Local initiatives can lead to modest gains in sustainability, but not the large-scale transformation we need. Meeting that challenge will require, among other critical factors, substantial changes in how we create and use money. As its history demonstrates, money is a social and political construct. It is the privatization of money—and not money itself—that has fueled social exploitation and environmental destruction. Money could, by contrast, help advance a Great Transition—but only if it is reclaimed for the public. Contrary to neoliberal assertions, the state can create money free of the debt that drives destructive growth and fosters inequality. Such public money can facilitate the provision of economic security and sustainable livelihoods for all. But for such a system of public money to work, there must be robust democratic control over monetary decision-making along with vigorous oversight of its implementation.

Earlier this week, we featured David Bollier’s commentary on Mary Mellor’s excellent paper on monetary policy. Now you can read the full version, originally published in the Great Transition Initiative, below.

Index

Why Money | Myths About Money | A Brief History of Money | Reclaiming Money for the People | Democratizing Money | Conclusion: Debt-Free Public Money for Sufficiency Provisioning | Endnotes

Why Money?

If we want to transition to a more just and sustainable society, we then need to be clear about where we are today.¹ The majority of the world’s population—in both developed and developing countries—now lives in urban areas. This demographic reality is unlikely to change as people have shown no eagerness to return en masse to rural livelihoods. Local, face-to-face innovations in production and exchange can be important steps, prefiguring the progressive society-wide changes needed. However, they are most appropriate for relatively self-contained areas, and cannot aggregate to the systemic transformation required.

In the contemporary world, provisioning, the creation and distribution of basic goods and services, depends on money.² Most people live in market economies with moderate- to long-distance supply chains. Under market-driven capitalism, individual livelihoods and public services depend on the success of the market, and money functions both as the medium of exchange and as the driving force behind market participation. The primary aim of the capitalist market economy is not the provision of essential goods and services for the people, but the investment of money and labor in activities that provide even more money (i.e., profit) for the owners of capital. This results in a two-step economy: people work to secure an income in order to pay for the basic goods and services they need to survive. And because work is necessary for survival, and the market determines its purpose and availability, people can end up in jobs that are harmful to themselves, others, and the environment.

Money has rightly gotten a lot of bad press. The love of money, or avarice, has been blamed for overconsumption and the exploitation of people and the planet. That said, it is difficult to envision how goods and services could be produced and circulated on a large scale without some mechanism to facilitate comparisons of value and the exchange of goods and services. It is not money itself that is the source of the imbalance in our relationship to one another and nature, but rather the way money is created and circulated in modern market economies.

The existence of money, importantly, does not entail the existence of a market, for some form of money has been around in almost all human societies. Money simply provides a recognized unit of value. That unit can be a price in the market, but it can also be the size of a gift or a measure of need. Equating money with coinage, as is commonly done, confuses form with function. It implies that money embodies value when it simply represents value. Money can take the form of something with use value (cattle, grain), something with social value (a special stone, shells), something with little or no value (paper, wood, base metal), or even something with no physical form (bank transfers, verbal promises). The unit of value may be either tangible (sheep, beads) or intangible (pound, dollar, euro).

Money, in other words, is a social and political construct. Using money does not intrinsically encourage human exploitation or ecological destruction. It is neoliberal capitalist ideology that puts monetary gain above social and ecological concerns, and it is the private, bank-issued money system that leaves us with a pernicious cycle of debt and growth. Money could encourage socially and ecologically sustainable production and consumption, but only if it ceases to be a creature of the market and is reclaimed as a social and public representation of value.

Visions of ecologically sustainable communities often look not to the state, but to the social economy, which occupies a space between the state and the market.³ Key features of the social economy such as community enterprises, cooperatives, and local markets based on local money are all beneficial, but they are insufficient for a Great Transition. Creating a just and sustainable future is a massive undertaking that will require a level of coordination that only the state can provide. We thus need to look at the potential of democratically governed economies in which money is treated as a public resource for sustainable provisioning.

However, neoliberalism, which has influenced so much of the conventional thinking about money, is adamant that the public sector must not create (“print”) money, and so public expenditure must be limited to what the market can “afford.” Money, in this view, is a limited resource that the market ensures will be used efficiently. Is public money, then, a pipe dream? No, for the financial crisis and the response to it undermined this neoliberal dogma. The financial sector mismanaged its role as a source of money so badly that the state had to step in and provide unlimited monetary backing to rescue it. The creation of money out of thin air by public authorities revealed the inherently political nature of money. But why, then, was the power to create money ceded to the private sector in the first place—and with so little public accountability? And if money can be created to serve the banks, why not to benefit people and the environment?

Myths about Money

One of the most significant obstacles to reclaiming money for the public good is the widespread misunderstanding of what money is. The conventional history of money rests on a series of myths that obscure its social and political origins. The first myth is that money and the market share a common origin, with modern money-based economies emerging from non-money barter. There is no historical evidence of widespread barter-based economies, and money, as the next section will explain, has a far more complex social and political history. The second myth is that money originated as precious metal coinage. While money has at times been made of such metal, it has also taken far less valuable forms whose use long predated the invention of coinage. Seeing money as made of something valuable (gold, silver) suggests that money is desirable in itself, an embodiment of value. Recognizing that money is valueless in itself (base metal, wood, paper) helps one to see it as a token representing a social relationship—what it really is.

Assumptions about the historical importance of precious metal coinage gave rise to a third myth: that banking activity emerged from the management of precious metal deposits that eventually came to be represented by paper money and accounting records. In reality, banking activity originated long before precious metal coinage, with accounting records as a central feature. This historical misapprehension, in turn, helped create a fourth myth: that banks today merely link savers (depositors) and borrowers. As has been increasingly recognized by the Federal Reserve, the Bank of England, and the International Monetary Fund, and has long been argued by monetary theorists, banks, in fact, create new money when they make loans, crediting deposits of previously nonexistent money to the accounts of those who receive them. Public monetary authorities retain a monopoly on the production of cash (notes and coin), but the money that banks create is also part of the national money supply and circulates through the economy as such.

These widespread myths all rest on a misreading of the history of money. So what is the real history?

A Brief History of Money

The earliest forms of money were used almost entirely in social contexts, e.g., payments and fines for injustice or injury, dowries, and gifts to build social solidarity or avoid conflict. As centralized states emerged, money appeared in new forms such as tribute payments, state expenditures, and taxation. In the earliest states, the use of money was recorded in hieroglyphs or represented in token form as clay tablets. Autocratic rulers with administrative centers in palaces or temples determined the form and available supply of money. All of this occurred thousands of years before the appearance of coinage around 600 BCE.

Far from being a product of markets, coinage was created and controlled by rulers and played a central role in the growth of the Greek and Roman empires. Coinages were associated with particular centers of power because the creation of money confers the benefits of first use, such as seigniorage (the difference between the face value of a coin and its cost of production). The power to create and circulate money is likewise linked to the sovereign power to tax. Rather than relying on the traditional receipt of tribute, a ruler could pay for goods and services with money that could later be reclaimed through taxation.

Commodity markets gradually emerged alongside city-states and empires. While merchants used the money created and controlled by the governments, they also developed their own as a means of dealing with value, debts, and payment. This new commercial money took the form of verbal or written promises or physical representations such as tally sticks (a promise to pay etched into a stick which was then split down the middle, the two parties each taking half). Central to this commercial money, whatever form it took, was debt: one person’s obligation to pay back another.

The emergence of the capitalist epoch, with its paper promises and modern banking, saw the gradual privatization of the sovereign’s power to create money. Constant conflict, resistance to increases in taxation, and shortages of precious metals weakened the grip of rulers. Control of money fell into the hands of the newly emerging economic elite, and rulers became increasingly dependent on borrowing. Over time, states built up large national debts to their banking sector, creating the financial dependency we see today.

A crucial step in this privatization process was when commercial money became the public currency. The Bank of England, for example, was originally formed in 1694 to make loans to the state. As time passed, its notes, backed by a nebulous “promise to pay,” were designated as currency. Eventually, all banks stopped issuing money in their own names, instead issuing it as public currency (e.g., pounds sterling). This step resulted in two major changes. First, the public became the backstop for the banks that were creating money in its name. Second, whereas the sovereign could create money free of debt, the banks could not. Money created and lent by banks must be repaid with interest. This critical difference drives growth because new debt is created to repay old debt. And if this debt-based system falters, so, too, does the money supply.

Today, our reliance on debt has become socially, ecologically, and economically unsustainable. It is socially unsustainable because creating money as debt exacerbates inequality. Money flows to those most able to pay back loans with interest—a dynamic that enriches the rich and traps the poor in long-term debt relationships. It is ecologically unsustainable because creating money through debt drives economic expansion. If loans are to be repaid with interest, there must be growth of some form. This does not necessarily cause ecological damage (it could just bid up the price of existing assets), but there is certainly no basis for degrowth or even a steady state economy. It is economically unsustainable because basing the money supply on debt will eventually lead to crisis when governments, businesses, and citizens cannot or simply will not take on any more debt.

Orthodox economics cements the growth imperative. By treating money as the embodiment of value generated in the market economy, it ties money creation to commercial profitability and economic growth. Economists and policymakers often portray government spending as akin to that of a household. Public sector expenditures, they argue, depend upon commercial “wealth creation” in the same way that a household’s spending is dependent on the earnings of the breadwinner.⁴ The more productive the economy, the more taxable income is available for public purposes. As a result, for those concerned with meeting public needs, growth is good, no matter the long-term cost.

The orthodox view of the economy ignores many other important sources of value—unpaid domestic labor, community, conviviality, and ecological resilience. There is an obvious desire to simply protect these areas from commodification, but doing that alone would leave the rest of the system intact. Instead, we need to reshape the monetary system to prioritize what really matters and devalue the current preoccupations of market capitalism.

We should start by treating money as an active force, rather than a passive one. In conventional economics, money flows through the economy reflecting expenditure and investment choices. But the crucial question of how money enters or leaves the economy is left out. History shows that there are two agents—states and banks—that can create new money. The use of this money, in turn, creates new forms of wealth. Historically, rulers raised armies and built forts and palaces. Banks created credit for trade and production. In modern states such as Britain, new money has provided consumer credit, particularly mortgages, turning houses into financial assets rather than just places to live. In contrast, money created to foster provisioning based on concepts of sufficiency and social justice would aim to create “wellth,” that is, well-being for all.

Reclaiming Money for the People

The social and public heritage of money needs to be reclaimed and its governance democratized. Money can represent social and public value, not just commercial and private value. And rather than being only a mechanism for profit-driven exchange, money can be a tool for the provision of goods and services people actually use and for guaranteeing everyone a right to livelihood, for example, through a basic income.

While the commercial use of money drives growth, the public and social allocation of money would provide people with what they need directly, thereby supporting a one-step rather than two-step economy. The development of a one-step economy is essential to a Great Transition to a just and sustainable society. By relieving people of the need to undertake unsustainable and unnecessary work in order to obtain money, it would reduce ecological strain and economic inequality. And by freeing people from a dependence on the market, it would create more time for the avocational, personal, social, and convivial activities that make life worth living.

Neoliberal economics denies that all of this is possible. Indeed, politicians routinely claim that there is “not enough money” for our basic social needs. But despite the claims and strictures of neoliberal ideology, states can and do “print money.” First, it is produced ex nihilo by central banks to provide cash and support for the money-creating activities of the banking sector. Second, money is created and circulated as the government spends, in the same way that banks create money as they lend. States spend money and then offset their expenditures against tax revenue and other income received. States, however, do not fill their tax accounts before they spend: the balance between public expenditure and public income only becomes clear after the expenditures have occurred. The political choice at that point is what to do with any “deficit,” that is, the surplus of expenditure over income. The extra money created by state expenditures could be left to flow around the economy, producing in effect a perennial “overdraft” at the national bank. Or the deficit could be shifted to the financial sector through “government borrowing,” thereby increasing the national debt (as happens in most capitalist economies).

All modern currencies are “fiat money,” created out of nothing, their value sustained by public trust and state authority. So why are states and their citizens shackled in debt? Why can’t the people simply create the money they need free of debt? Why can’t that money be circulated in a not-for-profit social or public sector? Why base the principles that govern our economic system on the butcher, the baker, the candlestick maker, and the hidden hand of the market rather than the doctor, the teacher, the care worker, the artist, and the not-so-hidden hand of a solidarity economy?⁵ As these questions make clear, freeing ourselves of misconceptions about money opens the door to new possibilities for driving a transition to a just and sustainable economy.

Control of the money supply and, more generally, the monetary system confers a tremendous amount of power. Can we entrust the state with it? Neoliberals warn of the dangers of state intervention in a market-based system. Proponents of social and local economies likewise harbor suspicions of the state, particularly its distant and opaque bureaucratic apparatuses. But without an expanded role for the state, many people will continue to fall through the gaps in the market and voluntary sectors. However, since many states have proven to be inefficient, corrupt, and autocratic, a public money system would be acceptable only if it were more robustly democratic. We cannot assume that public authorities will use money wisely unless they are subject to democratically determined mandates and effective public scrutiny. Exclusive control of the money supply must not simply be put in the hands of the government in power or the state apparatus and left unchecked. Public management of the creation and allocation of money must be transparent and accountable.

Democratizing Money

A shift from profits to provisioning would put the main focus of the economy where it belongs: on the sustainable meeting of needs. That goal would be met through a combination of a basic income (that is, a monetary allocation to each individual as matter of right) and a budget for collective expenditures on public services and infrastructure. The democratic process would entail the development of party platforms followed by participatory budgeting, in the process described below.

At national and regional levels, political parties would propose an overall allocation of funds among the social, public, and commercial sectors—as well as levels for the basic income—as part of their election platforms. Actual allocations would be those of the parties in power. Money to fund these democratically determined allocations would be provided through grants or loans administered by banks, using funds provided by the central bank and operating under social, public, or cooperative structures. In this process, the utilitarian purpose of banks—holding deposits, conducting transactions, and balancing accounts—would be preserved, but they would no longer be able to create money or engage in speculative finance. Where the private sector requires loans for sustainable and socially just investment, this would be accommodated by either an allocation of public money via these banks for lending or a transfer of existing money from private investors.

Public expenditure would be through direct spending of money created free of debt. Citizen and user-producer forums would identify specific public expenditure needs, providing input into local, regional, and national budgets. Given the complexity of the process, these budgets and the corresponding allocations would be set for at least a five-year period, with a modest margin for interim adjustments. Adoption of a participatory and transparent approach to decision-making would militate against domination by any particular group or body. The setting of long-term budgets would ensure that governments could not substantially amend proposed money creation or expenditure levels during the run-up to elections.

Because such a system would result in a massive increase in public expenditure, a phase-in would be prudent. Even with that, the additional money flowing into the market sector could increase the threat of inflation in the short term. But reconceptualizing the role of taxation offers a way to address the problem of inflation. In the conventional view, the state is dependent on tax revenue extracted from the “wealth-creating” private sector. Public expenditure is a burden on the hard-working taxpayer—who is almost never portrayed as a beneficiary of public services. If money is created exclusively by the commercial sector, the conventional view is in many respects correct. The public sector is dependent on the money raised by taxation, and absent borrowing, taxation must precede public expenditure. On the other hand, if money is created and circulated initially by the public sector, then there is no need to “raise” money through taxation. Rather than preceding public expenditure, taxation would follow it, retrieving publicly created money from circulation in amounts sufficient to keep inflation in check. If the public sector is much larger than the private sector, taxes might have to be quite high.

While levels of budgets and basic incomes can be determined through an open, democratic process, the assessment of the impact of public expenditure on the commercial sector would require technical expertise. This situation is no different from what we see today: experts in monetary policy try to anticipate and then propose actions to address inflationary pressure, usually by adjusting key interest rates. As is the case today, estimating the impact of public expenditures would be a hit-or-miss process, but a necessary one nonetheless. A committee of experts would make an assessment of the amount of public money the commercial sector could absorb without too great a rate of inflation and, correspondingly, the overall level of taxation required. The expert assessment would have no role in determining how much public expenditure there would be or how the required taxes would be applied. That is where the public would come in, debating questions of what amount to spend and whom, what, and how much to tax.

The model of public money and taxation just described reflects how money flowed before the commercial domination of the monetary system. Sovereign rulers issued money in various forms to pay for goods and services and then retrieved the money through taxation. Today, the people should be the sovereign. Under a system of public money, the people would make payments to themselves for goods and services provided for their benefit, then return that money to themselves via taxation. The process could be accomplished entirely without money, but that would be an administrative nightmare.⁶

Effectively exercising the public’s right to create and spend its money would require a wide range of democratic decision-making. Questions about the level of taxes, redistribution of income and wealth, whether to tax resource use or land, which expenditures should be taxed, etc., would need to be democratically determined. However, given the basic income and extensive public services included in the proposal, there would be much less need for the accumulation of wealth or for investment programs such as pensions, which are major drivers of growth. This, in turn, would justify even greater taxes on existing wealth. Moreover, since there would be less need for investment opportunities, public money could be created and used to purchase natural resources and utilities currently in private hands, bringing them back under public control.

Another important focus of democratic participation would be the enhancement of public spending oversight. All organizations that received a direct or indirect allocation of public money would need to have clear mechanisms for democratic accountability and transparency in place. Interested citizens along with workers and user groups would monitor their expenditures and business practices on a regular basis. Such monitoring would minimize the possibility for abuses, such as overleveraging of the financial sector and corruption in the public sector, which have plagued the current system.

Conclusion: Debt-Free Public Money for Sufficiency Provisioning

A public money system would enable a one-step economy in which individuals no longer have to undertake socially or ecologically harmful work in order to secure an income. Participation in the market would no longer be essential, as money would reflect an entitlement to livelihood, not just the market value assigned to work. Paid work would continue, but it would focus on democratically determined priorities. Caring for each other and for the planet and building a just society, not financial speculation and resource extraction, would be recognized as the real sources of wealth. New metrics would track and guide progress, with a shift from Gross Domestic Product to a notion of Gross Domestic Provisioning that measures overall “wellth,” that is, well-being.

In a transition toward an economy that prioritizes provisioning over profit, we must be attuned to the interplay between meeting our own needs and protecting the environment. For example, substantially reducing energy use would have profound effects on domestic work, as the latter would be much harder without labor-saving (but energy-using) devices. Birth control has helped reduce environmental strain by keeping population growth in check. But slower population growth, or even decline, has also led to aging populations with relatively fewer people available for both productive and care work. A major focus of a future provisioning system will, therefore, need to be care for the elderly. Although today this responsibility tends to fall upon the shoulders of women as unpaid or underpaid work, it can become a major source of meaningful work and societal wealth.

Reorganizing the economy around publicly created money is not utopian. It simply requires recognizing and reorienting what has existed in the past and what we, in fact, fall back upon today. In the wake of the financial crisis of 2007/8, the power of public money was made clear when governments used it to rescue the banks and other large businesses, such as auto manufacturers and insurance companies. Let it now be used to provision the people.

Endnotes

1. This essay is based on my book Debt or Democracy: Public Money for Sustainability and Social Justice (London: Pluto, 2015).
2. This essay adopts the feminist notion of “provisioning,” which embraces currently uncosted areas of human need and the resilience of nature. For more on this concept, see Marilyn Power, “Social Provisioning as a Starting Point for Feminist Economics,” Feminist Economics 10, no. 3 (2004).
3. For more information on the social economy, see “Social Economy,” Organisation for Economic Cooperation and Development, 2017, http://www.oecd.org/cfe/leed/social-economy.htm.
4. I refer to this concept and the related myths that the government must “live within its means” as “handbag economics,” as discussed in Debt or Democracy.
5. For more on the solidarity economy, see Peter Utting, “What is Social and Solidarity Economy and Why Does It Matter?” From Poverty to Power (blog), April 29, 2013, https://oxfamblogs.org/fp2p/beyond-the-fringe-realizing-the-potential-of-social-and-solidarity-economy/.
6. The case of the babysitting circle demonstrates the usefulness of money. Every participant does the same task (babysitting) and the group is small (a dozen or so families), but the system is much easier to administer with tokens than with an array of bilateral personal arrangements.

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Mary Mellor, professor emerita at Northumbira University in the UK, wants to change this reality, as she explains in a recent essay, “Money for the People” at the Great Transition Initiative website. Mellor, the author of Debt or Democracy and an expert on the development of alternative economies, writes that we must create new public circuits for money-creation so that we can direct money toward socially and ecologically needed activities, and not just the types of debt-driven loans that banks deem profitable. In other words, money-creation need not be controlled by private creditors in the course of creating debt.

The average citizen knows that banks are too powerful and often predatory, but they may not realize that the state has largely ceded its power to create new money (“seignorage”) to banks. Banks create new money out of thin air when they make loans. That money is not something they otherwise hold in a vault. It is literally created when a loan is approved. That is how banks make profits.

The power to create new money is something that the government could feasibly control and administer itself, for the benefit of all.  But governments have surrendered their power of seignorage to the private banking system and its investors.

This has far-reaching, negative impact because, as Mellor explains, “It is the private, bank-issued money system that leaves us with a pernicious cycle of debt and growth. Money could encourage socially and ecologically sustainable production and consumption, but only if it ceases to be a creature of the market and is reclaimed as a social and public representation of value.”

I highly recommend Mellor’s essay because it deconstructs some of the basic, unquestioned premises of modern banking and money-creation while opening up new vistas for progressive action.  Even Bernie Sanders, Elizabeth Warren and their followers have not gotten their heads around the idea that the public could credibly reclaim its power to create debt-free, socially useful money.  But this would require the creation of new types of public institutions and processes for creating money for public purposes, and avoiding the pitfalls of political capture and inflation.

Mellor writes:

“Neoliberalism, which has influenced so much of the conventional thinking about money, is adamant that the public sector must not create (‘print’) money, and so public expenditure must be limited to what the market can ‘afford.’ Money, in this view, is a limited resource that the market ensures will be used efficiently. Is public money, then, a pipe dream? No, for the financial crisis and the response to it undermined this neoliberal dogma. The financial sector mismanaged its role as a source of money so badly that the state had to step in and provide unlimited monetary backing to rescue it. The creation of money out of thin air by public authorities revealed the inherently political nature of money. But why, then, was the power to create money ceded to the private sector in the first place—and with so little public accountability? And if money can be created to serve the banks, why not to benefit people and the environment?”

In other writings, Mellor has pointed out the remarkable fact that “quantitative easing” carried out by the US Government to bail out banks is not regarded as public debt. QE gave away the game. It conspicuously demonstrated that the government itself (and not just banks) could create money out of thin air, and do so without it being considered public debt. The trillions of dollars created to prop up banks following the 2008 financial crisis, after all, was a case of the sovereign state creating debt-free money. (The banks are not going to repay those trillions.)

Mellor insists that “states can and do ‘print money.’ First, it is produced ex nihilo by central banks to provide cash and support for the money-creating activities of the banking sector. Second, money is created and circulated as the government spends, in the same way that banks create money as they lend. States spend money and then offset their expenditures against tax revenue and other income received.”

“All modern currencies are “fiat money,” created out of nothing, their value sustained by public trust and state authority,” write Mellor.  “So why are states and their citizens shackled in debt? Why can’t the people simply create the money they need free of debt? Why can’t that money be circulated in a not-for-profit social or public sector?”

She answers:  “….if money is created and circulated initially by the public sector, then there is no need to ‘raise’ money through taxation. Rather than preceding public expenditure, taxation would follow it, retrieving publicly created money from circulation in amounts sufficient to keep inflation in check. If the public sector is much larger than the private sector, taxes might have to be quite high.”  But these “expenditures” of new money would serve social and environmental needs without having to meet the profit-making criteria of banks.

In the rest of her essay, Mellor outlines how a new public circuit of money could be responsibly administered by new public institutions without creating inflation or resulting in special-interest abuses of the money-creation power (as if that does not already occur right now, via banks!).  She envisions “a shift from profits to provisioning would put the main focus of the economy where it belongs: on the sustainable meeting of needs. That goal would be met through a combination of a basic income (that is, a monetary allocation to each individual as matter of right) and a budget for collective expenditures on public services and infrastructure.”

To work well, a robust democratic process would be needed to ensure an effective form of participatory budgeting and strong oversight of monetary decisionmaking and implementation. But with such a system, money-creation would not just finance “development” that can no longer be sustained by the planet’s finite resources, it could facilitate the provision of economic security and sustainable livelihoods for all.

It’s time for commoners to open up a new debate about the politics of money-creation. The rise of blockchain-ledger software (the engine behind Bitcoin) is already doing this. Digital currencies are showing how voluntary collectives can create their own functional currencies that let communities (and not banks) capture the value that communities create. That represents a potentially huge shift of political power. It’s also time to bring the politics of fiat currency (conventional money) into this discussion, as Mary Mellor’s fascinating essay does.

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Mary Mellor: That’s right there are two magic money trees. Both the state and the banks can create money out of thin air.

States do this by having budgets. Despite the myths that have been told time and time again, states are NOT households – they run armies and banks and schools and police forces and so on. They allocate expenditure in expectation of getting an equivalent amount of money back through taxation. There is no direct connection between public expenditure and public income. There is no state piggy bank or house-keeping allowance.

Public expenditure and income is a constant flow of money and it is only when the totals are totted up that it becomes clear if there is a balance. Deficits are simply evidence that states spend in advance of receiving any income. If they waited until the money rolled in, deficits would never occur.

Despite the claim that states ‘printing’ money is automatically inflationary, this is not the case. What matters is the relationship between state income and expenditure and the condition of the wider economy. The skill is to balance the money created with the money recovered via taxation. In any case, public deficits can be a good thing. They put fresh money into the economy that is then free to circulate.

The other magic money tree is the banking sector. Banks do not simply look after the money in people’s bank accounts and “lend it out”, they actually create money out of thin air by creating new accounts or putting new money into existing accounts – with no democratic accountability.

The neoliberal era saw a massive increase in bank lending (student, consumer, mortgage, financial speculation) with banks becoming the major source of new money in modern economies. The magic money tree of the banks is far more de-stabilising than the magic money tree of the state. Unlike state magic money which can be created free of debt, bank magic money always has to be repaid with interest.

This creates the dilemma that the banks always want more money back than they lend out. Where does the extra money come from? Either extra loans constantly being taken out, or ‘leakage’ of debt free money from the state, that is public deficit. In fact, the use of public money was much more direct following the 2007-8 crisis.

‘Quantitative easing’ – a fancy term for new electronic money from central banks – put billions of pounds, dollars and euros into the banking sector to stave off collapse. This and other rescue measures did little to stimulate the core economy, but made a small elite very rich.

So when we are told social welfare, education, housing, health cannot be afforded because there is no magic money tree, this is a lie. New money is constantly pouring into the hands of the already rich as they gamble and speculate. Ordinary people are burdened with debt as they try to keep their heads above water.

The right of states to directly fund public services (“people’s quantitative easing”), is denied. It is falsely claimed that all new money is ‘made’ by the market sector. This is not true, money is accumulated in the market. It can only be created by states or banks. The claim that all state income comes from taxing the private sector is also false. The public sector also pays taxes – much more reliably than the private sector.

Let us have no more myths about the lack of magic money trees. They do exist – what matters is who owns and controls them. And it should be all of us.

Mary Mellor’s new book Debt or Democracy is available now please click here

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From the Abstract:

“Conventional notions of public money as public expenditure based on taxation of privately created wealth will be critiqued. Public money will be defined as the creation of public currency free of debt, and therefore free of the necessity to grow. It will be argued that both sovereign deficit and debt are misleading concepts and stem from neoliberal ‘handbag economics’ that sees the public sector as a dependent household. Through exploring two circuits of money, public and commercial, it will be argued that growth driven capitalist economies are dependent on the public creation of public money. The seeming dominance of the commercial circuit reflects the ‘Janus-faced’ role of central banks that supports both debt and growth. The alternative to debt is a money system based on surplus expenditure (deficit) that can enable social and public exchange of use-value rather than exchange of commodity value for profit.”

Here are some extensive excerpts:

* From the Introduction:
The background to this paper reflects three crises: environment, inequality, money/ finance. I want to argue that money/finance is key to the other two. Concerns about climate change and other ecological problems are side-lined by the demand that economic growth, that is, profitability in money terms, must be maintained at all costs, or that remedial action cannot be afforded, that is, there is not sufficient money. The post war move towards greater equality has also been reversed by financialisation and the concentration on financial assets and financial speculation, all represented as growth in money terms. This is not to deny the importance of other economic factors, but money itself has been largely neglected in economic debate.

Instead, the politics of money should be seen as a key aspect of political economy. Environmental and social priorities are rejected by the claim that money is in short supply. However, there was no shortage of money when it came to the banking bailout. Money cannot essentially be in short supply as it is an entirely social construct.There is as much or as little as those who create, control and determine the distribution of money choose there to be. In this context I do not distinguish between notes and coins and bank credit in the definition of money as both create the supply of public currency. I want to argue that the financial crisis must be seen as a crisis for money, or more precisely, a crisis of the privatisation of the supply of the public currency. What the crisis reveals is the key role of publicly created money in sustaining private finance. Yet, the ideology of what I describe as ‘handbag economics’, claims that the 1 public sector has no right to the money that it, itself, creates. Publicly created money must only be used to support the privatised creation of the public currency as debt. There is quantitative easing for the financial sector, but not the people.

Worse, the people are punished through austerity for the deficits and public debts created by the crash. If sustainability and social justice are to be achieved, the privatisation of the public currency needs to be challenged. Public money must be a public resource that addresses democratically determined priorities (Mellor 2010). The 2007-8 crisis was not just a crisis of banking and finance but a crisis of the supply of public currency. The major fear that triggered the vast creation of public currency by public authorities was that the ATM machines would dry up. Certainly banks and financial institutions were insolvent as well as illiquid, but for the public the most immediate sign would be that there would physically be no money. However, the monetary authorities did not get the printing presses going, there was no time. It would take months, if not years, to produce enough banknotes to ‘back’ bank deposits. Also there was no other representation of value such as gold, which in any case would be not sufficient, even if the link with gold had not long been abandoned (if it was ever effective anyway).

States and central banks backed their banking systems with nothing but their authority. They said the money was there and people accepted it. States nationalised or bailed out banks, central banks made rock bottom loans they did not expect to get back, and attempted to ‘quantitatively ease’ the amount of money in circulation by buying up various forms of debt or investment. In all cases they used public money, that is money created and circulated by public monetary authorities. The newly issued public money did not originate outside of those authorities, it was not ‘made’ elsewhere. Conventional economics has a contradictory attitude to this public money-creating capacity. While public expenditure is seen as dependent upon the ‘wealth-creating’ sector (states must not ‘print money’), it is quite accepted that monetary authorities create money. This is even graced with the title of ‘high powered money’ or ‘base money’. However this is not considered to be public money in the sense that the public has any right to it. It is created as public currency, in the public’s name, but it is only to be circulated via the banking system. The one body that must not ‘print money’ is the public itself through its public (but not necessarily democratic) organ the state. The people and the state can only borrow money from the banking and financial sector which includes the central bank.

Neoliberalism has made this clear by deeming central banks, with their authority to create money, as independent of any democratic institutions. States themselves are just another borrower. When states stepped into to rescue their banking sectors, they overran their expenditure plans dramatically, that is, they went into deficit. This required ‘borrowing’ under which excess state expenditure was securitised by the central bank and sold on to financial investors. The public sector was then pilloried for being in debt and forced into austerity. I want to argue that public deficit and debt is not a ‘problem’. In fact, commercial monetary economies cannot function without a long run surplus of public expenditure (deficit) over tax extracted. They cannot exist without publicly created money, that is, money free of debt spent into circulation or public currency made available to exchange for bank loans. There is no truth in the claim that environmental or social justice solutions cannot be ‘afforded’. There is no 2 shortage of money. What does exist is a dominant ‘handbag economics’ that ignores the social and public history of money. It also does not acknowledge that bank accounts are as much public currency as notes and coin. There is nothing private about bank-created money. In the last resort it is a public liability. Why, then, is it ideologically and in practice, captured as a private, rather than a public, resource? In response to the crisis, monetary authorities offered an almost blanket guarantee of their public currency in whatever form it was held. Intangible promises were made to support intangible money. This raises the question of the nature of money itself (Ingham 2004). What kind of money was in crisis and what kind of money was rescuing it? The crisis is acknowledged as being a crisis of credit supply and toxic debt as banks threatened to fall down like a line of dominos. As Duncan argues, this failure of ‘creditism’, the growth of debt, was equivalent to the collapse in money supply in the 1930’s (2012: 32). In the run up to 2007-8, banks were not just issuing credit, they were issuing the public currency. This challenges the conventional nostrum that there are two different kinds of money, ‘real money’ (notes and coin, central bank reserves) and ‘credit money’ (bank accounts).

* The Public Circuit of Money

One of the earliest proponents of a public conception of money was the German, Georg Knapp (1842-1926). Far from a market-oriented and privatised view of money, Knapp saw the state as central to the existence of money. In his major work The State Theory of Money (1905/1924) Knapp argues that money is not an economic phenomenon linked to the market; it is very much a public phenomenon: ‘money is a creature of law’ (1924:1). For this reason, he sees the study of the monetary system as a branch of political science and ‘the attempt to deduce it without the idea of a State ..(is)..absurd’ (1924:viii). It is states that establish the status of money forms such as coins, public currency notes or abstract notions such as the pound sterling. Keynes echoed Knapp’s view: ‘‘that money is peculiarly a creation of the state’ (1971:4) and claims it has been so for four thousand years.

While for conventional economics the first function of money is as a medium of commodity exchange, Knapp stresses money as a more general means of payment. Although money is used in market exchange, there are many situations in which payment does not relate to the market, such as fees, fines or taxes. In fact, Knapp sees public administrative payments as a better grounding for the status of money than general acceptance in trade: ‘the money of the state is not what is of compulsory general acceptance, but what is accepted at the public pay office’ (1924:vii). Knapp acknowledges that commodities of material value (such as precious metal) have been used in exchange, but he does not consider this to be money. In fact, money only comes into play when the actual form of payment has no intrinsic value: ‘money comes into being when the material is no longer the means of payment’ (1924:25). He goes on to argue that even where money is made of precious materials, ‘the soul of the currency is not in the material of the pieces, but in the legal ordinances that regulate their use’ (1924:2). He notes that the first question a trader will ask in a new country is, what is the nature of the currency? At the time that Knapp was writing, paper money was well established and he wanted to defend the view that ‘the much-derided inconvertible paper money is still money’ (1924:38). Knapp sees all forms of money as a chartal or token (chartal comes from the Latin for token).

Paper or other non-material money is not inferior to metal money, as both are part of an administrative monetary system: ‘Coins are stamped discs made of metal’ while ‘warrants are stamped discs of paper’ (1924:56). Knapp’s state theory of money has a very different view of the origin and nature of money from conventional economics. Money is created by the state as a convenience for society ‘the State….creates it’ (1924:39). Knapp sees it as 6 particularly beneficial to the taxpayer that the state creates the money that it later accepts in payment of tax as it ‘frees us from our debts to the state, for the state, when emitting it, acknowledges that, in receiving, it will accept this means of payment’ (1924:52). What Knapp is describing is a public circuit of money. Money is created and circulated through state expenditure and retrieved as tax. A public sector circuit reflects the long history of sovereign creation of money. Early coinage was created free of debt and spent, mainly on war or aggrandisement. The money was then left to circulate or demanded back as tax. When modern bank lending emerged, rulers combined public money creation and taxation with borrowing from the commercial money sector and the sources of public funding became intertwined. The public circuit is obscured because public expenditure is an ebb and flow of money. States do not wait to collect taxes before engaging in expenditure. It is only when outgoings and tax income are brought together in the accounts that the balance between them can be seen. The sequence of taxation and expenditure is therefore circular: taxes are spent and expenditure is taxed. Rather than seeing the circuit starting with tax to fund expenditure, expenditure can be seen as providing money to pay taxes.

The ‘chicken and egg’ nature of the public circuit creates confusion over the role of the central bank (or equivalent public authority such as the Treasury). The central bank/Treasury can be seen as lending money for public expenditure pending the receipt of taxes, or it can be seen as creating money for public expenditure that will be redeemed through taxation. If the public monetary authority behaves like a commercial bank, it will see this money as a loan to the state. Future taxation is then a fiscal matter of retrieving the money to repay the loan (with interest). If the monetary authority sees itself as a public agency, the public currency could be created debt free, and spent, pending possible future taxation. Depending on how the public money circuit is interpreted, the incoming tax can be seen as being drawn from activities in the private sector (based on commercial wealth-creation) or it can be seen as the state’s own expenditure being returned. Given that in modern economies there is both public and commercial creation of public currency, both are true. Both circuits can be seen as creating value by providing goods and services. While the commercial sector extracts its value as price on the market, the value of the public sector is judged by the quality of its provisioning. If the creation of public currency is not through the commercial sector, money does not have to be issued as debt. Unlike the banks, publicly created public currency doesn’t have to be commodified. It can be spent or allocated as a public resource without the need to be returned (with profit). However it is not wise to create unlimited amounts of money. The public money circuit is therefore completed not by repayment of debt, but payment of taxes or fees. Tax in this case is not a fiscal instrument as in the commercial money circuit (raising taxes from individuals, households and companies for the public sector to spend) but a monetary instrument, to retrieve money from circulation that could otherwise be inflationary. This creates a very different position for the taxpayer. Instead of ‘hardworking families’ paying out their ’hard-earned money’ in taxes, they can be seen as returning money that has done its work in creating public benefit (paying doctors, building bridges, environmental work, care for the elderly).The main difference between the 7 commercial and public circuits of money is that publicly created money may be issued as debt, but bank created money can only be issued as debt. While the former can be used for social purposes on a sustainable basis, the latter must demand growth and profitability. The former can spend more money than it seeks in return (surplus expenditure), the latter always wants to receive more money than it creates.

* Rethinking Deficit

Recognising the public circuit of money puts deficit spending in a new light. Running a deficit does not need to put the public sector into the red. A deficit means that the public sector is spending more money than it is asking back in tax. How this is perceived depends on whether the source of money is seen as emerging from the public or commercial circuit of money. The role of the central bank is critical here. If the extra public expenditure is seen as being ‘borrowed’ from the central bank it will be sold on to the financial sector and added to the national debt. Seeing the central bank as exercising the sovereign prerogative to create money, would allow the additional money to circulate debt free. If the ‘deficit’ is not taxed, it can filter into the private sector and be a net gain to the economy as a whole. Quite the opposite occurs when there is the demand for the public sector to balance the books, or, worse, go into surplus. If the public sector takes more in tax and payments than it spends, it is extracting money from the economy. As Duncan argues ‘however much government spending is cut by, the economy simply contracts by that amount’ (2012:24). Far from being a problem, there needs to be a public deficit. Creation by public authorities of money that is not reclaimed is necessary, otherwise the privatised money supply will go into crisis, as a purely debt-based money supply is not sustainable. Rather than demanding an end to budget deficits, they should be seen as a key element of macroeconomic policy in creating financial stability (Arestis and Sawyer 2010). As Wray argues, ‘if government emits more in its payments than it redeems in taxes, currency is accumulated by the non-government sector as financial wealth’ (2011:7) … ‘affordability is never the issue, rather the real debate should be over the proper role of government, how it should use the monetary system to achieve public purpose’ (2011:17). Suggesting that the state should openly reclaim its money-creation power, will almost inevitably be met by the assertion that the issue of debt free public currency risks inflation. This ignores the monetary role of taxation; as Galbraith has pointed out, fiscal policy can be used to manage excess demand as well as managing falling demand (1975:306-7). If more money is issued than can be absorbed by the level of goods and services in the economy, taxation can be used to retrieve that money. Critics of states ‘printing money’ tend to ignore the inflationary pressures of the floods of bank issued debt that have led to a series of asset-price booms. Good and bad management of money can occur in both state-based and bank-based money creation. Securitising public expenditure as debt, while not fiscally necessary, does have monetary and financial uses. Its monetary role is similar to that of taxation, to withdraw money from the economy. Its financial role is as an investment. In times of 8 crisis, public debt, far from being a problem, is an essential asset for the financial sector. Following the recent crisis, investors were willing to embrace negative real interest rates for the safe haven of sovereign debt. Even bailout countries such as Portugal were able to return to the commercial markets at a reasonable rate of interest relatively quickly. Pension funds and other financial institutions rely heavily on public debt. However, selling public deficits as debt is socially unjust, as repayment of that debt falls on the public while the investments are mainly a source of benefit to the already wealthy who can directly or indirectly ‘buy’ the debt. A fairer way is to remove money through progressive taxation, particularly of capital, as Piketty suggests (2014). The choice between additional taxation or increasing national debt is highly ideological and goes to the heart of modern public finance. In the run up to the crisis there was no sense of the public sector as a legitimate creator of money or of a public money circuit. Only the commercial circuit of money figured in the dominant ‘handbag economics’. “

* The Democratisation of Money

Commentators from the left and right have largely ignored the democratic potential of money. Instead they focus on the ‘real economy’ which is generally taken to be the capitalist productive sector. Money is seen as an epiphenomenon. What money circuit theory points out is the importance of the credit circuit in stimulating the productive process. Obtaining credit gives the borrower access to goods and resources that they have not yet ‘earned’. If this is true of the commercial money circuit it is equally true of the public money circuit. The creation and circulation of public money give people access collectively to goods and services. In Marxist terms it stimulates use value rather than exchange value or more correctly it stimulates monetary exchange for use rather than monetary exchange for profit. As argued earlier, money does not represent a value in itself, it is a representation of entitlement (access to goods, services or resources) matched by an obligation on others to accept it in payment. This is true for both the public and commercial circuits of money. In the same way that the commercial money circuit enables a commercial economy, the public money circuit can enable a public economy. There is no need to invent the public circuit – it already exists. Public money free of debt demonstrably exists, as when the central bank creates money it owes it to no-one. Any decision to then issue this money as a loan is purely ideological. There is also a public money circuit of expenditure and taxation where the need for surplus public expenditure is demonstrated by the fact that most states run deficits. Conventional economics also recognises the anomalies of currency monetary theories with the epicycle–like notions of fractional reserve banking and real versus credit money. To democratise money it is necessary to expose the illogical and ideological nature of conventional thought. The public sector is not monetarily dependent on the private sector, it is the private sector that is dependent upon public money. Money is not a political irrelevance. It is also not commercial in essence. Money can be the servant, not the enemy of radical democracy. Historically its origins lie in social convention and public authority as well as commercial credit. Democratised 13 money provides the potential to organise complex, large scale economies on a collective basis without undue bureaucracy or top down planning. In my forthcoming book I discuss in detail how democratised provisioning through the use of publicly created money could be achieved (Mellor in press). As Felix Martin argues: ‘ money is the ultimate technology for the decentralised organisation of society…only democratic politics provides the sensitivity to current conditions and the legitimacy … that is necessary for money to work sustainably’(2014:272). Deficit is therefore not a deficit – it is surplus expenditure. In the absence of handbag economics, more money can be circulated than will be reclaimed. This money would be free of debt or obligation and therefore be free to circulate.

Most importantly for capitalist economies, it could provide unencumbered money to pay debts and enable the extraction of profit. Rather than privatised money being ‘made’ in the market and then (grudgingly) extracted as tax to fund the public sector, a public economy would work the other way around. Public money would be created free of debt and used to enable democratically determined public services and policies. A monetary decision would be made as to how much should remain in circulation and suitable taxes then imposed (on environmental and social principles). The private sector would then earn the remaining money in circulation by providing goods and services on a commercial basis. The commercial provision of money as debt would cease to create new public currency and would revert to what orthodoxy says banks do – act as a conduit between savers and borrowers.”

The post Essay of the Day: In Praise of Deficits appeared first on P2P Foundation.

Austerity reflects an ideology that sees the public sector as a drain upon the activities of the private sector. And that is the biggest myth of all. It is the public capacity to create and circulate public wealth, and guarantee a public currency, that sustains commerce. We need an economic policy that understands that.

Mary Mellor, writing for the Independent, breaks down “handbag economics” and the ideology of austerity:

The basic justification for austerity is that the public sector must “live within its means”. We already know that real households do not live within their means; if they did, the economy would grind to a halt. Modern prosperity is built upon debt, and the main aim of economic recovery is to get the banks lending again to both households and businesses.

It is a myth, and it is propping up austerity politics. Another myth is that there is a shortage of money. This implies that there is a fixed pool of money, or some other external factor limiting supply. That might be true if money was made of a scarce resource, such as precious metal, but modern money is mainly held as bank records: only 3 per cent of modern money circulates as cash. The amount of money in existence depends on commercial, political and personal choices.

The widespread concern that there will be too much money in circulation causing inflation has blinded modern economies to the danger of too little money, or that the available money will be hoarded by the rich.

If you ask the question, ‘who can create our currency’, most people would answer that the state creates money and that the commercial sector circulates it. Yet that general understanding contradicts the political notion that our economy functions well because the private sector “makes money”, while the public sector must on no account be seen to “print money”. So, where does money come from?

It is now broadly acknowledged that banks create money by making loans. The myth that they only act as a link between savers and borrowers has been exposed for what it is. The failure to recognise the dangers of banks’ capacity to create new money through lending lay behind the 2008/09 financial crisis and its lasting legacy. Debt piled upon debt, until the whole system gave way.

What rescued the financial sector was a combination of states spending money and central banks issuing new money through loans and policy measures such as quantitative easing (using new money to buy financial assets from the financial sector). The austerity myth that damaged the public sector most significantly was the claim that states could not create money, they could only borrow from the banking sector.

There is no reason a public monetary authority should treat the public sector as if it were a private borrower. The ideology of neoliberal ‘handbag economics’ ensures that the public capacity to create money must only be exercised through the financial sector; that is, money can only be borrowed into existence. This leads to austerity, for two reasons.

The collapse in debt issue during a crisis leads to a shortage of money which shrinks the commercial sector and thus the tax take, while at the same time increasing pressure on public welfare. The assumption that the surplus public expenditure needed to rescue both people and banks is being “borrowed” in some way drives up overall public debt. Even where money was clearly created to buy back public debt through quantitative easing, the debt was not cancelled. It still sits on the government books, justifying ever increasing austerity policies.

Austerity will not drive out deficit spending, despite all the pain, and the threat of deflation is leading to radical measures. Years of virtually free money, and even negative interest rates, are not reviving flagging economies. Measures such as ‘helicopter money’ – creating new money and giving it directly to the people or the government to spend – are being considered just to put money back into people’s pockets. Ideas such as the universal basic income are being tested through pilot projects, for example in Utrecht. What is important is that this should be new money, not based on tax or public borrowing.

We are repeatedly told that states need to “balance the books”, in the sense that they must limit expenditure to the tax take. The public capacity to create money shows that this is not the case. And as government expenditure occurs alongside tax payments, there is always uncertainty about the final balance. Rather than tax take determining public income, the level of available tax money can be seen as determined by the level of public spending. Rather than austerity, the balance between expenditure and tax can be high, creating public wealth in terms of goods and services as well as commercial prosperity.

Austerity reflects an ideology that sees the public sector as a drain upon the activities of the private sector. And that is the biggest myth of all. It is the public capacity to create and circulate public wealth, and guarantee a public currency, that sustains commerce. We need an economic policy that understands that.

Mary Mellor is an emeritus professor of social science at Northumbria University and the author of ‘Debt or Democracy: Public money for sustainability and social justice’

Photo by Snaptotes.com

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Perhaps the leading champion for reforming the current money system is Mary Mellor, emeritus professor at Northumbria University in the UK and author of the recently published, eye-opening book Debt or Democracy:  Public Money for Sustainability and Social Justice (Pluto Press, 2015, distributed in the US by University of Chicago Press Books).

Mellor recently published an oped piece in The Independent, the British newspaper, that summarizes some of the key themes in her book. Her essay focuses on the “myth of handbag economics” – the idea that government budgets are comparable to household budgets.  This distorts our understanding of how the money supply works, says Mellor, and inexorably leads governments to adopt fiscal austerity policies.

The critical political question that is rarely asked, said Mellor at a policy workshop last September, is: Who controls the creation and circulation of money?

She notes that the government, as the sovereign, has the authority to issue new money – an ancient authority known as seignorage.  But in practice, governments have surrendered this authority to the commercial banking sector, whose lending creates nearly all of the money in circulation as debt.

Banks create money out of thin air by issuing new loans.  They need not have those specific sums of money on hand, in a vault. They need have only a small fraction of reserves of the total sum lent, as required by “reserve banking” standards. In this way, bank lending quite literally introduces new supplies of money into the economy based on strictly private, commercial standards – i.e., banks’ assessments of borrowers’ ability to repay the debt with interest.

Mellor believes that we need to recover the power of public currency to meet public needs.   By “public currency,” she means “the generally recognized and authorized public currency created through a public money circuit that originates in central banks and government spending.”  Privately created currency is money designated as public currency that is issued through the banking sector as loans.  It is the fact that bankers are creating the public currency when they make loans that makes the state liable to honor that money when banks go into crisis.

Mellor calls this simple-minded and self-serving understanding of money “handbag economics,” an allusion to the prominent handbag that Great Britain’s neoliberal Prime Minister Margaret Thatcher always carried around.  “According to handbag economics,” said Mellor, “there is no such thing as public money, nor can public money be created except through private banks.”

To underscore the folly of governments creating money, bankers reflexively cite the ruinous inflation that results when the German Weimar Republic “just printed money.” The assumption is that governments cannot legitimately issue money or create wealth; that can be done only through bank-issued credit, or lending – or so goes the story.  Therefore, any public spending that occurs without first collecting the money through taxation is deplored as reckless “deficit spending.”  Mellor argues that in practice governments are always spending in advance of taxation. States spend first and tax later. If they taxed first, deficits would never arise.

The standard narrative about banking and money also conveniently ignores the fact that governments routinely supply “basic money” to private banks to keep them afloat, said Mellor. We saw this quite dramatically in the months and years following the 2008 financial crisis.  The US Government created hundreds of billions of dollars out of thin air – as “public money” – to bail out the banks and prevent them (and the global economy) from collapsing.

It is always the public capacity to create public currency free of debt that stands behind the private banking system.  This is demonstrated again and again as debt bubbles burst and bank runs threaten to ruin the economy.  The state always needs to intervene as the lender of last resort.  “All formal money systems are essentially public, resting on public trust and public authority,” said Mellor.

This raises an interest point for Mellor:  Why should the commercial banking sector be allowed to be parasitic on the public sector?  Why do we, as citizens and taxpayers, allow the private finance system to control the public sector?  Mellor argues that the obvious answer to taxpayer bailouts and subsidies to private banks is to “harness the democratic right to create money” and use it to serve public purposes.

This is such a heretical thought that many people gasp, spit out their coffee, and exclaim that this is nuts.  (Just look at the comments in response to Mellor’s piece in The Independent.)  But Mellor argued at the workshop mentioned above:

The power to create money has shifted from sovereigns to the commercial sector, from the ruling class to the merchant class.  What is needed is to transfer this power to the public.  The central bank must return the sovereign prerogative of money-creation free of debt to the people, for the benefit of the people, as a public resource.  That is, money must be democratized.  This is particularly the case if we wish to create socially just and ecologically sustainable provisioning systems – a much better concept than “the economy.”

Moving toward this new orientation of “democratized money” requires that we change our understanding of what it means for government to create money.  It does not consist of “deficit spending” as presently understood – i.e., money that must be repaid to banks.  After all, government creation of money is a sovereign prerogative for meeting public purposes.  That why precisely what the “quantitative easing” used by central banks to save troubled commercial banks was all about.  It was the issuance of a public currency nominally intended to serve a public purpose (preventing economic collapse) but in effect a private business subsidy.

Funny, we didn’t hear too many bankers complaining about the dangers of government “just printing money” in that instance.  If it is acceptable to create public money to sustain private commercial finance (“quantitative easing”), why isn’t “quantitative easing for people” (and the environment, infrastructure, etc.) also a feasible, responsible policy option?  Why can’t public currencies be created to serve all sorts of public needs without incurring government debt?

Mellor explains that the problem is largely one of ideological framing:  Proponents of “handbag economics” demand that we regard money as a purely commercial asset, not as a public asset.  They demand that money creation occur chiefly through the private profit-making of banks (loans), and not through the government as a way to serve public purposes.

Mellor laments that “commentators from both the left and right have largely ignored the democratic potential of money.  They focus on the ‘real economy,’ which is generally taken to be the capitalist productive sector.  Money is seen as a secondary aspect, whereas it should be seen as an active, politically constructive agent.  All money is a credit that represents an entitlement for the holder, but not all money represents debt.”

Because over 95% of money in the more developed national economies is held in bank accounts with only a small amount circulating as cash (coins and notes), private sector debt-based money is perceived to be the unquestionable norm. But Mellor explains that it is entirely responsible to reconceptualize our understanding of money:  Instead of seeing money as something that government must borrow from banks, we should see it as a debt-free public supply of currency that could prioritize socially necessary expenditures, without first raising revenues through taxes.

There need be no “deficit”; the money would simply represent a public source of new money, a function that private banks already perform.  The difference would be that public currencies would be interest-free and support democratically determined needs – not primarily the commercial priorities of private lenders.

Mellor has called for recognition of the existence of a “public circuit of money” that operates according to a different logic than the dominant monetary system.  Unlike money created through a commercial finance circuit, in which money is created as debts that must be repaid, a public money circuit could create money free of debt.  There would be no impetus for repayment.  What would be requires is a sufficient return of that money to the public circuit – through taxes, charging for government services or selling investment opportunities to the public – in order to prevent inflation.

Mellor agrees that how to set the proper policies for this goal would be a matter of public debate.  She imagines an independent monetary authority assessing the overall amount of money that should be retrieved “so as to leave enough to enable all commercial and public payments to be made while avoiding inflationary pressures.”

Mellor’s ideas have great appeal for these times, but they will first require public understanding and political movements to gain sufficient traction.  One of their greatest virtues is that “democratic money” could provide the wherewithal to meet all sorts of public needs, especially ecological and social needs, at a time when commercial finance will deign to create new money only if it first meets its high-profit, high-debt criteria.

This is a much longer dialogue than a blog post can manage, of course, which is why I recommend that you chase down Mary Mellor’s fascinating book Debt or Democracy.  [Some of this blog post derives from the workshop report, “Democratic Money and Capital for the Commons.”]

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