Laughing all the way to the bank
A timely review in the New York Review of Books by David Graeber (Against Economics, a review of Money and Government: The Past and Future of Economics by Robert Skidelsky) asks the question what is money? It’s a timely question when in this general election even the Tories are talking of a spending splurge. They reckon theirs is affordable (even with tax cuts) whereas Labour’s is not. Graeber notes that ’There are plenty of magic money trees in Britain, as there are in any developed economy. They are called “banks.” Since modern money is simply credit, banks can and do create money literally out of nothing, simply by making loans. Almost all of the money circulating in Britain at the moment is bank-created in this way. Not only is the public largely unaware of this, but a recent survey by the British research group Positive Money discovered that an astounding 85 percent of members of Parliament had no idea of where money really came from (most appeared to be under the impression that it was produced by the Royal Mint.’
Perhaps MPs and the public alike harbour their quaint views on money creation because they think money is normally earned, it is a reward for labour (in its many forms). Thatcher capitalised on this perception with her metaphorical household scales suggesting that every family has to undertake to balance its books, and that too is what the government has to do. And that does seem sensible, for all (including me) who have no education in economics. But of course it is not the truth, it is fake economics maintained in the public sphere to protect a particular model—which was rather well exposed by the process of quantitative easing (QE), As the Bank of England website explains ‘Suppose we buy £1 million of government bonds from a pension fund. In place of the bonds, the pension fund now has £1 million in money. Rather than hold on to this money, it might invest it in financial assets, such as shares, that give it a higher return. And when demand for financial assets is high, with more people wanting to buy them, the value of these assets increases. This makes businesses and households holding shares wealthier – making them more likely to spend more, boosting economic activity.’ (emphasis added) But the £435 billion in QE since 2016 didn’t quite work out that way—the UK economy remained stalled. This hardly seems surprising since the government was busily taking money out of the economy at the same time under its austerity regime. The banks sat on their growing balance sheets (they were told they had to rebuild them) and the financial assets, such as property and shares rose in value mainly benefiting the undeserving rich. QE also did not address other factors in the economy, such as the reduction in investment brought about by Brexit uncertainty, despite share values remaining at near record high levels.
But the Tories' false claim that Labour will incur £1.2 trillion in debt and we’ll all have to pay for it (£2,400 each apparently) will no doubt resonate, bringing back memories of George Osborne’s successful lie that Labour profligacy brought on the crash of 2008. Labour’s response at the time was weak and uncertain, partly because it chose to indulge in a prolonged leadership battle. I have more confidence in John McDonnell getting the message across about the affordability of Labour’s plans., given that he is untainted by, e.g. Gordon Brown’s obsequious genuflections to bankers. Voters should be reminded that Britain’s immediate post-war recovery was built on a massive pile of ‘debt.’ And to help that recovery along, the Bank of England was nationalised in 1946. That fact could be useful in today’s context if Labour wins the general election, and the banks decide to be obstructive.
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