Money. It makes the world go around but, if you believe the doubters, it’s actually got quite a lot to answer for. Well, not money per se, but the money system and more specifically, the way money is created – by banks, as debt, to be repaid with interest. From silly house prices to inequality to climate change, all can be traced back to the financial wizardry caused when a bank, simply by typing some numbers on a screen, creates new money in the form of a loan. I wanted to find out more about this and specifically, what leadership might look like should one wish to reform this seemingly messy affair. To discuss the issues I sat down with B£ co-founder and economist at the new economics foundation, Josh Ryan-Collins, and writer and campaigner Brett Scott.
I wanted to begin by asking them something seemingly obvious, that all this is nothing new. As far back as the 1950s Joseph Schumpeter was writing about money creation from banks, while also claiming it to be a topic that causes a headache for most economists. It appears that little has changed 60 years down the line. Or has it? According to Josh, Schumpeter had a better grasp than most economists today, chained as they are to neoclassical economic dogma. Schumpeter, like Keynes, recognised that the nature of capitalism is that certain institutions kickstart the circle of production by creating IOUs without pre-existing savings. However as orthodox economics took grip in the 20th century, mathematical models became the favoured means of analysing the economy, many of which were abstract and without regard for money, banks and credit creation. Money was just an advance form of barter, and a neutral entity. And who are we to question? Economists, it is suggested, hold a special place in society. They are seen to have this enlightened expertise about the economy, sacred cows to whom the public – and crucially, politicians – defer. If they are not talking about money, the more likely it exists as a fringe issue.
Central banks too have failed to dispel myths that money creation is of no significance to the economy. In 2014 the Bank of England finally came clean, becoming the first central bank to publicly state that private banks create the majority of money in the economy. This was in no small part thanks to the groundbreaking 2011 book that Josh co-authored, ‘Where Does Money Come From?’ This added to the pressures on the bank which, post-financial crisis, was facing questions as to why this had happened, and one of the main reasons being that certain institutions created excessive amounts of credit.
However, to this day most people still think that governments and central banks create money. Just last week I gave a talk at Lloyds Bank, invited in to speak about currency innovation. How many people working at Lloyds correctly identified that banks create most of the money supply? Zero. It is not just on the shop floor. You will struggle to find a senior leader willing to engage in debate on money creation. The impact of money created by private banks as interest bearing debt – the transfer of wealth from poor to rich, the insatiable need for growth and trashing of the environment, for example – appears obvious, coherent, and urgent. Why wouldn’t anyone with a policy lever be interested in this? It was put forward that it attacks so much of taught mainstream economic theory that many are simply unwilling to countenance it. Then there’s ego at play too; if you’re a senior executive you don’t want to admit to not knowing something that seems so obvious. And when it comes to the financial sector leaders, the fact remains that they can operate in their jobs and be rewarded handsomely without needing to know how it works.
Despite this, there are examples of those in a position of authority who speak out on this. Martin Wolf at the FT is one. But among journalists he is rare. Surely if someone as respected as Martin Wolf is talking about money creation, others will take it up too? Not so, as Brett points out mainstream economics is so closely tied to political power that large amounts of counter evidence does not have to be taken in. There is a dominant narrative that is hegemonic, that doesn’t make room for ideas such as those which question where money comes from. You see the same in academia, where a dominant group of academics publish orthodox papers in journals edited by orthodox economists. Counter arguments do not get published.
Neither Josh nor Brett has come across a coherent rebuttal of the arguments they make. The battle, therefore, is over whether the money system is a bad thing, and what the alternatives are, and recently a chink in the political armour appeared. On 20 November, following lobbying from Positive Money, parliament held its first debate on money creation since 1844. As an indication of the way to go though, one only has to look at the attendance: just 35 members, or 5% of the House.
Ultimately, there is a huge amount of status quo bias; that what exists now must exist because it is better. Any reform or new initiative must prove itself at a higher gradient, ironic since the existing system is heavily subsidised in order to maintain this status quo. In the end, I asked, is it therefore likely that only total economic collapse will bring about the change that campaigners wish to see? Both agreed that encumbered as they are with a behemoth of a financial system (circa 500% of GDP), from a purely lobbying perspective politicians’ hands are tied; they are essentially paid by the financial sector to keep it afloat.
If there is hope for leadership at a macro level, it may come from further afield. In places such as Brazil, and East Asia, where the sizes of the financial sector is much smaller relative to the rest of the economy, one can find development banks, debt-free credit creation mechanisms, and high investment in infrastructure. It appears a path that our leaders won’t take, set as they are on heading towards a cliff edge instead.
This post is part of coursework for a PGC in Sustainable Leadership at the University of Cumbria. The next module, entitled ‘Sustainable Exchange’, takes place in London on March 18-21. Places are available to take this as a stand-alone module. For more information contact email@example.com