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Why IPE Needs to Talk about Money: On Austerity, Financial Power, and Debt (Part 2)

by Tim Di Muzio on April 20, 2016
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Though Marx never developed a theory of the capitalisation of the state or of money creation, he did notice this relationship of getting something for nothing (that we discussed in Part 1 of this post) in the first volume of Capital:  A Critique of Political Economy:

The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would…. It was not enough that the bank gave with one hand and took back more with the other; it remained, even whilst receiving, the eternal creditor of the nation…

And indeed, because our governments have been structured historically not to create money (with the exception of notes and coins in most instances), the public is forced to go into debt to private social forces.  But the big question is whether this has to be the case? Why shouldn’t our democratically elected governments have the power to create interest free money rather than enter a debt relationship with private social forces who capitalise the production of money at interest? This latter process, as we have seen, leads to mounting ‘national’ debts, the primary justification for the policies of neoliberal austerity.

Of course, because of years of misleading propaganda on the riddle of inflation combined with the popular denigration of public servants and institutions (stronger in some countries than in others) many would react in horror to the proposal that governments should be in control of the production of new money. There are undoubtedly real and perceived challenges to overcome when considering sovereign money but the alternative is to let the bankers continue to create new money out of thin air and profit from the interest. But there are indeed proposals to create sovereign or public money that avoids inflation and at their centre are two simple propositions: 1) money should be produced interest free and in a planned and democratic way; and 2) this new money should be spent on productive activities that benefit society and urgently address climate change and the need for renewable energy among defeating other unnecessary social ills like homelessness, poverty and hunger.

If you think that this is impossible, consider the fact that Switzerland will be holding a referendum on whether to stop private banks from creating new money while putting the control of new money creation solely in the hands of the Swiss National Bank. The elected government will then instruct the Swiss National Bank how it should spend new money into the economy, closely monitoring the effects of new money creation.

Today, much of the new money created by banks has gone into speculative asset inflation, particularly in real estate and the stock markets of the world. And this brings us to some of the key consequences of allowing commercial banks to issue the majority of the money supply and to charge interest for it. We can list them as follows:

  • Democratic governments are not in control of most of their money supply and are structurally forced into debt to a minority of private social forces who profit from this relationship. The fact that the state has the power to tax the population allows for private social forces to capitalise on this power process and direct a stream on income to themselves through government securities.  As Creutz pointed about long ago, it is a mathematical certainty that due to the ownership of government securities (the minority) and the payment of taxes (the majority) more money will be received by the minority of the bondholders from the majority of taxpayers. See also the forthcoming book from Sandy Brian Hager on Public Debt, Inequality and Power in the United States of America;
  • While governments do set spending, distribution and allocation priorities based on a budget, it is largely commercial banks that set allocation/distribution priorities for society given that they are the primary institutions of new money creation. Banks need not create money for productive purposes and can create money to speculate on securities and real estate;
  • There is always more debt in the system than the ability to repay. This is because when banks create loans they do not create the interest. For example, a US$100 dollar loan at 10% interest will mean that the borrower has to repay US$110 to discharge the loan. But the bank creates only US$100, not US$110. The money has to be obtained from elsewhere, which is also a key trigger for the need for economic growth and the greater commodification and monetisation of nature;
  • The sabotage of the possibility of public or sovereign money and the private ownership of the capacity to create new money leads to an inevitable need for credit/debt when incomes do not meet spending expectations or a desired lifestyle. For example, most people are forced into debt if they want to buy a home or car. But as Susanne Soederberg points out in her wonderful book Debtfare States, many low income groups have been turning to consumer credit just to make ends meet; and
  • Money/debt is based on creditworthiness and tied to assets and income, hence the already rich can borrow more money, leading to greater inequality. For example, hedge fund managers can typically leverage their assets by about ten times, meaning if they have assets of US$1 billion, they can borrow another US$10 billion from commercial banks to speculate on income-generating assets. We have to recall that a 5% return on US$10 billion is far greater than a 5% return on US$ 1 billion! Hence, the proliferation of hedge fund billionaires;
  • The owners of banks essentially profit from a fraud. Fraud is typically understood to be a deliberate deception in order to secure an unfair gain or advantage. Since the banks create new money and do not act as intermediaries between savers and borrowers, they are indeed deceiving the public and certainly are securing unfair financial gains. There is a reason why the banking sector is the most heavily capitalised sector of the global economy each year and that an orgy of bonuses and luxury spending follows each fiscal year. See below:

Pic1

  • Interest on money/debt is a key driver of differential inflation. Interest is a cost to business and gets pushed on to consumers. So consumers not only pay for the base costs of a good or service, but also a portion of the interest the business owes to the banks as well as whatever mark-up on costs the business feels it can get away with. This is interest inflation and profit inflation. Just so that we’re clear that most businesses to do not finance their expansions out of their retained earnings, here’s the level of non-financial corporate debt in the United States (and we assume a similar trajectory in capitalist economies):

pic2

  • Government fiscal policy is incredibly important and has more to do with monetary policy than the monetary policy of central banks – which basically regulates the inter-bank market. This is so because should an economy stagnate with low or negative growth and high unemployment then it is only the government that can help create effective demand by spending into the economy. The only problem with this solution is that, at present, thanks largely to Keynes’ denial of sovereign money, governments are forced into debt at interest to do so when they need not be;
  • There is another consequence for entrepreneurs who may have a great idea but not enough money to invest in their business to make it viable. Since banks typically do not lend to new small businesses without collateral or some other guarantee, this means that entrepreneurs have to turn to venture capitalists and the like for an investment and therefore give up equity in their companies; and
  • We need to abandon the notion that savings lead to investment. This is false. No saving has to take place before new money can be issued. Furthermore, more saving means less money in an economy, not more.

There is considerably more to debate and discuss, but I hope this blog post is enough to encourage scholars in IPE to talk more about money – particular before the next crisis hits, debt mounts and politicians cry out for balanced books and more austerity. When we learn that the current system is a historical legacy/creation and in no way a natural or inevitable one, using debt as an excuse to make certain political choices that ultimately benefit the 1% and undermine the public will hopefully be a non-starter.

Democratic societies should be in control of their own money supply, not a minority of private bank owners and their functionaries who profit enormously from capitalising on everyone else paying interest.

Tim Di Muzio
Tim Di Muzio is lecturer in International Relations and public policy at the University of Wollongong. His research is guided by two main agendas. In the first agenda, his interests lie at the intersection between the history of market civilisation, global capitalism and questions related to energy, the environment and global social reproduction. In the second agenda, his interests lie at the intersection between war, racism and liberal forms of rule in the making of world order.
6 Comments
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  • April 20, 2016 at 5:38 pm

    Great article,

    If you are not already familiar with their work – I will highly recommend Kelton, Mosler and of course Bill Mitchell. I think the MMT are the most important economic theory to understand today.

  • Susanne Soederberg
    April 21, 2016 at 1:45 am

    Great piece, Tim! I definitely think the social power of public money (and money in general) needs to be better theorised. I wonder how much people’s reliance on the vague concept of financialisation has halted critical thinking about a core source of power that lies at its core.

  • Tim Di Muzio
    April 21, 2016 at 7:32 am

    Thanks Lars – yes I’ve read Stephanie Kelton/Bell’s work and Mosler but am unfamiliar with the work of Bill Mitchell. Could you suggest something? I also agree that MMT is very important to know but my own view after canvassing the literature is that while they make good points on: 1) the origin of money not resulting from barter but from power, 2) that money is ‘endogenous’ to the economy, they have no deep theorization of the history of modern money as it relates to ownership and capitalization. There is also a tendency to elide the major consequences of the present way money enters the economy. I would argue that they were more concerned to understand how the monetary system works rather than to critically question it. In other words, I would say they are doing problem-solving theory (how can we tinker with the present system to achieve full employment/growth?) not critical theory, which would not only historicize how private social forces came to control the money supply but also spell out the consequences of the present system and seek alternatives that are of greater benefit to society and the biosphere more broadly. I’m not sure if you’d agree, but that’s my reading of their work – as important as it is.

  • Philip Roberts
    April 21, 2016 at 7:41 am

    I also should note that I’ve just found an article by Stefano Sgambati in New Political Economy (early 2016) – so maybe this will help start an open dialogue on our understanding of money in IPE. https://independentresearcher.academia.edu/StefanoSgambati

  • Tim Di Muzio
    April 21, 2016 at 8:04 am

    Thanks Susanne. I certainly agree. No shortage of talk about ‘financialization’ but no great theorization/historicization of modern money creation in IPE. If I ask people where milk comes from they invariably can answer. They may say a cow, goat or any other lactating mammal but the point is they can point to an origin. When you ask people how new money enters the economy you get all manner of answers. Sorting out this befuddlement is paramount for critically examining financial power and austerity not to mention the perpetuation of debt at interest. We need to move from confusion to clarity but I would argue that there is a lot of work to be done.

  • April 23, 2016 at 6:41 am

    Tim, I am a sociologist, who should write about other things. But last year I got so interested/angry with the ‘handling’ of the Greek crisis, that I began to educate myself more about economics. In this effort I also made this page on my begun home page, where you can find some interesting things. – I will highly recommend the two videos on the top with Mitchell and Mosler – and also you probably want to follow Mitchell’s blog which is on top of the page to the right. He is immensely important in my view. After listening to him here, I couldn’t stop smiling for a week or so. I just realized that the future might be bright for the world ;) – I just added a lot in the process of learning and I should probably clean out a bit to have only the best economics on the page. So if you or other people have some suggestions – perhaps Susanne S. – whom I am connected to on Facebook – I would welcome it. It can of course be both economist I should include and delete. Best Lars, Denmark

    http://homosociologicus.com/neoliberalism-3

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