The production of money is ultimately the struggle for control over resources, wealth, people and our environment. But there is a surprising level of ignorance around how banks create money out of thin air and the benefits which flow from it.
Host Ross Ashcroft is joined by the economist and author of the recent book The Production of Money, Ann Pettifor and founder of banking platform Seascader, Steven Round, to examine how money actually works.
It may come as some surprise even to many of the nation’s politicians, but the Royal Mint is not responsible for issuing Britain’s money.
A 2016 survey of British politicians demonstrated a disturbing level of ignorance around how the economy actually works.
How can we trust our elected leaders to make responsible policy decisions, if they do not even understand the true nature of money?
Economist, Ann Pettifor told Renegade Inc that the finance sector is one of the world’s best kept secrets, and that if people understood how the economy really operates, workers would be appalled by the way their governments and financial institutions have been deceiving and depriving the real economy.
We – the people – create the money supply,” says Pettifor. We have discovered that the banks create money out of thin air, but actually no money can be created until you or I apply for a loan. So actually we create the money supply. When the economists try to tell you that it’s done by the Central Bank. Well they’re talking rubbish. You are responsible for the money supply.”
Steve Round, founder of banking platform Saescada and chair of ecology building society told Renegade Inc that it is becoming increasingly difficult for many people and small businesses to gain access to finance.
“While the UK banking sector has the potential to be a very good system, unfortunately it just isn’t working very well for many millions of people,” he says.
“I grew up in a time where banking was about providing financial access to financial services for the majority of people. I think banks are getting more and more focused on not doing that.”
Round recommended creating new banking platforms, reducing branch networks and using technology to enable people to access financial services.
Pettifor told Renegade Inc that banking is a public good, as important as sanitation and clean water.
“Before we invented British banking in 1694, people with bright ideas would have to go to the robber barons who lived at the top of the Hill and beg for money and be charged excessive rates of interest,” Pettifor said. “With the invention of banking, borrowing and lending was sort of democratised.”
Round pointed out that when he first started in banking, loan applicants were assessed on character and ability, not the means to pay.
“Now that’s gone,” he said. “It really has.”
Round and Pettifor are in agreement that banks are no longer interested in assessing finance for new assets, projects or businesses. Rather than aiding in the creation of new assets, Pettifor says the banks are obsessed with gambling on existing assets, particularly in property, creating speculative bubbles which are doomed to crash.
“I get frustrated with economists to talk about the supply and demand for housing,” Pettifor said. “If you reduced the amount of finance being pumped into the property market in London suddenly we wouldn’t have a shortage of housing. It would all change quickly. The shortage comes about because most housing is unaffordable. There’s an awful lot of housing in London that’s empty. People who are based in Malaysia buying a property of plan and city because owning that property enables him to leverage additional borrowing”.
Round says regulators are more concerned that the banks have enough capital that when they do inevitably fall over, they’ll be fine.
Consequently, they are encouraged by default by the regulators, to continue gambling on existing assets, instead of facilitating the creation of new assets, which is why the banking system was setup in the first place.
Pettifor says the consequence of public and political ignorance is that the real economy is being starved of funds.
“The fact that politicians don’t understand that money is not a commodity,” says Pettifor. “It’s not gold, it’s not silver, it’s not cigarettes. It’s a promise to pay… it’s a social contract. I promise to pay you. You promise to pay me. And we do it every time we use a credit card.
“…Because most of us don’t really understand money, these guys can get away with it, and the regulators can get away with doing foolish things like insisting on capital raise which doesn’t stop the bank from gambling. In fact their intention to gamble now is much stronger because they’ve got British taxpayers German taxpayers American taxpayers on the hook. So why would you want to grow tomatoes when you can grow credit and never lose basically.”
But the jig is up. Citizens of the UK – and the US – are beginning to sense that something is not right, as evidenced by Brexit and the elevation of Donald Trump.
“I think there are movements out there of understanding that things have gone badly wrong,” says Pettifor. “People now have a sense that there’s some very grave injustice out there and there are insurgencies against it. Donald Trump represents that, Brexit is about that. The question is will we be able to channel that anger now into something positive into a transformation of the system.
“I don’t know whether or not the financial system and the regulators and the politicians are going to catch up quickly enough with what’s happening in order to correct all those imbalances before the people revolt even more. But I suspect they’re beginning to get the message that there’s something very wrong. It has to be fixed. And that is a good thing.”
Watch the full interview above with Steve Round and Ann Pettifor to understand how money really works.