I shared this video this morning. In it, I argue that if money is not scarce and is created costlessly by banks, why are we paying so much for it? Is doing so completely contrary to our well-being? Lord Keynes certainly thought so.
The audio version is:
This is the transcript:
Financial capital is not scarce.
So the real question is, why do we have to pay for it?
Now this is a really important question because the Bank of England has - as I have criticised them for doing so many times over the last few years - increased interest rates significantly since 2021, making us pay a great deal to get hold of that commodity which all banks create for nothing.
So, why is that appropriate? Well, I want to read you a quote from someone. And it's a pretty important quote. It says this.
“Interest today rewards no genuine sacrifice any more than does the rent of land. The owner of capital can obtain interest because capital is scarce just as the owner of land can obtain rent because land is scarce.
But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.”
Now, who said that? It was John Maynard Keynes, Lord Keynes, the greatest economist of the 20th century in my opinion; the man whose ideas basically funded the First and Second World Wars for the United Kingdom, and who was made a Lord as a consequence.
He said that in his 1936 book on the General Theory of Employment, Interest and Money. There's a copy on that bookshelf behind me. I read it in 1976. And I've believed in it pretty much ever since.
And why did he say that? Because he wrote in the 1930s. He said that money was at that time being constrained in supply, of course, by what was still, in effect, the gold standard whereby, supposedly, and ultimately, all money in the world was convertible into dollars, and all money in dollars was convertible into gold and therefore there was a scarcity in money supply linked to the amount of gold in the world, supposedly. And I say supposedly with care.
But the point is that Keynes knew then, and we know now, that there is no constraint on the creation of money if it is for useful purpose.
Since 1971, there has been no link anywhere in the world between the supply of money and the amount of gold that there might be in bank vaults. Instead, all money is created on what is called a fiat basis. Simply on the basis of a promise to pay. Which is what fiat, in these terms, means. So, there is no scarcity of money.
The constraint that Keynes referred to in 1936 is gone.
So why are we still paying interest?
Well, it's curious that in another work of his, the National Self Sufficiency Discussion that he took part in, he said this:
“I have become convinced that the retention of the structure of private enterprise is incompatible with that degree of material well-being to which our technical advancement entitles us unless the rate of interest falls to a much lower figure than is likely to come about by natural forces operating on the old lines. Indeed, the transformation of society which I preferably envisage may require a reduction in the rate of interest towards vanishing point within the next 30 years.”
In other words, Keynes was arguing that we should not be constraining our ability to deliver for the well-being of people in our society on the basis of limiting the amount of capital available for that purpose by charging interest on it.
We should instead be ensuring that the interest rate is so low that capital is available for every worthwhile project that we can do within society.
And he was right. That is what we should be doing.
The payment of interest is related to the idea of scarcity and there is no scarcity of money, and we now know that banks can create money without limit and completely costlessly.
We are, therefore, living in a world of economic exploitation where interest is charged inappropriately without any benefit to society at large but to the particular benefit of those who happen to own money on deposit.
This is a situation which Keynes has said has outlived its usefulness. It's time that we imagined a world where low interest rates were there in perpetuity and we worked out how to manage capital better.
Not so that money goes into stupid things, like pushing up the price of shares or the price of homes inappropriately, but into the productive well-being of the economy, so that we have the technology we need to meet our needs.
\And our needs are really big, because without investment, we can't manage climate change.
And these issues are intimately related.
PS Thanks for the suggestion for this video from a third party, whom I am happy to name if they give me permission to do so.
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A great argument in support of a universal basic income.
To see why money costs, ask who benefits: i.e. follow the money.
Ageing populations mean a greater pool of savings. This suggests that real rates should be close to zero over the cycle; say, 2%…..with long term gilt yields at about 2.5% to 3%. However, I don’t think price of money is the critical problem… the real issue is getting the capital used productively. “The market” has clearly failed as most lending is funnelled into bidding up the price of existing assets. Theory says this should lead to creation of new assets… but in practice it doesn’t; lower rates just creates asset bubbles. Unless this changes we will never
get the stuff we are going to need. It needs government intervention and credit controls.
Agreed
But there are only limited arguments possible in one video
Absolutely. Videos must be short….
“the real issue is getting the capital used productively. ‘The market’ has clearly failed as most lending is funnelled into bidding up the price of existing assets. Theory says this should lead to creation of new assets… but in practice it doesn’t; lower rates just creates asset bubbles”.
That statement ‘nails it’. With that observation in mind we return to how the government and finance sector manage the process of money creation and investment. We only really see anything of how this actually works, ‘in extremis’; because otherwise, the process is exclusive, and well hidden from public view. For example, the failure of QE was that the money created was directed by the privileged financial sector institutions provided with special access to the BoE, because they serve as the Treasury and BoE ‘medium of delivery’ of financial policy, into what is not, in fact investment for the benefit of the public; but rather exclusively for the benefit of these private ‘medium of delivery’ institutions into selected asset bubbles, for the benefit of these institutions investors, or clients (the same problem applied directly to the BoE, when it was a private sector institution; it had insufficient sense of public responsibility). We made the BoE a public institution, but have merely transferred the problem from the BoE directly, to its ‘medium of delivery’ of policy. We have again lost the ability to stimulate economic activity without it being siphoned off by institutions that are not actually economically active; but rather themselves wholly parasitical on the process of funding investment; extractors of value, not creators of value. As in the past, it destabilises the financial system. We then pretend it isn’t unstable, and the lurch of crisis to crisis is just a business cycle phenomenon. It isn’t. It is built into the system; indeed it is a product of the system.
And as transactions in existing assets do not register in GDP figures then the inevitable consequence is a high Debt to GDP ratio which in turn is used to justify austerity among other things.
Thank you and well said, Richard.
Mandelson should be forced fed this video based on the nonsense he talked to banksters just before the late May bank holiday. The banksters and lobbyists are just as ignorant as he is. Mandelson looked forward to more PFI. Blair is no better.
It’s interesting to observe how much big business engagement with Labour is by way of Blair and Mandelson. Have I missed news of the pair running for the Commons? Who’s in charge of Labour?
Speaking of banksters and Mandelson, my former (employer’s) CEO was ousted by regulators due to his links with Epstein and not disclosing the full extent of these links. This outcome was appropriate. Why is Mandelson not held to the professional standards that we bansksters are held to? Methinks when Labour hits the buffers, this sort of thing will crash out of the cupboard. It’s not just Epstein. It’s not just Mandelson.
I agree.
The next logical question, which I agree might not fit into a short video, is how the to control inflation? And, as I write that, I realise the first reaction will, angrily, be “interest rates don’t control inflation”. I agree interest rates don’t control inflation (witness the transient inflation spike we have just experienced which has passed irrespective of interest rates).
Nevertheless as interest rates tend to zero, more money will be borrowed thereby increasing demand (house prices are a very specific example that comes to mind).
IMO one of the governments primary jobs is to control the economy. It can’t do this by adjusting interest rates. More importantly it can’t (falsely) CLAIM to control inflation if interest rates are always near zero.
And, of course, the answer is taxation to control private sector demand. And taxes are a much more nuanced tool than interest rates, a scalpel rather than an axe.
So, I think what you implicitly saying is that we need “fiscal dominance”, that is controlling the economy through fiscal measures, primarily tax.
Do you agree?
Yes
As would Keynes
[…] Financial capital is not scarce, so why do we pay so much for it? Funding the Future […]
Excellent video and great quotes from Keynes. The erroneous perception that money is scarce is how we are kept submissive and obedient, and keeps us casting about in the dark for solutions. Imagine what would happen if people realised that banks don’t lend deposits, and that government doesn’t need taxes to fund expenditure. How can we bring this about? Your videos do a great service Richard.
Another favorite quote is from JK Galbraith: “The process by which money is created is so simple, the mind is repelled.” This is cited in the summary to a short document written by Library of Parliament economists for Parliamentarians in Canada. You may be interested, here’s the link: https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublications/201551E
Thanks
The televised debate this Friday will feature candidates from all of the major political parties and we can submit questions to the BBC for asking on the show. Please Richard Murphy, can you formulate the most effective question to expose the giant financial con we are all being sold regarding ‘No Money Left’ and the need to tax wealth? We must expose ‘the emporar’s new clothes’ snake oil that our politicians are feeding us. If a massive number of your blog followers pose this question on money then it might just get asked on the upcoming debate. Let’s blitz these devious politicians with the money and taxing wealth question.
I will do a video
Keynes also spoke about euthanizing the rentier. FDR in 1936 described what we call plutocrats as ‘economic royalty’ and ‘dynastic power’ and ‘new despotism’. They deprive us of economic freedom.
https://www.youtube.com/watch?v=pInSfKHu1Vw&t=372s
Agreed
And thanks fir providing the original quotes
Richard, you should have saved this fine column for June 5 – Keynes birthday!! 🙂
I did not know that…..
Thanks, again