The Production of Money Ann Pettifor

Published by Verso, 2017

I wanted to read this book after I heard Ann Pettifor on the radio saying that the problem with most mainstream economists was that they thought of money as a commodity, of which there was a fixed amount, whereas in fact money represented promises we make to each other and there is no limit on our promising.  There is a limited supply of natural resources, human creativity and skills, but not of money.  

Although John Maynard Keynes is Pettifor’s main source for her economics, she has also clearly been inspired by Karl Polanyi and his idea of ‘fictitious commodities’.  In his major work, The Origins of Our Time: The Great Transformation, published in 1945, Polanyi describes how the idea of a self-regulating market society arose in nineteenth century England.  In all previous societies the economy was made to serve social ends, but with a self-regulating market economy, society and nature were made to serve the needs of the economy.  For this to be achieved the three key factors of production, labour, land and money, must be regarded as being commodities, produced for sale on the market.  But labour, land and money are not commodities: labour is human activity, part of human life, which is not produced for sale; land is nature and therefore not produced by humans at all, and money, says Polanyi, is a token of purchasing power.

The implications for human life and for nature of treating labour and land as commodities are perhaps obvious.  I have struggled more with understanding the implications of viewing money in this way.  Pettifor’s book has helped a lot in that regard.  Polanyi says:

“the market administration of purchasing power would periodically liquidate business enterprises, for shortages and surfeits of money would prove as disastrous to business as floods and droughts in primitive society” (Polanyi, 1945 p.79).  

Pettifor makes clear that it is not just the overall supply of money that is important but its price and availability for different activities.  The problem, she argues, has been ‘easy’ but ‘dear’ credit: unregulated borrowing at high real interest rates, which has seen money flow to the wrong things.  It has been easy to borrow to buy property, or (if you are big enough), to speculate on the markets, but less easy to borrow for productive activities, or for example, to invest in renewable energy.  While the Bank of England base rate has been at an all time low that rate is only available to banks, and businesses have to pay high real rates of interest.

What Pettifor does not argue is that the power to create money through lending should be taken away from private banks.  This ability, she thinks, is one of the great innovations of modern societies.  It means that, if well regulated and managed, there should never be a shortage of money for all the things we want to do: education, health care, renewable energy.  Before modern banking, those in need of money had to go to the ‘robber barons’ who had the limited supplies of money that were available, and pay high rates of interest.  However, the deregulation of banking has increased the power of international finance and now this has taken the place of the robber barons with regard to the power it has over people and governments.

Pettifor disagrees with the proposals of organisations like Positive Money, while applauding the way they have promoted debate about money creation.  Instead of bringing in what she considers would be control by technocrats over the money supply, private banks should continue to be able to create money through lending.  However, they should be regulated to ensure that money is available at low interest rates for productive activities but not for speculation.

While Pettifor thinks that the current level of indebtedness of businesses and private individuals is something we should be very concerned about, Pettifor thinks we should be less concerned about the level of government debt.

Government debt is an important safe haven for capital: rather than seeing it as a bad thing that the government needs to borrow, we should regard government borrowing as meeting a need for safe investments.  The shortage of government bonds, caused by financial measures such as quantitative easing has helped to drive up asset prices, including that of property, as investors look for other places to put their money.  She discusses how Keynes managed to finance the UK war effort by issuing bonds of different maturities at pre-announced prices, but with no limit on the amounts.  The fact that money is not simply a means of exchange, but capital, which has to be saved somewhere, is another criticism that Pettifor makes of current economic thinking, including that of Positive Money.

In the preface to her book Pettifor says that the answer to the question, “what is to be done to restore economic prosperity, financial stability and social justice” can be summed up in one line: “bring offshore capitalism onshore” (p.xviii).  This is discussed a bit more in chapter 7, where she says that cross border capital controls should be taxed, and distinguishes such taxes from exchange controls, which limit the amount of a nation’s currency which can be taken abroad.  However, something which she says is so important, could have done with more discussion and explanation as to how such taxes would work and achieve her stated aim of closing borders to footloose, speculative, mobile capital.

A further issue is the extent to which her approach presupposes economic growth.  The government borrowing she commends is to be invested in ways that increase future tax receipts with which to pay back that borrowing.  Does this inevitably lock governments into promoting economic growth and the environmental destruction it causes?  However, Pettifor is clear that while money is not limited, natural resources and human capacities are.  In her final chapter Pettifor argues that environmentalists should be arguing for monetary reform because ‘easy money’ finances ‘easy consumption’.  Her proposals for regulation of credit according to the activities being financed would enable us to tackle the housing crisis by curtailing the flow of money going into housing markets, where it is simply driving up prices (see the Green House report on Tackling our Housing Crisis) and instead channel money into the investment that is needed to create a zero-carbon economy.

A final comment is that, although an excellent book, written for the general reader, and commendably short, there is inevitably some jargon that has crept in. A glossary and an index would have helped.

Reference: Karl Polanyi, (1945) Origins of our Time: The Great Transformation. London, Victor Gollancz Ltd.

See also this video by Ann Pettifor