David Graeber, 2014-03-18:
[We] … continue 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 this week 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 know 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. 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 paper does
admit, if you read it carefully, 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.
If new money goes to people who use it to buy property rights in existing assets, the result is asset price inflation (
!?)* – a so-called bubble. So, in the current system, it really matters who gets the new money. See Richard Werner on “central bank guidance” (
!?)(
!g).
Given how things are right now, it’s clear that new money has to go to people who need it for living expenses.
*
What form can this new money take? It can be money issued by the government, accepted by all as legal tender because the government guarantees to accept it in payment of taxes. If it goes to people who do not use it to buy property rights in existing assets but use it for living expenses when there is capacity in the system to produce the goods and services they need, then this new money has no inflationary effect.
Oh, and it costs nothing to do this. For monetarily sovereign (
!?) governments, that is.
*a link – see
a note on notes and links
