Mary Mellor’s “Debt or Democracy”: Why Not Quantitative Easing for People?

Although it is widely assumed that governments are the source of all new money – through “printing it” – the so-called private sector is the source of most new money put into circulation.  In one of the most successful enclosures of the commons in our time, commercial finance institutions have captured the power to create most new money through their discretionary lending.  This power has become so normalized and pervasive that hardly anyone acknowledges the startling fact that commercial lending accounts for more than 95% of “new money” created.  Government has in effect surrendered its enormous power to use its money-creating authority for the public good.

Perhaps the leading champion for reforming the current money system is Mary Mellor, emeritus professor at Northumbria University in the UK and author of the recently published, eye-opening book Debt or Democracy:  Public Money for Sustainability and Social Justice (Pluto Press, 2015, distributed in the US by University of Chicago Press Books). 

Mellor recently published an oped piece in The Independent, the British newspaper, that summarizes some of the key themes in her book. Her essay focuses on the “myth of handbag economics” – the idea that government budgets are comparable to household budgets.  This distorts our understanding of how the money supply works, says Mellor, and inexorably leads governments to adopt fiscal austerity policies. 

The critical political question that is rarely asked, said Mellor at a policy workshop last September, is: Who controls the creation and circulation of money?

She notes that the government, as the sovereign, has the authority to issue new money – an ancient authority known as seignorage.  But in practice, governments have surrendered this authority to the commercial banking sector, whose lending creates nearly all of the money in circulation as debt. 

Banks create money out of thin air by issuing new loans.  They need not have those specific sums of money on hand, in a vault. They need have only a small fraction of reserves of the total sum lent, as required by “reserve banking” standards. In this way, bank lending quite literally introduces new supplies of money into the economy based on strictly private, commercial standards – i.e., banks' assessments of borrowers’ ability to repay the debt with interest.

Mellor believes that we need to recover the power of public currency to meet public needs.   By “public currency,” she means “the generally recognized and authorized public currency created through a public money circuit that originates in central banks and government spending.”  Privately created currency is money designated as public currency that is issued through the banking sector as loans.  It is the fact that bankers are creating the public currency when they make loans that makes the state liable to honor that money when banks go into crisis.

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British Green Party Calls for Public Control of the Money Supply

The Green Party of England and Wales really knows how to stake out some fresh territory in their national politics!  At the autumn conference, the Greens adopted a resolution calling for “a programme of reform to remove the power to create money from private banks, and to fully restore the supply of our national currency to democratic and public control so that it can be issued free of debt and directed to environmentally and socially beneficial areas.” 

Bold thinking!  The Greens explain why the existing banking system is so pernicious: 

"The existing banking system is undemocratic, unfair and highly damaging.  Banks not only create money, they also decide how it is first used – and have used this power to fund financial speculation and reckless mortgage lending, rather than to finance investment in productive businesses.  Through the interest charged on the loans on which all credit is based, the current banking system increases inequality.  It also regularly causes economic crises:  banks create and lend more and more money until the level of debt becomes unsustainable, boom turns to bust, and the taxpayer bails out banks that are ‘too big to fail.’  Finally, the need to service the growing mountain of debt on which our money is based is a key driver of unsustainable economic growth that is destroying the environment."

The right to create money and profit from it is known as seignorage.  Banks currently enjoy this right and exercise it through their lending, which creates most of the money in circulation.  Governments have effectively let banks privatize control of the money supply.  In so doing, governments have forfeited the opportunity to provide debt-free lending to support productive enterprises and public needs as opposed to fueling boom-and-bust speculation and relentless economic growth that destroys the environment.

Reclaiming seignorage for public benefit has been a serious idea among many progressive economists for years.  A notable figure in this regard is James Robertson, the founder of the new economic foundation in Great Britain, in 1986, who has championed this issue for years.  Robertson’s most recent book Future Money explains how re-gaining public control over how new money is created and circulated could result in “an annual savings to all citizens of the UK of £75bn, and second in a one-off benefit to the public purse totalling £1.5bn over a three-year transition period.”

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