Cooking the Books: Green Recipe for Raging Inflation

‘The Green Party believes’, reads a resolution carried at their annual conference in September, ‘that the power to create money must be removed from private banks.’ What power, and how?

At one time ‘money’ was defined just as the notes and coins issued by the government or a central bank, but modern economists have come to include bank loans too as money. This can be confusing if it is assumed that these two types of money are the same, as is often done. For instance, the Green Party resolution says that only 3 percent of the UK’s ‘money supply’ is issued by the central bank as notes and coins, with the remaining 97 percent taking the form ‘of credit that is created electronically by private banks through the accounting processes they follow when they make loans’ (emphasis added).

This figure is correct (except that some of the 97 percent are loans made by other credit institutions) but, while the 3 percent is ‘created’ in the sense of not existing before, the 97 percent is not. It is already existing purchasing power, originally generated in production as wages and profits, which  banks and other credit institutions transfer from savers to borrowers. The Green Party resolution assumes that this too has been created from nothing and wants to transfer this supposed power to a government agency so that 100 percent of the ‘money supply’ will be under government control:

‘A Green Government will therefore develop and implement a programme of banking reform based on the following principles:

(a) All national currency (both in cash and electronic form) will be created, free of any associated debt, by a National Monetary Authority (NMA) that is accountable to Parliament.’ (http://policy.greenparty.org.uk/ec#Monetary)

All money. Not that it would be ‘debt-free’ since money issued by the state is counted as part of the National Debt.

‘(d) Any new money created by the NMA will be credited to the account of the Government as additional revenue, to be spent into circulation in accordance with the budget approved by Parliament.’

That’s much easier than the government having to raise revenue by taxes or borrowing, too easy in fact as the experience of countries like Zimbabwe shows.

For this scheme to work, banks and other credit institutions would have to be banned from making loans as these are part of the modern definition of the ‘money supply’.  This isn’t explicitly stated but it follows that if alongside the activities of the NMA private banks were just to continue to make loans as before there would be a massive increase in the money supply (as most broadly defined today), with the NMA now ‘creating’ the equivalent of the 97 percent, far more fiat money than required by the functioning of the economy, on top of the activities of the private banks. Hello, Zimbabwe.

To avoid this the banks would have to be reduced to institutions which merely take in money and use it to make payments to and for depositors (or focus even more than is the case now on dodgy asset management activities). This would most likely create other economic problems, in particular depriving capitalist enterprises of a key source of funding, so slowing down capital accumulation. Maybe this is what the Green Party wants as it is opposed to ‘growth’, but under capitalism you can’t stop this without provoking an economic crisis.

Clearly, those behind the Green Party’s resolution have not thought it through, but then a party with no chance of forming the government can afford to have barmy policies.