Politicians love to talk about “taxpayers' money.” But here's the truth: every pound in circulation is created by the government or banks licensed by it. This video explains why a £5 note is really a promise from the state, not something you or I created. If we stop believing in the myth of taxpayers' money, we can start demanding real accountability for how government spends its own money.
This is the audio version:
This is the transcript:
Who owns this £5 note? Is it mine because it's in my hand? Or could it belong to Thomas, who's behind the camera because I might just have borrowed it from him? Actually, I didn't. I borrowed it from his mother.
But alternatively, could it be stolen?
Or might it be something that I simply owe to my creditors?
The simple fact is we can't know by looking at that £5 note, and that's the whole point I'm making in this video.
The reality is that my name is not on that note. Nor is my wife's, even though it's hers at this precise moment.
There is no receipt trail for this note. She has no idea where she caught it from.
The person who gave it to her will not have a record of doing so precisely.
No one keeps a record of the serial numbers of the notes that they hold, including the bank that gives them to you out of their cash machines.
In other words, it's just about impossible to prove the individual ownership of any £5 note, £10 note, £20 note, £50 note, whatever you wish to refer to when it comes to notes, and coins are even worse.
So what is a £5 note? Well, the truth is, it is something called a bearer bond. In other words, the person who happens to have it in their hand at the moment in time when the question is asked is, for all practical legal purposes, the owner, because nobody else can actually prove it's theirs.
These things were, at one time, very common. Government bonds were issued as bearer bonds, and they worked quite well on that basis. But now anything that's called a bearer bond is ideally suited to the purposes of money laundering, and therefore, they're not too popular with government authorities. But we still have notes in circulation in our economy, because people want to use them.
So who does really own this bond? And the answer is, in fact, written on the note very clearly. The only name that is worth identifying on there is the Bank of England.
The Bank of England issued this note.
They created it.
They spent it into existence.
Their chief cashier, a woman with the name of Sarah John, if I remember rightly, signed the note to say that it's legal tender.
And that it is a promise to pay because, of course, that is what this note is. It is an IOU issued by the Bank of England. They say they promise to pay the bearer the sum of £5, and they will if you give it back to them in settlement of your tax liability owing.
More importantly though, and in practical terms, what that promise to pay, and the consequent ability to pay tax with it, creates is the fact that this note is a transferable promise to pay.
I can, after all, issue you with an IOU, and as Hyman Minsky once said, " That's fine, except try to get someone to accept it, particularly if you don't know who they are. Nobody will."
But the Bank of England note is accepted as having value, and in fact, that's the very point of this note as a legal tender. Precisely because the government's promise to pay does have value, and because it promises to redeem that promise in exchange for tax liabilities owing, our money has value.
But there are lessons to learn from this. What it says is that only the UK state can issue currency for use in this country . Nobody else can. Everything else is unusable for normal purposes.
More than that, though, it says we don't truly own the pounds that we use. Those pounds were, in fact, created by the government or by a bank acting under license from the government, because that's the way in which bank loans are created, and that creates money as well - electronic money rather than notes - but nonetheless, real money.
Oh, and by the way, if you are in Scotland and Northern Ireland, and you say, " But hang on, my notes have a bank's name on them", that's only possible because they deposit £1 with the Bank of England for every pound note that they issue.
So the truth is that we only have government-created money. There isn't, then, anything called taxpayers' money. That claim made so often by so many politicians is just wrong. We don't create money. We use government-created money.
It's the denial of that, which does, however, mean that politicians actually feel free to abuse money.
Let's just think about it for a moment. If the government thought it was spending its own money and not taxpayers' money, would it be more or less careful with it? My suggestion is that it might actually be very much more careful with it. The fact that they think it belongs to somebody else makes them rather indifferent as to the nature of money. But the truth is, every single pound the government spends was created by it.
If we hold the government to account for what it does with its money on our behalf, but nonetheless, its money, I think we would get better policy. I think we'd get better fiscal responsibility. I think we'd have a more responsible Bank of England. I think we would actually have politicians who understood what they were doing better, and who would understand that they can use money that they create for social purposes, which would benefit us in a way that the idea of taxpayers' money can't.
It's time we understood that the £5 note in our hand is the government's property and that we use it with their consent, and how they use it is a matter of the greatest priority to us because that's the thing for which we are holding them to account.
So, what do you think? Do you think the government creates your money, or do you think that there is such a thing as taxpayers' money, which you actually made? But if so, how do you think that could work?
There's a poll below. We're going to ask you some questions. Let us know the answers. They influence the way in which we make future videos. So it really does help to know your opinion.
Poll
Who do you think creates the money we use?
- The government (91%, 278 Votes)
- Banks (5%, 15 Votes)
- I'm not sure (2%, 7 Votes)
- Taxpayers (1%, 4 Votes)
Total Voters: 304
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I would like to vote “Government” and “Banks”…. but certainly not “Taxpayers”.
If those that used the phrase “Taxpayers’ money” genuinely meant ALL taxpayers then I would not be so unhappy with the phrase – after all, virtually everyone pays VAT. This would imply “Taxpayers’ money” = “People’s money”….. created for the people by the people’s government.
However, users of this phrase invariably mean “Income tax payers” and that makes me cross. It implies those that do not pay income tax are second class citizens who should have a lesser say in how government spends…. and that is divisive and dangerous. But I guess that is the aim of those that use the phrase.
The Taxpayers Alliance (a “think tank” – i.e., just a limited company political lobby group – apparently with tenuous connections to the Conservative Party) is a case in point. It claims in some way to represent the interests of tax payers; but you really do not have to scratch very far to discover who they are interested in serving; and it isn’t the indiscriminate mass of VAT payers. On their website, click on research and the first three research papers on the specific taxes examined (they are Briefing papers not substantive research – the income tax one is literally headed ‘Briefing: the shifting burden of income tax’, and then helpfully headed ‘Read the Briefing Note’, presumably to guide peculiarly dim, uninformed or lazy politicians looking for a quick, glib answer to a tax issue, who would otherwise give up in boredom or perplexity): the first there papers are on Income Tax, Inheritance Tax, and Council Tax. Of course they are.
Clive, exactly! An important point, because the £s created by banks are far less scutimised and potentially far more dangerous to the economy
The country is in a downward spiral because few fail to recognise that you can’t have a properly functioning democracy without having a clear understanding of how money works and affects the economy. The use of the term “taxpayers’ money” is a dead giveaway in regard to this lack of effort to understand how money works. For example, despite the work of Keynes, few acknowledge that money works as a credit loop in which the creation of money has to be matched by a varying degree of taxation drainage arranged by the state according to the state of demand in the economy. Furthermore, there’s almost no recognition that the drainage requirement of money means everyone needs sufficient income to pay taxes particularly indirect taxes like VAT and standing taxes like National Insurance even if they’re above the very low income of £12,584/£12,570 (the latter figure for the self-employed). There are even more issues of money ignorance such as how money is manipulated in global trading. Until the country has political leadership that recognises the above things will not improve in the UK.
Agreed
I found this quote on the UK parliament website:
“For centuries taxes have been an important fact of national life. Without them it would be impossible to pay for the country’s defence services, its health, welfare and social services, its schools and universities, and its transport systems”.
Is this plain wrong?
In the way in which it is written, with the implication given, yes, it is
Very strictly, it is difficult to determine legally who owns a BoE £5 note (or RBS, BoS, or Clydesdale Bank note). Legally, it is clear that the only legal person entitled to claim or collect or redeem it, is the BoE (or issuing Bank) that created and issued it. I would submit that the issuing Bank must own it; because money is an undated IOU, and therefore must be redeemable at the issuer’s sole call; and the BoE (RBS etc.) could at any time demand recall of all notes to destroy them (provided they pay the debt – with another bank note, as the 1954, 1991 and 2004 Banking Acts specify – in Scotland only notes under £5 are legal tender under the Bank Act, so the holder could claim payment of the debt in £1 notes – and before 1954, I think only in coin). It appears the only other legal alternative to the case I am arguing, is that nobody at all, in the strictest legal sense owns £5 notes. They are owned by nobody. It is quite mysterious.
The very fact it is generally undetermined or unclear simply emphasises the peculiar and unique privileges that surround the sovereign issuer of the currency.
It is indeed a mystery – hence the reason for the video
Most money is created by commercial banks as loans, and they expect, demand even, to get it back (though not necessarily physically the same money of course).
On the other hand, money has to be accepted as a means of final settlement of the transaction otherwise it would be credit and not money (Graziani)
Using the latter, when one pays tax that’s a transaction and for it to be final settlement, the person paying can’t retain any notion of ownership.
If one does not accept that then why does the same not apply to person/entity who gave you the money as settlement, most commonly one’s employer, why is your money not still your employers’ money, and one can apply the same logic through every transaction until one reaches the commercial bank who created it as a loan, effectively under licence from the central bank.
I am not sure I understand your argument. Money is an IOU of a special kind. Money is guaranteed to be paid by the sovereign issuer; something nobody else issuing credit or IOUs is able to match. Everything else is credit. Banks take money; but they lend credit. To understand this read “The Hierarchy of Money” (Perry Mehrling, 2012). What looks like money during periods of financial stability (like Bank credit), turns out not to be “money” and becomes demonstrably only credit (not guaranteed), when there is a financial crisis. The 2007-8 Financial Crash is illustrative. The queues outside Northern Rock formed because people wanted to exchange their commercial bank credit in their accounts for sovereign issue money they could rely on.
It seems to me only the sovereign issuer of “money” could claim to “own” the money, because of the special relationship between borrower and lender entailed by sovereign issue “money” (if it compellingly looks like a duck, quacks like a duck, and possesses a beak, feathered wings and webbed feet – it is probably a duck). Everything else is an imitation. The only alternative, philosophical option, it seems to me, is that “money” is a form of abstract entity that has no owner.
So I understand that the power to create money lies ultimately with the government in a fiat system, but in many countries the actual creation of money appears to be “outsourced” or “privatised” to commercial banks who create most of the credit in our economies through interest-bearing loans. Is that not a more accurate depiction of what is happening? Surely, it is important to state that this power needs to actually be brought back into public control through legislation? Or am I missing something?
They can only do this under licence from central banks. So, central banks are responsible.
@ Andre What you are failing to understand is that though licenced banks may create more money than government they don’t have the right to vary the amount of “cumulative drainage” of that created money. You are not understanding this I would argue because you don’t think of money creation as a credit loop – creation must always be linked to drainage but government logically is the only agency that should have power to vary the amount of drainage because it is charged with managing demand. This is where true democracy ought to kick in so that demand is equitable. We don’t have true democracy in the UK. The defence of FPTP by the Starmer government indicates that Starmer is lying when he says he’s interested in the well-being of all. PR will undoubtedly better represent the interests of those who want more equitable demand.
One can look at it as a franchise operation. One could envisage the system operating whereby all money was directly created by the central bank and distributed to all the commercial banks according to need and capability, but it would be incredibly clumsy with commercial banks needing to know in advance how much money they would need, and the central bank needing to know how much everyone would need in advance.
Instead, they licence commercial banks to produce their own subject to obeying the franchisor’s rules and using the franchisor’s branding so there’s no obvious distinction between their product and one produced directly by the franchisor, rather like McDonald’s.
I’ve always wondered, if it were (and it may well be?) possible for me to walk into the bank of England and ask them to uphold their promise to pay me £5, would they just give me another £5 note, which is just another promise to pay me £5, not actually £5. Not sure it has any relevance but it blows my mind!
They would give you another £5 note.
Or five £1 coins if you wanted.
But that is it.
I actually did try that, Jake, but I didn’t get any further than the security guard at the door and was unceremoniously ejected into Threadneeedle Street. Many years ago, the “Open London” scheme used to do tours of the Bank, but it was stopped. I asked Andy Haldane when I used to correspond with him if a special visit could be arranged for interested parties – economics students, photographers and architectual historians – but he refused. There’s a lot of heritage in that building that is hidden from the public. It is supposed to be possible to exchange one of the old notes that are no longer legal tender for a new one, but I suspect you would be redirected to go to the Bank of England museum round the corner, or a commercial bank.
I’ve always thought of money, at least in origin, as a proxy for barter – or at least a tool to simplify barter by decoupling it from the actual things being bartered. From this point of view its value stands for the value of things made (or discovered) by people, which is where the value first comes from.
If money is now simply a construct issued by a government, what is happening to the value that I or you might create by our work? Has the “value” of money so changed its nature that these values are now completely decoupled?
There is no evidence from history that money developed from or is related to barter. Tax give rise to money.
Value is what we agree. That’s all. It is an abstract concept.
Your post and John Warren’s post hit the nail on the head for me. There is a lot of designed/accidental duplicity about money. My view is that if people actually knew how money was created, they would not be repelled but more hopeful and demand more from their politicians. Ignorance for Thatcherite Neo-liberals is bliss.
I keep a fiver permanently in my wallet in to try to explain to people what the the little phrase ‘The BoE promises to pay the bearer of this note £5’ means and give them a little vignette into reality.
John Warren’s post both at once poses the problem and the answer – sovereignty. My view is that as much as we can poke holes in who owns what at what time and extemporise about the ephemeral nature of or powers that the holder has by the note – our money systems are as opaque as our democracy in this country that pretends to be a democracy . This both creates flexibility but can also be abused.
Consider we may not have a money ‘system’ because a system delivers essentials to every part of it. Our money ‘system’ takes money away and delivers increasingly to certain parts only.
When you think about how many times that £5 note is exchanged in its lifetime, the economic power it carries (to be spent, saved etc) is continuously transferred from one person to another. Temporal ownership, backed by overarching absolute ownership , is how I think it actually works.
Notes are like emissaries in the economy – if they are owned by anyone or anything, they are owned by the issuer for the purpose of economic activity. I think that this is what Stephanie Kelton taught me. Debates around this are simply to my mind the age old tussles that human beings have over power – the latest being the Neo-liberal love/hate relationship with the State (don’t regulate anything but bail us out when we mess up please, then impose austerity on those who had nothing to do with it).
The BoE issues the note, and it itself is owned by the State (despite an ethically corrupt Treasury’s interference). Sovereignty, for all its vagaries, goes to the top. Also note Clive Parry’s point about bank credit issuance – credit being a major source of financial instability.
Thanks
Hey again,
I wanted to say that you’ve hit it out of the park on this topic and that I think it’s a lot more important than just a lack of education. People aren’t just misunderstanding how money works, they are deliberately deceived about how money works.
In a some sense “taxpayers’ money” is a direct call for Oligarchy over Democracy. The logic goes something like this: The government is spending our money, we should get to decide what it’s spent on. But what goes unsaid is that the rich pay more taxes in an absolute sense and they demand to have more say than the rest, thus Oligarchy.
I’m no economist, but I believe in Democracy. I believe it’s the vote that gives everyone a stake in their government not their money. You might want to spell out what your oppositions propaganda is trying to achieve trough that phrase, if you want to change peoples minds. The truth of how money works isn’t as compelling as the truth of why it works that way and why they should care that it works that way.
Keep up the good work,
Styx,
(Legionnaire of Dynamic Discord)
Ps.: I know that you probably won’t be publishing this, because Styx, the goddess and mythical river in Greek underworld, isn’t name enough for some reason.
Dr Grok MMT & Prof DeepSeek MMT
The State as Professor Schrödinger
The UK state, as Professor Schrödinger, designs a macabre economic experiment, much like the physicist’s famous thought experiment where a cat in a sealed box is both alive and dead until observed.
The Setup:
The Box: The UK’s sealed monetary system.
The Cat: The £5 note, issued by the Bank of England.
The Poison Pill: The obligation to pay taxes, a debt that brings penalties if unpaid.
The Professor places the £5 note inside the monetary system and announces the rule:
the poison (tax liability) is fatal unless you use the note as the official antidote.
Until the box is opened—until the note is used—its value exists in a superposition: simultaneously a valuable credit (to settle debts or buy goods) and a worthless state liability (an IOU that may not hold value).
The note’s desirability stems from the ever-present threat of the tax obligation.
The Act of Observation: When you use the note, you open the box and resolve its fate:
You pay your taxes: The cat is alive! The note extinguishes your tax debt, settling the state’s liability to you.
You spend it: The box closes again. The note’s new holder inherits the same uncertainty, and the experiment continues.
You hoard it: The box stays sealed, and the note’s value remains suspended—neither fully alive nor dead—until it’s used.
The state, as Professor Schrödinger, never opens the box itself.
It orchestrates the experiment by issuing notes and enforcing taxes, ensuring the monetary system thrives on this delicate uncertainty.
So, the next time you hold a £5 note, ask yourself: is the cat alive, or is it dead?
*
Dr Grok MMT & Prof DeepSeek MMT
I think there is a lot in that.
This is quantum money.