A review of “Where the money comes from” 3

See here for part 1 and 2

After having explained how commercial banks can create “money” our of thin air and why current monetary policies are ineffective in restraining credit creation, the authors now turn to the issue of fiscal policy in chapter 6.

The main argument of chapter 6 is that in the current system one cannot truly separate fiscal and monetary policies. Fiscal policy consists of two parts: revenue and spending. The most common methods for governments to raise funds are taxation and borrowing (the authors ignore non-tax revenue).

As established previously by the authors about 97% of the money supply is created by commercial banks. Consequently the ability for governments to raise money through taxes or borrowing is tied to the creation of bank credit. Therefore separation of fiscal and monetary policy is virtually impossible.

However, the current systems is not the only possibility. First of all, the government could instead of issuing bonds to funds deficits borrow directly from the central bank, as was the case in France before 1973. Only this is illegal for EU member states due to the Maastricht Treaty.

Nevertheless, the authors point out there is way to circumvent these restrictions. Rather than issuing bonds governments could borrow money directly from commercial banks, similarly to ordinary citizens and businesses. Further there is no legal impediment for the government to own commercial banks.

The question is, however, why bothering with borrowing at all? As the authors have pointed out in chapter three, money is a social relationship backed by the state. Or put simply: money is whatever the state accepts for payment of tax. For instance, if the government would require all tax liabilities are paid with tea bricks, then tea bricks will be the de facto currency.

So there is nothing, except legal restriction, to prevent governments to issue their own currency at will and impose tax liabilities to secure sufficient the demand for such money. In fact, the issuance of debt-free money by governments have been quite common (e.g. the tally sticks in England or the US greenback).

Chapter 7 is primarily a summary of the entire book and I won’t discuss it in this review.

The authors have done a good job in giving insight how the modern banking sector works. It is worrying, however, that policy makers still rely upon out dated textbooks, with the result that banking and financial regulations are ineffective. Further it is important they have shown that financial deregulation has created speculative bubbles while real businesses are struggling to fund to their activities.

We recommend people to read “Where does the money comes from” for themselves.

References

Ryan-Collins, Josh, Tony Greenham, Richard Werner and Andrew Jackson, Where does Money come from? A guide to the UK banking system, New Economics Foundation, London 2015.

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