Mary Mellor on Public Money for Sustainability and Social Justice

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  • Article: Public Money for Sustainability and Social Justice. Written for the CSG Deep Dive Berlin 2015. By Mary Mellor, Emeritus Professor, Northumbria University.

Discussion

Mary Mellor:

What is Public Money?

I define public money as the generally recognised and authorised public currency that is created and circulated through a public money circuit (see below). Public money is therefore distinct from public currencies issued through bank loans, social monies such as local currencies or private digital currencies such as bitcoin. Public money is not the same as public expenditure because it is assumed under handbag economics (see below) that public expenditure originates in money extracted from the ‘wealth creators’ or ‘tax payers’. This reflects a zero sum view of money – all public expenditure is seen as a transfer of funds from the private sector (as in the assertion that the German taxpayer has to pay for the Greek bailout). This is an entirely political construct. Money is not zero sum. There is as much or as little public currency as the power holders choose there to be. Public currencies can be issued debt free or constructed as debt. Public currency as used here includes bank accounts as well as cash.

Neoliberal economics denies that public money exists, but the evidence is before our eyes as newly created electronic currency floods out from central banks to rescue and re-finance the banking sector. The role of central banks is critical here (see below) as they straddle the public and commercial production of the public currency. The critical political question is who controls the creation and circulation of the public currency? To challenge neoliberal ideology it is necessary to be clear about two aspects of money in general. First all money is socially (or politically) constructed – there is nothing natural about money. Second, those with the power to create money (including states, central banks and all banks that make loans designated in the public currency) create it out of nothing. All modern currencies are fiat money – sustained by social trust and public authority. (Commodity money made of precious metal was an historical anachronism and caused severe economic problems because its supply was externally determined by bullion discovery – it was widely supplemented by other forms of money such as tally sticks). If money can be easily created out of nothing, why are governments shackled with deficit, debt and austerity? Answering this question requires turning on its head conventional thinking as represented by neo-liberal ‘handbag economics’.


Handbag Economics and the ‘Public as Household’ Analogy

‘Handbag economics’ sees the public sector as analogous to a household, dependent upon external sources of income. The public household is limited to spending only what is in its handbag/purse/wallet, that is, what can be raised by taxation or other forms of income. In the absence of any alternative source of money, the public household is seen as solely dependent on the private ‘wealth-creating’ sector. The supply of money to the public sector must therefore originate with the taxpayer or the money markets (public borrowing). The ideal would be for states to be in surplus, but at minimum they should ‘balance the books’, ‘pay their way’, ‘live within their means’. The case is made that as all debt and interest payments are a burden on the taxpayer, now or in the future, the public sector must be limited as to how much can be borrowed (overall debt) or how far current expenditure can exceed income (deficit). Preferably states should have no borrowing at all and certainly no deficit. This is because handbag economics acknowledges only a commercial circuit of money.


The Commercial Circuit of Money

In the commercial circuit of money, previously existing money is borrowed and invested, or new money is created through bank borrowing, to pay the cost of production. This is then repaid following the process of exchange and consumption, and the circle turns again. What handbag economics ignores is the importance of creating new money in the circuit. The assumption is that there is a fixed pool of money that continually circulates finding the most efficient form of investment. If the state taxes any of this money it undermines production by reducing the pool. Tax is therefore always a negative. This ignores the fact that new money is continually being created as banks make loans and being extracted from the circuit as the loan is repaid.

This is the element that drives boom and bust. Rapid growth in money supply occurs as the circuit expands and rapid contraction when credit crunches and crises inevitably emerge. This is when the public money supply comes to the rescue, most explicitly in quantitative easing. The commercial circuit of money is unsustainable socially, ecologically and economically. Socially, it creates inequality and perverse forms of expenditure. Ecologically it drives unsustainable growth as it seeks profits. Economically it faces the contradiction that the origin of money in loans with interest means that more must be paid back than is lent. This requires an additional source of money or a continual expansion of loans.


The Public Circuit of Money

The public circuit of money occurs in two forms. The first is the supply of public currency produced ex nihilo by the central bank to provide cash and support for the money creating activities of the banking sector. This central bank money is not borrowed or taxed from anyone. Second, money is created and circulated as government spends in the same way as banks create money as they lend. Banks lend money and then cancel it as it is repaid. States spend money and then offset it against tax and other income received. States do not check their tax accounts before they spend. State expenditure is a continual circuit of spending and taxing. How this is viewed depends upon where the circuit is observed. If the starting point is taken as tax this is seen as funding public expenditure. If the expenditure is viewed first, tax can be seen as retrieving that expenditure. Deficits or surpluses only become evident when the two sides of the circuit are accounted. How any deficit is treated then becomes a political decision. If it is seen as a surplus of publicly issued money, created debt free, it can be left to circulate. This can provide a source of income for the private sector to fund the interest on their loan created money. However, under handbag economics any deficit is required to be ‘funded’ by increased taxes or borrowing from the commercial circuit of money.

If there is a public circuit of money why are governments in deficit and debt? Both deficit and debt are products of political ideology and historical circumstance. The political claim is that states must not/should not create money through excess expenditure (the threat of inflation/Weimar Republic is routinely referenced) whereas in practice states/central banks are continually creating money. A privatised view of the public currency denies the right of people to create public money for public purpose and upholds the power of private finance.

The historical circumstance is more complex – states originally had the monopoly of issuing or designating public currency but ceded this to the banking sector when they had to borrow the emerging commercially created private money – mainly to fight wars. The transfer of power happened when privately created commercial credit became designated as public currency (instead of lending their private credits, banks created loans in public currency). Banks couldn’t create coins or later notes – these generally remain a monopoly of the state/ central bank – but they can create ‘sight only’ bank accounts, nominated in the public currency.

As long as people are happy to work through bank transfers there is no need of cash. A bank run is always feared because there is not enough cash in circulation or reserve to match the volume of money recorded in bank accounts. A bank run would reveal the fact that the banking system has no backing at all (fractional reserves, capital ratios etc. are an illusion). As we have seen in the crisis the only force that can save the banking sector is the state. All formal money systems are essentially public – resting on public trust and public authority. This is the case for democratic control. Sovereign deficits and debts are the result of the privatisation of the public money supply as bank-created debt.


The Central Bank: the Pivot between the Circuits

The public and private money circuits are brought together in the central bank. This is a Janus-faced organisation, which can be a public or private institution, with both a public and private role. As a public body, the central bank has the traditional power of the ruling authority to create the public currency free of debt. As modern banking emerged, the power of rulers was curtailed, particularly as warfare became more costly and taxation was less effective. Money slipped from their control and instead of being money creators, rulers became debtors to powerful commercial forces issuing various privately created forms of money.

As Graeber points out, the early years of modern banks saw a shift in state funding. When rulers needed more money and could not raise more tax, they reverted to borrowing, often demanding ‘forced’ loans. For Graeber, there is a fine line between a ruler demanding taxation and requiring a loan from wealthy citizens when needing additional resources (2011:338-9). However, there is a critical difference. Taxation implies a sovereign right to command resources, borrowing creates an obligation of the sovereign to the lender. While today there would seem to be little difference between rule by an autocratic monarch or a cartel of bankers, there is an important influence on the modern conception of public debt and the functioning of the two circuits of money.

When the sovereign began incurring debts rather than raising taxes, this could be seen in two ways. One way would be to see it as an advance of taxation. Rulers would ‘pay’ for goods or accept loans that could be offset against future taxation by the supplier or lender. The other approach would be to see the supply of goods or loan to the ruler as being repaid out of future taxation. This makes little difference when the lenders/suppliers are also the major tax-payers. They are merely anticipating their own taxes. However, if the taxpayers and wealth-owners are separate groups the distinction between taxation and borrowing becomes critical. Today, the wealthy are the lenders but the whole public is the debtor/taxpayer. As a result, modern states have accumulated extensive national debts. Even when the Bank of England bought back a large portion of the outstanding public debt in its £375 billion quantitative easing programme, this debt was not cancelled. The public sector still owed it to the public central bank.

This is because under handbag economics the central bank issues public money in a purely commercial context. As seen during the crisis, it must make as much public money available as the bloated banking system requires, no matter how irresponsible the banking and financial sector. Yet, it cannot put its money creating powers in the service of the people. This is because the evolution of modern monetary systems is incomplete. The power to create money has shifted from sovereigns to the commercial sector, from the ruling class to the merchant class, what is needed is to transfer this power to the public. The central bank must return the sovereign prerogative of money creation free of debt to the people, for the benefit of the people, as a public resource. That is, money must be democratised. This is particular the case if we wish to create socially just and ecologically sustainable provisioning systems (a much better concept than economy)


Democratisation of Money

Commentators from the left and right have largely ignored the democratic potential of money. Instead they focus on the ‘real economy’ which is generally taken to be the capitalist productive sector. Money is seen as a secondary aspect, whereas it should be seen as an active politically constructed agent. All money is a credit for the holder that represents an entitlement, but not all money represents a debt. The creation and circulation of public money can give people access collectively to goods and services in a democratised public economy. This still leaves space for a commercial economy with taxation as the bridge between the two economies.

Taxation should be sufficient to prevent an inflationary flow of money into the commercial sector as well as addressing other issues such as inequality and resource depletion. A public supply of currency would prioritise socially necessary expenditure with the commercial sector playing a secondary role based on real investment (as opposed to bank created credit).

A public money system would not be acceptable unless it was fundamentally democratic. It cannot be assumed that public authorities would necessarily use money wisely, unless they were subject to democratically based mandates and effective public scrutiny. Exclusive control of public money must not be in the hands of the government in power, or the state apparatus. Both public and private finance are not free of embezzlement and corruption. Creation of both public and commercial money needs to be transparent and accountable. One important point of principle is to separate debates about money creation and circulation from the expenditure of a specific government. The administration of public money must be participatory and deliberative at the widest level.

The first and most important level is an initial public debate about how money creation should be organised: the balance between the public and commercial circuits of money. The public needs to be aware that there is a choice to be made, part of which is the overall amount of money to be created (rather than the privatised free-for-all at the moment) and which bodies should be enabled to create it. Those standing to be elected to public office at all levels should be required to make a clear statement about the allocation of the right to create money as between public agencies on a debt free basis and the banking sector creating public currency as debt for which the public is ultimately liable.

In order to avoid centralisation and to maximise participation, budgets would as far as possible be built up convergently from the grass roots through regions to the relevant centre. While most green proposals for new ways of issuing money would favour local money creation and circulation under social control, in practice a good deal of money creation would need to remain at a broader public level. Major expenditure decisions that need to be made at the centre would then have to cascade to the grassroots for approval. Specialist spending would also require its own democratic structures such as health (combined panel of users and practitioners) or agriculture (consumers, retailers, producers, environmentalists).

There would therefore be a two way flow of decision-making: convergent from the local to the centre(s) and cascading from the centre(s) to the local. A circuit view sees money as being continually removed from circulation through taxation or debt-repayment and then being re-created as expenditure or new loans. All public expenditure should therefore be regarded as new public money at the point at which it starts the public money circuit. The circuit always ends with the money creator, whether bank or state, and only they can re-start the cycle. Using debt-free public money as the basis of public provisioning requires both long term and short term fine-tune budgeting. Major long term decisions would need to be made about allocation to sectors, with smaller scale adjustments on an ongoing basis. These decisions would need to be deliberative and broad-based with elected politicians as only one of the participants in the process. Democratising the creation of money would require participation at many levels with at least one independent element.


Participatory Primary Budgeting

Based on convergent and cascading deliberation about expenditure and allocation proposals, a primary public money budget would need to be established. This would aggregate the proposals in order to decide how much money would be needed to meet provisioning and other publicly determined needs. What is included would be a matter for public debate, but it would reflect proposed expenditure or allocation of public money at local, regional, national and international levels. Current patterns of expenditure would be a starting point for discussion. Areas covered could include: public infrastructure and services; allocation to banks or specialist agencies for grants or lending; to communities to spend/lend/allocate; a basic income to citizens, or an income to nature. It would open up the possibility of hybrids in delivery, supervised banks making debt free allocations or public agencies making loans to individuals or public or social enterprises.

There might be a dramatic expansion of some areas of money supply if the decision was made to fund what are now unpaid livelihoods through, for example, a citizen’s income or payment of domestic and community labour. Other areas might shrink to reflect a move towards more sustainable provisioning. As this would be a complex process in the first instance, the primary money supply calculation would be for at least a five year period, or even longer, with provision for smaller scale adjustments when required.


Monetary Assessment

The primary budget would then be subject to an independent assessment of the monetary impact of the proposed public money supply. Shifting control of money supply to the public money circuit would require different monetary management.

The commercial circuit based on debt has an automatic dynamic: debts must be repaid. Current monetary control has been directed at encouraging or limiting the amount of debt issued through manipulation of interest rates or direct regulation. Indirect control through interest rates has not been very successful in curbing lending. The most stable time has been when governments have prescribed or proscribed certain kinds of lending or certain kinds of lenders and borrowers. The public money circuit needs a different dynamic as there is no automatic mechanism for the completion of the circuit. Money created free of debt does not have the impetus of repayment.

The main ways to complete the circuit would be to charge for services, to tax or to provide the public with investment opportunities. While the balance between these would be a matter for public debate, an independent monetary authority would assess the overall amount of money that should be retrieved so as to leave enough to enable all commercial and public payments to be made while avoiding inflationary pressures. It would make no recommendations on how the money would be reclaimed from circulation. Questions such as the level of taxes, redistribution of income and wealth, taxes on resource use, or land taxes, what kinds of expenditure should be charged or whether the public should be invited to return their money as investment or savings such as pensions would be democratically determined.


Participatory Secondary Budgeting

Actual expenditure, monitoring and allocation of money in the specific communities, agencies and governments would be determined through a variety of forms of decision-making, emphasising transparency and accountability. All public and private organisations that receive a direct or indirect allocation of public money would need to have clear mechanisms for democratic accountability in place. Such a large scale transparent system of primary and secondary budgeting would minimise the possibility for abuse. It would certainly prevent the abuse the financial sector has exhibited: manipulation of markets and rates, insider dealing, outright fraud and excessive borrowing among others. This is not to ignore corruption in the public sector, due to lack of transparency and abuse of power. The spread of decisionmaking proposed would militate against domination by any particular group or body. Setting long term budgets would mean that governments could not substantially amend proposed money creation levels during the run up to elections, particularly in view of the moderating role of the independent monetary authority.


Debt-free Public Money for Sufficiency Provisioning

Ecologically the aim would be sufficiency provisioning. This must be egalitarian as sufficiency means no-one has too little or too much. The approach to money and the economic framework would be very different under sufficiency provisioning. Labour through employment would not be the main access to provisioning. Money would not just represent work done, but be an entitlement to livelihood. Security of needs-led provisioning could allow people to adopt less employment-intensive and consumerintensive life-styles. This does not mean there would be no paid work, but people would be mainly engaged on democratically determined priorities.

As the primary source of debt-free public currency, public provisioning would become the main creator of wealth in the community, providing work, goods and services. The private sector, would rely on the secondary circulation of that money into a (socially and environmentally regulated) market. Sufficiency provisioning would also require a different way to reflect and measure provisioning activities. Gross Domestic Product would be replaced by Gross Domestic Provisioning that measures overall well-being.

This discussion of public money is not utopian. It is not about what could exist it is about recognising and re-orienting what does exist. The power of public money has been made clear through its use to rescue the banks, let it now be used to provision the people."

References

  • Desan,Christine (2014) Making Money: Coin, Currency and the Coming of

Capitalism Oxford University Press, Oxford

  • Graeber, David (2011) Debt – The first 5,000 years Melville House Publishing, New

York.

  • Martin, Felix (2014) Money: The Unauthorised Bibliography Vintage, London

More Information

Relevant publications by Mary Mellor:

  • Debt or Democracy: Public Money for Sustainability and Social Justice (Pluto

November 2015)

  • The Future of Money: From Financial Crisis to Public Resource (Pluto 2010)
  • The Politics of Money (Pluto 2002 co-authored)