Following the financial crisis of 2007-8 many states saw a spike in public spending that resulted in deficit – that is the state spent more money that it took in taxes. There were two possible responses to this situation: to see the deficit (which I would prefer to call surplus expenditure) as a necessary contribution to the rebuilding of economies or to see the additional expenditure as having to be clawed back. The UK , under a neoliberal Tory-Liberal Democrat coalition, took the second path: austerity – the culling of public services to reclaim the surplus expenditure – causing widespread hardship.
As I describe in my book Money: Myths, truths and alternatives (Policy Press 2019), the choice of austerity reflected two myths widely held about money: that the market is the sole source of funding for public spending and this must be limited because money is in short supply. Neither is true. These myths derive from false assumptions about the origin and nature of money: that money was invented by the market and its original and ideal form was scarce precious metal coin.
The historical evidence shows that these commonly held assumptions have little or no foundation. Far from emerging from the market, money has existed in most human societies from pre-state, pre-market, traditional communities through thousands of years of state development before becoming a mechanism dominated by market forces. Precious metal minted into coin is only one form of money. Money has been made of many other things: stone, shell, wood, paper and today it is largely intangible as plastic cards or electronic messages switch numbers between accounts.
Money is Social
However, the ideological power of these myths is very strong in contemporary market societies. The association of money with the market would seem to reflect most peoples’ everyday experience. Money is central to modern life. Lack of access to money can have dire consequences. Earning money is the key focus of most people’s lives. Money determines life choices. It dominates political and commercial debate: How much is that worth? What is the bottom line? Conceptions of money influence social and public policy. Requests for public spending are often rejected with the question ‘Where’s the money to come from’? In 2017 when challenged that prolonged austerity had forced nurses to rely on food banks, the then British Prime Minister, Theresa May, replied that she could not help because there was no magic money tree.
The assumption that modern money, like gold or silver, is naturally limited is mistaken. There is no shortage of paper to print banknotes or base metal to mint coin, or computer strokes to record accounts. So what limits the supply of money? Where does money come from? What determines how much money there is and the form it takes? What makes money, money? Despite its importance, money has been a largely neglected topic in both sociology and economics. Sociologists have largely assumed it to be within the remit of economics, while economists have seen money as merely a representation of underlying market dynamics.
The lack of a substantive political and social context to the phenomenon of money has led to the myths that distort our understanding. This is not helped by money’s ephemeral nature. While money has played a vital social and economic role throughout the ages, it has had no fixed form or structure. Although money has taken physical forms such as shells, coins, notes or plastic cards, the ‘moneyness’ of those objects is not inherent in the shell, metal, paper or plastic itself: it is in the social meaning attached to whatever is socially and/or politically defined as money. The value of money is not intrinsic to the form it takes, it is the trust that people put in it – whatever the form.
The myths of money justified austerity through a neoliberal ‘handbag economics’. Handbag economics sees the public sector as being like a household, dependent on a (private sector) breadwinner. States are required to restrict their expenditure to what the taxpayer is deemed to be able to afford. States must not try to increase their spending by borrowing from the (private) financial sector or by ‘printing money’. Money is to be generated only through market activity. States are to balance their books, that is, bring expenditure into line with tax receipts. The allocation of money is seen as zero sum. State expenditure robs the market of money for investment. The taxpayer is set against the welfare recipient. This builds conflict into the money system. Any request for increased public expenditure is almost invariably met with Theresa May’s assertion, that there is no ‘magic money tree’.
Handback economics is mistaken. The market is not the source of all money for public spending and there is not some scarce essential form of money that sets a limit to the supply of money. As money can be composed of base metal, paper or electronic data that are not inherently in short supply, there is no ‘natural’ level of public expenditure. The size and reach of the public sector is a matter of political choice.
Magic Money Trees
There are actually two magic money trees. Both the state and the market can increase and decrease the money supply by their activities. Markets increase the money supply when banks lend and decrease it as loans are repaid. States increase the money supply when they spend and decrease it when they tax. Neither draws on a previous stock of money. Banks do not raid existing bank accounts when they lend. Governments do not draw money from a taxation ‘piggybank’ when they spend. Both are creating money out of thin air. Banks may or may not retrieve all the money they have lent. Government budgets allocate spending commitments that may, or may not, match the amount of money coming in through taxation.
Conventional economics looks at public spending and taxation the wrong way around. Taxation and spending, like bank lending and repayment is in a constant flow. Handbag economics assumes that it is taxation (of the private sector) that is raising the money to fund the public sector. Taxation is taking money out of the taxpayer’s pocket. Looked at the other way around, public budgets can be seen as putting money in the pockets of individuals and organisations. Taxation is taking that money back. It is not tax that creates the money for the public to spend, it is public spending that creates the money to tax. Rather than seeing taxation as raising money for public expenditure, taxation can be seen as retrieving money already spent.
Unlike the neoliberal assumption that the taxpayer is a private sector ‘wealth-creator’, the taxpayer is just as likely to be a public sector doctor or teacher. Individuals and organisations in the public sector could not pay their taxes if they had not already been paid through public funds. The market is also a beneficiary of this public spending when the public sector spends its money in the private sector, or the state directly employs private companies.
State spending should not be assumed to be a drain on the market sector. Nor should a budget deficit be seen as a problem that requires the state to borrow from the private sector to bridge the gap. Public spending can be a source of new money free of debt. The important element in determining the balance of public spending and rate of taxation (monetary retrieval) required is the relation between public spending and the capacity of the market. If the private sector has spare capacity the amount of tax retrieved could be lower than the amount spent, if the market is overheating taxation could be higher than public spending to reduce the threat of inflation.
The Politics of Money
What is important about money is that it is a key institution in human societies. It is the vital link between people, market and state. It is a social construct that can be both tangible and intangible. It can be seen as an alienating and exploiting mechanism and as a force for social justice. Challenging myths about money opens up its radical potential. Social scientists need to ask fundamental questions about money: Where does it come from? How does it function? How is it owned and controlled?
Rather than the assumption of conventional economics that money creation and circulation is merely a technical matter, social scientists need to ask fundamental questions about money as a social institution. Should private bank borrowers be able to increase the money supply in a direction of their own choosing, such as financial speculation? Does a money supply based on bank lending drive inequality? How do states use their money? Both the state and bank capacity to create money have advantages and disadvantages. Both can be abused or corrupted. The reckless lending of the banking sector, led to near meltdown in 2007-8, reckless state expenditure could overwhelm labour and resource capacity driving inflation.
The answer must be to subject both forms of money creation – bank and state – to democratic accountability. Far from being a technical, commercial instrument, money can be seen as a public resource that has immense radical potential. Our ability to harness this radical potential is hampered if we do not understand what money is and how it works.
Mary Mellor is Professor Emeritus at Northumbria University Newcastle upon Tyne UK. She has published widely in the areas of social economy, financial exclusion and community development, ecofeminism and ecological political economy and the politics and sociology of money. Her most recent publications include The Future of Money (2010) Debt or Democracy (2015) and Money: Myths, Truths and Alternatives (2019)