Relieved of Debt

When the decision finally came that the Green Party would be adopting a policy that cuts the link between money creation and the parallel creation of debts it came as a huge relief. Following more than a decade of pondering, discussing, educating and campaigning the party's activists were convinced that they could believe in the possiblity of public credit creation to end the centuries of capitalist privatised money and replace it with money produced for the common good. The motion was passed on Sunday at the annual conference in Brighton by 110 votes to 90.

Key to the change of heart of the Green Party have been two members of Kent Green Party, both of whom might be described as 'outraged of Tonbridge'. Brian Leslie has been a campaigner for monetary reform all his life and he recently recruited to the cause Andrew Waldie, who is a tall, softly-spoken accountant with a Scottish accent - exactly the sort of person you want to be on your side in a debate about money. From this most unlikely centre of radicalism has come what Andrew called the final part of the trinity of radical economics policies, taking its place alongside Land Value Tax and Citizens Income on an economic platform that has the potential to liberate working people from the oppression of wage slavery.

I am reproducing Andrew Waldie's proposal speech in full here: read and rejoice!

'This motion strikes a blow at the heart of financial capitalism by removing from banks their power to create money - and restoring the supply of our national currency to democratic and public control. Through their lending, banks create 97% of the money we use in the form of credit.  This gives them enormous power to direct the economy and shape our society - without any form of democratic accountability.

'Our banking system is also unstable.  History shows that debt-fuelled booms and speculative bubbles inevitably turn to bust.  Governments bail out banks that have become “too big to fail” – and the price of these bail outs are savage cuts in public services. The burden of servicing the debt on which our money is based also increases inequality and drives unsustainable growth.  These are issues which are of fundamental concern to the Green Party.

'Simply bringing the banking system under "Social Control" is not enough - more radical reform is required.  Leading green economists have advocated reform based on the principles set out in this motion. The motion avoids the fundamental conflict of interest that has corrupted the current banking system.  It separates the power to create money from the power to decide how that money is first used.  A National Monetary Authority – NMA - appointed by Parliament, would manage the supply of national currency.  Its decisions would be protected by law from influence by financial or other special interests.

'Elected governments would decide how currency created by the NMA is first spent.  This currency would then circulate freely at all levels of society.  Saving and borrowing would continue.  Local currencies could circulate alongside the national currency.  The major benefit of the system we propose is that people would no longer need to go into debt to keep money circulating in the economy.

'Over a transition period of 20 years, the NMA would convert the stock of debt-based money by issuing the same amount of national currency to the Government as additional revenue.  The value from transferring the endowment of our currency to public control has been estimated at £50 billion per year – that’s enough to fund the construction of 300,000 new homes – for each year of the transition period.

'Restoring the supply of our currency to public control would deliver a huge prize that could finance the transformation of our society.  Today, we have the opportunity to commit our party to seizing this prize by passing this motion.'

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Answers in the Trees

I do hope that there is wisdom in the woods, since I have chosen to spend my summer holiday this year at Clissett Wood in Herefordshire, where I will be learning green woodworking. I'm not so ambitious as to think I will actually make a chair, but I should become better acquainted with a shave-horse, and spending that much time outdoors is enough of a thrill for me.

The rap poet Paradox is offering wisdom from the trees in his poem about the scandal of money, banking and interest. You will have heard this message many times before since the Crash of 2008, and read plenty of similar stuff on this blog, but none of it as stylish, I think, as this six minutes of poetry. Tweet

Money system of last resort

In a system that relies on debt to create money, as capitalist money systems do, there is always a temptation for individual banks to take imprudent risks and be unable to repay their creditors. Because greed tempts bankers to destabilise their own business, and a run on the bank leading to bank collapse would undermine faith in the whole system, capitalist economies have a 'lender of last resort'.

The lender of last resort in the UK economy is the Bank of England. When banks hit sticky times they turn to the Old Lady for a shot in the arm, and she must oblige. This is exactly what happened last year, when banks had massively over-borrowed, they were loaned vast sums by the Bank.

You may be left asking where this money came from: who were the creditors? The answer is that, because there was no one left to lend money, the government itself acted as what we might think of as the 'borrower of last resort'.* When all else fails, a government can decide to create money by political fiat - the quantitative easing policy. And who do they borrow money from? The answer, I'm afraid, is you and me - and we are now being asked to pay this back through spending cuts, higher taxes and more work.

Leaving aside the question of whether the UK is really capable of paying back this level of debt without unacceptable suffering and civil unrest, let us consider for a while longer the concept of a borrower of last resort. When demand in the economy is so low that we are in a self-reinforcing downward spiral, as we are now, a capitalist economy requires the government to step in and borrow, just as it would expect the central bank to step in and lend to banks. So rather than cuts and austerity in the public sector we need to see borrowing and investment.

So far I have only considered the last resort in a financial sense, but what about the ecological crisis we are facing: the ultimate situation of last resort. Surely it is time for the government to act as borrower of last resort and produce a massive spending package to create the infrastructure and home renovation projects we need to achieve the carbon reduction targets that are now enshrined in law? Mad as it may seem, if you insist on creating money as debt, that is the only way that we are ever going to be able to buy ourselves a future.

*Thanks to Richard Douthwaite for this useful thought - and so many others. Tweet

Old Lady Rampant in Stroud

We're nearly there. On Saturday I will be donning my father's old business suit and the bowler hat from my daughter's dressing-up box. I'll be heading down to Stroud's Threadneedle Street, with its very own Old Lady (Teashop) to launch the Stroud Pound.

Let's call it rivalry rather than competition, but the brief we gave our designers was to make our notes more stylish than the Lewes pounds, which we loved and secretly envied. They have certainly met this requirement and exceeded our wildest dreams. Four denominations will be available from Saturday morning with a mixture of local celebrities (animal and human) and scenes. This post will only be able to be adorned with one once the strict embargo is past.

Laurie Lee is our star character. There has been much interest in the local press, and we are delighted that his widow, Kathy, will be unveiling the note. She and her daughter Jessy were sure Laurie would have approved. His humanity and deep commitment to equality shine through his writing and must have been drawn from the Stroud valleys, which have been described as a red hand in the middle of Tory-blue Gloucestershire. Our local paper went so far as to say that the courage of the Stroud Pound Co-operative was akin to that shown by Laurie Lee when he went to fight for the Republicans in Spain. We blushed at the excessive compliment, but are delighted by the level of support that we have been given.

Starting a local currency is a deep learning experience. Clutching our own notes for the first time last night generated a mixture of hilarity and awe. As the past year has proved, money is right at the centre of our lives. It really does make the capitalist world go around. Just try to imagine what would have happened to your life if the high-street banks had seized up and your credit card had ceased to function last September. No cashpoints, no ability to pay in shops, very soon nothing in the shops. This is the vital role that money plays in a complex modern economy, and the money we are using has inequality designed into it. It is controlled by the very forces that are wreaking havoc on our planet. Making your own money gives you a chance to really change the economic system that is so all-pervasive as to be invisible and unquestioned.

I still have a wistful longing for Tom Paine, but, although he belongs to Lewes, his belief that 'We have it in the power to make the world anew' belongs to us all. Tweet

Nothing to Fear but the Flannel

It was the fact that we were hearing a lot about Zimbabwe on the news again that gave me the clue. The media-financialist complex has moved into a different gear. Now that they have frightened us into ramping up the national debt even unto the tenth generation we have stopped hearing the market disaster stories and the traders are playing along by boosting the values of stocks.

It is still unclear whether the elastoplast solution will work as there is as yet no sign of a fall in the interest rates banks are charging each other, or any increase in lending between them. The success of this latest attempt to reboot the corrupt banking system so that banks will accept each other's debts as money is not yet evident.

But what about the attempt to convince people that a system which has been variously referred to as a rollercoaster and a confidence trick by sober BBC commentators is the best we ingenious and sophisticated people can come up with? Will this crash prove a radicalising experience that people will remember and that will undermine their faith in the capitalist system as such and send them looking for something better?

As green economists we have grown tired of being told we must be communists just for questioning this wasteful and destructive way of organising economic affairs. We have an alternative paradigm up and ready to go. It will only take the courage of green politicians to announce it and the wisdom of the voters to choose it at the ballot box.

In the mean time I, for one, will be keeping in mind the words of John Lennon from 'Give Me Some Truth':

No short-haired, yellow-bellied, son of tricky dicky
Is gonna mother hubbard soft soap me
With just a pocketful of hope
Money for dope
Money for rope Tweet

Hoist by their own petard?

The confusion over where exactly money comes from seems so widely shared that I wonder whether it is a conspiracy of silence, a conspiracy of ignorance, or maybe just ignorance plain and simple. The smoke-and-mirrors and creative use of jargon is deliberately intended to conceal a simple fact: the banking system, as opposed to any individual bank, has been able to make as much money as it can persuade us to borrow.

A bemused reader of today's Guardian asked, 'Why do banks need to borrow from each other?' and was greeted with the usual confusing and misleading account. The response begins, 'Banks do not have vaults stuffed with money', agreed, but the following sentence about how they 'trade on fairly thin margins' is confusing and irrelevant. Deborah Hargreaves then drivels on about Libor and other irrelevant and technical sounding nonsense for a while. No doubt the reader feels none the wiser.

This confusion is not necessary because the way money is created is simple. Essentially, the banks operate as a kind of closed club, within which small amounts of money are inflated many times over until, as in recent years, the only limit on money creation is the willingness of borrowers to get into debt. Hence the growth of debt-concealing activities that are now unravelling.

This process is explained very clearly in the film Money as Debt, which is available on Youtube and on Google video. A laudably clear written account is given by Richard Douthwaite in chapter 2 of The Ecology of Money. So why the confusion? We can only assume that, if the simplicity of this scam were to become more widely known, in J. K. Galbraith's famous words, 'the mind would be repelled'.

It might also undermine any lingering support for the policy of throwing money at the banks. Since the money they loaned never existed, there is not enough money in the world to actually pay back all the debts of the financial institutions. Our money is being used to attempt to crank the debt-money system back into an upward rather than downward spiral; nothing more.

It is interesting to speculate to what extent bankers, financiers and finance ministers have begun to believe their own fantasy. If the reality of the money creation system were clear to them I can't help thinking they would be following a different sort of policy altogether. Tweet

By the waters of Leman . . .

So here we are again. Financial journalists and politicians trying to make sense of a world they have long reassured us could never come again. A world they vaguely remember from old men's stories and scratched black-and-white moving images. A world where banks collapse and stockbrokers commit suicide - well scrap the last part because there was at least some honour amongst thieves in the 1920s which appears strikingly absent today.

Because nobody believed this would ever happen again nobody has a plan to deal with it. We are all dredging around for what we can remember reading in the work of Galbraith, deliberately written to prevent us taking the same path towards economic destruction caused by financial irresponsibility. A path we have stumbled along in recent years with increasing speed as memories of the last significant financial crash have faded.

Vince Cable managed to dredge up the name of the Glass-Steagall Act, which I also recall from undergraduate economics. A lesson well learned from the last crash which required the creation of a wall between commercial and domestic banking activities and was designed - if memory serves - to prevent the risky behaviour of venture capital investors from dragging down the small saver - precisely what appears to be happening now as a result of the Act's repeal.

Clearly re-regulation of financial activities is crucial and urgent, but it isn't sufficient. Boom and bust is not an inevitability, it is merely the periodic consequence of an economic system which creates money in an irrational and undemocratic way. Without monetary reform we will only be storing up more problems in the future. The suited chaps who will bear the brunt of public opprobrium in the coming months were bound to create ever more ingenious ways to persuade people to borrow their unreliable money, because otherwise the whole system would have seized up. It is the system, not the greed it generates, that is at fault.

That is not to say that we should allow these city rogues to retire to their recently acquired country estates. The artificial value they created in the financial sector has been translated in many cases into real value as they bought up land, gold and other safe assets. We should use the money laundering legislation to trace the path this money took and claim it back through windfall taxes. This is the only way that the pain of recession can be fairly and democratically shared. Money generated from these windfall taxes can be used to fund the Green New Deal that leading environmentalists are calling for.

And because this is a blog which strives for erudition as well as political insight, here is a stanza from T. E. Eliot's The Wasteland which was dredged up from my memory:

THE river's tent is broken: the last fingers of leaf
Clutch and sink into the wet bank. The wind
Crosses the brown land, unheard. The nymphs are departed.
Sweet Thames, run softly, till I end my song.
The river bears no empty bottles, sandwich papers,
Silk handkerchiefs, cardboard boxes, cigarette ends
Or other testimony of summer nights. The nymphs are departed.
And their friends, the loitering heirs of city directors;
Departed, have left no addresses.
By the waters of Leman I sat down and wept...
Sweet Thames, run softly till I end my song,
Sweet Thames, run softly, for I speak not loud or long.
But at my back in a cold blast I hear
The rattle of the bones, and chuckle spread from ear to ear. Tweet

The Richness of Life

I've just had the pleasure of reading Cider with Rosie for the first time. Like everybody else I'm amazed I never had the opportunity before - it was a school favourite everywhere except my school, it appears. The explanation must be to do with my Victorian schoolmistresses fears about the possibile influence on tender minds of the scene under the hay wagon. They clearly felt that the face-slashing reality of Brighton Rock was more suitable for pre-pubescent girls.

For whatever reason I'm glad that this gem has been saved for my middle years and now comes to me at around the same age Laurie Lee was when he wrote the book - and very nearly in the same place as well. The village of Slad is only a couple of miles up the road from where I'm writing this. And I have been spared the stifling, smelly, repressive atmosphere of school as a permanent association with the book.

Everything about Lee's writing is rich, as is the childhood he describes. People who live around here and who knew the author and still know his widow tell you that it isn't realistic. That he has rose-tinted spectacles on. The major criticism is that he doesn't portray the family as poor enough. The spendthrift single mother and her frequently bootless, snotty-nosed children as seen from the outside do not match the wealth that Laurie Lee clearly found in the Gloucestershire countryside.

I was listening to Haydn's Creation recently and for the first time - I think because it was sung rather than spoken - thought about the second sentence of the bible: 'The Earth was without form - and void'. This is how death feels to those who live close to the earth: an absence of the teeming, messy variety of life at this time of year. As we have used technology to gain mastery over nature so we have strangled and stifled this life.

The UK economy is based on financial services - 73% of our economy is now in the services sector, and most of this is financial services. What could be more alien to life than this 'industry' which lures us through life with the attraction of money, especially money via pensions (by which time we are really too old to enjoy it and life has passed us by) and persuades us (the insurance 'industry') that we can use money to prevent the accidental disasters that are an inevitable part of life. A paltry attempt to use the meaningless and worthless construct of money to keep life at bay. Tweet

Thomas Atwood Award 2008

On Tuesday Austin Mitchell received the 2008 Thomas Atwood Award for his services to monetary reform in putting forward EDMs about public credit. I was able to say a few words in support of the award and reproduce them here.

The ceremony took place at the Palace of Westminster in a committee room. While we waited the Chancellor and other cabinet ministers passed by. We felt right at the heart of power, yet it is astonishing how the ideas we were talking about, which are the key ideas of our age, are marginalised from political debate.

So here is what I had to say:

For those of us who have spent our lives awaiting the collapse of capitalism these are interesting times. I work in a Management School and have lived for many years with the slogan that a threat is also an opportunity—suddenly that banal aphorism has taken on an exciting new life!

Capitalism is an economic system that focuses around money. It is a twisted game where the power to control money allows a minority to extract the energy (usually in the form of work) of the majority and of the planet itself for their own exclusive benefit. If the money system fails the game falls apart. Suddenly we are all equal—we become limited only by our own expectations.

To remake the world along just and equitable lines we need two things: a plan and the courage to execute it. It is because Austin Mitchell has demonstrated the wisdom to choose the right plan and the courage to publicly stand by this choice that he is being given the 2008 Thomas Atwood Award.

Courage is a personal matter—a matter of the heart. If we believe in something better we must overcome censorship, embarrassment and fear and stand up for that belief. But the plan is always changing as we learn more and our ideas develop: open minds are invited to engage. I will spend the rest of these few words discussing the outline of plans to change the way our money system operates at three levels: personal, national and global.

First, at the personal level, what should we do about our need to have a bank account and a credit card? There is an easy solution here, since the Co-operative Bank offers both, and other mutuals such as the Nationwide also provide bank accounts. The same applies to other financial services such as insurance and mortages, which can be switched to CIS and the mutual building societies. It is no coincidence that they are not facing the same instability and are rather having to close their doors to new business because of rising demand. Co-operative businesses do not exist to maximize profits but to provide services, and their financial services are more reliable and more ethical than those of their private-sector competitors.

At the national level, we need to be arguing for the reclaiming of the system of money creation so that it is democratized, rather than left to the vagaries of the market and the profiteering of the private sector. Banking also needs to be decentralized, so that local banks can profit from the creation of money to be invested in their local economies, as they did in Atwood’s day. To build resilience in our local communities governments should encourage the flourishing of local currencies through exempting them from tax—at least in the initial phase. And government should take on the major role for the creation of money, as Austin Mitchell’s various EDMs have argued.

Finally, at the global system, we need to go back to the drawing-board, or rather the Bretton Woods conference table. We need to renegotiate an international financial system that uses a neutral currency, as Keynes argued in 1944, and that links to a balanced international trade system. We can go further than this, and by linking the currency to carbon dioxide emissions, use it as a means to tackle climate change as well as global poverty.

We know that the money system we have is flawed, that it is breaking down. Even in its heyday it created massive inequalities and pressurized the planet; now it is failing even in its own terms. What I am proposing here is a massive, radical change and it is easy to lose heart. But the manifest failings of the existing system should give us the courage to believe that we are right.

I would be happy to work with others—especially those with political power—to discuss and develop these ideas. Together we have to decide on the model for money that we want: they we have to just do it. Tweet

Our national bank lies in ruins

The Bank of England is actually misnamed. This name suggests a bank that works for the benefit of the citizens of England. This is not its role; rather it works to support the interests of global capital. The creation of money, a fundamental requirement of a complex economy, is not under political control.

Leaving aside the fact that only England's interests are named - an anachronism that should surely be changed as part of a plan for the Bank's future - what would we propose as a new structure for an institution that has so clearly failed to protect the interests of the majority of our people?

In evidence that this is the case I offer the fact that the Bank has lowered interest rates without requiring the banks it lends money to to pass those lower rates on to customers. Instead retail and corporate bankers alike are charging higher rates on money they lend, and using the difference to inflate profits.

This is obviously greedy and immoral - but it will also prevent the positive impact of cheaper money from easing the operation of the real economy. Shareholders will continue to extract maximum value, but businesses which cannot afford credit will fold, and jobs will be lost.

We have private banks, being supported by a privatised national bank, working in the private interest. When times were good banks made the profits; now times are bad the public is expected to bear the loss. Vast sums are being added to the national debt - our children will be working to pay back money created to be put into the pockets of present-day shareholders.

When the Bank of England accepts worthless assets in return for government bonds this is the consequence. We might support such a policy to prevent the collapse of our banks, but only if we take ownership and control of the banks as part of the deal. The high-street megaliths could be broken up into a series of regional, mutual banks with members of the community sitting on the boards and all surpluses reinvested in community projects.

The current crisis is the consequence of allowing banks to operate outside political control. The global financial system is crumbling, our national bank is in ruins: it is time we proposed a nationalisation of the whole money-creation system. Tweet

Poetry vs. Greed

Shelley wrote extensively on a very modern theme: the way scientific and technological advances are used not to create the earthly paradise for all but to generate profits for the few:

The cultivation of those sciences which have enlarged the limits of the empire of man over the external world, has, for want of the poetical faculty, proportionally circumscribed those of the internal world; and man, having enslaved the elements, remains himself a slave. To what but a cultivation of the mechanical arts in a degree disproportioned to the presence of the creative faculty, which is the basis of all knowledge, is to be attributed the abuse of all invention for abridging and combining labour, to the exasperation of the inequality of mankind? From what other cause has it arisen that the discoveries which should have lightened, have added a weight to the curse imposed on Adam? Poetry, and the principle of Self, of which money is the visible incarnation, are the God and Mammon of the world.

If we substitute a word like ‘imagination’ for what Shelley called ‘the poetical faculty’ this quotation has immediate relevance to our political project.


Shelley was not alone in his revolutionary interests. Other poets of the so-called the Cockney School, including John Keats, shared his anti-capitalist views. Robert Southey, who later joined the establishment and became poet laureate, wrote a poem in praise of Wat Tyler in 1817. Coleridge and later Wordsworth joined Southey in brainstorming ideas about an ideal form of just and egaliatarian government they called ‘pantisocracy’. The aim of all these poets, now termed romantic but more accurately revolutionary, was to rekindle the energy that had led to the French Revolution around the time of their births. The group revolved around Leigh Hunt and bears his name:

The Hunt Circle believed that one could subvert power by undermining the intellectual, emotional, ideological grounds for its appeal. If one could not literally assault the Bank of England, one could raise questions about the use of paper currency and ultimately the economic system it underwrote.

This revival was successful, resulting in political unrest in the UK leading to the Peterloo Massacre, the Chartist movement and the Great Reform Bill of 1832. Several of the revolutionary poets had already predicted that an extension of franchise would be granted rather than a reversal of the economic changes which had led to wage slavery and were their real target. Rather than this message being heard the poets have been sidelined into nature-lovers and creators of beauty. The message from their verse with the greatest staying power ‘A thing of beauty is a job forever’ (written by Keats in 1817) has been transmuted into an appeal for consumption rather than the rallying call of a movement bent on restoring mankind to its natural paradise on earth, as it was intended. Tweet

You only give me your funny paper

The really mysterious thing about the operation of central banks around the world is how they can - as if by magic - 'inject' money into failing banks and finance businesses. Where does this money come from? (Here is what Richard Douthwaite has to say about this.)

Although the Bank of England is officially apolitical, it is in fact deeply political. It can create money by selling government bonds, in other words mortgaging the country in order to create money. At present it is creating money in this way to bail out banks and investment houses who have bought worthless assets. They took the risk but we are paying for it. They took their bonuses when they made the deals, but those bonuses are being paid by ourselves and future taxpayers.

I confess the workings of the central banks are highly arcane and deliberately obscure, so I may have this wrong. If so, I would be glad to be informed of where BoE can find a hidden stash of gold that is not available to others.


The nature of money creation is a shared scam by the commercial banks. They create debts which other banks accept as credits, and this allows the banking system as a whole to create money from nothing, which they share between themselves to create their massive profits.

The problem is that the reverse also applies. In troubling times a bank will refuse to accept another bank's paper but will rather ask for something of real value. Since the very nature of the system of money creation means there is nothing of real value there, the circle which was once (at least if you are a bank) virtuous, will very rapidly become vicious.

This explains the anomalous situation that, as the central bank cuts its own interest rate (meaning we are getting less back for our bonds), banks are actually charging us higher interest rates. They have become more risk-averse which means they have less trust about whether we (or other banks) will repay, which they reflect in making money more expensive. This also has the handy side-effect of increasing their profits at a time when their traditional means for doing this has folded up.

In the face of such disastrous mismanagement of the financial system the obvious solution is for political authorities to take back the power to make money. I predict that any suggestion along these lines will be met with some worthy bank stooge (my money would be on the Ken Clarke-Denis Healy double-act) waffling on about inflation. A shame they forgot to mention that when they allowed the banks to create worthless paper money. Tweet

Please Stop Talking about Climate Change

It's not just the carbon dioxide emssions associated with the thousands of flights to Bali from around the globe that could be saved if these farcical international negotiations were abandoned once and for all. There would be all the additional hot air produced by over-excited and sweaty men posturing at each other like shaved gorillas. And all that extra methane produced by all those excessive summit-of-extravagance dinners.

Of all the infuriations that arose in my troubled breast during the tortuous days of the Bali discussions the most poignant was the coincidence of the signing of the 'Lisbon' EU treaty, a day before all the HoGs had to be in Brussels, meaning that they had to fly specially to Lisbon only for the tacky signing ceremony, accompanied by lift music. A vast outpouring of C02 just to inflate some Portuguese egos.

I know there are some good people involved in these talks, and I truly wish them well, but the angrier and baser part of me just wishes they would all just fucking shut up. The sight of their hypocritical staged concern while they destroy my planet is more destructive to my soul than can be soothed by the minuscule progress that may have been achieved. How many of those participating are unaware that they can never get anywhere because the negotiators are in hock to the economic interests that cannot tackle climate change without voluntartily giving away their wealth and power?

The pictures show the signatories in Lisbon and the negotiators at Bretton Woods, where this whole crazy system started in 1944. We will never solve the one without addressing the other. A money system based on debt and enforcing geometric economic growth can enver be compatible with sustainability. (I couldn't find a photo of the actual negotiators in Bali - please help if you can). How much has power shifted in the past 60 years: one female out of 27 is an infinite improvement, mathematically, over the no women at all around the table in 1944.


Perhaps the most dangerous thing about negotiations such as those at Bali is the temptation to be sucked into all that displacement activity while what we should be doing is taking the power back into our own hands and sorting out our own economic and social realities. Planet-saving begins at home, not on some paradise island. Tweet

Bank money: source of debt and destruction

A bank charter is literally a licence to print money. Since the system of requiring a certain proportion of assets to be kept on reserve has gradually been eroded the only control on banks’ ability to produce money as credit is our willingness to borrow, hence the constant stream of junk mail and TV advertising offers of credit. When the banks lend us the money the debt is listed and the money sought and retrieved but at that point it belongs to the bank. They have used our willingness to borrow as an opportunity to create a debt; when we repay the debt the money they have taken from us belongs to them. No wonder we are seeing record bank profits: they are simply creating their profits out of our debts.

No surprise also that we see spiralling levels of personal, business and public debt. Neoclassical economists see no problem with this. On their planet, the creation of money in this way will be balanced out by a corresponding amount of economic growth. Apart from the obvious fact that money supply is growing far more rapidly than economic activity from a green perspective this growth itself is a problem. So the most important first step towards creating the steady state economy that will not put intolerable pressure on the carrying capacity of the planet is to change the system of money creation that generates the need for the growth.

The discussion so far has been in terms of a national currency, but currencies are also exchanged and used to pay for exchanges of goods and services between national economies. This role is now played primarily by the dollar, which has acquired the status of international reserve currency since the agreement establishing the financial structure to dominate global capitalism after World War II. Under the Bretton Woods Agreement, the USA also extracted the right to have its currency—the dollar—considered the equivalent in terms of economic weight of gold reserves. In the post-war exhaustion, low morale and financial desperation of the other world powers the USA pulled off this extraordinary confidence trick which has enabled their dominance for the past fifty years but left us all with a teetering economic system. The coda to the story is that the USA proved itself incapable of maintaining the value of the dollar and, in the face of the need for massive liquidity resulting from the costs of war in Vietnam, Nixon ‘closed the gold window’ on 15 August 1971. This meant that dollars were now themselves no longer linked to the reserves in Fort Knox but floating free, and foreign Central Banks could no longer exchange their dollars for gold.

Global capitalism relies on one country’s currency to provide credibility for the system as a whole. Initially this role was undertaken by gold itself, as a commodity of real value, but the movement towards fiat money which went hand in hand with the capitalist expansion, meant that currencies rather than gold played this role. The reserve currencies—sterling, the dollar, the yen, and the euro—are all used to underwrite economic activity, but just as in banking there is a central bank so in the currency system there is a central currency and this is the currency of the most powerful player in the global economy—the global hegemon.

It is mainly its own credibility and that of its economy and military structure that guarantees the functioning of the international economy, but it needs its own back-up in the form of gold reserves. During its days of empire the UK played the role of preferred currency. At that time US bankers supported the pound, a fact that alienated those outside the charmed circle who could not understand why US gold was being used to support a foreign competitive economy. Similar questions were raised when Chancellor Gordon Brown sold 415 tonnes of the UK’s 715 tonnes of gold reserves in May 1999, reducing the official reserve percentage held in gold from 16.7 to 7 per cent, and substituting currency, a mixture of dollars, euros, and yen. This is a record low level of gold holdings compared with the 2000-2500 tonnes held between 1958 and 1965, most of which were sold during Britain’s financial crises of the late 1960s and early 1970s.

The may seem like technical stuff, but the central point is simple. The nature of money creation via bank debt is undemocratic and unsustainable. Money should be created by ourselves, as citizens, to facilitate necessary economic exchange. Neither we, nor our governments, should be required to borrow it from banks. The debts this create cripple lives and are also fuelling unsustainable economic growth. Tweet

Where does money come from?

If you ask people where money comes from they will probably tell you from a bank. Dig deeper and you will find that people believe that the money they take out of the bank has been deposited there by somebody: by the person herself, in which case it is simply a withdrawal, or by somebody else, in which case it is a loan. This is the first big myth of money, because the truth is that all or nearly all (depending on your theorist of choice) the money you take from the bank has been created out of thin air by the bank itself.

When you begin teaching students about the economics of banking you teach a fiction known as ‘fractional reserve banking’ and many who have never taken economics as an academic discipline or worked in a bank have a hazy notion about this system. It is understood, because of Hollywood movies about ‘runs on the bank’,that the bank does not actually hold, or need to hold, as much money as it lends to people. Because it is highly unlikely that everybody will come and ask for all their money, all at the same time, the banks can consider themselves to be acting with probity if they retain only a proportion as ‘reserves’, this proportion being understood to be around 10 per cent. Let us for the time being take this story as a reasonable account of how banks create money; it is the one that is reproduced in most economics textbooks. The first stage is the deposit of some money by a punter, let us say £100. Because banks have learned from historical experience that only one in ten of such punters will want her or his money back at any given time, they feel quite secure in lending £900 on the basis of this deposit, effectively inflating its nominal value, and thus reducing its real value, tenfold.

The second myth about money that is universally believed is that it is, and needs to be, backed by something of real value. Governments create money and this money has credibility because the government has a sufficient store of gold in its vaults to support its value. Like the reserve banking story, according to this fiction governments can create more money than the gold they have, but only up to a certain limit. This story was true for some time, but it was found that the uncontrollable growth of the capitalist economy rapidly outstripped the gold available to support it and maintaining a ‘gold standard’ stifled economic growth.

Eagle-eyed and sharp-minded readers will have noticed that there is an inconsistency between the two stories told so far, in that they disagree about who is responsible for creating the money. They have in common the idea that, while there should be something of real value backing up a currency at least in part, who owns this collateral and who therefore creates the money could be either the bank or the government. This was how things were, both banks and government were entitled to create money: governments created money as fiat issues, whereas banks created it in return for a debt.

So there are several different types of money, distinguishable by the nature of their back-up and by who controls them. Banks can create money on the basis of deposits, as credit. Governments can create money by selling bonds, or just by making a decision to create currency. It may be efficient to leave the job of generating credit for economic activity to banks, so long as they operate within political controls, but it will also be necessary to have money created by government both as credit, to fund public works, and as currency, to facilitate economic activity without the creation of parallel debts. The graph shows how the political attitude to money since the Second World has effectively been the privatization of money creation. It shows the relative proportions of money created by banks and governments over that period. This has had the inevitable consequence of increasing the proportion of money paid to bank shareholders and producing a squeeze on the money available for public investment.

. . . to be continued (when you can bear it!)

If you can bear any more just now you might like to follow this link to a short presentation about money.

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