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A House of Cards

 

Modernising MoneyMoney makes the world go round. Or does it?

Gerry Gold looks at the ideas for reducing debt put forward by the campaign group Positive Money and argues that reforming the capitalist monetary system is not a solution to the global crisis.

In the fifth year of the global crash, many economies are contracting as austerity programmes deepen the effect of the recession, devastating public services, jobs, pensions and standards of living. Despite extreme, even unconventional measures taken by governments and central banks, the capitalist system shows no sign of recovery.

In the wake of the justified anger against the way that the state handed over huge sums of public money to the banks, the campaign group Positive Money has come up with proposals to reduce debt. In essence it resurrects an old idea – to stop commercial banks creating money.

The three-year old group of PMers want to provide the UK with a stable monetary and banking system, much lower levels of personal and national debt, and a thriving economy. And they see this as the key to solving the global environmental, poverty and inequality crises.

These are admirable objectives.

Positive Money sees the reform of the banking system – including giving control of the money supply to a public “Money Creation Committee” accountable to parliament – as the way to achieve them. The fundamental problem, as they see it, is the loss of control over the private, commercial banks’ ability to create money through lending.

But does their analysis, and what they propose should be done about it stand up to scrutiny?

To understand what’s really going on we also need to know that in capitalist society money fulfils two main functions: it acts as a universal store of the value created by human labour, and because it does that it also acts as a universal means of exchange. Under relatively normal conditions each unit of currency can be relied upon to represent an equivalent amount of value – meaning that you know what you can buy with it.

But in their attempts to keep the show on the road, banks and governments have invented money and credit (the promise to pay in the future) like there’s no tomorrow. As everyone knows, that means the money is debased, that each unit becomes worth less. And that finds its expression in many ways including higher prices and reduced real income. What capitalism also did was to make it appear as though money gave rise to more money, as though there was an absolute separation between production and finance. Money seemed to have a life of its own.

There’s much to be learned from a study of the arguments spokesmen Ben Dyson and Andrew Jackson put forward in their book Modernising Money, as well as in videos and interviews, and much to argue with. But it’s also necessary to follow the signposts beyond the content of the book itself to understand the historical and social significance of their arguments.

Their pitch, as they are quick to tell us (p24), is a modern version of an idea that’s been around at least since the 1920s when it was put into circulation by the chemist Frederick Soddy. Soddy was awarded a Nobel prize for his work on radioactivity – in particular its role in the transmutation of elements – with physicist Ernest Rutherford. He extended his understanding of the laws of thermodynamics into economics. His criticism of continuing economic growth, based on the exhaustibility of fossil fuels, has re-emerged in recent years in the school of ecological economics.

Positive Money also acknowledge their intellectual debt to the work of Irving Fisher, known as the father of “monetarism”, and his debt-deflation theory which attributed the cause of economic crises to the bursting of a credit bubble. Fisher is also infamous for his prediction, three days before the Wall Street Crash of 1929, that the stock market had reached “a permanently high plateau”, and for championing the cause of eugenics. This was practised by governments and academic institutions around the world in the early 20th century and most infamously adopted by the Nazis in search of their pure race.

They are also fans of Henry Simons, a monetarist whose ideas were a big influence on the free-market libertarian theories of the Chicago school of economics which included Milton Friedman and Friedrich Hayek amongst its professors.

Monetarism was the main economic influence on the Conservative government of Margaret Thatcher from 1979, and the Reagan administration in the US from 1981-89. When Friedman died in 2006, Thatcher waxed lyrical, declaring:

“Milton Friedman revived the economics of liberty when it had been all but forgotten. He was an intellectual freedom fighter. Never was there a less dismal practitioner of a dismal science. I shall greatly miss my old friend's lucid wisdom and mordant humour.”

As many will recall the Thatcher government’s implementation of monetary policies brought the country to civil war conditions in its determination to shut down Britain’s industrial base.

Turning to Positive Money’s Board of Advisors, they include Herman Daly, a former senior economist at the World Bank. Daly is known for advocating the idea of ecological economics which includes the concept of “natural capital” – subordinating nature to the capitalist need to commoditise all of the planet’s resources. Then there’s Martin Harrison who was chief investment strategist with Deutsche Asset Management, as well as a number of others tied up in the topmost echelons of banking. 

Dyson and Jackson are finding friends amongst the industrious promoters of the idea that solutions to so many of the problems of the 21st century including poverty and inequality, personal and sovereign debt, the ecological crisis, the attack on human rights and the decline of democracy, and more besides, can be found in reforms of the financial system. The solution, they believe, lies in making capitalism work better rather than getting rid of a system that in, a variety of ways, is destroying people’s futures and the planet’s ecology at the same time.

The evidence for PM’s allegiance to capital and for their adherence to the status quo – if any more is needed – can be found on page 280 where they are to be found railing against the special privileges accorded to banks: “There is perhaps no industry in the world that conforms less to the principles of capitalism than banking does.” The authors add:

“And in no other industry would the failure of one firm threaten to bring down the entire UK economy. Yet banks are able to continue in business whilst contravening almost every rule of capitalism in the process.”

With this brief look at the founding ideas of some of PM’s intellectual and political friends and their strong defence of both the principles and rules of the capitalist system, we also now know what they are aiming to achieve, so let’s turn to the book itself.

In a 300-page text-book entitled Modernising Money, it would be reasonable to expect an attempt at an explanation of money, including its history, the various roles it has played, and hopefully how its value is determined. It would, you would anticipate, have an analysis of the ballooning of credit and debt in recent decades, the so-called “credit supercycle” which took off in 1981. Key to an understanding of the whole subject would be an explanation of the overlapping relationship between money and credit.

But that’s not what we get in Modernising Money.

At the beginning of the book, there’s a five-page opening section, (plus a one-page box on p49) devoted to the origins of money, but it mostly consists of a denunciation of “the standard theory” of classical economics, that money emerged with the division of labour to enable trade to go beyond barter.

PM’s argument is based on a few quotes from Debt: the first 5000 years a recent, wide-ranging book by anthropologist David Graeber, a self-confessed libertarian anarchist active in the Occupy movement.  Graeber, to his credit, sets the history of the emergence of money and its use in commercial societies, including capitalism, in the much broader context of social obligations, giving to “debt” its much richer cultural meaning than just a simple owing of money. 

But PM throws the economic baby out of the bathwater, rejecting a study of the two-way evolution of the economics of social reproduction and the systems of credit and debt in favour of a narrower focus on the operation of the monetary system. Their main assumption, more an article of faith than a scientifically-proven theory, is that the source of many of our current problems lies in the relative autonomy of the private, commercial banks.

So the real focus of the book is limited to the subject matter of its sub-title: why the monetary system is broken, and how it can be fixed and they pursue the argument in a predominantly theoretical way. It is surely beyond argument, as they say, that the current banking system is dysfunctional, but for PM, the “underlying issue is that successive governments have ceded the responsibility of creating new money to banks” (P21).

It is a simple enough proposition and initially attractive, but why so many governments should have been so foolish or so careless isn’t subject to question or explanation. It just happened. This assertion, of the primacy of the banks, is based upon flimsy foundations.

In Chapter 3 What determines the money supply? we are told that the demand for credit is due to broadly three main reasons. Individuals, so we are told, have insufficient wealth due to inequality which induces the spirit of “keeping up with the Joneses”. Why there should be inequality is an unasked and unanswered question.

Young entrepreneurs, described as the “heroes of capitalism”, need credit to fund their start-ups, because they’ve got ideas but no money. Established businesses need to borrow to expand.  
 
And then there are the “legal incentives”, limited liability and tax “laws that apply to companies alter the demand for credit through the incentives they place on corporate management”. Yes, they exist, but how did they come about? Why do corporations have such favoured status? Not asked or answered.  

Their argument is that the actions of the banks in wantonly creating money in pursuit of profit “is the reason we have such a pronounced and destructive cycle of boom and bust, and it is the reason that individuals, businesses and governments are overburdened with debt.”   

Historians they quote from such as Schularick and Taylor examine the evidence for an association, a close relationship and even “a more general and worrying correlation” between the creation and destruction of credit, and the expansion and contraction of the productive economy. They go so far as to show that one takes place after the other.

Modernising Money, however, insists that the relationship is causal, but in the one direction. They are intent on showing that money creation through lending by commercial banks is the cause of any number of our current ills, and whilst it seems clear from the evidence that this contains an element of the truth, is at least part of the truth, it isn’t the whole truth.

Much more light can be shed on the problem if we take the trouble to look at the movement in both directions. Yes, there are complex and contradictory processes at work in the financial system that have consequences in the real economy where real value is produced.

Conversely, there are also complex, contradictory processes at work in the real economy that have consequences for the financial system. More than that, the economic and financial systems are mutually conditioning. Each affects the other in a set of reciprocal relations, to the extent that they are inseparable, two opposing sides of the same coin.

It never occurs to obsessive monetarists like PM that the special treatment of banks (and the globally-operating multitude of credit-generating unregulated non-banks upon which PM are silent) has been essential to the continuation of capitalism.

The pressure to overcome regulation over the creation of money and other forms of credit comes from within the bowels of the capitalist system itself. There the contradictions arising from competition lead to overproduction, a falling rate of profit and consequent demands for additional external sources of funds for investment and consumption. The growth trajectory of the adolescent period of the system is punctuated and then superseded by periods of deeper contraction and slump that become more pronounced as the system enters its declining years.

You won’t find that or the following argument in Modernising Money, but it should help to see their story in a broader context.

A system of regulation was adopted during the 1930s in the wake of the 1929 crash. A progressive assault on it got under way in the late 1970s and led to its dismantling. Lobbyists for multinationals joined a slew of academics in think-tanks and policy groups. Together they pushed forward what became known as the Washington consensus, or the neo-liberal agenda.

This was not done for reasons of pure ideology, but because the corporations had to expand their capital, grow their businesses, to satisfy shareholders committed to maintaining their rate of return. And they needed an ever-expanding source of credit to sustain that growth.

Nothing could be allowed to stand in the way of growth, not even the limitations of the consumers’ willingness and ability to buy the increasing torrent of commodities flowing from the cheap labour factories in the newly-industrialising zones of China and Latin America. So a whole new industry of credit creation came into existence servicing the formation of global corporations and arming global consumers with wallets stuffed full with credit cards.

In the final few years leading up to the crash, the invention of new vehicles for credit derived from the traditional titles to wealth – shares, government bonds, commodities and currencies, outstripped the more limited realm of mere money. The face value of derivatives outstripped the value of world output, with the value of traded contracts reaching an estimated $650 trillion dollars at the peak in 2008 – around ten times world output measured by GDP.

Credit default swaps enmeshed the private and public sectors in a global spiders’ web of mutually assured destruction. It couldn’t go on. Even the expansion of credit reached the limit of its ability to stretch the global market. The crash occurred when the market, the elastic linking the ballooning world of credit to the real world of production, snapped back.

But, apart from a single reference to mortgage-backed securities none of this is to be found in Modernising Money’s analysis. Most of the new credit activity took place in the unregulated world of shadow banking, the non-bank issuers of debt beyond the reach of PM’s proposals.

There is no mention of the vast sums gambled on the world’s stock markets, on the global commodity markets or on the foreign exchange markets. The international context, insofar as it is considered at all, is dismissed in a couple of pages, assuming that national currency systems are somehow independent of the world system.

Perhaps the most attractive of the reform proposals is the creation of two different kinds of accounts: transaction accounts and investment accounts. People could deposit their spare money in a transaction account, a supposedly risk free, electronic piggy-bank for use in receiving and making payments.

But the banks would not be able to use that money for lending, so it would always be 100% available. People seeking interest from their deposits, and willing to bear a risk could use an investment account. That money could be used by the banks to lend on.  

In PM’s fairy-tale world, commercial banking would still be run for profit, though subject to restrictions on what it can do. Customers’ accessible transaction-based cash deposits would be 100% protected but subject to charges. Not only would you have to pay charges for the costs of operating the accounts holding money deposited ‘safely’ but your money would be reduced by a profit mark-up. A proportion of your hard-earned funds would be transferred to shareholders, just as it is today.

PM proposes that the Bank of England would have sole control of the money supply and lending through a new Monetary Creation Committee accountable to a cross-party parliamentary committee of MPs.  In the real world of the early 21st century, the idea of handing your money over for safe-keeping to a supposedly neutral central bank accountable to a cross-party committee of MPs hardly seems attractive.

As the crisis deepened in 2012, democratically-elected governments were overthrown and replaced by technocrats – bankers appointed by the IMF, ECB, EU troika. Others governments were given their marching orders by the Troika.

The source of PM’s inspiration is to be found in Appendix II, in the 18th century, when the government of Pennsylvania moved to overcome its economic difficulties by printing and distributing some paper currency.

Things were a lot different then, three centuries ago in the early days of the nascent capitalist system. Now that the system is way beyond reform or regulation, the worsening eurozone crisis shows that shoring up the capitalist financial system, as Dyson and Jackson propose, isn’t just a technical exercise of fixing the monetary system.

It requires international management by an unelected, undemocratic conspiracy enforced by compliant governments working to reduce deeply indebted people in even more deeply indebted countries to unimagined depths of unemployment and poverty.  That’s bordering on a globalised form of dictatorship.

It’s no wonder the people of Spain, Greece and Cyprus are on the streets. We have to go beyond just blaming the commercial bankers, or their governments to a plan to replace a bankrupt system. That will involve setting up a new system of democracy that will place all of the productive capacity of every country under a variety of forms of social ownership. Working alongside a not-for-profit global financial system, we could easily meet social and human needs. It could even involve the establishment of a single global currency, something along the lines of the Bancor proposed by Keynes and Schumacher in 1940-42.

27 March 2013

  • Modernising Money: Why our monetary system is broken and how it can be fixed, Andrew Jackson & Ben Dyson, PositiveMoney £14.99
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Your Say (latest first)


Nostradurus says:

First, it does not explain how to limit multiplication through investment. Second, it does not explain how the state will be able to solve the financing of the budget, if there was a reduction of money. Third, debt reduction diagram is essentially false. No one can so quickly reduce debt because it requires a large emission of money. Fourth, there is no penalty for bank fraud so far - taking away the of banking assets. Fifth, do not see the problem in the accumulation of money for corporations. Sixth, do not say anything about the interest rates banks and depositors interest of investors. Etc.


Robin Baldock says:

I'd just like to reply to Tim Hart, when he says that its not about politics or economics but about power.

Yes I agree within that statement.

However the power to create money for private profit is the essential mechanism of the current power structure.

Every financial transaction, no matter how principled, no matter by how well and equitably run a society, buys into it and feeds the power structure. Soviet Russia, as a most extreme example of a supposedly alternative political system, was run within the context of this principle. In fact Maggie and Ronny used the extension of this principle to run the Soviet Block into the dirt.

It is a distortion in the basic unit of every currency, making each unit a net drain of societies wealth into the hands of a few private individuals. Every single pound or dollar owes more out of the economy to the banks than is put into it, forcing endless and unsustainable growth just to stand still.

It is a profoundly wrong principle, and the most profoundly fundamental one in our economics.

All the fee capital flows and derivative markets are essentially an international extension of the same principle and the acceptance of that principle as a basis for economics is what allows the manipulation of money to make more money, to flourish in economic terms. It is the keystone. Undermine that and we undermine the lot.

So there is no distinction between changing this root mechanism and changing the distribution of power, to me it is the very same thing. It will not be allowed exactly to the degree that those who wish to hold onto power do not let go.


Tim Hart says:

I thought this was a very interesting article which makes many well reasoned arguments criticising the inadequacy of the stance taken by Positive Money on monetary reform. I also read Robin Baldock’s comment which takes a more supportive view of what Positive Money proposes, at least in its general premise that financial markets, money and banks should, in a democracy, serve the interests of citizens, rather than narrow corporate and other vested interests. I would also support Positive Money in this aspiration. But for me the problem – and solution – is not predominantly one of economics or even politics, in a general sense. It is about power. So long as we suffer the continuing corporate hegemony in the UK, and in most countries around the world, at the expense of the erosion of the remnants of democracy then it doesn’t matter whether the commercial banks control the money supply or an agent of government, such as the Bank of England. They are essentially one and the same thing in that they are part of the nexus of corporate hegemony that is strangling our society; supported by the myth of free markets within capitalism. In reality we have what would be more appropriately described as a system of state capitalism, even more ingrained since the financial crisis of 2008. It is not just the banks that would fail to survive without the constant bailouts and quantitative easing etc, many – perhaps most – large corporate entities would fail if they were exposed to the rigours of free market capitalism. Instead they exist courtesy of government subsidies, tax breaks, tax avoidance and so on. Positive Money, in advocating that the control of money creation should pass from the commercial banks to the Bank of England, on the spurious grounds that such a quasi-government body would serve the interests of the people, is at best naive or it amounts to a more sinister agenda of re-packaging a variation of Friedman type monetarism that, as Gerry Gold points out, was so beloved by Reagan, Thatcher et at.

The solution of a fairer system of money lies in a fairer distribution of power, both economic and political. That requires the the growing inequality in our society and the absence of democracy to be confronted head-on. It is not simply about the inability of the existing ‘system’ to address these issues, but it is the deliberate negation of democracy and equality through the policies which those in control of the system pursue. Such deliberate anti-social behaviour cannot be solved with a reformist agenda such as that promoted by Positive Money. It requires a revolution in economic and political structures. Gerry Gold quite rightly highlights the paucity of Positive Money in failing to address such matters. Ultimately the answer to a better and fairer society lies in creating opportunities for ordinary citizens to wrestle power away from the corporations and the surrogates for these corporations, in the form of so-called ‘democratic governments;’ so that power can flow more freely in our society, rather than be concentrated amongst the corporate elite.

I would like to see AWTW and Positive Money on a platform together debating their respective views on this important topic.


Robin Baldock says:

I think you miss the point but that isn't unusual. The creation of capital for private profit is the root of capitalism, without it it cannot work. so their proposal, does signal the end of capitalism. Talk of banks being the least capitalist etc are just methods to disarm capitalist critics, point to anomalies and avoid a left right argument. what it would achieve is a balance, not a route by the left, something different from either.

But it also provides something a route to get there. By accepting the principle that the market is a product of society, not the other way round, the monetary system can be seen as the mechanism by which society provides a context within which the market can operate.

The monetary system by their ideas would be transformed into a not for profit facilitator of business instead of being as it currently is a business in itself. The effect of this is difficult to underestimate.

The writer should also read their other books especially Where Does Money Come From which addresses many of his concerns.

To try and end the market from where we are is really unrealistic and could only be imposed forcefully. It is to much a part of human nature to want a reward for effort. It would end up soviet in nature, the flip side of capitalism rather than the necessary balance between personal achievement and social responsibility. and I know you do not really want that.

What is worth arguing about is whether their proposal is watertight enough. Could a system be set up that is democratic enough but free enough of political opportunism and have they struck it?

I don't know if they have it right in that way, but the importance of their central intent, to set up a system whcih reflects the reality that our markets are under our control that we as a society decide the quality of our transactions, rather than the current one which reflects the lie that the markets is the context. It is crucial to our societies moving on.


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