Helen Schofield, Twitter and Facebook all drew my attention to a new report from the Gower Initiative for Modern Monetary Studies this morning. As Helen notes:
Off topic but to draw your attention to the following:-
https://new-wayland.com/blog/#Bonds%20Pay%20For%20Themselves
https://gimms.org.uk/2020/12/26/accounting-model-uk-exchequer/
Why should we be surprised sleights of hand are a specialty of the British establishment when, for example, in 1694 a private joint-stock company could start issuing hard copies of the currency (medium of exchange) piggy-backed on a retirement process enforced by the government!
The paper is entitled An Accounting Model of the UK Exchequer and is by Andrew Berkeley, Richard Tye & Neil Wilson.
I think I should give fair warning that this paper is long and is not an easy read. Why the authors thought putting out such a long paper without a summary t be a good idea slightly defeats me. The best there is can be found in the postscript on page 111. And having noted that I will not summarise it all.
As I read it the paper says little I disagree with. It argues that the power to raise tax is the foundation of what they call ‘moneyness ' and as such the Consolidated Fund in to which all government funds are aggregated is the power behind the UK Exchequer.
As they rightly argue, it is also a fact that the UK Parliament can authorise spending whether there are funds in that source or not.
They also rightly argue that all the arrangements around the Bank of England and Debt Management Office to issue debt and clear balances are largely charades, and necessarily have to be when in practice conditions of uncertainty exist around their operation meaning that the Treasury and its guarantee has to always underpin their operations.
The conclusions do support the fact that the Treasury functions, in their widest sense, operate as MMT says.
That said, and I stress I have not read it all as yet, there do appear to be limitations to the work. First, I have some minor quibbles. For example, I think there is a difference between my view on base money, which only includes central bank reserve accounts and the views of the authors, who seem too include all bills in issue. These are worthy of discussion, but are not major disagreements.
Second, and more important, the intention to prove MMT also limits the usefulness of the work. Whilst showing MMT is right in the sense that spend comes first, tax come second and debt issuance is not necessary, is useful establishing this is not a sufficient condition to argue for change as a result.
Of course, doing this does reveal that the arrangements around so-called independent central banking and the claimed dependence on the money markets are a sham, but that is (I think) already known. What I cannot agree with is the implication that none of the resulting structures really matter, which has long been my bugbear with some in MMT.
How we tax does matter.
What role the government plays as borrower of last resort (and so as the provider of safe savings opportunities) does very much matter.
And presuming gilts are just money is to deny other roles that they play for which as yet we have no substitute.
Technically this work looks to be important. If it had a good summary it would be even better (and Neil Wilson's blog post does not provide it).
But what really matters now is discussing what this means. In other words, given that we know that the government is playing games to restrict the access to money to provide public services that are essential what can we do to create a new narrative that empower an alternative politics.
I will read the piece in more detail, but not today. But it does not answer the question, what next? Its use is in saying where we are. And that's important. But what cannot be assumed is that wiping away all the structures referred would have no consequence. It would. As a result the repurposing of structures requires much more thought as yet.
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It’s rushed production has all the makings of a rear-guard action to me? Perhaps the authors share your world view and can see what is coming? Or maybe its a case of ‘make up your own mind’?.
BREXIT is a rich man’s charter making chattels out of all of us ordinary folk.
And forgive me for saying so but that book you wrote ‘The Courageous State’ tells us a lot about what is next in terms policy answers at least in broad philosophical strokes (practical ones too).
The courageous state also has to defend democracy and its sovereignty (it can only successfully do the latter by repudiating the idea of a totalitarian ‘free’ market and favouring a mixed social-market economy as you have always advocated).
We have to understand the Neo-lib mind set though. Do we?
Remember that they constantly talk about the immorality of State dominance/monopoly in issues but very often they mean is that what they often present as choice is actually THEIR choice between State monopoly and private and they prefer the latter of course because it confers all the benefits to their followers (so they lie profusely about it).
And it is nothing but a re-writing of human history and as Gillian Tett often points out (as has David Graeber did RIP – he is an anthropologist like Tett) , it’s about who controls the contemporary human narrative: mark my words however there is no ‘in-between’, no sharing in the Neo-lib world.
It is all or nothing to them but everything to us.
And look – we have those opposing narratives (many based on fact) but it is how and if they can be used. We have the tools to change that lying Neo-lib narrative. We really do. And that’s a good thing. And its a start.
This Xmas I managed to afford 6 copies of Kelton’s book as pressies. More will follow. That was my start. I saw it as an investment in the future of humanity. I mean, what else can I do?
The battle now is with the Neo-lib narrative and I think that as far as the weapons are concerned we are tooled up.
The narrative is the battleground in my view. And it’s a big one, but we know what happens when you start chipping away at a dam.
Pilgrim Slight Return,
Nothing rushed about it. The authors have spent two and a half years painstakingly researching their work.
This working paper has been published now because it’s when it was ready.
My view is still that it could have done with more sub-editing. I make no apologies for my stance.
My bias towards the editing angle is simply motivated by the need for these crucial pieces to be more accessible to the general public who are overwhelmingly misled by the dominating and enduring myths that exist in these matters.
The old adage ‘You can’t throw money at this and that’ is now not a valid statement. We must now start throwing money around to deal with Covid and the environmental crisis we are now in and other world problems that seem to have got worse under the ‘small-state ‘ mantra. And the money has to be thrown accurately.
That money has to be created by sovereign states – in equal partnership with markets who must be prepared to share their gains more readily (take less of a cut) and accept some basic rules for once – indeed, the whole competitive element needs to be greatly reduced.
Promoting ‘market efficiency’ whilst being blind to the effects of such ‘efficiencies will not do. Even Mark Carney spoke of ‘well paid jobs’ in a new green energy sector during his Reith lecture on R4 last night. Yet still the Neo-lib mouth pieces talk up the private sector as if it is infallible but it is a place where wages are destroyed and transferred to rentiers.
And still, they are talking about carbon trading!!!!! I ask you!!! WTF?
The whole view at the moment seems to see the ‘free market’ as the conduit for everything to do with mankind. Yet as pointed out last night by Mr Carney, the fucking markets have still not valued the Amazon rain forest as it is now and will only value it when it is all gone!! No market has valued the blue whale or living pangolins but you will get a price for pangolin flesh in the far East or when the whale was boiled down to its useful components. Too late when they’re gone! folks!
And we want to funnel these huge life saving projects through institutions that have no capacity to deal with them?!!! Institutions that could not even value and trade mortgage backed securities safely?
This is why this paper and the work Desan, Kelton is so important and need to be communicated easily. Governments have the power. We don’t need markets that are the same old markets – we need new ones, with new values and a different emphasis to help deliver the action needed to deal with these challenges. We need collaborative markets – not necessarily competitive ones.
The City and other financial centers are not set up to deliver without having their noses in the trough. We will need a whole new mindset to deliver change – longer return times, lower returns but balanced by valuing the natural assets that we must save to preserve life on Earth that benefit us all.
Can those bright people in the City come up with a complex formula that expresses that? Something that gives us a return that is simply the future survival of ALL humanity? Or will we all have to die first?
It was odd to me using the heading “Postscript” rather than “Conclusion” but this is where much of the summary of their hard work appears to lie. Hopefully, GIMM’s and/or New Wayland might provide a more easily digestible summary of their UK Exchequer Accounting Model for those still in the early stages of grappling with MMT.
I hope so
I wish it could be clarified why we need a central bank when we have an Exchequer and the GIMM’s Accounting Model now makes clear the BoE is just one part of the Exchequer. The BoE is relatively recent only 1694 and seems only to have arrived because of the defects in specie money providing a reliable quantity of currency (medium of exchange) and the Stop of the Exchequer:-
https://en.wikipedia.org/wiki/Stop_of_the_Exchequer
I see a role for a central bank – but explicitly under Treasury control.
I see no role for the Debt Management Office. It could be replaced by a Government Savings Bank.
Surely the point of setting up the BofE here was to facilitate domination of the majority by the banking class? You insert a token into the culture, have your buds in govt (who have no real idea what’s going on) help assign value to that token and then you harvest that value as ‘interest’. You sow credit but you reap spendable money. We are farmed! This doesn’t work when a majority are living off the land and not using money by and large but when everyone is off the land and in factories (which comes about, with your encouragement, over time) the need for your product massively increases. When the culture can only access more of it in the form of credit and in working they lend value to that credit and it’s the banks reaping that value, everyone’s working to make the banks richer. It’ s like a side-effect but I’d imagine it was the banking community’s main intention. This would be why you had teams competing to get the CB set up back then, all of them with connections to Holland where there was already a CB and they had bank credit but in a form which (I gather) wasn’t so antisocial. They understood how a variation on the CB theme could be used to dominate.
Mz Schofield,
Another remarkable source. I tip my hat to your forensic endeavours.
The Postscript looks to me like the Conclusions, and it is densely argued; but without the translucent clarity of Desan’s artistry. The closing paragraph, reproduced below – I thought it worthwhile to provide the quotation here as an example of its remarkable content – is an indication of how far and how fast this whole deconstruction of monetary economics and central banking is now travelling (the Berkeley, Tye and Wilson paper is dated December, 2020):
“The Consolidated Fund is the only entity in the monetary system that holds a sui generis asset. It is therefore the ultimate source of moneyness in the UK, not the Bank of England. ‘Liabilities to be funded by future revenues’ in the government sector precisely matches the equity held by the non-government sector. Therefore that equity represents ‘assets to become future government revenues’. In other words, the net financial equity of individuals is the public money which the Exchequer has issued and not yet taxed out of circulation. Reducing the amount of government securities in issue, via excessive taxation or inadequate government spending, necessarily implies reducing net private sector financial wealth by the same amount; financial wealth that is largely held in pension funds and insurance companies. This is in contradistinction to reducing the amount of private loans in issue which doesn’t alter net private sector financial wealth at all, since it reduces the amount of private deposits held by the same amount.”
Much of this is true
But I cannot agree ‘ Liabilities to be funded by future revenues’ in the government sector precisely matches the equity held by the non-government sector. ’
I could agree that future revenues to fund liabilities are matched by the balances held by the non-government sector.
But the term equity is used inappropriately here. The equity holders of government are not the bond holders.
And the ‘precise match’ is wrong. As is apparent from the discussion in the paper on consolidation the boundaries of accounting are porous. So too are liability recognition principles. To say bonds in issue precisely match anything is in that case wrong. It assumes double entry can do more than it can actually achieve.
It is true bonds are the net sum of spending not yet taxed. But by their very nature liabilities have not yet been spent. And we know they do not need funding. So this claim is confusingly, at best, constructed.
I think the paper valuable. But this claim is a step too far. Not least because, as we well know, there is no reason why the value of bonds in issue should become future revenues. Indeed, it may be highly undesirable that they do so: the retention of bonds in issue might be well worthwhile, and the harm of taxing them out of existence might be considerable.
The more I think about it the more I disagree with the structuring of this conclusion, which is perversely worded. It’s implication, that bonds can substitute tax, is sound. That they might then be considered a source of potential tax revenue is anything but.
@ Richard,
Ok but the paper doesn’t restrict liabilities, or equities, to just bond holders. It’s any liability which has to be included to make the sectors balance.
In fact that’s all the authors are saying. ie The sectoral balances have to, er, balance. For that to happen there has, by definition, to be a ‘precise match’.
My accountant, in the business I run, gets quite upset when there is just a slight difference from one side of the ledger to the other and ferrets through until she finds the mistake! Everything has to be reconciled. If it’s a penny out then that’s not a balance as far she is concerned.
But to say the sectoral balances does not require 111 pages of prior analysis
And the reference to equity is misleading
And sure there has to be a precise match – bit as I note, what is considered within and without the entity is an issue much more in interesting – it always is within accounting
If this is the big conclusion, it falls short of big
And, for the record, that undermines the conclusion on the consolidated fund in that case
Nice to see you following this line of research up.
There is a lot of smokescreens surrounding the set up of the BoE since it was initiated and misunderstandings about its independence and the delineation between the role of the Treasury and bank is a slender one. To the point many have even come to the conclusion that there is in effect not even a difference between monetary and fiscal policy.
As to the suggestion that a central bank should be under the control of the Treasury ,this was actually mooted in 1655 by Sir Charles Downing who proposed that the that the “Treasury become a virtual state bank”.
By 1781 the bank had become so well established that the Prime Minister Lord North reassured the nation that despite the Colonial War raging that we had at least the might of the BoE “When other gods are failing”.
He added that the BoE was now “from long habit and the use of many years…a part of the constitution, or if not part of the constitution, at least….to all important purposes the public exchequer”.
What began as a very lucrative money making project for private banks, (being allowed to create the nations money by Royal Assent) eventually evolved to become part of the very fabric of government.
Here’s a bit of history to throw into the mix. One’s by the well-known Libertarian and gold-pusher Tyler Durden but it’s interesting because it makes clear that the Roman mints were busy doing the leaders bidding de-basing the specie coinage from as far back as AD 64 and then along comes Charles II of England pulling tricks by screwing up tallies which lead to the Stop of the Exchequer:-
http://www.zerohedge.com/news/2015-02-21/why-does-fiat-money-seemingly-work
Here’s more detail how tally sticks worked as currency:_
https://gimms.org.uk/2019/03/08/history-english-tally/
https://en.wikipedia.org/wiki/Stop_of_the_Exchequer
Thanks Helen ,informative as always.
As far as I have seen ,rulers from antiquity have cheated with their sovereign right of money creation for personal gain. Whether that be minting too many coins(or tally sticks) or debasing the precious metal content or or “decrying” the face value of the national coin.
Repeated Royal cheating for many centuries eventually created a call for a great change. That great change came with the advent of commercial banks. Who grew so powerful they could challenge the power of Kings. Not that they had the power to enforce payment but they were able to present themselves as somehow more trustworthy…not a difficult thing to do. Yet at the end of the day their trust was of no more substance than the Kings they replaced. All any issuer of money has is confidence. Without that confidence the issuer of money/credit has nothing. We live in a world of monetary trust, if the issuer loses trust his credit/money becomes worthless.
More importantly money/credit creation has to be put to good use for the wider economy or else a few benefit at the expense of the many. Leaving that solely to private forces is not a good idea, the state today should not have to hide behind charade that it is not able to create money/credit at will and that this has to be left to private sources. This has never been the case and the more people understand that the better.
Is that Tyler Durden of Zerohedge [in] fame [y]?
ZH is now offering ZHPremium, because it has been defunded by Google!
Biter bitten?
Its comment sections feature a ripe collection of nutters, fools and trolls!!
So do its posts, this one included
Is that were the expression ‘Tally Man’ comes from? I remember that from my childhood. They were debt collectors; usually for colour TVs. A ‘Tally Man’ was definitely a debt collector.
“come Mr Tallyman, tally me banana”
https://www.youtube.com/watch?v=6Tou8-Cz8is
Or the funny version: https://www.youtube.com/watch?v=AQXVHITd1N4
Referring back to Mz Schofield’s first post, Richard’s response, and later ones; I am writing this only from my own perspective, but I would wish to suggest that this recent flowering of the debate is to be embraced and, over time reviewed and reflected on. I confess I am not fully keeping up with the amount of information and illuminating analysis that is now coming to hand! Whatever the limitations of aspects of it that must in time lead to reformulation or deconstruction of the issues, all of it enriches our understanding and slowly is now squeezing neoliberalism into a tight corner with less and less room to escape.
On the history of the BofE and the financing of Government I wish here to emphasis that I do not believe we should present an argument that the late 17th century thinkers and actors who created the Bank understood the full (or even most of the) consequences of what they were doing, or the causal relationships that informed their actions. Adam Ferguson’s profound social insight was correct. Hence, government financing and banking were evolutionary processes which became the outcome of actions undertaken, but not the outcome of their original intentions. The outcomes were neither predictable nor predicted.
For example, Desan demonstrates in a work that forensically deconstructs “the coming of capitalism …. a crucial transformation in modern history”, which is the core of her purpose (Desan, ‘Making Money’; Introduction, p.2). Nevertheless the critical importance in her history of the now semi-ignored, half-forgotten, brilliantly effective Sir George Downing (1624-1684), with his initiative from 1665, when: “the English government began to borrow by issuing paper public debt that circulated and bore interest – the Treasury Orders” (Desan, Ch.7, Ch.8 p.295) was certainly not part of his intention or purpose. Desan describes Downing as a “worldly and eclectic policy maker”; but that isn’t the half of it. The historian who perhaps knows Downing best, Jonathan Scott, described him in a 2003 ‘English Historical Review’ paper much better as “the most unscrupulous person of whom record survives”. A treacherous, ruthless Republican turned Restoration politician, Downing formed his talents and knowledge as Scoutmaster General in the New Model Army, and Teller of the Receipt in the Exchequer, under Cromwell. Nevertheless for Charles II he became the most skilful finance minister, mastermind of the Navigation Acts, diplomat and spymaster; he was probably the inventor of ‘extraordinary rendition’, including of his own closest Commonwealth, regicide mentor. Downing embedded Republican Government methods, Dutch trading innovations and a Mercantilist ideology into the Restoration Government of England; and there was no limit to the ruthless depths he would sink in pursuit of personal interest or the furtherance of the English imperial, essentially mercantilist State.
I have been unable as yet to find a sound source for the hint that as a Republican in the 1650s Interregnum, Downing proposed the founding of a ‘State Bank’.
Your second para is key
The late Prof Lisa Jardine in “Going Dutch” usefully informs us ” Downing’s most important contribution to English fiscal policy, however, was the importation of the underlying principles of state banking that led ultimately to the formation of the Bank of England.” Further, “Downing’s scheme used parliamentary legislation to underwrite loan repayments with the authority of the state (rather than simply of the monarch personally)” Further still, “Downing worked tirelessly to reform English financial institutions so as to bring them inline with those he regarded as so supremely successful in the United Provinces. He did so in spite of the fact that England was a monarchy, while the United Provinces was a long established republic. In so doing, he put in place the machinery for the ‘constitutional monarchy’ which would follow the arrival of William III in England in 1688.” Then, from John Beresford’s biog of Downing, “The Godfather of Downing Street” , “it is safe to sav that not one person in a thousand, including students and historians, has the Slightest conception of what Downing accomplished, or of what he attempted to accomplish. What he actually accomplished was, in effect, the virtual creation of the Treasury as the first Department of State, as that term is understood today. Further, the great Constitutional reform – Appropriation of Supply – is due mainly to him. What he attempted to accomplish was the creation of a National Exchequer Bank, which, had his scheme been permanently successful, would have rendered the creation of the Bank of England, twenty-seven years later, unnecessary.”” Downing tried to convince the King and various assembled nobles of the benefits (to the King most of all, obviously) of getting a national state bank set up. This next all took place in Lord Clarendon’s bedroom “”… what did it matter if Appropriation became the rule provided that ‘the Establishment of his Bank’ which was part and parcel of the proposal, really filled his empty Treasury? It was argued by the opposers that the Bank idea was a ‘Chimera,’ and presupposed a perpetual debt (in fact a National Debt) which would be ‘very ill Husbandry.’ Then Lord Clarendon pro- ceeds: “Yet all Discourse against a Bank was thought to pro- ceed from pure Ignorance. And Sir George was let loose to instruct them how easy it was to be established, who talked imperiously of the Method by which it came to be settled in Holland by the Industry of very few Persons, when the greatest Men despaired of it as impracticable; yet the Obstinacy of the other prevailed, and it was now become the Strength, Wealth and Security of the State: That the same would be brought to pass much more easily here, and would be no sooner done, than England would be the Seat of all the Trade of Christendom.’ And then assuming all He said to be Demonstration, He wrapped himself up according to his Custom, in a Mist of Words that Nobody could see Light in, but They who by often hearing the same Chat thought They understood it.”” early banking obfuscation there obviously 🙂 Downing tried to get a war going with Holland, or the Low Countries as we should probably call it/them, in order to create desperation for money to fight it. He failed, and incurred the displeasure of his king in the attempt, meaning he had to come back from Holland and spend six weeks in the Tower. When the Houblon gang fronted by Patterson later proved successful, the nation was already at war and the need for more money was already apparent. If Downing had managed to start war with Holland, he’d no doubt have succeeded in getting what becomes the BofE in operation too. It’s clear that was his intention. I’ve been assembling notes and thoughts and other bits and bobs on this for years on and off, (mostly off admittedly), and they’re grouped over at https://www.dutch-finance.co.uk if anyone’s interested.
I think Bill you miss the central point. The issue is a perceptual one of voters understanding that as far as their country’s medium of exchange or currency is concerning they need to recognise there must be democratically accountable collective power exercised but this power has to be variable. What I mean by this it has to be able to vary the “retirement” of the currency for a variety of reasons the principal ones being to maintain short term value and to enable saving for investment both of which help determine the stability of the economy.
Do I think having a central bank hampers this perception? Yes I do because the persistent argument is banks have to balance their books don’t they including a central bank. This means the “variable collective power” goes out of the window. The obvious example of this is that the UK has a “Kowed Keir” Labour Party which believes there has to be a fiscal rule of balancing the government’s books.
I think Bill carefully reading of Christine Desan’s book “Making Money: Coin, Currency, and the Coming of Capitalism” reveals historically there is this perceptual problem amongst voters/citizens. I know that Richard Murphy believes that the UK’s central bank can be brought under democratic control perhaps he’s right but the big gorilla in the room is this perceptual problem of acknowledging the state needs to be able to exercise this variable collective monetary power.
We don’t disagree Helen
I merely think we need an accountable agency to do the job – accountable to a minister and parliament that is
I thank you Helen for bringing Desan’s book to my attention – I now have it on top of the depressingly large pile of economics-related books I really ought to get round to reading.
Join the club!
@ John S Warren
Did George Downing advocated setting up a national bank? Two conflicting tales:-
https://www.americanantiquarian.org/proceedings/44806816.pdf
https://www.historyofparliamentonline.org/volume/1660-1690/member/downing-sir-george-1623-84
Note in this second tale Downing is reported as being replaced as Secretary of the Treasury in 1671 being replaced by Sir Robert Howard who became one of the joint-stock holders of the Bank of England in 1694:-
https://en.wikipedia.org/wiki/Robert_Howard_(playwright)
Tenuous then to argue that George Downing was the mastermind behind the 1672 Stop of the Exchequer.
Samuel Pepy’s in his diary described Downing as a “perfidious rogue.” Pepys was a clerk in the Treasury where Downing also secured his appointment as Secretary of the Treasury. Irony therefore at work that where British prime-ministers live and work is named after a “perfidious rogue!”
@ John S Warren
I’ve ordered a copy of the following book:-
https://www.amazon.co.uk/Day-King-Defaulted-Financial-Exchequer/dp/3319599860/ref=sr_1_1?dchild=1&keywords=The+Day+the+King+Defaulted%3A+Financial+Lessons+from+the+Stop+of+the+Exchequer+in+1672&qid=1609103180&sr=8-1
Might not provide much insight but it sounds as though the Stop of the Exchequer was close to a 17th century GFC for England and Wales.
I feel this is a story I also need to know more about
Thirty five years after the Stop of the Exchequer, England is paying Scotland (broke, but not indebted) the ‘Equivalent’; a sum in specie (sent in chests under armed escort to Edinburgh), the rest in English paper (!) for Scotland to accept its share of the English (now British) National Debt at the Treaty of Union (1707). The Treaty Commissioners agreed to the Scot David Gregory (Professor in Mathematics then in Oxford) to calculate the amount. Part of that payment was used as seed capital later, to set up The Royal Bank of Scotland. They still have the chests. The ironies abound.
Downing was a chillingly ruthless operator, who used an extensive network of spies, plotters (and to spirit his selected enemies out of Holland, no doubt operational thugs), who possessed not a shred of scruple in pursuit of his political aims. Charles II used him I suspect because he understood him and his talents, but with impeccable Stuart judgement, Restoration government lacked Downings’s efficiency and effectiveness.
Section 8 of the GIMM’s “An Accounting Model of the UK Exchequer” is interesting it would seem to make clear that from an accounting viewpoint the Bank of England is being used as a pawn to justify the mantra “the government needs to balance its books” when in reality that balancing takes place automatically. The sleight of hand justification is placing the BoE in the private sector for balance sheet purposes.
The fact is the BoE does not have new balance sheet – it has three
And the auditors sign that off as true and fair
A recent St. Louis Federal Reserve Paper is very related to your post Richard – Does the National Debt Matter?
Few Key lines:
a) Most people have a very personal view of the nature of debt. We know that high levels of debt and deficit spending at the household level are not sustainable. At some point, household debt has to be paid back. If a household is unable to do so, its debt will have to be renegotiated. It is natural to think that the same must hold true for governments. But this “government as a household” analogy is imperfect, at best. The analogy breaks down for several reasons.
b) Together, these considerations suggest that we might want to look at the national debt from a different perspective. In particular, it seems more accurate to view the national debt less as form of debt and more as a form of money in circulation. [as in perpetual consuls]
Canadian Professor Scarth and many others have made this point – It follows as a matter of simple arithmetic that if r ‹ g, then the government is in position to run a primary budget deficit indefinitely–that is, the effective carry cost of the debt is negative, even if the interest rate on the debt is positive.
https://www.stlouisfed.org/publications/regional-economist/fourth-quarter-2020/does-national-debt-matter
Agreed
And thanks
From page 101 (107)
Note 144. The Exchequer and Audit Departments Act 1866 s11requires that all Exchequer accounts held at the Bank of England are treated as one general fund by the Bank.
But still three balance sheets…..
Well I’m reading this GIMM’s “Accounting Model of the UK Exchequer” that these BoE accounts should really be regarded as Exchequer “Consolidated Fund” accounts. So it’s a what’s in a name argument. Should the BoE be renamed so that it’s regarded as a subsidiary agency of the Exchequer and fully under the control of the Treasury not as the GIMM’s authors argue the Treasury engaging in pantomime by standing behind a curtain at Threadneedle Street!
@ John S Warren
John there is an interesting comment on page 114 (120) on GIMM’s “An Accounting Model of the UK Exchequer” which states “….. the UK Government has never failed to redeem its securities …..”
https://gimms.org.uk/wp-content/uploads/2020/12/An-Accounting-Model-of-the-UK-Exchequer-Google-Docs.pdf
This simply isn’t true. There was the “Stop of the Exchequer” at the beginning of January 1672 and this was one of the key factors that led to the establishment of the private joint-stock Bank of England which then issued non-interest bearing bank bills and banknotes to the government to augment the lack of specie coinage.
https://en.wikipedia.org/wiki/Stop_of_the_Exchequer
Note that government warrant, securities or orders which were a form of currency were affected. Now read what the GIMM authors write below their misstatement:-
“Government securities therefore represent financial assets that, under the current monetary paradigm [160], support the functioning of the monetary system and are the subject of demand in much the same way as Bank of England reserves and banknotes. They are essentially an extension of the base money system: a counterpart to reserves relative to any given monetary policy stance, the residual stock of drained reserves, and are a substitute to reserves as assets held by the banking system or in the wider economy.”
Interest bearing bills more commonly prevalent today in the form of gilt edged pieces of paper (or their electronic equivalent) are a “drained reserve” but still a “reserve” and part of the government’s “high-powered” or base money/currency system. They clearly are not as the Conservative and Labour party leaderships tell voters funding the government!
I hope you can see the historical development linkages. Was this development “deliberate” or “accidental”? I think we can settle for both. For example, why would the self-confessed Marxist, John McDonnell, believe the government had no money of its own but operated on a credit card when at least one point of being a Marxist is to be as suspicious as hell of any right-winger who told you the government couldn’t create any money of its own. What on Earth did the Soviet Union do then exist on barter!
I am not completely convinced all gilts are base money
CBRAs definitely are
Gilts are an adjunct to reserves surely serving not only the purpose of helping control base rate but acting as collateral for clearing banks to buy reserves and do repo deals as well as helping prolong the value life of the currency. Not sure what other uses you have in mind.
I think gilts help control longer term rates
CBRAs help control short term rates
And the repo use is a small part of their function
They are the savings backstop, plus the mechanism for foreign exchange holding
And for that reason I do not see them as the same as CBRAs, which are base money
CBRA’s as collateral I could understand, if the clearing banks were ordinary creditors, but they are not; the clearing banks are ‘too big to fail’, so perhaps the CBRAs are faux collateral after all? I do wonder whether the real issue is not just the false independence of the BofE, but the clearing banks (we seem to approach this, and thenveer away at intervals?). The Crash surely proved that, and Covid has demonstrated that ‘at bottom’ and at ‘the Crunch’, the Government is the only game in town.
Your discussion is surely about the definition of base money, without a definition but rather a discussion that points to examples. Money, however is fluid and evolutionary, so difficult to define.
I hope my choice of words may incline Mr Gray to persist. It is the neoliberals who benefit most from the debate becoming arcane gobbledygook; Desan principally, and Kelton have shown the way to do this!
I do not think CBRAs are collateral. They do not provide collateral for anything in reality, as you note.
They are simply a means a settlement without wish our banking system could not exist.
But that’s valuable, and makes them base money.
I am making the suggestion as nothing more complicated than that.
Gilts do not meet that criteria and so are not base money, even if they are near it.
What happens to transferability? Desan, ‘Making Money’ (p.1) describes it in terms of a ‘measure’ of a ‘unit of account’ that must take shape “that travels from the centre of a society to its margins …. ‘hand to hand’, a medium of exchange for strangers as well as friends”. Gilts may not travel to the margins of society (!) but they can be used by strangers. The mode of CBRAs is opaque, not open to strangers, and if it ever reaches the margins, only by the most circuitous, devious route. Indeed ‘Austerity’ 2010-20 demonstrated it did not travel far outside the chumocracy.
Think of gilts as a deposit account
They are not transferable
They can be converted into a transferable unit if account with ease
But they are not the same
Fascinating to learn a bit of Central Banking history! Had never heard of the Great Stop. My knowledge is a bit more prosaic so I will stay silent except to say…….
Gilts are not money. However, they can always be converted into money (at least temporarily) via a repo transaction with the Lender of Last Resort who will always lend against gilt collateral.
“Back in the day” banks held as few reserves as possible because the rate paid on them was lower than anything else they could buy (indeed, zero for much of the time). This meant that there was always the possibility or running short of reserves (usually due to “Exchequer transactions” but occasionally hiccups in the system). So, in order to have access to borrowing from the “Lender of last Resort”, banks held gilts which (typically) had a higher yield than the rate paid on reserves. These gilts were seen as the closest thing to money without being money. Furthermore, the total level of reserves naturally increased over time as the economy expanded and there was greater demand to hold money. So, whatever the ebb and flow of day-to-day open market operations there was a steady trend to add reserves. One might think of the economy as a machine and reserves as oil. A bigger machine needs more oil to run properly; more oil might be required if some is leaking or pooling somewhere; oil might need to be drained if too much was added. The BoE has a role in “right sizing” the amount of money in the system and it is an “art” listening to the bearings for over heating, watching for blue smoke in the exhaust as excess oil is burnt.
Today we are in an unusual position (although after 12 years one might say it is now normal) where the system has been flooded with reserves (the machine smothered in oil). Sure, this has prevented the machine from grinding to a halt but the amount of oil in the system is NOT the problem – the problem is more profound.
Agreed
Sorry to persist, but while Gilts at least were close to ‘transferable’ (by ease of conversion) but not perhaps close enough (I was prepared to conced the point when I wrote it); I do not see how CBRAs can be considered ‘transferable’ (as money in Desan’s interpretation) without seriously damaging the meaning of the term; and even then, save by means so indirect and contingent in their delivery as to be doubted.
They are transferable…..
The Bank of England calls them the ultimate means of settlement
And in this occasion I agree
They are the in fact the transmission mechanism without which fiat currency could not deliver transferability now
How in that case aren’t they money?
And what could they be instead?
I would say in regard to McDonnell that despite him being a “self confessed Marxist” he never showed any indication he actually understand how money works, Marx most likely did. I have even been accused of being a Marxist myself in regard to my own views on money. I had never had any inclination to be a Marxist and was a bit taken aback by the accusation. But the more I read about Marx the more I must say I probably do indeed sound like one at times : )
As to gilts and reserves. It is a bit of a mix up. I think it was Martin Wolf or Warren Mosler who once said that the national debt and the reserve base (or base money or narrow money) is one and the same thing. It took me a while to ponder on that statement. Usually if a deficit is required, the govt “borrowing” the difference has meant that the govt takes money/reserves from so called “investors” and uses that money/ reserves to spend for its own uses, giving the investor a gilt to hold in return…which earns a dividend. That process does not however increase the overall amount of reserves in existence, technically this just takes some reserves from the “investor” and gives those to the govt to spend. So overall money in bank deposits accounts in the UK do not change,they just move from one set of bank accounts to another set. But truthfully this process is an entirely self imposed restriction on behalf of the govt on its own powers . Those powers now lie with the BoE
So the only time that reserves do in fact increase is when the BoE issues reserves off its own bat. Like when it tries to lower interest rates. It will the create some set amount of excess reserves (out of thin air)and pump them into the system by using those new reserves to buy any gilts back it can. This reduces gilts in circulation but does actually increases the amount reserves in existence and we see a corresponding increase in money deposited at banks as this new money lands in the bank accounts of the ex holders of those gilts. This new money/reserves is supposed to reduce interest rates in general as more of it is now available to lend on or invest in the markets.
QE is the same principle ,just it has injected way more new reserves into the system. The point here really is that the BoE is the one controlling the amount of money/reserves in use at any given time. The govt just plays a mute role. The general belief ,even by McDonnell is that the govt has to live within its own means. Or that the govt (minus the BoE) has to borrow reserves form the market ,when it is patently clear nowadays that the BoE is just an arm of the govt and so could if it wanted to …i.e just tell the BoE just to created some more reserves on demand without having the BoE resort to QE or setting interest rates via the past traditional methods of issuing reserves in exchange for gilts.
Of course this sets up the question of how the BoE accounts for all this on its books, but personally I don’t really concern myself with it so much. The truth is out and that is the main benefit of all this debate. So we can get to grips with what money is and how should we best use it.
You cannot create reserves without involving the commercial banks
And since the national debt is considerably more complex an issue than gilts the claim that the national debt is base currency is wrong, I suggest
But more on that in 2021
Indeed, the argument we as a society should be having and probably should have been having since the early 70s is about what is and isn’t productive. We might argue too that govt having an annual budget is itself more deliberate obfuscation as it suggests the govt has limited resources to allocate. A great allocation, perhaps, would be more suitable, in which the skillful chancellor alllocates his potentially limitless funds for the good of all without stumbling into inflation and damaging the currency.
CBRAs are “the ultimate means of settlement”. Yes, but not settlement as applied or understood by Joe/Josephine Public, and the money he/she uses. CBRAs are the ultimate means of settlement solely for the clearing banks, with the Central Bank. This is surely a rariefied, privileged form of money?
If we are going to designate CBRAs ‘money’, then are we not in effect (de facto, indeed de jure) creating a newly evolved form of money; a division of cells that changes the genetics? We now have two varieties of money: M-money, and P-money, if you will allow me this loose definition?
M-money is Joe Public’s medium of everyday exchange; a wholly transferable form of money, usable by friends and strangers – M-money: Mugs money (most of it taxed at source or retired through VAT). Then there is P-money; Professional money, the money of bankers, insiders who play the game and can turn contingent profit into guaranteed rent (where tax may even be optional), and have all the advantages of safe assets, without losing the opportunity to play at participating in ‘free’, ‘competitive’ markets; a conduit to M-money, for a fee (and bonuses), without the consequences that face Joe Public: a form of P-money privy to special privileged interets that, by definition, exclude Joe Public.
John
You are simply saying there is base and bank money
I agree
That is what we have
MMT greens, as far as I can see. Stephanie certainly does
Richard
Two forms of money, with different effects, perhaps on different evolutionary paths: on finer distinctions than that, empires rise and fall.
The Crash, QE and Austerity are no great advocates for the effectiveness of this way of operating. The ethereal, imponderable fog over central banking and the shiftless rentierism of the clearing banks surely requires to be lifted (and the whole process modified), particularly with regard to the privileged role of the clearing banks, which serves the clearing banks infinitely better than it does the economy. The clearing banks can fail; rise from the dead on public money, and go on as if nothing had ever happened. They do not offer value for money, at the most basic level.
“Bank money”, on the other hand, does not deliver the results we may legitimately expect. QE does not arrive in Joe Public’s hands and it does not lubricate (facilitate transactions, provide transferable exchange) in the ‘real’ (business, household) economy to which Joe Public is consigned, and increasingly resigned, to live.
Richard. This St. Louis Federal Reserve Paper relates to your post-
https://www.stlouisfed.org/publications/regional-economist/fourth-quarter-2020/does-national-debt-matter . It is titled Does the National Debt Matter?
These are a Few Key lines:
a) Most people have a very personal view of the nature of debt. We know that high levels of debt and deficit spending at the household level are not sustainable. At some point, household debt has to be paid back. If a household is unable to do so, its debt will have to be renegotiated. It is natural to think that the same must hold true for governments. But this “government as a household” analogy is imperfect, at best. The analogy breaks down for several reasons.
b) Together, these considerations suggest that we might want to look at the national debt from a different perspective. In particular, it seems more accurate to view the national debt less as form of debt and more as a form of money in circulation. [as in perpetual consuls]
Canadian Professor Scarth and many others have made this point – It follows as a matter of simple arithmetic that if r ‹ g, then the government is in position to run a primary budget deficit indefinitely–that is, the effective carry cost of the debt is negative, even if the interest rate on the debt is positive.
Thanks
i know i’m sluggish around Christmas time
but i can honestly say i haven’t understood a single thing in this blog
i’ll convince myself it’s only for the initiated
You may be right
Apologies
@ Rob Gray
Richard’s very useful blog is here because of a lack of clarity in British society about it’s use of money. There is a great deal of obfuscation about it particularly by those who wish to unaccountably benefit from its actual production. That obfuscation means it’s a slow learning curve.
I think on reflection I would modify my notion of a nation requiring the democratically accountable “collective variable power” in regard to currency (medium of exchange) as that power to both “advance” and “retire” currency. I say this because I’ve been re-reading a Christine Desan paper “Strange New Music: The Monetary Composition Made by the Enlightenment Quartet” (ignore the weird title). On page 5 she quotes the following 1707 argument of supporters of a privately owned Bank of England wanting the charter renewed:-
“Proponents of the Bank underscored how carefully it managed its specie reserve, using it ‘tenderly, and with great discretion.’ ” (“A Vindication” 1707: 13-15, 17)
Fast forward to 2007/2008 and the GFC where Alan Greenspan in the name of “an infallible private sector market” didn’t carefully manage the creation of “financial paper”!
Of course this links to the GIMM’s paper “An Accounting Model of the UK Exchequer” which argues we need to see this “collective variable power” through the lens of the Consolidated Fund upon which no legislative restrictive power has been enacted to advance currency as the nation’s need arises.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3217621
https://books.google.com/books?id=IwRcAAAAQAAJ&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false
https://gimms.org.uk/wp-content/uploads/2020/12/An-Accounting-Model-of-the-UK-Exchequer-Google-Docs.pdf
No legislative power has been granted, but practically the capacity exists
I note that you made it into ZH today. Obliquely: https://www.zerohedge.com/covid-19/uk-journalist-hounded-after-pointing-out-only-old-and-sick-die-covid
I would be amused, but note the narrative
Poor Julia is the victim
Those dying and those caring for them are ignored
That’s the tale
What on Earth makes Julia Hartley-Brewer think that Covid is interested in or has the capacity to be age discriminatory when it transmits?
If you deconstruct what happened in 1694 the UK’s new medium of exchange, the banknote, was the outcome of the “Advancer” of private self-interest combining with the “Retirer” of public collective-interest. Fast forward to 2007/2008 in the United States and the United Kingdom and the “Advancer” had gone rogue requiring the “Retirer” to take over the “Advancer’s” role.
I think what is easily lost, and here the history perhaps helps to crystallise, is that developments in money; banknotes, securities, cheques are not mere transparent enablers, but following Desan’s logic, each development of the ‘medium of transaction’ transforms the development, the growth potential of the so-called ‘real’ economy itself. I think the sheer potential economic scale of this phenomenon was something John Law was among the first fully to realise.
These purely financial ‘medium of transaction’ innovations transform economic development. Thus, the Byzantine nature of the relationship between clearing banks, central banks and government, and the way in which these relationships develop and the instruments and securities used to manage them – and here I must throw into the cauldron the witches’ brew the special power added by the rapid advance of modern, instant, digital forms of transaction (from a Central Bank keyboard, right down to the smart phone ‘standing-in’ for cash at a check-out) – in the contemporary economy, itself must profoundly affect the form in which the economy functions.
I agree….hence the significance of QE, CBRAs and the control of short term rates and QE and the control of long term rates, plus the potential move from injecting only into CBRAs and into the actual economy itself.
Kickback from 1694 and earlier that 17th century under Charles II:-
“It’s Trump’s first point — that the Senate “will start the process for a vote that increases [stimulus] checks to $2,000″ — that is by far the most realistic and politically problematic suggestion for Republicans.
Why? Because it puts them in a very small box: Either vote to massively increase the national debt — by giving $1,400 more to every qualifying individual in the country — or vote against what is much-needed money for people who have been devastated by the economic effects of the ongoing coronavirus pandemic.
So, either violate a bedrock principle of conservatism (the government is spending us into unmanageable debt!) or be attacked as heartless by Democrats. It’s a lose-lose. Bigly. Especially if you are Sens. Kelly Loeffler or David Perdue, both locked in tight runoff races on January 5. Both incumbent Republicans need base conservatives with them to win, so a vote for more government spending isn’t a good one.”
https://www.cnn.com/2020/12/28/politics/stimulus-checks-politics-trump-mcconnell/index.html