Democratizing Finance or Democratizing Money? *

Creating Money

In the case of a public currency (pound, euro, dollar), the power to create money rests with two agents: the state (or its equivalent) and the banks. States have the sovereign power of a formal monopoly over the creation of the public currency. This power may reside with the treasury or a central bank. Alternatively, states can nominate an external public agency as in the case of Eurozone countries or adopt another state’s currency such as the dollar. Despite their formal power to create money, contemporary capitalist states are constrained by the self-imposed political injunction that states should not “print money.” In theory, this leaves only one source of new money, the market via the banks. Particularly under neoliberal ideology, the market sector is seen as creating wealth through “making” money. Central to the making of money is bank lending, which embodies another myth: that banks are merely intermediaries between savers and borrowers.

However, it is increasingly recognized, even by banking authorities, that banks create new money in the course of making loans; they are not merely recycling existing money. ⁵ In doing so banks are effectively privatizing or, in Hockett’s terms, franchising the sovereign power to create money. The resulting balance of power over money between state and bank/market goes to the heart of modern politics. If the state retains the sovereign power to create the public currency, it has, for good or ill, control of the direction of economic priorities. If money is seen as emanating from the market, state spending is limited to what the market considers it can “afford.” The direction of the economy also then rests, for good or ill, with market priorities.

The market’s monetary dominance in modern economies was evident in the 2007–8 crisis. The financial crisis of the collapse of lending was supercharged by the threat of a collapse of the money supply. The fear of governments was not the failure of private investment but that the ATM machines would run dry, and that was because there is relatively little tangible currency (notes and coin) in circulation. In Britain it is only 3 percent of the total, the remaining 97 percent being composed of bank accounts. Bank lending had become a major source of new money. ⁶ Galbraith noted as long ago as 1975 that “the process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent.” ⁷ Even states, the traditional authority governing money, had become major borrowers.

The difference between money creation by the state and money creation by the banks is that banks only create new money by lending whereas states can create new money by spending directly into the economy. The democratization of lending, for example through public or social banks, is important. But there are also areas where lending would be inappropriate, including social and environmental needs that at present lie outside the public and private monetary framework. Unlike finance for investment, such allocations of money would not generate a monetary return (although there may be many social or environmental benefits). These would not be suitable areas for a money system based on debt, even with democratic input.

From an ecofeminist perspective I would argue that what is needed is a money system that puts ecological sustainability and social provisioning needs first, not last. This shift will require, among other critical factors, substantial changes in how money is created and used and by whom. To achieve those aims we must challenge conventional thinking about money, particularly the myth-laden neoliberal approach to public money that I have described as “handbag economics.”

A Critique of Handbag Economics

In capitalist economies the balance of power over money has tipped decisively toward the market. Particularly under neoliberalism, the state is derided as wasting the (private) taxpayer’s money. Similarly, the sovereign power to create money for direct use, condemned as “printing money,” is seen as having inevitable inflationary consequences. The public economy is feminized by a handbag economics that sees the public sector as equivalent to a household that has to live within its means. As markets are deemed to be the source of all wealth, public spending is seen as a drain on market funds. This zero-sum view assumes that more public spending must mean less money in the market sector.

Rulers and states have certainly misused and abused the power to create money. However, the focus of the neoliberal onslaught has not been corrupt rulers but the public spending of welfare states. It is an attack on the ability of people to provide services for one another without a market imperative. This capture and hobbling of the public economy has been enabled by economic myths that promote private and market structures over public structures in the evolution of money.

The core myth is that the origin of money lies in the market. The critical moment of money’s birth is seen as the invention of coinage, which enabled market exchange to emerge from nonmoney barter. This myth is entirely false. There is no historical evidence of widespread barter-based economies, and coinage has a much more complex social and political history. Far from being a product of markets, coinage was created and controlled by rulers following its invention around 600 BCE, two thousand years before the emergence of market economies.

For much of its history, rather than enabling markets, coinage played a central role in the growth of empires, particularly of Greece and Rome. Individual coinages were associated with centers of power because control over the creation and circulation of money confers seigniorage, the benefits of the use of that money. Central to the use of money by rulers is the sovereign power to tax. Rather than rely on the traditional receipt of tribute in kind, a ruler could pay for goods and services with money that could later be reclaimed through taxation. As I will explain below, this link between publicly issued money and taxation still exists today.

Another damaging aspect of the myth of the market origin of money is the assumption that the original and ideal form of money was created through the adoption of a valued commodity: precious metal. Seeing money as made of something scarce and valuable (gold, silver) suggests that money should be desirable in itself, an embodiment of intrinsic value. It also leads to the assumption that money is necessarily scarce.

Even if the claim that money was originally made of precious metal were true, it is certainly not the case today. Modern money clearly demonstrates that it is valueless in itself (base metal, paper, electronic information). It exists by fiat, that is, by authority alone. There is no “natural” shortage of any of these media. The existence of fiat money enables us to see that the idea that money is essentially precious and in short supply is purely ideological. What fueled the market and the growth of capitalism was not the invention of gold coin but the proliferation of bank-issued debt. The problem with trying to connect an ideological conception of money as gold to the emerging fiat money was illustrated by the prolonged attempt to rein in the banking sector by restricting the issue of banknotes to levels of state reserves of precious metal. The aim to maintain what became known as the gold standard was not finally abandoned until the 1970s.

The Emergence of Bank-Created Money

Precious metal money could never have fueled the development of markets and capitalism because of its natural limits. If capitalism was to monetize and marketize increasing sectors of society, it needed a flexible and expanding medium. This it found in commercial paper, a private network of credit-debt promises that linked investors, producers, traders, and consumers. These promises were periodically “cleared” by setting total commitments against one another. When that process was completed, relatively little formal currency was needed to settle any outstanding debts.

A crucial step in the history of modern banking and modern money was taken when what had previously been privately issued commercial money became the public currency. Formed in 1694 to make private loans to the state, the Bank of England issued those loans as private Bank of England credit notes, backed by a “promise to pay” taken to be in precious metal. Eventually the note itself became the designated public currency: the pound note. Thus the Bank of England, private until 1946, began its balancing act like all central banks, as banker/money creator to the state and banker to the banks. Today, although central banks are widely recognized as lenders of last resort for the banks, they are not generally seen as money creators of last resort. The implications of the way modern central banks combine their role as the backstop for bank-generated money with the sovereign power to create and control money are hardly recognized, let alone addressed.

In the same way that public currency banknotes evolved from privately issued patterns of credit and debt, bank accounts have gradually been acknowledged as creating new public currency. Bank accounts were originally seen as merely credit balances, not “real” money, but that position no longer holds in a digital age. As increasingly recognized by major institutions such as the US Federal Reserve, the Bank of England, and the International Monetary Fund, and long argued by heterodox monetary theorists, banks do not merely act as a link between savers and borrowers; they create money. When banks make loans they do not debit existing accounts; they create new deposits of previously nonexistent money that the borrowers undertake to repay (as shown in Fig. 1).

OPEN IN VIEWER

Figure 1.

The Banking Circuit of Money.

Within the banking circuit, money is created, lent, and returned. What is important about this circuit is that there is a larger arrow for repayment, as the need to repay with interest means that more money must be returned than is lent.

Bank-Created Money Is Crisis Ridden

A public money supply that relies on debt is socially, ecologically, economically, and politically unsustainable. It is socially unsustainable because creating money as debt exacerbates inequality. Money flows to those most able to pay back loans with interest. Favoring the more creditworthy borrower and the most profitable use of money does not necessarily fund the services and products people need. Bank lending is socially exclusionary because it locks out the poor, forcing them to go to more exploitative moneylenders.

Creating money through debt is ecologically unsustainable because it drives economic expansion. If loans are to be repaid with interest, there must be growth of some form. Debt-based money does not necessarily cause ecological damage (it could just bid up the price of existing assets), but there is certainly no basis for degrowth or even a steady-state economy.

Bank-created money is economically unsustainable because basing the money supply on debt will eventually lead to crisis when governments, businesses, and citizens cannot or simply will not take on any more debt. This tendency to crisis leads to the political unsustainability of privatizing the public money supply as bank lending. Whereas the decision about who gets the loans is considered a private matter, the liability for the money created by those loans is very much a public matter. That is because the new bank-created money is designated in the public currency. HSBC bank does not create new HSBC money; it creates new pounds or dollars when it makes loans and thus adds to the supply of public currency in circulation. That the new money becomes a public liability became clear in the financial crisis of 2007–8 when states had to guarantee bank deposits to maintain public confidence in the banking system.

For these social, ecological, economic, and political reasons, the bank money-creation circuit should be democratized and made publicly accountable, with its current mechanisms and privileges exposed. Bank lending must be seen as a public matter. The need is not just to democratize finance but to challenge the source and use of the money supply. Banks have become a major source of new money, and the problem is that it can emerge only as debt. The alternative is to reclaim the sovereign power to create money that can be circulated free of debt, that is, spent directly into circulation.

As described above, neoliberalism, which has influenced so much of contemporary thinking about money, is adamant that the public sector must not create (“print”) money. As a result, public expenditure must be limited to what the market can “afford.” Money, in this view, is a limited resource that the market ensures will be used efficiently. The 2007–8 financial crisis has fundamentally undermined this neoliberal dogma. The banking sector mismanaged its role as a source of money so badly that states had to step in and provide unlimited monetary backing to rescue it. The public monetary economy was revealed as the ultimate backstop for the banks. It became clear that the banks were creating a public resource, the public currency, which has to be underwritten by the state. Bank lending could no longer be seen as a private, commercial activity.

Following the crisis, the very evident public creation of money revealed the inherently political nature of money. When other fiscal and monetary solutions appeared unable to refloat damaged economies, central banks resorted to the explicit creation of money out of thin air. Under what was described rather obscurely as “quantitative easing,” vast amounts of newly created electronic money were used to rescue financial institutions. There was no question of the new money’s being borrowed from anywhere. It was a clear demonstration of the sovereign power to create money. Radical voices quickly asked why if the central bank could create money out of thin air to rescue the banks they could not create new money to rescue the people.

Unfortunately the dominance of neoliberal ideology was so strong that center-left politicians could not be seen to advocate printing money for public purposes. Nor was there a demand that where the new publicly created money was being used to buy up government debt held by financial institutions, that debt should be canceled. In Britain, where more than £400 billion was spent mostly on buying up government debt, that debt stayed on the books. A Tory-led coalition and subsequent Tory government used the high level of public debt as an excuse for a harsh program of austerity. To escape such reactionary politics, a radical alternative theory of money is needed.

Rethinking Money

Money can be seen as the agent of the overconsumption and exploitation of people and the planet, but it is difficult to envision how goods and services could be produced and circulated without a money-like mechanism. It is how money is created and circulated in modern market economies, not money itself, that is the source of the imbalance in our relationship with one another and nature. The primary aim of the capitalist market economy is not the provision of essential goods and services for the people but the investment of money, labor, and resources in activities that channel more money (profit) to the owners of capital. The result is a two-step economy: people have to work to secure an income in order to pay for the basic goods and services they need to survive. And because work is necessary for survival, and the market determines its purpose and availability, people can end up in jobs that are harmful to themselves, others, and the environment.

The existence of money does not entail the existence of a market. Some form of money has existed in most, if not all, human societies, including premarket and prestate communities. The money-thing, whatever form it takes, simply provides a recognized unit of measurement that can compare relative value and, in most cases, also transfer that value. The value can relate to money prices in the market, but it can also measure the size of a gift, the level of a fine for misdemeanor, or an assessment of need. Equating money with coinage, as is commonly done, confuses form with function. It implies that money embodies value when it simply represents value. The money-thing can take the form of something with use value (cattle, grain), something with social value (a special stone, shells), a medium that has little or no value (paper, wood, base metal), or even something with no physical form (bank transfers, verbal promises). The unit of value may be either tangible (sheep, beads) or intangible (pound, dollar, euro).

Money, in other words, is a social and political construct. Using money does not intrinsically encourage human exploitation or ecological destruction. It is capitalist ideology that puts monetary gain above social and ecological concerns, and it is the private, bank-issued money system that leaves us with a pernicious cycle of debt and growth. Money could encourage socially and ecologically sustainable production and consumption, but only if it ceased to be a creature of the market and was reclaimed as a social and public representation of value. A focus on capitalist markets also ignores many other important sources of value: unpaid domestic labor, community, conviviality, and ecological resilience. There is an obvious desire in some quarters simply to protect these areas from commodification, but doing that alone would leave the rest of the system intact.

What is needed is an approach to money that embodies a social and public role. Rather than prioritize wealth creation as the accumulation of money and assets, the aim would be to create “wellth,” that is, well-being for all. This approach would see money being created and circulated in the social and public economy through the exercise of sovereign power and seigniorage (benefit of first use of that money). Public money would be spent to achieve social purposes before flowing into the market sector, against the converse view that money is created and circulated in the market sector before being taxed out into the public sector. The case for seeing money as a public resource is not that states should create money; it is that they do. It has already been accepted by leading monetary authorities that banks create the public money supply when they lend. The equivalent case can be made for the public sector: that it creates money when it spends. What is needed is to recognize that the money supply is created through a public money circuit as well as a bank lending circuit.

The Public Circuit of Money

As shown in Figure 2, money flows out from the state and flows back in through taxation and other payments. The dynamic of the circuit is conventionally seen as state income driving state expenditure. It is also assumed that the ultimate source of state income is the market sector. I would argue both assumptions are incorrect.

OPEN IN VIEWER

Figure 2.

The Public Circuit of Money.

States do not tax then spend; they spend first and tax later. The larger arrow in Figure 2 representing public expenditure also indicates that the state may circulate more money than it reclaims. Unlike in the bank-lending circuit in which the bank always wants more money back than is lent, in the public circuit the money reclaimed through taxation can be less than the amount spent. This is because the public sector can exercise the sovereign power to create money free of debt. Publicly generated money can also be directly spent into the public or private economy.

The failure to recognize the existence of publicly created money reflects assumptions about the dynamics of the public money circuit. If it is assumed that taxation drives public spending, the money-creating effect of state spending will be ignored. However, the evidence that public expenditure comes first is quite straightforward. States do not have a piggy bank full of collected taxes when they spend. Budgets are allocated on the expectation that the money spent will be returned as taxes in the same way as banks assume their loans will be returned. If states did have piggy banks there would never be a deficit: they could only spend what they had in the pot.

The logic of handbag economics would also imply that as the money to fund public spending comes from the market “wealth-creating” sector, that that is the only sector that is taxed. However, the market is not the only source of state income. Public sector employees and organizations also pay their taxes, arguably more reliably than private sector employees. Whereas it could be argued that taxes raised from the market sector draw on privately created money and therefore can be seen as prior to state spending, the same cannot be true for taxation of actors in the public sector. For this sector, public funding must come first; otherwise individuals and organizations would have no money with which to pay their taxes.

Governments expand the money supply when they spend in the same way that banks expand the money supply when they lend. By the same token, repayment of bank loans and payment of taxes reduce the money supply. The overall impact and balance between public expenditure and public income becomes clear only after the expenditures have occurred. The political choice at that point is what to do with any “deficit,” that is, a surplus of public expenditure over income. If there are no inflationary pressures, the extra money created by state expenditures could be left to flow around the economy. In times of recession this would be a sensible strategy.

Instead, under the ideology of handbag economics, it is demanded that public expenditure must be balanced by public income. Any deficit must be covered by government borrowing. This is a strange form of borrowing, as it does not raise money to spend. The existence of deficit/surplus expenditure means that the money has already been spent. The borrowed money cannot be used for further public expenditure. What the loan to the government does is return to the public economy money equal to the extra money the government has spent. In return, the lender has a financial asset, a state promise to repay the loan with interest.

Handbag economics treats government deficit as if it were an overdraft at the bank. However, public sector borrowing is not an overdraft. When a private individual or company overdraws at the bank, they are spending the bank’s money. States when they spend extra money are not spending someone else’s money. The sovereign power to create money means that no other institution is liable for state spending. There is no need for the state to borrow from the private sector to cover its surplus spending. As the money has already been spent, borrowing is merely a way to recover that money. Progressive taxation is another way the same end could be achieved. However, the demand that states should borrow to “balance the books” means that state deficits become compounded into a national debt of the public sector to the owners of money as capital.

The “balance” in question is not between tax and spending within the public circuit, as claimed by handbag economics, but between the public circuit and the market sector to avoid inflationary pressure. It a case not of balancing public expenditure with tax income but of adjusting tax income to control how much publicly spent money flows out into the market. That does not mean that states can create unlimited amounts of money any more than banks can create unlimited amounts of debt. Both are constrained by the level of real labor and material conditions. However, the ability of states to create money is an important resource for the public economy.

Money as a Public Resource

Identifying the two circuits of money, bank and state, challenges the existing distinction between fiscal and monetary activity. The conventional view is that monetary activities govern the money supply and should be independent of public policy. Fiscal activities are concerned with tax and spending of money already in circulation. However, I argue that both bank lending and public spending are creating and allocating a public resource: money. Rather than the banking system’s being the support mechanism for public spending, the state is the backstop for the banks, as the 2007–8 crisis showed. Privately created money became a public liability. If it is to be a public liability, money should be reclaimed as a public resource. Control of the money supply and, more generally, the monetary system confers a tremendous amount of power. In the absence of recognition that the public circuit of money exists, monetary power over the public economy has been left with the privatized banking sector.

The ideology of market supremacy is used to undermine the principles of the welfare state and its concern for public well-being. Instead of a burden on the (private) taxpayer, public spending should be seen as the people’s creating and allocating money to provide goods and services for themselves—that is, a public economy based on money as a public resource. Money can represent social and public value, not just commercial and private value. And rather than only a mechanism for profit-driven exchange, money can be a tool for creating “wellth”—the provision of goods and services people actually use and guaranteeing everyone a right to livelihood.

However, although the power to create the public resource that is money cannot be left to the privatized banking sector, can we trust the state with it? Neoliberals warn of the dangers of state intervention in a market-based system. Proponents of social and local economies likewise harbor suspicions of the state, particularly its distant and opaque bureaucratic apparatuses. Many states have proved to be inefficient, corrupt, and autocratic. However, without an expanded role for the state, many people will continue to fall through the gaps in the market and voluntary sectors. What is needed is a public money system that is robustly democratic. We cannot assume that public authorities will use money wisely unless they are subject to democratically determined mandates and effective public scrutiny. Exclusive control of the money supply must not simply be put in the hands of the government in power or the state apparatus and left unchecked. Public management of the creation and allocation of money must be transparent and accountable.

Democratizing Money

The democratization of money would require the development of public platforms to open up a debate about the public and private creation and circulation of money. The democratic process must apply to both the banking and public sector. Banks’ money creation through lending is of public concern because the money created is a public liability. As pointed out, a debt-based money supply also leads to social, ecological, economic, and political problems.

Should banks be prevented from lending money at all? Should they lend money only from existing accounts? There is certainly a case for curtailing bank lending. In earlier eras, particularly following the Great Depression, banks were regulated and restricted. The structure of banking is also important. Should banking be seen as a utility under social or public ownership? Should banks be able to make grants as well as loans? Accountability and transparency are also vital. At a minimum it necessary to know to whom the banks are lending and for what purpose. Activities could be curtailed, such as lending for speculation rather than providing working capital for the provision of goods and services.

Shifting economic priorities from a search for profits to the provisioning of social needs would put the main focus of the economy on the social and public sectors rather than the market. That focus emphasizes money creation through public budgeting rather than bank lending. Public budgeting could include the provision of a basic income—a monetary allocation to each individual as matter of right, supplemented by additional payment based on need—and collective expenditures on public services and infrastructure. Public expenditure could be through direct spending of money created free of debt. The limitation on such spending would not be what the market deems it can afford but actual resource and labor capacity. There is no reason to assume that the private market would make better use of these resources than the public or social economy.

Exercising the public’s right to create, spend, and oversee the public resource of money requires a wide range of democratic decision making and entails a mixture of strategic and participatory processes.

Managing Money

Any proposal for democratizing money will be met by the claim that public money creation would be inflationary. This claim ignores the fact that bank-created money is equally inflationary, as the cycle of debt-led booms and slumps shows. All money systems need careful managing. Because the implementation of a democratic money system would almost certainly result in a massive increase in public expenditure, a phase-in would be prudent. Even with a phase-in, the additional money flowing into the market sector could increase the threat of inflation in the short term. Reconceptualizing the role of taxation offers a way to obviate the problem.

As I have said earlier, the need to “balance” the public budget should be in relation not to the income from taxation but to the balance between the level of public spending and the amount of money any continuing market sector can absorb. The role of taxation in this model is not fiscal; it is a monetary instrument. Taxation does not “raise” the money for public spending; it retrieves money already spent, as would any fees and charges for public services. Taxation follows rather than precedes public expenditure, retrieving publicly created money from circulation in amounts sufficient to keep inflation in the market sector in check. If the public sector is much larger than the private sector, taxes might have to be quite high. Far from the claim that high levels of public expenditure are a drain on the (private) “taxpayer” and the money in “his” pocket, high levels of public expenditure put the money into her pocket in the first place.

While levels of budgets and basic incomes can be determined through an open, democratic process, assessing the impact of public expenditure on the commercial sector would require technical expertise. This situation is no different from what we see today: experts in monetary policy try to anticipate and then propose actions to address inflationary pressure, usually by adjusting key interest rates. As is the case today, estimating the impact of public expenditures would be a hit-or-miss process, but a necessary one nonetheless. A committee of experts would make an assessment of the amount of public money the commercial sector could absorb without too great a rate of inflation and, correspondingly, the overall level of taxation required.

However, the expert inflation assessors would have no role in determining how much the total level of public expenditure would be or how the required taxes would be applied. That is where the public would come in, debating questions of what amount to spend and whom, what, and how to tax.

Reclaiming Money as a Sovereign Power

All modern currencies are “fiat money,” created out of nothing, their value sustained by public trust and state authority. So why are states and their citizens shackled in debt? Why can the people not simply create the money they need free of debt? Why can that money not be circulated in a not-for-profit social or public sector? Why base the principles that govern our economic system on the butcher, the baker, the candlestick maker, and the hidden hand of the market rather than the doctor, the teacher, the care worker, the artist, and the not-so-hidden hand of a solidarity economy? As these questions make clear, freeing ourselves of misconceptions about money opens the door to new possibilities for driving a transition to a just and sustainable economy. ⁸

A democratic public money system would enable a one-step economy in which individuals no longer have to undertake socially or ecologically harmful work in order to secure an income. Participation in the market would no longer be essential, as money would reflect an entitlement to livelihood, not just the market value assigned to work. Paid work would continue, but it would focus on democratically determined priorities. Caring for each other and for the planet and building a just society, not financial speculation and resource extraction, would be recognized as the real sources of wealth. New metrics would track and guide progress, with a shift from Gross Domestic Product to a notion of Gross Domestic Provisioning that measures overall wellth, that is, well-being.

The term “provisioning” is broader than the concept “economy.” It would include currently unpaid work, the resilience of the natural world, and the vibrancy of conviviality. Priorities for the allocation of money would put provisioning over profit and be attuned to the interplay between meeting human needs and protecting the environment. Work that is currently unpaid or underpaid could be recognized, such as care for the elderly. Although today this responsibility tends to fall on the shoulders of women as unpaid or underpaid work, it could become a major source of meaningful work and societal wealth.

Exercising the sovereign power to create and circulate money to provide services and a livelihood would mean much less need for the private accumulation of wealth, which, in turn, would enable a shift toward social equity through taxation of existing wealth. Since there would be less need for investment vehicles such as private pensions, public money could be created and used to purchase natural resources and utilities currently in private hands, bringing them back under public control.

Reorganizing the economy around publicly created money is not utopian. It simply requires recognizing and reorienting what exists, and what underpins our money system today. In the wake of the financial crisis of 2007–8, the sovereign power to create public money was made clear when governments used it to rescue the banks and other large businesses, such as auto manufacturers and insurance companies. Let it now be used to provision the people.