View source for Mary Mellor on Public Money for Sustainability and Social Justice


* Article: Public Money for Sustainability and Social Justice. Written for the CSG Deep Dive Berlin 2015. By Mary Mellor, Emeritus Professor, Northumbria University.

=Discussion=

Mary Mellor:

==What is Public Money?==

I define public money as the generally recognised and authorised public currency
that is created and circulated through a public money circuit (see below). Public
money is therefore distinct from public currencies issued through bank loans, social
monies such as local currencies or private digital currencies such as bitcoin. Public
money is not the same as public expenditure because it is assumed under handbag
economics (see below) that public expenditure originates in money extracted from
the ‘wealth creators’ or ‘tax payers’. This reflects a zero sum view of money – all
public expenditure is seen as a transfer of funds from the private sector (as in the
assertion that the German taxpayer has to pay for the Greek bailout). This is an
entirely political construct. Money is not zero sum. There is as much or as little public
currency as the power holders choose there to be. Public currencies can be issued
debt free or constructed as debt. Public currency as used here includes bank
accounts as well as cash.

Neoliberal economics denies that public money exists, but the evidence is before our
eyes as newly created electronic currency floods out from central banks to rescue
and re-finance the banking sector. The role of central banks is critical here (see
below) as they straddle the public and commercial production of the public currency.
The critical political question is who controls the creation and circulation of the public
currency? To challenge neoliberal ideology it is necessary to be clear about two
aspects of money in general. First all money is socially (or politically) constructed –
there is nothing natural about money. Second, those with the power to create money
(including states, central banks and all banks that make loans designated in the
public currency) create it out of nothing. All modern currencies are fiat money –
sustained by social trust and public authority. (Commodity money made of precious
metal was an historical anachronism and caused severe economic problems
because its supply was externally determined by bullion discovery – it was widely
supplemented by other forms of money such as tally sticks). If money can be easily
created out of nothing, why are governments shackled with deficit, debt and
austerity? Answering this question requires turning on its head conventional thinking
as represented by neo-liberal ‘handbag economics’.


==Handbag Economics and the ‘Public as Household’ Analogy==

‘Handbag economics’ sees the public sector as analogous to a household,
dependent upon external sources of income. The public household is limited to
spending only what is in its handbag/purse/wallet, that is, what can be raised by
taxation or other forms of income. In the absence of any alternative source of money,
the public household is seen as solely dependent on the private ‘wealth-creating’
sector. The supply of money to the public sector must therefore originate with the
taxpayer or the money markets (public borrowing). The ideal would be for states to
be in surplus, but at minimum they should ‘balance the books’, ‘pay their way’, ‘live
within their means’. The case is made that as all debt and interest payments are a
burden on the taxpayer, now or in the future, the public sector must be limited as to
how much can be borrowed (overall debt) or how far current expenditure can exceed
income (deficit). Preferably states should have no borrowing at all and certainly no
deficit. This is because handbag economics acknowledges only a commercial circuit
of money.


==The Commercial Circuit of Money==

In the commercial circuit of money, previously existing money is borrowed and
invested, or new money is created through bank borrowing, to pay the cost of
production. This is then repaid following the process of exchange and consumption,
and the circle turns again. What handbag economics ignores is the importance of
creating new money in the circuit. The assumption is that there is a fixed pool of
money that continually circulates finding the most efficient form of investment. If the
state taxes any of this money it undermines production by reducing the pool. Tax is
therefore always a negative. This ignores the fact that new money is continually
being created as banks make loans and being extracted from the circuit as the loan
is repaid.

This is the element that drives boom and bust. Rapid growth in money supply occurs
as the circuit expands and rapid contraction when credit crunches and crises
inevitably emerge. This is when the public money supply comes to the rescue, most
explicitly in quantitative easing. The commercial circuit of money is unsustainable
socially, ecologically and economically. Socially, it creates inequality and perverse
forms of expenditure. Ecologically it drives unsustainable growth as it seeks profits.
Economically it faces the contradiction that the origin of money in loans with interest
means that more must be paid back than is lent. This requires an additional source
of money or a continual expansion of loans.


==The Public Circuit of Money==

The public circuit of money occurs in two forms. The first is the supply of public
currency produced ex nihilo by the central bank to provide cash and support for the
money creating activities of the banking sector. This central bank money is not
borrowed or taxed from anyone. Second, money is created and circulated as
government spends in the same way as banks create money as they lend. Banks
lend money and then cancel it as it is repaid. States spend money and then offset it
against tax and other income received. States do not check their tax accounts before
they spend. State expenditure is a continual circuit of spending and taxing. How this
is viewed depends upon where the circuit is observed. If the starting point is taken as
tax this is seen as funding public expenditure. If the expenditure is viewed first, tax
can be seen as retrieving that expenditure. Deficits or surpluses only become
evident when the two sides of the circuit are accounted. How any deficit is treated
then becomes a political decision. If it is seen as a surplus of publicly issued money,
created debt free, it can be left to circulate. This can provide a source of income for
the private sector to fund the interest on their loan created money. However, under
handbag economics any deficit is required to be ‘funded’ by increased taxes or
borrowing from the commercial circuit of money.

If there is a public circuit of money why are governments in deficit and debt?
Both deficit and debt are products of political ideology and historical circumstance.
The political claim is that states must not/should not create money through excess
expenditure (the threat of inflation/Weimar Republic is routinely referenced) whereas
in practice states/central banks are continually creating money. A privatised view of
the public currency denies the right of people to create public money for public
purpose and upholds the power of private finance.

The historical circumstance is more complex – states originally had the monopoly of
issuing or designating public currency but ceded this to the banking sector when they
had to borrow the emerging commercially created private money – mainly to fight
wars. The transfer of power happened when privately created commercial credit
became designated as public currency (instead of lending their private credits, banks
created loans in public currency). Banks couldn’t create coins or later notes – these
generally remain a monopoly of the state/ central bank – but they can create ‘sight
only’ bank accounts, nominated in the public currency.

As long as people are happy to work through bank transfers there is no need of
cash. A bank run is always feared because there is not enough cash in circulation or
reserve to match the volume of money recorded in bank accounts. A bank run would
reveal the fact that the banking system has no backing at all (fractional reserves,
capital ratios etc. are an illusion). As we have seen in the crisis the only force that
can save the banking sector is the state. All formal money systems are essentially
public – resting on public trust and public authority. This is the case for democratic
control. Sovereign deficits and debts are the result of the privatisation of the public
money supply as bank-created debt.


==The Central Bank: the Pivot between the Circuits==

The public and private money circuits are brought together in the central bank. This
is a Janus-faced organisation, which can be a public or private institution, with both a
public and private role. As a public body, the central bank has the traditional power of
the ruling authority to create the public currency free of debt. As modern banking
emerged, the power of rulers was curtailed, particularly as warfare became more
costly and taxation was less effective. Money slipped from their control and instead
of being money creators, rulers became debtors to powerful commercial forces
issuing various privately created forms of money.

As Graeber points out, the early years of modern banks saw a shift in state funding.
When rulers needed more money and could not raise more tax, they reverted to
borrowing, often demanding ‘forced’ loans. For Graeber, there is a fine line between
a ruler demanding taxation and requiring a loan from wealthy citizens when needing
additional resources (2011:338-9). However, there is a critical difference. Taxation
implies a sovereign right to command resources, borrowing creates an obligation of
the sovereign to the lender. While today there would seem to be little difference
between rule by an autocratic monarch or a cartel of bankers, there is an important
influence on the modern conception of public debt and the functioning of the two
circuits of money.

When the sovereign began incurring debts rather than raising taxes, this could be
seen in two ways. One way would be to see it as an advance of taxation. Rulers
would ‘pay’ for goods or accept loans that could be offset against future taxation by
the supplier or lender. The other approach would be to see the supply of goods or
loan to the ruler as being repaid out of future taxation. This makes little difference
when the lenders/suppliers are also the major tax-payers. They are merely
anticipating their own taxes. However, if the taxpayers and wealth-owners are
separate groups the distinction between taxation and borrowing becomes critical.
Today, the wealthy are the lenders but the whole public is the debtor/taxpayer. As a
result, modern states have accumulated extensive national debts. Even when the
Bank of England bought back a large portion of the outstanding public debt in its
£375 billion quantitative easing programme, this debt was not cancelled. The public
sector still owed it to the public central bank.

This is because under handbag economics the central bank issues public money in a
purely commercial context. As seen during the crisis, it must make as much public
money available as the bloated banking system requires, no matter how
irresponsible the banking and financial sector. Yet, it cannot put its money creating
powers in the service of the people. This is because the evolution of modern
monetary systems is incomplete. The power to create money has shifted from
sovereigns to the commercial sector, from the ruling class to the merchant class,
what is needed is to transfer this power to the public. The central bank must return
the sovereign prerogative of money creation free of debt to the people, for the benefit
of the people, as a public resource. That is, money must be democratised. This is
particular the case if we wish to create socially just and ecologically sustainable
provisioning systems (a much better concept than economy)


==Democratisation of Money==

Commentators from the left and right have largely ignored the democratic potential of
money. Instead they focus on the ‘real economy’ which is generally taken to be the
capitalist productive sector. Money is seen as a secondary aspect, whereas it
should be seen as an active politically constructed agent. All money is a credit for
the holder that represents an entitlement, but not all money represents a debt. The
creation and circulation of public money can give people access collectively to goods
and services in a democratised public economy. This still leaves space for a
commercial economy with taxation as the bridge between the two economies.

Taxation should be sufficient to prevent an inflationary flow of money into the
commercial sector as well as addressing other issues such as inequality and
resource depletion. A public supply of currency would prioritise socially necessary
expenditure with the commercial sector playing a secondary role based on real
investment (as opposed to bank created credit).

A public money system would not be acceptable unless it was fundamentally
democratic. It cannot be assumed that public authorities would necessarily use
money wisely, unless they were subject to democratically based mandates and
effective public scrutiny. Exclusive control of public money must not be in the hands
of the government in power, or the state apparatus. Both public and private finance
are not free of embezzlement and corruption. Creation of both public and commercial
money needs to be transparent and accountable. One important point of principle is
to separate debates about money creation and circulation from the expenditure of a
specific government. The administration of public money must be participatory and
deliberative at the widest level.

The first and most important level is an initial public debate about how money
creation should be organised: the balance between the public and commercial
circuits of money. The public needs to be aware that there is a choice to be made,
part of which is the overall amount of money to be created (rather than the privatised
free-for-all at the moment) and which bodies should be enabled to create it. Those
standing to be elected to public office at all levels should be required to make a clear
statement about the allocation of the right to create money as between public
agencies on a debt free basis and the banking sector creating public currency as
debt for which the public is ultimately liable.

In order to avoid centralisation and to maximise participation, budgets would as far
as possible be built up convergently from the grass roots through regions to the
relevant centre. While most green proposals for new ways of issuing money would
favour local money creation and circulation under social control, in practice a good
deal of money creation would need to remain at a broader public level. Major
expenditure decisions that need to be made at the centre would then have to
cascade to the grassroots for approval. Specialist spending would also require its
own democratic structures such as health (combined panel of users and
practitioners) or agriculture (consumers, retailers, producers, environmentalists).

There would therefore be a two way flow of decision-making: convergent from the
local to the centre(s) and cascading from the centre(s) to the local.
A circuit view sees money as being continually removed from circulation through
taxation or debt-repayment and then being re-created as expenditure or new loans.
All public expenditure should therefore be regarded as new public money at the point
at which it starts the public money circuit. The circuit always ends with the money
creator, whether bank or state, and only they can re-start the cycle. Using debt-free
public money as the basis of public provisioning requires both long term and short
term fine-tune budgeting. Major long term decisions would need to be made about
allocation to sectors, with smaller scale adjustments on an ongoing basis. These
decisions would need to be deliberative and broad-based with elected politicians as
only one of the participants in the process. Democratising the creation of money
would require participation at many levels with at least one independent element.


==Participatory Primary Budgeting==

Based on convergent and cascading deliberation about expenditure and allocation
proposals, a primary public money budget would need to be established. This would
aggregate the proposals in order to decide how much money would be needed to
meet provisioning and other publicly determined needs. What is included would be a
matter for public debate, but it would reflect proposed expenditure or allocation of
public money at local, regional, national and international levels. Current patterns of
expenditure would be a starting point for discussion. Areas covered could include:
public infrastructure and services; allocation to banks or specialist agencies for
grants or lending; to communities to spend/lend/allocate; a basic income to citizens,
or an income to nature. It would open up the possibility of hybrids in delivery,
supervised banks making debt free allocations or public agencies making loans to
individuals or public or social enterprises.

There might be a dramatic expansion of some areas of money supply if the decision
was made to fund what are now unpaid livelihoods through, for example, a citizen’s
income or payment of domestic and community labour. Other areas might shrink to
reflect a move towards more sustainable provisioning. As this would be a complex
process in the first instance, the primary money supply calculation would be for at
least a five year period, or even longer, with provision for smaller scale adjustments
when required.


==Monetary Assessment==

The primary budget would then be subject to an independent assessment of the
monetary impact of the proposed public money supply. Shifting control of money
supply to the public money circuit would require different monetary management.

The commercial circuit based on debt has an automatic dynamic: debts must be
repaid. Current monetary control has been directed at encouraging or limiting the
amount of debt issued through manipulation of interest rates or direct regulation.
Indirect control through interest rates has not been very successful in curbing
lending. The most stable time has been when governments have prescribed or
proscribed certain kinds of lending or certain kinds of lenders and borrowers.
The public money circuit needs a different dynamic as there is no automatic
mechanism for the completion of the circuit. Money created free of debt does not
have the impetus of repayment.

The main ways to complete the circuit would be to charge for services, to tax or to
provide the public with investment opportunities. While the balance between these
would be a matter for public debate, an independent monetary authority would
assess the overall amount of money that should be retrieved so as to leave enough
to enable all commercial and public payments to be made while avoiding inflationary
pressures. It would make no recommendations on how the money would be
reclaimed from circulation. Questions such as the level of taxes, redistribution of
income and wealth, taxes on resource use, or land taxes, what kinds of expenditure
should be charged or whether the public should be invited to return their money as
investment or savings such as pensions would be democratically determined.


==Participatory Secondary Budgeting==

Actual expenditure, monitoring and allocation of money in the specific communities,
agencies and governments would be determined through a variety of forms of
decision-making, emphasising transparency and accountability. All public and private
organisations that receive a direct or indirect allocation of public money would need
to have clear mechanisms for democratic accountability in place. Such a large scale
transparent system of primary and secondary budgeting would minimise the
possibility for abuse. It would certainly prevent the abuse the financial sector has
exhibited: manipulation of markets and rates, insider dealing, outright fraud and
excessive borrowing among others. This is not to ignore corruption in the public
sector, due to lack of transparency and abuse of power. The spread of decisionmaking
proposed would militate against domination by any particular group or body.
Setting long term budgets would mean that governments could not substantially
amend proposed money creation levels during the run up to elections, particularly in
view of the moderating role of the independent monetary authority.


==Debt-free Public Money for Sufficiency Provisioning==

Ecologically the aim would be sufficiency provisioning. This must be egalitarian as
sufficiency means no-one has too little or too much. The approach to money and the
economic framework would be very different under sufficiency provisioning. Labour
through employment would not be the main access to provisioning. Money would not
just represent work done, but be an entitlement to livelihood. Security of needs-led
provisioning could allow people to adopt less employment-intensive and consumerintensive
life-styles. This does not mean there would be no paid work, but people
would be mainly engaged on democratically determined priorities.

As the primary source of debt-free public currency, public provisioning would become
the main creator of wealth in the community, providing work, goods and services.
The private sector, would rely on the secondary circulation of that money into a
(socially and environmentally regulated) market. Sufficiency provisioning would also
require a different way to reflect and measure provisioning activities. Gross Domestic
Product would be replaced by Gross Domestic Provisioning that measures overall
well-being.

This discussion of public money is not utopian. It is not about what could exist it is
about recognising and re-orienting what does exist. The power of public money has
been made clear through its use to rescue the banks, let it now be used to provision
the people."

=References=

* Desan,Christine (2014) Making Money: Coin, Currency and the Coming of
Capitalism Oxford University Press, Oxford

* Graeber, David (2011) Debt – The first 5,000 years Melville House Publishing, New
York.

* Martin, Felix (2014) Money: The Unauthorised Bibliography Vintage, London

=More Information=

Relevant publications by Mary Mellor:

* Debt or Democracy: Public Money for Sustainability and Social Justice (Pluto
November 2015)

*The Future of Money: From Financial Crisis to Public Resource (Pluto 2010)

* The Politics of Money (Pluto 2002 co-authored)


[[Category:Money]]

[[Category:Policy]]