Understanding Money

Many people are seeking to understand how the money system works and looking for answers on websites and in books. My own journey of discovery has been informed more by Mary Mellor than by anybody else. She has a refreshingly down-to-earth approach and an underlying commitment to sustainability that make her explanation particularly appealing.

Very sensibly, Mary's local Transition Towns network asked her to give a series of lectures explaining money, which were filmed and have been made available online. Mary gives four lectures: What is Money?, Money and Banking, The Financial Crisis, and The Future of Money. Mary's view of the latter is an empowering one: money should be a social resource from which we all benefit. We must end the privatisation of money and the banking monopoly.

Mary is critical of the view of money in economic theory, claiming that it is shot through with inconsistencies. It is focused on modelling rather than understanding. 'The influence on coinage on Western notions of money has misled us', she claims. Even in 1698 the amount of money held in 'tally sticks', a physical system of recording money owed between two parties, was actually larger than the amount of money held in coins. Money is a story of relationships, a story of communities, and of economic exchanges based on trust.

James Robertson, doyen of the monetary reform movement and grandfather of green economics, said about these lectures: 'Mary Mellor's understanding makes an essential contribution to anyone wanting to know more about how the money system work and what its future could and should be. I warmly recommend these films to anyone who wants to learn more and think what we should do about it.' So please find time to watch them, learn more, and begin to change the world.
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The Quest for Academic Credibility

This may, I know, be a futile quest. But I am impressed by the way the post-war pro-market ideologues came to control the world through controlling the economic ideas that dominated it. Much of this strategy was focused on systems of power, and particularly the media, but they also dominated academic economics, and that struggle to reverse that sorry tale of misinformation and deception of so many young people is an important one.

For this reason I would like to give a small plug to an article of mine that came out yesterday in the Cambridge Journal of Economics. This is the best of the economics journals, since it reflects the way economists at that university still have some freedom to question the neoclassical paradigm. Building on my book, Green Economics, I seek in the article to carve out a specific space within academia for an approach to economics that arises from reverence to nature and a fundamental commitement to social justice.

In the article I identify four characteristics of green economics:

'Its pluralism is inherent, and is evidenced by the repeated call for a wider range of perspectives on economic problems than those that currently dominate academic and policy discussions. This leads naturally to a commitment to global equity and to giving equal importance to the needs of the majority world to decisions about the allocation of global resources. Equity is also a concern at the domestic level, a concern that arises necessarily from the closing of the planetary frontier. Schumacher’s catchphrase ‘small is beautiful’ is influential, but has been developed into a call for strengthened local economies and an opposition to the globalisation and displacement that have typified economic ‘progress’ during the past century. And, finally, the call for a steady-state economy and the replacement of the growth dynamic that is central to the capitalist economy is a fundamental tenet of green economics.'

As part of a strategy of changing what economists do, and particularly how economics is taught to future citizens, I hope the paper will make a contribution.

PS In response to a comment about the fact that this article is copyright controlled, I forgot to include in the article the important information that academics often make a pre-publication version of their articles available via the Social Science Research Network. If you wish to read this article please email me direct (molly@gaianeconomics.org) and I will send you an electronic copy.
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Stability Facility Two-Step Reaches Conclusion

After weeks of rising political rhetoric the outline of a plan for the Eurozone appears to be emerging. The road that involved further debt guarantees from the wealthier nations of the EU, primarily Germany, and a consolidation of all Eurozone debts into one Eurobond, appears to have been abandoned. This was presumably because Chancellor Merkel refused, or argued successfully that this was politically impossible and might lead to a less market-friendly government in her country—perhaps even a Green one.

Since the debts cannot be absorbed the new plan is that some will be turned into losses, with a negotiation between the banks that unwisely took on Greek bonds and the Greek government that cannot repay them: the so-called hair-cut, which is now moving down to a number 2 on that automatic machine that muscular men with early hair loss so often favour. It was the Argentinians back in 2002 who taught us that it takes two to tango: serious debt crises require losses to creditors as well as pain to debtors.

The other side of the plan is more interesting: a larger bailout pot, now tastefully renamed the European Fiscal Stability Facility. This will be available to support governments whose national debt is so large as to undermine market confidence. It is assumed that it will never be used: its existence is intended to be enough to underpin confidence. This means it will have to be a very large pot indeed. And once the money is in the pot you can guarantee that the financial market makes will find some way to provoke a crisis and make it their own.

The argument now seems to be about where the money will come from to fill the pot. We must keep very close attention on this. If the money comes from national governments then our obvious question should be: 'How can there be money to put into a bailout pot when there is no money to pay for hospitals or children's services?' If, alternatively, the money is created directly by central banks—in a process akin to quantitative easing—then our question should be: 'Why not create enough money this way to repay all the national debt and so remove the need for the pain of spending cuts?'

This is the most interesting question of all. We know that the Bank of England is under pressure to quease more money into the economy at any time. Some of that money has previously been spent buying back our own debt; a similar process has been undertaken by the European Central Bank to buy Italian debt. So why not go the whole hog? Could it be that this would make it clear that there really is no need to create money as debt in the first place? That money could be directly spent into the economy as needed. The reason for resisting this is the power of those who live by lending money: without debt they would have to go to work like the rest of us.
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How can we solve the crisis in the Eurozone?

The growing tension in the Eurozone is matched by a total failure by the media to give space for alternative views of how our economic lives, and especially our monetary policy, might be determined. Last night's Radio 4 debate, hosted by the well-meaning and well-informed Paul Mason, Economics Editor of Newsnight, fell into the trap of setting up a false dichotomy between Keynesian and Hayekians. Three conclusions emerged: the audience was partisan and wholly unrepresentative, the two iconic figures around whom the debate revolved both had some arguments on their side, and none of this has anything to do with how our governments make policy. Plus, of course, the obvious fact that neither Keynes nor Hayek could imagine a world where ecological limits mean that economic growth can no longer happen.

Green Economics grows in strength and confidence: we are growing clearer about the design of our alternative future, and the expanding evidence of the failure of globalised capitalism adds to this confidence. An example is the new work by James Robertson, a book addressing the question of money to be published by Green Books next year. The publisher is allowing us all a sneak preview of Robertson's proposal for managing the national money supply.

James Robertson has been right about money for years. He has a claim to be one of our leading economists, and yet his work is excluded from the public debate. In this chapter he provides an excellent critique of what is wrong with a money system based on bank debt and, more importantly, cogent proposals for an alternative system.

It is important that we know where we are going, and all those who support a just and sustainable economy should read and understand the Roberthttp://www.blogger.com/img/blank.gifson proposal. But it does not help us with the transition. We cannot be naive about the vested interests dedicated to maintain the current system in place, and the courage required to politicians to stand against them.

What would a transitional policy look like? Presumably politicians would have to secretly agree to simultaneously suspend trade in the national debt of all the leading economies, and exchange transactions between their currencies. The moratorium would allow breathing-space for a new international agreement between nations to be drawn up: this would be a democratic agreement based on national control of sovereign debt and currencies exchanges: Bretton Wood with knobs on, as this blog has been arguing for since the beginning of the crisis. The market has no solution: only by taking political action can its destructive consequences be forestalled.
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Grandfathering

It's two months now since I launched Green Economics in Oxford and I've finally got round to posting James's kind words at the launch:

I'm delighted to have been asked to say a few words at this launch of Molly's book. I'll start by thanking her for the appreciative references in it to my own work. I don't find it easy to ignore them in order to make an objective assessment of the book!

Let me just say briefly that I very much agree with what Caroline Lucas and Richard Douthwaite say about it on the back cover: it 'explains in clear terms the economic paradigm for the 21st century' ... it gives 'a vision of a just, sustainable and fulfilling economic life' ... it's 'an excellent introduction to a rapidly developing branch of political economics' ... 'the scope for debate is one of the things that makes this pioneering book so exciting'.

It organises clearly a very wide range of subject matter. The three Parts are on: Theory; Vision for the Future; and Policies. Chapter headings include: Work; Money; Green Business; Globalisation and Trade; Relocalising Economic Relationships; Green Taxation; Green Welfare; and Land and the Built Environment.

Chapter 5 on Money is particularly topical. It's an excellent 16-page summary of the background to the present financial shambles, and what should come after it. The final Chapter 13 - "Summary and Further Resources" - helpfully pulls the whole book together.

The book suggests very clearly the "cognitive dissonance" to which societies like ours are now exposed. That's the term used by social psychologists to describe being compelled by circumstances to believe, and act on, two contradictory beliefs at the same time. On the one hand our governments say they must take emergency action to induce us to live more lightly on the planet. On the other hand they are doing what they can to stampede us into returning to high consumption lifestyles in order to save the economy - at the cost of billions of money borrowed from ourselves as future taxpayers. This book will, I am sure, help to accelerate the inevitable and necessary resolution of this contradiction within the next 10 years or so.

I will end these few remarks, as I began, on a personal note. Molly has dedicated the book to me as 'the Grandfather of Green Economics'. Not being a grandfather myself, I decided to consult Google on the grandfather's role. I learned that:

"Grandfathers have lots of wisdom and life experience to draw from. They have seen events and changes come and go. .... As grandchildren grow, they make attempts to learn about their world, their family, relationships, and society. A grandfather's perspective, formed from years of experience, can help guide, inform, and influence the growth and development of his grandchildren."

Straightforward enough, though quite a challenge in this context. However, I have settled for being a less conventional grandfather than most - if only because I have no idea how many grandchildren there are in this case. The practical answer to that has to be, of course: 'the more the merrier'. So I hope we can help their numbers to grow unstoppably.

Green Economics will be an invaluable aid for that purpose, as well as for our own understanding. We must try to make sure it gets the attention it deserves in places of education, in the press and communications media, among environmental, social and economic NGOs, and among the politicians, officials, and other mainstream professionals who will be responsible for helping us to shape a greener future. Tweet

Money, money everywhere

I had another horrendous train journey yesterday - I was facing the prospect of a two-and-a-half hour delay on a two-hour journey when I took direct action and cadged a lift. The explanation was 'incidents in tunnels' which has made me think about 'leaves on the line' and, more relevantly, 'the wrong kind of snow'.

Perhaps this is what Marx meant by the contradictions of capitalism? During the floods, which were our local learning experience of last year, we found ourselves deluged and yet short of water. This year our economy is short of cash because of an excess of credit. The recession that we are jointly embarking on has been the result of the uncontrolled creation of the wrong kind of money: debt money.

The link between rail disasters and monetary disasters is that we should not allow control of the most fundamental structures in our economy to be in the hands of privateers. Railtrack, at least, is now back in public hands; the money creation system should follow. This is not to argue for the abolition of private banks, just to suggest, as James Robertson and Joseph Huber do in their excellent book Creating New Money, that they should perform a standard retail function rather than being allowed absolute power over the extent of credit in our economies.

Such a system would not only stabilise the money system, it would have the added benefit that the value of the money created would be in public, rather than private, hands. It would be available to be invested in public projects or used to pay off the national debt and generate tax cuts, depending on the preferences of the government in power.

The debate is now focusing on whether or not the carnage we see around us representss capitalism working or failing. All I can say is that if this is a system working, it just isn't a very good system. Tweet