Policy Research in Macroeconomics

It’s official: There is a money tree

By Ann Pettifor

(Originally published in the Huffington Post UK; Photo source: The Guardian)

George Osborne, the British Chancellor, has publicly disagreed with his prime minister on a fundamental issue of monetary policy – in an official Treasury report.

The prime minister recently argued that “There’s no magic money tree to fund” what he called “this ever more wishful borrowing and spending”.

But his Chancellor, George Osborne, disagrees.

The disagreement is aired in one of the documents tabled by the Chancellor on budget day. It’s titled: “Review of the Monetary Policy Framework.” – and is tucked away in the bundle of documents issued last Wednesday.

In paragraph 3.34, the Treasury makes plain that the monetary authorities could finance increased government spending on infrastructure “through the creation of money”.

Taxpayers, the Treasury makes clear, are not the only source of finance for governments – as neoliberal economists would have us believe.

There is a money tree, and it’s called the Bank of England.

In arguing the contrary Cameron echoed his predecessor Margaret Thatcher, who in October, 1983 told the Conservative Party conference that:

“the state has no source of money, other than the money people earn themselves. If the state wishes to spend more it can only do so by borrowing your savings, or by taxing you more. And it’s no good thinking that someone else will pay. That someone else is you.

There is no such thing as public money. There is only taxpayers’ money”.

This idea that “there is no such thing as public money” was later foolishly echoed by Labour’s Treasury spokesperson, Liam Byrne. He left a note for his successor upon leaving the Treasury in 2010 which said: “I’m afraid there’s no money left.”

But now it’s official: there is “a money tree”.

Here is how the Chancellor explains Bank of England financing of public investment in his Review of the Monetary Policy Framework:

“central banks could go beyond the range of unconventional instruments deployed … in advanced economies since the 2008-09 financial crisis. For example, it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. In theory, this could allow governments to increase spending or reduce taxation without raising corresponding financing from the private sector.” (My italics).

Having contradicted Cameron’s ‘there is no money tree’ approach the Chancellor then lays out his own objections to the Bank of England financing fiscal deficits.

These relate mainly relate to inflation – a serious matter for concern.

But interestingly, neither the Chancellor nor the Treasury seem very concerned about the inflation caused by Bank of England Quantitative Easing (QE). This finances the purchase of speculative assets by bankers and other financial institutions. By doing so, QE is inflating asset bubbles across all global capital markets, just as ‘easy credit’ fuelled the property and other asset price bubbles of the 90s and 00s. These bubbles are caused by deregulated private sector speculation. They are expanding and will inevitably burst.

The Chancellor seems relaxed about the threat of an asset-price inflationary bubble. Grassroots Conservatives are not so sanguine. A blog on the impact of QE on asset prices on the Conservative Home website states correctly that:

“… the reason why QE isn’t stimulating growth or stoking inflation is that so little of the money created has “filtered down to the high street”. It is, however, pushing up demand for investment products.”

For ‘investment products’ read, speculative assets. Despite Conservative Home’s and the Spectator’s efforts to raise concern about asset price inflation, there is very little commentary on the subject. Instead, the fear of wage and price inflation is raised to block Bank of England financing of public investment that will benefit millions of ordinary Britons, and filter “down to the high street”.

If managed well, this investment in real productive – as opposed to speculative – activity, will not create inflation. That is because right now there is far too little money ‘chasing goods and services’ in Britain’s high streets. As the economist Michael Burke notes both public and private investment have been slashed and “industrial production… is now back where it was in 1992, in the depth of the crisis during sterling’s membership of the exchange rate mechanism (ERM)”.

The government could reverse this collapse in investment – and finance “the march of the makers.” With Bank of England financing, there would be no need to cut spending or raise taxes. Instead, with the help of the monetary authorities, government could increase spending on sound infrastructure projects. Low-cost financing by the Bank of England would enable George Osborne to implement Vince Cable’s public infrastructure investment plans.

Public investment would generate employment. Employment would generate wages, salaries, profits and tax revenues – from both the public and private sectors. Tax revenues could then be used to finance the deficit, repay the Bank of England, and pay down the national debt.

Only once the economy is operating at full steam, with full employment, would the Chancellor have to start worrying about inflation. Not before.

Has this macroeconomic (and Keynesian) insight finally dawned on the Chancellor? Is this why he has dared to contradict his leader? And is this why he is flying a kite that suggests he may, after all, shake the branches of the Bank of England’s money tree?

7 responses

  1. what about Article 123 of the Lisbon Treaty, which forbids central banks from printing money to finance government spending??

  2. “When the BoE prints, it takes from other people by diluting the value of the pound. “

    We have a floating rate exchange system and a dynamic economy. We are not passing around a finite number of coconuts.

    The power of an engine is determined by how much fuel it can get to flow actively into the engine and the efficiency by which it uses that fuel.

    It has nothing to do with the amount of fuel in the tank.

    I suggest some compulsory readings in Modern Monetary Theory until you understand how the monetary system actually works. Flows matter. Stocks less so.

  3. There is no money tree. When the BoE prints, it takes from other people by diluting the value of the pound. This cannot be a long term policy as it destroys the status of the pound as a currency. If the pound collapses, for example China or Qatar refuses to accept it for UK imports, we are in real trouble. This will happen, and that is the point of hyper-inflation.
    You will not create full employment by cramming spending & expenditure. How can someone take time to think and create when they are also being forced to rush, spend & speculate.

    I find it funny that left wing economists put forward a policy that concentrates wealth. Perhaps it is the central planning aspect of BoE stimulus. I also hate what capitalism has become – a corporatist system of self-enrichment. Although I am not saying there is an answer, there is no magic money tree.

    Fiscal prudence and less interference in an economic system that promotes community wealth and co-ownership. We need to finance new co-operative structures and *hope* growth can appear through better education & innovation. It may take time – that is what depressions are for.

    1. Damian. You’d better get real and take your ideological blinkers off! Western central banks in cahoots with the the commercial banks abandoned sensible under-writing house mortgage standards so, for example, between 1997 and 200t under a UK Labour administration the average house price rose 123%. If this is isn’t hyper-inflation caused by the private sector capturing the state sector I don’t know what it is. You need to understand that modern fiat monetary systems work as a partnership of government and commercial banks creating money from nothing (technically really a credit/debt contractual arrangement) in which a sovereign government or a foreign sector or both have to run a deficit to allow a domestic private sector to save in aggregate. Finally, this partnership has to ensure the desire to both spend and save is optimally accommodated leaving sufficient money in active circulation and equitably distributed with the resources available to an economy. This is a dynamic process making it difficult to simultaneously achieve all objectives. At the end of the day controlling inflation has to be the responsibility of a democratically elected government that has the interests of all its citizens at heart. A Neoliberal ideology that believes in extremely light touch regulation has clearly failed to enable the containment of hyper-inflation.

  4. FROM MY LETTER TO MERVY KING GOVERNOR OF THE BANK OF ENGLAND July 11th 2012“Governor King, in the late 1930’s, Vincent Vickers, a member of the famous armaments dynasty (including what is now VSEL which, without the direct threat of war or the cold-war currently stands for Very Soon Everyone’s Leaving), was an acting director of the Bank of England, who was certain that hypocrisy, economic myopia, and fiscal parsimony lay at the heart of the world’s recurring problems. In his important book ECONOMIC TRIBULATION he states:

    “…Some years ago we heard a great deal about ‘rationalisation of industry’ which in plain English meant a ‘drastic cut of wages and schemes of amalgamation…Similarly, on Inflation and Deflation of the currency: we have been taught that Deflation, which benefits the lenders of money (such as banks), [is] at times an unavoidable and necessary action in order to preserve ‘sound finance’: whilst Inflation, benefiting the debtor (such as farmers, shopkeepers, and traders), entails action which is so disgraceful that it should never be mentioned in any respectable bank parlour. When things changed, so that it had to be mentioned, the word ‘Reflation’ was coined – in order that orthodox economists would not have their delicate digestions upset by being made to eat their own words…”

    Two years earlier than Archbishop William Temple, Geoffrey Crowther, Editor of the Economist, published the following declaration. In his “An Outline of Money” pointing out that: “Only by a periodic rise in prices (i.e., a fall in the value of money) has the community been able to escape from being choked by usury”

    Further evidence comes from William Greider, in 1988, then an Assistant Managing Editor of The WASHINGTON POST, who, in his excellent work: ‘SECRETS OF THE TEMPLE’ – HOW THE FEDERAL RESERVE RUNS AMERICA, confirms the fact that Central Banking Authorities have always understood the causes of the problem but see nothing reprehensible in sacrificing millions of people rather than committing adequate expenditure to save the community from the burden of debt or eradicating the other evils of peace-time which, as the last 5000 years of history prove, have invariably lead to war or civil strife. He states:

    “The antidote (during the 1920’s & 30’s) to a general economic collapse was well understood – Lower Inter-est Rates and Rising Prices – If [only] the authorities had the nerve to pursue it. For Central Bankers (however), it was the hardest choice imaginable – to deliberately debase money in order to save people. Reviving inflation was beyond discussion. But, perhaps in time, as more people came to understand it, they would [come to] demand as the cure what they had been told was the affliction”. P 63/64

  5. Keynes called for a somewhat “Socialisation of credit” which would eventually lead to “the euthanasia of the Rentier” and their cumulative oppressive power”. IN 1988 CANADIAN PROFESSOR JOHN HOTSON, CHAIRMAN OF C.O.M.E.R COMMITTEE ON ECONOMIC & MONETARY REFORM WROTE: “Many economists rail against “wage push.” and it’s true that wages have risen by 2,700% over the past 50 years. But in the same period government tax revenues went up by 3,400% and net interest by 26,OOO%! And yet most of the economic textbooks that deplore rising wages don’t even mention the tax and interest pushes. And it’s not because they are complex ideas rather, that they are so simple and obvious—and because it would be so embarrassing for economists to admit they’ve made a boner of such magnitude: that their theory of monetary policy violates basic principles of scientific logic.”
    Therefore, the central question of economics (which is very rarely addressed even by academic economists) should be, how might this need for a continuing growth in the money supply be best achieved? Is it better that an institution, answerable to the community, should produce the community’s money supply in the public interest? [A NATIONAL CREDIT OFFICE] Or is it better that private profit-oriented institutions – commercial banks – be allowed to continue to create and issue the money supply, claim its ownership, and lend it as interest-bearing debt for the principal benefit of their shareholders?”

    THIS IS THE REASON WHY BRIAN GOULD WAS FORCED OUT OF BRITISH POLITICS: On February the 19th 1993, The New Statesman & Society, published the following recommendation by Brian Gould. Speaking as the Labour Member of Parliament for Dagenham, he said: “Why not commit a Labour government to two simple targets – full employment and a decent home for all? And if the private banking sector persists in its failure to develop a system of industrial banking, why not use the power of the state to make good that deficiency by setting up a major publicly owned investment bank? And while we are about it, why shouldn’t a socially aware and economically responsible government create credit where appropriate in order to ensure that essential investment is made and at the same time strike a great blow for the democratic control of the economy?”
    David M Pidcock

    1. And, of course, we now have a National Investment Bank proposal taken up by Jeremy Corbyn as PQE, a development of Richard Murphy and Colin Hines Green QE idea, structured to conform with the EU requirement that central banks cannot create money from nothing to give to government treasury departments for spending purposes.

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