1

2

Just Money

How Society Can Break the

Despotic Power of Finance

Ann Pettifor

3

Just Money

© 2014 Ann Pettifor

All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission.

Cover design by Jordan Chatwin

The moral rights of the author have been asserted.

Commonwealth publishing.

4

Introduction

“Modern finance is generally incomprehensible to ordinary men and women … The level of comprehension of many bankers and regulators is not significantly higher. It was probably designed that way. Like the wolf in the fairy tale: “All the better to fleece you with.”

Satyajit Das.1

The global finance sector today exercises extraordinary power over society and in

particular governments, industry and labour. The sector dominates economic policy

making, undermines democratic decision-making, has financialised all sectors of

the economy including the arts, and has made vast profits, often at the expense of

both governments and the productive sector.

Yet even as finance capital eludes and defies governments, and as legislators bow to

the sector’s demands to cut public services in the name of ‘austerity’, finance has

become more, not less, dependent on the state and on taxpayer support. Despite its

detachment from the real economy and from state regulation, the global finance

sector has succeeded in capturing, effectively looting, and then subordinating

governments and their taxpayers to the interests of financiers.

Geoffrey Ingham, the Cambridge sociologist describes the power the sector now

wields as ‘despotic’.2

In this short book, I hope to briefly outline how society can begin to unpick the

knots of jargon and gibberish that finance has used to immobilise the rest of us,

and how society can break the power of despotic finance. I will argue that while the

finance sector abuses the monetary system for private profit, the system is also

potentially a great public good. Our money and monetary system has evolved over

centuries as a public infrastructural resource - just as the sanitation system was

developed as a public good. Managed well, our monetary system could enable

society to do what we can do. And as a public good our monetary system, like our

5

sanitation system could and should be just – and serve all citizens, not only a

wealthy elite.

Unfortunately because most orthodox economists treat money as if it were ‘neutral’

or simply a ‘veil’ over economic transactions, the question of how to control the

monetary system and in whose interests it should be managed, has long been

neglected. In the words of a leading economist who will remain anonymous money

or credit is “a matter of third order importance.” Some think that this neglect by the

economics profession is not accidental. It has enabled global finance capital to

thrive, untroubled by close academic or public scrutiny.

For the monetary system to be managed as a public good, there must be greater

public understanding of money, and how the system works. If we are to reclaim the

public good that is the monetary system; if we are to once again subordinate the

small elite that makes up the finance sector to the interests of society and the

economy as a whole, there must be democratic and accountable oversight of the

system. We know it can be done, because in our recent history, after the 1929

financial crash, society succeeded in wrenching control of the monetary system

back from a reckless and greedy wealthy elite.

Unfortunately citizens will not receive much help in understanding or taming

finance from the economics profession, from regulators or officials because many

are either uninterested or ill-informed about the nature of both money and banking.

While the dominant, orthodox or neoclassical school of economists may pay

little attention to ‘neutral’ money in designing models of the economy, they

also conceive of it as akin to a commodity. Money, in their view is

represented by a tangible asset or commodity, like gold or silver. In this

view money can represent a surplus to be set aside or saved, accumulated

and then loaned out. In this story, savers lend to borrowers, and bankers

are mere intermediaries between savers and borrowers.

Because neoclassical economists conceive of money in this way, and

because all commodities have a scarcity value, these economists theorise as

if money is subject to market forces of supply and demand, and like

commodities, can become scarce. But money is not like a commodity. To

6

define it as such is to create a ‘false commodity’ as the political economist

Karl Polanyi argued. 3

There is an alternative understanding of money, one that is periodically lost

to history. This understanding informs the work of some of our greatest and

most influential economists.4 They have all understood that money is not

and never has been a commodity, nor is it based on a commodity. Instead

money is a social construct – a social relationship based primarily and

ultimately on trust.

This gap between the orthodox or neoclassical understanding of the nature

of money and, for example, the Keynesian understanding of money is as

wide and profound as that between 16th century Ptolemaic and Copernican

concepts of the heavens. It is a gap in understanding that led the 2013

winner of the Nobel prize in economics, the orthodox Eugene Fama to make

the response below to a question posed by a journalist on the New Yorker:

Many people would argue that… there was a credit bubble that inflated and ultimately burst.

Eugene Fama: I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.

So what caused the recession if it wasn’t the financial crisis?

Eugene Fama: (Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.) We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity.

……Let me get this straight, because I don’t want to misrepresent you. Your view is that in 2007 there was an economic recession coming on, for whatever reason, which was then reflected in the financial system in the form of lower asset prices?

Eugene Fama: Yeah. What was really unusual was the worldwide fall in real estate prices.

So, you get a recession, for whatever reason, that leads to a worldwide fall in house prices, and that leads to a financial collapse ...5

7

Moving away from an economic orthodoxy based on Fama’s flawed notion of

credit as the savings of ‘people that save too much’ will be as revolutionary

as the paradigm shift that took place under the leadership of Copernicus.

For John Law, John Maynard Keynes, Joseph Schumpeter and Karl Polanyi

amongst others, the thing we call money has its original basis in a promise,

a social relationship: credit. “I trust that in exchange for my favour to you,

you will (promise to) repay me – now or at some time in the future”. The

word credit after all, is based on the Latin word credo: I believe. “I believe

you will pay, or repay me for my goods and services, now or at some point

in the future.”

Money, and in particular credit (and its ‘price’ – the rate of interest) became

the measure of that trust and/or promise – or indeed of the lack of trust. (If I

do not trust you to repay, I will demand/expect more from you 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.

To understand this, think of your credit card. There is no money in most

credit card accounts before a user begins to spend. All that exists is a social

contract with a banker; a promise made to the banker to repay the debt

incurred as a result of spending on your card, at a certain time in the

future, and at an agreed rate of interest. And when we spend ‘money’ on our

credit card, we do not exchange our card for the products we purchase. This

is because money is not like barter. No, the card stays in our purse. Instead

the credit card, and the trust on which it is based, gives us the power to

purchase a product. It is the means by which we purchase the good.

Your spending on a card is expenditure created ‘out of thin air.’ The

intangible ‘credit’ – nothing more than the bank’s and the retailer’s belief

that you will honour an agreement to repay - gives you purchasing power.

Money in this case is based on the trust your bank has in your ability and

willingness to repay credit, and the trust that the retailer has in the bank

8

honouring your debt. As such, all credit and money is a social relationship

of trust – between a banker and its customers; between buyers and sellers;

between debtors and creditors. Between shoppers and retailers accepting

(and trusting) the promise made in return for a transaction. Money is not,

and never has been a commodity like a card, or oil, or gold – although coins

and notes have, like your credit card, been used as a convenient measure of

the trust between individuals engaged making transactions. So, if a banker

trusts you more than most others, you will be given a fancy gold or

platinum card. If a banker does not trust you or your ability to pay, you will

not be granted a credit card, or you may be given one with a very low limit.

As a result you will lose purchasing power.

Faith, belief and trust - that someone is reliable, good, honest and effective -

is at the heart of all money transactions. Without trust monetary systems

collapse and transactions dry up.

Because trust is so important to the economy, society has developed

institutions to uphold trust in, for example, the belief that you will honour

the obligations you make when you create money out of thin air and spend

it on your credit card. These include the law of contract, a system of

accounting, the criminal justice system, central banks and the banking

system – that provide confidence to the retailer and banker that you and all

those active within the banking and monetary system, will honour

obligations. In countries without such institutions – like some in Africa -

credit is hard to come by, and credit cards are not in use.

The Bitcoin mania

Bitcoins have introduced millions to a currency that appeared from nowhere and is,

apparently “cryptographic proof”. Whereas private banks can create money by a

stroke of the keyboard, the creation of Bitcoins involves, apparently, vast amounts

of computer processing power. This power is capable of deploying a complicated

algorithm that approximates the effort of “mining” coins.6

The Bitcoins so “mined” have become the new ‘gold’ and Bitcoiners the new

‘goldbugs’.

9

This new currency (which claims to be a ‘commodity’) is a form of peer-to-

peer exchange. It began life in the murky world of the ‘Silk Road’ ‘an online

Black Market on the Deep Web’ (to quote Wikipedia) and has generated a

great deal of excitement. It was ‘created’ by an unknown computer scientist,

a Bitcoin ‘miner’. It is now used for international payments, but also for

speculative purposes.

There are two striking things about this new currency: its creators (computer

programmers) have apparently ensured that there can never be more than 21m

coins in existence. Bitcoin therefore is like gold: its value lies in its scarcity. This

potential shortage of Bitcoins has added to the currency’s speculative allure,

leading to a rise in its value. However, these rises and subsequent falls in its value

has made it unreliable as a means of exchange for merchants. Having to regularly

adjust prices upwards or downwards when you are trading goods and services is

tricky.

Second, this money or currency is not buttressed by any of the institutions

named above. Its great attraction to its users is precisely that it bypasses

the state and all regulatory institutions. Indeed it appears to be based on

distrust. One commentator notes “Bitcoin was conceived as a currency that

did not require any trust between its users”. 7

Equally its scarcity means that unlike the endless and myriad social and economic

relationships created by credit, Bitcoin’s capacity to generate economic activity is

limited – to 21 million coins. Its architects deliberately limit economic activity to 21

million Bitcoins in order, ostensibly “to prevent inflation”. In reality the purpose is

to ratchet up the scarcity value of Bitcoins most of which are owned by originators

of the scheme.

In this sense Bitcoin ‘miners’ are no different from goldbugs talking up the value of

gold; from tulip growers talking up the price of rare tulips in the 17th century; or

from Bernard Madoff, talking up his fraudulent Ponzi scheme.

As this goes to press, speculators have inflated to delirious heights the

value of the Bitcoin. The winners will be those who sell - just before the

bubble bursts. In the absence of regulation that reinforces and upholds

trust, the losers will be robbed. Trust is central to the millions of

transactions that take place every day in every economy for every kind of

10

good or service. For society and the economy to function effectively, it has to

be defended, protected and upheld. This can only be achieved through

regulation based on society’s widely shared values of honest and fair

dealing, and on the institutions based on those values.

-----------------------------------------------------------------------------------------

In 2012 it emerged that bankers were manipulating the rate of interest used

to determine the value of trillions of dollars of debt, and known as the

London inter-bank offer rate or LIBOR. Andrew Lo, MIT Professor of Finance

said on CNN that the LIBOR scandal dwarfed “by orders of magnitude any

financial scam in the history of markets.” 8

However the LIBOR scandal did illuminate several points: first that the rate

of interest – the ‘price’ of money - is not, it turns out, the result of the

supply and demand for money or savings. Interest too is a social construct,

set and manipulated, in the case of LIBOR by ‘submitters’ in the back

offices of banks.

In ancient times trust – in money, in units of measurement, in exchanges –

was upheld and enforced by respected community and religious leaders and

institutions. These included the chiefs of villages, the officers of temples;

and senior, trusted members of the Church or Mosque.9 They ensured that

a pound of sugar was weighed correctly; that a pint of beer was indeed a

pint; that a yard of cloth was equivalent to the standard, and that money

exchanges were fair.

Today trust in our monetary system ought to be upheld by public

authorities – the courts, accountants, regulators, central bankers -

accountable to, and trusted by society. However most regulators and central

bankers have bowed to the ideology of free markets, and dispensed with

powers and regulations to uphold and enforce trust in financial

transactions. Instead transactions are “liberalised” - left to the whims of

financiers operating in the so-called ‘free’ market of finance. But that

‘market’ too is false. Financiers trashed our financial system by

transforming the very human, social relations at the heart of money into

11

‘products’ they could trade and ‘markets’ they could manipulate. By

detaching social relationships from regulation, and allowing them to be

enforced by the ‘invisible hand’ of the abstract ‘market’ – regulators,

economists and bankers abdicated their responsibility for upholding and

defending society’s moral and ethical standards. No wonder fraudsters,

cheats and crooks had a field day! Backed by large swathes of the

economics profession, criminals, charlatans, Ponzi schemers and common

thieves are effectively granted free rein to rob and loot, to cheat and lie, to

evade tax, to launder money, to move vast sums of illicit ‘dirty’ money

across borders – and to do so unfettered by law or regulation.

No wonder the ‘free marketisation’ of social relations was welcomed by

finance capital and by criminal elites embarked on what has been called “an

orgy of thievery” 10. No wonder too that it is a deluded and utopian mission,

one that leads inevitably to serial financial crashes, wider economic failure

and social breakdown.

This deluded economic theory (that trust does not need to be carefully

regulated and upheld by qualified, publicly accountable institutions like the

law) originates in the flawed understanding that so many professional

economists have of money. These free market ‘economists solemnly believe

that money is “gold coin and bullion” to quote Murray N Rothbard 11; that

credit is just a “surrogate for gold”; that bankers are mere intermediaries

between lenders and borrowers, and market forces alone can manage,

discipline and regulate the supply and exchange of money.

The whole, vast, shaky edifice of today’s liberalised financial system has

been erected on this flawed understanding of money, and on hopeless

attempts to transform the social relationships at the heart of money into

marketable ‘products’. To paraphrase Keynes’s criticism of the Austrian

economist Friedrich Hayek, this is an example of how, starting with a

mistake, a remorseless logician can end in Bedlam. 12 It is because of the

flawed foundations of economic orthodoxy – taught in almost every

university of the world - that society suffers both periodic shortages of

finance, and regular and sometimes catastrophic financial crises.

12

There need never be a shortage of finance

The operations (if not the utterances) of bankers demonstrate that they do

not share the orthodox economist’s misunderstanding of money. Both

central and commercial bankers have known for more than three hundred

years (when the Bank of England was founded) that credit and bank money

is based on trust between debtors and creditors; that as such, it can, in

collaboration with borrowers and lenders, and on the basis of contract, be

‘created out of thin air’ by both central banks but overwhelmingly by

licensed private bankers. (Note: not all private banks create credit. Some

non-standard financial institutions – like payday lenders, crowd funders

and savings institutions - act simply as intermediaries between

savers/depositors and borrowers/investors. Savings banks (that is, old-

style building societies in the UK and savings and loans associations in the

US) only lend out existing and limited savings or funds deposited in their

banks. This is not the case for credit-creating, commercial, licensed banks.)

Central bankers understand that in a well-developed, regulated monetary

system in which credit is created ‘out of thin air’ there need never be a

shortage of money or finance. The creation by central bankers of trillions of

dollars of ‘bailout’ finance via a process defined as ‘quantitative easing’

reminded wider society of this power after the 2007-9 crash. Yet it is a

power that the Bank of England, for example, has exercised since its

founding in 1694.

Monetary systems as a civilizational advance

Monetary systems are one of human society’s greatest achievements. The

creation of money by a well-developed monetary and banking system was a

great civilizational advance. As a result there need never be a shortage of

finance for private enterprise or the public good. There need never be a

shortage of money to invest in, and create economic activity and full

employment. There need never be insufficient money to tackle energy

insecurity and climate change. There need never be a shortage of money to

solve the great scourges of humanity: poverty, disease and inequality; to

ensure humanity’s prosperity and wellbeing; and the ecosystem’s stability.

13

The real shortages we face are first, humanity’s capacity: the limits of our

individual, social and collective corruptibility, integrity, imagination,

intelligence, organisation and muscle. Second, the physical limits of the

ecosystem. These are real limitations. However, the social relationships

which create money, and sustain trust, need not be in short supply in a

well regulated and managed monetary system.

Within a sound monetary system we can afford what we can do. Money

enables us to do what we can do within our limited natural and human

resources.

Money or credit does not exist as a result of economic activity, as many

believe. Like the spending on our credit card, money creates economic

activity.

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, credit financed the firm and entrepreneur that employed that

young person; and an overdraft probably financed the wage she earned in

that first job. However, her employment hopefully created additional

economic activity (by e.g. producing widgets) and generated income with

which the employer could pay down the overdraft, repay the debt and afford

her wage.

In a well-managed financial system, money provides the stimulus, the

finance needed for innovation, for production and for job creation. In a well-

managed economy, money is invested in productive, not speculative

economic activity. In a stable system, economic activity (investment,

employment) generates profits, wages and income that can be used for

repayment of the original credit.

There are many constraints on the ‘production’ of this social construct that

we call money, and they include inflation on the one hand, and deflation on

14

the other. When the private banking system is not managed, bankers can

create more money than can usefully be employed. This can lead to too

much credit or money chasing too few goods or services. Equally, as now,

the private banking system can contract the amount of credit created,

deflating activity and employment. But if the banking system is properly

managed by public authorities there need never be a shortage of finance for

sound productive activity.

That is why sound banking and modern monetary systems - like sanitation,

clean air and water - can be a great ‘public good’. They can be used to

ensure stability and prosperity, to advance development and to finance

ecological sustainability, as I explain below.

Managed badly, a banking system can fatally undermine social, political,

economic and ecological goals – as they do in many low income countries.

Bankers and other lenders (including micro-lenders) can charge usurious –

and ultimately unpayable rates of interest on society’s greatest asset – trust,

expressed as credit. By using their despotic power to withhold credit or

finance from the economy, bankers and financiers can cause economic

activity to contract, leading to the deflation of wages and prices.

Left to run amok, a banking and financial system can, and regularly does

have a catastrophic impact on society and the ecosystem. Managed badly a

financial system can usurp and cannibalise society’s democratic

institutions.

We are living through a disastrous era in which the finance sector has expanded

vastly – an era in which most financiers have virtually no direct relationship to the

real economy’s production of goods and services. De-regulation has enabled the

finance sector to feed upon itself, to enrich its members and to detach its activities

from the real economy. Productive actors in the real economy – the makers and

creators - have periodically been flooded with ‘easy if dear money’ and just as

frequently starved of affordable finance. This instability has led to increasingly

frequent crises since the ‘liberalisation’ policies of the 1970s; and to prolonged

failure since the financial crisis of 2007-9.

15

Many low-income countries are dogged by badly managed and lightly

regulated financial systems, and therefore by a shortage of finance for

commerce and production. This is in part because they lack the necessary

public institutions and policies that underpin a properly functioning

financial sector. No monetary and banking system can function well without

a system of regulation, without sound accounting, and without a system of

justice that enforces contracts, and prevents fraud. But while low-income

countries have been encouraged to open up their capital and trade markets,

and to invite in private wealth, they have been discouraged or blocked

outright in their efforts to build sound public institutions and policies to

manage financial flows and to regulate the creation of credit by the financial

sector.

The role of ‘robber barons’

In countries with weak regulatory institutions and systems, in other words

without a sound monetary system, entrepreneurs are obliged to turn for

loan finance to those who have acquired by fair means or foul, stocks of

wealth or capital. Poor country governments turn to institutions like the

IMF and World Bank, or to the international capital markets, for foreign

hard currency. As a consequence of dependence on both domestic and

international ‘robber barons’ money is dear. It is lent by powerful creditors,

with the authority to create credit; with savings or a surplus, at high rates

of interest – rates that often exceed the income or returns that can be made

on the investment. If it is borrowed in foreign currency, then volatility in

currency movements can both increase the cost of the loan, and also

diminish those costs. But volatility is a deterrent to promising enterprises.

As a result, innovation can be held back, unemployment and under-

employment remain high, and poverty entrenched.

Yet it does not have to be this way. With a sound banking and monetary

system, there need never be a shortage of affordable finance to meet a

society’s needs.

Our monetary systems have been cut loose from the ties that bind them to

the real economy, and to society’s relationships, its values and needs. That

16

is largely because our monetary systems have been captured by wealthy

elites who, with the collusion of regulators and elected politicians have

undermined society’s trust, and now govern the financial system in their

own narrow, rapacious and perverse interests.

The stealthy transfer of power to finance capital

Many orthodox economists are opposed to managing and regulating finance in the

interests of society as a whole. Acting consciously or unconsciously on behalf of

creditor interests, many effectively provide justification for ‘easy’ (that is

unregulated) but ‘dear’ (at high rates of interest) credit, the worst possible

combination for society and, I will argue, the ecosystem.

Orthodox economists also have an unhealthy obsession with the state, which they

accuse of ‘rent-seeking’ while ignoring the rent-seeking of the private sector.

As recently as October 2008 former Governor of the US Federal Reserve, Alan

Greenspan made the ideology explicit under cross-examination by a Congressional

Committee, chaired by Henry Waxman. 13 The chair of the committee reminded Mr

Greenspan that he had once said:

I do have an ideology. My judgement is that free, competitive markets are by

far the unrivalled way to organise economies. We've tried regulation. None

meaningfully worked.

Greenspan later went on to explain that he had

found a flaw in the model that I perceived as the critical functioning structure

that defines how the world works, so to speak ... That's precisely the reason I

was shocked, because I had been going for 40 years or more with very

considerable evidence that it was working exceptionally well.

Over this period of 40 years, and thanks to the pervasive influence of the

ideology, western governments used ‘light-touch regulation’, ‘outsourcing’ ‘

globalisation’ and other policy changes to effectively transfer power and

regulation over the public good that is the monetary system and the

nation’s finances to private wealth. This transfer conceded two great powers

to the private banking system. First the power to create, price and manage

credit without effective supervision or regulation. Second the power to

17

‘manage’ global financial flows across borders – and to do so out of sight of

the regulatory authorities.

By this transfer, democratic and accountable public authorities handed

effective control of employment, welfare and incomes to remote and

unaccountable financial institutions and individuals – e.g. global bond

markets - seeking usurious capital gains.

This hand over of great financial power took place by stealth. There was

virtually no public or academic debate about the impact of this transfer

away from public, accountable regulators to private interests. Instead, the

public were offered reassuring platitudes about the self-correcting power of

free markets. Competition, we were told, would eliminate cheating and

fraud.

The result was entirely predictable. Small groups of individuals and

corporations in the private finance sector made historically unprecedented

capital and criminal gains. Vast wealth was extracted from those outside

the sector. Those engaged in productive activity experienced low growth.

Profits fell relative to earlier periods, unemployment rose and wages

declined as a share of GDP. Inequality exploded. Trust and confidence in

the banking system and in democratic and other public institutions waned.

The reason is not hard to understand. The transfer of economic power away

from sound, elected, accountable institutions to wealthy elites had hollowed

out democratic bodies and placed key decision-makers – like the heads of

global banks - beyond the reach of the law, of regulators and politicians.

The economics profession and the universities stood aloof, as enormous

powers were concentrated in the hands of small, reckless financiers.

Academic economists focussed myopically on micro-economic issues and

lost sight of the macro-economy. They obliged the finance sector by largely

ignoring its activities. To this day, the economics profession remains

distanced from the crisis, and almost irrelevant to its resolution.

While our universities turned a blind eye to this capture of a great public

good for private gain, knowledge of the monetary system was scant, and

18

sometimes deliberately buried. Politicians and the media were dazed and

confused by the finance sector’s activities. Gillian Tett, one of the few

journalists bold enough to explore and challenge the world of international

financiers and creditors, blames a ‘pattern of “social silence”…which

ensured that the operations of complex credit were deemed too dull,

irrelevant or technical to attract interest from outsiders, such as journalists

and politicians.’ 14 Finance was too dull and arcane to attract the interest

of mainstream feminism and environmentalism.

As a result of this ‘social silence’ citizens were unprepared for the crisis.

They remain on the whole ignorant of the workings of the financial system

and its operations. They were made ignorant of ways in which money or

credit can be deployed as a public good. It is this widespread confusion and

lack of understanding that enabled the private financial sector to seize

control of, and manipulate the global monetary system.

It is obfuscation and confusion that led the financial sector to abuse one of

society’s greatest assets: trust.

Overcoming the defeatism of economists and politicians

This book has been written in the belief that money and the monetary

system are not difficult to understand. Second, that a broad understanding

of money and credit, and of the way in which the banking system operates

is essential if citizens of democratic states are to reinvigorate and empower

the democratic process, and override the despotic, unaccountable power of

today’s financial plutocracy. Such knowledge or understanding is vital if we

are to see through the academic obscurantism and economic ‘quackery’ of

much debate around monetary systems. We need such understanding as a

basis for sound financial regulation and policy-making. It is also vital if we

are to overcome the defeatism of democratically elected politicians, leaders

and economists. Politicians are quick to abandon democratic processes and

the interests of those they are elected to represent. Economists are defeatist

about the possibilities of recovery from crisis, and about reform – offering us

only business as usual, or “secular stagnation”15 as Larry Summers,

Professor of Economics at Harvard University opined at an IMF seminar in

19

2013. Too many gladly subordinate the interests of society to the interests

of global finance capital; others wrongly believe that there is no alternative.

This is hardly surprising, given the financial sector’s grip on how it is

described, not to mention the lavish rewards that await politicians on

retirement.

Karl Polanyi frequently reminded his readers that ‘militant liberals – from

Maucaulay to Mises, from Spencer to Sumner – expressed their conviction

that popular democracy was a danger to capitalism.’ 16 Many of the

architects of the Eurozone’s monetary system share that scepticism of

democracy, as explained below.

This book takes the opposite position: today’s rampant financialisation of

the global economy is a grave danger to the revival of employment and

economic activity, to the values societies hold dear, and to democracy. The

experience of financial de-regulation has shown that capitalism insulated

from popular democracy degenerates into rent-seeking, criminality and

grand corruption.

We have done it before. We can do it again

We have been here before. In the 1930s economists and politicians insisted that

democracy be placed above the power of money; that finance should be servant, not

master, to the economy and society. The economic cataclysm of the Great

Depression came to be regarded as the direct consequence of the financial

liberalisation (or ‘globalisation’) policies that prevailed in the 1920s. When the UK

economy slumped in the 1930s the Bank of England refused to act proactively,

which is why it was nationalised in 1945 and remains to this day under democratic

control, even if that control is not always exercised.

After 1931 control over the finance sector in the United States was wrested from

private wealth and placed in the hands of the transparent and accountable state.

Under a later mandate (the 1944 Bretton Woods Agreement) the democratic state

and central banks were charged with a responsibility to manage, and maintain

stability and balance in international trade and finance. All aspects of interest rate,

exchange, banking and financial market policy became a matter for government.

Central banks were brought under increased public control, even - as in Britain

20

and France - nationalised. The drivers behind these policies were elected politicians:

Franklin Delano Roosevelt, France’s Leon Blum and, later, Clement Attlee’s Labour

Party. But it was the British economist, John Maynard Keynes that provided the

intellectual underpinnings of this re-ordering of society.

Liberalised finance with the support of orthodox economists, has once again

weakened democratic oversight of the economy and hollowed out the

institutions of states that oversee and regulate the finance sector. If we are

to prevent the kind of cataclysm that befell the world in the first half of the

20th century, then greater public understanding of how the financial system

operates, and how it can be reformed, is vital.

Challenging taboos about money

I hope to shed some light on what Keynes called capitalism’s “elastic

production of money”, and to indicate how monetary reform can restore

oversight of the finance sector to democratic institutions.

I have two overriding objectives, First, to challenge and nail the argument

that ‘there is no money’ for society to address major threats, to fight poverty

and to meet human needs. Money and monetary systems, I will argue, are

social constructs, and can and must be managed, mobilised and deployed

to serve the wider interests of society and the ecosystem.

Second, I want to force into the open a subject that is taboo: the role of

private, commercial banks in the creation of money ‘out of thin air’. For too

long orthodox economists have misled politicians and others, and focussed

only on central bank money creation. They have deliberately down played

the role of the private sector: in credit creation or ‘printing’ money; in

providing or denying finance to productive sectors; and in generating

inflation.

Monetarists, such as those that advised Mrs Thatcher’s government, never accuse

the private commercial banking system of ‘printing money’. Yet the private banking

system ‘prints’ 95% of the money in circulation in Britain, according to the governor

of the Bank of England. It is they who hold the power in an unregulated system to

provide or withhold finance from those active in the economy.17 Yet neoliberal

21

economists largely ignore private money ‘printing’ and aim their fire instead at

governments and state-backed central bankers whom they accuse of stoking

inflation by the excessive creation of money.

The blind spot for the private creation of credit is part of the ideology rooted in the

belief that “free, competitive markets” are the best way to organise the finance

sector and the economy. This belief is in turn rooted in contempt for the democratic

state – a contempt actively expressed by the Thatcher government of the 1980s. The

monetarist blind spot for the link between private banks’ money creation and

inflation goes some way to explaining why Mrs Thatcher’s economic advisers found

they could not control both the British money supply and inflation. 18 They had

aimed only to control the public money supply – government spending and

borrowing. Partly as a result of monetarist doctrine, the Thatcher administration

presided over a rise in the inflation rate to 21.9% in its first year of office. Only

during the fourth year did inflation come down below the inherited rate. As William

Keegan explains, the “defunct (monetarist) economic doctrine” led not only to a rise

in inflation, but also to a savage squeeze on the British economy and to escalating

unemployment.19 Unsurprisingly, “the private sector did not respond…because the

methods chosen by the evangelicals made the economic outlook much worse, so

that there was no incentive for it to respond.” 20

Management of the monetary system

While the creation of money “out of thin air” is a fascinating, and to many a

fresh, discovery, it is not finance per se, but rather the management or

control over the ‘elastic production of money’ that matters. There should be

no objection to a monetary system in which commercial banks create

finance needed for the real economy. Indeed commercial banks have a

critical role to play in providing and smoothing the flow of finance around

the economy. Bank clerks have critical roles to play in managing myriad

social relationships between debtors and creditors, and in assessing the

risk of the bank’s borrowers. Assessing Mrs Jones’s application for a

mortgage, Mr. Smith’s application for a car loan and a firm’s application for

an overdraft is not a role best suited to civil servants in government

bureaucracies. However, the power of private, commercial bankers to create

and distribute finance must be carefully and rigorously regulated – by

publicly accountable institutions - to ensure that finance or credit is

22

deployed for sound, affordable and sustainable economic activity; and not

for speculation. The great power bestowed on banks by society – the power

to create money ‘out of thin air’ – should not be used for their own self-

enrichment. Nor should customer deposits and their assets (loans) be used

as collateral for their own borrowing and speculation.

Like doctors and dentists, bankers’ roles must be carefully defined and

regulated, and their rewards must be modest. Incompetence, fraud and

theft must likewise be punished.

Money’s rent

It is not just the creation of money and the sustaining of trust in money

that this book focuses on, but also the price at which the public good that is

bank money is ‘rented’ out to what can broadly be defined as Industry and

Labour. That is the rate of interest applied by private bankers to the real

economy. A low rate of interest is a moral imperative. But it is also an

economic imperative, as it allows private industry to thrive. For capital

investment projects to expand, for creative or innovative activity to be

sustainable, depends on affordable finance, and affordable finance is cheap

finance.

Sustainable finance must also be affordable in ecological terms. Our

concerns should not be limited to the way our rentier economy uses high

rates to extract additional value from citizens, firms and the public sector.

As worrying is the way in which high rates of interest lead to rising rates of

exploitation and extraction of the earth’s limited supply of assets (forests,

fish, land, minerals, clean air etc.) to finance debt repayments.

In other words it’s not finance per se that is the most important factor, but

how money is managed and spent. Does affordable finance flow to

productive, sustainable, employment-creating, income-generating

investment? Or is costly credit directed at reckless, de-stabilizing,

unaffordable consumption and speculation?

Challenging the defeatism

23

Above all, there should be wider understanding of how a monetary system

can be managed to serve the interests of all sectors of the community, and

not just the privileged owners of private wealth.

Monetarist and other orthodox economists encourage politicians to persist in a form

of despair; that society is helpless to control a man-made, socially constructed,

globalised, and increasingly anarchic financial system. ‘The clock’ we are told by the

World Bank ‘cannot be turned back.’ 21 Instead economists persist in the lie that:

‘there is no money’ – a lie repeated endlessly by politicians of all colours.

This book is written to challenge that dominant flawed ideology.

In mounting a challenge to finance we must gain confidence from this truth: finance

capital has no greater fear than democratic regulation and reform of the monetary

system. This is because monetary reform will transform the balance of power

between democratic societies, the ecosystem and finance – in favour of democracy,

society and the ecosystem. And it will do so in a way that one-party communist

states, for example, were not able to achieve.

Knowing that should give us courage: another world is indeed possible.

But then I am an optimist.

24

Chapter One: So how is money created

today?

It's not tax money. The banks have accounts with the Fed, much the

same way that you have an account in a commercial bank. So, to lend to

a bank, we simply use the computer to mark up the size of the account

that they have with the Fed.

Ben Bernanke explaining in a TV interview how $85bn had been

created to bail out AIG. 22 The journalist had asked if it was tax

money?

Most orthodox, neoliberal economists would have us believe that banks and

bankers are mere ‘intermediaries’ between borrowers and savers; that

savings are needed for (and prior to) investment; that loans are made from

deposits; and that the price of money – defined as the ‘natural rate of

interest’ – is a function of the supply of, and demand for, money or savings.

Economists such as John Maynard Keynes, Joseph Schumpeter, JK

Galbraith, Victoria Chick, Geoff Tily, Cullen Roche and those who define

themselves as Modern Monetary Theorists (MMTers); sociologists, central

bankers, commercial bankers, presidents and politicians have long known

that none of this is the case. Nor has it been so since before the founding of

the Bank of England in 1694.

Private commercial bankers are not, nor ever have been, mere intermediaries.

Savings are not needed for investment.

Commercial bankers do not lend the deposits of their customers on to

borrowers.

Bankers do not use their reserves ‘parked’ in central banks to lend on.

The money for a loan is not in the bank when a borrower applies for a loan.

25

Bank credit-money is produced out of nothing more than the promise of

repayment – a promise deemed acceptable by the banker.

Credit creates purchasing power.

Bank money issued as credit does not exist as a result of economic activity.

Instead, bank money creates economic activity.

Private bank loans issued by commercial bankers (with a stroke of the

computer keyboard) create deposits.

It is the loan application together with a risk assessment, the borrower’s

promise of both collateral and repayment over a specified period of time at a

specific rate of interest - that creates deposits. This was confirmed in the

summer of 2013 by Paul Sheard, the chief economist of Standard and Poor’s,

in a note headed Repeat After Me: Banks do not Lend out Reserves: -

Banks lend by simultaneously creating a loan asset and a

deposit liability on their balance sheet. That is why it is called

credit "creation"-- credit is created literally out of thin air (or

with the stroke of a keyboard). The loan is not created out of

reserves. And the loan is not created out of deposits: Loans

create deposits, not the other way around.

Paul Sheard23

After a risk assessment, a contract agreement, and the offer of collateral,

money is created by simply entering a number into a computer and charging

the sum to the borrower’s account. (In bygone days this bank transfer was

made using a fountain pen or quill to make an entry into a ledger. It was

then known as ‘fountain pen money’.)

The overwhelming bulk of credit is ‘bank money’ created in this way. It exists

as nothing more than a promise to repay over an agreed period of time. At

the most tangible, it is the quantities expressed on a bank statement.

26

When banks extend loans to their customers, they create money by

crediting their customers’ accounts.

Mervyn King, Governor of the Bank of England in a speech to the

South Wales Chamber of Commerce at The Millennium Centre,

Cardiff, 23 October 2012.24

In the Eurosystem, money is primarily created through the extension of

bank credit… The commercial banks can create money themselves.

Bundesbank25

The Euro’s introduction in the form of notes and coins dated from 2002,

but it existed as a means of setting prices, contracting debts & a means

of payment for over a year before [being] embodied in these media of

exchange.

Geoffrey Ingham26

Money’s quality, its acceptability and validity is simply due to its

being able to facilitate transactions - as the genius and Scottish

economist, John Law, was first to fully recognise.

“Money is not the Value for which Goods are exchanged, but

the Value by which they are exchanged”.

Joseph Schumpeter, History of Economic Analysis, attributes

this quote to John Law.27

The delusion of ‘fractional reserve banking’

Those who grasp this much still sometimes fall into another popular

misconception, the idea that commercial banks can only create credit or lend

on the basis of a fraction of ‘reserves’ or cash or ‘capital’ in the bank. In

other words, so it is said, to lend £1000, banks need a reserve requirement

of £100 in their vaults, or in the vaults of the central bank. The reality is

27

exactly the opposite. Reserves are created as a result of, and to support

lending.

Banks keep reserves in the central bank, in reserve. Reserves are funds

provided by the central bank, which banks need on a day-to-day basis to

settle accounts with other banks, as part of the cheque-clearing process: for

no other reason.

Frances Coppola has it right:

Bank reserves never leave the banking system. They are not "lent out",

as is often claimed. When a bank lends, it creates a deposit "from

nothing", which is placed in the customer's demand deposit account.

When that loan is drawn down, the bank must obtain reserves to settle

that payment - but the payment simply goes to another bank (or even

the same one), either directly through an interbank settlement process,

or indirectly via cash withdrawal and subsequent deposit. The total

amount of reserves in the system DOES NOT CHANGE as a

consequence of bank lending. Only the central bank can change the

total amount of reserves in the system. This is usually done by means of

"open market operations" - buying and selling securities in return for

cash.28

Money’s quality, its acceptability and validity is simply due to its

being able to facilitate transactions.

The deregulated financial system – and liquidity

It’s important to understand that under our deregulated financial system

bankers can create credit or liquidity (i.e. assets that can easily and readily

be turned into cash) effectively without limit. There are now few regulatory

constraints on the creation of credit by commercial bankers. Furthermore

de-regulated finance also encourages financiers in the ‘shadow banking

system’ to create or ‘securitise’ more and more artificial or synthetic ‘credit’

products or assets. This has led to a new type of financial engineering known

28

as the ‘originate and distribute’ model for packaging and ‘originating’

financial instruments or collateral that were ‘synthetic’ in that (unlike

property or works of art or other forms of collateral) they were created

artificially. These packaged ‘assets’ were then used to leverage further

borrowing, which in turn generated massive amounts of liquidity for those

active in shadow banking. These assets and associated borrowings create

tremendous wealth and are often hidden and managed off balance sheets in

‘special investment vehicles’ or SIVs.

Central bankers failed to understand these dangerous self-enriching

activities, or intentionally turned a blind eye. Some cheered on the finance

sector’s increasingly godlike financial engineers. Alan Greenspan in 2004

said that under the deregulated system

“Not only have individual financial institutions become less vulnerable

to shocks from underlying risk factors, but also the financial system as

a whole has become more resilient.” 29

Where do notes and coins come from?

While banks are not on the whole constrained in their ability to create credit

there is one thing bankers cannot do. They are not licensed to issue notes

and coins as legal tender.

Only the central bank can issue the legal, tangible stuff: notes and coins.

So if Joanna Public takes out a mortgage for say, £300,000, and needs

£3,000 in cash, the commercial bank has to apply to the central bank for the

tangible notes and coins she wishes to withdraw. £297,000 of credit is

granted as intangible bank money, and is deposited in Joanna’s account.

It is important to understand that central banks place no limit on the cash

made available to private commercial banks to satisfy a loan application.

Because the central bank provides cash on demand, there is therefore no

limit to the cash, bank money or credit that can be created by commercial

29

banks. In other words, there is no ‘fractional reserve’ or ratio. In fact, the

demand for cash is falling; but during the long boom the demand for credit

accelerated – and central bankers turned a blind eye. They neither limited

the quantity of credit created, nor did they offer guidance to private bankers

on the quality of credit issued. So banks were freed up to not only lend for

productive, income-generating activity, but also for risky, speculative

activity.

Just as importantly, central bankers in the 1970s relinquished control or

influence over the full spectrum of interest rates made on loans by bankers.

These include rates on short-term and long-term loans, as well as on safe

and risky loans. They abandoned tools and policies used during the

Keynesian era to regulate credit creation, and to influence rates across the

full spectrum of lending. The purpose then had been to ensure that rates for

productive activities were kept low for all borrowers, and therefore repayable.

These policies were based on Keynes’s theory that employment, economic

activity and profits could only be assured if credit was affordable. His

liquidity preference theory was used as the basis of policies that ensured

that interest rates during World War II were kept low, to help with affordable

financing of the war. They were stunningly successful. More on that below.

After the collapse of the Bretton Woods era, credit creation and the ‘pricing’

of credit was left to the whim of the ‘invisible hand’. Private bankers were

unfettered in their power to create credit (debt) effortlessly and if they

wished, for speculation in property, exotic derivatives, works of art, football

clubs, and so on. They were freed up to charge high real rates of interest.

The result was entirely predictable. A vast bubble of credit was used to

speculate in, and inflate the value of assets: for example, works of art,

classic cars, footballers and football clubs, yachts, brands, property, stocks

and shares. Assets are largely owned by the wealthy, and can be used to

increase wealth when used as collateral for further borrowing. The inflation

of assets vastly and effortlessly increased their wealth, and the ability to use

that wealth as collateral with which to leverage further borrowing.

30

At the same time, and predominantly in the Anglo-American economies,

‘easy’ but ‘dear’ credit buried companies, firms, households and individuals

in largely unaffordable debt.

Credit creates deposits

Deposits are created when a banker, having assessed the risk associated

with the loan; having confirmed by legal contract the promise to repay,

backed by collateral (e.g. property) at a rate of interest and over a fixed period

of time; and having obtained the cash proportion of the loan from the central

bank, then enters numbers into a ledger or computer. After entering the

amount of the agreed loan into the computer, the banker credits the funds to

the account of the borrower.

This, as Ben Bernanke explained in the interview quoted at the beginning of

this chapter is what the Federal Reserve accomplished when it created $85

billion ‘out of thin air’ and credited that amount to the account of a near-

bankrupt insurance company AIG, one day in the winter of 2008-9. The

money was not raised from taxation, as Chairman Bernanke made clear to

the journalist who questioned him. Furthermore, AIG is not a bank, and

should never have had an account with the Fed, but major concessions were

made to reckless, effectively insolvent firms that posed a systemic threat to

the economy during that period.

When the loan created by entering numbers into a keyboard is drawn down

by the borrower, the payment goes either to the same bank, or to another,

either through interbank settlements, or by withdrawing cash from bank A

and depositing it in bank B.

In accounting terms, these deposits are liabilities for the bank that issued

the loan. The reason for this is that claims can immediately be made on

deposits, for both the tangible notes and coins and for the intangible bank

money element of the loan. Bank A will have to ‘clear’ any payment to Bank

B.

31

The loan itself, however, becomes an asset. The reason for this is that the

bank expects to earn interest or a rate of return on the loan when it reaches

maturity – in other words, over time. The task of the banker is to ensure a

match between income earned from lending, and liabilities incurred from

deposits.

Once the loan is drawn down the bank proceeds to drain a share of the

borrower’s income, in interest payments.

By these means do commercial banks create the overwhelming bulk of

deposits, and earn interest on a process that costs them little.

Andy Haldane, Executive Director, Financial Stability at the Bank of England

explained recently that by fixating on inflation targeting, central bankers had

turned a blind eye to what was really going on in the credit-fuelled financial

system:

“Inflation targeting assumed primacy as a monetary policy framework,

with little role for commercial banks' balance sheets…what happened

next was extraordinary. Commercial banks' balance sheets grew by the

largest amount in human history. For example, having flatlined for a

century, bank assets-to-GDP in the UK rose by an order of magnitude

from 1970 onwards.”30

(To remind readers: assets in this context means bank lending.) In 1980, UK

bank credit or lending was just 36.2% of GDP. By the year 2000, bank credit

had risen to 136% of GDP. In 2008, bank credit was a whopping 212% GDP,

according to the World Bank.

Mervyn King confirmed the role of private banks in expanding the money

supply in an interview (14 June, 2013) with Martin Wolf just before his

retirement as Governor of the Bank of England. Wolf asked the Governor

about quantitative easing – had that worked as he hoped?

“I’ve always seen this as a way of increasing the broader money

supply. And the thing that’s so extraordinary is that, for the past few

32

years, the banking system, which is normally responsible for creating

95 per cent of broad money has been contracting its part of the money

supply. And since we at the (Bank of England) only supply about 5 per

cent of it, the proportional increase in our bit has to be massive to

offset the contraction of the rest.”31 (My emphasis)

Banks and bankruptcy

If bankers can create credit out of thin air, I hear you ask, how can they be

bankrupted? When a banker elicits a promise of repayment on a loan from a

customer, and then creates credit for the customer, this immediately

becomes a loan asset and a deposit liability on their balance sheet. The loan

is an asset because, over time, it will earn interest for the bank. The deposit

is a liability because it is immediately owed by the bank to the customer or

depositor – who may withdraw it to make payments to another bank. (Time

management is a critical function for bank managers.)

The bank has to manage its assets and liabilities carefully to ensure funds

are available when the depositor wishes to withdraw her deposit. It does this

by obtaining reserves from the central bank system each time it creates a

deposit. Reserves are used for clearing and settling inter-bank financial

transactions.

The banking system as a whole has to manage financial transactions and

ensure that cheques and other payments are cleared between those receiving

payments and those making payments.

This is the critical role played by the central bank – e.g. the Bank of

England, the Federal Reserve or the Bank of Japan. Central banks perform

important roles in helping to maintain balance in the financial system by

clearing and settling interbank payments. The central bank helps settle

payments between bankers by debiting the accounts of banks making

payments and crediting the accounts of banks receiving payments. When

payments are made between the accounts of customers at different

commercial banks, they are ultimately settled, as explained above, by

33

transferring central bank money (reserves) between the reserve accounts of

those banks.

In normal times these payments cancel each other out, with only a small

amount of central bank reserves needed for settlement at the end of the day.

But bankers can get into difficulties, and times are not always normal. If

owing to mismanagement a bank finds its liabilities begin to exceed its

assets, then no amount of central bank reserves can help it: it is facing

bankruptcy. If the public get wind of any difficulties, then there is a ‘run’ on

the bank; deposits are quickly withdrawn, and liabilities begin to mount.

(Remember though, all licensed banks have deposits up to a specified limit

guaranteed by the state, so deposits are on the whole, protected. In this

respect banks are very different from corporations, whose customers, in the

event of bankruptcy, are not protected by the state.)

Until recently commercial banks were prohibited from mixing their lending

and deposit arms (commercial banking) with their more speculative

investment arms. Then in 1999 President Clinton, under pressure from big

bankers, and aided by the economists Larry Summers and Robert Rubin,

repealed the Glass-Steagall Act which after the 1929 financial crisis had

enforced separation between commercial and investment banking. Other

central bankers soon followed suit. Commercial bankers were then freed up

to link their own borrowing and speculative activity to the more sober day-

to-day role of assessing risk, and supplying credit and deposits to those

engaged in the real economy. Because these two sides of banking became so

closely integrated, excessive borrowing for reckless speculation by private

bankers exposed all those who used the banking system to major – or

systemic - risks, costs and losses.

As sure as night follows day, excessive borrowing and speculation by

bankers helped precipitate the global financial crisis of 2007-9, when most

banks faced the threat of insolvency. They were bailed out by taxpayer-

backed governments with barely a rap on the knuckles, and with virtually no

‘terms and conditions’. To this day no banker has been jailed, or been held

34

criminally responsible, or had to admit any wrongdoing for his role in

precipitating global financial meltdown in 2007-9 – or for subsequent frauds

and failures. Where fines have been administered, they have represented

but a fraction of the cost to society of financial failure and wrongdoing. Andy

Haldane, responsible for Financial Stability at the Bank of England, argued

once that even if bankers were to compensate society for the losses endured,

“it is clear that banks would not have deep enough pockets to foot this bill.”

32

Despite massive bailouts by taxpayer-backed central banks, I contend that

most global banks are still effectively insolvent. Government guarantees and

backing, coupled with the manipulation of balance sheets, is what stands

between today’s global banks and insolvency.

The good news: credit creates economic activity

The good news is that when the banking system is properly regulated and

managed, bankers create all the credit society needs for purposeful economic

activity. When this credit creates new deposits at low, repayable rates of

interest, then if used for productive activity, deposits create economic

activity (investment and employment). These in turn – if the money is

invested in ecologically sustainable activity - generate income (wages,

salaries, profits and tax revenues). This income can be used to repay loans

and debts.

This virtuous economic circle in which debtors and creditors engage at a fair

rate of interest, and on the basis of trust in order to invest and generate jobs

and income, to create and to innovate, to finance vital projects, and then to

settle debts, is how an advanced, sound and stable monetary system can

work. It is how a monetary system can be used to finance services vital to for

example, women; or to fund the transformation away from fossil fuels to

more sustainable forms of energy.

It is under the strains of speculation and high rates of interest that the

system quickly becomes unstable, and likely to ‘debtonate’. In other words,

35

the system becomes unstable if credit is largely wasted on creating vast

bubbles of unpayable debt; or on illusory liquidity. The latter can be defined

as fictitious capital or ‘Ponzi finance’ where risks are underestimated, buyers

disappear and value quickly evaporates in a crisis. Liquidity becomes

illusory when the owner of an asset finds no buyers for his asset, at a time

he urgently needs to sell. So for example, I might purchase expensive

diamond watches, or collateralised debt obligations (CDOs) believing they are

largely ‘liquid’ i.e. can quickly be turned into cash in a crisis. That ‘liquidity’

evaporates when buyers for diamond watches or CDOs disappear from the

market – often because a generalised loss of confidence, and because they

too are heavily indebted.

The ecological impact

In the run-up to the crisis of 2007-9, firms, individuals and

households, but also banks in mainly Anglo-American economies

took on huge debts at rates of interest too high to make repayment

affordable. These debts were used to purchase an explosion in

financial assets, in property and consumer goods.

The rise in consumption led inevitably to a rise in greenhouse gas

emissions.

In order to repay rising debts, firms and households are obliged to

exploit natural and human resources in a way that is damaging in

the medium, never mind the long, term. Employees are expected to

work longer hours, to generate more goods and services, and to do so

at lower rates of pay. Hence the rise in the 1980s and 90s of the

phenomenon of 24/7 – shops and firms open for long hours, with

workers expected to work unsocial hours.

Natural resources (like the land, forests and seas of fish) are exploited

at exponential rates, to enable firms and even governments to

36

generate the income needed to repay debts. (Think of Brazil stripping

forests to generate the hard currency needed to repay foreign debts.)

These developments add social insecurity and ecological instability to

the mix of financial volatility.

Society must learn from these grave errors, that the great public good

that is the ‘magic’ of credit-creation by the private banking system

must be managed and carefully regulated if lending is to be

affordable, sound and sustainable, and if society as a whole is to

benefit. Management of the rate of interest plays a key role in the

regulation of a stable financial system.

37

Chapter 2: The ‘price’ of money – or the

rate of interest

While the creation and management of credit was indeed a revolutionary

advance for society, perhaps just as important was the impact the greater

availability of finance had in lowering of the ‘price’ of money, or the rate of

interest. 33

The rate of interest on credit is fundamental to the health and stability of an

economy, which is why much attention is paid to it in this book. The level of

employment and activity in an economy depends critically on the rate of

interest. Too high a rate stifles enterprise, creativity and initiative and

renders debts unpayable. There is also a moral dimension to the relationship

between those who own assets, the creditors, and those in need of money or

credit, but without assets, the borrowers. This moral dimension has been at

the heart of the condemnation of usury – exploitative rates of interest - by

faiths, including Islam and Christianity

A low rate is also fundamental I argue, to the health of the ecosystem. Too

high a rate demands ever-rising extraction of the earth’s assets, to generate

resources for repayment.

Given there is no necessary limit to the volume of credit and debt that can be

created by private, commercial banks then credit is essentially a free good –

not subject to finitude, or the market forces of supply and demand.

From this it follows, as Keynes argued in his Treatise on Money, that:

“... if the banks can create credit, (why) should they refuse any

reasonable request for it? And why should they charge a fee for what

costs them little or nothing?” 34

38

Keynes recognised that once the system of bank money evolved, and credit

became more widely available, society no longer needed to rely on existing

wealth holders for finance. Barons in the castle – owners of a surplus of

capital - were no longer sole providers of loan finance to the rest of the

economy. Savings were no longer needed for investment. The powers

exercised by the owners of wealth could be subordinated to society’s wider

interests. Credit creation by banks could provide borrowers, entrepreneurs

and innovators with the finance needed for investment – at affordable rates

of interest. Creative artists and designers, entrepreneurs and innovators no

longer had to turn to wicked, wealthy ‘robber barons’ for usurious finance.

The ‘price’ of money vs the price of smartphones

The rate of interest on this bank money is determined in ways quite different

to the way in which the price of (say) tomatoes or a smartphone or a pair of

shoes is fixed. It is different, and cannot be subject to the forces of ‘supply

and demand’ because of the very nature of bank money, and of the largely

effortless way in which it is created; and because rates are fixed by

committees of men and women.

To manufacture a product such as for example a smartphone requires

manufacturers to engage with first the Land – in the broadest sense of the

word. Minerals and crucial elements for the phone have to be extracted from

the earth, and then transported to manufacturing sites. The extraction,

supply and transport of these minerals are subject to both geological and

geographical, but also geopolitical, constraints.

Second, the manufacturers of the smartphone have to engage with Labour –

in the broadest sense of the word. Labour has to be found and trained;

wages have to be negotiated; and sometimes disputes have to be managed.

The creator of credit faces none of these challenges. The banker engages with

neither the Land nor Labour in the creation of his financial product. Sound

banking requires good judgment, a conscience, and accounting skills. But

39

the mere act of credit creation is effortless in the way that the manufacture

of, say, a mobile phone, no matter how slapdash or obsolete, is not.

Because credit or bank money is created in this way, there is no necessary

limit to the volume of credit that can be created. Of course there are

constraints in the management of credit, including the threat of excessive

credit leading to inflation; or the contraction of credit leading to deflation.

But unlike smartphones, credit does not rely on finite (mineral and labour)

resources for its production. Instead it relies on a potentially infinite supply

of that essentially human quality: trust.

Interest extracts wealth from borrowers and assets from the planet

The development of the credit system takes place as a reaction

against usury. This violent fight against usury … on the one hand robs

usurer’s capital of its monopoly by concentrating all fallow money

reserves and throwing them on the money-market, and on the other

hand limits the monopoly of the precious metals themselves by

creating credit-money.

Karl Marx35

As Marx notes above, the development of the banking system, and of a

system of credit, arose as a reaction to usury. Rates of interest, in particular

usurious rates, extracted excessive wealth from borrowers. Borrowers and

wider society eventually reacted against such exploitation, and the banking

system began its steady evolution.

The extraction of wealth from borrowers is compounded when payments to

the lender, creditor or rentier are delayed or halted, so that the lender can

make exponential gains from debtors. As such the practice of exploitative

moneylending is widely viewed as parasitical, with humanity and the

ecosystem as host.

40

Furthermore money-lending at high rates of interest can help stratify wealth

and poverty. The rich effortlessly become richer, and the poor and indebted

ever more entrenched in their debt and impoverishment.

Usurious behaviour is repellent, but high real, rates of interest are accepted

as normal – the necessary ‘price’ paid for ‘easy money’ - in western society.

There was a time when Christianity’s leaders condemned usury, and

punished usurers with ostracism, denying them the chance to be buried in

sacred ground, or married in church. Cosimo de Medici paid for the

restoration of a monastery in return for a papal bull that redeemed him of

past sins, in a clear attempt to absolve himself and his heirs of any potential

charge of usury by the Church.

Christianity’s prohibition of usury was to be modified by John Calvin

(1509 – 1564) and other Christian leaders, a modification as the

Financial Times noted on the 400th anniversary of Calvin’s birth, 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.36

Even while some branches of Islamic finance circumvent the Koranic law,

Islam has always upheld the Koran’s prohibition of the taking or giving of

interest, or riba – regardless of the purpose of the loan. “Riba” includes the

whole notion of effortless profit or earnings that arise without work or value-

addition production in commerce. In Islam money can only be used for

facilitating trade and commerce – a crucial difference with the acceptance of

interest by the world’s major Christian religions. Islamic scholars were fully

aware that moneylending can stratify wealth, exacerbate exploitation, and

lead to the eventual enslavement of those who do not own assets. Because

Arabs were the world’s foremost mathematicians, having imported the

41

decimal system invented by Hindus they fully understood the “magical”

qualities of compound interest, and its ability to multiply and magnify debts.

Usury is today widely accepted as normal in western economies that have

been weakened, morally, politically and economically, by the parasitic grasp

of finance capital, and immobilised 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

Prof. Frederick Soddy 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 …”

Prof. Frederick Soddy37

The 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, as the late Margrit Kennedy

demonstrated in the chart below.38

42

In order to repay debts that have accumulated exponentially, society is

obliged to extract more and more assets from Labour on the one hand, and

Land on the other.

This means, in macroeconomic terms, that Labour has to work harder and

longer, to repay rising levels of debt. It is no accident that the de-regulation

of finance correlated with the de-regulation of working hours, and the

abolition of Sunday as a day of rest. ‘24/7’ – meaning shops are open 24

hours a day for 7 days a week, became an acceptable practice as the finance

sector’s values took precedence over other considerations.

It is not just workers who are hurt by finance capital’s exploitation of their

labour and the extraction of wealth, by way of high rates on debt. Firms,

entrepreneurs, inventors and engineers, innovators, artists of all kinds find

their efforts thwarted by bankers, ‘private equity investors’ demanding

higher rates, and a larger share of the returns on creativity, investment and

innovation. As this process snowballs, rents rise.

43

But high rates have implications for the ecosystem too. First, ‘easy credit’

leads to an expansion of consumption. Shopping malls become the temples

of the High Street. In order to pay for credit-financed consumption, seas

have to be fished out; forests have to be stripped; and the ‘productivity’ of

the land intensified – at the same exponential rate as interest rates rise.

High-yield crops, the use of fertilisers and pesticides; the constraining of

animals indoors; increases in food production, not just for the world’s

growing population, but to make food production more profitable than debt -

all this must be done in order to repay debt. The effects are well known: soil

degradation, salination of irrigated areas, over-extraction and pollution of

groundwater, resistance to pesticides, erosion of biodiversity, etc.

In other words, the earth’s limited resources have to effectively be

cannibalised to repay the world’s creditors.

The high real rates of the neoliberal era

As I have shown above, the supply of money or credit is without limit. Its

over-supply, and the tendency of creditors to lend pro-cyclically, should if

anything, suppress its price. Not so. Interest rates, in real terms, have risen

steadily over the period since Keynesian policies were abandoned. Indeed

high rates of interest have punctured credit bubbles with painful regularity

since central banks abandoned management of rates, and regulations over

credit creation were lifted in the 1970s.

There are very few charts that show the progress of interest rates in real

terms – that is in relation to inflation. Because of this I have chosen to

highlight the chart below, with acknowledgements to the Financial Times. It

shows in nominal terms (i.e. not adjusted for inflation) the official Bank of

England Rate between 1914 and 2009. Central bank rates are on the whole

lower than commercial bank rates. While this chart does not provide the full

picture, note the period between 1933 and1950 when Keynes’s liquidity

preference theories were applied by Britain’s authorities. Over this period

inflation was subdued. Note also, that as finance was liberalised, and the

creation of too much credit chasing too few goods and services led to

44

inflation, the central bank’s rate rose too – both in line with inflation, but

also as a symptom of the volatility caused by liberalisation. The central bank

rate in turn influenced rises in the full spectrum of interest rates – for short-

term and long-term loans; safe and risky loans and in real terms. These

latter rates are not reflected in the chart below.

45

Dr. Geoff Tily in a study published by the Bank for International Settlements

provides the following chart of US long-term real interest rates, which shows

the rise of rates in real terms after the mid-1970s.39

The de-regulation of credit creation was begun in the UK in 1971 with a

process known as ‘Competition and Credit Control’ – often described by

economists as “all competition and no control.” Finance capital – the ‘robber

barons’ of our day - had regained control over the spectrum of rates applied

to borrowers, from long-term rates used for investment by firms, to

mortgages and short term unsecured loans.

As de-regulation freed up private bankers to create credit without oversight,

and for speculation, too much credit/money began chasing too few goods –

resulting, inevitably, in inflation. Secondly, as private bankers were freed up

46

to fix rates on that ‘easy money’, so interest rates were ratcheted upwards.

High rates periodically bankrupted firms, industries and economies.

Governments reacted to the inflation of the 1970s by introducing policies

that suppressed the prices of wages, goods and services. Asset prices, by

contrast were not suppressed in the same way.

Today, by controlling the dominant rates of interest in an economy, finance

capital once again controls and holds the economy to ransom. It is finance

capital, not central bankers or politicians that exercises overbearing, and

unaccountable power over society and the ecosystem.

Determining a sustainable rate of interest

Our desire to hold money as a store of wealth is a barometer of the

degree of our distrust of our calculations and conventions concerning the

future… The possession of actual money lulls our disquietude; and the

premium which we require to make us part with money is the measure

of the degree of our disquietude.

J. M. Keynes, 1937 40

Keynes’s liquidity preference theory outlined in The General Theory of

Employment, Interest and Money provided central bankers and governments

with not just an understanding of how interest rates are determined but also

with policies for managing, and keeping rates of interest low across the full

spectrum of lending during World War II, and beyond.41 This was a time

when Britain’s government borrowed more than it had ever borrowed before,

and public debt peaked at 250% of GDP.

Geoff Tily argues in his book, Keynes Betrayed 42 that:

liquidity preference theory led [Keynes] to conclusions of the most

profound importance. Ultimately, the theory turned classical analysis on

its head. The rate of interest was the cause, not the passive

47

consequence, of the level of economic activity and in particular, of the

level of employment.

Yet this revolutionary monetary theory is largely ignored by the economics

profession, and forgotten by regulators and policy-makers.

Central to Keynes’s theory is an understanding of bank money, not just as a

means of exchange but as a store of value. He argued that once a system of

bank money evolved, society no longer needed to rely on the holders of

wealth, the “robber barons” of old. The existence of bank money means, as

explained in earlier chapters, that those fortunate enough to own a surplus

of capital are no longer sole providers of loan finance to the rest of the

economy.

Second, under a well-managed banking system (managed in the interests of

society as a whole) finance capital need no longer determine the rate of

interest for lending. Instead, within a bank money system, finance capital

can be held at bay, and forced to play a more passive role in the economy.

How, you ask?

A lender or creditor’s decision about where to place, and for how long to hold

her savings, is determined first by a need for cash, for immediate or near-

immediate use in purchasing goods and services. Second, by the

precautionary motive: the desire for security as to the future equivalent of

her cash. And third, by the speculative motive: the desire to secure gains by

knowing better than the market what the future will bring. Here’s Tily again:

The rate of interest, Keynes concluded is therefore determined by the

supply of, and demand for, safe assets into which holdings of (stocks) of

wealth can be placed for different motives and for different periods of

time – to suit the liquidity preferences of the investors.

By producing and managing a full range of such assets, governments

working with Treasuries and central banks can jointly create and manage a

the full range of assets needed by investors, and thereby influence and

48

manage the spectrum of interest rates applied across the economy for loans

of different maturities and riskiness

However, central bankers long ago abandoned Keynesian policies for the

management of rates to meet investor demands for assets that will satisfy

their need for liquidity or cash, for security and for speculation. Instead this

asset-creation role, and with it the determination of interest rates, was

transferred into the hands of global finance capital.

Today, as this book goes to press, global financial institutions are gravely

weakened by the financial crisis. Investors have lost confidence in these

institutions and their ‘products’, and there is a serious shortage of assets. As

a result savings and surpluses are poured into a small group of assets

regarded as safe by investors: mainly property, gold, jewels, stocks and

shares, government bonds. This has led, predictably, to the inflation of these

assets. Central bankers appear helpless to deal with this inflation – only

because they have abandoned Keynes’s advice of how central banks and

governments can intervene, to manage both the production of a range of

assets needed by investors, and the pricing, or the rate of interest on those

assets.

How commercial bankers fix interest rates

While central banks have control over the ‘base’, ‘short’ or ‘policy’ rate, they

have not since the de-regulation of the 60s and 70s exercised control over

the whole spectrum of rates: real, short and long-term; safe or risky rates.

Indeed urged on by commercial and central bankers, politicians and

regulators deliberately weakened central bank control over the rates of

interest that could be charged by commercial bankers.

The Bank Rate is of very little relevance to producers in the real economy: no

entrepreneur that needs to borrow from a commercial bank pays the ‘base’

or central bank rate (currently 0.5% in the UK and 0.225% in the Eurozone)

for their overdrafts or loans. Only banks or financial institutions registered

with the central bank enjoy the benefit of the policy rate.

49

The rates on loans made to firms and individuals are determined – socially

constructed - by those engaged in the ‘production’ of loans: commercial

bankers. Bankers make decisions about the rate of interest on a loan based

on their assessment of the riskiness of the borrower, and on the rate of

return themselves; but also on what other creditors are offering borrowers in

the market place. Given that the banking sector is oligopolistic, there is in

reality very little competition, and instead a great deal of collusion on

decisions about rates.

The LIBOR scandal brought to the attention of the general public (and to

economists and the regulatory authorities!) the role played by (a) the cartel

that is the British Bankers Association, and b) back office ‘submitters’, in

‘fixing’ the price of inter-bank loans: the inter-bank rate of interest.

This was Keynes’s point: the rate is not fixed by the demand for savings, but

rather by the demand for assets. For individual loans made by banks to

firms and individuals the interest rate is determined by bankers and

‘submitters’ in the back offices of banks like Barclays.

Because of the nature of credit-creation, the ‘price’ or cost of borrowing is

unlike any other price. It is a social construct a ‘price’ fixed on something

that is essentially a social relationship, and that therefore, unlike a

commodity, cannot be finite or scarce. History teaches us that it need not

ever be high; and it need not be determined by powerful individuals or

institutions with excessive wealth.

Fixing the central bank’s rate of interest

The Bank’s primary objective is to ensure that short-term sterling

market interest rates are consistent with the official Bank Rate. The

Bank is able to implement monetary policy because it is the sole issuer

of sterling central bank money. It can therefore establish itself as the

rate-setter by being the marginal supplier or taker of funds at its chosen

rate(s).

50

From “The framework for the Bank of England’s operations in the

sterling money markets.” January, 2008.43

Because of its monopoly over the issue of notes and coins, the central bank

today controls just the base rate of interest when it provides an endogenous

(originating from within) supply of cash to commercial banks that in turn

determine the quantity of credit created. It is the sole power to issue notes

and coins that provides the Bank of England for example, with a mechanism

for setting the official, base rate of interest. The central bank does this by

providing cash on demand i.e. without limit to a commercial bank, in

exchange for collateral (assets, e.g. Treasury bills, mortgages or bonds).

Quantitative Easing, as explained earlier, operates in a similar way: the

central bank swaps assets like reserves (which do not leave the banking

system but can be used for clearing with other banks) in exchange for

government and corporate bonds, mortgages and other assets.

If Anybank UK intended to make a loan of say £6,600 to Josephine Bloggs,

the bank could approach the Bank of England and demand £300 of that

loan in cash (the amount that Josephine is likely to draw in cash). In return

Anybank would offer an asset (say a government bond) of £300 to the Bank

of England. The BoE holds this ‘collateral’ or asset for a period, and then

returns it to Anybank at a discount of its value, retaining say 5% of the

asset, or £15.

The central bank’s normal approach is to accept a wide range of eligible

assets from commercial banks in exchange for cash.

The difference between the original value of the asset and the new value – i.e.

5% - is the rate of interest (an arrangement known as a repurchase

agreement or “repo”) on a specified date. In other words, the central bank

takes its cut, returns the assets to the commercial bank, and it is the ‘cut’

that is the base rate.

51

The rate at which these assets are discounted is set by committees of men

and women - public servants – who decide on a base rate intended to suit,

on the whole, all sectors of the economy: Finance, Labour and Industry. In

the UK the committee is known as the Monetary Policy Committee, and in

the US as the Federal Open Market Committee. The interest rate set by

these committees of men and women is known as the Bank Rate.

In short central bank control over the Bank Rate is achieved through the

central bank discounting assets owned by commercial banks in exchange for

cash.

The commercial bank pays the Bank Rate in due course, adds its own

interest to both the cash and the bank money it has created, and passes

both charges on to the borrower.

Note that this ‘price’ is not a consequence of demand for cash. It comes

about as a result of deliberations by a committee of men and women and the

deliberate action of the central bank. That is why it is described as a social

construct, not the consequence of market forces.

The central Bank Rate has no necessary relationship to rates charged by

commercial banks to non-financial institutions.

The arrangements to obtain cash from the central bank, allows private

banks to expand credit-creation so long as they have sufficient eligible assets

to exchange for just the cash-ratio. Because cash is disappearing from

everyday life in high-income countries, commercial banks are economising

on the cost of obtaining cash from the central bank. Instead commercial

bankers encourage their customers to refrain from using the Bank of

England’s sterling or cash, and instead to use debit or credit cards for

transactions.

The rate of interest as weapon

Wielding the weapon of interest, finance capital effectively holds society,

governments and industry, but also the ecosystem, to ransom over

52

repayment of its loans. However, this is only because society, elected

governments and industry have conceded this despotic power to finance

capital.

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. But this time rates are kept high not by a

scarcity of money, but by a scarcity of general understanding of the social

relationship that is money.

53

Chapter Three: a brief survey of the

evolution of bank money.

Many historians and economists have described the evolution of money with

more authority, and at greater length, than I can match in this little book. I

refer you to an excellent book Money, Whence it Came and Where it Went, by

Kenneth Galbraith;44 Geoffrey Ingham’s superb The Nature of Money 45 and

to David Graeber’s Debt: The First Five Thousand Years,46. Felix Martin’s

recent Money: the unauthorised biography is a fascinating historical

overview, and is highly recommended.47

Instead I want to sketch the key stages of money’s evolution, as a basis for

what I hope will be greater understanding of key aspects of monetary theory.

Without some understanding of monetary concepts and theory, it is not

possible to analyse events properly; worse it is not possible to devise

appropriate monetary policies that civil society can advocate for, and

politicians, governments and central banks can implement.

And please don’t be put off by talk of ‘monetary theory’. It really is not rocket

science.

One of the reasons the public may be a) daunted and b) confused about

monetary policy is that most orthodox economists are. Believe it or not, for

all their confidence, most economists lack the sound foundation of a full

understanding of money. If pressed they are liable to resort to jargon or an

airy insistence that money doesn’t really matter and that it is eccentric or

even sinister to think it does.

Still, let us not be daunted, and begin at the beginning.

54

Money as trust

In the beginning there was trust. People exchanged goods and services,

swapped things, did deals, on the basis of trust. Even in a world without

coins and notes and banks, this was money as credit. Credit is based on the

Latin verb, credo: I believe. In other words, ‘I believe that you will repay me,

swap something back, exchange my gift for another.’

As David Graeber, the anthropologist shows convincingly, this system of

trust existed long before barter.48 Barter itself was only ever a marginal

activity for ancient communities and societies – a way for strangers to

exchange goods with one another. By definition barter is only ever an

occasional event and there is no evidence that money has ever developed out

of it. Credit, with or without the infrastructure of money or coinage systems,

has existed, as Graeber’s sub-title has it, for at least 5,000 years.

So money, the social construct, is not based on the concept of barter, as

orthodox economists would have us believe. It is based on a public or social

good: trust. Credit as trust was, and is, the main means of exchange.

Over time, societies developed a unit of currency with which to measure the

value of goods and services that were exchanged. Even so, as Graeber writes:

the value of a unit of currency is not the measure of the value of an

object, but the measure of one’s trust in other human beings.49

A unit of currency, or the measure of trust began to be associated with

coins, which first circulated nearly three thousand years ago. The

development of coinage had one serious drawback. Because coins are

physical commodities, usually based on a scarce metal (copper, silver or

gold), people began to think of money as a commodity. A unit of currency as

“a measure of one’s trust in other human beings” was to be lost.

55

Today notes and coins make up a tiny proportion of the money we use every

day – bank money. In Britain, only 3% of the money in circulation is in notes

and coins. Instead money today takes the intangible and invisible form of

credit cards, Oyster or Metro cards – or even ‘mobile money’, We never touch

it, or indeed see it – except as a charge on our bank account

And this is how it should be, for money is a measure of the trust we have in

each other. Felix Martin tells a fascinating story of the closure of Irish banks

in1970, as a result of a breakdown in industrial relations. Despite the

closures, the majority of payments continued to be made by cheque – in

other words by transfers from one person’s account to another – despite the

fact that the banks at which these accounts were all held were shut.50 Often

the landlords of bars and public houses acted as ‘clearers’ of the credits and

debts undertaken by their customers – because they had a fair idea of the

financial balances of their customers and of their trustworthiness.

What this incident proved is that society does not need coins, commodities

or even banks to do business; to make undertakings, to give promises and to

create credit. Society does not even need banks to bring together those with

money but no purpose so that they can meet those with purpose but no

money. The Irish experience worked because the communities involved were

close-knit, and lenders and borrowers were well known for their integrity or

lack of integrity. This is not possible in a bigger economy, in which more

people are involved, and more complex transactions and arrangements take

place, which is why banks have been necessary institutions.

Fiat money

The stamp on the coin was the guarantee of a measure of trust, whose value

was uniform across a district, or parish, or kingdom. For the convenience of

traders, but also to ensure uniformity in tax or rent collection, sovereigns

began to establish uniform systems of weights and measures throughout a

kingdom, including a measure for the exchange of goods and services on the

basis of trust.

56

So early on, money or credit and its measure, the unit of account, were given

the imprimatur of the State. To quote Keynes money was:

…State-created in the sense that it was the State which defined (with

the right to vary its definition from time to time) what weight and

fineness of silver would, in the eyes of the law, satisfy a debt or a

customary payment expressed in talents or in shekels of silver.51

The state, backed as it was by the law and by institutions that could enforce

contracts; and keen to collect rents and taxes, acquired the sole power to

issue the currency of a country, or region.

Currency in the economic sense of the term, means the unit of account in

circulation within a country or geographical area. It has a value defined by

the state governing that country. Above all, it is money that has the backing

and enforcement of the laws and institutions of the state and is acceptable

as payment for taxes.

Today that unit of account in Sierra Leone is the leone; in Indonesia it’s the

rupiah, and in Canada it’s the loonie or dollar.

Currency issued, and backed by the state became known as fiat money.

The inconvenience of commodity money

Coinage and the commodities that in those days represented money (gold,

silver) had limitations. Large amounts were difficult to handle, and were

unsafe to carry across distances.

This is where pawnbrokers and goldsmiths stepped in. Their shops had

good security arrangements and soon they began to receive valuables and

gold for safekeeping – in return for receipts – or acknowledgements of a debt.

At first all the gold kept in the (trusted) goldsmith’s vault was available to be

redeemed immediately by depositors. The receipts were exactly equivalent (as

57

far as we now know) to the gold deposited. The gold in the vault came to be

known as ‘reserves’.

Soon the receipts – that could be redeemed for gold – began to circulate as

‘money’, and could be lent out and exchanged.

The business of depositing and lending out only the amount stored in the

vault is known as 100% reserve banking. As such it is not very different from

today’s Peer-to-Peer (P2P) online lending, with intermediation provided then

by a goldsmith, and today by a P2P company.

The early goldsmiths at first managed the exchange between depositors of

gold (lenders or creditors) and borrowers. The money supply was restricted to

the amount of gold in the vault; just as the money supply in P2P lending is

restricted to the amount that savers are willing to lend – with a ‘reward’

(commission) deducted for the intermediary.

Soon however, goldsmiths began to multiply the receipts – the claims against

the gold asset for the delivery of a deposit - so that several receipts could be

set against the same bar of gold.

The ‘receipts’ were to take on a life of their own. They became a tangible form

of acknowledgement of a debt. They went on to become the intangible,

invisible bank money on which we are so reliant today.

In the words of Keynes this was the:

discovery that for many purposes the acknowledgements of debt are

themselves a serviceable substitute for money proper in the settlement

of transactions. When acknowledgements of debt are used in this way,

we may call them bank money […]

The important economic development was this: the availability of money for

society’s activities was no longer artificially constrained by limited amounts

of precious metal – such as gold, silver or copper. Society was no longer held

back in what could be done, by a limited money supply. Money was no

58

longer scarce. This development was to have a profound impact on societies

with banking systems.

Bank money and the invention of double-entry bookkeeping

Receipts that were easy to carry and safe to transport along hazardous

journeys, circulated and were exchanged and accepted in trust. Soon they

were deposited with merchants of other banks, and proved useful in

facilitating transactions across a wide range of economic activity.

The goldsmith or banker, on receiving a receipt of a certain value from a

merchant, would, using a quill and ink, deposit the money in his vault, by

entering numbers into a ledger.

At the same time the banker would have liabilities - claims made against his

deposits or assets, for the transfer of ‘receipts’ or money to other banks. For

these purposes, the invention of double-entry bookkeeping was both

formative for the banking system, and invaluable in keeping track of assets

(loans or deposits) and liabilities (debts).

The ‘reserves’ (that is the gold in the goldsmith’s vault) became irrelevant

and unnecessary to the creation of credit. The ‘receipts’ or bank money alone

became money or a guarantee of trust, and could be used to create new

deposits.

These deposits in turn created purchasing power and facilitated economic

transactions and activity – independently of the asset held in the goldsmith’s

vault: gold.

Trust and confidence invested in a banker was acquired because he so

managed his accounts that the daily accrual of assets was carefully balanced

by daily liabilities. Furthermore he was careful about assessing the risks

associated with lending.

Hayekian economists like Murray N. Rothbard call this form of money-

creation fraudulent, counterfeiting and inflationary because, first, receipts

59

did not accurately reflect the value of gold held by goldsmiths, and second,

they multiplied the money supply.

However, the receipts were issued in the belief they could and would be

redeemed, and the money supply would be managed – e.g. to prevent

inflation. In other words, faith and trust were at the heart of the goldsmith’s

trade.

Second, the money supply only multiplied because economic activity

(employment) multiplied – and was not held back by limited supplies of, for

example, gold.

This is not to say that money creation could not be inflationary (or indeed

deflationary). Indeed history is littered with tales of inflationary outbursts, of

deflationary depressions, of bank runs and of financial and economic

failures.

Over time commodity and bank money contributed to a mixed managed

system of currency, created and issued by the central bank on behalf of the

State, and with no fixed value in terms of a commodity (e.g. gold) apart from

the law or practice of the institutions of the State. While bank notes declared

they could be redeemed in gold, notes were seldom or ever redeemed.

However the intent helped build confidence in the system.

Whereas commodity money was based on the State-defined value of a

particular metal coin or other commodity; bank money came to be quite

different. It was based on little more than trust, and the institutional and

legal backing of the unit of account, whose value was defined by the state.

Wealth, debt and the ‘dark ages’

Back in the days before the establishment of a sound banking system in

Europe, entrepreneurs and innovators were dependent, as explained earlier,

for investment capital on ‘robber barons’: those who had acquired a surplus

of wealth by foul means or fair and who exercised great power over those

without wealth. Because finance was scarce, these rich and powerful

60

individuals were able to demand high rates of interest on loans. In the

absence of a sound banking system, powerful overlords were free to charge

usurious rates of interest in return for renting out their surplus (capital) to

poorer borrowers for fixed periods of time. As a result of their control over

access to capital, as well as over its ‘price’, economic activity, creative work,

employment and innovation were held back, pretty much as they are today

in many poor countries.

In other words, the interests of those with wealth were opposed to the

interests of those engaged in risky innovation, creativity, commerce or

production. The holders of wealth, by demanding high rates of return on

their surplus or savings, effectively suppressed the risky activities of

innovation, creativity, commerce and production.

Slowly, if erratically, the medieval system was replaced first, in Italy and

then the Netherlands and finally in 17th century England, by a hybrid

system of state and private bank money.

Understanding bank money

With experience, with a sound accounting system, and above all with sound

overall management, goldsmiths began to work their way into the trust of

the public authorities and merchants. By creating money out of thin air they

increased the supply of money and of economic activity, which had

previously been limited to the surplus or savings accumulated by the rich

and powerful. This increased supply of money led to three important

developments. First it began to democratise or open up access to finance to

those who would previously have been denied finance by those who owned

private wealth. Second, it began to lower the ‘price’ of money (interest rates).

Third, it provided an impetus to trade.

Today, thanks to the developed bank money system that evolved and now

exists in most advanced economies, innovators, creatives and traders can

obtain access to credit if, after a risk assessment, the bank believes their

61

promises can be trusted; if they have sufficient collateral, and if they can

demonstrate an ability to generate future streams of income.

Most households receive salaries in bank money, the latest evolution of the

goldsmith’s receipts. Bank money is intangible and often invisible (unless

printed on a statement) - as credits to bank accounts. Taxes are paid by

electronic transfers from firms to government; big purchases are paid for by

direct debit, credit cards, money transfers, mobile phone transfers. Public

transport is paid for by ‘oyster’ or ‘metro cards’. The most tangible of these

money transfers – cheques – is fast becoming redundant in western

economies. Bank money, which has always been intangible, becomes more

so by the day, while the use of notes and coins diminishes. Whereas in poor

countries a large percentage of all the money handled is in the tangible form

of notes and coins, today in a rich economy such as Britain’s, only 3% of the

money we handle is in tangible notes and coins.

Perhaps the most difficult aspect of the theory of bank money is this:

bank money held in banks does not necessarily correspond to what

we understand as income. It does not necessarily correspond to any

economic activity. The link that existed between money and gold in

fifteenth century Florence or seventeenth century London does not

exist in today’s banking system.

Banks, as Felix Martin has explained, are institutions that write IOUs

on the one hand (deposits, liabilities) and accumulate IOUs (loans

etc.) on the other. These IOUs are not equivalent to the quantity or

quality of economic activity currently undertaken by actors in the

economy.

There is no tangible quantity of money that corresponds to the

aggregate of employment, or of activity in an economy at any point in

time. This is because a tangible quantity or quality is not a

characteristic of money. Misunderstanding this simple fact is at the

62

heart of much orthodox and monetarist confusion about money –

leading to vain attempts to ‘limit the money supply’.

To repeat: money’s quality, its acceptability and validity is simply due

to it being able to facilitate transactions. Given our confused

understanding of money, this is a difficult concept to grasp. (I know,

because it took me a long time to get my head around the theory!). So

you may want to mull over this section, and come back to it later.

Banking as a great civilizational advance

The goldsmiths’ evolving banking system mobilised the integrity inherent in

society’s commercial transactions and exchanges, and enabled economic

activity to take place.

Banking services were both necessary and sufficient to enable employment,

or economic activity to take place across wide areas of activity, and across

borders. There was no need - it turned out - to use limited supplies of gold

(or silver, or any other commodity) as a means for which (instead of by

which) goods and services could be exchanged, or even as a store of value.

The ‘receipts’ – i.e. bank money - would do the trick of honouring the trust

inherent in the transaction. Indeed the very limited supplies of gold under

the 100% reserve system had imposed an artificial constraint on credit

creation, and therefore on economic activity, and in particular on the

creation of employment. (This is why Keynes called the Gold Standard of the

1920s and early 30s ‘a barbarous relic’. In order to limit the amount of

economic activity to the equivalent amount of gold in the vaults of banks,

politicians and policy-makers deliberately contracted economic activity – by

way of ‘austerity’ policies, which led to a steep rise in unemployment. Society

is capable of creating far more work than can be measured by a finite

amount of lumps of gold.)

Within a well regulated monetary system, the receipts, the promise to repay,

and the manner and trust with which ‘receipts’ were valued and then

63

exchanged, were sufficient to spur the investment, employment and

economic activity of which society was capable, and to generate income for

repayment.

Employment creates income (think of your own experience) in the form of

wages and salaries. These, in turn, can help create profits, and generate tax

revenues – with which to repay private and public debts.

As the bearer of society’s integrity, trust and confidence, the goldsmith-

banker amassed great power. However, that power was only conceded so

long as the goldsmith lived up to the faith his customers had in his

judgement, integrity and trust; and the faith he had in theirs.

And goldsmiths-bankers needed very fine judgement (and good accounting

skills) if they were to retain the right quantity of gold in their vaults to meet

unexpected demands from merchants for the immediate and full return of

gold deposited. To remain solvent, goldsmiths also had to judge carefully the

quantity of ‘receipts’ or credit created, and lent out. The issue of too many

‘receipts’ would cause inflation. Inflation would erode the value of their

assets (loans) and invite the community’s blame. Bad judgement in

assessing risks would mean debts would not be repaid. Failure to meet

demands for the return of deposits, would destroy trust in the goldsmith’s

judgement and integrity, and trigger a run on his ‘bank’.

And then all hell could break loose.

The banker’s shrewd judgment of character, his reputation for sound risk

assessment and his sharp mathematical and accounting skills are the basis

of the trade’s mystique. It’s a mystique bankers still trade on, even though

many lack sound judgement and depend on taxpayer-backed bailouts to

compensate for their flawed mathematical and algorithmic models.

By these halting steps was the modern banking system developed. Economic

activity, and in particular employment, was no longer constrained by the

64

quantity of gold in vaults. More ‘receipts’ or money in circulation meant more

investment and employment.

The development of the modern banking system was a great civilizational

advance. As a result of that advance, societies with sound banking systems

and related institutions, and with democratic oversight of those institutions,

could mobilise finance for development.

In such societies there is never a shortage of money.

Credit allocation ‘democratised’

One of the greatest advances that followed the development of sound

banking systems was that the allocation of credit or loans was made more

widely available to citizens. Access to finance no longer depended on the

whim of the powerful baron in his castle. Instead decisions about credit

allocation were made more fairly; on the basis of rules and regulations; on

the availability of collateral; on the trustworthiness of the borrower, and on

potential streams of income. These procedures effectively democratised the

allocation of credit – and ensured that a much wider range of society’s

members could borrow to invest, not just those with assets.

Loans were granted based on the goldsmith’s assessment of the ability of the

borrower to undertake activity that would earn the sums needed to repay; and

of the integrity of the borrower’s promise to repay.

Today that task would be defined as ‘risk assessment’.

This new system of allocating society’s system of trust fundamentally altered

the balance of power between society as a whole and private wealth –

especially between private wealth and the ‘makers’ - artists, artisans,

inventors and entrepreneurs. The activities of goldsmiths and proto-bankers

bypassed the existing holders of wealth, and increased the availability of

credit.

65

The increase in the quantity of credit created out of ‘thin air’ had a

profoundly radical, and progressive impact: it lowered the ‘price’ of money –

the rate of interest. In his History of Interest Rates, Sidney Homer (1977)

shows that in Britain from 1700 onwards, yields (the returns on investment)

declined slowly. Starting at 6-8% they finally broke through 3%, which

culminated in the flotation of the famous British 3% consols (government

bonds) in 1751.52

A rate of interest at 3% made creation and innovation affordable and

attractive for inventors, artists, entrepreneurs and merchants, because there

was a better expectation of making a return (profit) of 3% or more - with

which to repay the debt. Repayment of a debt with an interest rate of e.g. 8%

was far less likely to be affordable.

For the purposes of my argument it is helpful to think of the development of

the banking system and of lower rates of interest as the result of a grand

struggle between the owners of wealth on the one hand, and the rest of

society. The establishment of a banking system that ensures access to credit

for all those that are not existing owners of wealth, can be understood as the

culmination of a great struggle between the wealthy creditors or

moneylenders of pre-banking eras - and debtors.

As Geoffrey Ingham explains in his book The Nature of Money:

In capitalism, the pivotal struggle between creditors and debtors is

centred on forging the real rate of interest (nominal rate minus inflation

rate) that is politically acceptable and economically feasible …

Weber’s emphasis on money’s status as a weapon in the economic

battle directs attention to its political nature.

This element is entirely absent from all orthodox economic

analysis…This lacuna is the result of the apolitical conception of politics

that is to be found in the mainstream meta-theory and, surprisingly as it

may appear to some, the Marxist counterpoint. …The conception of

66

money as a neutral instrument that underlies all modern macro-

economic monetary analysis and practice by government and their

central banks derives from this foundation.53

The development of a banking system in Italy, and the wresting of control

over the allocation of finance from private wealth holders meant that the

system was then aimed at wider public and commercial interests. This

manifested itself in the glory of the Italian Renaissance, in the Netherlands

as the Reformation, in the English and Scottish Enlightenment, and in the

emergence of the United States of America.

It is no coincidence that the innovation and entrepreneurship associated

with the industrial revolution began some seventy years after the

establishment of a banking system, and the founding of the Bank of

England; and sixty years after interest rates on loans began to fall.

As such the development of banking became a public good which society

could deploy to finance productive activity, including innovation and

research, and to address major challenges. Given the social injustices of the

time, the results were not uniformly good or fair. Women, for example did

not have the same access to finance as men. But the experience

demonstrated that within the framework of a sound banking system, there

need never be a shortage of finance for innovations as bold as Robert

Stephenson’s steam engine, or for adventures as costly as Captain Cook’s

explorations of the seas around Australia and New Zealand. Or indeed for

decades of all-out war.

The big questions that arose were these: how could society maintain control

over this great public good? And to what ends should it be put?

67

Chapter Four: The defeatism of the meme: “there is no money”.

We live in turbulent political and financial times, and in a global

economy dogged by failure. We survive precariously on a planet

warmed by human greenhouse gas emissions and disturbed by a

human-induced mass extinction. The financial system at the time of

writing is volatile, corrupted, and widely discredited. Scandals of

miss-selling, theft, manipulation and fraud abound.

In most western economies, the financial transmission system is

broken: instead of lending into the economy of real production, banks

are borrowing from the economy. In other words, customer savings or

deposits in banks exceed the amount of lending undertaken by

bankers. This is bizarre, because banks and the banking system were

established precisely to act as lenders into the economy – not

borrowers from those active in the economy. That is why today’s

broken financial transmission system - in countries as diverse as

Japan and Britain - is a historically unprecedented development.

The response of governments to threats posed by an out-of-control,

and effectively insolvent financial sector is to bow to the interests of

finance capital. Governments of the OECD economies have

abandoned efforts to manage, re-structure or re-regulate the global

banking system so that it serves the real economy and wider society.

Instead, politicians and regulators have tinkered with banks’ so-

called capital requirements. The reason for this is a mystery to this

author, because while banks may need capital to back up their own

(often reckless) borrowing they do not, as explained above, need

capital for the purposes of credit creation. In other words, they do not

need a bank of ‘capital’ to back up their lending. Indeed, before 1988,

there were no requirements on private banks to hold ‘capital’, as

68

Bernard Vallageas points out in his paper: Basel III and the

Strengthening of Capital Requirement.54 Yet, despite the fact that the

banks did not ‘hold capital’ against their lending in the period before

1988 – there were no financial crises between 1945 and the 1970s.

‘Curiously’ writes Vallageas, ‘the adoption of capital requirements

(took place) at the same time as the liberalisation of the financial

system, and yet, despite their adoption, they did not prevent financial

crises, particularly the major 2007-9 crisis.’

Let that be a lesson to regulators and the general public. For all the

serious-sounding jargon that emanates from the Basel Committee

responsible for regulation, the economic orthodoxy relies on studied

indifference to the evidence.

As well as increasing capital requirements, policy makers have

resorted to the ‘gold standard’ policies of the 1920s and 30s. They

have once again imposed or tolerated ‘austerity’ or deflationary

policies on whole populations in Europe and Japan. Deflationary

policies have the effect of lowering wages, incomes and prices, while

protecting the value of assets owned by creditors and international

investors. (Assets are both valuable in themselves - think property,

stocks and shares, works of art etc. - but also as collateral for further

borrowing.)

Deflation is welcome to bankers and creditors as it protects the value

of loans and debt. Indeed as prices, wages and incomes fall, the value

of debt rises in relative terms for creditors. This is in contrast to

inflation which erodes the value of debts. The effect of austerity

policies therefore is to exacerbate the indebtedness of western firms,

households and individuals; to punish those innocent of causing the

crisis, while increasing the value of assets (debt) owned by those

responsible for it. For a few years after the bankruptcy of Lehman

Brothers, rising debt levels were made bearable by the low rates of

69

interest that were the result of central bank action, or reaction to the

2007-9 crisis. However, as noted earlier, central banks can only

strongly influence the ‘base’ or ‘policy’ rate – and loans at this rate

are only available to institutions in the finance sector. Rates on loans

to small businesses, firms and households are influenced by base

rates, but also by global financial markets in for example, US

Treasuries. (The yield on the US 10-year Treasury bill serves as a

reference for global interest rates set by commercial banks.) Finally

rates are fixed or set by commercial bankers according to their own

assessment of the risk of a lender, and the rate of return on a loan.

These interest rates remain high in real terms, that is, relative to the

inflation or deflation of prices and wages.

However, they are expected to rise even further when central bank

rates rise, causing bond yields in global capital markets to rise

further. Rises in rates on longer-term assets (bonds and mortgages)

will have a punitive impact on household and corporate debtors –

especially in the Anglo-American economies. Indeed each time the

US or UK economy appears to improve, recovery is choked off by

rising bond yields in global capital markets. These in turn raise

expectations and justifiable fears that long-term interest rates on

mortgages will follow.

Disillusionment with democracy

The politicians responsible for enforcing austerity policies have not

just imposed unnecessary suffering and dislocation on millions of

people, their communities and countries. They have caused

disillusionment with democracy to set in amongst the unemployed

and impoverished in Europe and the US. Austerity has opened up

political space for right-wing, populist political parties like the US’s

Tea Party, France’s National Front and Golden Dawn in Greece.

These are the social and political consequences of enacting policies

70

that enrich the few, while impoverishing the majority; policies based

on the interests of ‘robber barons’ and on the flawed theories of

‘defunct’ economists.

“There is no money”

At the heart of the politically inept responses to the financial crisis is

an ideologically-driven and mendacious conviction: that while society

can afford to bail out a systemically broken banking system, it cannot

afford to finance and address economic failure, youth unemployment,

energy insecurity, climate change, poverty and disease. Society, it is

argued ‘has no money’ to finance these challenges, to stimulate

recovery and create employment.

Mrs Thatcher, whose views on the economy still inform the policies of

many Conservative and Social Democratic OECD governments, gave

clearest expression to the conviction that ‘there is no money’ in a

1983 speech.

The state has no source of money, other than the money people

earn themselves. If the state wishes to spend more it can only do

so by borrowing your savings, or by taxing you more. And it’s no

good thinking that someone else will pay. That someone else is

you.

There is no such thing as public money. There is only taxpayers

money.

Mrs Thatcher, speech to Conservative Party Conference, October,

1983.55

Today this assertion sits strangely with the facts of the recent bailout

of the global banking system. While politicians try to persuade

electorates that ‘there is no money’ something quite different

71

happened under the guise of ‘Quantitative Easing’. Central bankers

created trillions of dollars ‘out of thin air’, and did so ‘overnight’ to

bail out the banking system.

And I mean trillions.

Quantitative Easing: ‘new money that the Bank creates

electronically’.

Bank of England website in ‘Quantitative Easing: how it

works.’56

The American Senator Bernie Sanders directed the US’s Government

Accountability Office to undertake an audit of the amount of ‘state money’

created by the US Federal Reserve, and supported by governments, during

the crisis. The conclusion was that $16 trillion “in total financial assistance”

had been mobilised for “some of the largest financial institutions and

corporations in the United States and throughout the world”.57

Please note that not a cent of these trillions of dollars was raised by taxing

Americans, although the liquidity created by the Federal Reserve is backed

by US taxpayers. Second, note that the beneficiaries of all this American

taxpayer-backed largesse included German, British and French bankers.

Here in Britain, the Governor of the Bank of England explained to a Scottish

conference in October, 2009 that

a trillion (that is, one thousand billion) pounds, close to two-thirds of the

annual output of the entire (British) economy”58

had been mobilised (again, almost overnight) to bail out the British banking

system.

Never in the field of financial endeavour … has so much money been

owed by so few to so many.59

72

Despite this evidence that the state does indeed have “other sources of

money” – other that is, than taxation - many have adopted Mrs Thatcher’s

reasoning, including those on the progressive end of the political spectrum:

Dear Chief Secretary, I’m afraid to tell you there's no money left.

wrote Liam Byrne, a British Labour Treasury Minister, in a letter to his

successor and published in the Guardian, on 17th May, 2010.60

The British government has run out of money because all the money

was spent in the good years …

said George Osborne, Britain’s Chancellor of the Exchequer on Sky News on

the 27th February, 2012.

We will have to govern with much less money around.61

noted Ed Balls, Britain’s opposition Chancellor, in a speech: Striking the right

balance for the British economy, delivered at Thomson Reuters, on Monday

3rd June, 2013.62

The mantra ‘there is no money’ confuses electorates, and strips governments

of agency when faced by threats from financiers and financial crises.

The 2007-9 crash

The root cause of the crisis that led to the bankruptcy of Lehman’s

and other banks in 2008 was the bursting of a vast bubble of

unaffordable credit. ‘Easy’ (unregulated to the point of recklessness)

credit was generated by commercial bankers and by others active in

the shadow banking system. Commercial banks vastly expanded the

amount of money in the economy. When this ‘easy’ credit became too

expensive (‘dear’) to make repayment affordable, borrowers defaulted.

In other words, it was high, not low interest rates that ‘debtonated’

the vast bubble of credit. This is a contested view, as most

economists and commentators locate the cause of the crisis in the

73

low rates of interest set by central bankers after the bursting of the

dot-com bubble in 2000-02. However, these rates were set low as a

reaction to the bursting of that asset bubble – and while it is true that

low rates laid the ground for the next crisis they were not the

immediate cause. Vast amounts of easy, dear money unrelated to real

economic activity, triggered the crisis.63

Very few economists blame the cause of the crisis on ‘easy’ or poorly

regulated and mis-managed credit-creation. Even fewer propose

increased regulation of credit-creation. Most focus on the low interest

rates that prevailed after the bursting of the 2001 dotcom bubble as

causal of the crisis. But it was ‘Easy credit’ that blew up the credit

bubble, including variations on ‘liar loans’ or ‘no documentation

mortgages’; or the packaged and re-packaged pools of mortgages,

‘sliced and diced’ into securities by banks like Goldman Sachs. The

risks on these were then sold and cynically passed on to the ‘little

people’ – borrowers and shareholders - as well as to big institutional

investors.

Nor do most mainstream economists give proper weight to the steady

rise in interest rates after 2003-4, and the impact of rising rates on

indebted firms, households and individuals. The chart below, from

the economist Richard Koo, shows just how sharp these rises were in

74

the run up to the crisis.

Chart taken from presentation by Richard Koo, Chief Economist, Nomura Research

Institute, Tokyo, to the INET Conference, Berlin, 14th

April, 2012.

It was higher interest rates that I contend, made debts unpayable

and that burst the credit/asset price bubble that precipitated the

crash of 2007-9.

At the height of the credit boom, as late as 2005-7, loans or

mortgages were still being offered to individuals, households and

firms, without any real assessment by bankers of the ability to repay.

Some of these borrowers were high-risk (e.g. ‘sub-prime’) borrowers.

Because they were high-risk, they could be milked for usurious rates

of interest. The returns on these loans were scandalously high, which

is why banks like Goldman Sachs demanded more of such lending by

the mortgage-selling agents of private banks. They wanted to gather

up these sub-prime mortgages, bundle them up and artificially create

new assets – a mixed bundle of mortgages and loans – they called

‘collateralised debt obligations’ or CDOs. These new financial

‘products’ or assets could be sold again at a massive capital gain; but

could also be used as collateral to back up additional new borrowing

0

1

2

3

4

5

6

7

8

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(%)

Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Mar. 23, 2012.

Australia

EU

US

UK

Japan

75

- by bankers. That is until the individuals, households and firms at

the heart of the CDOs defaulted, the debt bubble popped – and the

‘sub-prime’ crisis erupted.

To imagine the role that sub-prime debt played in the crisis, it helps

to think of sub-primers as positioned at the base of a vast, upside

down pyramid of debt. Although their debts were not substantial in

the grand scheme of things, nevertheless they were the poorest, most

vulnerable borrowers in the market – and most likely to be the first to

go under. Balanced precariously above sub-prime debts, were huge

sums of ‘structured’ and often ‘synthetic’ debt, made up of

collateralised securities, credit default swaps and other complex

financial products. These financially ‘engineered’ products created

artificially by the shadow banking system in the run-up to the crisis,

were explosive precisely because they bore no relation to the real

world of productive activity. However, they were tenuously linked to

the properties and mortgages – the assets - of poor workers.

It took the default of some of the poorest borrowers at the bottom of

the financial pyramid to blow up the system. This was an

extraordinary development; one in which the debts of the poorest in

society caused a systemic crisis for the richest. Costas Lapavistas

writes that: “under conditions of classical, nineteenth-century

capitalism it would have been unthinkable for a global disruption of

accumulation to materialize because of debts incurred by workers,

including the poorest.” 64

The ‘debtonation’ of August, 2007

The crisis began when it became obvious that banks were sitting on

significant non-performing loans in a housing market where prices

were already falling. At the same time the merged retail and

investment banks had built up their own enormous debts – not

76

permitted before the abolition in 1999 of the US’s Glass-Steagall

legislation of 1933. The problem was made much worse because of

the use of ‘exotic instruments’ like CDOs and CDSs. The cynical

irresponsibility of lending at usurious rates of interest to those

defined as ‘sub-prime’ borrowers was just the most visible part of

their greed and recklessness. Huge loans made against all kinds of

property and other risky assets were exposed as unpayable.

Because proper regulation and oversight of the finance sector had

been neglected, no one had the first clue how bad it would get, or

which banks were most likely to default on their debts. On 9th

August, 2007 – well before the collapse of Lehman Brothers- bankers

realised that some of the banks they dealt with were not in a position

to repay debts. As a result of that loss of confidence or trust, ‘credit

crunched’. In other words, bankers became unwilling to offer fellow

bankers credit. On that day inter-bank lending froze, and a slow run

on the banking system began. The intervention of central banks like

the ECB, the Bank of England and the Federal Reserve kept banks

afloat, but also served to keep the crisis under wraps, preventing the

wider public from becoming fully aware of the crisis until the collapse

of Lehman Brothers.

Years after the ‘credit crunch’ of August, 2007, the global economy

struggles to recover from that crisis and the easy (unregulated) credit-

fuelled bubbles that were violently burst by rising (real) rates of

interest. Indeed some argue that western economies are living

through the longest period of economic failure in peacetime history.

Only during periods of war was economic failure so prolonged. And

yet far from re-regulating the financial system, governments stand

idly by as the global credit bubble – which was never fully deflated

after 2008 – is reinflated by central bank operations. Having done

little to re-structure or re-regulate the global finance sector, central

bankers have used a range of tools at their disposal – including

77

Quantitative Easing – to help bankers clean up their balance sheets.

Commercial bankers have been able to do this by drawing on QE and

other forms of cheap finance, and to use these resources for

speculation. Speculation, unlike patient, long-term lending, leads to

quick and sometimes exponential gains for bankers. These gains are

reflected in the way in which QE and other central bank operations

have re-inflated the value of assets - owned by wealthy elites.

Simultaneously, in the real economy, investment, wages and salaries

have fallen, and the poor have become poorer.

This apparent collusion between central bankers and finance capital

is leading to growing social unease.

What is Quantitative Easing?

When credit ‘crunched’ in August 2007 publicly-backed central

banks came to the rescue of the failed private sector. Central

bankers used a routine monetary operation that came to be known as

‘Quantitative Easing’ to inject large amounts of ‘liquidity’ (i.e. assets

readily converted into reserves) into the private (and, in some cases,

nationalised) financial system. Central bankers undertook this as

part of their regular money market operations.

Open market operations have been undertaken by, for example, the

Bank of England since it was founded in 1694. As already noted,

these routine operations are used to achieve policy targets – e.g.

lowering or increasing the base (or policy) rate of interest. For some

reason QE has attained a sort of mythical status, when really it is

what central banks do, and always have done. What is new about QE

is the scale of central bank operations. Central banks have

purchased or swapped trillions of dollars of assets since 2008-9.

About $4trillion of this liquidity has flooded into emerging markets,

inflating the value of their currencies, and of assets such as property,

78

stocks, works of art etc. As it is mobile, this money may just as

quickly flood out of low-income economies, and out of such assets.

This unprecedented scale of liquidity creation through the expansion

of bond purchases by central banks has had virtually no effect on

economic recovery in any of the economies in which QE the main

policy tool deployed to stimulate recovery (Japan, the US and the

UK). Nor has QE proved inflationary – despite the alarmist fears of

orthodox economists.

Why so? Under QE operations, the central bank makes a swap

arrangement with a private bank. It exchanges bank reserves for an

interest-bearing asset such as a government bond. Reserves cannot

be, and are not, used for lending, but instead are used for ‘clearing’

bankers’ day-to-day obligations to other banks, as explained above.

By entering into this operation with the central bank, a commercial

bank can increase certain assets – central bank reserves, or short-

term loans - on its balance sheet, and can remove more risky assets –

e.g. mortgages, from its balance sheet. The latter are placed on the

central bank’s balance sheet. This strengthens the private bank’s

position – i.e. makes it more viable, and therefore able to borrow and

take risks.

The Ronaldo Loan

One of the assets offered up as collateral in the QE process is a loan

made by a Spanish bank (now absorbed into the nationalised bank,

Bankia) to the football club Real Madrid. The loan was used to

finance €76.5m in transfer fees for the footballer Ronaldo and for

Kaka, a Brazilian forward. Bankia put up the loan or bond as

collateral with the European Central Bank in return for vital funding,

79

i.e. reserves. If both Bankia and Real Madrid go bust, the ECB would

be in ‘possession’ of the two footballers.65

By taking bonds such as the ‘Ronaldo loan’ on to its books, the

central bank shrinks the supply of such bonds on the market. This

increases the value or price of said bonds. A higher price for a bond

implies a lower yield (equivalent to an interest rate, or the rate of

return).1 By this means does the central bank exercise a marginal

influence on interest rates (or bond yields) in capital markets.

However, increased reserves and a strengthened balance sheet won’t

necessarily encourage banks to lend on, as they do not use reserves

for lending. What encourages banks to lend is a thriving economic

environment, one in which there are borrowers with good collateral

and potential income willing to borrow, confident of their ability to

invest and to generate profits and income with which to repay the

bank at the rate of interest charged.

QE cannot alone provide that confidence. Nor can it generate

confident borrowers, as the five years of economic failure since

Lehman’s collapse, and the twenty years since the start of Japan’s

lost decades have so comprehensively demonstrated.

Monetary policy alone cannot conjure up recovery. When the finance

sector is effectively insolvent; when industry lacks confidence and is

anyway too indebted to take investment risks, then monetary policy

has to work in tandem with fiscal policy, to help revive the economy.

Bank lending cannot revive when there are too few private borrowers

active in the real economy, because private borrowers are already

heavily indebted and therefore reluctant to take on more debt;

unemployment is high, insecurity is rising, and western economies

are in a prolonged recession or just recovering from prolonged 1 A bond that pays out $10 a year and costs $100 has a ten percent yield. If the bond doubles in price to $200, the $10 annual payment represents a five percent yield.

80

recession. In economies practising ‘austerity’, orthodox economists

(backed by their friends in political parties) actively discourage the

only viable borrower - government – from borrowing to substitute for

the absence of private borrowers.

Richard Koo, an economist who is best known for his work in Japan,

explains why QE did not work in Japan: “If there were many willing

borrowers and few able lenders, the Bank of Japan, as the ultimate

supplier of funds, would indeed have to do something. But when

there are no borrowers the bank is powerless.”66

How to create more borrowers? In the circumstances of a debt-fuelled

slump, in which the private sector is inhibited from investing, the

borrower of last resort - government - has to intervene, to borrow to

stimulate investment and create employment. Public investment will

in turn raise confidence, provide opportunities for the private sector,

and by way of ‘the multiplier’ – explained below - simultaneously

generate income for government via increased tax revenues and

reduced welfare payments.

The multiplier 67

New spending has a series of ‘repercussions’ through the economy.

This means that the aggregate impact of public spending can be far

larger than the original expenditure.

So for example, the direct effects of government spending on a wind

farm will first benefit the companies that produce the relevant

equipment, their existing employees, and those who benefit from the

new jobs created as a result. But the increase of employment doesn’t

stop there. There will also be a number of secondary repercussions.

The extra wages and other incomes paid out are spent on extra

purchases, which in turn leads to further employment. So the

81

workers on the wind farm stimulate more demand for food,

entertainment, clothes and so on. ‘If the resources of the country

were already fully employed, these additional purchases would be

mainly reflected in higher prices and increased imports,’ wrote

Keynes. ‘But in present circumstances this would be true of only a

small proportion of the additional consumption, since the greater part

of it could be provided without much change of price by home

resources which are at present unemployed.’ 68

But the process continues: ‘The newly employed who supply the

increased purchases of those employed on the new capital works will,

in their turn, spend more, thus adding to the employment of others;

and so on.’ 69 These cumulative repercussions are a virtuous reverse

of the vicious cycle brought on by financial failure and the

contraction of economic activity caused by policies for ‘austerity’.

How taxpayers protect central banks from the threat of

insolvency

The reason central banks are able to create large amounts of liquidity

for the banking system and to rescue the private finance sector at

times of crisis is because they are state institutions, backed by

taxpayers.

Central banks, unlike private banks or firms or households do not

face solvency constraints. They are part of the government of a

nation, and nations and their governments cannot be ‘liquidated’ in

the way that a bankrupt firm can. (Some would say that Germany

was ‘liquidated’ after World War II, in the sense that her financial and

banking institutions were destroyed. However, as we all know,

Germany remains a powerful nation and was able to rebuild her

monetary and governmental institutions. Similarly while Zimbabwe’s

economy is moribund, the nation and government of Zimbabwe

82

continue to exist and to function. It is in this sense that nations and

governments are different entities from firms.)

Furthermore, the sovereign state, the issuer of the nation’s currency

can always call on both its central bank, but also private banks to

create money in domestic currency to finance bailouts and fund their

own spending. (Central banks cannot create money in foreign

currencies, and so foreign debt becomes a significantly more

challenging repayment burden than domestic debt. And as an aside:

because countries of the Eurozone have given up their sovereignty

over monetary policy to a European institution (the European Central

Bank) these nations’ central banks do not have the credit-creation

powers that sovereign governments such as the US, Japan and the

UK enjoy.)

Private non-financial firms do not have access to banks that can

‘print’ on demand unlimited supplies of money for use by that firm in

a crisis – and so firms face the threat of insolvency.

Governments have another advantage over companies: an endless

queue of taxpayers, one that stretches forward into future

generations. If sound tax collection systems are in place,

governments can generate the revenue needed to repay debts over

future generations – which is why sovereign debt is largely considered

safe. Private firms are not guaranteed an endless queue of customers

into the future; and while firms or banks may expect future income

streams from borrowers or rent-payers, these flows are not as certain

as ‘death and taxes’.

Of course sovereigns can default on debt repayments and can inflate

debt away by printing too much money – but that is not the same as

‘liquidation’ or bankruptcy of a sovereign.

83

The failure of commercial banks to lend

Despite a massive increase in the supply of reserves by central banks

and the strengthening of their balance sheets, commercial banks

continue to fail in their role as major creators of the money supply,

for the reasons outlined above. Borrowers are already indebted; the

financial crisis has been exacerbated by ‘austerity’ policies that have

increased unemployment, and lowered tax revenues, profits, wages

and incomes. Furthermore, the crisis has been used by politicians to

promote the ideological aim of ‘shrinking the state’, as Jeremy

Warner, deputy editor of the UK’s Daily Telegraph confirmed in a

recent article:

In the end, you are either a big-state person, or a small-state person, and what big-state people hate about austerity is that its primary purpose is to shrink the size of government spending ... The bottom line is that you can only really make serious inroads into the size of the state during an economic crisis. This may be pro-cyclical, but there is never any appetite for it in the good times; it can only be done in the bad.70

The global banking system has not been fixed, re-structured or re-

regulated. Debts in the Anglo-Saxon economies have not, on the

whole, been deleveraged (written off, or paid down). This overhang of

private debt is one of the major barriers to recovery.

The failure to lend and thereby create new deposits arises in part,

because, thanks to de-regulation of the banking system (on the

initiative of the Clinton administration) bankers were freed up over

the last few decades to expand their activities beyond lending; and to

engage in speculation. They did so with large sums of borrowed

money. The result was another historically unprecedented

development: the vast build-up of debt owed by private banks and

other financial institutions. That bank debt, combined with defaults

84

and ‘non-performing’ loans and mortgages on their balance sheets,

brought many to the brink of bankruptcy.

Given these conditions bankers dare not risk making new loans to

firms and households – especially given the declines in profits,

incomes and wages. However, bankers continue to engage in

speculation – undeterred by regulators - in the hope of making quick

capital gains which can be used to help clean up their balance

sheets.

(In Britain, at the time of writing, bank lending is still subdued,

except for one corner of the economy: the property market. In the first

quarter of 2013 lending to this sector turned positive for the first time

in several years, aided by government subsidies and the political

imperative to inject a ‘bubble’ of confidence into the economy before a

general election.)

Why corporations are hoarding cash

Many big global corporations also have high levels of debt, but have

simultaneously built up a stockpile of cash. These corporations are

‘hoarding’ the cash instead of investing in productive, employment-

creating activity. Fearful that interest rates on corporate debts will

rise and that the crisis will be further prolonged, corporations are

sitting on cash, and not investing. They are imitating the South East

Asian countries that after the 1997/8 financial crisis began to hoard

foreign reserves, fearful of yet another crisis, and of the power of

global capital markets to attack their currencies. The prolonged

nature of the crisis, the volatile financial system combined with

austerity policies have all served to undermine confidence in lasting

recovery by those active in the productive, corporate sector.

Furthermore most big firms and corporations are heavily indebted as

a result of the easy money era of the 90s and 00s. The result is

85

predictable: companies will not take risks by investing their cash or

surplus.

Some refer to this hoarding of corporate cash as a “strike” by Capital. I do

not see it that way. British corporates, for example, are still heavily indebted,

as the Bank of England’s Financial Stability Report showed in November,

2013: “the gross external debts of the (private) non-financial sector have

risen to 160% of GDP — an increase of 40 percentage points since 2007…

driven mainly by private sector borrowers.” 71 The Bank explained that

Britain’s private non-financial corporations (PNFCs) had not delevered their

debts evenly since the crisis and remained vulnerable to shocks. PNFCs with

weaker credit ratings had risen since 2012 and weaker-rated companies had

been less able to obtain long-term finance. All these firms remained

vulnerable to shocks, including from rising interest rates. Those possible

shocks combined with the lack of demand for goods and services in the

economy, was a major cause of the hoarding of cash.

What this behaviour by corporations illuminates is that financial

volatility and high rates of interest are major inhibitors of investment.

Both low levels of corporate investment and the wider economic crisis

cannot be addressed without first re-structuring, re-regulating and

managing global finance capital. .

Collusion between central bankers, politicians and Haute

Finance

Because of the dysfunctional state of the banking system, citizens

and small firms (SMEs) cannot (on the whole) access affordable credit

– except perhaps from payday lenders and other non-standard

financial institutions. This shortage of credit is further contracting

economic activity. Individuals, households and firms are denied

loans and overdrafts for everyday activity, except at high rates of

interest. (Banks quite often blame this situation on a lack of demand

for loans; but their pricing of loans often blocks demand.)

86

As a result of austerity and the repression of lending by banks,

citizens of the US and Europe have endured years of suffering from

rising unemployment (higher for example in Spain than during the

Great Depression) or economic inactivity (very large numbers have

simply despaired, and dropped out of the US workforce); rising rents

and taxes and falling incomes. At the same time, governments have

used the crisis to cut back on welfare payments and to privatise

public services.

Financial institutions have fared better: they have privileged access to

loans from central banks at very low, or negative rates of interest. (As

this goes to press, the European Central Bank provides loans to

European banks at an average rate of 0.225 per cent, up from 0.128

per cent according to the three-month Euribor index.72 ) As noted

above, bankers have used ‘easy’ and cheap central bank liquidity to

cover their losses; to borrow for speculative purposes and to blow up

new bubbles in a range of asset classes (property, bonds, stocks,

commodities, etc.). As I write this, bond yields (the rates on sovereign

and corporate bonds) are rising, and, because of the

interconnectedness of the global financial system, these rises will

cause banks to raise interest rates in mortgage and other markets.

These rate rises – on loans across the full spectrum of lending – pose

a real threat to western economies with heavy private sector debt

burdens.

By borrowing cheap from the central bank and lending dear into the

real economy, private bankers are able, with the help of public

servants at central banks, to re-capitalise their institutions and to do

more to clean up their balance sheets. These ‘repairs’ to the finance

sector’s own finances are made at great cost to society, and to the

productive economy as a whole.

87

High interest rates are like daggers aimed at the asset bubbles

created by renewed financial speculation. Borrowing on margin to

gamble is fun while you’re winning; but costly when the gamble is

lost. That is why rising interest rates once more pose a grave threat to

the global financial system.

Because regulators and policy-makers have taken a ‘hands off’

approach to the private banking system, the authorities cannot

ensure finance is transmitted to the rest of the economy. Central

bankers, politicians and regulators have baulked at nationalising

and/or re-regulating banks. Even when banks have been

nationalised, regulators have not used taxpayer-funded bailouts to

require terms and conditions from bankers that would result in better

management of credit-creation, and the financial transmission

system. They seem unable to learn from the past, when governments

regained control over the financial system; when central bankers

offered bankers ‘guidance’ on the quality of credit creation and

lending that private banks could engage in, and when these were

conditions imposed on those that benefitted from the protection

provided by taxpayer-backed central banks.

During the Bretton Woods era regulators set strict rules on the

amounts lent and borrowed, relative to incomes. In some countries

such rules still apply. There have been times in western monetary

history, most notably after 1933 in the UK and the US when

governments and central bankers set out to manage interest rates,

and to keep them low for all forms of lending.73 And after the Great

Crash of 1929, American regulators insisted in 1933 on the

separation of retail banking from investment (speculative) operations.

As noted above this legislation was repealed in the US 1999 and

encouraged bankers to go on borrowing sprees prior to the crisis. By

failing to re-regulate and re-structure the banking system, policy-

88

makers have exposed citizens of the global economy to further

financial crises and economic failure.

Nor do politicians have the political will to regulate and stabilise the

mobile, footloose flows of international capital “governed” by the

private global banking system.

Partly because of this regulatory spinelessness, and in spite of a

broken transmission system, the finance sector enjoys business-as-

better-than-usual. While bankers and financiers may face solvency

questions, they have been told that their institutions are too big to

fail, and that they themselves are too ‘too big to jail’, as US Attorney

General Eric Holder said in evidence to a Congressional committee on

6 March 2013:

I am concerned that the size of some of these institutions

becomes so large that it does become difficult for us to prosecute

them when we are hit with indications that if we do prosecute —

if we do bring a criminal charge — it will have a negative impact

on the national economy, perhaps even the world economy. I

think that is a function of the fact that some of these institutions

have become too large.74

As long as the banks remain vastly complex bundles of businesses,

the executives running them remain above the law. No wonder they

are lobbying hard to prevent meaningful re-structuring!

Despite a supposed commitment to the ideology of ‘free markets’,

market forces no longer impose any meaningful constraints on the

risks that a handful of very large banks take on. Instead private

financial institutions enjoy taxpayer-backed protection - the very

inverse of today’s dominant and orthodox free market economic

theory. This makes bankers both parasitic on the state and

89

dangerous for taxpayers, given that many question the solvency of

the world’s biggest commercial banks. The Financial Times columnist

Wolfgang Münchau recently used a ‘back of an envelope’ calculation

to assess the extent to which banks are bust.75

The total balance sheet of the monetary and financial sector in

the eurozone stood at €26.7tn in April this year. How much of

this is underwater? In Ireland, the 10 largest banks accounted

for losses of 10 per cent of total banking assets in that country.

The total loss will be higher. In Greece, the losses have been 24

per cent of total assets. The central bank of Slovenia recently

estimated that losses stood at 18.3 per cent. In Spain and

Portugal, the recognised losses are already more than 10 per

cent, but the numbers will almost certainly be higher. Non-

performing loans are also rising rapidly in Italy.

Germany is an interesting case. The German banking system

appears healthy at first sight. It certainly fulfils its function of

providing the private sector with credit at low interest rates. But I

still find it hard to believe that the German banking system as a

whole is solvent.

Instead, Münchau writes, regulators “pretend not to see the losses,

and extend the crisis.”

As a result speculation by the private finance sector has once again

been unleashed and new asset bubbles created. These have inflated

the prices of stocks and shares, bonds, property, works of art. Post-

2009 asset price inflation has wildly enriched the rich, while those

without assets are further impoverished. Inequality has predictably,

widened. When today’s reinflated asset bubbles burst, they too will

cause further havoc.

90

These facts are widely known and understood, but not acted upon.

91

Chapter Five: The capture of the

public good that is banking

While the establishment of a system of credit, and the lowering of interest

rates was a great civilizational, advance, the banking system could be

captured and then controlled by the ‘barons of global finance’.

Geoffrey Ingham explains that this capture includes control over the

production of money:

“Money expands human society’s capacity to get things done, but this

power can be appropriated by particular interests. This is not simply a

question of the possession and/or control of quantities of money – the

power of wealth. Rather, as we shall see, the actual process of the

production of money in its different forms is inherently a source of

power.”76

John Maynard Keynes understood well how the prosperity of society is

dependent on a sound, managed banking system, based on bank money,

and low rates of interest.

He also understood that the development of banking was a threat to the

owners of great wealth - society’s “robber barons”.

Under a well-managed banking system, and with the sagacious use of bank

money, surplus wealth is no longer needed for loans and investment.

Furthermore, under a well-managed monetary system, and as explained

above, interest rates can be kept low by the authorities (the central bank and

the Treasury/finance ministry) to benefit society as a whole.

Both of these developments were and are anathema to capital-holders, as

first, they render excess wealth redundant to the wider needs of society.

Second, they reduce the rate of return on lending. Indeed as Keynes argued,

92

a low interest rate policy would lead to the ‘euthanasia of the rentier’; to the

disempowerment of capital-holders as a class.

But then Keynes too was an optimist.

The New Age of the Rentier

Today we live in a world in which the public infrastructure that is money

production has been captured and subordinated to the interests of a wealthy

elite - finance capital. Rentiers - individuals or institutions that live by

unearned income - have not been euthanized by the banking system. On the

contrary: they are in triumphant possession of it.

While capitalists may invest to create new capacity, the rentier simply

exploits existing assets for cash flow. The rentier purchases an asset e.g.

land, which does not have costs associated with its production (because land

after all, is created by nature), and charges rent on it. These rights to an

asset enable the rentier to, for example, install tolls and extract fees from

travellers; or to purchase hospitals or schools or football clubs and then

drain rents from the users of those institutions – much as a landlord charges

rent on a property. Here’s Michael Hudson, a scourge of the bank-friendly

orthodoxy:

U.S. banks don’t make loans for what can be produced in the future.

They make loans against collateral already in place – including entire

companies with high-interest “junk” bonds. Instead of extending loans

to create new factories to employ people, new means of production,

bankers look at what can be pledged as collateral on which they can

foreclose.77

Rentiers as financial parasites

Today’s ‘robber barons’ under the pretext of ‘equity investment’, borrow huge

sums of money to purchase e.g. a football club like Manchester United, or a

company like Boots the Chemist. They then drain rent (debt repayments)

from the corporate body, by diverting cash flows. These cash flows are

93

created and provided by the producers, managers, retailers and customers

of, for instance, Boots, or by Man United football fans. Fans provide the cash

flows by buying the club’s t-shirts or kit. By these means do rentiers (with

little effort) drain the wealth of those with limited amounts of cash, but

without collateral or other assets.

This parasitic behaviour is bad enough, but to increase the capital gains to

today’s ‘robber barons’, governments make this kind of borrowing tax

deductible. The result is a double whammy: massive exploitation and

appropriation of the assets of companies like Boots, or football clubs like

Manchester United. And declining tax revenues for governments from

rentiers disguised as ‘private equity finance’ or ‘debt leveraging’ companies:

e.g. Kohlberg, Kravis, Roberts, CVC Capital Partners, or the Blackstone

Group.

These concessions to the rentier sector by governments are a painful form of

fiscal ‘self-harm’ because declining tax revenues worsen the government’s

rating with bond markets under today’s ‘liberalised’ financial architecture.

This leads to higher rates of interest on government bonds – paid by

taxpayers mostly oblivious to these decisions.

And so the parasitic behaviour of the rentier gradually weakens the body

fiscal, and with it the body politic.

‘Neo-feudal’ rentier capitalism: the story of Manchester United

Manchester United was taken over in 2005, at the height of the credit boom

by the Glazer family of Tampa, Florida. The transaction was a ‘leveraged

buyout’ which means that United was acquired, not with the existing wealth

of the Glazer family, but with borrowed wealth, i.e. debt. By June 2010 this

debt had escalated to over £784m.

The debt was secured primarily against the football club itself – meaning

that the Glazers borrowed against an asset - the Man U football community -

that could be ‘milked’ to generate regular, high returns, in the form of

94

revenue streams from the sale of e.g. rising ticket prices, Man U kits, TV

rights (paid for by subscriber fans) and T-shirts sold, as I have personally

witnessed, to already impoverished child fans in remote parts of Africa.

These revenues repay the high real rate of interest on the debt, but they also

finance dividends for the Glazers.

The interest bill from Man U’s debt of £784 million over eight years, is

estimated at £350m and the total cost in that short time (including fees,

derivative losses and debt repayments) is estimated at almost £600million.

The blogger ‘andersred’ believes that Man U’s total costs from the Glazer

structure will top £1bn by 2016.

Manchester United is not alone. Football teams throughout Europe have

loaded themselves with debt in an effort to reach the top leagues that attract

pay-tv revenues. It is a winner-takes-all pattern that is replicated in sector

after sector. The money drives up wages for a lucky few but all too often ends

in collapse and government bailouts.

Rentier capitalism and government bond markets

Under today’s liberal financial architecture, governments are encouraged to

raise funding for public expenditure by borrowing from the private finance

sector, and not from their own central banks. The rates on that borrowing

are fixed by invisible and unaccountable players in global bond markets.

As a result of this dependence on private finance, the power of the global

bond market over governments is used to force policy changes on reluctant

electorates. At the same time the restless, reckless, conduct of global bond

markets epitomises rentier capitalism. Those active in these markets use

uncertainty and volatility to force up bond yields and to then drain streams

of revenue from taxpayer-financed institutions. They revel in particular in

the usurious rates that can be charged on bonds issued by the poorest, most

vulnerable of states, for example Ghana, South Africa or Greece.

95

Finance capital despotically in command

Today in both rich and poor countries finance capital is despotically in

command of democracies. Economic activity is held back; firms are bled dry

by rentier activity; loans are hard to come by, and the rates on lending often

usurious. As a result, productive and creative activity stagnates; firms and

even states (think Greece, Spain, Italy) are weakened by the parasitic

behaviour of finance capital, or, in the case of firms, are bankrupted. And

millions of people are immiserated by unemployment; many more millions

impoverished. Inequality has risen to levels unprecedented in history.

Today as the anonymous London Banker, notes:

“… the state has lost control of the currency as central banks allowed

barons in banks and shadow banks to create money from

securitisation and quantitative easing. The state lost control of

markets as the Securities Exchange Commission (in the US) and the

Financial Services Authority in the UK allowed those same barons to

set up alternative trading platforms beyond any public scrutiny and to

bastardise public exchanges with algorithmic trading and synthetic

instruments priced against fraudulent reference rates.” 78

In the place of ‘the state’ we argue that democracy, operating through the

state, has lost control of the public good that is the currency.

Democracy and the Euro

Otmar Issing, a neoliberal German economist, is well known as the

“Architect of the Euro” and was a member of the Executive Board of the

European Central Bank as well as its first Chief Economist from 1998-2006.

He is also a great admirer of the ‘classical’ economist Friedrich Hayek. In a

recent book on the “Making of the European Monetary Union”, Harold James

quotes Issing as arguing that

“… many strands in Hayek’s thinking…may have influenced the

course of the events leading to Monetary Union in subtle ways …What

96

has happened with the introduction of the Euro has indeed achieved

the denationalisation of money, as advocated by Hayek.”79

We can replace “the denationalisation” of money with something more

explicit: the de-democratisation of money – the utopian fantasy of global

finance capital.

When academics and beneficiaries of the public purse like Otmar Issing

collude with creditors and financiers to grant finance capital such despotic

power over society, democracies are inevitably hollowed out and

democratically elected politicians rendered irrelevant and powerless. This

leads to disillusionment and despair with the democratic political process,

and recourse to populism, fascism and other forms of protest.

This loss of democratic control over the financial system in general and

private credit creation in particular means that the state cannot regulate in

the interests of society as a whole. This is partly a result of powerful lobbying

and manipulation by bankers; but also of public ignorance of the basic

elements of credit creation and bank money. Because the system of bank

money evolved behind a veil of deception; and because this deception suits

the interests of bankers and speculators – the “neo-feudal rentier class” -

there is still widespread obfuscation about the creation of money by

commercial bankers.

This confusion does not just persist in the public mind but also in the minds

of professional neoliberal and even ‘Keynesian’ economists: the guilty men

(and they are mostly men).

They will not understand until the public around them does.

97

Chapter Six: Subordinating finance, and

restoring democracy

The crisis of finance capital’s despotic power is one that Italian economists

Massimo Amato and Luca Fantacci explain as the result of western society’s

subjugation to ‘the yoke of ideology’.80 In other words, this is a crisis of

ignorance and political impotence in the face of a set of ideas serving the

interests of the few.

By shielding its activities from public oversight and academic scrutiny,

finance has turned society’s social construct – credit – and the social

relationships between debtors and creditors into a false commodity on the

one hand, and an artificial market on the other. Social relationships cannot

be marketised. Markets cannot buy and sell the trust (or distrust) that exists

between debtors and creditors. That much is self-evident. Society’s social

relationships cannot be bought and sold like commodities, finished goods or

services. They can only be upheld through the setting of standards, oversight

and regulation.

The task therefore is political: society must reject the marketization of social

relationships and of the social construct that is credit. Instead we must once

again restore these social relationships to the fields of law, ethics, and

standard setting. By regaining democratic oversight and regulation of the

great public good that is our monetary system, society will by political means

(that is by mobilising political will and enacting legislation and regulation)

once again subordinate finance to its proper role, of servicing real markets in

goods and services. Today those operating in markets that trade in goods

and services struggle to operate efficiently, fairly and sustainably in a world

of liberalised finance, as the economist and free-trader Jagdish Bagwati

argued in his famous essay: The Capital Myth: The Difference between Trade

in Widgets and Dollars. 81

98

The question is this: how to subordinate finance? Below I offer some

suggestions – none of them new or original. However they are all tried and

tested, and have proven effective in limiting the power of finance – which is

why perhaps, they are so little discussed and examined.

Controlling the social variable that is the rate of interest

Liquidity: A measure of the extent to which a person or organization has

cash to meet immediate and short-term obligations, or assets that can

be quickly converted to do this.

Business Dictionary82

To capitalists, liquidity - or the lack of it – matters a great deal. Indeed for

many it is a fetish; and in financial crises, as explained above, liquidity

becomes illusory, as buyers evaporate.83

As I have outlined in Chapter 2, Keynes’ theory on liquidity preference

explains that interest rates can be determined and shaped by the supply of

and demand for assets. Not, as many neo-classical economists argue - by the

demand for savings.84

Capitalists do not have any control over whether they will invest (they have

after all to do something with their savings/capital!) but they do have control

over the period they are willing to invest for; the period during which they

give up the ability to convert their wealth quickly into ready cash. As Dr.

Geoff Tily explains:

Interest is paid not as a reward for not spending (saving) but as a

reward for parting with the liquidity of wealth. Firms and governments

do not need to encourage households to save to gain access to their idle

resources. If firms and government are willing to borrow on liquid terms

then they would not need to pay any reward for access to these

resources ... Debt management policy should permit a sensible and

coherent framework for the balancing of firms’, governments’ and

99

households’ differing preferences towards holding and borrowing

wealth with different degrees of liquidity/illiquidity.85

So if the government wishes to determine, and to keep low, the rate of

interest over a range of time periods, argued Keynes, then it must arrange its

own borrowing i.e. issue its own assets (debt or bonds) over time periods that

suit the liquidity preferences of the holders of capital. Some may wish to part

with capital for just one day (to be sure of cash) for thirty years (to ensure

security in e.g. retirement) or for several months – in the hope of making

speculative gains. Vital to the control of the rate of interest, argued Keynes,

is the provision of a full range of safe government assets that meet those

different and varied time preferences.

Because of the government’s dominant role as an issuer of bonds, the

reward for parting with liquidity over different time periods can then be

managed by governments through the debt management office of the finance

ministry or Treasury. By creating, offering and managing a range of

government assets to meet the demands of investors for liquidity over

different time periods, the government can both exercise greater control over

its own financing costs, and determine the rate of interest over those time

periods in ways that reduce the financing costs of the private sector.

Keynes’s great insight was his understanding that the rate of interest is a

social variable, one that can be deliberately managed by the public

authorities, while at the same time holding finance capital at bay. Just as

the social construct that is the central bank’s discount rate (described above

in relation to the provision of cash to banks) is managed by the public

authority that is the Bank of England’s Monetary Policy Committee.

Keynes’s understanding of how interest rates are determined – i.e. not by a

demand for savings, but rather by the demand for assets into which stocks

of wealth can be invested over different periods of time - meant that interest

rates in Britain could be brought down low after 1933, and remained low for

the duration of the war.

100

Tily explains how Keynes directed the management of public debt during

World War II, and helped manage the rate of interest.

“During W.W.II the British authorities adopted a technique known as

the tap issue. Under the tap system the Government issued bonds of

different maturities (e.g. bills and bonds of 5 year, 10 year and no final

maturity) at pre-announced prices, but set no limits to the cash

amount of any issue.

The ‘taps’ of each bond were held open so individuals and institutions

could purchase the maturity of their choice, when and to whatever

quantities they desired. The system therefore enabled the public to

choose the quantity of debt issued at each degree of liquidity at the

price set by the Government.”86

The suite of policies that arose from the theory, established a permanent

long-term rate of 3 per cent on bonds set against a short-term rate on bills of

1 per cent, from 1933 onwards. This was an extraordinary achievement, and

played a significant role in Britain’s ability to finance the war effort.

However, as noted earlier, his revolutionary monetary theory; his

understanding of the nature bank money, of the banking system and of how

the rate of interest is determined, has been well and truly buried by the

public authorities, by the finance sector, and by mainstream academic

economists.

Controlling mobile capital: the international dimension

Just as a well managed banking system ends society’s dependence on

‘robber barons’ at home, so a well-developed and sound banking system

should end society and the economy’s reliance on international capital. With

a managed banking system, operated in the interests of both Industry and

Labour, both government, Industry and Labour need not depend on, or fear

‘bond vigilantes’ or ‘global capital markets’.

101

However, management of the financial system and of interest rates in

particular will be subverted if capital is mobile and lenders in international

markets offer higher or lower rates beyond a country’s border – rates not

appropriate to the economic conditions in-country. Keynes advocated

controls over the mobility of capital, because “the whole management of the

domestic economy depends upon being free to have the appropriate rate of

interest without reference to the rates prevailing elsewhere in the world.

Capital control is a corollary to this”, he wrote in this letter to R. F. Harrod:

Freedom of capital movements is an essential part of the old

laissez-faire system and assumes that it is right and desirable

to have an equalisation of interest rates in all parts of the

world. It assumes, that is to say, that if the rate of interest

which promotes full employment in Great Britain is lower than

the appropriate rate in Australia, there is no reason why this

should not be allowed to lead to a situation in which the whole

of British savings are invested in Australia, subject only to

different estimations of risk, until the equilibrium rate in

Australia has been brought down to the British rate.87

Keynes understood that under a bank money system, not only was reliance

on foreign capital ended, but that in order to manage the economy, countries

should actually close their borders to footloose, mobile international capital.

To do so he advocated capital control: the taxing of cross-border capital

flows. (Capital controls are taxes, and differ from exchange controls. The

latter place limits on the amount of a nation’s currency that can be taken

abroad. The Financial Transaction Tax (or Robin Hood Tax) is a form of

capital control, a tax or ‘sand in the wheels’ of capital flows.)

Professor Jagdish Bhagwati has argued persuasively 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 …

102

… 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 benefit … have been used to

bamboozle us into celebrating the new world of trillions of dollars

moving daily in a borderless world ... 88 (My emphasis)

Removing finance’s control over a nation’s currency

Keynes also understood that the modern-day practice of using the rate of

interest to manage the exchange rate of the currency would hurt the

domestic economy, because central bankers are obliged to focus on the

interests of the ‘robber barons’ - international capital markets - instead of

the interests of ‘the makers’ and exporters of the domestic economy. He

argued that instead, central banks should manage exchange rates over a

specified range by buying and selling currency rather than by manipulating

and ratcheting up interest rates to attract foreign capital. This would both

allow interest rate policy to be focussed on domestic interests, and at the

same time, ensure stability and transparency in exchange rate

arrangements.

A suite of policies for subordinating finance to the real economy

This suite of policies – management of credit creation; of interest rates

across the spectrum of lending; the regulation of mobile capital; and the

management of the exchange rate - gradually loosened the control

wealthy elites had over the financial system and the economy. They

formed the basis of the Bretton Woods financial architecture, which

while it endured (1945-1970) was, and still is defined as ‘the golden age’

of economics. These policies in turn loosened finance capital’s control

over society, and over democratic institutions. The power, status and

prestige of bankers in Britain and the United States were considerably

modified. The ‘golden age’ was a period the famous historians

Eichengreen and Lindert described as ‘a golden era of tranquillity in

international capital markets, a fulfilment of the benediction “May you

live in dull times.”’ 89

103

Keynesian monetary policies managed the banking system in the interests of

society as a whole, ensuring that all major stakeholders in the economy

enjoyed ‘a share of the cake.’

However, soon after Keynes’s death his theory and its practical application

were neglected and discredited. In its place the Hayekian (neoliberal) and so-

called ‘Keynesian’ schools of economics restored the old Classical theory.

This once again asserted that savings are needed for investment; that

bankers are mere intermediaries between savers and borrowers etc. Above

all, the Classical theory elevates the role of finance capital and capital

markets in the lending markets, and restores to private wealth the power to

determine interest rates. It is a collection of plausible fantasies – an ideology

- that has enriched the rich, and systematically replaced more democratic

policies and financial management.

In other words, by removing the policies and regulations that allowed

governments to manage the economy, orthodox economists restored to

finance capital the despotic power it had exercised before the stock market

crash of 1929. Power resided not only with those who had amassed great

wealth but also with those who could make new gains through lending. By

obfuscating the nature of their business, bankers established a new kind of

despotism.

Today central bankers retain a tenuous hold over the ‘short’, ‘policy’ or ‘base’

rate charged to banks (and not to other borrowers); but do not exercise

influence or control over the full spectrum of interest rates. These are fixed

by ‘the market’. As a result rates on the whole spectrum of lending are

socially constructed - fixed or manipulated - by finance capital’s minions –

by ‘submitters’ in the back offices of banks like Barclays, and by banking

cartels such as the British Banking Association.

They are not fixed to suit the wider interests of Industry or Labour.

104

Neoliberal theorists and practitioners (like Jens Weidmann and Otmar

Issing, respectively President and former Chief Economist of the

Bundesbank) while aware of the nature of credit-creation, appear to have

little understanding of bank money, and deliberately ignore the role of

commercial banks in credit-creation.90 The effect of this ‘blind spot’ concedes

and reinforces finance capital’s power - think of the bond markets - to fix

the ‘price’ of money. That helps explain why the neoliberal economic policies

of the German Bundesbank and the ECB have placed Eurozone economies

at the mercy of the reckless and unfettered speculation of capital markets,

and their usurious rates of interest.

There are differences though. Today’s robber barons enjoy eye-popping

stocks of wealth that are historically unprecedented. And the rates of

interest they demand for parting with this wealth make the usurious

practices of the money-lenders of the past seem modest.

Keynes’s monetary theory buried

Keynes knew well that his monetary policies, based on the conviction that

low interest rates were pivotal to prosperity, were hardly attractive to those

who wanted to maximise returns on their capital. Finance capital

understood that his liquidity preference theory would eventually lead to the

‘euthanasia of the rentier’. Because he represented a profound threat to

finance capital, and to the interests of the City of London and Wall Street in

particular, his theories were inevitably attacked and marginalised.

Enormous sums were, and still are, invested in think tanks, bank research

units, academics and universities that oblige finance capital by labelling

Keynes as an ‘inflationist’ and a ‘tax and spender’, or caricaturing him as

being exclusively concerned with fiscal policy.

Finance capital and its supporters in taxpayer-backed universities and

public institutions are happy to adopt the crudest of tactics to discredit the

man. And for good reason: returns on vast stocks of wealth are at stake.

105

And so his liquidity preference theory has been quietly buried – with the

acquiescence of both ‘Keynesian’ friends and neoliberal or monetarist foes.

Instead Adam Smith’s classical view of money is revived and used to inform

the work of influential ‘Keynesians’ like Paul Samuelson, N. Gregory Mankiw

of Harvard (and even Paul Krugman) as well as that of the monetarist

Chicago School.

Keynes’s fiscal policies for full employment and for recovery from financial

crisis were then presented as his sole outstanding legacy – isolated from The

General Theory of Employment, Interest and Money.

This campaign against Keynes was part of a wider effort by finance capital to

undermine our democracy. A renewed appreciation of Keynes’ legacy will not

be sufficient to break the power of finance, but it is certainly necessary.

106

Chapter Seven.

Yes, we can afford what we can do

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_de_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:21946394~menuPK:51340323~pagePK:64257043~piPK:437376~theSitePK:4607,00.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/Workshop2013/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 http://www.ft.com/cms/s/2/350a10a2-d284-11e2-88ed-00144feab7de.html#axzz2XV49gsUF [emphasis my own, accessed 29/09/2013 16:40 GMT].

32 Andrew G Haldane, Executive Director, Financial Stability, Bank of England in a speech The $100bn Question, Bank of England, March, 2010. 33 This section draws on the work and writings of Dr. Geoff Tily, author of Keynes’s General Theory, the rate of interest and ‘Keynesian’ economics: Keynes Betrayed. Palgrave Macmillan, 2007.

34 John Maynard Keynes: The Collected Writings Vol. VI. Cambridge University Press 2012, p. 196.

35 Karl Marx: Capital Vol. III pt. 2. New York International Publishers 1894, pp.704 and 708-9.

36 Charles R. Geisst: Beggar Thy Neighbour: A History of Usury and Debt. University of Pennsylvania Press 2013, p. 7.

37 J. Martin Hattersley: Committee on Monetary and Economic Reform, Frederick Soddy and the Doctrine of “Virtual Wealth”. 14th annual Convention of the Eastern Economics Association, Boston 1988. Online: http://nesara.org/articles/soddy88.htm [accessed 30/09/2013, 17:46 GMT].

38 I am indebted to Margrit Kennedy for use of this chart from her book: Interest and Inflation free money. Seva International, 1995. Online: http://kennedy-bibliothek.info/data/bibo/media/GeldbuchEnglisch.pdf [accessed 30/09/2013, 17:49 GMT].

118

39 Geoff Tily in, BIS Papers, No 65. Threat of Fiscal dominance? Keynes’s Monetary Theory of Interest, published by the Bank for International Settlements, Monetary and Economic Department, May 2012. http://www.bis.org/publ/bppdf/bispap65c_rh.pdf 40 John Maynard Keynes in, The General Theory of Employment, published by the Quarterly Journal of Economics, February, 1937. http://www.jstor.org/discover/10.2307/1882087?uid=3738032&uid=2&uid=4&sid=21102814913137 41 Geoff Tily: Keynes´s monetary theory of interest. Bank of International Settlements Papers No. 65. Online: http://www.bis.org/publ/bppdf/bispap65c_rh.pdf [accessed 3/10/2013, 18:53 GMT]

42 Dr. Geoff Tily in Keynes Betrayed: The General Theory, the Rate of Interest and ‘Keynesian economics’, published by Palgrave Macmillan, reprint edition, October, 2010. http://www.amazon.co.uk/Keynes-Betrayed-Interest-Keynesian-Economics/dp/0230277012 43 Bank of England: The framework for the Bank of England’s operations in the sterling money markets. Bank of England News January, 2008. Online: http://www.bankofengland.co.uk/publications/Pages/news/2010/140.aspx [accessed 3/10/2013, 19:24 GMT].

44 John Kenneth Galbraith: Money: Whence it came, where it went. Harmondsworth Penguin 1975.

45 Geoffrey Ingham: The Nature of Money. Polity Press, 2004 46 David Graeber: Debt: the first five thousand years. Melville House Printing, 2011.

47 Felix Martin: Money: the unauthorised biography. Bodley Head, 2013.

48 In Debt: The First Five Thousand Years, by David Graeber, Melville House, 2012. 49 Graeber: Debt, p. 47.

50 Felix Martin, op. cit.

51 John Maynard Keynes: The Collected Writings Vol. V, A Treatise on Money: The Pure Theory of Money. Cambridge University Press 2012, page 11.

52 Sydney Homer and Richard Sylla: A History of Interest Rates. John Wiley and Sons New Jersey, 2005, pp. 155-8.

53 Geoffrey Ingham: The Nature of Money. Polity Press 2004, p.198.

54 Bernard Vallageas: Basel III and the Strengthening of Capital Requirement: The obstinacy in mistake or why “it” will happen again. World Economic Review, No. 2, 2013, World Economics Association. Online: http://wer.worldeconomicsassociation.org/ [accessed: 3/10/2013, 10:54 GMT].

55 Margaret Thatcher in a speech to the Conservative Party October 1983. Online: http://www.margaretthatcher.org/document/105454 [accessed 1/10/ 2013, 13:06 GMT].

56 Bank of England Video: QE – How it works. Banke of England website. Online: http://www.bankofengland.co.uk/education/pages/inflation/qe/video.aspx [accessed 3/10/2013, 11:17 GMT].

57 Bernie Sanders: Federal Reserve System: Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance. US Government Accountability Office July 2011. Online:

119

http://www.sanders.senate.gov/imo/media/doc/GAO%20Fed%20Investigation.pdf [accessed 4/10/2013, 13:34 GMT].

58 Mervyn King in a conference speech. Sky News Report and Video. Online: http://news.sky.com/story/733003/boe-governor-signals-fragile-uk-recovery [accessed 4/10/2013, 14:08 GMT].

59 Ibid.

60 Liam Byrne quoted in Paul Owen: Ex-Treasury secretary Liam Byrne´s not to his successor: there´s no money left. Guardian, on 17th May, 2010. http://www.theguardian.com/politics/2010/may/17/liam-byrne-note-successor [accessed 4/10/2011, 14:13 GMT]

61 George Osborne, Britain’s Chancellor of the Exchequer on Sky News on the 27th February, 2012. Online: http://www.telegraph.co.uk/news/politics/9107485/George-Osborne-UK-has-run-out-of-money.html [accessed 4/10/2013, 14:17 GMT].

62 Ed Balls: Striking the right balance for the British economy, delivered at Thomson Reuters, on Monday 3rd June, 2013. Online: http://www.labour.org.uk/striking-the-right-balance-for-the-british-economy [accessed 04/10/2013, 14:19 GMT].

63 Ann Pettifor (ed.): The Real World Economic Outlook. New Economics Foundation, Palgrave Macmillan 2003.

The book includes articles from a group of economists at the “new economics foundation”, who predicted a bursting of the credit bubble. The “New Statesman” featured our prediction on its front cover. We were wrong. The credit bubble had much further to go. By 2006 concerned, as friends and acquaintances took out unaffordable mortgages and loans, I wrote another book: The coming first world debt crisis. Palgrave Macmillian 2006. There were heated arguments with the publisher about the title, which I did not like.

There was no way I argued, that the book’s title would remain current for more than a month, as the crisis was imminent. Again I was wrong: credit creation expanded further, and the implosion did not take place until 2008.

64 See Costas Lapavistas’s Profiting without Producing : How Finance Exploits Us All , Verso 2013. 65 Philip Aldrick: Spanish bank fields Ronaldo as collateral. Daily Telegraph 29 Jul 2011. Online: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8671468/Spanish-bank-fields-Ronaldo-as-collateral.html [accessed 3/10/2013, 12:24 GMT]. I am grateful to Prof Martin Hellwig for drawing my attention to this arrangement.

66 Richard Koo, quoted in Cullen Roche’s blog: Quantitiative Easing, the Greatest Monetary Non-Event. 9 August, 2010. Online: http://pragcap.com/quantitative-easing-the-greatest-monetary-non-event [accessed 3/10/2013, 12:25 GMT].

67 The following paragraphs are drawn from the second report of the Green New Deal of which Ann Pettifor was a co-author: The Cuts Won’t Work, was published by the new economics foundation on 7th December, 2009. http://www.greennewdealgroup.org/?p=161 68 Keynes JM (1933) The means to prosperity. (London: Macmillan). 69 Ibid. 70 Jeremy Warner: Oh God – I cannot take any more of the austerity debate. Daily Telegraph, 11 September, 2013. Online: http://blogs.telegraph.co.uk/finance/jeremywarner/100025496/oh-god-i-

120

cannot-take-any-more-of-the-austerity-debate/ [accessed 3/10/2013, 12:29 GMT]

71 Bank of England, Financial Stability Report, November, 2013. http://www.bankofengland.co.uk/publications/Pages/fsr/2013/fsr34.aspx 72 Micheal Steen: Draghi pledges to keep interest rates low. Financial Times, 3 Oct 2013. Online: http://www.ft.com/cms/s/0/35373476-2b47-11e3-a1b7-00144feab7de.html?siteedition=uk#axzz2geq1vAe0 [accessed 3/10/2013, 12:33 GMT].

73 Economists like Carmen Reinhart describe this as a form of ‘financial repression’: Financial repression back to stay. Bloomberg 11 March 2012. Online: http://www.bloomberg.com/news/2012-03-11/financial-repression-has-come-back-to-stay-carmen-m-reinhart.html [accessed 3/10/2013, 12:36 GMT]

74 Transcript: Attorney General Eric Holder on `Too Big to Jail´ 6 March 2013. Online: http://www.americanbanker.com/issues/178_45/transcript-attorney-general-eric-holder-on-too-big-to-jail-1057295-1.html [accessed 3/10/2013, 12:40 GMT].

75 Wolfgang Münchau: Europe is ignoring the scale of bank losses. Financial Times June 23, 2013. Online: http://www.ft.com/cms/s/0/f4577204-d9ca-11e2-98fa-00144feab7de.html#axzz2XV49gsUF [accessed: 17/09/2013, 17:23 GMT].

76 Ibid., p.4.

77 Michael Hudson, Interview on Blog Naked Capitalism 18 September 2013. Online: http://www.nakedcapitalism.com/2012/09/michael-hudson-on-how-finance-capital-leads-to-debt-servitude.html [accessed 3/10/2013, 19:28 GMT]

78 Anonymous ‘London Banker’ in a blog post: Chop off their Hands, 20 March, 2013. http://londonbanker.blogspot.co.uk/2013/03/chop-off-their-hands.html 79 Hayek is quoted by Harold James: Making the European Monetary Union. Harvard University Press, 2012, p. 6 (Emphasis my own).

80 In Amato and Fantacci forthcoming. Also Massimo Amato and Luca Fantacci in The End of Finance, Polity Press, 2012. 81 Professor Jagdish Bhagwati: The Capital Myth: the difference between trade in widgets and dollars. Published in Foreign Affairs; May/Jun 1998; 77, 3; ABI/INFORM Global pg. 7 and available here: http://web.cenet.org.cn/upfile/57122.pdf 82 Business Dictonary. Online: http://www.businessdictionary.com/definition/liquidity.html [accessed 03/10/2013, 19:32 GMT]

83 For more on ‘illusory liquidity’read Fragile Finance: Debt, Speculation and Crisis in the Age of Global Credit by Dr. Anastasia Nesvetailova. Published by Palgrave Macmillan Studies in Banking Oct 2007. 84 For a detailed exposition of Keynes’s Liquidity Preference Theory, see Goeff Tily: Keynes Betrayed: The General Theory, the Rate of Interest and ´Keynesian Economics`. New York Palgrave Macmillan, ch. 7.

85 Ibid.

86 Ibid., p. 202.

87 Keynes to R. F. Harrod 19 April 1942 in John Maynard Keynes: Collected Writings, Vol. XXV. Cambridge University Press 2012, pp. 148-9.

121

88 Professor Jagdish Bhagwati: The capital myth: The difference between trade in widgets and dollars. Foreign Affairs; May/Jun 1998. http://web.cenet.org.cn/upfile/57122.pdf 89 Eichengreen and Lindert, The International Debt Crisis in Historical Perspective (MIT Press, 1991), p. 90 Norbert Häring: The veil of deception over money: how central bankers and textbooks distort the nature of banking and central banking. Real-World Economic Review, No. 63. Online: http://www.paecon.net/PAEReview/issue63/Haring63.pdf [accessed 1/10/ 2013, 13:02 GMT].

91 Stephen Cecchetti: Threat of fiscal dominance? Bank for International Settlements Papers No. 65, May 2013. Online: http://www.bis.org/publ/bppdf/bispap65.pdf [accessed 4/10/2013, 15:12 GMT].

92 Robin Harding: Central Bankers have given up on fixing global finance. Financial Times, 27 August 2013. Online: http://www.ft.com/cms/s/0/020103b6-0b4e-11e3-bffc-00144feabdc0.html#axzz2geq1vAe0 [accessed 3/10/2013, 19:38 GMT].