peak money what does it mean?

nef (the new economics foundation)

Peak MoneyWhat does it mean?

Tony Greenhamnef (the new economics foundation)

Transition Network25th April 2012


A few questions of minor importance

1. What is money?2. Where does it come from?3. What is the relationship between money, debt &

economic growth?4. What happens next?


What is money?


Money is a social relationship

• Unit of account, means of exchange, store of value, means of final settlement

• Classical/neoclassical economics: a ‘neutral veil’ lying over the ‘real’ economy (exchange/production)

• Truth: social relation (of credit and debt) determined in an abstract money of account (Innes 1913; Ingham 2004)

• The state/monarch has been determining the money of account for over 4000 years (Keynes 1931)

• i.e. money (credit/debt) precedes the capitalist market economy (Graeber 2011)

• Control of money is a social and political issue


What do banks do?

Look after our gold?

Lend our savings out to businesses and fellow citizens?


Banks create new money

Source: Ryan-Collins et al. (2011) Where does Money Come From?, nef (the new economics foundation), p56


Central bank vs commercial money



Central bank money ‘merry-go-round’



The tail wags the dog


‘In the real world, banks extend credit, creating deposits in the process, and look for the reserves later.’

Alan R. Holmes, Federal Reserve Bank of New York (1969)

‘In reality the sequence works more in the opposite direction with banks taking first their credit decisions and then looking for the necessary funding and reserves of central bank money.’

Vitor Constancio, vice president of the European Central Bank (2011)


So debt and deposits take off

Source: Bank of England, Interactive Database, data series LPQAUYM (M4), LPQVQKT (notes and coins), YWMB43D (Central bank reserves).


Where has the money gone?



Debt / money slides

Growing Inequality

Reproduced from the Economisthttp://www.economist.com/blogs/graphicdetail/2012/01/daily-chart-8


Where are we now?

Reproduced from Business Insiderhttp://articles.businessinsider.com/2011-12-04/markets/30473957_1_household-debt-uk-safe-haven


“I’m all for including the banking sector in stories where it’s relevant, but why is it so crucial to a story about debt and leverage?”

“I think it has something to do with the notion that creating money = creating demand, but again that isn’t right in any model I understand.”

Paul Krugman (2012), http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish

“It proved extraordinarily difficult for economists to recognize that bank loans and bank investments do create deposits.”

Schumpeter, J. A. (1954) History of economic analysis, Allen & Unwin, p1114.

Debt: an economics blindspot?


Money, debt and growth

• Argument: money created as debt requires growth– Contested whether this is necessarily true in theory– But given the inequality of debt, and tendency of the

current system to create money for financial speculation means it is likely to be true in practice

– The sheer quantity of debt appears to be overwhelming the economic system


What happens next?

1. Repay it: ‘Austerity’– Requires increases in real income, growth or redistribution– Real income is falling – the ‘paradox of thrift’– Redistribution of income and wealth? Yeah, right– Ecological limits and the end of growth?

2. Default– Likely the wealthiest will protect themselves. Social and economic

damage could be extensive

3. ‘Slow default’ – inflation and financial repression4. Debt jubilee + debt-free money produced by state or people


More information

[email protected]/projects/monetary-reform

mailto:[email protected]

mailto:[email protected]

http://www.neweconomics.org/projects/monetary-reform

peak money what does it mean?

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