Let's Make Money!

It’s so simple it sounds ridiculous. They take everything they can lay their hands on and commodify what's left. The commonwealth is replaced by private assets and the earth is left bare.

Privatisation as Orthodoxy

Not just the SEC and the Board of Works, not just the tollways and the ports and the airfields. More than Telecom and the State Savings Banks. Not content with private schools and hospitals and selling Medibank and outsourcing the Employment Service, our political and financial betters are now turning to individual citizens to see what more they can lay their hands on.

Recently my age pension was cut because the Government changed the rules for “deeming” household income. This meant in actual fact that my wife’s superannuation (which she’d earned as part of her career) now has to cover the reduction in my age pension (which I’d contributed to through a lifetime of taxation). Just a little personal example and we’re better off than many others.

Privatisation is the almost unchallenged orthodoxy in government economics. Unchallenged within the “mainstream” at any rate.

Proceeds from privatisation were estimated by Australia's Reserve Bank, in 1997, at $61 bn. Money supposedly spent on reducing Government deficits and providing more public infrastructure. But twenty years later Governments are still wingeing about “the deficit” and say they don’t have enough money for infrastructure. And that $61 bn looks insignificant next to the $1.46 tn - TRILLION - currently in circulation in Australia. They sold the farm to get 4% of the current economy? Then spent that by giving it back to the banks and investors they’d previously borrowed from. Say what?

Privatisation, according to many commentators more expert than I, does not and cannot bring sustained benefits to the majority of Australians. John Quiggin for example, has shown it benefits the investors, the corporate sector, the overseas/international banks, and to a lesser extent the CEOs and managers. After twenty years, many Australians are sceptical, wary of further sell-offs, and losing trust in the established political parties.

But worst of all, we never realised they’d already privatised the money supply itself.

Money and Banks: Privatising Everything

You’ll find easy-to-read explanations of the money supply from reputable sources as well as from crackpot sources all over the internet. But remarkably there’s a consensus between the far-right populists and the sensible suited economists. John Kelly, here at AIMN, in Money Created Out of Thin Air:

And then from the “far right” SOS News, How money is created in Australia:

Hang on, doesn’t the Government print sovereign money at the Mint? Well, yes, but - coins are made by the Commonwealth Government at the Royal Mint in Canberra and banknotes are printed in Melbourne by Note Printing Australia, a wholly owned subsidiary of the Reserve Bank which in turn is wholly owned by the Commonwealth Government. So it is fair to say that our currency comes from the government. Provided the total money supply stays in balance with the goods and services generated throughout the country, the manufacture of coins and banknotes will not cause inflation nor a shortage of money.

But the Reserve Bank’s own statistics show that less than 5% of all money in Australia exists as coins and banknotes. In 2012 the Reserve Bank reported notes and coins at $58.9 bn, but the M3 money supply was $1.46 tn. So where does the other 96% of money come from?

What is Money?

And what is “money” anyway?

Defining it can be difficult. According to the Macquarie dictionary it’s "coins or certificates (such as banknotes etc.) generally accepted in payment of debts and transactions, or any article or substance similarly used". In the early days of Sydney, rum was frequently used as a medium of exchange. In the modern world credit cards and, until recently, cheques are generally accepted in payment of debts and transactions, so credit is a form of money.

David Graeber in his book Debt points out that money can be three things at once: a medium of exchange, a store of value and a measure of price. Taken together these attributes constitute money as a commodity in and of itself. And since most money is now abstract/credit/digital/non-material, it is a virtual commodity not a tangible one like wheat or timber or even gold. Which is why it can no longer be pegged to the price of gold.

Richard Werner and colleagues, in Where Does Money Come From, identifies anything that is widely accepted as payment, particularly by the tax office, as money. This includes bank credit because although an IOU from a friend is not acceptable at the tax office or in the local shop, an IOU from a bank most definitely is. In their overview (Chapter 1) they write of Britain:

New money is principally created by commercial banks when they extend or create credit, either through making loans, including overdrafts, or buying existing assets. In creating credit, banks simultaneously create brand new deposits in our bank accounts, which, to all intents and purposes, is money. This basic analysis is neither radical nor new. In fact, central banks around the world support the same description of where new money comes from – albeit usually in their less prominent publications.

More on Werner’s book here, from the New Economics Foundation, including a PDF download of the intro and overview.

This effective privatisation of the money supply was recently confirmed (for those who need “official” confirmation) by the Bank of England itself (see Graeber’s Guardian article) who’s Monetary Analysis Directorate stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist positions more ordinarily associated with groups such as Occupy Wall Street are correct. Banks can and do increase the money supply by creating credit. They conjure money out of nothing to lend to investors and others, even governments, who then produce goods and services in the real economy. That’s in the theoretical best case scenario.

By so doing their influence over the total amount of money circulating in the community is many times greater than that of the government manufacturing banknotes and coins. And so it is that the privately owned banks can cause, as well as control, inflation. Remember that next time you hear some scaremonger predicting ruinous inflation caused by the government printing money.

In time, the credit created is extinguished as the loan is repaid, so at the end of the loan the temporarily created credit will have disappeared, but leaves the bank richer by the amount of interest paid. Would now be a good time to remember that the interest amount is often greater than the original amount of the loan? And those interest payments come from the “real economy” - the borrower has worked away at her job (shop counter, assembly line, call centre, wherever) and possibly scrimped and saved to meet the repayments only to become the profit-cream on the fictional-money cake.

To expand its business, the banking industry seeks to continually increase the overall level of debt, and just loves big spending business and government customers. But it is worth noticing that banks can at any time decrease the supply of money circulating in the community by refusing to issue new loans as existing ones are repaid... thereby causing recessions and depressions.

If banks create too much credit and it’s not invested productively then the system floods and there’s a serious problem.

To get a sense of how radical the Bank of England’s admission is, Graeber considers the conventional basis of all mainstream debate on public policy, the basis he shows to be false:

It's these conventionally accepted views that persuade us to talk about money as if it were a limited resource like bauxite or petroleum, to say "there's just not enough money" to fund social programmes, to speak of the immorality of government debt or of public spending "crowding out" the private sector. What the Bank of England admitted is that none of this is really true. To quote from its own initial summary: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits" … "In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money 'multiplied up' into more loans and deposits."

In other words, everything we accept is not just wrong – it's backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes.

In other words the creation of money has been privatised - they create 95-97% of the money in circulation, and they also determine how it is allocated. Richard Werner has a series of videos explaining this in simple (albeit rather boring) interviews.

There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with "quantitative easing" they've been effectively pumping as much money as they can into the banks, without producing any inflationary effects.

What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the Bank of England paper does admit that the central bank does fund the government after all). So there's no question of public spending "crowding out" private investment. It's exactly the opposite.

All of which means they have effectively thrown the entire theoretical basis for austerity out of the window.

Werner et al describe how the power of commercial banks to create new money has many important implications for economic prosperity and financial stability. For example:

  1. Current bank regulation is ineffective at preventing credit booms and asset price bubbles.
  2. Banks decide where to allocate credit in the economy, often favouring lending against collateral, or existing assets, rather than lending for investment in production. As a result, new money is more likely to be channelled into property and financial speculation than to small businesses and manufacturing, with associated profound economic consequences for society.
  3. Fiscal policy does not in itself result in an expansion of the money supply. Indeed, in practice the Government has no direct involvement in the money creation and allocation process.

Their book is about banking in the UK but given the global reach and interlocking nature of these financial institutions, most of this applies to the US and Australia as well.

Some questions we could ask once we start to comprehend all of this -

✱ If the Commonwealth Bank was still publicly owned, could it create money (loans) to finance an immense expansion of renewable energy? Let’s say solar panels on virtually every roof in Australia?

✱ If we had publicly owned banks, could they run at minimal interest rates, just enough to cover their own costs and sustainability, not to enrich their elite stockholders?

✱ Why cannot the Government, via the Reserve Bank, direct the commercial banks to lend for productive purposes rather than property speculation?

✱ Why cannot the Government, with its own sovereign currency, produce enough money to fund all the productive public works and infrastructure the “Common Wealth” requires?

✱ Why does not the Government take all of this knowledge (as articulated by Graeber, Werner, the Bank of England etc) into the public arena and counter the fallacies and misinformation prevalent in the mass media?

Well I guess that, sadly, as long as its creation is in the hands of a small number of corporate directors money, instead of being a tool for facilitating trade and production, will remain a tool for the rich to get richer, and for that they need to govern the world.

This article is one of a number I am trying to research, which includes an examination of the Reserve Bank, it’s purpose and track record, as well as the idea that sovereign governments with their own sovereign currencies never have to borrow anything. They can simply create the money to do the things the country needs (Modern Monetary Theory). This piece draws heavily on the sources listed below and in part is a paraphrase of them, especially David Graeber’s work and Richard Werner’s book and videos


A simple list of twenty years (The Mayne Report)
Reserve Bank of Australia Report, 1997
John Quiggin's PDF Record of Failure
Electrical Trades Union media release on Record of Failure
Public Are Sceptical (The Guardian)
Problems with private providers (The Conversation)
Money creation:
John Kelly “Out of Thin Air” on AIMN
David Graeber on the Bank of England
Where Does Money Come From? New Economics Foundation, 2011
Richard Werner videos on Youtube
Australian Money supply:
Reserve Bank Report 2012
Trading Economics stats on M3