Why we need to talk about money

After a succession of apparent victories for the populist right, the British general election on 8 June has been hailed as something of a turning point, even perhaps as the death knell of neoliberalism and it unlovely offspring, austerity. There was certainly much to cheer: the collapse of UKIP, the Conservatives left without a parliamentary majority and in increasing disarray, and the popularity of a Labour manifesto that sought to break decisively with some of the orthodoxies that have dominated political discourse since the Thatcher era.

In at least one respect, however, the official positions of all the principal parties stuck to an orthodoxy so embedded that it is taken as an unchallengeable given by politicians from across the political spectrum, broadcasters, commentators, columnists, think tanks, academics and probably by most voters. This orthodoxy is represented by a variety of code words and political clichés. Some are serious-sounding: 'we must live within our means', 'we will deliver sound public finances', 'balancing the books', 'government borrowing must be reduced'. Others are more jokey. The recent austerity era has been bookended by two such seeming flippancies. The first was the note left after the 2010 General Election by the out-going Labour Chief Secretary to the Treasury, Liam Byrne, for his successor, which read 'I am afraid there is no money'. (Byrne has since said he deeply regrets writing it.) The second is the repeated appearance in the 2017 election campaign of the 'magic money tree', or rather of the idea of its non-existence. Fittingly, this meme reached its zenith (or nadir) when, on live TV, prime minister Theresa May patronisingly explained to a nurse whose pay had not increased for eight years that 'there isn't a magic money tree that we can shake that suddenly provides for everything that people want'. With hindsight, this moment epitomised the failing Conservative campaign, revealing May's lack of empathy and awkwardness. It also licensed a torrent of satire, with magic money trees sprouting all over social media to pay for corporate tax cuts, nuclear weapons, high speed rail and repairs to Buckingham Palace. Then, following the election, which left May eight seats short of an outright majority, the government agreed to one billion pounds of additional public expenditure in Northern Ireland to secure the support in parliament of the Democratic Unionist Party. Money might not grow on trees, but it appears that it can be found in abundance when political circumstances dictate.

And that should not be surprising. As heterodox economists such as Richard Murphy and Ann Pettifor point out, governments of sovereign states with their own currencies can indeed create money at will-and they do.¹ Most obviously, governments print banknotes and mint coins, but in wealthy countries notes and coins represent only a very small proportion of the money in existence (about 3 per cent in the UK). The vast majority of money exists only as stored information: as hand-written or typed entries in ledgers and account books in the past and today as digital records on computer servers. Moreover, all this money, including the physical notes and coins, is debt. Every British banknote carries the phrase 'I promise to pay the bearer on demand'-in other words the note represents an obligation owed by the issue to the holder, that is, a debt. Electronic money is also debt. Every time we buy something using a credit card the issuing bank creates new money to finance the transaction. The same thing happens whenever an individual or a business takes out a loan. If my bank makes a loan to me of £5000 I can immediately spend it-there is £5000 more in the economy that did not exist the day before the loan was made. In fact most money is created privately by banks, albeit under licence from the government. Given the importance of money and the potentially disastrous consequences of poor lending decisions, the regulation of private banking is one of the most important functions of any government.

As well as licensing private money (debt) creation, the government can create public debt with...