It’s very reassuring that more people are slowly learning how our monetary system really works: if you want to fix something, you need to know a bit about it. The indefatigable Ellen Brown has been hugely helpful in this regard with her regular well-informed and easy-to-read articles that relentlessly confront the myths of capitalist monetary theory. Her early work Web of Debt is an authoritative account of something that everyone should know about and understand; and if everyone were to read just one book on the subject that should be it: if everyone clearly understood the lessons of Ellen’s work we could start to make some serious inroads into reforming our rotten and corrupt economic system.
Unfortunately economics is one of those subjects — like statistics — that induces instant drowsiness in most people. I say unfortunate because at this moment in our history economics is one of the most important subjects the 99% should know something about.
Ironically, the most important lesson about economics is incredibly easy to learn because unlike statistics, which almost by definition is pretty much wholly concerned with factual observations, economics is completely different in that, as the economist Steve Keen points out:
There is one striking fact about this whole literature [of economics], and that is that there is not one single empirical fact in it.1
In other words, most of the vast amount of information about economics in general and capitalist theory in particular is founded on hot air.
Economics is much more like a religion than a science because it comprises a belief system based not on hard evidence, but blind faith and dumb unquestioning obedience to some intellectually unsupportable dogma. Like religion, most followers of any particular economic system do so because that’s what they’ve been conditioned to do, not because they’ve formed their belief after wide-ranging study and hours of challenging debate and quiet thought and reflection. Anyone who does examine economics in that way could hardly arrive at a conclusion that differed much from Steve Keen’s view.
The bottom line is that just about any economic system works, even though those systems may be poles apart – such as socialism and capitalism, say; but the thing that separates them is not science, as the proponents of capitalism would certainly argue, but morality. In other words, the really important question is not which system is scientifically right (because as far as the science goes there’s little difference), but which system is morally right.
This is a vitally important distinction. The mighty armies of suited “experts” which make up the crusaders for capitalism use their smoke and mirrors brainwashing to convince the ill-informed masses “There Is No Alternative” based on their snake-oil science; whilst the hippyish humane proponents of socialism rely on almost irrefutable moral arguments to champion their cause. Morality should nearly always trump science – especially bogus sciences such as economics; but the brainwashing of society is so complete that not enough people understand that, and most can always be brought to heel by allowing a few carefully-chosen “experts” to dominate whatever carefully-chosen debate is allowed to be heard; and as far as economics is concerned the “science” of capitalism is made to appear more believable than the morality of socialism.
This is an old trick. Religion used to be used in a similar way (and in many places it still is). Powerful secular leaders work hand in glove with carefully selected priests to supply the justification for the barbaric excesses that serve priests and emperors equally well.
Prior to the European Enlightenment, priests were the experts of their day and religious theory was the internet search engine of the times. Any mystery about the known universe could be fully explained by referring to some trusted priest who would consult some “holy” book or sacred oracle. In a shamefully large part of the world, this situation still exists. The fact that nearly all holy books are based mostly on unprovable myths and outright lies was seldom a hindrance, because to make such a suggestion was, and in many places still is, punishable by death; so it’s not too surprising that challenges to such religious authorities were (and often are) fairly rare.
This same mindset is very much alive and well today and perfectly exemplified in the pseudo-science of economics. We’re brainwashed into thinking that the most perfect economic theory in the world is capitalism. It isn’t. There is no formal name for the economic theory that actually rules the world, but gangsterism comes pretty close to properly describing it because it’s exactly the same economic theory that common gangsters have always used: enrich the brutal few by exploiting the many weak; and the more brutal you are, the more weak you can exploit and the richer you become. This is the real economic theory of today’s world; and it’s not capitalism, it’s gangsterism. Exactly the same model has been used in so-called communist countries, where party elites have enriched themselves at the expense of the suffering masses. Gangsterism has as little to do with communism as it has with capitalism. Both communism and capitalism are perfectly viable economic theories, but they require proper and effective regulation and policing if they are to work properly, and keep the gangsters contained.
The appearance on the global stage of Margaret Thatcher and Ronald Regan nearly four decades ago marked a major watershed moment in global affairs, because the flimsy but moderately effective regulatory controls of global economics that had been in effect since Bretton Woods and earlier were about to be destroyed. The demonic double act had the same effect on the world economy as repealing criminal laws and removing the police and law courts from the streets would have. The gangsters rubbed their hands with joy and got to work.
Money Matters
The founder of the Rothschild banking dynasty is widely credited with making the point that the real controller of a nation is not the person who makes the laws but the person who controls money supply. For most of modern history the money used in an economy has been made from relatively scarce metals, such as gold and silver. The important point about these metals has nothing to do with the metals themselves, but their rarity. The fact they were scarce is what made them valuable. But it’s not just the scarcity that made gold and silver valuable, it was the fact that the imperial owners of the sources of the gold and silver could also use their military might to control trade. The combination of being able to tightly control the source of a rare metal and decree that particular metal to be the only legitimate currency that could be used for trading, together with having a mighty army that could control which country traded with which was, and is, the key to total economic control.
The invention of paper money a couple of hundred years ago was a major turning point in the history of money, because something that was relatively cheap and easily obtainable — paper — could be used as currency. However, the same key component that precious metals had — scarcity — could still be achieved. Not just any paper could be used for trading purposes. The paper had to be produced by a trusted and recognised person who promised to redeem the paper for a quantity of gold or silver to whoever presented it to him. That “promise to pay” is what made the paper valuable. This was the birth of fiat currency – currency based entirely on faith in the belief that a piece of paper could be exchanged at any time for a quantity of gold or silver.
The next major step in the history of money was the production of a currency that could be used as legal tender without any tie whatsoever to precious metals. Abraham Lincoln was the first well-known leader to do this when he authorised the creation of “greenbacks” to help finance the American Civil War. Greenbacks were simple pieces of paper supported by nothing more than the promise of the government to recognise them as legitimate currency. This proved to be a highly effective method for a government to finance its projects without having to borrow money from private banks at interest, and Lincoln was keen to adopt it permanently – but he was murdered before he could pass the necessary legislation. His plans for state-produced fiat currency were quietly shelved and the private banking system resumed its stranglehold on the US money supply.
For the last half century or more, most global trade has been facilitated by fiat currency, but today the situation has evolved to the point where not even paper is necessary. Most money is created, and remains, in cyberspace; it begins life in a computer terminal in one of the many private banks that wholly control our money supply when someone receives a loan from that bank. The loan is brand new money, in the form of a number appearing in the bank account of the borrower. From the moment it is created to the moment it is destroyed (when the loan is repaid) most of that money will never be anything other than numbers stored in computer memories.
This is not necessarily a bad thing, as the system itself is perfectly workable; and providing it’s properly regulated and controlled it could be used for the rest of time.
The fact that cyberspace money has been used all around the world for the vast majority of business transactions for many years shows beyond doubt that the method itself is sound. The main problem with it, that manifested itself with the global meltdown of the banking system in 2008, was not due to the principle of cyberspace money, it was due to corrupt and criminal banks abusing the system together with the corrupt, criminal, stupid and morally bankrupt politicians who helped them do so. Given the human beings who were complicit in this mammoth crime it would have made absolutely no difference what type of money was being used; the same thing would have happened: they would have stolen it anyway.
Ever since 2008 a considerable number of economic “experts” have appeared wringing their hands about the “mistakes” that were made. No mistakes were made. The people who engineered and carried out the biggest theft in history were not idiots, they knew exactly what they were doing. Quite a sizeable number of more genuine experts (such as Ellen Brown and Steve Keen) have been doing their best to enlighten the 99% about how the game is really played. Some have proposed ways to put things right. But it’s not always obvious whose interests these experts are promoting. Max Keiser, for example, is clearly very well-informed about the criminality of the global banking system, and seems passionately opposed to it. I’ve heard Max on many occasions singing the praises of a return to a gold and/or silver-based monetary system; as well as many, many other occasions when he has suggested that various types of crypto-currencies are the solution to the woes of the global monetary system. But I don’t think I have ever heard him talk about how to reform the political system that would inevitably control whatever money system is in place. Gold/silver-based monetary systems have existed in the past – in fact, for many centuries – but they didn’t prevent or limit the damage of corrupt and criminal leaders; and the model always favours those who stockpile the most gold/silver or crypto-currency, at the expense of those who don’t have the stockpiles.
People such as Ellen Brown have identified (correctly in my view) that the most important component to have in place is a public banking system wholly operated by the state. However, even Ellen hasn’t stressed often enough that this would have to be conditional on the state being truly democratic, operated openly and properly accountable to the citizenry.
One New Theory
Modernising Money is a new book by Andrew Jackson and Ben Dyson. On the face of it, it appears to be a good piece of work in that it explains the existing monetary system pretty much as I’ve just done (but in far more detail, obviously), and suggests this system is fundamentally flawed, because the last third of the book comprises the authors’ proposal for a reformed model.
At the heart of the Jackson and Dyson model is a different way for creating new money. Our existing system uses a model where the vast amount of money in circulation is created by private banks. Jackson and Dyson say, correctly in my view, that this is wrong and that private banks should not have a monopoly on this power. They propose instead something called a Monetary Creation Committee (MCC).
They write:
The MCC must be politically independent and neutral, just as the Monetary Policy Committee (responsible for setting interest rates) is today. As well as being shielded from the influence of vote-seeking politicians, it is essential that the MCC is sheltered from conflicts of interest and lobbyists for the banking sector and other industries.
They then suggest the possibility that: “[A]ppointments to the MCC will automatically include the Governor and two Deputy Governors of the Bank of England, as is the case with the Monetary Policy Committee today.”2
Political independence and neutrality are fine-sounding ideals in some circumstances, but notoriously difficult to achieve. The BBC, for one example, suggests that it is politically independent and neutral, but anyone who understands anything about how the British media really works knows very well that the BBC has never been independent and neutral, which is just what its first Director General quietly assured the government it would be. Historian Michael Parenti makes the following point on this subject:
If there is no conscious intent to miseducate, it is because many historians who claim to be disciples of impartial scholarship have little sense of how they are wedded to ideological respectability and inhospitable to counterhegemonic views. This synchronicity between their individual beliefs and the dominant belief system is treated as “objectivity”. Departures from this ideological orthodoxy are themselves dismissed as ideological.3
Parenti was talking here about history teachers, but the same principle is true in many other areas – such as monetary theory, where it’s quite probable that the “neutrality” that Jackson and Dyson think might apply to the august members of the MCC would, in fact, be no more than synchronicity between their individual beliefs and the dominant capitalist belief system.
Jackson and Dyson say that it’s “essential that the MCC is sheltered from … lobbyists for the banking sector and other industries” – yet the controllers of the Bank of England would be part of the MCC. Do the writers seriously believe that the Bank of England is indifferent to lobbyists for the banking sector and other industries? Did they not know that the Bank is run by someone who worked for Goldman Sachs for much of his career? Do they not know that the all-powerful movers and shakers who run the western world do so through the infamous “revolving door” that links the corporate business world with the political and economic decision-making establishment?
As for the main purpose of the MCC the writers tell us: “As is the case today, the target of monetary policy will be the rate of inflation.”
I felt my heart sink a little more as I read those words. Do Messrs Jackson and Dyson not know that the rate of inflation is a carefully rigged number, that no two measurements of it are based on the same statistics and that the rate is therefore meaningless as it can never properly be compared to anything? Do they not understand that the main purpose of the official inflation rate is not to accurately measure price rises but to constrict the minimum wage, pensions and other welfare benefits – which are all pegged to the rigged number? Do they propose that the controllers of today’s inflation rate would be the same controllers in their model, therefore rendering little actual change in today’s critical condition of the nation’s money supply?
However, I was immediately cheered up very slightly when I read the next sentence: “However, in line with democratic principles, Parliament will have the ability to change the MCC’s mandate if it considers other targets, such as economic growth or employment to be more relevant.”2
This suggested to me that Jackson and Dyson are trying to propose a real improvement on what we have. But at the end of the very next paragraph they write:
“Under no circumstances would [the MCC] be aiming to create however much money the government needs to fulfil its election manifesto promises.”4
At this point I pretty much gave up with the Jackson and Dyson model. It really needs to go back to the drawing board. If the creators of the nation’s money supply can freely ignore the wishes of the nation’s elected representatives, you might as well not have any elected representatives: the nation would be openly controlled by a tiny group of unelected and effectively uncontrollable technocrats. How can you have a situation where Parliament has the ability to change the MCC’s mandate – perhaps in an effort to fulfill the manifesto promises made by the government to the voters who brought it to power – but which the MCC could then ignore by refusing the finance?
I’m sure Andrew Jackson and Ben Dyson tried to propose a good solution to the dire situation that exists in the world of global finance. I’m sure their hearts are in the right place. Their book may be a good effort to present a moderately academic approach to this subject. However, it misses one very important element: morality.
It’s a Question of Morality
If there’s one crucial lesson to learn about economics it’s this: it is NOT a science, it’s a belief system; and nestling at the heart of any belief system is morality. Trying to give economics the appearance of real science by dressing it up in quite meaningless mathematical equations is no more than cynical deceit, because as Steve Keen pointed out, “there is not one single empirical fact in it”. I’m sure if there was a mathematician who felt like doing so, she could design sets of equations and graphs for the Christian religion, say, or any other religion. The mere existence of mathematical paraphernalia does not necessarily equate to truth.
The morality of the existing so-called capitalist model of economics (if it could even be called morality) is akin to the law of the jungle – that only the strong have a right to life. As Andy Grove (of Intel) infamously said:
“The purpose of the new capitalism is to shoot the wounded.”5
Or as JM Keynes more eloquently put it:
“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”6
Economics is a belief system, NOT a science. But… the main reason the 99% are so blinded by economics is their carefully conditioned conviction that economics is a science. So when our great trusted leaders tell us “There is no alternative” to their “austerity” economics, and back it up with complicit economists with their pseudo-science, graphs and equations, together with their corporate media accomplices banging on daily about rigged interest rates, pointless stock exchange indicators and phoney inflation numbers, it’s not too surprising that the 99% – who almost never get the chance to hear any counter-argument – swallow their fodder like the good factory-farmed herd they are.
Capitalism should not be confronted by the claim that it doesn’t work, because it most certainly does work. The question should not be whether it works or not, but WHO does it work for? Capitalism obviously works – for the 1%. It’s worked very nicely – for the 1% – for thousands of years, so, of course, it works. But when we ask if it’s the best economic model for the interests of the 99%, together with the planet in general, a very different answer is inescapable, because a quick glance at the conditions of life for the vast majority of humanity, as well as the global ecological devastation it causes, quickly reveals that very obviously it isn’t.
Therefore the heart and soul of any economic theory needs to be its morality – not its pseudo-maths. Whose interests does it best serve? And if the answer to that question is anything other than the 99% and the planet in general, it’s an economic theory that must be discarded.
So although books like Modernising Money are no doubt written with good intentions, if they fail to provide an alternative to the morally bankrupt economic model we’re forced to endure they fail to be of much use.
The suggestion by Jackson and Dyson that money creation should be controlled by some elitist group of technocrats who are effectively beyond the control of our elected representatives is actually not much different to what we already have, which renders their model effectively useless.
The Bigger Picture
Another major factor that’s crucial to monetary theory, but which is completely ignored in Modernising Money, is the need for money to be usable for foreign trade. If the money your country produces isn’t recognised by any other country, it’s completely useless for buying things from other countries. Hence a key objective for any empire is to control internationally recognisable money.
Friends of empire may be allowed to use their own currency to trade with others (subject to the empire’s controls and kickbacks, obviously), whilst empire’s enemies’ home-grown money is declared illegitimate and rendered valueless.
Money produced by the empire becomes widely recognised and used as a trading medium, and is therefore an incredibly powerful tool of imperial control.
The power of this “reserve currency” is similar to the power of your local bank, but more so, obviously. When your local bank agrees to loan you money it doesn’t actually cost the bank anything more than administration fees, for it literally produces brand new money out of thin air by some clerk typing a number into a computer. In exchange the bank acquires legal ownership of the car you want to buy, or the house, or whatever – until the day you pay back every penny you borrow, plus interest. So in exchange for a few minutes work by some bank clerks a bank can obtain legal ownership of something of real and substantial material tradable value – like a car or a house or a business, plus the legal obligation of the debtor to repay the loan at a time of the bank’s choosing, plus interest.
Reserve currencies work in a similar way. When the empire which produces the reserve currency wants to buy something from another country it can simply order a clerk to type a number into a computer and obtain something of real tradable value in return – like oil, say, or wheat, or iron ore. Or if one country wants to trade with another country but needs reserve currency to do so, it can borrow it in pretty much the same way, and with similar strings attached, as the person who walks into her local bank asking for a loan.
This vitally important function of money — the ability to use it for foreign trade — isn’t mentioned at all in Jackson and Dyson’s book, and I think it should be; because no matter what monetary system a country tries to adopt it’s almost useless unless it conforms to the wishes and controls of the empire of the day. The failure of Modernising Money to cover this subject is important, because it assumes that any sovereign country can put right its monetary policy by itself, without permission from the empire, and that’s not how the real world works.
In an ideal world empires would not exist and no one country would be able to dictate to others how and with whom they may trade. But we don’t live in an ideal world. In our world empires do exist and they are utterly ruthless in controlling the trading activities of other countries. This fact has to be recognised in any discussion about monetary theory.
Bretton Woods Two
Towards the end of World War 2, when it was known what the outcome would be, the winners-in-waiting convened a meeting at Bretton Woods to discuss how the global economy would be managed in the new world order. The fact that the meeting was held in the US rather than England was a tacit recognition of the transfer of global imperial power from Britain to the US.
JM Keynes, who led the British negotiating team, tried quite valiantly to promote an international monetary system that could not be controlled by any one country. But he was too late. If his country had tried to do this when it had the chance, prior to WW1 say, it might have succeeded, but that was when the British Empire was still reaping the rich rewards of imperial plunder and it had no wish to do anything that might possibly reduce those rewards.
Bretton Woods could indeed have provided the opportunity for creating a just and equitable global economy – all the warrior nations were exhausted from six years of horrendous destruction; but the US was having none of it. It was the last man standing and it saw its chance to take over the mantle of empire together with the unimaginable riches for the privileged few; and the opportunity for real global economic justice passed by.
In recent years there has been talk of the need for a second Bretton Woods, recognising the need for another effort at creating a truly just and equitable global economic system. At some point in the future this must inevitably happen, and it must happen not because of “mistakes” in the existing global model (there were never any “mistakes” in it – it works just as intended) but because of its corrupt and rotten morality.
The US is possibly in the position that the UK was in a hundred years ago. It possibly has the opportunity, if it was so minded, to use its considerable power for real good — good, that is, for the 99% and the rest of the planet. It would be a considerable challenge — as the US has never done that sort of thing before — but it could possibly do it if it wanted to. Unfortunately, however, it’s unlikely to happen for exactly the same reasons that it never happened when Britain was ruling the world: the handful of people who profit so handsomely from the existing corrupt and rotten system would fight tooth and nail to keep things just as they are. But just for the sake of argument, let’s pretend that a US administration decided to do the right thing. What exactly could it do?
This essay is about money, so I won’t delve into tantalising areas such as creating world peace or starting to rescue the planet (which would also become possibilities); but what could be done about repairing the global financial system?
First and foremost, the single most important thing to get right is the morality of the new model: whose interests would it aim to serve? The answer is very simple. The existing model serves the 1%, and only the 1%; so the new model must serve the 99%, which would inevitably lead to other benefits such as world peace and the rescue of the planet as those things are obviously in the interests of the 99%.
At the heart of global monetary reform must be the creation of a new global reserve currency that is not controlled by any one country. This could be easy to do. The World Bank, IMF and WTO should simply be closed down as they would no longer be needed and they are all morally bankrupt and too discredited to be trusted to reform. A new global bank should be created, under the control of the UN General Assembly. Its core ethos should be that money is a human right, and that every country in the world should receive a basic annual allocation of the new global reserve currency according to the size and basic needs of its population.
The new global reserve would be fiat-based (it’s value deriving from its status as legitimate legal tender), and would have a demurrage rate built in so that the value of any annual allocation of currency decayed to zero over a fairly short time span – five or ten years say. This would encourage the money to be spent rather than saved (thus driving the economy), and would prevent too much currency accumulating and rendering it worthless.
The key purpose of the global reserve would be to meet the basic needs of society – not to pay for non-essentials. Non-essentials could be financed as they are now by the private banking system. So the global reserve would ensure that every human on the planet could have sufficient vegan food and water for a healthy lifestyle, safe and comfortable shelter, footwear and clothing, public transport, good medical care and education… and so on. The global reserve would not be intended to provide motor cars, yachts and gourmet meals. The private banking sector can pay for that, and the private banking sector, being a non-essential, would never be “bailed out” by the global reserve.
This is part of a model I call EnMo Economics (EnMo stands for Enough and More). It suggests the different but related roles and responsibilities of the state and private sector in the economy and, as far as this article is concerned, especially regarding public banking and private banking.
Public banking, controlled and administered by the state at national level, and the UN at international level, is intended to ensure that every human being has Enough. The private banking system, properly controlled by the state at national level and the UN at international level, would be free to finance More.
I see the new global economy as two parallel universes — different but capable of existing in relative harmony with each other. In the one universe, the vitally important function of Enough is managed at national and global level by public officials whose purpose is to see that every human being has Enough of everything they need for healthy, safe and happy lives, and managed in a such a sustainable way that the planet would easily maintain a supply of Enough for as far into the future as we can see; and managed without any further destruction of wilderness and fragile ecosystems – indeed, with a view to restoring these to relative health. In the other universe the private sector, nationally and internationally, is free to supply More to those who want it; BUT the private sector will be properly controlled and regulated by state governments and the United Nations.
How exactly the private sector would operate is not of much interest to this essay. It would be fairly similar to the way it works now – except for the fact that its excesses would be severely curtailed by proper regulation and policing, and not facilitated at all or underwritten by the public sector.
The proper functioning of the public sector, at national and international level, is at the heart of EnMo’s economic morality; because if the public sector is working properly, most of the problems that confront our planet would disappear. War would end. Poverty would end. Justice would operate fairly. Our planet would be able to start to heal itself.
I believe the core principle of any economic model is an ethical one. The ethical principle that underlies the economic model that dominates the planet today is something akin to the law of the jungle, but it isn’t as fair. The law of the jungle says that only the strong will survive but it doesn’t demand that all other species should be sacrificed to it. The law of the jungle has operated for hundreds of millions of years, but prior to the very recent appearance of human beings life on Earth blossomed and flourished. Some species were exterminated, but new ones evolved too, and the general trend of evolutionary progress continued. That trend continued through most of history, even with the arrival of the first human beings; but at some point in the quite recent past the population of human beings reached saturation point. From that moment onwards, as the numbers of human beings spun out of control, our planet has been in a slowly accelerating death spiral. The economic morality of the world, which has nearly always served the purposes of the rich and powerful in true law of the jungle fashion, had nowhere else to go. Our planet, which is super-saturated with human beings, can no longer support the rapacious greed of the super-rich without first destroying the means of survival of every other species of life, before inevitably consuming itself. It’s obvious that this lethal economic morality must be stopped.
EnMo Economics proposes an economic morality which is the opposite of what we have. We have a model which protects the 1% at the expense of the 99% and the rest of the planet in general. EnMo protects the 99% and the rest of the planet in general at the expense of the 1% – which is not a bad thing as the 1% do not deserve their privileged over-pampered positions anyway. EnMo recognises and values the fact that the only source of wealth is human labour. It proposes a model whereby every human being could have everything they need for a comfortable, safe and happy life in return for a modest amount of their labour, no more than 20 hours a week, say, in helping to provide some public service. But it also provides for others to obtain more in terms of personal rewards if that’s what they want to do, but they would have to work much harder than others and within the constraints of the law in order to truly earn those rewards.
EnMo is just one possible alternative to the monstrous economic practices of the gangsterism that plagues the entire world. There could be others. However, the key to deciding whether an economic theory has any real value is not to be dazzled by any pseudo-science, but to examine its morality, to ask the old Roman question: who benefits most? If the answer is anything other than the 99% and the planet in general, it’s an economic theory that must be tossed in the bin.
- Debunking Economics by Steve Keen p. 67.
- Modernising Money by Andrew Jackson and Ben Dyson p. 205.
- History as Mystery by Michael Parenti p. 4.
- Jackson and Dyson, p. 207.
- The Best Democracy Money Can Buy by Greg Palast p. 146.
- Quoted in Extreme Money by Satyajit Das p. 128,