There is a magic money tree…in fact there are two

By Professor Emeritus Mary Mellor, from University of Northumbria

That’s right there are two magic money trees. Both the state and the banks can create money out of thin air.

States do this by having budgets. Despite the myths that have been told time and time again, states are NOT households – they run armies and banks and schools and police forces and so on. They allocate expenditure in expectation of getting an equivalent amount of money back through taxation. There is no direct connection between public expenditure and public income. There is no state piggy bank or house-keeping allowance.

Public expenditure and income is a constant flow of money and it is only when the totals are totted up that it becomes clear if there is a balance. Deficits are simply evidence that states spend in advance of receiving any income. If they waited until the money rolled in, deficits would never occur.

Despite the claim that states ‘printing’ money is automatically inflationary, this is not the case. What matters is the relationship between state income and expenditure and the condition of the wider economy. The skill is to balance the money created with the money recovered via taxation. In any case, public deficits can be a good thing. They put fresh money into the economy that is then free to circulate.

The other magic money tree is the banking sector. Banks do not simply look after the money in people’s bank accounts and “lend it out”, they actually create money out of thin air by creating new accounts or putting new money into existing accounts – with no democratic accountability.

The neoliberal era saw a massive increase in bank lending (student, consumer, mortgage, financial speculation) with banks becoming the major source of new money in modern economies. The magic money tree of the banks is far more de-stabilising than the magic money tree of the state. Unlike state magic money which can be created free of debt, bank magic money always has to be repaid with interest.

This creates the dilemma that the banks always want more money back than they lend out. Where does the extra money come from? Either extra loans constantly being taken out, or ‘leakage’ of debt free money from the state, that is public deficit. In fact, the use of public money was much more direct following the 2007-8 crisis.

‘Quantitative easing’ – a fancy term for new electronic money from central banks – put billions of pounds, dollars and euros into the banking sector to stave off collapse. This and other rescue measures did little to stimulate the core economy, but made a small elite very rich.

So when we are told social welfare, education, housing, health cannot be afforded because there is no magic money tree, this is a lie. New money is constantly pouring into the hands of the already rich as they gamble and speculate. Ordinary people are burdened with debt as they try to keep their heads above water.

The right of states to directly fund public services (“people’s quantitative easing”), is denied. It is falsely claimed that all new money is ‘made’ by the market sector. This is not true, money is accumulated in the market. It can only be created by states or banks. The claim that all state income comes from taxing the private sector is also false. The public sector also pays taxes – much more reliably than the private sector.

Let us have no more myths about the lack of magic money trees. They do exist – what matters is who owns and controls them. And it should be all of us.

Mary Mellor’s new book Debt or Democracy is available now please click here

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8 Responses

  1. Alexander Pyemont-Cardoza

    You clearly are not an economist. Seems to me like you need to go work at the central bank of Zimbabwe for a bit and see what happens when the central bank continues to print endless streams of money.

    1. Michael

      You clearly didn’t read the article properly. Seems to me like you read… lets print lots of money and that alone will solve our problem when in reality that is far from what was said.

      I qoute the article
      “‘Quantitative easing’ – a fancy term for new electronic money from central banks – put billions of pounds, dollars and euros into the banking sector to stave off collapse. This and other rescue measures did little to stimulate the core economy, but made a small elite very rich.”

      So this economist agrees that just smashing out cash doesn’t work there are and needs to be other factors at work.

  2. Elspeth Crawford

    This is important to all of us – there are petitions to sign and show how much it matters at and also
    My only disagreement withMellors is that it is not taxation that has to balance with Money issued FROM NOTHING just as she says, but is our resources, our people, our lands and what they give us. The myth that the government has not access to Money too often wastes our talent. It is worth looking at what Positive Money has to say, or New Economics Foundation.

  3. Philmo

    1. I take issue re public sector taxation – it’s a myth! Simply imaginary money running circles on account sheets.
    2. The money printing is simply mortgaging the nation’s future with an obligation to repay, along with a vain hope that inflation might make it vanish, or at least become tolerable.
    3. Interesting that no mention is made of possible surplus in the account. Will “surplus” disappear from our vocabulary, I wonder?
    4. Equally no mention of national debt, now approaching £2tn, thanks to un-stemmed flow of profit and tax off-shore.
    5. No mention either of the committed colossal future debt attributable to the promised unfunded pension rights being accumulated on behalf of public sector, which no politician dare tackle. Of course it’s next parliament’s problem or the one after, we’re all-right jack!

  4. Chris

    Quantitive easing can be ignored as all that happened was bad money, worthless derivatives, were replaced in banks balance sheets by new good money. The politicians expected this new money to flow through to the economy by enabling the banks to lend for business investment but they then applied strength tests that required greater asset holding so this new money never went anywher but the banks balance sheets.

    The U.K. Currently spends more than it earns period. Continued borrowing is just mortgaging your children and their children’s future. Unless the world economic system is going to revert to barter this debt has to be repaid. Currently £60bn of taxes go on debt servicing. This is 1 1/2 times what is spent on defence! Yes there is an option to print money to pay off the deficit currently heading for 2 trilion pounds but the currency will loose value compared to others and the interest level on the issued debt will increase and a positive reinforcement loop is created.

    The options are spend less, tax more, spend less and tax more and of course improve tax recovery rates!

    Sorry economists but in the end a government is no different to a household!

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