Talk on money at the last group meeting
The question ‘what is money and where does it come from?’ is deceptively simple but fiendishly difficult to answer. The actual money in your wallet or purse is essentially worthless. The bits of paper are actually worthless and the coin will fetch only pennies as scrap metal. Yet we use it without really thinking what it is or how it is created. These questions are in fact extremely important because some of the assumptions we have had about how the system works are no longer true. We learned at school about the goldsmiths issuing paper notes in place of actual gold and that they were able to issue more and more notes on the assumption that not everyone would ask for their gold at the same time.
Banks went on to do essentially the same thing but we all thought that the system was controlled by the Bank of England and that the banks had some tangible assets to support their activities. Then the crash happened and we were shocked to discover that the fabulously well paid bankers did not know what the financial instruments they created were worth; that there was a merry-go-round of paper which turned out to be worthless when the music stopped; that bankers were corruptly fixing the Libor interbank rate for financial gain; that no one was in control at the Bank of England or anywhere else, and so on and so on. The system was broke. Then came austerity where the poorest in society paid the price. After the crash, banks were required to increase their reserve ratios.
At the last group meeting we were delighted to welcome Phil Tyler (pictured) from Southampton and who is a member of Positive Money which is a group working towards the principal of a money and banking system that works for society and not against it. Phil went through the modern process of how money is created and how the system works. It was the case he said that the BofE created it but since the ’70s the banks largely do this when they offer a loan.
Simply put, when a loan is offered the bank creates the money. A first sight this is astonishing because the system is inherently unstable. It depends on growth and the ability of the borrowers to meet their interest obligations. Once that stops happening, there are big problems – hence the crash. The crash happened Phil pointed out because trust between lenders to meet their mutual obligations broke down.
The banks decide on what type of loans to make and unsurprisingly, nearly half of all loans are for property, a peculiarly British obsession but which is essentially unproductive. While the country worries about things like low-productivity and weak investment, money pours into bricks and mortar. Recent reports suggest that the uncertainties around Brexit are inhibiting bank lending.
He then went on to discuss the role of economics and economists which was the subject of an earlier post on this site concerning the book Econocracy. Essentially, a lot of economics teaching is questionable and based on doubtful and sometimes discredited theories. The Russell group of universities continue to teach these theories and supply the economists who work in the banks, city and media. They have become a training ground supplying a market not institutions questioning the fundamental theories. Thus there is a kind of club of individuals all trained in the same way of thinking.
What’s to be done?
The solution to this problem remains tantalisingly distant and wrapped up in other problems. Ideally, the supply of money and the creation of credit is too important to be left to the banks alone to decide. But politicians could not be trusted to do the job either and the BofE has shown itself to be less than equal to the task.
Another problem is trying to get the public to grasp the nature of the beast and to understand the risks the country runs. If the public were aware of the scale of risk and the extent of mismanagement they would demand something be done. So somehow, through greater transparency and explanation, the general public should ideally be encouraged to see what is being done in their name. Another element is neoliberalism and the beliefs it had of free markets, small government and the supremacy of private capital. Despite its manifest shortcomings – including the crash itself – it is still the main policy in town.
So a fascinating talk about an important subject and the group thanked Phil for coming over to Salisbury to give it.