Cash Flow

The Production of Money: How to Break the Power of Bankers BY Ann Pettifor. Verso. Hardcover, 192 pages. $19.

The cover of The Production of Money: How to Break the Power of Bankers

For most of us, money seems like the realest thing there is. It dictates what we eat, where we live, and how long we stay alive at all. Worse still, it seems there’s never enough of it to go around. But what is money, exactly? Where does it come from, and who controls how it’s made, spent, lent, disbursed, and denominated?

In The Production of Money, political economist Ann Pettifor sets out to answer these questions and to examine how politics and class interests contribute to widely held assumptions about how money works. She emphasizes an obvious but frequently overlooked point: Money is not simply a commodity but a social relationship, which should be treated as such, both by economists making models and by elected officials writing policy. Pettifor also imagines what the economy and labor market might look like if we did away with the perception of money as an apolitical beast guided by mysterious “market forces,” and instead made sufficient supply a priority.

Lurking beneath the lines of The Production of Money is the ghost of John Maynard Keynes, whose significance Pettifor ranks on par with Charles Darwin’s. Most people understand “Keynesian” policies primarily as fiscal ones—those that promote government spending to stimulate the economy. Pettifor, however, believes Keynes’s ideas about monetary policy—the management of interest rates and currency—to be his greatest contribution. “Keynes was ruthless in his approach to the subordination of the finance sector to the interests of wider society,” she writes, admiringly. Mainstream economists and politicians, she suggests, have willfully and conveniently ignored Keynes’s radical legacy, and the consequences are all around us: “the unemployment and impoverishment of millions of people, recurring financial and economic crises, polarizing inequality, social and political insurrections, and war.”

But there’s good news: These ills aren’t inevitable. Pettifor believes that money isn’t really scarce and can be managed in a different way, which presents an opportunity to build a better system by regulating whom bankers lend to and at what rates. To handle the effects of globalization—to take back control, as virtually every successful political movement of the past few years has put it—politicians must wrest domestic economies from the clutches of global financiers. Only then, writes Pettifor, can our monetary system be truly equitable, fair, and democratic.

Hans-Peter Feldmann’s Hugo Boss Prize installation, 2011, Solomon R. Guggenheim Museum, New York. David Heald.
Hans-Peter Feldmann’s Hugo Boss Prize installation, 2011, Solomon R. Guggenheim Museum, New York. David Heald.

Pettifor has been thinking about debt—how vital, insidious, and prevalent it is for people, companies, and countries—for a long time. At the end of the last century, she ran the Jubilee 2000 movement, whose advocacy, petitions, and high-profile endorsements, along with the requisite U2 benefit concert, led to the cancellation of $100 billion of debt owed by thirty-five countries. She also predicted the financial crisis long before it hit: The global economy, Pettifor argued in a 2003 column in the New Statesman, was fundamentally unsound, and the debt consumers were forced to take on because of rising housing costs and falling incomes was getting close to impossible to repay. If unemployment rose, people would sell off or default on their homes, sending the housing market, and with it the economy, into free fall.

At the same time, Pettifor acknowledges that debt is essential because it’s what gives money—which, remember, is a social relationship—its value. “If the money supply has shrunk, because the private sector has lost confidence,” she said in a recent lecture based on her book, “then the best way to fund savings would be for governments or private banks to issue new debt.” That’s not necessarily what happens in a crisis, though. Citing Margaret Thatcher (who, in addition to saying there was “no such thing as society,” justified cuts in state spending in 1983 by declaring that “there is no such thing as public money . . . only taxpayers’ money”), Pettifor convincingly argues that crises like the one we all lived through in 2008 present the perfect opportunity for ideologues to “shrink the state” by chipping away at social programs. Austerity in Europe is a great example of these tactics in action.

Pettifor blames politicians and regulators for this state of affairs, but she also points the finger at her own profession. Academic economists, she writes, do not “appear to understand money, banking and debt.” Most of them “treat money as if it were ‘neutral’ or simply a ‘veil’ over economic transactions. They regard bankers as simply intermediaries between savers and borrowers, and the rate of interest as a ‘natural’ rate responding to the demand for, and supply of, money.” In the real world, bankers and the rules they abide by are anything but neutral.

Pettifor notes that the “textbook” position treats money as finite, like corn, gold, or even Bitcoin, when in fact it is a social construct: It doesn’t behave as grain or precious metals do because it isn’t grown, harvested, discovered, or, as in the case of Bitcoin, digitally mined. Citing David Graeber’s seminal book on debt, she debunks the idea that money evolved from barter. “It is ideology, not science, that asserts that the market in money is like the market in widgets, and must be left to the forces of supply and demand, and not regulated by governments,” she explained in her speech. Given this, we ought to do away with a “false scarcity” mentality. “Spend to tax” is Pettifor’s mantra, not “tax to spend”; money is “not the thing for which we exchange goods and services but by which we undertake this exchange.” Citing Keynes, she argues that we can afford whatever we create.

The money supply is not even as centrally determined as we suppose. While national banks control the creation of the bills in our wallets, most of the money in the economy is brought into being by “shadow” financial institutions making loans by digitally transferring figures from one bank account to another. There’s enormous power in that, and without the right regulations, Pettifor writes, bankers will continue to behave as they have been doing—like Goethe’s Sorcerer’s apprentice, who misused magic to clean up his master’s studio.

The result was chaos, with a proliferation of brushes and pails, and the flooding of the Sorcerer’s workshop. So it is with unmanaged and unregulated credit creation; the result leads invariably to excessive credit creation, the inflation of assets, prices or wages, the build-up of unpayable debts, and then catastrophic failure of the financial system as debts are defaulted upon.

In Goethe’s ballad, the Scorcerer returns and breaks his understudy’s foolish spell. Pettifor’s still waiting for modern-day regulators to exercise the same authority. It’s people, not their money, who decide on the rules.

The rift between the orthodox neoclassical view of how the economy works and heterodox alternatives like her own, Pettifor confirms, “is as wide and profound as that between sixteenth-century Ptolemaic and Copernican concepts of the heavens.” Think about the language of budget negotiations: It’s assumed that funds for social welfare programs need to “come from” another source—taxes, spending cuts, or both. These arguments rest on the notion that there’s only so much money to be had. “In adopting austerity policies politicians have effectively resorted to the very dated ‘gold standard’ policies of the 1920s and ’30s,” Pettifor writes, noting that “contractionary policies have the effect of lowering the money supply and, with it, profits, wages, incomes and prices.”

There are consequences to outsize exuberance, too, of course—the prospect of inflation, in particular, keeps a lot of economists (of both the academic and armchair variety) up at night. But Pettifor is much more worried about deflation, which is caused by a decrease in the supply of money in the economy. Wages aren’t keeping up with housing costs, and social welfare is being cut, so that people must spend more relative to their wages on things they need to get by. When people have less money to spend on toasters and tires, the predominantly Chinese manufacturers of these items will be left with a glut of them and lower their prices. These depressed prices, along with lower wages, will make debt more expensive relative to the cost of living—creditors, Pettifor notes, love deflation—and the result will be a stagnating, ailing economy, much like the one we have today, with few prospects for improvement.

Have you heard that the stock market is doing great? That quantitative easing worked? That the crisis is over? Pettifor has. But she isn’t buying it. Unemployment among young people in the eurozone as a whole has been stuck between 19 and 25 percent for years, and is over 40 percent in some European countries. It may be the case that more people in the US now have jobs—but they’re badly paid, contingent jobs. Global banks, she contends, remain as insolvent as ever, propped up only by artificially cheap finance, government guarantees, and balance-sheet manipulations (unfortunately, she does not elaborate on this last point). The rise of the populist right, according to Pettifor, makes perfect sense given these conditions. We’re dealing, in the words of John Kenneth Galbraith, with “private affluence and public squalor.”

As consumers, taxpayers, and wage earners, we have, in her view, been taken for a ride. Look at low interest rates. Cheaper mortgages are good, right? Not always. When central banks began their policy of quantitative easing—that is, buying up securities in order to drive down the cost of borrowing—the lowered interest rates actually pushed property prices up, because as stock prices rise and bond yields fall, investors turn to the property market to find higher rates of return and safe havens for their cash. Who are these investors? The wealthy. And who pays rent? The rest of us. “As such,” she writes, “QE contributed to rising inequality and to the political and social instability associated with it.” Combined with the mobility of capital, which allows the global ultrarich to park their money in fancy condos, that is why the rent is so damn high.

What’s more, Pettifor contends that QE has not increased investment and economic growth as much as it seems. You can tell this is the case, Pettifor writes, because of the emergence of negative interest rates: when commercial banks must pay the central bank to hold their money, making it more costly for them to keep it there than to lend it or invest it elsewhere. The negative interest rate is a tactic intended to encourage commercial banks to lend more. The fact that they would nonetheless rather take the hit and leave their money with the central bank (effectively keeping it safe for a period of time) is, Pettifor says, “a sign of a broken monetary system.” It’s also a sign of “the fear gnawing away at investors, as financial volatility drives them to search for the only ‘havens’ they now regard as safe for their capital: the debt of sovereign governments.” This isn’t an easy problem to fix, because it’s a symptom of a whole economy gone topsy-turvy. And the indebtedness of the current banking system, paired with the fact that stock markets are doing well, gives bankers the incentive to speculate and aim for short-term gains rather than long-term returns.

Encouraging or mandating a better kind of lending—even from the private sector—can help. Pettifor devotes much of the second half of her book to arguing for greater regulation of the banks by the public in order to make it work for ordinary people. Pettifor doesn’t advocate for the destruction of the finance sector. Banks wouldn’t have to disappear—but they would have to change drastically the way they spend and lend. Issuing new debt without immediate prospects for repaying it isn’t necessarily a problem if that debt goes to fund useful activities that will generate revenue in the medium and long term. By the same token, credit constraints can serve to limit consumption that hurts the environment (think of low rates to start a wind farm, and high ones to drill in an oil field). So, instead of the regulatory systems we have today, a public, democratically elected authority would have to be in charge of monetary policy. There would be fewer loans for gambling, betting, rent-seeking, and speculating: Lending would instead go toward productive activity that generates employment and income.

Another key element of Pettifor’s proposal hinges on economic nationalism. She advocates for capital controls, which from the mid-’70s onward were widely considered beyond the pale—although today even mainstream economists and institutions like the IMF have softened their views somewhat. Pettifor is particularly eloquent and passionate on the subject. “To bring global capital back onshore would be transformational of the global monetary order,” she writes. “Democratic policy-making—on taxation, pensions, criminal justice, interest rates, etc.—requires boundaries and borders. . . . But freewheeling, global financiers abhor boundaries and regulatory democracies.”

Pettifor has a gift for breaking down complex economic ideas into notions that feel almost intuitive. If her book cannot hope to wholly democratize money, it could certainly help democratize the understanding of it, which Pettifor sees as the first step to encouraging public demands for a fairer system. Her political arguments are, on the other hand, well worn: It’s hardly news that budget constraints and austerity can be ideological ploys executed to hurt the poor and further enrich the rich. And while Pettifor’s response is ethically commendable—it’s hard not to get behind many of her hopes and dreams—she’s essentially calling, if not for an end to capitalism, then at least for a fundamental realignment of capitalist values.

It’s unlikely that the very financiers and politicians whom she characterizes as out of touch, mercenary, and power hungry would change their ways if they could only see the light and truly understand money for the first time. For all her talk about how money works in the “real world,” Pettifor’s prescriptions seem as divorced from our political reality as the market ghosts and spirits she critiques. If the structural problems in the way the global economy is organized ultimately stem from class politics, will it not take class politics to fix them?

Atossa Araxia Abrahamian is a journalist and the author of The Cosmopolites: The Coming of the Global Citizen (Columbia Global Reports, 2015).