As a follow up to the debates this week on how to disseminate ideas I wrote and recorded this yesterday:
This is the transcript, near enough (as I suspect I changed a word or two when recording):
If people are asked what money is they usually talk about notes and coins.
But when they come to spend money they mostly use a credit card, or go online.
Only 20p in every pound spent in shops is now settled in cash.
In the economy as a whole 97p in every pound spent is electronic.
So money is not cash after all. That's a special case.
Money is actually entries in a computer.
So why do we trust those computer entries? What is it about them that makes us think that they're valuable?
It's not because there is anything like gold to back them up. That system had ended, the whole world over, by 1971.
Since then all money actually represents is the promise written on our banknotes.
The Chief Cashier of the Bank of England says on a banknote that ‘I promise to pay the bearer on demand the sum of twenty pounds' or whatever other value the note has.
But what you would find if you turned up at the Bank of England and met the cashier and asked for your £20 was that they'd just give you another £20 note.
So there has to be something else that makes this promise valuable.
And there is. The value in the promise is that it is the government - which has owned the Bank of England since 1946 - that is really making it.
That's important because the government has the ability to make good on the promise it is making.
There is one simple reason for that. It's because many of us, most of the time, are in debt to the government. We owe it tax. And the only thing they'll accept in payment is the money that they happen to make - the pound in your electronic bank account.
So what they're really saying when they ‘promise to pay the bearer on demand' is that they'll take the money they create - the pound - in settlement of the debt that they make - your tax bill - using the money in your bank account that just happens to be recorded in pounds.
So what is money?
Money is a promise.
It's a promise to pay.
And the promise to pay that really matters is the one that the government makes.
Which gets its value because we all have to pay tax in some way or other.
And the government promises to take the money it makes - the pound - in payment of that tax.
Which is how they give their promise value.
Which is enough to make all those entries in your electronic bank account have value.
Which is why we call them money.
-------
Thoughts?
Edits?
Rewrites?
I am really interested to hear. If this is to be done I want to do it in a way that works.
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Means of exchange.
Means of storing value.
Means of final payment.
Means of comparative value.
I’ve seen it put better than that but don’t have the text to hand at the moment.
Can you explain what you want done with those terms?
I prefer Mary Mellor’s use of means of transfer, as opposed to means of exchange. This is because money paid by parents to their offspring, or say, a fine you must settle is very much a one way transfer (nothing of value or anything tangible is given in reciprocity).
Apologies Richard.
I posted the above before I listened/read the piece!
I just read the headline! Doh!
I read a neat definition of what constitutes money (which I can’t find) but in this case I don’t think it is relevant to what you are trying to explain.
I really like the bulk of the podcast.
Along with some others I too find the “promise” bit confusing. I understand what you are saying but I think it just clouds the narrative. The “promise” is not clear. It seems crazy and a nonsense that the government would give you £20 in exchange for £20!!! I know this is what would happen but it doesn’t really help the narrative.
I believe the “promise” on a bank note is a throwback to when you could actually exchange notes for the equivalent in gold, and is not really relevant today?
The promise to pay is infact a promise to accept back, the government’s own money, in payment of tax. I think this is the key point that needs to be highlighted.
Another way I have had it explained to me is that government money is an IOU for labour/services and tax is an UOI. The IOU is the promise to accept the UOI from the tax payer. The tax payer accepts the the government IOU as payment for work done, because the government guarantees that it will accept it back in payment of tax.
Secondary to that, we all use the IOUs in transactions between eachother. For there to be enough IOUs for all the transactions we make between eachother, the government needs to spend more IOUs than it demands back in tax. Otherwise there would be no spare IOUs for us all to trade with!
But it is always a promise to pay
Because that is what debt is
And all money is debt….
So how else should I put it?
Try the one I will publish later as well….
It’s that slippery word “debt” again!
I’m not sure “Promise to pay” is right. Who are the government promising to pay and with what?
They are promising to accept back their IOUs as payment in tax.
There is a subtle difference between private and government debt. If I take on a debt I have to earn the money to repay the debt. I can’t just go in my shed and print money to pay it off.
But the government can. The government can’t earn (its own money) to pay off its debts. All it can do is print more of it.
Take government bonds. The problem for the government isn’t finding the money to pay back the money tied up in the bond on maturity. It can just print the money to do that. The problem is whether the economy can absorbe the returning money that was locked away in the bond, without the economy “overflowing” (inflation) (in the cup off coffee analogy). The returning money also takes up room that could have been used/filled by government spending and so reduces the amount the government can spend. (We all need the government to spend) Hopefully, for the government, the economy has grown enough in the time the money was “locked up” in the bond, to easily accommodate the returning (bond) money.
PS. Richard.
I think your voice and delivery in the podcast are spot on.
Your voice has the right tone and clarity and you speak at the right tempo.
It’s a voice of calm authority! You sound like you know what you are talking about without “lecturing” or being condescending.
Thanks
That’s Radio 4 pace….they taught me
“I’m not sure “Promise to pay” is right. Who are the government promising to pay and with what? ”
I think I see what you mean Vinnie. Richard’s simple, step by step description is exactly what’s required to draw the listener in, however, I think, in the interest of not losing the listener’s attention, he says “It’s a promise to pay…that the government makes”. This is slightly jarring in the listener’s mind as it may seem like government is the entity that is paying.
However I think I see Richard’s problem too. Its absolutely essential to introduce this process in as simple and digestible a way as possible, so there’s a tension between technical accuracy and the desire to communicate as effectively as possible. For what it’s worth, here’s how that section could have been put (but its at the cost of losing flow, so jarring the listener’s mind).
“So what is money?
Money is a promise.
It’s a promise to ACCEPT PAYMENT.
And the promise to ACCEPT PAYMENT that really matters is the one that the government makes.
Which gets its value because we all have to pay tax in some way or other.
And the government promises to take the money it makes – the pound – in payment of that tax.”
I like that
I have noted it…..on my master transcript if it comes to be re-recorded.
Another concept that needs explaining is the idea that money is being “transferred” from one account to another.
It might seem like a trivial side issue but it is central to understand Government spending.
When I make payment (bank transfer) from my bank account to yours, no money is actually bring “transferred”. All that is happening is my account is being marked down and yours is being marked up. No money is flowing down the wires. All that is being exchange is the request from my bank to yours to credit your account by £X.
The language of “transfer” or “deposit” comes from back in the day when cash played a more prominent role. Money was physically moved from place to place. We have all seen the security van pull up outside the bank to pick up the money, or a shop owner going to the bank with a sack of coins to deposit the days “takings”. But the language creates the illusion/confusion that digital money is actually being moved from A to B.
This principle also applies to government spending. All the accounts at the BoE work the same way. No money is actually being “transferred” between accounts. The BoE is just instructed by the Treasury to mark up and down different accounts.
The Treasury may have an account with the BoE but it doesn’t need one to spend.
The Treasury just needs to instruct the BoE to mark up the accounts of various high street banks in order to initiate spending.
Having an account may help the “bean counters” at the Treasury to keep track of tax payed and money spent but it doesn’t need it to spend.
The Treasury could have a £Zillion pounds in an account or zero. It makes no difference on how much it can spend, because the money it spends need not come from the account. Infact the money held in a Treasury account can be said to not really be “money” until it is spent into the economy.
That £Zillion is having no impact, good or bad, on the economy until the Treasury instructs the BoE to mark the Treasury account down and a high street banks up.
(Out of interest Richard, what would you call the money held by a high street bank at the BoE? J D Alt uses the term “reserves” to describe all the money in all the accounts at the Fed. I know you don’t like to use “reserves” as you think of reserves as the stuff that high street banks use for payments between eachother only. It would be good to use a common definition (shorthand) as this is where confusion can spring from)
This is important to understand, because it can explain the confusion around tax. Tax need not be shown in the Treasury account, it could just disappear on payment. If it does get recorded, then it creates the appearance that the tax is being used to make future payments, which it is not.
It can be explained best using cash as an example. If I pay my tax using cash, some of the notes may be in good condition and some may be really tatty. The Treasury could keep the good ones to use again and destroy the tatty ones. Or if it didn’t want the hassle of sorting the good from the tatty, it could just destroy the lot and print shiney new ones to replace them all. The point is that the notes I hand over to pay my tax are not needed by the Treasury for future spending.
It just creates the illusion/confusion that it does.
Sorry, I had to just get this out of my brain and down in words.
Am I on the right track?
I do call them reserves…that’s what they are…that’ what they’re used for
I will try to cover transfer payments at some time – but they really are just shuffling who holds the promise – that’s all
Stephen Ferguson.
Spot on. I think that sounds much better.
I think it’s very good. And good delivery too.
Would just comment that the piece finishes on ‘because of tax’, which leaves you gagging for the next release!
Which I presume was the intention…
A cliff hanger…really?
So the more they take in tax the higher the value of their promise/of money?
No
But without tax their promise is meaningless
And there has to be enough tax to create that meaning
Which is why in low tax states other currencies are often in use
I don’t think it is only due to the acceptance of the state to take the “currency” as payment. Also fundamental to the willingness of people to use it is the belief that the number of pounds/dollars etc needed to purchase goods and services across time will remain more or less stable or will rise at a rate slow enough for earnings and prices to keep n step. It is therefore a belief that the state having created the currency will ensure that the medium of exchange element of money will be kept stable. When it isn’t we see alternative “currencies” coming into use.
But if tax is used properly that doesn’t
And right now in most countries alternative currencies are not in use
Where they are it can be argued tax is too low to achieve the goal of backing the promise, which is another issue
Simon.
People accept it because they believe everyone else will accept it off of them. This is guaranteed, because we all need to get our hands on it to pay our taxes. The government is creating the demand for its own currency by using the law (prison if you don’t pay) to inforce it’s tax policy. Inforce is a bit strong. Tax is a good thing. It not only creates the need for the government money , which creates stability, it also removed money from the economy so that the government can spend more.
That is not quite true. A significant portion of us do not pay tax mainly because income is too low but still they accept the principle that the currency can be used. {There is a slight over emphasis on tax in this argument.
Everyone pays tax – just not necessarily income tax
Simon.
Even if you don’t pay any tax (which Richard pointed out you still do, but not income tax)
the people that accept your money in payment for goods and services in the shops etc, DO need the money to pay tax. (As do most people) That’s why they accept it off you in the first place.
“It’s not because there is anything like gold to back them up. That system had ended, the whole world over, by 1971.”
If Gold doesn’t back money (the pound, the currency) what does? The Government (in Britain the constitutional nicety is the ‘Crown’) promise to back the currency. A promise that people believe. Nothing else. This is called fiat currency. The proof it works is that you and I use the pound every day without hesitating, and indeed you have to use it to pay your taxes.
Now I have written that I am really unhappy with it; (the simpler the statement the harder it is to express it), but you did ask……..
It’s mind numbing, one person who listened to this in advance if publication said
How can something so simple be right, was the question?
Professor Murphy, it occurs to me that in this day and, given how money now works, the promise on bank notes is already meaningless. Could you possibly suggest a different “promise” to fit the modern situation? “I promise to accept this note in payment of tax” perhaps?
That would be much better…I agree
I agree. The “promise to pay”, without further clarification, is confusing. Promise to pay who, and for what was my first thought when I first encountered the phrase.
What would help clarify it?
For me the confusion stemmed from the understanding that money could not be exchanged for a precious commodity (ie gold). The promise to pay statement had clear meaning when money was linked to gold.
My question would have been how does the issuer intend to fulfil the promise to pay, without giving me yet more promises to pay (ie notes exchanged for notes) and what would they be paying for (if they were willing to accept an exchange at that point)?
I think the key message to convey to people looking to understand money is that money in itself is of no value, but it is the productive (hopefully!) economic activity that it can be exchanged for that has real value.
I hoped that I had explained that….
It’s a promise to accept the currency in payment of tax
And I agree with David’s suggestion for an ‘updated’ promise.
🙂
It is needed
Is there any link in the value of money à nd the ability of the economy to deliver goods and services that is not linked to government tax requirements?
It is tax that gives money value
Like it or not, that’s a fact
Do I understand this correctly? The value of money derives from the fact that the government has the power to demand that I pay them money via taxation? I accept money in return for my labour because I will have to give some of it to the government. The Supermarket accepts my money in return for groceries because they will have to give some of it to the government, and so on?
If I grokk that right, it is pretty simple.
That’s right….
Michael Moss.
It all depends on your definition of value.
Taxes create the need for the government’s money. This can be described as giving it “VALUE” (because people have a need/desire to get their hands on it).
If I start printing my own currency, it has no value because no-one needs it to pay tax (unless I hire some “muscle”!) so no-one would accept it as a means of exchange.
That is different to saying how much stuff you can buy with your £s. That is it’s purchasing power rather than its value in this sense.
It’s the double meaning of value.
Overall I like it.
However I feel there’s a section in the middle that makes me feel that what you are saying is that the government is unrightfully taxing people in order to give its money value. I know that’s not what you mean but I got that feeling. This section need a rewrite.
The length and the delivery are good I think. I feel I could share this with people and they could listen to it. They’d have no reason or excuse not to find the 3 minutes to listen to it.
I can see this being a series of short audios.
Have you ever watched ‘23 1/2 hours’ on YouTube? It’s about exercise, by a doctor. However it has hand sketched drawing to go with the narration. I feel that you could have the audio presentations then at some point in the future add this sort of (costly?) animation. It’s a very powerful format in that video.
Sorry, I’ve rambled on a bit.
Animation of three minutes can take a day…I haven’t got that
Money is not necessarily a promise to pay. Cowrie shells, gold coins, copper coins, cigarettes (in German prisoner of war camps) have all been used as money, and those items are not promises to pay.
There’s nothing wrong with the standard definition of money that appears in dictionaries of economics and economics text books which is almost invariable something like, “Anything widely accepted in payment for goods and services or in settlement of a debt”
I am not interested in what was
I am not giving a history lesson
I am interested in what is as an economics lesson
And that means money is a promise to pay
Given the vast assortment of items used as money in the past, it’s a 99% certainty that there are still some jungle tribes or desert islands with only a few inhabitants where items like cowrie shells are still used as money. Ergo my point does not refer exclusive to the past .
Second, the fact that something takes a different form in 2020 as compared to 1920 or 1820 does not change the basic nature the “thing” concerned. The fact that murder often took the form of coshing someone on the head with a club in the stone age, and is nowadays more likely to be done with a gun or knife does not change the basic nature of or definition of murder.
Third, I do like your last two sentences: “I am interested in what is as an economics lesson. And that means money is a promise to pay.” So Richard Murphy asks a question, namely what is money, and concludes by begging the question, i.e. saying that because Murphy is giving an economics lesson, ergo his initial ideas as to what money is must be correct.
Actually, money now is not what it was
That’s a fact
So it’s not wrong to dismiss what it was
And this is a series focussed at the UK right now so to ignore cowrie shells is quite OK
I confess, your last point lost me
Steve Porter.
You might like Debt: The First 5,000 Years by David Graeber.
It’s a mighty tome but we’ll worth the effort.
He is an anthropologist and looks into all kinds of “money” throughout history and cultures.
David Graener’s 5000 years of debt is indeed a mighty tome.
Try his succinct radio series on the same subject: This was where I started with all this!
https://www.bbc.co.uk/programmes/b054zdp6
David Graeber’s 5000 years of debt is indeed a mighty tome.
Try his succinct radio series on the same subject: This was where I started with all this!
https://www.bbc.co.uk/programmes/b054zdp6
Very much agree Frank.
The programme title is “Promises, Promises: A History of Debt”, which is why Richard’s use here of ‘promise to’ phraseology is so – if you’ll excuse the awful pun 😀 – on the money!
Frank.
I too, stumbled across an episode of the radio adaptation of the book on Radio 4.
It set me off on a whole knew journey of discovery which I am still on.
(I really enjoyed his book “Bullshit Jobs” as well. Well worth a read. More food for thought)
It does hang together but I was thinking there needs to be some sort of tag lines that can grab attention, turns of phrase that will get people to listen (or even just enough for them to take away as only a small percentage of people read past the headline)
Somethings going around my head
Government spending pays for your taxes
Government debt is just savings that have not been taxed yet
Your money only has value because it can be used to write off tax
Overly simplified I’m know but the messaging needs to work in the soundbite as well as the detail
I like that…..
“But if tax is used properly that doesn’t”
Ok so lets caveat the proposition that apart from just the need to pay tax in the taxing currency it also requires that the state adheres to a sound tax policy.
I suppose in terms of your basic question “What is money” the answer as you say is “What the citizen is required to pay their taxes in” but in practical terms money requires something else.
Maybe not. Just thinking aloud
Money is a promise to pay
That is it. In its entirety
But tax gives that promise value
That link/connection is a key one to spell out to people like me who are still trying to build a better understanding of these things (even reading the discussion here is helping, I think).
It’s a key one to spell out because most people’s most common understanding of money is as a means of exchanging value – how does it come to be that money is the thing we use to do that?
Is it because we *all* need it in order to pay our taxes (our societal membership fee), therefore it’s the most appropriate, common (to all) medium for exchange.
We *could* use other things to exchange value, but they’d all become superceded by money.
The promise to pay is about the fundamental nature of taxation. The unique value of that (ability to pay tax) is what gives money value as a medium of exchange.
(All the above is assuming that I have correctly understood what i have read.)
I should say, i think an explanatory resource to explain the modern economy, tax, money, to anyone at ‘grass roots’ using Wee Blue Book style of promotion, participation, and advocacy – is a very powerful idea. One which could conceivably change the whole nature of public discourse on economics and society; opening all sorts of doors.
You have understood correctly
I have just spent far too long in this crappy comment box trying to answer this question and once again, my name and mail name has been inadvertently pasted over my contribution and it has been lost. I’ve had it with this interface. I have other things to do than work on something as flaky as this.
“The key to unlocking this problem in the public’s mind is by asserting:
Sovereignty
Sovereignty
Sovereignty
Kings and Queens of old issued money and also destroyed debt as Michael Hudson tells us, as do all those ancient coins with rulers’ heads on them that we keep finding in archaeological digs. Because rulers had the power to do this. The power is called sovereignty.
Sovereignty is the ‘Deus ex Machina’ – the God in the machine – that lies within the machinery of State and is crucial to money creation.
The King and Queens of antiquity were sovereign: in modern times, the State is sovereign. The power of money creation resides in the State. The currency it is issued in (£’s) belongs to the State. Not to the private banks, or private individuals. Nor the City of London. They just move it around. Sometimes in plain sight, other times secretly.
Money is a public matter. It is a public means. Owned and operated by your Government. For everyone.
The State can issue money as (1) real cash (through the public and private sector, and through policy mobilisation) (2) debt (through the private sector banks) (3) tax receipts. (anything else?).
Real cash has to be related to something tangible. This is no longer gold but bonds or gilts — pieces of paper that record the instruction to create it or even just a ledger. The BoE (a public institution) and the Government (Treasury?) agree on the amount needed and create the bonds that create the money.
The amount of money in the UK is not finite; the money in circulation is not a closed loop. It is not just the job of people to fight and compete with each other for some of this finite money, a share of it. The money can always be added to by the State, by cash, credit or tax receipts as and when needed. At any time. By choice to do so or not do so.
The money is released — to buy effective combat gear for our soldiers, to create Surestarts, fill pot holes, prepare effectively for pandemics, look after our elderly, stop people starving (in fact all the things in other words it has NOT been doing recently).
The State is the headwaters of the money supply. Just as the glacial lakes feed downstream and create rivers and streams and other lakes, State money helps to infrastructure and jobs and incomes alongside markets which create shops, businesses, which also use that money to create private profit which is perfectly acceptable. The two should mix and complement each other in making a country that works for everyone.
The tax system on the other hand is like a weather system — just as water evaporates and then precipitates (comes down as rain, essentially recycled water), taxes are recycled back into the economy continuously by Government.
This recycling however is undermined by tax evasion and off shoring where the rich and corporations essentially bypass Government and recycle tax to themselves, thereby making the rich richer and a law unto them. This can prevent the State from controlling inflation, to also protecting and upholding democracy and fairness.
The State is also is faced with printing more new money as less tax is collected. This is not a problem as the State can print as much money as it needs to solve a problem, but it is much better to collect tax from the rich for matters already mentioned above, because the State prints money and collects taxes to be used for the benefit of society — not just stored and hidden away like the rich tend to do where it can cause inflation in certain assets like housing which cause problems for society.
The Government may have chosen to sell some of those bonds we spoke about earlier as debt to the private sector. The private sector likes to store its money in the State because they know it is very safe there, so a Government can offer bonds for sale if it wants to. After all, the Government is here to serve all of us — rich and poor and some private investors like to invest in their country this way.
Therefore the State owes the private sector a debt — but that is why not all the bonds are sold to the private sector and also why the interest rates (the amount the State will have to pay on top of the original sum paid for them) are monitored closely for abuse. It also worth noting that such bond arrangements are for the long—term, 14 years on average. And the UK State has never ever not paid. In fact some private entities have kept their money in Government bonds for longer.
Tax revenue pays for returns on these bonds but printing money can too.
The other way in which the private sector can invest in debt is when the banks are allowed by the State to issue money as interest bearing debt through loans, mortgages and credit cards. These debts can also be sold off to rich investors by the banks. When the debt issuance is controlled, it works but as we know, the credit cycle tends to be the most unstable and inflationary of all the ways in which money is produced in our society (boom and bust).
In 2008, the re-selling of debt business got so bad that Governments everywhere had to print money into the banking system. Governments used their sovereignty to print money to get things working again. But States could have sorted that out be just regulating properly in the first place.
But we have to go back to sovereignty — the power of the State, its sovereignty. Those bonds that are not sold to the private sector can be simply annulled by the State.
Not only is sovereignty being expressed when bonds are annulled, but also the simple fact is that the State owns the Bank of England. The State – who remember, owns the money/currency — also has the power to annul its own debts, as well as the debts of the banks in 2008. Technically, a sovereign state cannot owe money to itself.
How much money is enough? How much money does a sovereign state have to print?
Well, one way is to print enough to make sure everyone has enough to live on and to value their contribution to society.
That means not having to beg, to use food banks, having to take out interest bearing loans because you are waiting for your Universal Credit, not living on the streets, not feeling ashamed because you haven’t got this or that, not having to have more than one job to make ends meet, to not having to work without PPE when a plague comes around, not paying our carers less than minimum wage to look after those who have worked all their lives to provide for us and the country. These are some of the ways we could measure the good that printing the sovereign currency can do for everyone.
It means providing jobs and not thinking it is OK to have a load of people out of work just to curb the cost of labour.
Money is not just money. Money is also about ‘quality of life’. Your life. Your kids. Your parents. Your friends. The lives of those who are supposed to look after us.
And once those objectives above (and more) have been met, the sovereign State can stop printing money or print less, or just concentrate on the tax system perhaps, making sure that it is fair and being spent wisely, as well as regulating the banking system to ensure that it and the rich it mostly serves behaves itself?
And all of this because we know and accept that the sovereignty of the State — YOUR State can do this, and the Government of your state can exercise these choices.
So, your question you as a voter when times are bad to politicians can be:
‘Why are you not printing the fucking money to sort this out?’
Or maybe:
‘Why have you allowed the banks to issue all that cash as interest bearing debt?’
And then you can vote them out because having realised this stuff about State Sovereignty and money, your expectations will have changed. And the wool cannot be pulled over your eyes any longer”.
The argument is simple but essential: Sovereignty and its connection to modern democracy is where you have to start with money.
PSR
I do apologise: this is a WordPress issue I cannot address
Can I urge you to write offline and copy and past in?
Thanks for the comment too
Oh go on then……………..I was spitting blood this morning. It did not used to this.
PSR.
I agree with most of the above but I question a couple of points you made.
Government “create the bonds that create the money”
I’m not sure that that is in effect what happens (but I could be wrong. It’s been known!!!) Bonds remove money from the economy (for a specific period of time) to create space for more government spending, which the BoE can just create the funds for. The money from the sale of the bond does not directly get used to fund government spending??????
Also you say “taxes are recycled back into the economy”. This implies that tax revenue is used to fund future spending which plays into the idea that government needs to tax first in order to spend later. Tax is in effect destroyed when paid. The government does not need to use it to spend. Again the BoE can create the funds for government to spend.
I’m not trying to lock horns with you by the way.
I think it is an important distinction though.
Your understanding is right Vinnie
No offence taken Vinnie at all – having lost the original version I was not writing in a positive frame of mind!!!! I just went for it. I was trying to describe the operation of how money gets into use as I saw the operation more important than the attributes of money alone. To me, the power of sovereign State money to help citizens is more important than the more obscure attributes of money itself. In fact, not meaning to be rude, such enquiry is boarding on the scatalogical to me at this moment in our history when I wrote yesterday.
Now – onto your very valid points (and thank you for reading and feeding back BTW).
Yes – I know tax destroys money, and that it has an effect on inflation – it curbs it. But I saw this post as about the creation of money (the most important part being the State’s involvement in originating it), not destroying it. In my view, we have to be really measured in how we spring these concepts on people – it is very complicated and also sometimes counterintuitive (I have found this out be engaging people in conversation, but I may also betray this in any inaccuracies I put forward here). Also, if we tell tax payers rightly that taxes destroy the value of money………..well in these anti-tax times, sales of the Joy of Tax are hardly likely to go up and tax will continue to get a bad rap!!
Also, no where do I mention tax and spend – I thought I had made it clear that tax follows from the spending of new money released into the economy by the State or banks on license. It’s spend and tax, and always has been.
I also thought it necessary to depict tax as being recycled (say as transfer payments, benefits) because I wanted to get away from the idea that taxes had to be collected to pay down the illusory debt we are frequently lied to about. Because Government debt is tied to taxation levels (wrongly so) in the minds of politicians and the public alike. I could have also said something about the multiplier effect of that tax spending too.
With regard to your query about my depiction of bonds, my understanding is that bond issuance only absorbs money from the economy when they are sold to the private sector in the bond market where it can also act as a break on inflation in some cases (according to John F Weeks). If those private pounds are soaked up to make room as you say, then the question is, how do Government made pounds come into being to fill the gap and fulfill policy aims and objectives?
The answer is what I was actually trying to describe which was what John F Weeks calls ‘Government auto-finance’ (he recounts how Sweden did this in his book, ‘The Debt Delusion’) where as I understand it the pounds are created, released into the economy having been agreed between the Government of the day, Treasury and BoE. I’m trying to say that such money is not debt – yet we are confronted with money as being debt – a promise to pay – when we are considering its attributes.
So, let us say that when Labour created Surestarts, they might have used cash from those bonds to provide grants for those as a policy aim and objective. I don’t know if I they did or not. But that is how I interpret it.
Once the money is released, the bonds are not treated as debt by the BoE/Treasury but simply annulled (or is it capitalised as investment like we do in housing development, my field?). The ‘return’ on that investment is tax receipts which are returned again to the economy in a virtuous cycle (what else does the Government do with them?). But the release of money and its consumption (spending it) comes before taxes. But that should be a continuous process up until (say) full employment has been reached?
My reaction to this question is because when I hear people say money is debt or a promise to pay, although I understand that concept, ‘debt’ as a word applied to new money is such an emotionally charged word these days that I think we are ill advised to use it with the public and politicians when trying to describe money.
Richard’s post was trying to explain money. I do not think you can explain money without saying how it can be used by a Government in the apparatus of the State (Governments come and go, but the apparatus of the State is more permanent – such as sovereignty). Whether it is through printing it, using taxes or allowing interest bearing debt (or in reality all three). What we need is the right mix. What we have had is austerity (less new Government money), less tax income but a huge growth in interest bearing debt on the public.
The last 10 years have shown us what less Government money has produced – food banks, in work poverty and people dying because of no PPE for example. The last 10 years has made the statement ‘You can’t just throw money at problems’ totally redundant in my view.
It’s not what money actually is that always matters to the voter – it’s what it can do and who can do it when we accept that it can be made or created when needed. I still think that the public needs to know how sovereign money operates. One of the first things that is lost if we DON’T ask and know about this is hope for something better.
But there we go – at worst I have betrayed my ignorance, but at best any misunderstandings might help those who have taken these problems on refine the explanations.
John is not a fan of MMT – although as usual he’s almost there. We know each other and get on well
John believed bonds are real, and not a residual form of reclaiming money already spent
I think the spend is the real issue – effectively direct monetary funding (DMF) of government spending by central banks
Bonds tidy the balance sheet after the event
QE can cancel them
But it’s the DMF that matters
A really useful description for me – thank you.
I think that it also speaks in support of a counter-narrative to the “The enemy *is* the State” narrative that (imho) has been used effectively to convince people to vote against their own interests for far too long now.
I think it is part of the larger picture; of the relationships between individuals, companies, economics, and politics. And how the manipulation of the way we see those relationships affects the ability of interested parties to steer things toward their limited interests.
People need to be reminded to own the state, if they are convinced not to, they cede control of it.
What I am also doing is saying is that the tangible entity that money creation is tied to is State Power: state sovereignty, and by default, democracy. This is the only way progressives can wrestle money from the markets, money not having its value tied to gold or some other tangible thing.
Agreed
Agreed.
If people stop using/accepting government money as a means of exchange, it signifies that the government is no longer able to inforce it’s own laws. Any government that gets to this stage is no longer really a government.
All State legitimacy is underpinned by the “threat” of violence. If you don’t pay your taxes you will have your possessions or liberty taken off you. If you say “no” they will be taken by force!
That was excellent Richard. Agree with every word of it.
And the quality of measured delivery was just right to draw in the audience. Was like listening to an excerpt from a really top notch BBC R4 program on the subject….Hope one of their producers is tuning in!
If you do another one, then please point out in no uncertain terms that the national debt that everyone is so scared of is, while it is indeed very much a debt, (a) nevertheless is NOT at all an onerous burden for government to bear (is simply that promise to accept £s as tax) and (b) is NOT a debt that the UK population themselves bear at all (as is ONLY a liability of the INSTITUTION of government).
This understanding is so, so important right now so that people aren’t frightened by ill-informed politicians and media out of lock down by what are just numbers on a computer.
That is a planned topic – but not the next one
“Money is a promise to pay … But tax gives that promise value”
In the abstract, sure. But for most citizens, paying tax is not why we value money. Rather the reverse – for the individual, tax is a more or less regrettable overhead which reduces the value you can get from whatever money you can acquire. It’s a matter of viewpoint. But there’s a cognitive dissonance in equating value with tax, which probably needs working up to rather than being presented too early as fundamental to the argument (even though it is).
It is this misunderstanding of the direction of travel that I am seeking to address Bob
I am not going to condone the misunderstanding as a result
Money is the means by which transactions can be made easily and efficiently, replacing the aggravation of bartering. It is the lubricant of the economy. Preferably it should be our servant, not our master. It is an indication of value but cannot be an absolute measure as economies, production of commodities, seasonal influences etc vary which means that the relationship between values/worth and money are in flux over time.
That stuff about barter predating money is actually a bit of a myth – barter has never been used extensively.
Rather, the much more sensible and straight forward IOU was how people traded in most cases. This comes back to money essentially being debt. Even between tribes where people didn’t trust each other, IOU (debt) was more commonly used.
David Graeber’s book on debt covers this quite well, as another commentator mentioned.
Thank you for the transcript 🙂
I recognise how amazingly effective videos and podcasts can be for getting a message out to most people, but I’m deafblind, so transcripts and written articles are my only option. It’s much appreciated!
I will always try to do this
I agree that money is simply a promise to pay. But I think the word “promise” needs to be emphasized a bit. Here’s how I see it, based on the U.S. GDP:
So money really depends on the money-users’ PERCEPTION of the validity of that “promise to pay”. And we see in Trump’s cult-like following how easily perception can be manipulated. If some monied-interests in the US wanted to kill the US dollar and convert the currency used to the yuan (of course after converting their dollars to yuans), it’s likely they could do so via a massive propaganda campaign.
Re your parallel “Question of the day”, I believe the above GDP paragraph conveys the essence of MMT. Note that the household spending in GDP includes EVERYTHING that the public buys to consume – food, housing, transportation, healthcare, entertainment, etc. Looking at the income side of GDP, you find that neither Federal borrowing nor personal or corporate income taxes are part of that income — so they DO NOT (and never have) paid for (or “funded”) that spending. For proof, simply pull up the GDP Primer at https://www.bea.gov/resources/methodologies and look at Account 1 on Page 9.
So the productive economy that GDP measures is the “production-and-consumption” economy. It depends on nothing other than the livelihood needs of the public. If a business community cannot satisfy those needs without the assistance of the “other” economy (that I’ll label the NON-PRODUCTIVE economy, but known more commonly as the FIRE economy), it doesn’t deserve to be called a “business” community. (It’s currently called our “small business” community, which is slowly being squeezed out of existence by the large businesses integral to the FIRE economy)
GDP is defined in various ways
Tax and government spending are very definitely a part of GDP
That “GDP is defined in various ways” is incorrect (at least in the US, and I suspect in most countries as NIPA is an international program). In the US,it is precisely defined in the accounts that comprise it, in the definition of those accounts, in the sources of data being compiled into those accounts, and in the methodology used in compiling that data into those accounts, all detailed in a 500+ page Handbook available at the link I cited.
Re “Tax and government spending are very definitely a part of GDP”, government spending (on finished goods/service) is certainly included (as are household and business spending), but the ONLY taxes that are included are those directly included in the purchased costs of those goods/services. Personal and corporate income taxes as well as property taxes are specifically excluded.
The importance of GDP (specifically NGDP) is that it is the ONLY objective measure of a nation’s productive (ie, production-and-consumption) economy, as it is the result of compiling the data from the monthly & annual reports businesses (as well as households and government agencies) are required by law to submit.
Y = C + S + T is one of the three normal definitions of GDP
The US will prepare a GDP calculation on that basis, I am quite sure
The expenditure side of GDP (which BEA (the compiling agency) uses and considers most accurate) is Y=C+I+G+(X-M) and the income side is Y=C+S+T (and by the double-entry bookkeeping BEA uses to ensure max accuracy, C+I+G+(X-M) = C+S+T). However, each of those variables is precisely defined and economists tend to use them sloppily. For example, the C variable in the two expressions are NOT (even close to) equal, so are commonly misused in sector balance discussions. And T variable is Taxes, but only the very limited set of taxes directly included in the purchased cost of finished goods/services.
I note you’re ignoring the third version
BEA considered the third method, as an alternative to expenditure capture, but decided the latter was more reliable (at least for the US). That was a good choice, IMHO, because it makes BEA’s Account 1 a nice, clean earnings statement for the productive economy (income and expenses, side-by-side in a T-account) that anyone with with business experience can easily understand.
So an incomplete view then
How is that an incomplete view? The 3rd method is simply an alternative method for collecting expenditure data. If used, it would yield the same result as the direct collection of expenditure data currently used (just more susceptible to error, given US data). These methods are not different GDPs. They’re just different ways of measuring GDP. BEA uses the expenditure method as their reported GDP, uses the income method to verify the result of the expenditure method (via the “statistical discrepancy” account in their income accounts), and chooses not to use the 3rd method.
Thanks for this. I had expected something longer – hence why I put off reading it until now. Just right!
As a cliff-hanger, can you use a question to stimulate constructive thinking? (something based on this, but looking forward to the next) and, like comedians, end with “Ive been …; next one ….
I think I should….
Just to say that this does not answer everything, but there’s more to come…
[…] Yesterday I explored what money is. […]
Looking forward to catching up on this when I get a moment. In the meantime, a practical suggestion:
If you’re making a set of explainers, can you include a contents page of these on the website, perhaps in the menu, or at its most basic a pinned blog post which you can update as particularly noteworthy posts are added.
The same goes for your “long reads” (e.g. your New Green Deal for Scotland from last autumn, or last week’s post on ways out of the post-corona depression).
In short, finding stuff (particularly second time around when you want to share it) is a bit tricky given your prolific blog output, and putting a bit of index structure on the blog would help immensely. This would also get you a long way towards the more collated sets of explainers you’ve been mulling over, and is good bang for buck in terms of effort.
I am working out how to do this…
Agree that MMT fails to convey anything useful about this issue. It fails to convey that:
Money is a public good. We all need it, like clean air and water.
We should make it and tax it to serve public interests.
Much can be owned owned privately, but not hoarded without limit.
Money should always promote solidarity and community values.
Money acknowledges that economics involves politics (which neoliberalism disguises).
What about Public Interest Economics (or if PIE wrongly implies a finite cake) Economics in the Public Interest?
I think MMT can do those things – but it is a step, not the whole answer
As my friends will confirm, I am known to like PIE 🙂
Is money necessary at all, or is it just a fake man-made construct that isn’t necessary, exploited by governments to control populations and prop up established power hierarchies?
Is this the elephant in the room no-one wants to talk about? A significant proportion of the population don’t even consider this, and just accept the construction of the world order as is, and coronavirus is dangerously beginning to expose that the truth might be something different.
Do we need to consider the existence of money in the first place, and whether it needs to exist at all, and if it needs to exist, (which I personally don’t believe it does), that it’s construction needs to be different?
Money is the root of all evil and a great source of suffering to the majority of people around the world.
What would you do without it?
And how would you do that?
And money is not the root of all evil – desire for it is
Richard,
Does your explanation of why money has “value” (because of taxation) neatly show why BitCoin is worthless?
(Until a country accepts it for paying taxes, obviously…)
Allan
Yes
Unless you want to buy guns, drugs or hire a hit man on the dark web!
Richard
Thank you for your patience but I fear that I must test it again.
I have to say that treating bonds as something real (as John F Weeks says) is desirable within the context of the State asserting (or the desire of it asserting) sole authority (sovereignty) for the money supply. The issuance of bonds in the State’s name is a record of a decision that it is empowered to take for its citizens. It also has an element of accountability and democracy allied to this function. Decisions are tangible – or are they not?
What you say about bonds tidying balance sheets seems to be based more in some form of mathematical logic that escapes me at this moment in time.
Take pity on me and realise that I might not be the only one who does not quite get the point you are making.
Bonds are not issued except in the sense that building society bonds are issued
They satisfy savers needs
They are just savings accounts
And like all savings they withdraw money from the economy
And like bonds early redemption can be done – but only at state option in this case via QE
I will cover this soon….
I don’t think taxation drives the acceptance and use of a national currency.
It may get the ball rolling but if taxation drives currency then as the tax rate approaches zero, the value of the currency approaches zero.
Which is an outcome we don’t see.
Saudi Arabia had no personal income tax for decades and yet the Rial was used by all.
And then there’s dollarised economies that still collect tax in their own local currencies (Zimbabwe?).
What drives currency acceptance is convenience. When you can’t buy a coffee at the local cafe with your state sanctioned tax tokens then you look for something else people will accept.
No, people use other currencies
And we do see that
Wilson Logan.
Does Saudi Arabia have no form of tax at all other than income tax?
It has a VAT
And a very large budget deficit
Richard, very nice but I remain a heretic.
My problem is, that for every pound the government collects as tax, it creates almost exactly the same number of identical new pounds. The small difference is the only new money that the government creates.
An alternative suggestion:
Money is blood.
Just like the blood in your body, money only has value when it circulates.
You can consider your heart as the government.
Tax is the blood returning via your veins to your heart, government spending is the blood recirculating through your arteries back to your body.
Of course, the economic circulatory system is far longer and more complex, but without the heart, essential parts of the body are deprived of blood, or blood accumulates, stops moving, and stops doing its job.
Returning money to the heart (government) as tax is an key part of the circulatory system. It can redress the tendency to starve essential parts of the economy of the resources they need or the tendency of money to accumulate where it achieves nothing.
Just as blood allows the different organs of the body to fulfil their function, money simply facilitates the trade of goods and services that have actual value.
Every day I get a cluster of emails explaining that I need to buy gold bars or bitcoins for the forthcoming economic disaster. When Armageddon comes, I think I would rather have bought cans of beans. You can’t eat gold bars.
You are wrong: you are making the standard economics mistake that time is not an issue when it comes to such things