Synopsis of The Production of Money – How to Break the Power of Bankers by Ann Pettifor

This is an inspiring book. It is short, bold and thought provoking. First published in 2017, revised in 2018, it is full of insights on this most important subject. Since it was written, global economies have been totally overturned by Covid19 and the book is even more relevant. Ann validates and draws on John Maynard Keynes’s ideas. In the synopsis below I  try to capture the key arguments.

The chapter titles indicate clearly what it is about:

  1. Credit Power
  2. The Creation of Money
  3. The “Price” of Money
  4. The Mess We’re In
  5. Class Interests and the Moulding of Schools
  6. Should Society Strip Banks of the Power to Create Money?
  7. Subordinating Finance, Restoring Democracy
  8. Yes, We Can Afford What We Can Do

Chapter 1 Credit Power

The global finance sector exercises extraordinary power over our society and government. They dominate policy making and undermine democratic decision making. The private commercial banking system creates 95 percent of our money in various forms while the central bank issues only about 5 percent or less. In the UK the financial sector has expanded vastly and detached itself from the real economy which has declined. Economic power has been transferred away from government whose role is to create the money needed for public good. One of the consequences was the great financial crisis of 2007 – 2009. Ignorance of how money is created poses great dangers, not least the need to manage or regulate finance in the interests of society as a whole and the environment.

Chapter 2 The Creation of Money

The good news: The miracle of a developed monetary economy is this savings are not necessary to find purchases or investments. Those entrepreneurs or individuals in need of funds for investment need not rely on finance from individuals that set aside their income in their savings bank or under the mattress. Instead they can obtain finance from a private commercial bank. This availability of finance in a monetary economy is in contrast to a poor, under-developed, non-monetary economy where savings are the only source of finance for investment, and where inevitably, there is no money for society’s most urgent needs.

To sum up: in a monetary economy saving is different from the business of building up a surplus of corn, and then lending it on. The corn can be saved without it ever affecting others. However, saving in an economy based on money always “affects others” because it is always an act that sets up a financial relationship with others: a claim. The borrower has a duty to pay back the loan. It is the case that if savings in an economy are to expend then it will be necessary for debt to expand too. It is when debt exceeds the capacity to repay, that it becomes a burden on individuals, firms and the economy as a whole. To avoid the exploitative nature of debt that two conditions must prevail. First, the interest on loans should be low enough to ensure repayment. Secondly, loans should be made for activities judged to be productive and likely to generate employment and income. Ideally, lending for   activity other than this, should be discouraged or banned. As Keynes argued, what we create, we can afford. The credit system enables us to do what we can do within the physical limits of imposed by our own, the economy’s and the ecosystem’s resources. That is the good news. A well-developed monetary system can finance very big project, projects whose financing can finance whose financing would far exceed an economy’s total savings squirrelled away.

Unfortunately, western democracies have not used their existing power to control rekless national financiers and speculators. Instead, elected governments allowed global financial corporations to move capital offshore and across borders to create credit without over-sight, regulation, taxation or restraint and amass astonishing amounts of wealth. The Bretton Woods era, (1945-71) was a time when, thanks to John Maynard Keynes, the financial system was made to work largely in the interests of society. It has to be said that this is largely true of Germany’s multi-tiered banking system.

Chapter 3 The “Price” of Money

The rate of interest on credit charged for economic activity is fundamental to the health of an economy. Rates that are too high stifle enterprise and ultimately render debts unpayable. However in the neoliberal era, under Mrs Thatcher, rates of interest rose steadily. Between1971 and 1974 credit fuelled inflation: a 35% rise in consumer prices and 79% rise in import prices. For the next thirty years, high interest rates periodically bankrupted many individuals, firms, industries and economies, leading to unemployment, culminating in the 2007-9 crash. Little has been done since then to remove control from commercial banks.

The development of banking and sound monetary systems should have ended the power of any elite to extract outsized returns from borrowers. However, elected government had conceded despotic power to financial capital.

Now of course all this is turned on its head and is history. Government borrowing is phenomenal sums in order to tackle the consequences of Corvid 19.history for the time being. Extraordinary sums are being borrowed.

Chapter 4 The Mess we’re In

At the time when this was written, before Covid 19 emerged, the world and Britain, in particular, was in a mess its government having decided to leave the European Union, its largest and nearest market.

Anna Coote said: We live in turbulent political and financial times, and in a global economy dogged by failure. We survive precariously on a planet warmed by human –induced greenhouse gas emissions and disturbed by human-induced mass extinction. The financial system is currently volatile, corrupted and widely discredited. Scandals of mis-selling, theft, manipulation and fraud abound. And the cry “there is no money” for care for the elderly, the mentally ill, or for social housing; none for or for public investment in water conservation, renewable energy, flood defences, the retrofitting of old, energy leaking properties , or other investments designed to protect society from climate change.

There is a chorus that “there is no money” and an argument that public debt ought not to be used.

Chapter 5 Class Interests and the Moulding of Schools

The first part of this chapter is an account of the moulding of economic thought. Staggering as it may seem, she argues, the overwhelming majority of mainstream economists do not understand the nature of credit and money or the wider financial system. Policies based on a vacuum in economic theory still prevail in western treasuries. While the resulting finance economy remained intact, according to the International Labour Organisation, around 200 million people were made unemployed in 2015 and the Middle East and North Africa had the highest youth unemployment in the world. Europe, with obstinately high levels of unemployment, faced frightening political tensions and division sand the rise of right- wing, even fascist parties.

Dominant schools of thought have led to vast capital gains for financial elites but prolonged failure of the global economy and rising inequality.

After World War 2, acceptance of John Maynard Keynes’s thinking (https://en.wikipedia.org/wiki/John_Maynard_Keynes) that the monetary system should be steered away from serving class interests and serve the needs of society as a whole, led to the Golden Age (1947-71) near full employment and unprecedented narrowing of income distribution. But this did not endure. Dear money was restored in 1980 and since then advanced economies have endured high levels of unemployment, periodic financial crises and severe instability culminating in the global financial crisis of 2007-09. Unpayable debts are more likely to build up under dear money. Politicians do no more than build up political capital – “we’re balancing the books”, “living within our means.”

Chapter 6 Should Society Strip Banks of the Power to Create Money?

Ann Pettifor is opposed to the Positive Money Movement https://positivemoney.org/our-proposals/sovereign-money-creation/ which proposes Sovereign Money Creation as a way of paving the way for a Sustainable Recovery. She applauds their taking aim at reckless greedy bankers. But she believes the public need to be involved and that would not be the case if these decisions were taken centrally and for banks to be constrained in lending and for firms and individuals to be constrained in borrowing. To remove this public involvement at a micro level in the creation of the nation’s money supply, and instead rest this power with a small committee would be steps on the road to autocracy.  However, Ann argues, there is no reason why society should not aspire to building a gift based- economy for clean air and a safe environment. The closest we have come to this is free education, a free Health Service, subsidised housing etc.

The creation of a socially just monetary system that enables us all to do what we can do, and be who we can be should be the aim of any progressive movement. 

Human – induced climate change represents a major threat to a liveable future. It will require above all a great deal of finance, for example to transform transport, erect flood defences, retrofit ageing housing or to make buildings more energy efficient. Employment will generate income with which to repay the credit or debt. Fundamental to any attempt to wrest power back from financial markets must be greater understanding of the nature credit, money creation and the monetary system as a whole. That is what this book is about.

Chapter 7 Subordinating Finance, Restoring Democracy

Finance capital’s “despotic” power over the world’s nations has led, since the 1970s to a series of ongoing financial crises, and to the build-up of mountains of private, unpayable debts. These have inflicted grave costs – human, ecological as well as economic – on whole societies. The US Treasury estimated that 8.8 million jobs were lost in the US alone, and $19 trillion of household wealth was destroyed during the 2007-09 crisis. But finance capital’s power has done more: it has hollowed out democratic institutions, as those powers that have the allocate resources have been privatised. This helps explain why the costs of crises have not been borne, on the whole by the finance sector. Most financiers were bailed out after the 2007-09 crisis. Those who have paid the price, directly or indirectly, include, include tax payers, the unemployed, bankrupted small and large firms and the homeless. The affordability of homes has been adversely affected. Western social democratic and conservative parties also paid a high price for their neo-liberal policies and in effect colluding with finance capital interests rather than the interests of their populations.

In this chapter, Ann propose goes on to set out tried and tested key economic policy proposals amongst which are these:

  1. Private created finance for productive activity should be encouraged. Money for speculation should be strongly discouraged and priced at very high rates of interest. Germany is given as an example of doing this well.
  2.  Managing the price of money. Too high and investment and employment will suffer. Realistic rates and householders and entrepreneurs will benefit and economic activity will flourish.
  3. Governments of advanced economies should spend and borrow.
  4. Central banks should manage exchange rates.
  5. International cooperation and coordination.

Chapter 8 Yes, We Can Afford What We Can Do

First, the public must develop a much greater understanding of how the bank money system works. Knowledge is powerful and empowering. Today’s flawed economic ideology will be weakened by wider public understanding. For women the issue is central. Women are largely responsible for managing household budgets but they have largely been excluded from managing the nation’s financial system and budget. At present the networks that dominate the financial sector are largely male. Thankfully this is changing.

Secondly, Ann argues that the refrain “there is no money” most frequently applies to women’s interests and causes. Hence there is never enough money to fund the all the social services women provide, nor enough money to reduce the high rates of maternal new born mortality across the world, fair and decent wages to women or provide adequate high quality child care for women at work. Then there are environmentalists. There is a direct link between deregulated uncontrolled credit and increased consumption, rising greenhouse gases and increasing exploitation of the earth’s scarce and precious resources. To protect the ecosystem it is vital to manage and regulate finance.

We need to rebuild and strengthen democratic political parties and institutions and participate in political debate and elections. In other words we, the people, have to organise. There needs to be a partnership between labour and industry.

Because there need never be a shortage of finance, we can afford to undertake this huge transformation and care for an aging population, the young and the vulnerable only within the limits of the limits of the ecosystem.  

Suggested further reading:

·   Strategic quantitative easing: Stimulating investment to rebalance the economy https://neweconomics.org/2013/07/strategic-quantitative-easing/

  • Positive Money https://positivemoney.org/our-proposals/sovereign-money-creation/ There is a need for an alternative strategy for a more sustainable economic recovery. This paper proposes this alternative, a new solution called Sovereign Money Creation (SMC). SMC offers a way to make the recovery sustainable. In a similar way to Quantitative Easing, SMC relies on the state creating money and putting this money into the economy. But whereas QE relied on flooding financial markets and hoping that some of this money would ‘trickle down’ to the real economy, SMC works by injecting new money directly into the real economy, via government spending, tax cuts or rebates.
  • For an overview of the challenges facing us read: The 21st Century Revolution: A Call to Greatness. Oxford Alumni Book of the Month for November 2016 https://brucenixon.com/books/new-book-the-21st-century-revolution-a-call-to-greatness/

Organisations to support:

Counting Women In, 50:50 Parliament, Women’s Equality Party, Voice4 Change, People’s Vote. And Lobby your MP.

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