My Green New Deal colleague, Colin Hines, had this letter in the New European this week:
Labour's chance
James Balls article (“‘How we must pay for Covid” TNE#234) should become key reading for Keir Starmer and Anneliese Dodds. Its central message is that the old Thatcherite ruse that government finances work like a household budget was blown out of the water by the response to the economic crisis of 2008. This was when the Bank of England began creating hundreds of billions of pounds through the process of quantitative easing (QE), whereby it electronically creates the money involved and no government debt is incurred. This process has been repeated to help pay for the effects of Covid.
As he points out what has to be realised is that the Bank of England is now the biggest holder of the UK's national debt and that it is owned by the UK state. We therefore owe ourselves hundreds of billions of pounds.
It is often forgotten that before Thatcher, state funds were always referred to as the “public purse”. It is our money because it is our government that creates it. There is therefore no such thing as “taxpayers' money”.
As the Tories bask in a vaccine poll bounce their next step will be to return to austerity. Labour will be invited to show fiscal propriety in supporting this.
Sunak, a professed Thatcherite, will don the ‘sacred duty' mantle of slashing the deficit instead of dealing with the social and environmental deficits. Labour must explain the difference between household's inability to print their own money compared with government's ability to create the money it needs to ensure the nation builds back better and greener.
Colin Hines
Convenor UK Green New Deal Group https://www.greennewdealgroup.org/
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I’ve waited a decade for this to become common knowledge. I feel we are on a brink.
This is so obvious once you get it. The debate needs to move on to how .the use and abuse of the new fiscal tools lead to diametrically opposed outcomes
Getting the message out there is a major obstacle. Many people assume economic issues are way above their level of understanding so don’t read about them. I am constantly sharing your videos etc. on Facebook and but know that some of my friends will just scroll by.
However, most of my friends on Facebook love a good quiz. Has this method of spreading information been tried?
Sorry if this is not entirely relevant to the main post but I wasn’t sure where else to bring it up.
Crikey (to use a rather old fashioned word)
That’s not one I had thought of….
Let me muse on that
‘Crikey’ is a brilliant word. – much underrated. ‘Blimey’ is another one.
So is the word ‘Bollocks’ (better than ‘Bullshit’).
And I still prefer ‘Bloke(s)’ to ‘Guys’ any day of the week.
In my view there’s nothing wrong with expressing Englishness in two areas of our lives: the spoken/written word and music.
When I used to give talks for Positive Money we used to set a fun quiz at the beginning of the talk to warm people up and get them thinking about money and how it comes into existence. Here is some examples;
1 When you deposit your pay check money into your bank(say Lloyds) who legally owns that money
a) Me its my money
b)The Bank of England
c)Her Majesty’s Treasury
d) Lloyds bank
2 Which of the following creates money in the economy
a) The Bank of England
b) HM Treasury
c)Commercial banks like RBS Barclays, Lloyds
d)Dept of Trade and Industry
3.When a bank lends you money(like a mortgage) where does the money come from?
a) Savers who deposit money in that bank
b)The BoE
c)Nowhere-as commercial banks create new money when they make a loan
d)HM treasury
4.What limits the amount of credit a commercial bank eg Lloyds, can lend out out to borrowers
a)The BoE- they have strict rules about this kind of thing
b)The feeling that the bank has that it is likely to get repaid.
c)The Treasury- it regulates how much the banks are allowed to lend
d) The IMF
5.Who regulates the money supply in the economy
a)The Treasury
b) The BoE
c) nobody
d) Dept of trade and Industry
It is a useful exercise to get people thinking, other questions could easily be created like;
Who creates our money?
a)Bank of England
b)Banks
c)Businesses.
d)Someone else
Where do govts currently borrow money from?
a)Foreigners
b)Banks
c)Investors
d)The BoE
e) Mars.
btw answers to the quiz were 1.d,2a &b.,3.c,4.b,5c.
So, it can be done…
Great idea! My small suggestion would be, devise one ‘quiz set’ that jollys it up in true ‘Pub Quiz’ fashion by keying the questions to events in the popular imagination. You know, the kind of shock-horror drama that everyone remembers, sort of, but nobody exactly understood (inflation fears of the seventies?) And don’t forget the visuals (cartoons from back issues of eg Private Eye? Old tabloid headlines?) … and what about song lyrics, prefaced with a clip from the song of course… endless fun. Maybe there should be a suggestion box!
@Joanna,
There is a perfectly good film on this kind of thing made by ex Monty Python star Terry Jones called “Boom or Bust” with puppets, cartoons economists and senior financial people,with some wonderful songs with a singing Hyman Minsky taking us through his theories on boom and bust.
Can be used for a screening anywhere in a public setting. Accompany with a quiz and it gets folk talking all night.
https://www.youtube.com/watch?v=K-QSpz-Guck
You can watch the whole film here I believe and its worth it(only £2.99 to rent), thoroughly entertaining and informative,
https://www.youtube.com/watch?v=K-QSpz-Guck
Thanks
I liked this quiz Vince (and the concept in general). I might try it on some friends but I suspect that the answers, especially to Q4 and Q5, might take some selling, going by my previous experiences of sending them Positive Money video clips. Do you have any tips, such as concise, accessible answers rather like the ones that a quizmaster might be called upon to offer?
I would like to give airtime to this so keep suggestions coming…
@Alan,
The quiz is really just a bit of fun and for personal use only. We didn’t mark the quizzes at all, it was just to show how people how they really understood money in a way they never actually had done before. We were always advised to keep it light.
Most of us think we know how money works, but when challenged(like in this quiz)we don’t really know the definitive answer. . Most people will do their own homework later if they are intrigued enough….and I find most people invariably are and really love this kind of “out the box” thinking.
However a small minority can prove hard to get through to. I once spent 30 mins trying to convince a University statistician that banks create money, to the point was close to lamping me by then end! She confused earning money with creating money, a basic mistake at this level, and for the life of me I couldn’t get it through to her. She demanded “proof” and said I was looking like an fool standing before people spouting such nonsense. Even after explaining that the Governor of the BOE had admitted this and showing her the quote from the BoE’s own bulletin, she remained unconvinced and in the end we had to agree to disagree before she really lost it. I really hope she went home and followed that up at her own pace. But when an intelligent and well educated individual just point blank refuses to see new evidence it can be very disconcerting and even stressful!
As to question 4 What limits the amount of credit a commercial bank eg Lloyds, can lend out out to borrowers?
The simple answer is that banks only lend if they see a fair chance of getting the debt repaid, no other reason. There are no official restrictions on that from anywhere. The bank is taking a bet on the lender repaying in full. So you go through a vetting procedure first. If they see a solid, solvent person ,you get the loan. The loan is created there and then. The bank gives you the money and records that as a liability on its books(a bank deposit entry to you and me)by just typing the numbers into your account. They then get you to sign a bit of paper saying you will repay the loan at X rate of interest. That bit of paper is now the bank’s asset. They then put that asset on the other side of their ledger and hey presto new money is created for you to spend and the banks books balance perfectly because its liabilities match its assets and all is well. The regulators allow this to happen as long as the banks can settle day to day payments and does not lose too many deposit so that it breaches capital rules(buffer equity/profits it has on stand by)Even then banks get time and help to correct problems as and when they occur. . Welcome to the world of banking. It is a convoluted process but can be broken down into steps so you see the magic trick happening. Banking as been a very obscure process for hundred of years.
On question 5.Who regulates the money supply in the economy? The answer is nobody, because the banks actually affect that by lending only. There are no limits on the money supply set by any authority. The BoE tries to “influence ” that but can only do so indirectly via interest rates ,but that is not the same as directly setting limits on the amount of money in circulation, that is in effect decided by the banks cumulative lending levels. And no one has any idea what that will be at any given time. It usually depends on general confidence in the population as to how much borrowing people and businesses want to take on.
It seems counterintuitive when you first thing about it, as the household model of “taxpayers money”, and “tax and spend”, and “how are you going to pay for it”, is so engrained. Was your interlocutor able to explain what sort of proof she would find convincing?
The pay cheque example is simple if there are real coins and notes involved – to all intents and purposes, the person holding the physical money “owns” it. The employer satisfied their debt to you by paying you with their money, and the bank has created a new debt owned to you (as reflected in its ledgers) in return for you paying in your money. It becomes the bank’s money, and It can satisfy its debt by paying money to you (probably different notes or coins) or to someone else on your instructions.
In the old days when we had actual physical cheques, the company was giving you a written instrument that allows the holder to draw on the company’s account with its bank, and your bank was crediting your account with an amount on the basis of that cheque when you deposited it (subject to the cheque being honoured, and interbank clearing sorting out the payables and receivables each way).
These days it is all electronic and there is hardly any physical money or instrument anywhere. Your “money” is a ledger entry at your bank representing its debt to you, and the payment increases that debt while a different account entry is adjusted down in a ledger at the payer’s bank. Nothing is paid in or out: it is just accounting entries representing debt obligations shifting around.
@Andrew,
You are correct there. Though banks do act as basic intermediaries in running our payments system, they also carry out a second role ,that of credit/money creator or lender. These two duties are actually causing conflicting aims between the requirement for a very stable and safe payments system whilst also dabbling with the more risky lending bit . Bank loans(assets) are long term and illiquid but are based entirely on short term created liabilities that are prone to run in a crisis. It is thus not clever to have our payments system put at risk by this practice. Obviously the likes of Positive Money wanted to separate the risky bit from the safe bit ,which is entirely sensible in many peoples view.
My “interlocutor” a you put it ,was stuck on one point and couldn’t move on from that, so any progress was doomed. She thought that she created money for her bank when she worked and deposited money into it and that was it. This is correct at one level, just she couldn’t see the bigger picture. In that she wasn’t asking where her employer got that money and where that came from and so on. Eventually it’s a net zero game since we are all just shuffling around the same money at a non bank citizens level. No money creation is going on at all in that scenario. What she was not seeing we as that banks were at the same time each and every day, injecting new money into the system via lending and also of course removing money from circulation as and when loans were repaid. Not many see that bit of our money system so get confused. But the two views are entirely correct ,its the similar with micro and macro economics. The whole is often greater than the sum of the parts.
We’re definitely approaching a regime change in terms of the balance between fiscal and monetary policy – and in terms of the use of competition policy and regulation – in the advanced western economies as the Biden administration seeks to pivot away from the ugly dogmas of this misnamed neoliberalism. Mrs. Merkel made some tentative steps last July under cover of the EU’s Covid Recovery Fund.
The government here will not be unaffected, but, typically, in true Johnsoneque mode, it will seek to have it both ways. It will continue to preach the brutal orthodoxies of neoliberalism – to suppress those who don’t vote or would never vote Tory – while continuing to play fast and loose with disguised direct monetary financing – to maintain this inchoate coalition of core Tory supporters (which itself is an inchoate coalition), former Labour voters in Labour’s traditional heartlands and lower income, socially conservative entho-nationalists.
What happened to the US Deficit, it seems to have vanished in a puff of smoke, but was a major issue in the past?
The economic indicator that people “worry” about seems to be a matter of fashion. I can remember a time where every news program ended with a report about the balance of payments. I don’t think I have heard it mentioned for decades. So while at one time every politician had to have an answer to questions like “What effect would your policies have on the balance of payments”, it apparently now does not matter at all.
I can remember the phrase “taxpayers’ money” being used in the late 60’s – i.e. before Thatcher – although it was probably not very common.
If Thatcher had very achieved half of what both here fans and critics credit her for, it would have been quite remarkable. As it is….
The failure to understand how the modern monetary systems work is hardly a party political issue and as important as it is, the Labour Party have far more existential questions to consider.
Really?
It could solve many of its problems by understanding it
For sure, as could all parties. Tell me one party that demonstrates a correct understanding of the macro economy? But that still leaves Labour with the challenges of determining what, if anything it stands for, and realising that the most popular answer to that question leaves them unelectable.
The earliest reference I have found in Hansard to “taxpayers’ money” is in a debate in 1872, on Elementary Education Act, by the Liberal MP Dr Lyon Playfair responding to a complaint about state funding of denominational schools:
https://hansard.parliament.uk/Commons/1872-03-05/debates/99acd4c4-a643-49fe-972b-7547fd8adfc7/Resolutions
“There has been much refinement shown in the proof that part of the taxpayers’ money thus goes to the support of religion in an indirect way. Well, I am not going to deny it. If I feed a sheep to get mutton for my dinner-table, I cannot help part of the grass going to the wool upon its back; but that is a contingency, inevitable, no doubt, but not in my contemplation, and altogether subordinate to my main purpose.”
According to the Hansard search function, the term was only used 80 times before 1900, and another 703 times between 1900 and 1945. Since 1945, over 14,000 times (!)
Very good…
I see you’ve tweeted.
Looking for “public purse” at https://hansard.parliament.uk/search – that phrase is used 1544 times in the 1800s (about 15 times per year), 957 times from 1900 to 1945 (about 20 times per year) , and 6956 times since then to date (about 90 times per year).
Compared to “taxpayers’ money”, about three times a year from 1870 to 1900, and then about 15 times per year to 1945, and about 180 times per year since then.
I’d want to normalise each by the total number of words/pages in each decade to draw conclusions about frequency, as I suspect there are more politicians using much more ink nowadays than there were in the 1890s.
But comparing them side by side, and looking decade by decade, it is pretty clear that “public purse” was ahead to the 1930s; and then the narrative of “taxpayer’s money” was used about twice as often from the 1940s onwards.
Your comment was just too good not to use
Fascinating change
Thanks for looking at this
This is very good and would love to see more granularity for the time scale. Is there a web tool to do that?
That link above allows you to run a search for any selected time period, from a single day to all time. It gives you a bar graph showing frequency each year, which is very noisy but you can see some trends, which become clearer if you search by decades or longer periods. Some of that may reflect underlying changes – more and longer speeches, Westminster Hall, committees, more parliamentary questions, etc, so it seems to me the most useful thing to do is compare the relative frequency of the two terms in each period, side by side. The term “taxpayer’s money” does seem to be used less often than “public purse” until about 1945, but more often afterwards, and the underlying trend is that both terms are used more often.
It is interesting but I’d caution against drawing any firm conclusions. I think the search covers the the entire print run, which has been digitised, but Volume 1 of the First Series only started in 1803. And the record was partial in early years: it only became a comprehensive account of every speech from 1909.
Thanks
This is accepted as a valid research technique in social science
Sorry, important correction, I meant “taxpayers’ money” – with the apostrophe after the “s”. Or “taxpayers money” without an apostrophe which gets the same results.
The results for “taxpayer’s money” – with the apostrophe before the “s” – are very different: 64 uses before 1945 and 561 uses since 1945.
Labour must tackle the idea that the country is like a household
And if it needs any help it looks like the Royal Bank of Australia has shown them a very good example of how to do it………
http://www.progressivepulse.org/economics/money-issuers-are-in-charge
In just one day Martin Place [Aussie government and civic life] brought short-sellers to their knees, and 3-year government bond yields rapidly converged back to the 0.1 per cent target. This was followed on Wednesday by [Royal Bank of Australia -Australia’s Central Bank- Governor] Lowe’s speech, which was, as the governor remarked afterwards, designed to deliver some “clear messages” to investors.
Furthermore:
…the RBA [Royal Bank of Australia] is comfortable with the idea of increasing QE whenever it needs to, as it did a couple of weeks ago when it bought $4 billion of bonds on a single day. “We remain prepared to alter the timing of purchases under the current programs in response to market conditions,” Lowe affirmed. “We did this last week when liquidity conditions deteriorated…and will do so again if necessary.”
Well spotted by Peter and Progressive Pulse
Thanks Vince for you comprehensive reply to my question, raised further up concerning the quiz issue.
I really like your explanation for Q5 as its possible to argue factually that its correct.
I also really like your answer on Q4 but feel that it does potentially get trickier as it gets us into arguing the implications of those regulations that we know factually do exit (as you acknowledge). It also gets us into the contending theories such as FIT, FRT (not to mention our old blinkered friend, QTM). They all have their devote disciples and I recall Richard Werner, amongst others, railing very articulately against them in the past (and by the way, does anyone know whatever happened to him?)
Regarding the response from your Statistician friend, I anticipate that this presents a salutary warning to all of us (I bet Richard could show us many such scars).
But it always seemed to me that Economics was closer to Religion than Science and perhaps your friend can be forgiven if we see Statistics as one of the tools used for doing science, rather than as Science itself (even though some undoubtedly clever economists use statistics and have attempted to deploy some other fairly sophisticated scientific tools, in their work).
But science surely accepts, at core, that we can never be really sure that we know anything, even in science. Better perhaps to accept that we live in a world of revealed part-truths and currently accepted best-explanations, rather than anything more absolute.
Thanks for the reply. It is a huge complex subject but the idea was to get people debating the basics and as to whether it was acceptable because of the wider implications of what happens when money creation fails to serve society well. eg bank crashes and environmental harm. It is in fact our money and we should have a say on what is and isn’t acceptable and not just leave this to the banks to decide. Of course we also have the central banks/Treasury recently getting involved too, which widens the debate but at least shows that the state has role to play that was not realised(or accepted) only a year ago.
As to Richard Werner ,he set up a public bank with the backing of Hampshire council to lend to SME’s only. He was trying to get the idea spread throughout the land which is a splendid idea, which could be used by a national investment bank at its head and then local investment banks further down run with local funding, both public and private. This is more like the German banking model he so loves. It is still running as far as I know, but he seems to have taken a lower profile of late.
Thanks again Vince. This quiz idea that you and others have raised here seems an excellent way to get people asking the important questions that they would not otherwise engage with. If their curiosity can be raised then there is at least a chance to challenge the false awareness that abounds.
The last I heard of Richard Werner he was locked in a court case with his previous employer (Southampton University I seem to recall). But I don’t know what the outcome was or whether he has resurfaced in academic circles. His presentations always seemed very clear and convincing and he was quite prominent so it seemed odd and unfortunate that he dropped out of sight.