3: CREATING NEW MONEY

By Joseph Huber and James Robertson New Economics Foundation, 2000. £7.95 Review by Frances Hutchinson

C.H. Douglas noted that "it has always been universally recognised that the minting of money is a prerogative of the community, State, Government, or whatever name we choose for the moment to apply to the body politic, and the coining and counterfeiting of it has uniformly been penalised". He went to analyse the nature of credit which was convertible into money and concluded, inter alia, that:

* All credit-values are derived from the community, regarded as a permanent institution; not merely from the present generation of workers "by hand and by brain

* The community does not control credit-issue.., at present.

Huber and Robertson essentially agree with these propositions, and outline in their report very detailed and practical proposals for reform of the monetary system designed to ensure, that at last, the community would indeed control the creation of the nation’s money/credit supply and as a result, enjoy huge benefits. In presenting the case for reform of the debt-based money system the authors focus upon the financial benefits potentially available to government policy makers, benefits which are currently denied by the present system of economic accounting.

It is a common misapprehension that mainstream economists are mainly concerned with the world of money. They are not. Professional economists study the production, distribution and exchange of goods and services from so-called scarce resources. Their theory holds that money is a mere facilitator of exchange. People sell factors of production - land, labour or capital -in the production process. In exchange they receive money in the form of rent, wages or interest/profits. They consume by spending the money received on the goods and services produced. In the process they indicate their preferences. Once the cycle is complete, the whole process starts up again. Through creation of models economists study the dynamics of the system so that flaws can be eliminated. Therefore, to be taken seriously, any proposals for monetary reform must be demonstrably compatible with maintaining the existing system of production, distribution and exchange. It is my contention, confirmed by reading Creating New Money, that the debt-created money system is the cornerstone of the capitalist system as we know it. Hence its abolition would constitute far more than a minor adjustment to that system.

In economic theory money is regarded as a commodity with four special features. As a medium of exchange, money is generally acceptable because it will be received in return for virtually any other commodity. As a measure of value, money can overcome the difficulty of equating a pile of gooseberries and a plump hen. As a store of value, money allows the exchange of a perishable crop now, so that products can be purchased in the future. As a standard of deferred payment, money allows debts incurred now to be paid in the future. These four features exhaust the functions of money within mainstream neo-classical theory. Economists do not concern themselves with calculations involving actual money transactions. Those are matters for accountants.

In theory, then, production calls forth its own demand: everything is produced by somebody earning money, hence across the economy as a whole, everything can be bought with the money earned from production, i.e. Say’s Law holds. Over the long run, over-production, under-consumption and unemployment are technical impossibilities. Hence Keynes had great difficulty persuading the economics profession that there could be structural unemployment, i.e. that market equilibrium at less than full employment was an actual possibility. His remedy is now well-known. Less familiar is the consciousness, originating with Thorstein Veblen (author of the highly readable and still topical Theory of the Leisure Class) and developed by Douglas, that money-creation initiates the process of production, and hence distribution of incomes and exchange. Fractional reserve banking has, since the outset of western industrialisation, initiated production for the purpose of trade and exchange. Seventeenth century bills of exchange, cashed in paper money against goldsmith’s reserves, gave rise to the economy as we know it today. As Douglas, Joseph A. Schumpeter (The Theory of Economic Development) and many others have demonstrated, under the capitalist system money is not a mere neutral facilitator of exchange, a useful commodity with special properties. Rather, debt—created finance was, and remains, the initiating factor in economic growth and industrialised production.

In this context, monetary reform can take two main forms. Following Veblen, Douglas, Frederick Soddy, Hazel Henderson and many others, monetary reform can be designed to create a wholesome society in which a sufficiency of goods and services can be produced through ‘good work’ (a reference to Schumacher) and with minimal environmental destruction. In such a society economic growth and international trade on a massive scale are neither desirable nor necessary. As Keynes observed in the 1930s:

"I sympathise, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel—these are the things which should of their nature be international. But let goods be homespun whenever it is reasonable and conveniently possible: and above all, let finance be primarily national." (quoted in Daly and Cobb For the Common Good 1990).

Serious study of the work of these economists is essential if a coherent, logically consistent ‘new economics’ is to emerge.

The other course, and that taken by the authors of Creating New Money, is to regard the money-creation process as essentially neutral in directing, and indeed defining the very terms of wealth creation. In this school of thought economic growth and large-scale international trade can be compatible with environmental protection and social equity. They advocate, ‘seigniorage reform’, a ‘basically simply’ revision of the banking system which would remove from banks the right to debt-creation of money. Chapter 1 shows how central banks could create all new cash and non-cash (sight deposit) money by crediting new money to their governments as public revenue. The proposal is that commercial banks should be banned from creating new money, becoming mere credit-broking intermediaries. The processes whereby new money would be created are set out in Chapter 2. Chapter 3 explains more fully the measures necessary to restrain commercial banks from continuing the present system. At this point the authors draw a neat distinction between money as a means of payment’ and money as a store of value’ without, however, going on to define finance capital and its role in the productive process. Chapter 5 draws our attention to some possible advantages of seigniorage reform. These include greater equity and social justice, reduction in inflation and greater stability in business cycles and banking institutions. The ‘simple reform’ would take money-creation out from private commercial banks and transfer it to the central bank under supervision of the government. This would reduce the pressure to produce environmentally unsustainable goods, while making the whole system more ‘transparent and generally comprehensible. The final two chapters deal with possible arguments for and against the proposed reform.

The two authors of Creating New Money have impeccable credentials. After working in the Cabinet Office in the 1960s, James Robertson set up the Inter-Bank Research Organisation for the UK banks, and co-founded the New Economics Foundation in 1985. Joseph Huber is chair of economic and environmental sociology at Martin-Luther University, Halle, and has been active in the International Greening of Industry Network and the Environment Bank. Their practical experience of money and banking, ensures that this report provides a useful resource for monetary reformers seeking a more wholesome society. As such, it is to be welcomed. However, although facts and information consistent with the work of mainstream and heterodox economists are scattered throughout the text, the ‘report’ stands aloof from any wider debate. It is therefore unlikely to appeal to a very wide audience. It may be full of answers, but it fails to specify the questions.

While Social Crediters will welcome the succinct clarity, and the highly detailed and appropriate proposals in the report for monetary reform, they might regret that the authors did not more comprehensively outline the —philosophic, socio-economic and environmental objectives, that reform of the monetary system will make possible.

*************************************

QUOTE:     "When exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and the Statute of the ESCB, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks."

            Treaty on European Union:           Maastricht 1992.                 Monetary Policy: Article 107.