How can we restore to our democracy the public good that is the modern banking system? And how can we avoid the confiscation of this public good in the future as we deal with the threat of climate change and energy insecurity?
The answers I would suggest are as follows. First, the public must develop a much greater understanding of how the bank money system works. Knowledge is both powerful and empowering. Today’s dominant flawed economic ideology will undoubtedly be weakened by wider public understanding of the financial system. Sadly, we cannot look to our universities for greater understanding. Departments of Economics are overwhelmingly staffed by ‘classical’ or ‘neo-classical’
economists. These have no firm foundation of monetary theory on which to develop appropriate theory or policies. Furthermore
university departments are packed with micro-economists who study economic processes in detail, and often in isolation, and then wrongly draw macroeconomic conclusions from such processes.
Stephen Cecchetti, at a workshop organised by the Bank of
International Settlements in May 2012 highlighted a key flaw at the heart of most micro-economic modelling:
Let’s say that we are trying to measure tide height at the beach.
We know that the sea is filled with fish, and so we exhaustively model fish behaviour, developing complex models of their
movements and interactions … The model is great. And the model is useless. The behaviour of the fish is irrelevant for the question we are interested in: how high will the seawater go up
107 the beach? … By building microeconomic foundations we are focusing on the fish when we should be studying the moon.91
Micro economic models are great, but they are useless. It is no
wonder that most mainstream academic economists could not answer the Queen’s famous question: “why was the crisis not predicted?”
Their models had missed the deluge that beached many banks and other financial institutions in 2007-9.
As the financial crisis rolls on and economic failure intensifies, many economists remain detached from policy debates that could help stabilise the global economy, and alleviate human suffering. And many still do not understand how the private banking system created debts, vast as space, with which to crash the economy.
Central bankers – the Guardians of the Nation’s Finances - have also surrendered to defeatism, and given up on any effort to re-structure the global banking system. Robin Harding filed this depressing report after the 2013 annual gathering of the world’s central bankers in Jackson Hole, Wyoming:
The world is doomed to an endless cycle of bubble, financial crisis and currency collapse. Get used to it. At least, that is what the world’s
central bankers – who gathered in all their wonky majesty last week for the Federal Reserve Bank of Kansas City’s annual conference
in Jackson Hole, Wyoming – seem to expect.
All their discussion of the international financial system was marked by a fatalist acceptance of the status quo. Despite the success of
unconventional monetary policy and recent big upgrades to financial regulation, we still have no way to tackle imbalances in the global economy, and that means new crises in the future.92
108 If the people lead, the leaders will follow
Given the defeatism of our leaders, it is imperative that the people must lead. In particular there are two overlapping groups in society whose engagement in these issues is vital. If they take the lead in debates about the monetary system, credit creation, and about the management and pricing of credit they will stand a much better chance of securing their objectives.
The first are women; the second, environmentalists.
For women the issue is central because first while women are largely responsible for managing household budgets, they have on the whole been excluded from managing the nation’s financial system and its budgets. Thankfully this is changing with the appointment of women to critically important posts within the economy. However women students, working women, the members of for example, Mumsnet, business women, all largely stand on the sidelines of debate about monetary theory and policy. At present the networks that dominate the financial sector are overwhelmingly male, and often shockingly sexist. Their dismissive attitude towards half the population and their enjoyment of an unequal distribution of knowledge are not
coincidental. They are part of the same despotism that harms the great majority, male and female and that feminism is uniquely well placed to challenge. If nothing else, feminists should want to
challenge the friends of finance every time they say that ‘any
housewife will tell you that you can’t spend money you don’t have’. I hope I have shown that this is nothing more than a ruse to obscure the realities of credit creation, and to enlist prudent women of modest
109 means to support policies that serve the interests of wealthy and reckless men.
Secondly, the refrain ‘there is no money’ most frequently applies to women’s interests and causes. While there is enough money to bail out bankers, there is never enough money to fund all the social services women provide to society. There is never enough money to reduce high rates of maternal and newborn mortality across the world; to pay fair and decent wages to women and to provide adequate and high quality childcare for women at work.
The creation and management of society’s money does not currently loom large in contemporary feminism. But it is a feminist issue, and is central to the liberation of women from the servitude of unpaid work.
The second group that stands to benefit from engaging in the issues raised by the management of the monetary system are
environmentalists. It is my contention that there is a direct link
between the de-regulated, uncontrolled expansion of credit, increased consumption and rising greenhouse gases. By isolating consumption from the creation of credit, environmentalists are fighting a losing cause. By failing to understand how ‘easy money’ finances ‘easy consumption’ and with it rising toxic emissions, eco warriors are missing a trick. By failing to understand that repayments on high levels of expensive debt lead to, and demand rising exploitation of the earth’s scarce and precious resources, environmentalists will fail to check rising greenhouse gases and the depletion and extinction of species.
The link between liberal finance and increased exploitation of the ecosystem is strong. To protect the ecosystem, it is vital to first manage and regulate finance.
110 But to be armed with knowledge and understanding is not enough.
We must go further. We must reinvigorate our political and democratic institutions, because they are the vehicles by which society collectively and democratically agrees to legislative and regulatory change. We must understand that if our democratic institutions have been hollowed out by liberalisation and
privatisation; if our politicians have been co-opted or captured, stripped of policy-making powers, and of the power to allocate resources – then that is not accidental, but the deliberate result of finance capital’s actions, its lobbying and its consequent despotic power over us all. To challenge finance, it is essential that we engage in, rebuild and strengthen democratic political parties and
institutions; that we participate in political debate and in elections, and in loud, open discussion about issues that have a profound impact on our lives.
In other words, we, the people, have to organise politically; and to be clear about the financial and economic transformation we aim for, in order to bring about a more ecologically sustainable world.
I have always believed that an alliance between Labour and Industry is important if Finance is to be effectively challenged. The interests of both would be served by subordinating Finance to its proper role as servant, not master of the real, productive economy. Some argue that the financialisation of Industry makes such an alliance impossible. I am not so sure. There are makers and creators out there who resent the bullying of financiers and the costs of rentier capitalism as much as any trades unionist or activist.
As to the policies needed to subdue finance capital, these are known, and have been briefly outlined in the last chapter of this short book.
We do not have to reinvent the wheel. We do not need a social
111 revolution. We simply have to reclaim knowledge and understanding of money and finance; knowledge that has been available to society for many centuries.
We need to reform and adjust monetary policy. We can turn the clock back, and move forward. Of course finance and their friends in the media, the universities and the establishment will resist, because monetary reform is the thing they fear most – even more than the revolts and occupations of city squares by citizens. Protest without concrete proposals for policy changes, and indeed for a
transformation, pose no threat to the invisible, intangible global financial system.
If we cannot, through sensible monetary reform, dismantle finance capital’s great power then it is my fear that society will react to the immiseration of unpayable debts, unemployment and falling incomes in ways that will be politically ugly, chaotic and destructive.
But it need not be this way. I have tried, in this short book, to explain that for those privileged to live in societies with a developed banking system, and with the public institutions needed to uphold the
integrity of banks there need never be a shortage of finance.
With sound monetary policies in place, we can ensure that society has the finance it needs to transform the economy away from its dependence on fossil fuels, and towards more sustainable forms of energy. Because there need never be a shortage of finance, we can afford to undertake this huge transformation and care for the ageing population, the young and the vulnerable. We can surely afford great works of art and music. In short we can afford all those things we can do, within the limits imposed by human shortcomings, and by the ecosystem.
112 But that great transformation can only happen if we the people equip ourselves with a full and proper understanding of money-creation, bank money and interest rates – and then begin to demand the reform and restoration of a just monetary system, one that makes finance servant to the economy, and removes it from its current role as master of the economy.
With an understanding of what constitutes just money, we - as women, environmentalists, trades unionists, producers, creators, businessmen and women, designers, activists, farmers - can lead our leaders into once again doing the right thing. Namely, adopting
straightforward and well understood monetary reforms that will break the despotic power that finance capital exercises over us all.
113 Acknowledgements
I am heavily indebted to Dr. Geoff Tily, author of Keynes’s General Theory, the Rate of Interest and ‘Keynesian’ Economics (Palgrave 2007); and of the re-print: Keynes Betrayed (Palgrave, 2010). Geoff has generously shared his wide knowledge of Keynes, and of
monetary theory and policy; pointed me in the direction of experts and scholarship; and has always done so with patience, wit and charm. However, he cannot be held responsible for any of the contents of this book. Many others have illuminated the murkier corners of monetary theory and policy for me, including Professor Victoria Chick, Professor Steve Keen and my colleagues at the new economics foundation, Tony Greenham and Josh Ryan-Collins. Mary Mellor, Margrit Kennedy, Gillian Tett, Susan Strange and Yves Smith have all helped shape and form my thinking, and I am immensely grateful to them for that. I owe a particular debt to Geoffrey Ingham author of The Nature of Money - a book very important to me because of its clear and forensic analysis of money and the monetary system.
I owe unpayable debts to my husband and best friend, Jeremy Smith.
He has been, and is the wind beneath my increasingly ragged wings.
Finally sincere thanks are due to Rachel Calder my agent, and Dan Hind, patient editor and publisher of this book. Both believed in me, and in the book, and that confidence is a gift for any author.
Recommended Reading List
Akyüz, Yilmaz, 2012, Financial Crisis and Global Imbalances – A Development Perspective, Geneva: South Centre
Chick, Victoria., 1977, The Theory of Monetary Policy, Revised
Edition, Oxford: Parkgate Books in association with Basil Blackwell
114 Galbraith, J.K., 1975, MONEY Whence it came, where it went,
Middlesex: Penguin Books Ltd
Greenham, Tony., Jackson, Andrew., Ryan-Collins, Josh., Werner, Richard., 2012, Where Does Money Come From?, Second Edition, London: nef
Helleiner, Eric, 1994, States and the Reemergence of Global Finance, USA: Cornell University Press
Ingham, Geoffrey, 2004: The Nature of Money, Cambridge: Polity Press
Keen, Steven, 2011, Debunking Economics – Revised and Expanded Edition: The Naked Emperor Dethroned?, London: Zed Books
Kennedy, Margrit, 1995, Interest and Inflation Free Money, Michigna:
Seva International
Keynes, John Maynard, 1973, The General Theory of Employment, Interest and Money, Cambridge: Cambridge University Press
Mellor, Mary, 2010, The Future of Money, London: Pluto Press Polanyi, Karl, 1975, The Great Transformation – the political and economic origins of our time, Boston: Beacon Press
Strange, Susan, 1998, Mad Money, Manchester: Manchester University Press
Tily, Geoff, 2010, Keynes Betrayed, UK: Palgrave Macmillan
Other relevant reading
Cockett, Richard., 1994, Thinking the Unthinkable, London:
HarperCollinsPublishers
Daly, H.E., 1973, Economics, Ecology, Ethics, San Francisco: W.H.
Freeman and Company
Daly, H.E., 1977, Steady-State Economics, San Francisco: W. H.
Freeman and Company
Elliott, Larry., Hines, Colin., Juniper, Tony., Leggett, Jeremy., Lucas, Caroline., Murphy, Richard., Pettifor, Ann., Secrett, Charles., Simms, Andrew., 2009 - A Green New Deal, London, Green New Deal Group.
http://www.greennewdealgroup.org. Also The Cuts Won’t Work http://www.greennewdealgroup.org/?p=161
115 Galbraith, John Kenneth., 1992, The Great Crash 1929, London:
Penguin Books Ltd.
Geisst, C.R., 2013, Beggar Thy Neighbor, Philadelphia: University of Pennsylvania Press
Graeber, David., 2011, Debt, the first 5,000 years. New York: Melville House Publishing
Guttmann, William., Meehan, Patricia., 1975, The Great Inflation, Farnborough: Saxon House
Hudson, Michael., 2003, Super Imperialism, Second Edition, London:
Pluto Press
Martin, Felix., 2013, Money, London: The Bodley Head
Murphy, Richard,. 2011, The Courageous State, London: Searching Finance
Smith, Yves., 2010, ECONNED, Basingstoke: Palgrave Macmillan
1 Satyajit Das: Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatoves. Financial Times series Prentice Hall 2010.
2 Geoffrey Ingham, The Nature of Money.
3 Karl Polanyi: The Great Transformation: the political and economic origins of our time. First Beacon Paperback edition 1957.
4 These include: John Law, John Maynard Keynes, Joseph Schumpeter, Karl Polanyi, Kenneth Galbraith and Herman Minsky; and of contemporary economists and sociologists like Victoria Chick, Steve Keen, Geoff Tily, Cullen Roche, Geoffrey Ingham and the school of ‘Modern Monetary Theory.’
5 Rational Irrationality, an interview with Eugene Fama, by John Cassidy, New Yorker, 13 January, 2010.
http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview -with-eugene-fama.html. I am grateful to Lars Syll for drawing this
interview to my attention in his blog: Self-righteous drivel from the
chairman of the Nobel prize committee, in the Real World Economics Review blog, 23 December, 2013.
rwer.wordpress.com/2013/12/23/self- righteous-drivel-from-the-chairman-of-the-nobel-prize-committee/#more-14584
6 When memory becomes money; the story of Bitcoin so far, by Izabella Kaminska, FT Alphaville, 03 April, 2013.
http://ftalphaville.ft.com/2013/04/03/1446692/when-memory-becomes-money-the-story-of-bitcoin-so-far/
116
7 Jonathan Levin, Governments will struggle to put Bitcoin under lock and key, The Conversation, 27 November, 2013.
http://theconversation.com/governments-will-struggle-to-put-bitcoin-under-lock-and-key-20731
8 Remarks reported by CNN Money, July,10, 2012.
http://money.cnn.com/2012/07/03/investing/libor-interest-rate-faq/index.htm
9 See also Michael Hudson and Cornelia Wunsch (eds.): Creating Economic Order: Record-Keeping, Standardization and the Development of Accounting in the Ancient Near East. CDL Press, Baltimore, 2004.
10 In An Orgy of Thieves by Jeffrey St. Clair and Alexander Cockburn, in CounterPunch, 22-24 November, 2013.
http://www.counterpunch.org/2013/11/22/an-orgy-of-thieves/
11 Murray N. Rothbard, page 90 in “The Mystery of Banking” Second Edition, Ludwig von Mises Institute, Auburn, Alabama, 2008.
12 Keynes Hayek – the clash that defined modern economics by Nicholas Wapshott, W.W. Norton & Company, Inc., 2011, p. 97.
13 Verbatim report, He found the flaw? In The Washington Times, written by Jon Ward, 24 October, 2008.
http://www.washingtontimes.com/blog/potus-notes/2008/oct/24/he-found-flaw/
14 Gillian Tett: Silos and Silences – why so few people spotted the problems in complex credit and what this implies for the future. Financial Stability Review No. 14 Banque de France July 2010. Online: http://www.banque-france.fr/fileadmin/user_upload/banque_de_france/publications/Revue_d e_la_stabilite_financiere/etude14_rsf_1007.pdf [accessed 3/10/2013, 11:03 GMT].
15 See Summers on bubbles and secular stagnation forever, FT Alphaville, 18 November, 2013, 09.27.
http://ftalphaville.ft.com/2013/11/18/1696762/summers-on-bubbles-and-secular-stagnation-forever/
16 Quoted in Kari Polanyi Levitt: From the Great Transformation to the Great Financialisation: on Karl Polanyi and other essays. Zed Books 2013, p. 79.
17 See Cullen Roche: Understanding why Austrian Economics is Flawed.
Blog Pragmatic Capitalism 10 September, 2013. Online:
http://pragcap.com/category/myth-busting [accessed 3/10/2013, 10:58 GMT]
18 For more on this, see Mrs Thatcher’s Economic Experiment by Victor Keegan, published by Allen Lane, 1984.
19 Mrs Thatcher’s Economic Experiment by William Keegan, Penguin Books, 1984, pg.208.
20 As above.
21 See for example, this editorial from a World Bank publication:
Modernizing Multilateralism and the Markets. World Bank Washington, DC October 6, 2008. Online:
http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21 946394~menuPK:51340323~pagePK:64257043~piPK:437376~theSitePK:4 607,00.html [accessed 30/09/2013, 17:10 GMT].
22 CBS News: Ben Bernanke greatest Challenge. Interview 15 March 2009.
Online: http://www.cbsnews.com/8301-18560_162-4862191.html [accessed 3/10/2013, 12:47 GMT].
23 Paul Sheard: Repeat After Me: Banks Cannot And Do Not "Lend Out"
Reserves. New York Standard and Poor’s 13 August, 2013. Online:
http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After _Me_8_14_13.pdf [accessed 3/10/2013, 12:57 GMT].
117
24 Mervyn King, cited by the New Economics Foundation: Banking
Standards. Written evidence from the New Economics Foundation. NEF 20 November, 2012. Online:
http://www.publications.parliament.uk/pa/jt201314/jtselect/jtpcbs/27/
27vi36.htm [accessed 17/09/2013, 17:54 GMT].
25 Jaromir Benes and Michael Kumhof: The Chicago Plan Revisited.
International Monetary Fund/Bank of England presentation March 7, 2013. Online:
http://www.bankofengland.co.uk/research/Documents/ccbs/Workshop2 013/Presentation_Kumhof.pdf [accessed 15/09/2013, 12:34 GMT].
26 Geoffrey Ingham: The Nature of Money. Cambridge Polity Press 2004, p.6.
27 Joseph Schumpeter: History of Economic Analysis. Oxford University Press 1954, p. 322.
28 Frances Coppola: There's a problem with the transmission. Coppola Comment Blog 31 May, 2013. Online:
http://coppolacomment.blogspot.co.uk/2013/05/theres-problem-with-transmission.html [accessed 30/09/2013, 17:30 GMT].
29 The Reckoning: Taking Hard New Look at a Greenspan Legacy. by Peter S.
Goodman in the New York Times, October 8, 2008.
http://www.nytimes.com/2008/10/09/business/economy/09greenspan.
html?pagewanted=all&_r=0
30 Andrew G. Haldane (Executive Director for Financial Stability at the Bank of England): What have the economists ever done for us? Vox EU October, 2012. Online : http://www.voxeu.org/article/what-have-economists-ever-done-us [accessed 29/09/2013 16:34 GMT].
31 Sir Mervyn King in an interview with Martin Wolf: June 14, 2013: Lunch with the FT. June 14, 2013. Online