Who controls our money supply?

Both the Eds, Miliband and Balls, have said that a future Labour government will have ‘less money to spend’ and as a consequence will have to continue the Coalition’s austerity programme. But what does it mean to say there is less money available? Who controls our money supply? Politicians like ‘Miliballs’ do not ask these questions and like their Coalition counterparts, refuse to be open with voters on how our money supply is created.

There are two types of money in the UK system: M4 or broad money which is everything  held electronically in bank accounts. Banks create broad money when they extend credit, and destroy it when the debt is repaid. M0 is narrow money and is (1) the reserves which banks must keep at the Bank of England, which are used to settle inter-bank transactions; and (2) the notes and coins that we all carry as cash.  M0 is only a fraction of M4, yet it is this narrow or ‘high powered’ money created by the government that makes the system work. Broad money is a series of uncollateralised banking IOUs. There is no reason why the money supply should not consist entirely of state-issued money.

What happens when a government spends? The conventional view is that public spending is financed by tax revenue and by borrowing from private financial institutions such as banks, pension funds and insurance companies. Governments have no money of their own, according to Margaret Thatcher in 1983, a view shared by Miliballs. But all money in circulation carries value only because it is accepted by the State in settlement of taxes and for that reason is accepted in settlement of private debts. When the state borrows, it is effectively borrowing its own IOUs. And since virtually all money originates as credit created by banks, there is nothing here that the government cannot do in the public interest and do more cheaply and efficiently. Which is precisely what the Bank of England has done with QE: created £375bn of new bank reserves which has not gone into circulation but sat on bank balance sheets to support asset price speculation. So when politicians talk about having less money to spend, they are being disingenuous. It would be more honest to tell voters that they have put voluntary constraints on freedom to act in the public interest, restraints which only benefit the financial elites.

This insistence that the availability of money limits public action stands reality on its head. Money is the way that resources are mobilised. Libraries are closed for lack of money when all the resources, buildings, books, staff and the demand are there and all that is needed is the money. Keynes, writing in 1928, described leaving resources idle for lack of money as imbecile. That people must be kept unemployed and services cut because they are unaffordable for lack of money makes no sense. Only by mobilising resources fully can anything be afforded. Governments outside the Euro zone with sovereign control of their currency can create whatever is needed to finance activity. There is no limit to money creation other than the capacity to produce goods and services which if exceeded would generate inflation. The appropriate safeguards to stop the power being abused would have to be implemented, of course. (In deciding how much new money should be injected into the economy only the needs of the economy as a whole would be considered and not the desires of the government or politicians.) But it is imbecilic to allow the money supply to contract and for economic activity to fall well below capacity.  Allowing a private cartel to determine our public money supply is like, as Warren Mosler put it, tying your shoelaces together and pretending you can’t walk, which makes our leaders appear both foolish and dishonest.