Time to Get Rid of Money. It’s just not worth it. By Phillip Sutton. Old Moles Collective. 60 pages.
This booklet is a classic example of being right for the wrong reason. It starts off well enough by saying that ‘it has been said that money is the root of all evil but this is wrong; it is class society’ and that ‘getting rid of money can only happen when the working class takes power and gets rid of capitalism’. After that, it’s downhill all the way as the author, strangely from someone who has emerged from the Left Communist milieu, embraces a currency crank theory of banking and money.
We are told that:
‘It is a total myth that banks need or use savings in order to lend out money. This monetary system is what Aaron Sahr has called “Keystroke Capitalism” ie, money is quite simply a product of using a keyboard as the banks create money by making and recording loans on their computer!!’ (his emphasis).
and that:
‘… the whole financial system is based on creating money out of thin air … The whole financial industry really is just based on creating electronic assets (ie, virtual money) that are loans on which interest can be charged. What a system — an electronic data entry costs virtually nothing but earns interest for the bank!’
To back up this incredible view Sutton cites a 2014 article from the Bank of England Quarterly Bulletin. Although this does state that banks create money when they make a loan, this is just a definition and does not imply that they do this from thin air. This said, the article’s authors have only themselves to blame when ignorant or naive people take their words literally.
Sutton writes that:
‘In modern capitalism it appears that in the money creation process, it is the borrowers that determine the money supply, and the only restriction on this credit is the ability, or perhaps the willingness, of borrowers to put forward existing assets as collateral against a loan’.
If you think that banks can simply create money to lend at interest by a few keyboard strokes, this is a logical deduction — the only limit to what banks could lend would be the amount requested by credit-worthy borrowers.
In an appendix Sutton reproduces a long section from that Bank of England article which includes this passage which contradicts his claim above:
‘Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system’.
If he read, beyond the introductory summary, the part where the authors expand on this he would find it is not ‘a total myth’ that banks need funds to back up a loan. The article explains what happens after a bank has used its keyboard to record a loan when the borrower then begins to spend the money.
When the borrower does this, most of it is likely to go to people who bank with other banks; so the lending bank will have to transfer money to another bank (if some of the recipients bank with the same bank that will go towards reducing its outgoings). What happens is that at the end of the day (literally) banks clear what they owe each other. If a bank has more money going out than coming in it covers this by drawing on its reserves. But this cannot continue indefinitely as at some point its reserves would be exhausted. The article goes on:
‘Banks therefore try to attract or retain additional liabilities to accompany their new loans. In practice other banks would also be making new loans and creating new deposits, so one way they can do this is to try and attract some of these newly created deposits. In a competitive banking sector, that may involve increasing the rate they offer to households on their savings accounts. By attracting new deposits, the bank can increase its lending without running down its reserves. Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending’ (their emphasis ).
So much, then, for the idea that banks don’t need to fund the loans they make. The article then explains what does limit bank lending:
‘And the cost of that [attracting funds] needs to be measured against the interest the bank expects to earn on the loans it is making, which in turn depends on the level of Bank Rate set by the Bank of England. For example, if a bank continued to attract new borrowers and increase lending by reducing mortgage rates, and sought to attract some new deposits by increasing the rates it was paying its customers on their deposits, it might soon find it unprofitable to keep expanding its lending. Competition for loans and deposits, and the desire to make a profit, therefore limit money creation by banks’.
Sutton’s misunderstanding of the nature of money and banking leads him down the same road as other adherents of the Thin Air School of Banking — that debt is the problem.
‘… it is the super-rich which owns the majority of debt in the world whereas the working class, which suffers most from the burden of debt, actually owns very little of that debt … Given the level of debt today, it would have to be one of the first tasks of the working class to cancel all debts even if it cannot completely eliminate money quite so easily’.
This makes the booklet a curious combination of Left Communism and currency crankism. But, to be fair, the author does want to see the working class eventually establish ‘a society of abundance in which people are rewarded for their contributions by the free provision of their personal needs’.
Adam Buick
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