Zoe Williams writes:
Shock data shows that most MPs do not know how money is created.
Responding to a survey commissioned by Positive Money just before the June
election, 85% were unaware that new money was created every time a commercial
bank extended a loan, while 70% thought that only the government had the power
to create new money.
The
results are only a shock if you didn’t see the last poll of MPs on exactly this
topic, in 2014, revealing broadly the same level of ignorance. Indeed, the real
shock is that MPs still, without embarrassment, answer surveys.
Yet
almost all our hot-button political issues, from social security to housing,
relate back to the meaning and creation of money; so if the people making those
choices don’t have a clue, that isn’t without consequence.
How is money created?
Some is created by
the state, but usually in a financial emergency. For instance, the crash gave
rise to quantitative easing – money pumped directly into the economy by the
government. The vast majority of money (97%) comes into being when a commercial bank extends a loan.
Meanwhile, 27% of bank lending goes to other financial corporations; 50% to
mortgages (mainly on existing residential property); 8% to high-cost credit
(including overdrafts and credit cards); and just 15% to non-financial
corporates, that is, the productive economy.
What’s wrong with that?
On the corporate
financial side, bank-lending inflates asset prices, which concentrates wealth
in the hands of the wealthy. On the mortgage side, house prices rise to meet
the amount the lender is prepared to lend, rather than being moored to wages.
The lender benefits enormously from larger mortgages and longer periods of
indebtedness; the homeowner benefits slightly from a bigger asset, but
obviously spends longer in debt servitude; the renter loses out completely.
Is there a magic money tree?
All
money comes from a magic tree, in the sense that money is spirited from thin
air. There is no gold standard. Banks do not work to a money-multiplier model,
where they extend loans as a multiple of the deposits they already hold. Money
is created on faith alone, whether that is faith in ever-increasing housing
prices or any other given investment. This does not mean that creation is
risk-free: any government could create too much and spawn hyper-inflation. Any
commercial bank could create too much and generate over-indebtedness in the
private economy, which is what has happened. But it does mean that money has no
innate value, it is simply a marker of trust between a lender and a borrower.
So it is the ultimate democratic resource. The argument marshalled against
social investment such as education, welfare and public services, that it is
unaffordable because there is no magic money tree, is nonsensical. It all comes
from the tree; the real question is, who is in charge of the tree?
What could we do instead?
We could do QE for
the people, overt monetary financing in which a government creates money for
social benefit, such as green infrastructure or education. Or helicopter money,
a central bank distributing it to everyone, either in a one-off citizen’s
dividend or a regular citizen’s basic income. The nature of centrally created
money should itself be opened up for debate, whose starting point is: if we
agree that commercially created money is skewing the economy, can we then agree
that it should be created by a public authority, even if we don’t yet know what
that authority would look like.
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