It\u2019s 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?<\/p>\n
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\u2019t regret it.<\/p>\n
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 \u2013 Michael McLeay, Amar Radia and Ryland Thomas \u2013 dispelling myths about money creation would have set it off again. They were so keen, they even did a youtube video<\/a> filmed in the gold vaults of the bank. Writing on his debtdeflation blogspot, Keen said he eagerly awaited Krugman\u2019s reaction to Threadneedle Street\u2019s paper. He is not expecting university lecturers to change their lectures any time soon.<\/p>\n As for me I am a bit embarrassed that the first chapters of my book Healthy Money Healthy Planet \u2013 Developing Sustainability through New Money Systems pbl Craig Potton 2005 refer to \u201cfractional reserve banking\u201d and the \u201cmoney multiplier effect\u201d 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.<\/p>\n 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.<\/p>\n The Bank of England paper dispels two myths. It says: <\/p>\n \u201cWhenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower\u2019s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks:<\/p>\n \u2022 Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.<\/p>\n \u2022 In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money \u2018multiplied up\u2019 into more loans and deposits.\u201d<\/p>\n They say \u201cThis article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits \u2014 the reverse of the sequence typically described in textbooks.\u201d<\/p>\n It\u2019s 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 \u201cBanks do not act simply as intermediaries, lending out deposits that savers place with them\u201d.<\/p>\n 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. \u201cWhen 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 \u2018funds available\u2019 for banks to lend.\u201d I like it. It makes sense.<\/p>\n So are universities the right place to start? I am not sure. It is logical enough to argue they train society\u2019s 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 \u201cUnlearning Economics\u201d and \u201cSack the Economists\u201d and jokes about not letting facts get in the way of a good theory?<\/p>\n 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.<\/p>\n Well so what should we all do? Any of these would be a start.<\/p>\n 1. Send the paper\u2019s link to top politicians through whatever media you fancy, be it twitter, facebook, email or snailmail.<\/p>\n 2. Get active in any organisation or group that tells it like it is.<\/p>\n 3. Have a look at a student\u2019s economic textbook and write to the university who prescribed it pointing out the authoritative paper and urging they teach facts not myths.<\/p>\n 4. Ring up any radio station that perpetuates the myth of intermediation pointing out it is wrong.<\/p>\n 5. Join with others in this campaign.<\/p>\n 6. Offer to help the New Economics Party<\/p>\n 7. If you are a student, then organise petitions to your academic staff and changing the textbooks.<\/p>\n","protected":false},"excerpt":{"rendered":" It\u2019s 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 … Continue reading