Ann Pettifor

It’s official: There is a money tree


(Originally published in the Huffington Post UK; Photo source: The Guardian)

George Osborne, the British Chancellor, has publicly disagreed with his prime minister on a fundamental issue of monetary policy – in an official Treasury report.

The prime minister recently argued that “There’s no magic money tree to fund” what he called “this ever more wishful borrowing and spending”.

But his Chancellor, George Osborne, disagrees.

The disagreement is aired in one of the documents tabled by the Chancellor on budget day. It’s titled: “Review of the Monetary Policy Framework.” – and is tucked away in the bundle of documents issued last Wednesday.

In paragraph 3.34, the Treasury makes plain that the monetary authorities could finance increased government spending on infrastructure “through the creation of money”.

Taxpayers, the Treasury makes clear, are not the only source of finance for governments – as neoliberal economists would have us believe.

There is a money tree, and it’s called the Bank of England.

In arguing the contrary Cameron echoed his predecessor Margaret Thatcher, who in October, 1983 told the Conservative Party conference that:

“the state has no source of money, other than the money people earn themselves. If the state wishes to spend more it can only do so by borrowing your savings, or by taxing you more. And it’s no good thinking that someone else will pay. That someone else is you.

There is no such thing as public money. There is only taxpayers’ money”.

This idea that “there is no such thing as public money” was later foolishly echoed by Labour’s Treasury spokesperson, Liam Byrne. He left a note for his successor upon leaving the Treasury in 2010 which said: “I’m afraid there’s no money left.”

But now it’s official: there is “a money tree”.

Here is how the Chancellor explains Bank of England financing of public investment in his Review of the Monetary Policy Framework:

“central banks could go beyond the range of unconventional instruments deployed … in advanced economies since the 2008-09 financial crisis. For example, it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. In theory, this could allow governments to increase spending or reduce taxation without raising corresponding financing from the private sector.” (My italics).

Having contradicted Cameron’s ‘there is no money tree’ approach the Chancellor then lays out his own objections to the Bank of England financing fiscal deficits.

These relate mainly relate to inflation – a serious matter for concern.

But interestingly, neither the Chancellor nor the Treasury seem very concerned about the inflation caused by Bank of England Quantitative Easing (QE). This finances the purchase of speculative assets by bankers and other financial institutions. By doing so, QE is inflating asset bubbles across all global capital markets, just as ‘easy credit’ fuelled the property and other asset price bubbles of the 90s and 00s. These bubbles are caused by deregulated private sector speculation. They are expanding and will inevitably burst.

The Chancellor seems relaxed about the threat of an asset-price inflationary bubble. Grassroots Conservatives are not so sanguine. A blog on the impact of QE on asset prices on the Conservative Home website states correctly that:

“… the reason why QE isn’t stimulating growth or stoking inflation is that so little of the money created has “filtered down to the high street”. It is, however, pushing up demand for investment products.”

For ‘investment products’ read, speculative assets. Despite Conservative Home’s and the Spectator’s efforts to raise concern about asset price inflation, there is very little commentary on the subject. Instead, the fear of wage and price inflation is raised to block Bank of England financing of public investment that will benefit millions of ordinary Britons, and filter “down to the high street”.

If managed well, this investment in real productive – as opposed to speculative – activity, will not create inflation. That is because right now there is far too little money ‘chasing goods and services’ in Britain’s high streets. As the economist Michael Burke notes both public and private investment have been slashed and “industrial production… is now back where it was in 1992, in the depth of the crisis during sterling’s membership of the exchange rate mechanism (ERM)”.

The government could reverse this collapse in investment – and finance “the march of the makers.” With Bank of England financing, there would be no need to cut spending or raise taxes. Instead, with the help of the monetary authorities, government could increase spending on sound infrastructure projects. Low-cost financing by the Bank of England would enable George Osborne to implement Vince Cable’s public infrastructure investment plans.

Public investment would generate employment. Employment would generate wages, salaries, profits and tax revenues – from both the public and private sectors. Tax revenues could then be used to finance the deficit, repay the Bank of England, and pay down the national debt.

Only once the economy is operating at full steam, with full employment, would the Chancellor have to start worrying about inflation. Not before.

Has this macroeconomic (and Keynesian) insight finally dawned on the Chancellor? Is this why he has dared to contradict his leader? And is this why he is flying a kite that suggests he may, after all, shake the branches of the Bank of England’s money tree?


5 thoughts on “It’s official: There is a money tree”

  1. It has taken two years of Tweeting & sharing this info.To try & get british economy off the floor. I can’t believe G.Osborne was without knowledge of Macroeconomics.It is after all basic 1st year economic learning for most Business exec. like myself.Learned in the Accountancy proff. for the last fifty years. For Gods sake get this Coalition moving now & CREATE GROWTH by stopping CUTS to Government Spending

  2. “There is no such thing as public money. There is only taxpayers’ money”… CORRECT. The public sector does not generate wealth. It consumes it, so its money (‘public money’) is merely a subset of the private taxpayer wealth of the country.

    Thinking otherwise is deluded, as was G Brown in saying that lowering the tax take ‘took money out of the economy’ What piffle.

  3. Dear John,

    Mariana Mazzacuto, a professor at Sussex university, has documented that without state-funded investments in the internet & without the US National Science Foundation (NSF) grant that funded the discovery of its own algorithm there would be no Google. That the iPad would not have been so successful without the state-funded innovations in communication technologies, GPS & touch-screen display. That neither GSK nor Pfizer would have done as well without the $600bn the US National Institutes of Health put into research that led to 75% of the most innovative new drugs in the last decade.

    The state’s role in each of these cases was not just about correcting “market failures”. What the state did was to take on the greatest risk, before the private sector dared to enter – acting as an “entrepreneurial” state. In biotech, venture capital entered 15 years after the state invested in the biotech knowledge base. In nanotech, scientists in the NSF coined the term before business understood its potential returns.

    Good if it happened in the UK to the same extent.

  4. According to Stephanie Kelton, Associate Professor of Economics, University of Missouri-Kansas City, the US Government, the FED, can issue the currency, is not revenue constrained, always has the ability to pay & can afford anything for sale in $US. This is seemingly echoed by both FED chairs, Greenspan & Bernanke:-
    “Government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.” Alan Greenspan, Fed Reserve Chair, 1997
    As Chair Bernanke explained in 60 minutes in 2009, (Pelley) Is that tax money that the FED is spending? (Bernanke) “It’s not tax money. We simply use the computer to mark up the account.”

    Is all the above true of the UK’s Central Bank, the Bank of England?

    If it is true of the BoE, why can’t the Green New Deal be funded by the BoE creating the money out of nothing?

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