This interview with Dr. Ian Cosh appeared on the Misc magazine website on 29 August, 2018
We tend to think of money as a cultural artifact that has evolved from stone disks and precious metals into modern currencies that are becoming increasingly digital. According to Ann Pettifor, a UK-based economist and director of Policy Research in Macroeconomics (PRIME), this technological frame distracts us from the more important social dimensions of money. In this interview, Ann describes her view of money as an essential part of civilizational advancement, and argues that the future of civilization depends on how effectively we understand and manage money – not as a technology, but as a human social system.
What comes to your mind when asked about the future of money?
With the future of money, you’re thinking bitcoin, digitally created cryptocurrencies, or whatever other technological shape money takes. But the wonders of technology can be a little bit delusional. The critical thing is this: Money is a social construct. And so, because it is not a commodity but a series of man-made promises – obligations and claims, assets and liabilities, credits and debts – it is not finite in supply. However, these promises, obligations, and claims must be institutionally upheld – by both contract law and the criminal justice system.
Now, bitcoin prides itself on operating in a sphere where there ain’t no law – there is only the accounting system of blockchain. Bitcoin aims for the utopia of all liberal free marketers: that they get to live beyond the control of regulatory democracy. The second thing the architects of the system have done with bitcoin is totally orthodox, and based on the theories of Friedrich Hayek, who advocated for a free market in The Denationalization of Money. Bitcoin’s founder, Satoshi Nakamoto, understood that to maintain or increase the value of bitcoin, it must conform to a monetary policy of artificial scarcity. In this sense, bitcoin would come to resemble gold, whose value is based on its scarcity. Apparently the limit of 21 million bitcoins will be reached in about 2140, at which point miners will be remunerated on the basis of transaction fees only.
But there are inherent flaws in this system, aren’t there?
The issue with only 21M bitcoins (and the enormous number of units into which it can be sub-divided) is that it theoretically aims to limit economic activity. Hayek believed this was necessary to prevent inflation. And that’s what the gold standard was about; it was what orthodox economists wanted because they believed that, by limiting the supply of a commodity (such as gold), they could tame inflation. But money and monetary systems are not based on a commodity – nor have they been for at least 5,000 years, as anthropologist David Graeber explains in his book Debt: The First 5,000 Years. We have had systems for making and keeping promises that date back to then, but our systems have always had to be overseen by trusted third parties – the village chief or priest, and then ultimately, the regulator. Once released from such oversight and management, money systems are quickly corrupted by the wicked.
But this is exactly the fatally flawed theory that Hayekians tried to achieve with a socially constructed system of promises, obligations, and claims; they turned it into a system based on a commodity (gold) and argued that the system had to be left to the control of the “invisible hand.” They tried to use gold as a way of controlling economic activity, and contracting investment, employment, and so on, by arguing that society “can only do as much activity as we’ve got bitcoins or gold bars in the bank.” In the age of the gold standard, when governments supposedly ran out of bars, the public was told, “You’ve got to slash back your economic activities, because they exceed the amount of money/gold in the bank.” That was a deeply, deeply flawed and reactionary theory. It’s what caused the contraction of economic activity (mainly employment, but also investment and consumption, leading to falling profits, bankruptcies, and unemployment), which has led to recurring crises and depressions.
Why does that serve anybody’s interests?
Because the more demand you create for your gold bar or your bitcoin, the more the price rises – which is good if you own the gold or the bitcoin. But bitcoin doesn’t help create economic activity, and it’s a really bad exchange for ordinary traders. It is so volatile – its value can change by up to 10% a day. The dollar, for all its faults, has a certain stability: Its central bank is a proper institution, and it has a sense of value across the world. And unlike bitcoin or gold, the dollar’s not finite. And thank God it isn’t, because what we want to do isn’t finite.
A lot of Greens argue that unlimited money supply is the problem, because you can consume far more. That is true, but that is why we have to manage it. In the old days, you couldn’t buy an $11,000 crocodile leather handbag with a credit card. But then the banks made it easy; it’s hugely profitable for someone to use a credit card and charge them 22%. We should manage the credit system so it doesn’t do these things. But if it is used to build wind farms all over the world, we should be able to finance that. A wind farm employs people, it uses resources, it generates income, and it can repay the debt. Therefore, it brings about a sort of equilibrium. Whereas if you buy a leather handbag, it just gets destroyed, it doesn’t have an income-generating use.
That being said, a lot of people earn a lot of income from their bags.
You talk about institutions and how money is not finite. That sort of goes against how many of us experience money. Money seems so natural – most of us can’t even remember how we learned about it. Growing up, we probably saw parents using it to get things. Then came allowances, summer jobs, salaried careers, and so on.
Yes, the way we think about it growing up, it just flows around us. There’s so much confusion around money. We go to work, and at the end of the week or month, we are given money. And we think, “Ah, that money has come as a result of me working.” In reality, that money was there before you worked. No investment in anything begins without money in the first place. Money then enables economic activity to occur, and that generates income.
Money – or credit – has never been anything except a promise to pay. It is that promise to pay which enables us to undertake activity, not just to barter. But that promise has to be institutionally backed up. The most important institutions are those that uphold the law of contract and say, “I promise to pay.” Another key institution is the central bank, whose role is to give these promises a value by making us pay our taxes in a currency, in a form that represents those promises. And then there is a fee for the upholding of this promise, and that’s the rate of interest. If you have all of that in place, you can issue credit – and credit is money.
A lot of civil society organizations have discovered – and when I say discovered, I mean that ironically – that banks create credit out of thin air. Well, banks have been doing that since the 15th and 16th centuries. And yet today, there’s still a lot of blinding to the science of it. I always tell this story of Ben Bernanke, the Chairman of the Federal Reserve from 2006 to 2014, giving an interview to 60 Minutes in 2008, the day after he had given $85B to American International Group (AIG) to bail them out. A journalist asked him, “Where did you get that money from? Did you get it from taxpayers?” And he said, “No, no, no, no, we have at the Federal Reserve something called a computer, and we enter numbers into the computer and we post it to AIG’s account and they get $85B.” And the bank demanded collateral from AIG and the promise to repay, which was upheld under law, and they set a rate of interest. And that’s how all money is created.
By the time you do actually see money – when you’re a kid and you’ve earned your pocket money, for example – it’s gone through these processes to end up in your mum’s bank account. And you think you’ve got it for being a good boy.
What would be different if more people understood money?
The finance sector would be held accountable. At the moment, the finance sector is beyond our control. It’s beyond governmental control, and it can do as it likes. It has enriched itself to an extent unprecedented in history. For me, the reason we are in this populist crisis is that the financial sector has tried to detach itself from all of these institutions. They don’t like regulations, they don’t like central banks, they don’t like to pay taxes, and they don’t like any of the things that keep the system stable. So they are detaching the financial markets from all of those and operating at a global level.
But that is socially and politically unsustainable, and civil society organizations are beginning to ask the right questions and basically say, “We didn’t know you could just do this out of thin air, you bastards.” That’s fine, but we need to nuance it a little bit to understand that the monetary system is really essential. Monetary systems are a great civilizational advancement, but they have to be managed by a democratic society, and they have to be made subservient to the interests of that society – not allowed to be the masters of it.
On the broader scale of human concerns, does the future of money matter?
I think it matters enormously, especially to environmentalists and women, because it’s those groups that are told there is no money for what they need. It’s simply not true. We discovered it wasn’t true when the central bank found a trillion dollars from nowhere overnight to bail out the banks. I feel passionately about this because of climate change. We may not have the intelligence to tackle climate change, and there are big challenges facing us, but we will never ever be short of money. We can never run short on the promises we make to each other. The idea that there is no money is laughable and is something that denies us the possibility of a sustainable future.
So instead of the future of money, maybe it’s more important to think about how our understanding of money shapes the future.
Absolutely. The propaganda we get is that there is no money, forget it, just go lie in your slum. I get really angry because of that defeatism. The acceptance that we are victims of money is terrible. It’s what is tearing the earth apart. There’s a lot at stake. We must remember that money is a human social system that we’ve constructed to enable us to do things. It isn’t complicated, except it is made to look complicated. It is crucial to understand the system and make it work for us.