High time the universities changed their teaching on money creation

It’s disturbing when university professors tell lies about the money creation process. I thought universities were supposed to be repositories of knowledge and their statutory duty was to pass on knowledge. And when they fail in that duty and pass on myths to their students who then go on to hold jobs in banking, media and all the related jobs, how much greater the crime? And when journalists pick up untruths from the academics and their graduates, how can a society learn the truth?

Some years ago I was contemplating spending my remaining years suing a university for inaccurate teaching about money creation. I was enraged that a trusted societal institution should fail so profoundly in its statutory duties when the consequences were so enormous and profound. But I chose instead to co-found the New Economics Party and I don’t regret it.

Every now and then Professor Steve Keen from Sydney has a sparring match with Paul Krugman, the former Nobel Prize winner in economics and columnist for the New York Times. The publishing of a paper by three Bank of England economists – Michael McLeay, Amar Radia and Ryland Thomas – dispelling myths about money creation would have set it off again. They were so keen, they even did a youtube video filmed in the gold vaults of the bank. Writing on his debtdeflation blogspot, Keen said he eagerly awaited Krugman’s reaction to Threadneedle Street’s paper. He is not expecting university lecturers to change their lectures any time soon.

As for me I am a bit embarrassed that the first chapters of my book Healthy Money Healthy Planet – Developing Sustainability through New Money Systems pbl Craig Potton 2005 refer to “fractional reserve banking” and the “money multiplier effect” which, according to both the Bank of England and to Michael Kumhof and Jaromir Benes of the IMF are just plain wrong. I wish I could change it.

So how is money created? Well I actually wrote both versions of money creation in my book and the second one is right. I must have confused many readers and apologise.

The Bank of England paper dispels two myths. It says:

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks:

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.”

They say “This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.”

It’s a lovely clear paper, accessible and readable. The two videos with it are filmed against the unforgettable and authoritative background of gold nuggets in the vaults in the Bank of England, a clear statement in itself. It describes how some money is created by buying assets, outlines the constraints on bank lending and reminds us the way money is destroyed is by paying back loans. It says clearly “Banks do not act simply as intermediaries, lending out deposits that savers place with them”.

Knowing that commercial banks create most of the broad money supply and that savings takes money out of the total in circulation, I have always been suspicious of comments of bank economists, journalists and politicians who urge more savings. So here is a quote on saving that I like. “When households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend.” I like it. It makes sense.

So are universities the right place to start? I am not sure. It is logical enough to argue they train society’s professional economists and influence journalists and politicians. But it may also be useful to focus on educating journalists to be suspicious of academics in economics. After all do other disciplines have websites and books similar to “Unlearning Economics” and “Sack the Economists” and jokes about not letting facts get in the way of a good theory?

This blog is not about solutions. It is about getting the facts about banking and money creation right in the first place. When solving problems you have to start with facts not myths. And whether you are a Social Creditor, Positive Money adherent, New Economics Party member or anything else you will have your solutions to public money creation. This is not the forum to debate solutions.

Well so what should we all do? Any of these would be a start.

1. Send the paper’s link to top politicians through whatever media you fancy, be it twitter, facebook, email or snailmail.

2. Get active in any organisation or group that tells it like it is.

3. Have a look at a student’s economic textbook and write to the university who prescribed it pointing out the authoritative paper and urging they teach facts not myths.

4. Ring up any radio station that perpetuates the myth of intermediation pointing out it is wrong.

5. Join with others in this campaign.

6. Offer to help the New Economics Party

7. If you are a student, then organise petitions to your academic staff and changing the textbooks.

Deliberating in public “would have a chilling effect on free discussion”, say MPs

Last year we went to the trouble of collecting nearly 900 signatures for a petition. When I was finally informed that it was going to be discussed on a Thursday by the appropriate Select Committee, I said "Good, I will come". "Oh, no," said the secretary, "this is not an open session". Having been involved in local government where meetings are almost always in the open I was gobsmacked.

Well the petition was turned down and we are none the wiser as to why. We don't know what arguments were put forward or used in objection, we don't know anything – only that they invited a submission from the Reserve Bank because they sent us this recently, together with their final report.

NZ Parliment After discovering this behind doors policy, I wrote to the Speaker, saying that Parliament had legislated to require local authorities have their meetings in public (give or take a couple of exceptions) 22 years ago. Why did they now expect the same standards of open government from themselves?

The Speaker wrote an excellent letter back and invited us to submit to the Select Committee on Standing Orders. We did this and before long they invited us to give evidence. We got a reasonable hearing.

But a few months later when I asked what the result was, the secretary gave me a link to the committee's report and lo and behold there was nothing about having Select Committees in open session. Again we have no idea what the arguments were and who argued which way.

The only part of Parliament we see is the tribal raruraru in the House and it is an embarrassment to notice there are school children in the gallery watching it all. The Westminster System certainly shows its ugly side.

But Select Committees, they tell us, are the most constructive part of Parliament. So why can't the public see them cooperating and deliberating? Why do they close their doors? What have they got to hide?

No wonder so many are turned off Parliament and don't vote. All parties seem as bad as each other at the moment.

And today the advice from the Clerk of the House was posted on Parliament's website. "No", she said. "While I agree that it would be useful for the public to see the constructive discussions that occur in closed meetings, the nature of these discussions would be likely to change if they were conducted in public, or they would take place outside the committee room. In particular, opening proceedings would affect the provision of free and frank advice, have a chilling effect on free discussion and political negotiation amongst members, and increase the likelihood of lobbying."

Well that was what one MP told us when we went there. Oh how dreadful seeing them being constructive. Oh how surprising seeing them negotiate. Well it makes one wonder what is so different about being an MP when councillors at local level can deliberate in public with the media and the public present. The latter is democracy we trust, the former is a closet democracy.

And it seems the MPs followed the Clerk's report, because that is how they decided. And no one will ever know if one of them didn't agree. If this is the effect of the adversarial imperative of the Westminster system it is not serving well and it is time our adversarial system was reformed.

Letter to a budding politician concerned about inequality and climate change

Letter to Miriam Pierard, Miriam I listened to your radio interview with Wallace Chapman and I was very impressed.

Yes, the top issues of our time are climate change and inequality. You say you are concerned to find answers. Great news.

Gosh Miriam I have been looking to solutions to the environmental crisis for decades. I was a candidate for the Values Party in 1975. And we were saying in those days that the GDP wasn’t necessarily an indicator of progress, because we had noticed inequality then – and unemployment and deprivation. And it is still worshipped forty years later.

Late in 2012 we had a 40 year reunion of New Zealand Values Party activists. We reflected on progress and it was quite sobering. Inequality had got worse and the environment had deteriorated to the situation where our very habitat is threatened with climate change and all the storms, flood, drought and food insecurity it brings.

A year before that reunion I had helped co-found the New Economics Party. Whereas most of the Values Party seniors said they were frustrated within the Green Party, I said I wasn’t at all because I was actively engaged in finding solutions and believed I had come to understand two of the big solutions.

I know I have. The very money system we have is structured so that the money supply has to grow, debt has to grow and the economy has to grow. So when it comes to climate change talks, after all the dire warnings from increasingly alarmed scientists, we usually watch helplessly while official delegates back away, claiming that the economy mustn’t be harmed and economic growth cannot be jeopardised. “Balance” is the cry… and they come up with some puny version of what is needed.

The structural problem we have here is this. We have a monetary system where if the economy doesn’t grow, it collapses. That is how it is designed. You are damned if you do and damned if you don’t scenario. So it’s not a great choice – runaway climate change if we do nothing or economic collapse if we do something that will halt it.

So I had finally found the cause of the growth imperative. It was the money system whereby we allow banks to create money as interest bearing debt. The negative consequences would all follow. It had taken me till 2004 to realise this.

But finding the cause(s) of inequality? It has come to me in various forms over the last few years. But now it is crystal clear. The earth has a finite supply of land and natural resources – land, water, fish, electromagnetic spectrum and so on. We all can’t occupy the same piece of land. Some land is more valuable than other land. Land is given its value by the desirability of its surroundings. So those who claim monopoly use of the best land must compensate the others for the privilege. In other words pay a full rental on the land to the public purse and then let this revenue be shared with all, perhaps as a Citizens Dividend or for health and education and other government services. Add to this the rental on the monopoly use of fish stock, water, coal, oil, minerals and you get government revenue.

If we don’t charge a rent on the monopoly use of natural resources, the consequence is asset inequality and this leads to income inequality. You are always going to derive income from monopolising resources like land.

I had also realised this land issue must be solved at the same time as the money issue. When I was starting to understand the money system and advocating for money spent into existence without interest (the Reserve Bank issues its coins this way) it became clear that interest-free money would cause a rise in the price of property. That really meant a rise in the price of land. We would have a land bubble. (that is why economists wouldn’t ever agree to zero interest money; they knew the bubble consequences).

But the land bubbles only happen because freehold land originally meant land “free of rent”. Apart from a small amount as the land proportion of our rates, there is no price on the holding of land. We can see that in Auckland as speculators buy valuable sections or old houses, and sit on them while the area develops and the price rises. Without doing anything at all the land speculators get an unearned windfall gain. (And a Capital Gains Tax won’t solve it, but I won’t go into that now).

Those who have freehold land should pay the public a full rental. Any valuer will tell you they can work out the rental value of any piece of land, it’s easy. And it should be reviewed annually, otherwise there are unpleasant hikes upwards.

But is this another tax? No, it is a replacement tax. Since there is no logic in income tax because there is plenty of labour we should get rid of that. Labour and entrepreneurship are valuable and we should encourage them. GST is regressive and income tax illogical.

Now I won’t go on any more, except to say if you are seriously concerned about inequality and climate change I encourage you and your party to focus your energies on economics. Other wonderful results follow from understanding these two issues. It’s the money system. It’s the tax system.

Few economists can tell you much about how money is created and, as two economists from the IMF and three from the Bank of England have recently embarked on a campaign to teach the economics profession about bank created credit. They say the textbooks are wrong.

However politicians worth their salt will also be aware that it is political suicide to favour a third tax on land. People will protest they pay their rates and they pay their mortgage so why should they pay another? Quite right. Actually the bank is getting the money that rightfully belongs to government. It’s a challenge.

Look I don’t know how this could all be implemented without shocking the economy. I have worked out one solution. I am not sure it is right. But I do know that somehow, someone must be politically creative, politically determined and wise enough to win the public over and finally address climate change and inequality at the root. Nothing else will suffice. Artificial bandaid solutions can’t work because they don’t get to the root of the problem.

As a woman in her seventies addressing a clever young budding politician I wish you the very best and hope that you can help make a better world for my grandchildren. Meanwhile I will keep doing what I do.