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The choice you won’t be offered on 8 June

Between now and June 8th, the most common question posed by politicians, journalists and drunk men down the pub will be some variant of “how are you going to pay for it?”  From defence spending to international aid and from energy price caps to social care, every electoral promise will be put under the spotlight.  Organisations whose forecasting records rank only just behind newspaper astrologers will be wheeled out to pontificate over the chances of this or that political party balancing the books.  Stereotypical businessmen with vaguely working class accents will be invited to remind us that “we can’t pay ourselves more than we earn.”

Such is the theatre of general elections.  However, for all of the bluster, the question is largely meaningless.  It is based on the entirely false belief that a government operates like a household or a business. By accepting this, those asking the question make the profound error of mistaking the process of obtaining money with the processes of actually making money.

This is understandable.  Until very recently it was entirely possible to complete a three year economics degree course without ever being taught about how money is created.  Insofar as this has changed, it is only because students themselves, concerned about their discipline’s inability to predict financial crises, demanded that the syllabus be updated.  Even now, only a handful of economics teachers, such as Professor Steve Keen at Kingston University, spend any time explaining money creation and its impact on the economy.

Most people still imagine that the power to create money is exclusively reserved to the crown, with the Royal Mint and the Bank of England being the only bodies permitted to create new money.  In a recent survey of MPs, the campaign group Positive Money found that:

“7 out of 10 MPs believed that only the government can create money, when in fact 97% of money is created by banks when they make loans, as recently confirmed by the Bank of England.”

The Bank of England paper they refer to clarifies that:

“In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans.  Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” (My emphasis)

Today, cash transactions account for less than one percent of all of the transactions in the UK.  The remainder are conducted by one or other of a range of electronic means.  The result is that the power of the banks to print (electronically) new money out of thin air has grown to the extent that it can destroy countries and even threaten the future of the global economy.  And yet neither economists nor the politicians they advise is ever told this.  In his book Debunking Economics: The Naked Emperor Dethroned, Keen says that:

“It may astonish non-economists to learn that conventionally trained economists ignore the role of credit and private debt in the economy – and frankly, it is astonishing.  But it is the truth.  Even today, only a handful of the most rebellious of mainstream ‘neoclassical’ economists – people like Joe Stiglitz and Paul Krugman – pay any attention to the role of private debt in the economy, and even they do so from the perspective of an economic theory in which money and debt play no intrinsic role.  An economic theory that ignores the role of money and debt in a market economy cannot possibly make sense of the complex, monetary, credit-based economy in which we live.  Yet that is the theory that has dominated economics for the last half-century.”

Of course, the banks themselves have no great desire to rush to tell the public that they are doing, to all intents and purposes, what we put mafia bosses in jail for.  The only difference between the counterfeit notes and coins that the Mafia prints and the electronic currency that the banks loan into existence is that governments turn a blind eye to the activities of the banks.  Nevertheless, the impact of both practices is the same – Inflation!

We tend to think of counterfeiting as direct theft when poor forgeries are passed onto an unsuspecting business or customer.  When the defrauded customer attempts to spend the forged currency, shops will not take it.  When the defrauded business attempts to deposit the forged currency at the bank, the bank will refuse to credit it to their account.  But this is small beer.  The real crime comes when the forgeries are so good that they are indistinguishable from genuine currency.  In that case, the crime is indirect; and we are all its victims.  This is because each time a forged Pound enters circulation; it effectively steals a tiny fraction of the spending power of all of the other Pounds already in the economy.  This is experienced as rising prices.  But in reality it is not the cost of the goods or services that is rising, but the spending power of the currency that is falling.

Arguably, we get a better deal from the Mafia than we get from the banks.  This is because the Mafia simply sells counterfeit currency.  The banks, by contrast, effectively rent us the currency by charging compound interest on every new Pound they loan into existence.  As Tim Watkins points out in The Root of All Evil:

“The important point to understand here is that banks are not charging interest on money that was already in existence – that is, money for which some equivalent value (the time and skills of a worker or the capital equipment of a business owner) had already been exchanged.  And the impact of this money for nothing counterfeiting scheme on the real economy is devastating.”

The need to pay interest on almost all of the currency in existence means that the debt can never be repaid.  New money has to be continuously borrowed into existence simply to keep the economy running.  But this means that we have also to live with perpetual inflation that makes it almost impossible for the economy as a whole to catch up.  The only means by which this vicious circle can be squared is through infinite growth.  As Tim Watkins points out:

“Growth itself is the necessary outcome of the need to pay back interest on all of the currency that we collectively borrow into existence… in practice, this means exploiting people and raping the planet’s resources and energy in order to keep producing secondary wealth so that even more money can be borrowed into existence in the future.  We do not need the latest phone or car or washing machine. Indeed, we do not even need to own any of the goods we use – and there is good reason to believe that an economy based around rental would be far more environmentally friendly. It is solely the requirement that we pay compound interest on our money supply that keeps this sorry state of affairs going.

“I cannot overstate my case here.  If we do not find an alternative means of creating money, we cannot hope to resolve the life-threatening problems that confront us.  We will inevitably experience economic collapse in a relatively short time because none of the fundamentals of the 2008 crash have been resolved. Following this, within the next decade we face severe energy and resource shortages as billions of people in developing countries seek to bring their standards of living closer to those in Europe and the USA.  In every other historical period when people have faced resource and energy shortages, the result has always been war.  I see no reason to believe that there is anything exceptional about us.  Finally, assuming we survive economic chaos and resource shortages, and providing we do not wipe ourselves out in a nuclear holocaust, we face extinction as global temperatures rise way above the 2oC of warming above preindustrial levels that scientists tell us is the absolute upper limit to the amount of climate change we can afford.”

Fortunately, there is an alternative means of creating money.  The idea of democratic money has been around since the 1929 Crash, when scientists like English Nobel Prize winning chemist Frederick Soddy sought a means of tying the amount of money in circulation to the amount of wealth that it was meant to represent.  The stumbling block has always been the means by which the tie to wealth might be made.  Some seek a return to a precious metal standard in which the currency in circulation relates to a quantity of physical gold and/or silver in a vault somewhere.  Critics note, however, that this has been tried and has failed many times before.  Others look to new technologies like cryptocurrencies and especially the block-chain as a means of generating honest money based on real wealth.  Others seek some kind of expert committee – similar to the monetary policy committee that sets UK interest rates – to determine how much currency should be in circulation.

All of these systems have their flaws, and none is ideal.  Nevertheless, they all share in common the conviction that the power to create new money should be removed from the banks and restored to a democratically elected government.  It is a choice that most of us would readily embrace.  Indeed, it is a choice that most of us already think exists.  But it is not a choice that any political party is willing to offer us.  So until more of us – and our political representatives – take the time to understand that crucial difference between obtaining money and actually making it, we will be stuck with the insane political/journalistic conceit that governments cannot introduce necessary reforms because they do not have enough money.

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