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Why IPE Needs to Talk about Money: On Austerity, Financial Power, and Debt (Part 1)

by Tim Di Muzio on April 13, 2016

The esteemed science fiction writer and Professor of Biochemistry at Boston University, Isaac Asimov once said that the most interesting phrase to hear in science is not ‘Eureka! I’ve found it’, but ‘gee, that’s funny.’ It turns out that the ‘gee, that’s funny’ moments are the most exciting because they can set you on a path to find those ‘eureka’ moments. Ten years ago, when I was a graduate student at York University I had my own ‘gee, that’s funny’ moment.  I was having lunch with a well-respected visiting professor of political economy and we were casually discussing the state of the world economy just before the global financial crisis. Eventually, it dawned on me to ask him where money came from in the first place. He said he felt embarrassed, that he used to know, but had somehow forgotten the answer along the way to his professorship.

‘Gee, that’s funny.’

I figured if one of the world’s leading critical political economists didn’t seem to care much about how new money entered the economy, then it might not be important. At the time, I was finalising my PhD on what I thought (at the time) was a completely different topic, so I didn’t think to pursue my question any further. But not knowing continued to gnaw on me, particularly because I considered myself a critical political economist and this means a critical engagement with the history, theory and practice of capitalist accumulation. If the main goal of capitalists is the pursuit of evermore money, it would be a pretty good idea, I thought, to know how new money is produced.

DebtSurprisingly, the literature in International Political Economy (IPE) was of very little help in my search. I canvassed all leading IPE textbooks and not one discusses the history of money, how money is produced or the problems and consequences – read: relations of power and inequality – of the present monetary system. I also canvassed leading textbooks in political economy that have a less international focus.  Same thing. How is it, as scholars and educators of IPE, that we have not addressed these questions? In my estimation, the oversight is nothing short of scandalous given the centrality of money to everyday life, well-being and the ebbs and flows of the global political economy more generally.

With some considerable exceptions in heterodox political economy and sociology, much of the extant literature is uncritical and lacks deep historical and theoretical analysis. At the moment, I’m finalising my literature review for a new book with Richard H. Robbins called Money: A Critical Introduction, due out with Routledge in early 2017. The book aims to offer an accessible introduction to the history, theory and literature on money with a critical analysis of how new money enters the economy and the consequences and power relations that result. We intend it to be a companion volume to our recently published Debt as Power with Manchester University Press in the UK and Oxford University Press in the USA.

In Debt as Power we consider the ubiquity of debt at all levels of the global economy and argue that debt is a technology of capitalist power known by its effects on bodies, built environments and nature.  As we claim in the book:

the world is awash in debt and though we should recognise that debt levels and access to credit are radically unequal within and between countries, the commonality of all modern political economies is not so much that they are market oriented but that they are all debt based political economies. Indeed, as Rowbotham noted: ‘the world can be considered a single debt-based economy’ (1998: 159).  To take an international perspective, according to the global management consulting firm McKinsey and Co., as of 2012 the total outstanding debt across 183 countries was US$175 trillion (Update: it’s now US$199 trillion as of a 2015 McKinsey Report). In 1990, the same figure was only US$45 trillion or a 288% increase over the period. As identified in Table 1.1, all categories of debt have increased considerably with government debt, financial industry debt and securitised debt (e.g. mortgages, commercial real estate) leading the categories by percent increase.

Table 1.1 (2012 dollars)

Type of Debt 1990

US $Trillion


US $Trillion

Percent Increase
Government Bonds 9 47 422%
Financial Bonds 8 42 425%
Corporate Bonds 3 11 267%
Securitized-Loans 2 13 550%
Non-Securitized Loans 23 62 170%

But the concept and prevalence of debt in capitalist modernity needs to be critically theorised. Our starting point, and primary argument, is that debt within capitalist modernity is a social technology of power and its continued deployment heralds a stark utopia. Our claim is not that debt can be thought of as a technology of power but rather that debt is a technology of power. By technology we simply mean a skill, art or manner of doing something connected to a form of rationality or logic and mobilised by definite social forces. In capitalism, the prevailing logic is the logic of differential accumulation and given that debt instruments far outweigh equity instruments, we can safely claim that interest-bearing debt is the primary way in which economic inequality is generated as more money is redistributed to creditors.

This fact not only has implications for growing inequality and the rise of the 1% and billionaire class. As many of us are aware in IPE, the fear of ballooning public debts is virtually always the perennial justification for neoliberal austerity politics. It seems that almost everyone is living beyond their means but the bankers and the 1%. But when we critically examine how new money enters the economy, the need for neoliberal austerity policies should be understood as a political choice rather than one that is historically inevitable by some iron law of debt and public spending. These policies (privatisation, fiscal discipline, deregulation, cutbacks, layoffs, user fees, more indirect taxes, tax cuts for the wealthy, etc…) also tend to cause incredible damage to the livelihoods and well-being of ordinary people, not to mention the most vulnerable.

So why are neoliberal austerity policies a political choice rather than a historical necessity? The story in brief, drawing from Debt as Power and the additional work to come, can be told as follows.

Layout 1First, let us consider the simple fact that there is considerable mystery when it comes to understanding money and specifically how new money enters an economy.  It is highly likely that our politicians do not have a clear understanding of monetary mechanics and are themselves beholden to ‘received truths’ passed down by generations of faulty or misleading scholarship – particularly in Economics where money is treated as unimportant and a neutral veil. In our view, money and particularly the production of it, is far from neutral and involves perhaps the most important power relationship in capitalism (see the seminal and vastly understudied work of Geoffrey Ingham, The Nature of Money). So our first point is that we are governed by politicians who likely have: 1) no understanding of how money enters the economy or 2) have a faulty, muddled or outdated understanding of how new money enters the economy.

As it turns out, this is an excellent situation for the private social forces that actually do own and control how new money enters the economy. Our money supply, as it were, is capitalised by the owners of commercial banks. So now, let’s take a closer look at how new money actually does enter an advanced capitalist economy like the United States.

Many would be surprised to find out that the vast majority of the money supply in leading capitalist countries (we have focused on the US and UK in our research) is issued by commercial banks when they make loans – over 90% in most advanced capitalist economies. Most of this money does not consist of notes and coins, but numbers in computers organised by double-entry bookkeeping. This form of bookkeeping is an historical creation that has been naturalised and taken for granted rather than critically examined for its effects.

But now is not the time to take double-entry bookkeeping to task.  Let’s focus on why the fact that banks create money is crucial for understanding neoliberal austerity policies as a political choice rather than a product of some iron law that must be followed to the letter.

The important point is this: most people assume that banks are intermediaries. That is, they take money in from savers and because it is assumed the savers don’t need their money right away, the bank is able to lend some of this money at interest to willing borrowers. This view is completely wrong. In reality, when banks make loans to willing borrowers – individuals,  businesses and governments – they are creating new money as deposits in the accounts of their customers. For example, if I take out a loan or a credit card for US$10,000, the bank records this as a liability (they owe me this credit facility) on their balance sheets. To offset the liability side of the balance sheet, they record my promise to pay (remember, we sign a contract for loans and credit cards) as an interest bearing asset. The contract is the bank’s asset and the loan/deposit, the bank’s liability.  This has been confirmed by the recent work of Josh Ryan-Collins et. al., Where Does Money Come From?.  It should also be noted that Post-Keynesians and neo-chartalists have also recognised endogenous money but have oddly never problematised the fact that banks create new money when they issue loans. While this research has hardly caused a dent in mainstream or popular thinking across the world, even Martin Wolf of the Financial Times had to recognise the glaring facts in a 2014 article.

What this means is that our democracies have relegated the power to create new money to privately owned (though publically traded) commercial banks (with a key role for central banks of the world not discussed here). There is a rich history of how this arrangement came about and we explore this in our work, but the key point to emphasise in this blog post is that if our governments want to spend more money than they take in in taxes, fees and fines, they are structurally forced to borrow at interest. There is no legitimate reason why this has to happen, but there is a historical one and it has to do with power, inequality and ultimately a very tiny minority getting something for nothing. Put simply, there is a structural reason why the collective ‘national’ debts of the world’s governments currently stands at US$ 58 trillion and counting according to the Economist’s debt clock.




So the question now becomes who are our governments borrowing from? As it turns out, there are five major sources: 1) individuals/families who purchase government debt as a safe investment – typically through a financial vehicle and/or intermediary; 2) non-financial corporations can place surplus cash in government interest bearing securities; 3) foreign governments and corporations; 4) domestic commercial and central banks; and 5) government entities.

But of these five options, it is only the domestic commercial and central banks that have the power to create money for the purpose of purchasing government securities. In other words, whereas the other four options involve investing money that is already in existence, when domestic commercial and central banks purchase government securities they do so by creating the money and expanding their balance sheets accordingly.  Effectively, this means that the owners of commercial banks are getting something for nothing. The implications of this are vast and the subject of the second part of this post, next week.

Tim Di Muzio
Tim Di Muzio is an Associate Professor in International Relations and Global Political Economy in the School of Humanities and Social Inquiry at the University of Wollongong, Australia. His research focuses on issues of social and environmental justice from a critical political economy perspective.
Leave a response
  • Robin Chang
    April 14, 2016 at 9:18 am

    Interesting points. But see the parts on money in Miller’s textbook: https://www.routledge.com/products/9780415384094

  • Tim Di Muzio
    April 14, 2016 at 10:25 am

    Hi Robin, you’re right, he certainly discusses some of the literature on the history of money and does repeat the fractional reserve account of how new money is created. But he still seems to suggest that banks have to have deposits before they can issue ‘credit’ -money which is incorrect not only according to the Bank of England but also according to the research done by Werner (2014). So yes, it’s a bit disingenuous to say ‘all’ textbooks fail in their discussion of money but I still think his account is inadequate and continues to teach an improper understanding of money. And he certainly doesn’t draw the conclusions for inequality/power about the way we produce new money. There is an assumption that this ‘has to be so’ when it certainly does not. So I appreciate your comment and apologise for not flagging up Miller as an important exception.

    • Robin Chang
      April 14, 2016 at 2:26 pm

      Hi Tim, thanks very much for your thoughtful response. It may interest you as well that a second edition is in the works. I will be sure to pass on your concerns to Miller. Again, interesting points, and looking forward to the next installment. Robin

  • Martina McAuley
    April 30, 2016 at 6:57 pm

    This was a great article to find (thanks to Steve Keen). My PhD (Sociology) is on debt in the neoliberal era and I’ve just ordered your book. Lazzarato’s ‘Indebted Man’ deals with the power imbalance inherent in debt as well. I’m hoping that some IPE or social science conferences will cover the topic at some point.

  • Tim Di Muzio
    May 2, 2016 at 7:38 am

    Thanks for your comment Martina – yes, there’s also Governing by Debt by Lazzarato as well. I’m about half way through it – it’s less political economy (the empirical detail is sparse) and more philosophy but overall, so far an enjoyable read.

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