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onesime's review against another edition
4.0
A clear overview and introduction to our banking system and all its problems. Most, but not all paragraphs were easily understood on first reading, which is more than I can say for the econ textbooks with which I first started learning about these topics.
stateofchassis's review against another edition
4.0
Coming at this from a Marxist perspective, I can't really agree with everything. But it is a very accessible book which provides a very good analysis of the failings of classical/neoclassical economics and how their failings led to the 07-09 financial crisis, and makes a very compelling argument for a solution in the form of Keynesian/Post-Keynesian social democracy.
lahna's review against another edition
3.0
I am so glad someone has written this book, to help inform the general public about systems that are so alienating in their language and culture, that it keeps many of us from feeling like we can engage or challenge. However I don't feel like this book is as accessible as it could, or perhaps should have been if it were to truly "break the power of bankers".
I often found myself having to re-read and re-read sentences to break through the complex language and terms, which in some senses is innevitable and a part of getting into this world, but I also thought at times Ann could have done a better job of making it more digestible.
I liked the book overall and think it is incredibly important, but I wonder whether the complexity may keep people from understanding the world of finance, or worse - put people off ever trying to understand again!
I often found myself having to re-read and re-read sentences to break through the complex language and terms, which in some senses is innevitable and a part of getting into this world, but I also thought at times Ann could have done a better job of making it more digestible.
I liked the book overall and think it is incredibly important, but I wonder whether the complexity may keep people from understanding the world of finance, or worse - put people off ever trying to understand again!
timmason's review against another edition
3.0
Others have summarized the main arguments. While the outline of how money comes into being was quite clear, the prescriptions were not particularly convincing, nor particularly radical. At times it seems hastily written, with a reliance on cliché, but it's worth reading.
quitehumerus's review against another edition
4.0
Terve kaikille, mun lukutavoite on tässä vähän kärsinyt mutta here we go again.
Luin The Production of Money alunperin vaihdossa mutta unohdin kyllä kaiken tästä sen jälkeen. Tuntui silti että tässä oli suht tärkeä viesti ja toisen lukukerran jälkeen oon samaa mieltä. Tästä rebyystä tuli vähän pitkä, mutta jäsennän tässä samalla vähän omia ajatuksia pankeista ja tuloeroista koska tuntuu että tää opus antoi ihan hyödyllistä lisätietoa.
Mun korviin on viime aikoina kantautunut paljon juttua että jotain on vialla talouden kanssa: rikkaat rikastuu, työttömyysasteet ovat korkealla ja talouskasvua ei ole vaikka keskuspankin korot on nollissa. En kuitenkaan oo saanut pin down niitä mekanismeja miksi näin on.
Taloustieteen perusteoriat eivät tunnu oikein ottavan kantaa tuloeroihin ja tarkastelua vaikeuttaa (syystäkin) vihaiset maallikot jotka sanovat "capitalism bad" ilman sen suurempaa substanssia.
Ann Pettifor valottaa ainakin yhtä mahdollista/todennäköistä syytä yllämainittuun kehitykseen: pankit. Tää nyt ei tietenkään tuu kellekään yllätyksenä että pankkiireilla on kyseenalainen maine, jo muinainen Aivovuoto sen totesi. Pankeille on nyky-yhteiskunnassa suotu yksi väline jonka väärinkäytöstä tulee ongelmia: valvomaton lainananto.
Perus talousteorioiden mukaan pankit vain välittävät säästäjien ylimääräiset varat lainojen muodossa niille jotka tarvitsevat rahoitusta. Tällöin rahan hinta eli korko määräytyy kysynnän ja tarjonnan mukaan normaalilla markkinamekanismilla: talouskasvun kiihtyessä rahan kysyntä ja korot kasvavat.
Pettifor argumentoi edesmenneen J. M. Keynesin tapaan että asia on päinvastoin: korkotaso määrittää taloudellisen toiminnan määrää. Toinen Pettiforin pääargumentti on, että pankeille on annettu liikaa valtaa korkotason määrämiseen.
Reaalimaailmasta tiedetään että pankit ovat myös omaa etuaan ajavia yrityksiä, mikä on ristiriidassa talousteorioiden kanssa. Pettiforin mielestä pankit siis asettavat korot reaalimielessä liian korkeiksi, mikä heikentää taloudellista toimintaa niiden keskuudessa, joilla ei ole valmiiksi vakuuksia, kuten yrityksen perustajat.
Pankit tietävät että markkinoilta löytyy niitä jotka pystyvät maksamaan korkeat korot jotka ovat tietenkin rikkaat. Heillä on antaa vakuuksia ja maksukykyä löytyy, mutta heidän rahankäyttötarkoituksensa ovat useammin spekulatiivisia, osakkeita ja sijoitusasuntoja, mikä usein johtaa hintakuplien muodostumiseen (ks. Helsinki).
Tavanomaisessa markkinamekanismiin perustuvassa koron määräytymisen mallissa ei ole siis mitään järkeä koska fraktionaalisen pankkijärjestelmän ja lepsujen reservivaatimusten takia pankkien mahdollisuudet tarjota lainaa ovat loppumattomat. Käytännössä rahaa riittää jokaiselle lainaajalle, mutta pankit asettavat korkonsa houkutellakseen rikkaita lainaamaan spekulatiivisiin tarkoituksiin. Eihän se ole mikään vitun yllätys että yksityisyritys toimii oman eikä yleisen edun mukaisesti.
Ei ole myöskään yllättävää että pankkien edutavoittelu on talouden pullonkaula: korkeiden reaalikorkojen takia rikkaat syytävät rahaa bitcoineihin samalla kun hyödylliset ja merkitykselliset kohteet kuten tiede, taide, pienyritykset ja työpaikat jäävät rahoittamatta.
Bottom line: rahan tarjonta modernissa yhteiskunnassa on käytännössä loputon. Se ei meinaa että pitäisi olla vitun tyhmä mutta suoraan sanottuna nykymenosta ei oikein typerämmäksi enää pääse. En tässä edes koskenut kuinka keskuspankkien tiukat inflaatiotargetoinnit ja valtioiden säästöpolitiikat hyödyttävät lähinnä lainanantajia.
Luin The Production of Money alunperin vaihdossa mutta unohdin kyllä kaiken tästä sen jälkeen. Tuntui silti että tässä oli suht tärkeä viesti ja toisen lukukerran jälkeen oon samaa mieltä. Tästä rebyystä tuli vähän pitkä, mutta jäsennän tässä samalla vähän omia ajatuksia pankeista ja tuloeroista koska tuntuu että tää opus antoi ihan hyödyllistä lisätietoa.
Mun korviin on viime aikoina kantautunut paljon juttua että jotain on vialla talouden kanssa: rikkaat rikastuu, työttömyysasteet ovat korkealla ja talouskasvua ei ole vaikka keskuspankin korot on nollissa. En kuitenkaan oo saanut pin down niitä mekanismeja miksi näin on.
Taloustieteen perusteoriat eivät tunnu oikein ottavan kantaa tuloeroihin ja tarkastelua vaikeuttaa (syystäkin) vihaiset maallikot jotka sanovat "capitalism bad" ilman sen suurempaa substanssia.
Ann Pettifor valottaa ainakin yhtä mahdollista/todennäköistä syytä yllämainittuun kehitykseen: pankit. Tää nyt ei tietenkään tuu kellekään yllätyksenä että pankkiireilla on kyseenalainen maine, jo muinainen Aivovuoto sen totesi. Pankeille on nyky-yhteiskunnassa suotu yksi väline jonka väärinkäytöstä tulee ongelmia: valvomaton lainananto.
Perus talousteorioiden mukaan pankit vain välittävät säästäjien ylimääräiset varat lainojen muodossa niille jotka tarvitsevat rahoitusta. Tällöin rahan hinta eli korko määräytyy kysynnän ja tarjonnan mukaan normaalilla markkinamekanismilla: talouskasvun kiihtyessä rahan kysyntä ja korot kasvavat.
Pettifor argumentoi edesmenneen J. M. Keynesin tapaan että asia on päinvastoin: korkotaso määrittää taloudellisen toiminnan määrää. Toinen Pettiforin pääargumentti on, että pankeille on annettu liikaa valtaa korkotason määrämiseen.
Reaalimaailmasta tiedetään että pankit ovat myös omaa etuaan ajavia yrityksiä, mikä on ristiriidassa talousteorioiden kanssa. Pettiforin mielestä pankit siis asettavat korot reaalimielessä liian korkeiksi, mikä heikentää taloudellista toimintaa niiden keskuudessa, joilla ei ole valmiiksi vakuuksia, kuten yrityksen perustajat.
Pankit tietävät että markkinoilta löytyy niitä jotka pystyvät maksamaan korkeat korot jotka ovat tietenkin rikkaat. Heillä on antaa vakuuksia ja maksukykyä löytyy, mutta heidän rahankäyttötarkoituksensa ovat useammin spekulatiivisia, osakkeita ja sijoitusasuntoja, mikä usein johtaa hintakuplien muodostumiseen (ks. Helsinki).
Tavanomaisessa markkinamekanismiin perustuvassa koron määräytymisen mallissa ei ole siis mitään järkeä koska fraktionaalisen pankkijärjestelmän ja lepsujen reservivaatimusten takia pankkien mahdollisuudet tarjota lainaa ovat loppumattomat. Käytännössä rahaa riittää jokaiselle lainaajalle, mutta pankit asettavat korkonsa houkutellakseen rikkaita lainaamaan spekulatiivisiin tarkoituksiin. Eihän se ole mikään vitun yllätys että yksityisyritys toimii oman eikä yleisen edun mukaisesti.
Ei ole myöskään yllättävää että pankkien edutavoittelu on talouden pullonkaula: korkeiden reaalikorkojen takia rikkaat syytävät rahaa bitcoineihin samalla kun hyödylliset ja merkitykselliset kohteet kuten tiede, taide, pienyritykset ja työpaikat jäävät rahoittamatta.
Bottom line: rahan tarjonta modernissa yhteiskunnassa on käytännössä loputon. Se ei meinaa että pitäisi olla vitun tyhmä mutta suoraan sanottuna nykymenosta ei oikein typerämmäksi enää pääse. En tässä edes koskenut kuinka keskuspankkien tiukat inflaatiotargetoinnit ja valtioiden säästöpolitiikat hyödyttävät lähinnä lainanantajia.
benpurvis42's review against another edition
4.0
I found this an enjoyable and fairly accessible read. I say fairly accessible because it seems to assume some prior knowledge of economic theory in which I was lacking. This didn't really impede my enjoyment, but at times I was frustrated by what otherwise feels like a really good introductory test.
The text is at times dry and academic in language, but it has been nicely broken up with frequent sub-headings allowing it to be digested in more manageable chunks.
Whilst Pettifor articulates in depth the issues that exist with the current globalised financial system, and presents Keynsian monetary theory as the answer, there is only a superficial treatment of how we might get there. Of course there are no easy answers to this, and Pettifor's subsequent publication of The Case for the Green New Deal (2019) goes some way in addressing this. The last chapter which presented, in a handful of pages, a fairly unconvincing suggestion that more women and environmentalists in the finance sector is the solution, felt at odds with the depth and rigour of the rest of the text. As another reviewer pointed out, Pettifor seems keen to avoid any accusation of being on the radical left and thus appears to concede to the liberal white feminist narrative of 'more women working in banks' being the appropriate route to the really quite radical restructuring of the global economic system she is suggesting.
The text is at times dry and academic in language, but it has been nicely broken up with frequent sub-headings allowing it to be digested in more manageable chunks.
Whilst Pettifor articulates in depth the issues that exist with the current globalised financial system, and presents Keynsian monetary theory as the answer, there is only a superficial treatment of how we might get there. Of course there are no easy answers to this, and Pettifor's subsequent publication of The Case for the Green New Deal (2019) goes some way in addressing this. The last chapter which presented, in a handful of pages, a fairly unconvincing suggestion that more women and environmentalists in the finance sector is the solution, felt at odds with the depth and rigour of the rest of the text. As another reviewer pointed out, Pettifor seems keen to avoid any accusation of being on the radical left and thus appears to concede to the liberal white feminist narrative of 'more women working in banks' being the appropriate route to the really quite radical restructuring of the global economic system she is suggesting.
chalicotherex's review against another edition
2.0
Wielding the weapon of interest, finance capital effectively holds societies, governments and industries, but also the entire ecosystem, to ransom over repayment of its loans. This predicament is particularly tragic given that, in theory, the development of banking and of sound monetary systems should have ended the power of any elite to extract outsized returns from borrowers. Today, just as in earlier pre-banking eras, interest rates remain high in real terms, even in rich countries. However, this is only because these societies, elected governments and industries have conceded such despotic power to finance capital.
Okay, so if I understand this right, the orthodox view is that money is created at a central bank, I guess in the clearing process they perform for commercial banks, and they see it as another commodity? But actually money is not a commodity and is created through the lending process of commercial banks, i.e. when you take out a loan or mortgage or whatever. The orthodox view doesn't see that there is a problem, while sovereign money people want to use democracy/technocracy to restrict a bank's lending ability. But this is wrong because a) they'll accidentally re-create money scarcity like during the gold standard years, and that's just going to keep the rich rich. B) and because banks don't create money from scratch, they need consumer demand to take out loans in the first place. What we actually need are a return to a highly regulated market (with borrowers for productive purposes paying lower interest rates that speculators) and the creation of capital controls, with democracies educated about how money works.
The myth of where money comes from: One of the most serious is the often repeated accusation that central banks ‘print money’ and thereby cause inflation. While it is true that central banks are responsible for both the issue and the maintenance of the value of the currency, they are not responsible for ‘printing’ the nation’s money supply. As the then-governor of the Bank of England Mervyn King once explained, it is the private commercial banking system that ‘prints’ 95 percent of broad money (money in any form including bank or other deposits as well as notes and coins) while the central bank issues only about 5 percent or less.3 In a lightly regulated system, it is private commercial banks that hold the power to dispense or withhold finance from those active in the economy.4 Yet neoliberal economists largely ignore private money ‘printing’ and aim their fire instead at governments and state-backed central bankers whom they regularly accuse of stoking inflation.
Where money comes from part 2:When young people leave school, obtain a job, and at the end of the month earn income, they wrongly assume that their newfound income is the result of work, or economic activity. This leads to the widespread assumption that money exists as a consequence of economic activity. In fact, with very rare exceptions, it is credit that, when issued by the bank and deposited as new money in a firm’s account, kick-starts activity. It was probably a bank overdraft that helped pay the wage she earned in that first job. Hopefully, her employment created additional economic activity (because, for example, she helped produce and sell widgets) which in turn generated income and savings needed to reduce the overdraft, repay the debt and afford her wage.
Financiers have made vast capital gains by siphoning rent (interest) from debt, but also by effortlessly draining rent from pre-existing assets such as land, property, natural resource monopolies (water, electricity), forests, works of art, race horses, brands and companies. As Michael Hudson writes, ‘the financial sector’s aim is not to minimize the cost of roads, electric power, transportation, water or education, but to maximize what can be charged as monopoly rent.’
It's not a commodity:The orthodox or neoclassical school of economists ... also conceive of [money] as akin to a commodity. Money, in their view, is representative of a tangible asset or scarce commodity, like gold or silver. As with any commodity, for example corn, money in the orthodox view can be set aside or saved, accumulated and then loaned out. Savers lend their surplus to borrowers, and bankers are mere intermediaries between savers and borrowers.
While it is true that some institutions (savings banks, credit unions, British building societies of old, today’s crowdfunders) collect savings and lend these out, commercial bankers have not acted as intermediaries between borrowers and savers, between ‘patient’ borrowers and ‘impatient’ lenders, since before the founding of the Bank of England in 1694.
Furthermore, because neoclassical economists conceive of money as having (like gold or silver) a scarcity value, they theorise as if money is subject to market forces, as if money’s ‘price’ – the rate of interest – is a consequence of the supply of and demand for money. Many argue that like commodities, money or savings can become scarce.
But money is not like a commodity, and to define it as such is to create a ‘false commodity’ as Karl Polanyi argued.1 On the contrary, with the development of sound monetary systems in developed economies, there is never a shortage of money for society’s most important needs. Instead the relevant question is: who controls the creation of money? And to what end is money created?
...
A small group of distinguished economists all understood that money as part of a developed monetary system is not, and never has taken the form of a commodity. Instead money and the rate of interest are both social constructs: social relationships and social arrangements based primarily and ultimately on trust. The thing we call money has its original basis in belief. Credit is a word based on the Latin word credo: I believe. ‘I believe you will pay, or repay me now or at some point in the future.’ Money and its ‘price’ – the rate of interest – became the measure of that trust and/or promise. Or, if trust is absent, the measure of a lack of trust. If the banker does not fully trust a customer to repay, they will demand more as collateral or in interest payments.
Money in this view is not the thing for which we exchange goods and services but by which we undertake this exchange, as John Law famously argued in 1705.3
The miracle of a developed monetary economy is this: savings are not necessary to fund purchases or investment. Those entrepreneurs or individuals in need of funds for investment need not rely on finance from individuals that set aside their income in a savings bank or under the mattress. Instead they can obtain finance from a private commercial bank. This availability of finance in a monetary economy is in contrast to a poor, under-developed, non-monetary economy where savings are the only source of finance for investment, and where inevitably, there is no money for society’s most urgent needs. ...To sum up: in a monetary economy saving is different from the business of building up a surplus of corn, and then lending it on. The corn can be saved without it ever affecting others. However, saving in an economy based on money always ‘affects others’ because it is always an act that sets up a financial relationship with others: a claim. Claims can take the form of an asset or a liability. So for example, when a central bank issues a dollar bill to a private bank, it has a duty (liability) to deliver the value of that currency to the bank that applies for it. The bank then has an asset (the dollar bill), but also owes something (a liability) to the central bank. When a commercial bank makes a deposit in a client’s account, it has a duty to disburse money to the person that applied for a loan (sometimes in the form of cash). The borrower has an asset, the money deposited, but also a liability, a duty to pay back the loan, and so on. These are the relationships – of credit and debt, between owners of liabilities and assets – that are fundamental to a monetary economy, and that generate the income and savings needed for investment, employment and all manner of useful and important activities.
The nature of money (according to Mark Carney?):Bank of England published two articles on the nature of money in their January 2014 Quarterly Bulletin. The articles were met with delight by monetary reformers and indifference by many mainstream economists.
The Bank’s economists made clear that most of the money in the modern economy is ‘printed’ by private commercial banks making loans – and is not created by central banks. In other words, almost all money in circulation originates as credit or debt in the private banking system. Rather than banks acting as intermediaries and lending out deposits that were placed with them, it is the act of lending itself that creates deposits or bank money, and is also a debt, the Bank’s staff explained. Of course this bank money is not actually printed by the private bank; only the central bank has the legal authority to print money and mint coins. The money created by a loan – bank money – is simply digitally transferred from one private bank account to another. The only evidence of its existence is in the numbers printed on a bank statement. Of the total amount of money created, only a tiny proportion is normally converted into tangible money in the form of notes and coins, or cash.
For private commercial bankers operating within a monetary economy, the relevant consideration is not the availability of existing savings, but the viability of the borrower, her project, her collateral and the assessment of whether the project will generate income with which she can repay the credit/debt.
And yes, the Bank of England confirmed that in a monetary economy the money multiplier (the percentage of deposits that banks are required to hold as reserves against lending) is an incorrect account of the lending process. Bank lending is not constrained by ‘reserves’. The assumption that banks hold reserves equal to a fraction of their lending – ‘fractional reserve banking’ – is wrong. Bank ‘reserves’ are not savings in the sense we understand them. They are resources (resembling an overdraft) made available only to the bankers licensed by the central bank. They are used to facilitate the ‘clearing’ process for settling deposits and liabilities between banks at the end of each day. Central bank reserves never leave the banking system to enter the real economy. While central bank reserves may help to free up the balance sheets of banks and other associated financial institutions, they cannot be used to lend on to firms or individuals in the non-bank economy.
...
The Bank’s economists confirmed that most of the money in the modern economy is created by private banks making loans. Moreover, the Bank emphasised that this was ‘the reverse of the sequence typically described in textbooks’. Let us be clear here: this was not a failure of some textbooks; it was a failure of virtually all economics textbooks.
As a result, economics students were and are still taught a fallacious theory of money. And this failure of teaching was and is symptomatic of an even greater failure: the failure of the academic economics profession itself, of its learned discussions, conferences, published papers and contributions o policy. And let us not beat about the bush: as the liberal John Hobson (1858–1940), an English economist and social scientist, observed over a hundred years ago:
The selection and rejection of ideas, hypotheses and formulae, the moulding of them into schools or tendencies of thought, and the propagation of them in the intellectual world, have been plainly directed by the pressure of class interests. In political economy, as we might well suspect, from its close bearing upon business and politics, we find the most incontestable example.6
The ‘moulds of schools of thought’ now dominant in both economics and wider society have led to vast capital gains for financial elites, and to a prolonged failure of the global economy and rising inequality. But thankfully, the triumph of class interests is not universal. The Bank of England rightly credits the handful of scholars that have railed against mainstream academia’s understanding of money.
Blame protestants for debt and climate change:In time, Christianity’s prohibition of usury was to be modified by John Calvin (1509–64) and other Christian leaders. On the four-hundredth anniversary of Calvin’s birth the Financial Times noted that Calvin’s escape from French Catholic rule, and his arrival in Geneva led to ‘a huge influx of protestants from France, following in Calvin’s footsteps [who] brought … skills to Geneva while the lifting of the Catholic Church’s ban on usury paved the way for the city’s pre-eminence in private banking.’2
Usury is today widely accepted as normal in western economies whose monetary systems have been weakened by the parasitic grasp of finance capital, and enfeebled by heavy burdens of debt. This acceptance blinds society to the way in which usury exacerbates the destructive extraction of assets from the earth. This happens because, as the English radiochemist, Professor Frederick Soddy (1877–1956) once explained,
Debts are subject to the laws of mathematics rather than physics.
Unlike wealth which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living … On the contrary (debts) grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest … which leads to infinity … a mathematical not a physical quantity.3
By contrast, earth and its assets are finite and subject to the process of decay. Nature’s curve for growth is almost flat; the rate of interest’s curve is linear. Compounded interest’s curve is exponential.
global financial markets are bad:Professor Rey is not the first to note the lack of evidence that global capital mobility brings economic benefits. Back in 1998 an equally distinguished orthodox economist, Professor Jagdish Bhagwati, argued persuasively (in a paper that has also become famous) that we had been ‘bamboozled’ into believing that the central pillar of globalisation – capital mobility – should be celebrated. He noted that China and Japan,
different in politics and sociology as well as historical experience, have registered remarkable growth without capital account convertibility. Western Europe’s return to prosperity was also achieved without capital account convertibility …
In short, when we penetrate the fog of implausible assertions that surrounds the case for free capital mobility we realize that the idea and the ideology of free trade and its benefits … have been used to bamboozle us into celebrating the new world of trillions of dollars moving daily in a borderless world.12
Just as a well-managed banking system ends society’s dependence on robber barons at home, so should a well-developed and sound banking system end society’s and the economy’s reliance on international, mobile capital. With a managed domestic banking system, operated in the interests of both industry and labour, then government, industry and labour need not depend on, or fear, ‘bond vigilantes’ or ‘global capital markets’.
Our society’s subjection to the predations of these markets is a tragedy entirely of our own making. We, or at least our elected representatives and public authorities, including central bankers, allowed the capital mobility genie to escape from the bottle of domestic regulation. By doing so, we, or they, were ‘bamboozled’ into allowing a small financial elite to create colossal quantities of private wealth while burdening the world with debt, volatility, crises and rising rates of inequality.
This sounds like a good idea but implementation tricky:Keynes proposed a scheme at the 1944 Bretton Woods conference that would act as an incentive for both rich and poor countries to converge towards balance in financial, trade and labour flows. He called it an International Clearing Union (ICU). Its workings would resemble those of a domestic banking system. Just as in banking, at the heart of the ICU proposal would be the equivalent of a central bank: in this case, the master of all central banks.
The key role played by this new international central bank – the ICU – would be to manage flows of money between states, and to use a new currency, bancor, as the relevant currency. (In other words, a neutral currency, not the currency of one imperial power.) Like any other central bank (or indeed ordinary bank) the ICU would ‘clear’ deposits and withdrawals between trading states. And like any bank, the ICU would provide an ‘overdraft’ to debtor countries, enabling them to continue trading. However, it would penalise countries moving into deficit by applying punitive interest rates on that country’s ‘overdraft’ with the ICU.
But the proposed ICU differed from other central banks in one critical respect: it would also penalise countries that built up a surplus. In other words, countries that accumulated profits from trade, and deposited those profits in the ICU would be charged punitive rates of interest on the surplus.
Keynes argued that this was necessary because imbalances – like those between indebted Greece and profitable Germany – are dangerous. They lead to economic failure for the debtor and, with it, political hostility. Adjustment to restore balance between trading nations is therefore necessary if we are to prevent trade or currency wars, but also militarised war. However, under the current system (and within the Eurozone) the adjustment to those imbalances is compulsory for the debtor (for instance, Greece or Mozambique), but only voluntary for the creditor (like Germany or the United States). If trade between nations is to be fair, and not lead to rising tensions, then it will be necessary for both the debtors like Greece, and the creditors like Germany, to manage their trade in the interests of balance and stability.
The effect of this scheme would be to force both countries to import and export less. Instead, they would focus on expanding their domestic economies, to become more self-sufficient – a framework that would reduce toxic emissions from transporting freight across the world, helping restore balance to the ecosystem, too.
Okay, so if I understand this right, the orthodox view is that money is created at a central bank, I guess in the clearing process they perform for commercial banks, and they see it as another commodity? But actually money is not a commodity and is created through the lending process of commercial banks, i.e. when you take out a loan or mortgage or whatever. The orthodox view doesn't see that there is a problem, while sovereign money people want to use democracy/technocracy to restrict a bank's lending ability. But this is wrong because a) they'll accidentally re-create money scarcity like during the gold standard years, and that's just going to keep the rich rich. B) and because banks don't create money from scratch, they need consumer demand to take out loans in the first place. What we actually need are a return to a highly regulated market (with borrowers for productive purposes paying lower interest rates that speculators) and the creation of capital controls, with democracies educated about how money works.
The myth of where money comes from:
Where money comes from part 2:
It's not a commodity:
While it is true that some institutions (savings banks, credit unions, British building societies of old, today’s crowdfunders) collect savings and lend these out, commercial bankers have not acted as intermediaries between borrowers and savers, between ‘patient’ borrowers and ‘impatient’ lenders, since before the founding of the Bank of England in 1694.
Furthermore, because neoclassical economists conceive of money as having (like gold or silver) a scarcity value, they theorise as if money is subject to market forces, as if money’s ‘price’ – the rate of interest – is a consequence of the supply of and demand for money. Many argue that like commodities, money or savings can become scarce.
But money is not like a commodity, and to define it as such is to create a ‘false commodity’ as Karl Polanyi argued.1 On the contrary, with the development of sound monetary systems in developed economies, there is never a shortage of money for society’s most important needs. Instead the relevant question is: who controls the creation of money? And to what end is money created?
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A small group of distinguished economists all understood that money as part of a developed monetary system is not, and never has taken the form of a commodity. Instead money and the rate of interest are both social constructs: social relationships and social arrangements based primarily and ultimately on trust. The thing we call money has its original basis in belief. Credit is a word based on the Latin word credo: I believe. ‘I believe you will pay, or repay me now or at some point in the future.’ Money and its ‘price’ – the rate of interest – became the measure of that trust and/or promise. Or, if trust is absent, the measure of a lack of trust. If the banker does not fully trust a customer to repay, they will demand more as collateral or in interest payments.
Money in this view is not the thing for which we exchange goods and services but by which we undertake this exchange, as John Law famously argued in 1705.3
The nature of money (according to Mark Carney?):
The Bank’s economists made clear that most of the money in the modern economy is ‘printed’ by private commercial banks making loans – and is not created by central banks. In other words, almost all money in circulation originates as credit or debt in the private banking system. Rather than banks acting as intermediaries and lending out deposits that were placed with them, it is the act of lending itself that creates deposits or bank money, and is also a debt, the Bank’s staff explained. Of course this bank money is not actually printed by the private bank; only the central bank has the legal authority to print money and mint coins. The money created by a loan – bank money – is simply digitally transferred from one private bank account to another. The only evidence of its existence is in the numbers printed on a bank statement. Of the total amount of money created, only a tiny proportion is normally converted into tangible money in the form of notes and coins, or cash.
For private commercial bankers operating within a monetary economy, the relevant consideration is not the availability of existing savings, but the viability of the borrower, her project, her collateral and the assessment of whether the project will generate income with which she can repay the credit/debt.
And yes, the Bank of England confirmed that in a monetary economy the money multiplier (the percentage of deposits that banks are required to hold as reserves against lending) is an incorrect account of the lending process. Bank lending is not constrained by ‘reserves’. The assumption that banks hold reserves equal to a fraction of their lending – ‘fractional reserve banking’ – is wrong. Bank ‘reserves’ are not savings in the sense we understand them. They are resources (resembling an overdraft) made available only to the bankers licensed by the central bank. They are used to facilitate the ‘clearing’ process for settling deposits and liabilities between banks at the end of each day. Central bank reserves never leave the banking system to enter the real economy. While central bank reserves may help to free up the balance sheets of banks and other associated financial institutions, they cannot be used to lend on to firms or individuals in the non-bank economy.
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The Bank’s economists confirmed that most of the money in the modern economy is created by private banks making loans. Moreover, the Bank emphasised that this was ‘the reverse of the sequence typically described in textbooks’. Let us be clear here: this was not a failure of some textbooks; it was a failure of virtually all economics textbooks.
As a result, economics students were and are still taught a fallacious theory of money. And this failure of teaching was and is symptomatic of an even greater failure: the failure of the academic economics profession itself, of its learned discussions, conferences, published papers and contributions o policy. And let us not beat about the bush: as the liberal John Hobson (1858–1940), an English economist and social scientist, observed over a hundred years ago:
The selection and rejection of ideas, hypotheses and formulae, the moulding of them into schools or tendencies of thought, and the propagation of them in the intellectual world, have been plainly directed by the pressure of class interests. In political economy, as we might well suspect, from its close bearing upon business and politics, we find the most incontestable example.6
The ‘moulds of schools of thought’ now dominant in both economics and wider society have led to vast capital gains for financial elites, and to a prolonged failure of the global economy and rising inequality. But thankfully, the triumph of class interests is not universal. The Bank of England rightly credits the handful of scholars that have railed against mainstream academia’s understanding of money.
Blame protestants for debt and climate change:
Usury is today widely accepted as normal in western economies whose monetary systems have been weakened by the parasitic grasp of finance capital, and enfeebled by heavy burdens of debt. This acceptance blinds society to the way in which usury exacerbates the destructive extraction of assets from the earth. This happens because, as the English radiochemist, Professor Frederick Soddy (1877–1956) once explained,
Debts are subject to the laws of mathematics rather than physics.
Unlike wealth which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living … On the contrary (debts) grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest … which leads to infinity … a mathematical not a physical quantity.3
By contrast, earth and its assets are finite and subject to the process of decay. Nature’s curve for growth is almost flat; the rate of interest’s curve is linear. Compounded interest’s curve is exponential.
global financial markets are bad:
different in politics and sociology as well as historical experience, have registered remarkable growth without capital account convertibility. Western Europe’s return to prosperity was also achieved without capital account convertibility …
In short, when we penetrate the fog of implausible assertions that surrounds the case for free capital mobility we realize that the idea and the ideology of free trade and its benefits … have been used to bamboozle us into celebrating the new world of trillions of dollars moving daily in a borderless world.12
Just as a well-managed banking system ends society’s dependence on robber barons at home, so should a well-developed and sound banking system end society’s and the economy’s reliance on international, mobile capital. With a managed domestic banking system, operated in the interests of both industry and labour, then government, industry and labour need not depend on, or fear, ‘bond vigilantes’ or ‘global capital markets’.
Our society’s subjection to the predations of these markets is a tragedy entirely of our own making. We, or at least our elected representatives and public authorities, including central bankers, allowed the capital mobility genie to escape from the bottle of domestic regulation. By doing so, we, or they, were ‘bamboozled’ into allowing a small financial elite to create colossal quantities of private wealth while burdening the world with debt, volatility, crises and rising rates of inequality.
This sounds like a good idea but implementation tricky:
The key role played by this new international central bank – the ICU – would be to manage flows of money between states, and to use a new currency, bancor, as the relevant currency. (In other words, a neutral currency, not the currency of one imperial power.) Like any other central bank (or indeed ordinary bank) the ICU would ‘clear’ deposits and withdrawals between trading states. And like any bank, the ICU would provide an ‘overdraft’ to debtor countries, enabling them to continue trading. However, it would penalise countries moving into deficit by applying punitive interest rates on that country’s ‘overdraft’ with the ICU.
But the proposed ICU differed from other central banks in one critical respect: it would also penalise countries that built up a surplus. In other words, countries that accumulated profits from trade, and deposited those profits in the ICU would be charged punitive rates of interest on the surplus.
Keynes argued that this was necessary because imbalances – like those between indebted Greece and profitable Germany – are dangerous. They lead to economic failure for the debtor and, with it, political hostility. Adjustment to restore balance between trading nations is therefore necessary if we are to prevent trade or currency wars, but also militarised war. However, under the current system (and within the Eurozone) the adjustment to those imbalances is compulsory for the debtor (for instance, Greece or Mozambique), but only voluntary for the creditor (like Germany or the United States). If trade between nations is to be fair, and not lead to rising tensions, then it will be necessary for both the debtors like Greece, and the creditors like Germany, to manage their trade in the interests of balance and stability.
The effect of this scheme would be to force both countries to import and export less. Instead, they would focus on expanding their domestic economies, to become more self-sufficient – a framework that would reduce toxic emissions from transporting freight across the world, helping restore balance to the ecosystem, too.