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  • Published in Book Reviews

Mainstream economics mystifies the nature of money. Mellor’s Debt or Democracy explodes the myths, and provides the social alternative, argues Phil Armstrong

Mary Mellor: Debt or Democracy: Public Money for Sustainability and Social Justice (Pluto Press 2015), viii, 215pp.

This book provides a timely reminder of some of the key issues facing contemporary capitalist societies. The author covers a wide range of important topics and links them together superbly. The book is undoubtedly a resounding success, founded as it is on deep and wide research and incisive and passionate writing.

Professor Mellor provides a compelling and carefully constructed critique of neoliberalism and the use of ‘handbag economics’, a clever and memorable term (p.6-7 and 187). One of the underpinning elements of handbag economics is the idea that a government should be treated like a ‘giant’ household which needs to fund itself by taxation or, if needed, borrowing – but this is frowned upon. Rather, like a household ought to fund itself via income, borrowing only prudently and always looking to ‘live within its means’, a government needs to follow the basic rules of domestic financial management.

In reality, of course there is no viable analogy between households and governments, providing that the latter issue their own currency with floating exchange rates (the analogy has some traction for nations using the euro or operating under fixed exchange rates, a point made by the author). Mellor instead stresses that governments can issue their own currency debt free, instigating a public-money circuit (see below) to provision society in a sustainable way. This power has been given away under neoliberalism and the consequences of the pre-eminence of handbag economics have been catastrophic for both the living standards of the population and the natural environment.

She takes a ‘substantivist’ position; that is to say, she rejects the traditional narrow view of neoclassical economics and instead contends that the purpose of the economy is the provisioning of the population (people before profit, it could be said). She illustrates why economists should not confine their theorising to explaining the rationale behind individual choice under conditions of scarcity, rather, they should devote themselves to developing the means to discover the most efficient and equitable way of providing a sustainable, high quality of life for the whole population.

The author’s deep understanding of the nature of money and the monetary system as a whole is crucial and underpins her exposition; she takes the time to explain why commonly held myths about money are wrong. One such fable is money’s supposed development from barter. It suits mainstream thinkers committed to a monist ideology to create an origin-of-money story based on individuals seeking the most efficient medium of exchange from a starting point of barter. However, the historical record provides no comfort for the holders of this view; money is a social institution and its origins are rooted in the debt and credit relationships embedded within communities.

Mellor also explodes another well-known myth, popular in neo-classical circles: that of treating banks like mere intermediaries between savers and borrowers, and instead showing how banks actually manufacture money themselves. Importantly, she explains how banks have acquired the right to create public currency in their pursuit of profit which, in turn, requires the public sector to underwrite their behaviour. She then explains the nature of the negative consequences of this ceding of power.

The author offers a convincing case in support of heterodox theories of money; in particular state and credit theories, citing the critical early work of Knapp and Innes respectively. However, perhaps the most impressive aspect of the book – amongst many – is how it explains the nature of and the links between the private and public circuits of money.

The author shows how money can originate from two sources: the state and its central bank (the public circuit) and private banks (the commercial circuit). Crucially, banks manufacture money by making loans. However, given its nature – as public currency, rather than simply private credit – this requires the state (via the central bank) to act as a back-stop to the system. In the neoliberal period, with a highly deregulated banking system, private-money creation based on the profit motive has been promoted as opposed to public-money creation to provision society. This is, according to the logic believed by free-market supporters as an article of faith, an efficient way for the monetary system to operate.

However, as Mellor points out, private financial institutions only create money as debt. In other words, when looking at the private sector as a whole, without any monetary input from the public-money circuit, there can be no net saving. Private credit exactly balances debt. In contrast, the public sector can issue money, debt free, from the private sector’s viewpoint, and any untaxed public spending becomes net saving for the private sector. The public-money circuit is therefore a vital stabilising force as debt-free public currency provides the net saving required to support the credit structure of the private sector.

However, neoliberal handbag economics does not recognise this key role played by publically-issued money, instead, the idea of the public sector creating money, debt free, to serve public purpose has been denigrated as inefficient and potentially inflationary. Accordingly, government prudence has been the order of the day. The orthodoxy is that the public sector needs to act as if it is a currency-user (rather than the currency creator that it is) and fund itself from taxation, borrowing as little as possible.

This image builds on the erroneous ideological viewpoint that the public sector is somehow parasitical on the private sector. In other words the latter creates the wealth and the public sector funds itself from the income the private sector creates. As Mellor points out, this is far from true in reality. The private-sector monetary circuit, based as it is on debt, is highly unstable. Banks are encouraged to create more and more loans, in pursuit of profit, until eventually indebtedness becomes too great and the system crashes. At this point the public sector needs to create massive volumes of money to support the private financial system. In reality, it is the private sector which relies, in the final analysis, on the public sector. The truth of this view was starkly illustrated during the Global Financial Crisis of 2007-8.

Neoliberal economics has meant the demonising of public-sector deficits – which are exactly equivalent to additions non-government sector net saving (both domestic and foreign) – and, effectively, the privatisation of the public-currency system. It has been handed over to the private sector profit-seekers and only when excessive greed, bad management and fraud builds indebtedness to a critical point is the public sector called upon to act in its role as guardian of the system.

Professor Mellor suggests the way forward. The public sector’s right to issue money debt free must be reclaimed and the dominance of neoliberal handbag economics ended. Progressive thinking needs to take its place. This will require theorising based on accurate perceptions of how the monetary system works in practice and will enable society to provision itself sustainably.

The private sector’s ability to create public currency at will needs to be severely curtailed and the financial sector made to serve the public purpose rather than the short-term greed for profits. The latter leads to increased inequality, and to a pattern of resource use which is determined by a wealthy minority and is often environmentally destructive. The author suggests using public currency for sustainable provisioning, sharing the work that needs to done, whilst protecting the environment. The author believes, like me, that this will provide the best means of enhancing quality of life for the majority of the population in the future.

I have no doubt that this book deserves to be widely read and deeply considered. It provides a clear analysis of the problems inherent in the current monetary system and shows how major changes need to be made if we are to make full use of its capacity to serve the public purpose. The author expertly compares and contrasts the approaches of alternative non-mainstream schools pressing for these changes, in particular, the advocates of Modern Monetary Theory (MMT) and those who favour monetary reform. Her analysis extends beyond the domestic monetary system and she considers the international nature of money, perceptively evaluating the relative merits of different proposals to reorganise the world’s monetary system.

I heartily recommend this book as essential reading for people interested in radical solutions to the problems associated with what has been called the neoliberal form of capitalism, particularly monetary mismanagement, declining quality of life and ecological destruction. It is a tour de force and constitutes a memorable polemic against the current world monetary order.

I find myself in profound agreement with this sentiment:

‘There is no compromise between economic democracy and the market. Priority must go to the social and public economy (social and public provisioning), with the remaining commercial market in a secondary role. The democratisation of money is not about bringing commercial values into public provisioning. Quite the opposite: democratically determined public values would drive the commercial sector’ (p.181).

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