A Bank of England paper corroborates David Graeber’s provocative argument on the origin of money.
Just over two years ago, anthropologist and anarchist David Graeber rattled the cages with a book that questioned the very basis of the economics that is taught in schools and colleges. Though Graeber is not an economist, Debt: The First 5000 Years was widely read because he was the intellectual leader of the Occupy movement, which was raging on every continent except Antarctica at the time. Wall Street was in a moral crisis, the global economy had crashed in flames and it seemed all right to let thinkers from other disciplines take a look at the patient. Just a second opinion, you know.
Occupy carries on — it is unleashing a global Wave of Action now — but interest in Graeber flagged as the economy recovered. Until a couple of weeks ago, when the quarterly bulletin of the Bank of England published a paper titled “Money in the Modern Economy: An Introduction” by Michael McLeay, Amar Radia and Ryland Thomas, economists at the bank’s monetary analysis directorate. It saw eye to eye with David Graeber — pupil to pupil, actually. The latter immediately wrote an article in the Guardian, ripostes followed and a war of words broke out.
Let’s begin at the beginning, though, with the idea of money which is central to economics. In school, we were taught that the market marks the beginning of the modern economy. Before that, in the subsistence economy, hunters ate meat, fisherfolk ate fish, foragers ate berries and obesity was unknown. Real economic activity began when a fisherman bartered a mahseer for a forager’s papaya (substitute trade goods according to taste), establishing a market. Money, representing fish and papayas in portable form, was introduced to make trading easier, and people got fat. Central banks were then created to contain greed, to prevent governments from printing wads of cash and living on the never-never. In short, first there was the market, and then there was money.
As an anthropologist, Graeber looked at material that economists usually do not, such as the history of cultures. And he declared that there was no evidence in the historical record that money was born of trading, since trades were not recorded. What was recorded from the dawn of writing, on the contrary, was debt — what was owed to the monarch in taxes, to the temple or the church in tithe and, from the 15th century onwards, to the bank in interest. It was, therefore, more reasonable to posit that money was created to quantify debt. The origin of the economy, in general, and money, in particular, lies not in the market, but in debt.
Now, the Bank of England paper seems to support that position. It suggests that the origins of money in the modern economy are misunderstood, and elaborates: “When a bank makes a loan to one of its customers it simply credits the customer’s account with a higher deposit balance. At that instant, new money is created.” Commercial banks like Standard Chartered and the Bank of Baroda create money, not the Reserve Bank of India? For radicalism, this is about neck and neck with Occupy’s agitprop, and it’s straight from the Old Lady of Threadneedle Street.
Though the political implications are immense, the debate over this issue seems to be restricted to economic and academic circles. One would have expected roars of baffled rage to emanate from nations which have recently taken bailout packages (like Greece) or allowed themselves the luxury of quantitative easing (like the US), because this theory of the generation of money seems to debunk the austerity measures and belt-tightening imposed on troubled economies.
Graeber has argued that if commercial banks create money, they can carry on so long as someone is willing to borrow.
Never mind the high mysteries of the repo and reverse repo rates, the money supply does not depend on the central bank’s willingness to lend, but on the public’s eagerness to borrow. Money is, therefore, not a limited resource like fossil fuels and no one should have to make do with less. In particular, governments cannot argue the inability to support spending on the social sector or research for lack of funds. So long as people take out commercial loans, the money supply should be growing.
Now that people know that loans are conjured up out a hat, will they still pay them back? And at the level of national economies, whatever happens to the idea of deficit financing? This is terra incognita. Or, as the legend on old maps used to say, “Here be dragons.”