Thanks
And good luck
Very well constructed & worthy. However, money reformers like you. Positive Money and even myself are great at the argument but we can’t get the message and discussion into the mass media. There is resistance. A grass roots campaign is needed. Every representative needs to be informed by a constituent(s) at the same time with press & tv also informed this is happening. This could be your article. Then there must be spokespersons available for interview, especially MPs. Another debate in Parliament is needed. There is some cross-party support.
It has to be made news.
Things like “The Deficit Myth” are important but not read by many, do not get much coverage & not for very long.
It’s what we do with your excellent article in an organised way that’s now vital or yet again we’re only talking to ourselves.
Contact your MP. Spread it on social media. That’s a start.
I need someone to design this as an ebook..
I’d go along with most of this.
A few points:
1) “…..their (Govt/BoE) promise to pay that is actually behind the real value of our money”
The standard MMT line is that the demand that taxes be paid in the Govt’s currency of issue that creates a demand for the currency and thereby gives it a value.
2) The point about gilts being backed by gold isn’t quite right. Unlike pounds they weren’t, to the best of my knowledge, ever backed by a gold standard which is why they were considered a debt but the issue of gold backed currency wasn’t. Now that nothing is backed by gold, it would make sense to consider it all to be debt or nothing to be debt. The only difference is the interest payable. But debts can still be debts even if they are interest free.
3) “…… the amount of savings a government wants to accept, and the interest rate it now has to pay on it, can always now be controlled through the QE system.”
It may seem like a small quibble but I’d say “wants to pay on it”. A previous post was headed with
“QE is going to save the UK a fortune”. The Govt is a currency issuer so “saving fortunes”, in a monetary sense, isn’t an issue. Right now it makes sense to have interest rates at close to 0%. The government could have always had them at 0% if it wanted to but previously they were much higher. So would it have been better to have set them at 0%, say 20 years ago?
I’m not sure it would. Maybe in another 20 years time it would make sense to have them higher too. We should try to keep our options open. Having said that I fully agree that interest rates shouldn’t be used as a primary means to regulate the economy.
1) I know – and yes, I did not cover every argument on this – there are limits to the length I can expect people to read on Twitter. And this was an argument, not a thesis
2) Noted. I would edit, although there is a link
3) I think what I said was right
“The standard MMT line is that the demand that taxes be paid in the Govt’s currency of issue that creates a demand for the currency and thereby gives it a value.”
I would speculate that the relationship between currency and tax, for Government here is a function of the history of government’s actual understanding and handling of currency and tax, as much as it is a matter of monetary theory. The sovereign’s reliance on gold and silver was, I hypothesise a function of the fact that a sovereign ‘promise to pay’ was not, independently of commodity value, historically sufficiently trusted by the public to represent a ‘safe asset’; the 17C and 18C was beset by ‘clipping’, which attracted severe punishment; which in turn I suspect underscores the point. Tax on the other hand was a powerful tool of both law and enforcement through which the sovereign could much more readily and effectively exercise its power and authority.
I would welcome comment on this.
Wow! Richard you get better with every revised explanation.
What troubles me though is the conclusion we tend to draw that the government needs to be educated, to realise that their view of the economy is wrong. May I suggest that the government understands full well how MMT works. Why else would they, in the same breath as they justified their austerity policy, spend £70billion on HS2? Their rationale was that it would create work and help the economy. That’s MMT. Their austerity policy did nothing to protect the economy because it wasn’t intended to protect the economy. It was intended to introduce a cruel, unnecessary, right-wing ideology. And so it will be with Sunak’s heroic £400billion furlough spend. MPs may not know what’s going on, but it is inconceivable that the Bank of England, and therefore Sunak, does not understand the basis of money creation. But it is politically expedient to perpetuate the myth to justify future austerity policies, even if the word won’t be used. So underfunding of the NHS (until it is fully privatised!), social care, education, welfare et al will continue and the public will suck up the lies put out to justify it.
So it’s the general public, including MPs, that need enlightening not the government. What is needed is to get the simple, understandable message of MMT across via the mainstream media. This message is absolute dynamite yet I have seen nothing in the media about it. Not even mockery. Why is this? Is it a case of lies travelling round the world while the truth is putting its boots on?
Trying to get the truth through to public consciousness through blogs and pressure groups is fruitless when the government and all those who ‘know better’ are prepared to shut off any mainstream media discussion, knowing that the uninformed public prefer their lies about a household economy and the perils of debt.
Nothing less than a direct, intense and relentless bombardment of the mainstream media will counter this proliferation of ignorance.
I regret to say that I think it is entirely conceivable that they do not believe this is is the basis for money creation
I doubt the Treasury does either
Most economists know almost nothing about money
It rarely features in their models
This presumably is the secret of China’s extraordinary success.
Enormous expansion of credit and supplying goods to the rest of the world so cheaply that it keeps people in employment.
But can the trick be repeated? What actually can we supply to the rest of the world?
European Financial services are about to jump ship; car making for export to Europe will close down; Tourism is never going to be the same;
Cheap knock off goods from the bargain basement of world markets presumably. and tax havens for the worlds rich, needing safe places to reside, while they span the world.
Its a role but hardly a positive one.
But tat has nothing to do with money
That has to do with polirtical stupidity putting deliberate obstacles in the way of trade
Forgive me for coming back but is not the positive example of China’s success proof of the value of MMT? which points to a positive future direction for the UK? if it can identify what it should be trading with the rest of the world?
It may be a bit late for green technology, although i know of examples in fuel cells that have potential ( the technology has already been licensed to the chinese and germans).
Presumably providing capital to green investment to the planet in the absence of local investment elsewhere could be a lucrative line?
Credit control as ever is the key. Selling expertise in trade talks less so.
Roger,
I had not seen the answer to this question before, but it is entirely obvious. Richard has provided it many a time on this blog, though he didn’t actually respond this time(he has been busy!).
Green investment is the answer, we could become a world leader on it, providing jobs and a force for good, given the investment, which as we now know is entirely feasible if we are just talking about creating enough money to fund it, money creation is infinite, resources are not.
I have been busy……
I enjoy doing the blog but I needed a break yesterday
Your indefatigability is remarkable and this piece is great.
A while ago you drew our attention to accumulated government borrowing since the late 40s and pointed out that we simply don’t repay it….(apart from the very occasional running of a surplus)….pretty well never. I have found the table from the House of Commons Briefing Paper you quoted to be a particularly strong piece of evidence when explaining to friends that “debt” is really savings…and that we don’t pay it back! The “overwhelming threat” of the “national debt to the “public finances” and in particular to our grandchildren’s future is how the austerity mongers are framing the situation. As you show very clearly, understanding money is the way to tackle this, but the public debate is being framed to be all about the size of “the debt”. Perhaps there is a place for one or two more explicit comments on the “national debt” and how what governments of every hue have been doing for decades is NOT paying it back! Thanks. Alan .
Thanks
Agree with the summary and the points well made but why the need for the arrogant, “arrogant bankers” quip? Its a shame to dilute clear, excellent economics with political baggage and/or banker-bashing.
Dog walked, jobs done – last 35 pages of The Deficit Myth to read…I hope that I can summarise as well as this!
Because there are arrogant bankers who have no hesitation in arguing their worth which is unjustified?
Thank you, Richard, for another excellent post.
I wonder how tomorrow evening’s broadcast at 8pm on Radio 4 of: –
“The Magic Money Forest: Dharshini David explores how the government and the Bank of England turned the money taps back on.”
– compares. Another measure of orthodox analysis in the offing?
I am not hopeful
So glad that you have put this in a blogpost because I was just starting to copy each tweet of it into a word document because I want my A level students to read this, it is the best and most concise explanation of all this thta I have read. Thank you Richard
Thank you
Happy to answer their questions live on Zoom if you want to arrange it – seriously
Hi Richard this is great it occurred to me that it could be the script for an animated explainer movie. Do you have plans to use it this way, would you mind if I had time in the coming weeks if I had a go?
Might we discuss
My contacts are on the blog?
Richard.
I feel the animation idea really could make a difference. A clear story (which you have done a great job of putting together) combined with effective visuals might at last get sufficient traction to impact on the consciousness of enough people to establish the alternative narrative.
I am open to it – seriously
I’d happily do the voice…
This sounds wonderful! Keep it light; humour could also help visually if it can be pulled off, but difficult to do well.
[…] Cross-posted from Tax Research UK […]
That was brilliant; idiot proof (for me) without being at all condescending. I do believe you’re cracking the nut of explaining MMT as easily as that handbag stuff. XXX
[…] 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 […]
@ John S Warren
If I understand you correctly, what you have written is the standard MMT line too. Even in the days when payment of taxes was done by handing over Gold coins, the value of the Gold in the coins had to be less their face value. To issue coins with too much gold content invited the possibility of their being melted down. There were stiff penalties for doing this but it would still happen.
So where did the extra value come from? It came from a demand by the Sovereign (King or Queen) that the coins should be used as payment for taxes.
Will QE and tax be sufficient to prevent hyperinflation/deflation in regards to brexit, with speculation on the floating pound and trade shocks impacting imports/exports?
Nothing can prevent an external shock
It can at best mitigate buit
But they could do that
Well, there it was. 1 minute of the 30 minute ‘Magic Money Forest’ programme Radio 4 programme tonight given to MMT. After a cheap shot at MMT sounding like Magic Money Tree, Stephanie Kelton had barely time to mention the theory let alone make crucial points before being roundly dismissed, mainly for ‘not being new’ rather than for any weaknesses. But of course now they can say it was included in the programme. What nonsense and what are they frightened of? Not being able to introduce more unbalanced austerity which will make the poor poorer and the rich richer? Not being able to attack opposition profligacy? I don’t suppose Richard was invited. I wonder why? A travesty, demeaning the BBC – again.
I was not invited
Talk about a stitch up…
I tweeted my frustration during the programme – Stephanie acknowledged
“Tax does not fund spending”. No, but has not the present tax system been made as though it does?
If one main purpose under MMT is to stop inflation, as necessary, how should a chancellor judge the instantaneous amount required. You might say that currently, with unemployment rife, and no inflation, almost all tax should be cancelled. Having arrived at a necessary amount, how should he then spread the tax amongst income tax, VAT, Buisness rates, Death Duties, Stamp Duty, etc.?
MMT might seem a simple explanation, but I don’t think it does give the answer about how to run the economy.
Unless you want hyperinflation no you would not say that
I am sorry to say that MMT does not permit the taking leave of one’s common sense
And yes it can provide the answer to how to run an economy, because it does not what say what you suggest
Sorry! The suggestion of stopping all taxation was a bit glib.
There does seem to be something of a problem selling the ideas to hoi polloi though.
Most of us can see the necessity of paying our share of health care, defence, Police, Roads, Public Service and infrastructure etc. It seems therefore acceptable to “pay tax” to achieve those things. It is a lot more difficult to sell the idea that tax needs to be charged and adjusted, perhaps quarterly, to keep inflation at some ideal figure, by cancelling money!
Is there any chance of getting hoi polloi to understand it? The household allegory is easy!
I think that the financial whizz-kids are terrified that the general populace might finally understand that the magic money tree does exist.
Of course that is possible
And it’s still a contribution to the system that pays for these things
It just does not fund them
But they would not be possible without tax
When anyone promoting MMT says otherwise they are quite simply wrong
This is excellent. The one line I stumbled on was the one about gilts being “gold backed savings products”. I understand the neat turn of phrase, and the pound was on the gold standard so at some level the value of the debt instrument was based on gold, but factually I don’t think that is correct to say the gilts themselves were “gold backed” in any meaningful sense. As someone else has said, it comes from the physical certificates which literally had a gilded edge, like the pages of some books. If/when this is republished, it is the only thing I would suggest you tweak, as it would be a shame to give your detractors a weakness to latch onto to dismiss the whole thing. A professional editor might suggest other minor wordsmithing, but you would not want to lose the simple language and easy conversational tone.
I would edit that now
Richard,
Can I have you permission to post this blog article on the Bank of England Citizens Panel blog? They are asking for ideas on 2021 – what lies ahead for the UK economy?
I think you article would be perfect for people to read on this blog.
Of course!
Might you send the link?
Here is the link but you will need to create an account and the article is located in the discussion forums. I hope this helps.
https://bankofengland.crowdicity.com
I have applied
Thanks
For information I have seen today on the French lunchtime TV consumer programme (la Quotidienne) the financial expert attempt to explain how the “debt ” created by the crisis could be managed:
He gave three options :
1. Classique – borrow more and spread costs over 50 years paid for by taxation (unaffordable)
2. Tease out – take out perpetual debt at 0% from the ECB to pay for costs of Virus
(said to not eliminate the debt and not infinite)
3. Efface the debate. wipe out the debt worldwide in agreement with all countries.
Said to be fiercely opposed by China.
Sadly my french was not good enough to understand all that was said but the fact of the debate was significant and that there is a need to frame the debate in the public’s mind.
A career awaits you on daytime television !
Or simply accept people want to own the debt, and do nothing about it
Why are we obsessed with trying to get rid of what are best called national savings?
That is the real answer
Would you mind if I copied it and changed all the references to British things into Canadian, please?
Feel free