Government can create the money we need in order to do the things that really matter.
Author: Gavin Barker
Whether you are a VCSE organisation seeking funding, campaigning for a publicly funded NHS or a climate activist, sooner or later you hit a financial wall: ‘there is no more money’. Those that pull the levers of power politely explain that ‘Government budgets operate like household budgets and we must live within our means’.
This is a mantra repeated and amplified by the press and both the main parties are now engaged in a pre-election gambit to position themselves as ‘the fiscally responsible party’; a safe pair of hands when it comes to handling tax payers money. Labour ‘will not turn on the spending taps’ if elected, and the Conservatives proclaim their ‘pledge to get the national debt falling’.
In the light of the multiple crises we face, from collapsing public services to accelerating climate change, this is a false and dangerous narrative peddled by both main parties. But to understand why this is false, we need to take a step back and look at where money comes from.
Bank lending is the main way in which new money is created. It does not come from other people’s savings. This is confirmed by the Bank of England which states:1
“If you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account. This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth.”
And in a separate article on its website it states:
“The reality of how money is created today differs from the description found in some economics textbooks: rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits”2
High street banks create or ‘print’ around 80% of the money in the economy as electronic deposits. They also have accounts at the Bank of England - what are called ‘Reserves’. While regulation does not permit private banks to create unlimited amounts of money, organisations such as Positive Money and the New Economics Foundation point to light touch regulation which allows private banks too much freedom to create the kind of credit booms and their associated asset price bubbles that led to the Great Financial Crisis of 2008-9.3
Such speculative investment damages the health of the economy even in stable times. For example, Positive Money points out that only 10% of loans by private banks go to the productive economy - the businesses that produce the goods and services on which we rely. By far the greatest proportion of bank lending is invested for speculative gain - in land, property, stocks, shares and insurance products.4
We are taught to believe that public finances are scarce and the government only has two options when it comes to finding money: tax or borrow. But governments with their own sovereign currency (the UK has the Pound, the U.S. has the dollar, Canada the Canadian dollar) can instruct their central bank to create or print money in unlimited amounts, particularly in a crisis. Here are two examples given by the economist Ann Pettifor relating to the Great Financial Crisis of 2007-9. The first relates to America and the second to the UK.
In the American example, the board of the Federal Reserve (the U.S. Central Bank) had just agreed to a $85 billion bailout of AIG, an insurance company, one of several loans to that company as part of drastic measures to prevent the systemic failure of the global finance sector. Scott Pelly from CBS news interviewed the chair Ben Bernanke and asked where the money had come from:
Had the $85 billion been tax money? ‘No’, said Bernanke firmly. ‘It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a Commercial Bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.’ The sum of $85 billion dollars, expressed in numerals with nine noughts - $85,000,000,000 - was transferred to AIG's account in just an instant after all 11 numbers had simply been tapped into a Fed computer.5
In the UK example, the Bank of England exhibited similar financial firepower. Its governor explained to a Scottish conference in October 2009 that:
‘A trillion (that is, one thousand billion) pounds, close to two thirds of the annual output of the entire British economy’, had been mobilised to bail out the British banking system.6
This demonstrates not just the immense power of the state at a time of crisis but also clear evidence that the state does indeed have deep financial resources other than taxation. Yet quite suddenly, this buttress of financial support went missing when it came to addressing the welfare of its citizens during that crisis, many of whom lost jobs and homes as a result.
A second UK example is the covid pandemic and the significant amounts of money the government borrowed - to the tune of £412 billion - in order to finance the furlough scheme. The BBC and major national newspapers made much of this and argued that ‘The government cannot keep borrowing at this level forever, so it must find a way to cut spending or increase taxes’.7 Not once did the BBC or any other paper mention the role of the Bank of England in buying back that same debt through Quantitative Easing (QE) or ‘money printing’, thereby ‘deleting’ the debt. As the New Economics Foundation has pointed out:
Between April 2020 and July 2021, the Bank of England’s ‘money printing’ programme – creating new money to buy up government debt — matched 99.5% of total new debt issued by government to pay for Covid support schemes like furlough…While total borrowing between March 2020 and July 2021 was £413 billion, the Bank of England’s total purchase of government debt was £412bn, or 99.5%.8
This brings us to the national debt which is rapidly becoming an election issue. Both parties cite the urgency of bringing down the national debt which, according to the Office for Budget Responsibility is forecast to rise from 89% in 2023/24 to 92.8% of GDP in 2028/29.9 However the Bank of England owns just under a third of that debt (including the covid debt) in the form of government bonds. Since the Bank of England is in turn owned by the government, that effectively cancels the debt (you cannot owe money to yourself). Nevertheless, the government keeps it on its books and the interest from that debt is recycled back to the UK Treasury.
The size of the debt itself is subject to some contention. Separate analysis by the economist Richard Murphy raises serious doubts about government accounting practices and its tendency to inflate the figure. He gives a detailed breakdown of the national debt including that owned by the Bank of England and concludes:
Just over £1 trillion of debt, representing £1,023 billion, or £1,022,946 million of the supposed UK national debt simply does not exist. It is either not owing to anyone, or it cannot be paid to them because it represents ‘base money’.10 However, and despite this, we are told that the UK has debt almost equivalent to its GDP, when in practice it has supposed debt that is no more than 61% of GDP.’11
The government has recently been challenged on this point to come clean and explain the calculations behind the national debt by Lord Prem Sikka who questioned whether debt bought back by the Bank of England via QE (and therefore ‘deleted’) should still be considered debt.12
If you are surprised by the explanation about where money comes from, you are not alone: a survey of MPs conducted by Positive Money revealed that only 15% of MPs were aware that new money is created when banks make loans, and existing money is destroyed when members of the public repay loans. 62% thought this was false, while 23% responded ‘don’t know’. Tory MPs seemed to have a slightly better idea, with 19% answering correctly, compared to only 5% of Labour MPs. As Positive Money states:
“Despite their confidence in telling the public that there is ‘no magic money tree’ to pay for vital services, politicians themselves are worryingly ignorant of where money actually comes from.”13
Money is not scarce, nor does it have a fixed limit. Moreover, the obsession with government debt is a dangerous distraction in the face of the existential threat posed by climate change and the crisis of underfunded public services. As the economist Simon Wren-Lewis has said:
“We owe it to future generations to mitigate the impact of climate change…and deal better with future pandemics. Not doing so would saddle these generations with a burden far greater than paying a bit more interest on government debt.”14
Notes:
1. ‘How is Money created?’ Bank of England explainer
2. Money creation in the modern economy Article in Bank of England Quarterly Bulletin 2014 Q1
3. Where does money come from? New Economics Foundation
4. How Has Bank Lending Fared Since the Crisis? Positive Money
5. extract from Chapter 2 of Ann Pettifor's book The Production of Money.
6. extract from Chapter 4 ofAnn Pettifor's The Production of Money.
7. How much is Covid costing the UK and how will we pay? BBC website 22-6-2021
8. 99.5% Of Government Covid Debt Has Been Matched By So Called Bank Of England ‘money Printing’. New Economics Foundation
9. See Full Fact website: https://fullfact.org/economy/laura-trott-government-debt/
10. Base money' is sometimes called ‘central bank money'. It comprises the currency issued by central banks in the form of notes and coins and what are called the central bank reserve account balances
11. Funding the Future: The good news this Christmas is that £1 trillion of the UK’s national debt does not exist article published 24-12-2023
12. See House of Lords Autumn Statement 2023 debated 29-Nov-2023
13. Poll Shows 85% Of MPs Don’t Know Where Money Comes From. Positive Money
14. Article on Mainly Macro by Prof Simon Wren-Lewis 9-Jan-2024
The publisher is Citizen Network Research. The ‘Scarcity’ of Money © Gavin Barker 2024.
Basic Income, politics, social justice, Sustainability, tax and benefits, England, Article
