Ann Pettifor

Money and the Government: Everything You Need to Know But Were Afraid to Ask

What is money? That might seem like the kind of question a person asks herself late at night, staring at a handful of rumpled bills through bloodshot eyes. But as stoner queriesgo, this one is actually very important, for the answer depends to a great degree on what kind of money you’re asking about, and to whom you’ve posed the question. Some “money”—a very small percentage—is cash. The rest is imaginary (“fiat currency,” as it’s known), a vast network of contracts. The $25 birthday check from grandma is one kind of contract. The payment swiped off your credit card to buy shoes is another. When your bank enters the sequence of digits on a screen that affirm your small business loan has gone through, that’s two contracts—the first guaranteeing that the bank will supply you funds for the goods and services you need, the other guaranteeing that you’ll repay the loan at a later date, plus interest. Why is it important to know the difference between “money” and cash? Well, because according to Ann Pettifor, a London-based political economist famous for, among other things, being among the few to predict the 2008 financial crash, monetary theory is a feminist issue.

Pettifor’s new book, The Production of Money: How to Break the Power of Bankers, aims to elucidate the nature of money, the better to help women advocate for their needs. Money, credit, interest rates, bank regulations, the way things are accounted for in the public budget; all of these, Pettifor argues, have tangible effects on women’s lives, and the condition of society as a whole. And in order to make change, we’ve got to get passionate about topics that most of us have been conditioned to consider dry-as-dust. Here, Pettifor talks to Vogue about money matters—and why they matter for women, most of all.

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Photo: Courtesy of Verso Books

Let’s start with the obvious question: What is money?

As the economist Joseph Schumpeter said, money is nothing more than a promise, a promise to pay. It’s a social construct. Coins, checks, the credit card you hand over at the till—they’re representative of those promises. We’re trained to think of money as a commodity, something there’s a limited supply of, that you can either spend or save, but in fact we’re creating money all the time, by making these promises. When you use a credit card, you’re not handing over your card to the shopkeeper or the waiter to keep, you’re just showing them a piece of plastic that says, “this person can be trusted.” We make myriad uses of these arrangements every day. And there’s far more of those promises in circulation at any given time than there is hard money sitting in vaults, or in people’s wallets, or wherever.

And what does understanding money-as-promise have to do with feminism?

Most orthodox economists would have you think of money as finite, like a commodity. Which makes it very easy for politicians to say, when you come asking for paid maternity leave, or government-subsidized childcare, Sorry, ma’am, there’s no money in the budget for that. But you’ll note that they don’t reach for that excuse when they have other priorities—when they want $54 billion for military spending, for instance, or a trillion dollars to bail out the banks, suddenly the money is magically available. A well-managed economy has the means to fund any priority it holds dear.

But surely the government runs a budget, and the government we elect sets priorities for how to spend the money that it has. And some governments prioritize military spending, and others prioritize childcare . . .

I’ll give you an example of what I mean. When the Federal Reserve decided to bail out AIG in 2008, a lot of journalists were asking Ben Bernanke: Hey, are you spending taxpayer money on this? And his answer was, no, we’ve just entered this $85 billion into their account. In exchange, AIG had to put up collateral, as you do when you take out a mortgage, but fundamentally, all the Fed was doing was typing some numbers into a computer that said: This belongs to AIG.

Where taxpayers come into this is the Fed’s ability to make sure that $85 billion loan is backed by the money people pay to the U.S. government in taxes. Not what the government has on hand now, but what it anticipates taking in next year, five years, 100 years from now. And there you have two issues: The issue of a well-managed economy, and the issue of how a government is different from an individual or a family where budgets are concerned. Politicians who advocate for austerity measures—cutting spending—like to say that the government ought to run its budget the way women manage our households, but unlike us, the government issues currency and sets interest rates and so on, and the government collects taxes. And if the government is managing the economy well, it ought to be expanding the numbers of people who are employed and therefore paying income tax and tax on purchases—purchases that turn a profit for businesses which then hire more employees, and on and on it goes. That’s called the multiplier effect, and for 100 years or so, it’s been well understood. And it’s why governments should invest not in tax breaks for wealthy people, but in initiatives like building infrastructure.

One thing I’ve noticed, since the campaign and the election, is how gendered the idea of “job creation” is. Like, when Trump talks about ”jobs,” and throws out the idea of a massive infrastructure package, you automatically visualize men in steel-toe boots. But if we expanded pre-K to all 50 states, we’d need to hire teachers and assistants and administrators, and aren’t those jobs, too?

Yes! From an economic perspective, it makes no difference where the government invests its money, if doing so creates employment—put it into roads and bridges or put it into schools, either way both investments will be repaid to the government, because people have jobs and they pay taxes, and the multiplier effect does its work. The problem is that the accountants who run government budgets distort our priorities, by treating infrastructure, for instance, as an investment, and education on the other hand as a “government service.” It’s vital for women to demand a better accounting system. After all, education is an investment, too.

We’ve been talking about jobs the government creates—either directly or by proxy. But in theory, the private sector ought to be seeing to job creation on its own. That’s the free market, right?

Well, here we get back to needing to understand money and banking. Let’s say I want to start a business: In order to start my business, I need the bank to give me a loan. John Maynard Keynes theorized that, on average, companies should expect a 3% rate of profit, on average. If my bank loan charges me interest far in excess of 3%, how am I ever going to repay it? I might be dissuaded from starting the business in the first place. Or, if I’m a giant corporation, I might start looking for ways to increase my rate of profit by, say, automating my factories, or outsourcing them, or taking my profits and instead of re-investing them in my company, offshoring my profits in a tax haven, or speculating in the financial market. Now, the banks are perfectly happy for companies to speculate, and for the money made in the United States to fly all around the world, unhampered by any regulation. But as you can see from the Brexit vote, and the election of Donald Trump, many, many people are deeply unhappy about the effects of that.

Aren’t interest rates at a historic low?

The bank rate is. Meaning, when the Federal Reserve loans money to a commercial bank, they’re getting it on the cheap. But since the late 1970s, the U.S. and Britain have both loosened bank regulations such that the commercial banks can loan out that money at more or less the rate they see fit. So, in fact, interests rates are generally quite high. And that will only change as a result of political pressure.

As you say, the political environment at the moment reflects the fact that people feel like the current economic system isn’t working for the Average Joe. (Or Jane.) And in your book, you talk about the need for erecting barriers to capital mobility across borders in a way that resonates, for me at least, with Donald Trump’s protectionist rhetoric on trade. Is there a difference?

I think, if you go back to thinking about the money system as a network of promises, then it’s fair to ask the banks and corporations who profit off the laws and institutions that guarantee those promises to act as responsible stakeholders in the societies where they trade. They can’t act as masters of those societies—that’s where you get the disillusionment with government, and populist movements where people look for strongmen to protect them from forces that seem beyond their control.

So it’s perfectly fair for governments to demand that corporations pay their taxes, just as we do, and it’s perfectly fair for them to assert some capital controls. And beyond that, when politicians are looking at what’s good for the economy, they should be thinking about that multiplier effect. I’ll tell you a story, about a tea shop in Dorset. For 17 years, this tea shop was a family-run business. They had employees, they made a profit, it functioned well within the community. But the space itself was owned by the local town council, and when the national government cut the council’s budget, as a result of austerity measures, the council decided to put the tea shop up for tender. A multinational firm based in Philadelphia—one that had made its money running canteens in prisons—wound up outbidding the family who’d been running the shop for the lease. Now, you could look at that situation and say, aha, the free market. Or you could look at that situation and say, here’s a family out of work, here’s a community-based business that paid tax replaced by a multinational likely to offshore its gains, here’s a tea shop that employed residents of Dorset that might, who knows, change to a more automated system or one that relies on occasional, precarious labor. You can look at the situation of that tea shop either way. The politics comes down to: Which do you choose?


2 thoughts on “Money and the Government: Everything You Need to Know But Were Afraid to Ask”

  1. Heriberto Arribas

    Dear Ms Pettifor

    I have read your book. I take a special interest in two sentences at the beginning of the book

    1.- “While global GDP is just $77 trillion, global financial assets have grown to $225 trillion since 2007.”

    2.- “When bankers create more credit/debt than can usefully be employed by an economy, this can result in ‘too much money chasing too few goods or services’ – i.e. inflation.”

    If we consider the size of the financial market ‘too few goods’ has no sense. The money has to be repaired between the two markets. And the financier is more attractive. When Thatcher liberalized the financial markets, a security valve was created, or rather a drain, where the excess of money could escape. Perhaps not only the excess and part must be replenished by credit. Otherwise the level would drop too much, deflation. That reflux of money would explain the Great Moderation.

    Respectfully Heriberto Arribas

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