"What is Money?" on BBC Radio 4

At 20:30 on Monday 26 March the BBC broadcast on Radio 4 a half-hour programme intriguingly entitled What Is Money?

As I write it is still available on BBC iplayer:

http://www.bbc.co.uk/iplayer/episode/b01dtlzn/Analysis_What_Is_Money/

The broadcaster Frances Stonor Saunders posed this fundamental question and invited comments from various people including writers John Lanchester, author of Whoops!: why everyone owes everyone and no one can pay, and Philip Coggan, author of Paper Promises: Money, Debt and the New World Order. Also consulted were Paul Fisher, an executive director of the Bank of England (BoE) and the person in charge of the Quantitative Easing (QE) programme, and Chris Salmon, the chief cashier at the BoE.

Ms Saunders ran through the basics of money both as a store of value and as a universal medium of exchange, using a new £50 note as her focus. Paul Fisher contributed a potted history of BoE banknotes and the function and meaning of his signature on the current issues. Mutual user confidence and trust, together with the stamp of authority from the sovereign ruler, which these days is the state, were emphasised as the foundations of modern fiat money. Professor Miri Ruben of Queen Mary College, University of London, gave an historical perspective on the nature and the necessity of this officially sanctioned network of trust, describing the development of bills of exchange and credit from the thirteenth century. Philip Coggan drew an amusing analogy between our required collective faith in money and a theatre audience at the end of Peter Pan being asked to clap together if they believe in fairies in order to save Tinkerbell.

The recent credit explosion and subsequent crisis were introduced and described by John Lanchester together with their negative effects upon our faith in banks, government and money. Adam Ferguson, author of When Money Dies: The Nightmare of the Weimar Collapse,  explained how badly things can go wrong and the devastating social consequences of a total loss of confidence in money.

The  programme then moved onto QE, a major part of the response to the credit crunch. Paul Fisher seemed embarrassed to inform us that under QE the BoE just created new money from nothing.  Ms Saunders stated blithely that the BoE had a monopoly on creating new money (!) and expressed the official hope that the new QE money, received by the sellers of gilts such as pension funds, would then circulate and unblock the economy. Dylan Grice from Societe Generale criticised QE as being at odds with the supposed political independence of the BoE.

Dissappointingly, Ms Saunders then stated that it was very hard to fathom what the BoE does and Dylan Grice agreed, going so far as to suggest that even the BoE does not fully understand what the BoE does.  John Lanchester lamely proposed that elves making money by magic was a more straightforward explanation and that it made just as much sense as the detailed official account of QE. This is weak journalism bordering on deliberate obfuscation  – have they not read the clear explanation of QE in the BoE Quarterly Bulletin Vol 49, pp90-100? There is no excuse for treating the listener as too dumb to understand in this evasive way.

Some good discussion on the maintenance of confidence in a fiat currency followed and Ms Saunders entertained the idea of swapping her £50 note for some gold. Gordon Kerr of Cobden Centre espoused the virtue of gold as a store of value and predicted that a return to the gold standard was now “inevitable.”

The cultural morphing in recent times of undesirable ‘debt’ into socially acceptable ‘credit’ was noted by John Lanchester, though without reference to the accompanying and causally connected change in the composition of our medium of exchange, which is now almost exclusively debt-based bank credit. Philip Coggan observed perceptively that we have made far more promises than ever we can honour and that inescapably we will face some difficult decisions about which of these to break.

Unfortunately, though as we might have expected, no attempt was made to explain the crucial debt-based nature of the overwhelming bulk of our current medium of exchange – the electronic money used by each of us every day. The topic under discussion was effectively restricted to central bank money, and mostly to the paper variety at that.

The key distinction, at the heart of our two-tier UK money system, between electronic central bank money, the medium of settlement between banks, and electronic commercial bank credit money, the principal medium of exchange upon which the economy runs, was ignored.

So the programme failed to discuss its title question What is Money?  in any full sense or depth.

The erroneous impression was left that it is central bank money that is our medium of exchange and furthermore that the subject is too complicated and difficult for Joe Public to understand or to question.

There was no wider discussion on alternative money and banking systems, no acknowledgement (other than Gordon Kerr’s reference to the gold standard) that our present system is but one among many possibilities, indeed one which has prompted Mervyn King to comment that  “of all the ways of organising banking, the worst is the one we have today”. Input from Positive Money was sorely needed, and the contributors would have been far better informed had they read Where Does Money Come From?