Sunday, October 30, 2011

“Where Does Money Come From”?

I’ve just read / skimmed thru this recently published book (published by the New Economics Foundation, London). It does what it claims to do on the front cover, that is it is “A guide to the UK monetary and banking system”. But there are so many references to bank and money systems in other countries, that the book is arguably a guide to bank and money systems in general.

This book explains the numerous deficiencies in the existing system, but does not propose any particular remedy: that is not the aim of the book. Bits of the book that stuck in my mind (because I’m an MMTer) were thus.

1. Warren Mosler’s “parents, children and business cards” hypothetical economy is briefly explained on p.34.

2. The book accepts that the text book model of banking where banks are constrained by their reserves is out of date.

3. The section headed “Is cash a source of ‘debt-free’ money” (p.66) left me scratching my head. This section claimed that “some monetary analysts have concluded that there are two ‘money supplies’. Firstly a supply of cash, created by the Bank of England and injected into the economy by being lent to commercial banks, and secondly a much larger supply of bank-created money created as banks make loans to and buy assets from businesses…” The authors then try to play down the difference between the two sorts of money, for example by pointing out that commercial bank created money is backed by the state: up to £85,000 per account in the UK (but check the small print before assuming your money is safe!).

In effect the authors play down the distinction between what MMTers call “vertical” and “horizontal” money. However, this attack on the latter distinction is half hearted and not very successful.

But there is much more to this book than the above MMT oriented points.

Incidentally in a separate publication, the publishers (New Economics Foundation) and one of the co-authors Prof.R.A.Werner advocate a basic MMT idea, namely that in a recession, the government / central bank machine should simply create new money and spend it into the economy. See:


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