‘The Production of Money’: How to Break the Bankers and Put Our Broken Economy Back Together

Ann Pettifor’s sleek little study The Production of Money lures in prospective readers with a subtitle akin to a Hogwarts magic spell: “How to break the power of bankers.”

How many readers will reach for the book without reflecting first on that subtitle and why it speaks so powerfully to us? Why do we feel such an urgent need to break the power of bankers?

Indeed, argues Pettifor, a well-developed monetary system is one of the great accomplishments of humanity, a critical enabling factor in the achievements of our modern civilization. So what went wrong?

The bankers who once liberated us from the usury of feudal robber-barons have forgotten that their role is supposed to be an essentially altruistic one, her tightly argued book suggests. They were supposed to free us from the crushing weight of grinding poverty and debts we can’t pay, and lend order and humanity to our economic structure, not usurp the role of robber-barons themselves. A significant portion of humanity’s holy books and ethical systems are based on hammering home one fundamental tenet which today’s bankers seem to have forgotten: no usury (an antiquated yet increasingly relevant term referring to excessively high rates of interest). Greed is bad. Do not seek to profit excessively off others.

Yet the bankers and finance sector that facilitated our shift to a complex modern society have forgotten that core message, and are now hell-bent on getting as rich as they can — riches for the sake of riches; growth for the sake of growth. The consequences of this, for both people and the planet, have been severe. A key consequence is that the purpose of the modern monetary system — which is not to make people rich (prehistoric barbarians were able to do that with spears and clubs), but to make society better (through education, the arts, medicine, technology, leisure, social mobility, welfare) — has been hijacked toward socially useless ends. This is demonstrated most tellingly through the amount of money wrapped up in global financial speculation, with the end goal of producing nothing tangible beyond more wealth, and all of it going into private pockets.

What is to be done?

Pettifor’s essential message is this: we need to promote spending on societally and ecologically useful things. Our economy and monetary policy urgently need to be redirected toward these ends.

‘But governments are broke! Austerity is the new normal!’ comes the instant retort.

But that’s in many ways because governments allow themselves to be broke. They have the tools to turn this around, if they chose to use them.

As Pettifor ably demonstrates, money is relatively easy to create. Private banks do it all the time, by extending credit. Contrary to what many of us believe, when banks extend credit, it doesn’t mean they have the actual cash reserves to cover it. They’re making a calculated gamble that the loan will pay off, and the borrower will be able to go out and bring back actual money to pay back the invented money the bank credited them. By providing the borrower with the credit they need to purchase goods, employ people, and do all sorts of economically productive things, the banks have essentially created new money.

When they do it wisely (by screening applicants and ideas, and charging low rates of interest), the gamble pays off. The borrower starts their company, has a smash success, and not only are they able to pay back the loan, but they’re able to hire lots of people, produce lots of goods, and otherwise stimulate the economy in all sorts of spin-off ways. The money which the bank envisioned into existence by extending credit, becomes real in a very tangible way.

Voila: the production of money, not by government treasuries but by private banks. It happens. And it can work.

But it doesn’t always work. Failure can come in two forms.

It can come when the gamble does not pay off, and the bank is unable to get back the credit that it extended. Given that banks give out many loans at any one time, any one failure is unlikely to sink a bank. But if failure becomes too common a trend, or if the gambles are too high, then the bank could be in trouble (as we witnessed in the recent 2008 financial crisis).

But failure comes in a second way too, and that is when credit is not extended for societally or ecologically useful purposes. The classic trope of a bank loan — to a daring and confident entrepreneur who’s got a clever idea for a new product or service responding to a public need or demand — is becoming the exception, not the norm. Banks have been lending not to real people trying to do real things in the world, but to other financiers who are simply speculating on the esoteric spin-offs of the global financial system.

Take sub-prime mortgages: irresponsibly lending money to people who couldn’t pay the loans back (or demanding unacceptably high terms which guaranteed they couldn’t pay them back), then bundling those loans together and selling or trading them, provided a scheme which made a few individuals and firms incredibly rich (before the firms crashed into crisis), but which really contributed nothing useful to society or the planet (especially since many of the average people affected subsequently lost their homes as well).

Governments responded to the financial crises of 2008 by creating more money that they then used to bail out the banks (not the people), but again instead of using their newly recovered stability to fund economically stimulating and productive projects, the banks continued doing the same thing that brought them into crisis in the first place: concentrating their efforts on speculative activities designed to generate massive profits but without contributing anything useful to the world around them (by way of employment, for instance, or ecological benefit).

At present, there’s plenty of money floating around in the world, but it’s all in the wrong places. It’s not being used to create employment, to transition our economies and societies into ecologically sustainable practices, to educate the public or fund socially useful projects and welfare. It’s being used to make a handful of people at the top rich.

So what can we do about it? Well, move away from austerity economics, for one. Cutting public spending on socially useful things, as austerity ideologues demand (witness US President Donald Trump’s latest budgetary suggestions) does not help the economy. It doesn’t help anything, other than possibly making a handful of rich people richer (by increasing the value of their savings and assets, which is what happens in times of economic crisis like the present).

So governments need to spend and encourage people and firms to borrow and spend but in societally and ecologically useful ways. Projects that expand employment, or provide people with the skills to obtain employment (funding universities, for instance), ought to be generously funded. Social programs that improve the social well-being and social capital of everyday people, so that they can obtain employment and live fulfilling lives as active members of society, ought to be generously funded. These are iron-clad investments that pay back immensely, not just in terms of economic productivity but in societal terms as well. Governments need to increase spending in these areas. Banks need to offer generous loans at low interest rates to projects that promise to pursue these goals.

We also need lending and spending on projects that offer to improve the ecological sustainability of the planet, argues Pettifor. Climate change is a real, serious issue and one that’s not just wreaking havoc on the environment but is also proving increasingly costly in economic, human and social terms. We have many of the tools to tackle it, by shifting away from the less expensive and more profitable yet ecologically destructive practices we tend to use at present, into more ecologically sustainable methods of production, transportation, housing, and so forth.

Yet shifting into an ecologically sustainable economy is the sort of massive undertaking that will require huge amounts of money up-front and will take a fair amount of time before we see the benefits (ecologically, socially, and economically). In other words, it’s an ideal undertaking to fund through credit (the creation of money). The pay-off is virtually guaranteed: a better world for future generations of humans, along virtually every measure. The problem is the short-term ‘pain’ (in fiscal terms) it will require to get us there. And that, Pettifor suggests, is precisely the sort of smart, forward-thinking planning that the monetary system, and credit, were invented to make possible for humanity to pursue in the first place. Yet instead, bankers and the finance sector have thrown the purpose of money out the window, and are using these techniques for pure self-enrichment at society’s expense.

This is Pettifor’s recommendation: extending credit to carefully screened initiatives that promote specific social goods that benefit society, and lending it at low interest rates. After all, most of the private banks are able to lend money because they, in turn, borrow it at low rates from central government banks. Yet instead of passing this benefit on to the public in the form of carefully screened low interest credit, the banks offer it indiscriminately at high interest rates, which is what leads to financial collapse and crises.

Pettifor tackles a daunting subject — the nature and purpose of money — and one which she notes even economists are hesitant to tackle (the lack of serious examination of the nature of money in university economics departments, she says, is a key part of the reason economists have been incapable of responding to the global financial crises in any coherent way; none of them really have a grasp of what money is). She struggles, with middling success, to make her argument accessible to the general reader — after all, it’s the voting public that will have to bring about the change she calls for.

This last point is an important one. She concludes her provocative and insightful study with a parting shot at some progressive economists and activists who have proposed similar monetary policies as the ones she advocates, but who think monetary policy should be taken out of the hands of the politicians and put in the hands of ostensibly objective technocrats. That sort of thinking — that a handful of people behind closed doors know best — is precisely what led to our present crisis, and is keeping us mired here, she warns. What we need is monetary policy directed toward public good and under transparent, democratic control — a monetary policy of the people, by the people, and for the people (and the planet).

It’s an ambitious vision, but if more economists start demonstrating Pettifor’s fearlessness and eloquence in arguing the point, perhaps we might yet one day achieve it, and without incurring further harm.