Public Money for Sustainability and Social Justice

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* Book: Debt or Democracy: Public Money for Sustainability and Social Justice. Mary Mellor. Pluto, 2015.




"Debt or Democracy explodes the myths behind modern money. It challenges the neoliberal obsession with public debt and deficit, arguing that a much more serious problem is the privatised creation of money through bank debt that leads to boom and bust. Far from being a burden on the taxpayer, Mary Mellor argues that public money and public expenditure is necessary for economic well-being. Arguing that money is a public resource that should be under democratic control, Debt or Democracy directly challenges conventional economic thinking and presents a radical alternative for socially just and ecologically sustainable provisioning."


“It will make the case that deficit, expressed as surplus public expenditure is essential for socially just and sustainable provisioning. Conventional notions of public money as public expenditure based on taxation of privately created wealth will be critiqued. Public money will be defined as the creation of public currency free of debt, and therefore free of the necessity to grow. It will be argued that both sovereign deficit and debt are misleading concepts and stem from neoliberal ‘handbag economics’ that sees the public sector as a dependent household. Through exploring two circuits of money, public and commercial, it will be argued that growth driven capitalist economies are dependent on the public creation of public money. The seeming dominance of the commercial circuit reflects the ‘Janus-faced’ role of central banks that supports both debt and growth. The alternative to debt is a money system based on surplus expenditure (deficit) that can enable social and public exchange of use-value rather than exchange of commodity value for profit.”

2. Mary Mellor:

"As I explore in my book 'Debt or Democracy: Public Money for Sustainability and Social Justice,' money is a social and public construct that enables markets; it is not a product of markets. Money can as well enable public economies or social economies, that is, the circulation of use value as against commodity value. (Marx confused the situation by linking commodity value to exchange value - but it is perfectly possible to exchange use values as local money systems demonstrate). The public circuit of money (public money creation with taxation as the main retrieval mechanism) and the commercial circuit of money (debt-based money creation and repayment as retrieval) are distinct, but they have become confused and intertwined in modern economies.


Writing from an ecofeminist perspective, I am seeking deliberative and participatory sufficiency provisioning rather than 'economy'. In this aim, I think there is tremendous potential in rescuing money from the market and seeing it as a public resource (I made this case in my earlier book 'The Future of Money: From Financial Crisis to Public Resource'). To socialise and democratise money would remove from capitalist markets their engine of growth and the realisation of profit. It would make currently unpaid communal and domestic work the starting point for 'economy'. There is also need to reclaim the notion of 'public' from its demonization. Embracing it as a caring and feeling concept - turning 'handbag economics' against itself would be a start." (Great Transition website, debate on Economism, November 2015)



The background to this paper reflects three crises: environment, inequality, money/ finance. I want to argue that money/finance is key to the other two. Concerns about climate change and other ecological problems are side-lined by the demand that economic growth, that is, profitability in money terms, must be maintained at all costs, or that remedial action cannot be afforded, that is, there is not sufficient money. The post war move towards greater equality has also been reversed by financialisation and the concentration on financial assets and financial speculation, all represented as growth in money terms. This is not to deny the importance of other economic factors, but money itself has been largely neglected in economic debate. Instead, the politics of money should be seen as a key aspect of political economy. Environmental and social priorities are rejected by the claim that money is in short supply. However, there was no shortage of money when it came to the banking bailout. Money cannot essentially be in short supply as it is an entirely social construct.There is as much or as little as those who create, control and determine the distribution of money choose there to be. In this context I do not distinguish between notes and coins and bank credit in the definition of money as both create the supply of public currency. I want to argue that the financial crisis must be seen as a crisis for money, or more precisely, a crisis of the privatisation of the supply of the public currency. What the crisis reveals is the key role of publicly created money in sustaining private finance. Yet, the ideology of what I describe as ‘handbag economics’, claims that the public sector has no right to the money that it, itself, creates. Publicly created money must only be used to support the privatised creation of the public currency as debt. There is quantitative easing for the financial sector, but not the people. Worse, the people are punished through austerity for the deficits and public debts created by the crash. If sustainability and social justice are to be achieved, the privatisation of the public currency needs to be challenged. Public money must be a public resource that addresses democratically determined priorities (Mellor 2010). The 2007-8 crisis was not just a crisis of banking and finance but a crisis of the supply of public currency. The major fear that triggered the vast creation of public currency by public authorities was that the ATM machines would dry up. Certainly banks and financial institutions were insolvent as well as illiquid, but for the public the most immediate sign would be that there would physically be no money. However, the monetary authorities did not get the printing presses going, there was no time. It would take months, if not years, to produce enough banknotes to ‘back’ bank deposits. Also there was no other representation of value such as gold, which in any case would be not sufficient, even if the link with gold had not long been abandoned (if it was ever effective anyway). States and central banks backed their banking systems with nothing but their authority. They said the money was there and people accepted it. States nationalised or bailed out banks, central banks made rock bottom loans they did not expect to get back, and attempted to ‘quantitatively ease’ the amount of money in circulation by buying up various forms of debt or investment. In all cases they used public money, that is money created and circulated by public monetary authorities. The newly issued public money did not originate outside of those authorities, it was not ‘made’ elsewhere. Conventional economics has a contradictory attitude to this public money-creating capacity. While public expenditure is seen as dependent upon the ‘wealth-creating’ sector (states must not ‘print money’), it is quite accepted that monetary authorities create money. This is even graced with the title of ‘high powered money’ or ‘base money’. However this is not considered to be public money in the sense that the public has any right to it. It is created as public currency, in the public’s name, but it is only to be circulated via the banking system. The one body that must not ‘print money’ is the public itself through its public (but not necessarily democratic) organ the state. The people and the state can only borrow money from the banking and financial sector which includes the central bank.

Neoliberalism has made this clear by deeming central banks, with their authority to create money, as independent of any democratic institutions.

States themselves are just another borrower. When states stepped into to rescue their banking sectors, they overran their expenditure plans dramatically, that is, they went into deficit. This required ‘borrowing’ under which excess state expenditure was securitised by the central bank and sold on to financial investors. The public sector was then pilloried for being in debt and forced into austerity. I want to argue that public deficit and debt is not a ‘problem’. In fact, commercial monetary economies cannot function without a long run surplus of public expenditure (deficit) over tax extracted. They cannot exist without publicly created money, that is, money free of debt spent into circulation or public currency made available to exchange for bank loans. There is no truth in the claim that environmental or social justice solutions cannot be ‘afforded’. There is no 2 shortage of money. What does exist is a dominant ‘handbag economics’ that ignores the social and public history of money. It also does not acknowledge that bank accounts are as much public currency as notes and coin. There is nothing private about bank-created money. In the last resort it is a public liability. Why, then, is it ideologically and in practice, captured as a private, rather than a public, resource? In response to the crisis, monetary authorities offered an almost blanket guarantee of their public currency in whatever form it was held. Intangible promises were made to support intangible money. This raises the question of the nature of money itself (Ingham 2004). What kind of money was in crisis and what kind of money was rescuing it? The crisis is acknowledged as being a crisis of credit supply and toxic debt as banks threatened to fall down like a line of dominos. As Duncan argues, this failure of ‘creditism’, the growth of debt, was equivalent to the collapse in money supply in the 1930’s (2012: 32). In the run up to 2007-8, banks were not just issuing credit, they were issuing the public currency. This challenges the conventional nostrum that there are two different kinds of money, ‘real money’ (notes and coin, central bank reserves) and ‘credit money’ (bank accounts).

What is Real Money?

Writing in an era when most people still used cash (notes and coin) Galbraith argued that central banks provided ‘a reliable supply of wholly acceptable money when… people wished to turn their deposits in the commercial banks into the cash which, by the nature of deposit creation, was not there’ (Galbraith 1975:40). Such ‘backing’ for bank-created money was essential because ‘the monetary achievement of the nineteenth century was a fragile thing’ with a number of crises (Galbraith 1975:42). What is that ‘wholly acceptable money’? The illusion that it is gold has gone, fewer people use cash, so what exactly are central banks providing? In conventional money theory High Powered Money (HPM) or Base Money refers to the money controlled by the monetary authority usually seen as the total of bank reserves and cash in circulation. HPM is contrasted with credit money, the money created only as bank ‘sight’ accounts. If an account holder asks for cash, the bank has to buy this from the central bank paying from its reserves. Keynes saw bank money as ‘acknowledgements of debt’ whereas only HPM, ‘money proper’, could finally settle that debt (1971:5-6). However, in practice, bank transfers between people are perfectly adequate in settlement of debt. Banks also settle debts between themselves at the level of the central bank, but they are not using a special form of money to do so. Distinguishing ‘money proper’ from bank money implies that bank created money is a different form of money to state created money. This was more clearly the case when bank notes were private agreements between borrowers, creditors and the bank and the only backing for the notes was trust in the long term viability of the particular bank. However with the establishment of public currencies, the right of banks to issue their own bank notes was largely prohibited. Banks could only borrow and lend central bank notes or produce their own notes by agreement with the monetary authorities. Theoretically, the central bank could now control lending through control of the amount of notes issued. However, limiting the number of bank 3 notes in circulation did not limit the bank’s ability to create ‘sight accounts’ that exist only as bank records but are still designated in the public currency. Bank transfers could operate through paper or electronic records, increasingly so today. Given that electronic records designated in the public currency are as trusted as cash, there is no effective distinction between ‘real money’ and ‘credit money’. Hence states and central banks had to offer their banks virtually unlimited support (Konings 2009, Montgomerie and Williams 2009). If bank credit wasn’t ‘real money’ why did states feel compelled to underwrite their banking systems which, in Keynes’ terms, will be riddled with private bank debt rather than ‘money proper’? A lot of the confusion is caused by the myth of ‘hard money’. If high powered money is taken to be the equivalent of gold there must be something tangible in reserve. This illusion cannot hold today. The public currency can be created publicly and privately in electronic form. The difference therefore cannot be one of form. However, there is still one clear point of difference between the state and the banking system as a source of money supply. The state can create new money without debt, whereas the profit-based capitalist banking system cannot. Even conventional economics acknowledges the power of banks to privately create money through new loans in the theory of fractional reserve banking. The pretence was that the bulk of the loans were not ‘real money’. As all money is now fiat, without even the suggestion of an intrinsic base, that distinction falls. As money has no intrinsic value, what does it represent? Why do people accept and use it? In circulation it represents previous value (entitlement) or a promise to provide the value the money represents (obligation). The value itself is relative within a money system, two pounds is worth twice one pound. Money only has a ‘price’ when interacting with another currency: a pound is worth so many euros or dollars or when artificially linked to a fixed standard. Acceptance of money is a mixture of social trust and public authority. As the money passes from hand to hand there is the presumption that the next recipient will honour its agreed value. Lying behind that is the authority of the state. There is no basis for trust in the banking sector itself because its solvency is an illusion as the fractional reserve theory acknowledges. There is a nicety about talking about bank illiquidity rather than insolvency, but in a crisis they are indistinguishable. Banks have only a fraction of capital and reserves to back their balance sheets. Given that money is entirely a social construct, how is it constructed? Who has the right to construct it? As Minsky said, anyone can create money, the trouble is getting it accepted. For Modern Monetary Theory (MMT) money is an IOU, a credit/debt (Wray 2012:262). If it is an asset to one person it is an obligation to someone else. At its loosest, holding money is a call on the labour, assets or resources of that money system. If that promise does not hold, then the money becomes worthless. The specificity of a public currency is that its acceptance is generally assured (although collapses are not unknown). There are many questions that may be asked about money in circulation, such as how it is distributed, how its relative value shifts and changes, but a central question is who has the right to create the public currency? The distinction between real money and credit money implies that only public monetary authorities can create real money (taken to be notes and coin), but 4 as argued here, that distinction no longer holds. Both banks and states create the public currency as electronic records. In fact, far from not being able to create the public currency, bank debt is increasingly seen as the only source of public currency (Jackson et al 2012, Ryan-Collins et al 2011). What has happened is that supply of the public currency has been collapsed into the supply of credit on a commercial basis, thus making it susceptible to the latter’s endemic tendency to crisis. Bank loans expand the amount of money in circulation and when credit dries up, so does the money supply.

The Commercial Circuit of Money

The commercial circuit of money has been explored by Money Circuit Theory (MCT). The Italian economist Augusto Graziani (1933-2014) saw bank finance as central to capital formation. MCT sees money as both the key to production and the goal of production for capitalism. Money is borrowed to pay the cost of production, this is then repaid following the process of exchange and consumption, and the circle turns again. Money circuit theory’s ‘endogenous’ view of money gives total precedence to the commercial sector. It rejects the idea that the state can impose any top down ‘exogenous’ control of bank lending, for example through manipulation of central bank reserves. For Rossi, money is ‘a creature’ of banks, rather than the state (2007:21). Money is created by banks when producers borrow money in order to launch the circuit of production: ‘Money’s value is based …on production and banking systems working together to associate a real object (that is, produced output) to a numerical counter (money)’ (2007:20). Placing the banking system at the centre of its analysis of money’s origin, money circuit theory sees bank lending as growing out of personal loans and promises of payment. Banks acted as a ‘third partner’ in commodity exchange. Based on their own credit-worthiness, bankers agreed to ‘cash’ a debtor’s promise to a creditor for a fee and/or a discount pending later payment to the bank by the debtor. This meant the creditor had ready money from a creditworthy source in place of a personal debt, while the banker took the risk of non-payment. Unlike conventional theory, money circuit theory does not see money as a neutral reflection of the circuit of production. It is an active force for capitalism, determined by conflict and structural power that makes possible ‘both market exchange and the more extensive set of relationships known as capitalism’ (Smithin 2009:59). It requires full ‘elasticity of credit’. If debt creation ceases, it is disastrous for capitalism. While money circuit theory provides an important analysis of the commercial circuit of money, and reveals the importance of the private creation of money to the survival of capitalism, it does not address the possibility of a public circuit of money. Equally, neoliberal economics recognises only the commercial circuit of money but does not see the implications of banks creating new money. Banks are only seen as intermediaries between savers or investors and borrowers. What then, are the implications of creating the public currency supply through debt created money? The first is that there is a drive to growth. If a profit is to be made and debts repaid with interest, there must at least be monetary expansion. This 5 would also drive physical expansion in terms of use of resources etc. At the minimum there would be no basis for movement to curtail growth, much less de-growth (Latouche 2012, D’Alisa et al 2015). Second, public currency supply based on debt means that who borrows and for what purpose determines the direction of the economy. Third, it produces a ‘handbag economics’ where public expenditure is deemed to be dependent on the commercial creation and circuit of money. Fourth, the money supply will always be threatened by the periodic crises that the credit circuit creates. To focus on the commercial circuit obscures the public circuit of money.

The Public Circuit of Money

One of the earliest proponents of a public conception of money was the German, Georg Knapp (1842-1926). Far from a market-oriented and privatised view of money, Knapp saw the state as central to the existence of money. In his major work The State Theory of Money (1905/1924) Knapp argues that money is not an economic phenomenon linked to the market; it is very much a public phenomenon: ‘money is a creature of law’ (1924:1). For this reason, he sees the study of the monetary system as a branch of political science and ‘the attempt to deduce it without the idea of a State ..(is)..absurd’ (1924:viii). It is states that establish the status of money forms such as coins, public currency notes or abstract notions such as the pound sterling. Keynes echoed Knapp’s view: ‘‘that money is peculiarly a creation of the state’ (1971:4) and claims it has been so for four thousand years. While for conventional economics the first function of money is as a medium of commodity exchange, Knapp stresses money as a more general means of payment. Although money is used in market exchange, there are many situations in which payment does not relate to the market, such as fees, fines or taxes. In fact, Knapp sees public administrative payments as a better grounding for the status of money than general acceptance in trade: ‘the money of the state is not what is of compulsory general acceptance, but what is accepted at the public pay office’ (1924:vii). Knapp acknowledges that commodities of material value (such as precious metal) have been used in exchange, but he does not consider this to be money. In fact, money only comes into play when the actual form of payment has no intrinsic value: ‘money comes into being when the material is no longer the means of payment’ (1924:25). He goes on to argue that even where money is made of precious materials, ‘the soul of the currency is not in the material of the pieces, but in the legal ordinances that regulate their use’ (1924:2). He notes that the first question a trader will ask in a new country is, what is the nature of the currency? At the time that Knapp was writing, paper money was well established and he wanted to defend the view that ‘the much-derided inconvertible paper money is still money’ (1924:38). Knapp sees all forms of money as a chartal or token (chartal comes from the Latin for token). Paper or other non-material money is not inferior to metal money, as both are part of an administrative monetary system: ‘Coins are stamped discs made of metal’ while ‘warrants are stamped discs of paper’ (1924:56). Knapp’s state theory of money has a very different view of the origin and nature of money from conventional economics. Money is created by the state as a convenience for society ‘the State….creates it’ (1924:39). Knapp sees it as 6 particularly beneficial to the taxpayer that the state creates the money that it later accepts in payment of tax as it ‘frees us from our debts to the state, for the state, when emitting it, acknowledges that, in receiving, it will accept this means of payment’ (1924:52). What Knapp is describing is a public circuit of money. Money is created and circulated through state expenditure and retrieved as tax. A public sector circuit reflects the long history of sovereign creation of money. Early coinage was created free of debt and spent, mainly on war or aggrandisement. The money was then left to circulate or demanded back as tax. When modern bank lending emerged, rulers combined public money creation and taxation with borrowing from the commercial money sector and the sources of public funding became intertwined. The public circuit is obscured because public expenditure is an ebb and flow of money. States do not wait to collect taxes before engaging in expenditure. It is only when outgoings and tax income are brought together in the accounts that the balance between them can be seen. The sequence of taxation and expenditure is therefore circular: taxes are spent and expenditure is taxed. Rather than seeing the circuit starting with tax to fund expenditure, expenditure can be seen as providing money to pay taxes.

The ‘chicken and egg’ nature of the public circuit creates confusion over the role of the central bank (or equivalent public authority such as the Treasury). The central bank/Treasury can be seen as lending money for public expenditure pending the receipt of taxes, or it can be seen as creating money for public expenditure that will be redeemed through taxation. If the public monetary authority behaves like a commercial bank, it will see this money as a loan to the state. Future taxation is then a fiscal matter of retrieving the money to repay the loan (with interest). If the monetary authority sees itself as a public agency, the public currency could be created debt free, and spent, pending possible future taxation. Depending on how the public money circuit is interpreted, the incoming tax can be seen as being drawn from activities in the private sector (based on commercial wealth-creation) or it can be seen as the state’s own expenditure being returned. Given that in modern economies there is both public and commercial creation of public currency, both are true. Both circuits can be seen as creating value by providing goods and services. While the commercial sector extracts its value as price on the market, the value of the public sector is judged by the quality of its provisioning. If the creation of public currency is not through the commercial sector, money does not have to be issued as debt. Unlike the banks, publicly created public currency doesn’t have to be commodified. It can be spent or allocated as a public resource without the need to be returned (with profit). However it is not wise to create unlimited amounts of money. The public money circuit is therefore completed not by repayment of debt, but payment of taxes or fees. Tax in this case is not a fiscal instrument as in the commercial money circuit (raising taxes from individuals, households and companies for the public sector to spend) but a monetary instrument, to retrieve money from circulation that could otherwise be inflationary. This creates a very different position for the taxpayer. Instead of ‘hardworking families’ paying out their ’hard-earned money’ in taxes, they can be seen as returning money that has done its work in creating public benefit (paying doctors, building bridges, environmental work, care for the elderly).The main difference between the 7 commercial and public circuits of money is that publicly created money may be issued as debt, but bank created money can only be issued as debt. While the former can be used for social purposes on a sustainable basis, the latter must demand growth and profitability. The former can spend more money than it seeks in return (surplus expenditure), the latter always wants to receive more money than it creates ,”

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