04 May 2011

15 Things They Don't Tell You About Money

Dire Straits were right!

Sourced from Positive Money, 29 April 2011

'Inspired by Ha Joon Chang’s 23 Things They Didn’t Tell You About Capitalism (2010) where you learn for example that the Nobel Prize for Economics is not really a Nobel Prize: it is awarded by the Swedish Central Bank.

1. Governments in full sovereign control of their currencies can create sufficient money to ensure full employment and to finance all their activities. There is no limit to money creation and to say that ‘there is no money left’ is as absurd as it is untrue.

2. Governments with sovereign power do not need to borrow either from private financial institutions or the IMF. That they borrow and then have to ‘appease financial markets’ is a self-imposed constraint, rather like tying your shoelaces together and claiming that you can’t walk (see Warren Mosler below).

3. Governments do not control the money supply but instead have chosen to subcontract the provision of the public money supply to private banks.

4. Governments voluntarily forego the substantial public revenue of money creation called seigniorage. In the UK this amounts to a subsidy to private banks of the order of £100 bn a year

5. Money is not a ‘ thing’ but a legal relationship, a creation of the State. It is a token (these days electronic) system which establishes claims over resources.

6. Money is not wealth. Wealth is land, natural resources and the products of human labour. Money is only a claim on wealth.

7. Real wealth comes from the production of socially useful goods and services and investment in infrastructure and skills. Property or share price speculation and the promotion of pyramid schemes (the process called ‘financial liberalisation’ or ‘deregulation’) are predatory and extractive activities which do not create wealth.

8. Banks are offspring of the State. They have a virtual monopoly of money creation and the legal privileges and protections of corporate personhood and limited liability. They pretend to be independent and self reliant but like spoilt teenagers, at the first sign of trouble, they run home crying and demanding unlimited handouts.

9. Banks do not lend anything. They create money as credit out of nothing and charge interest on something which costs nothing to produce. Credit creates an additional debt overhead in the form of interest which adds to costs in the economy but, as no additional money is issued to cover it, there is never enough money in circulation to enable debt to be repaid, causing bankruptcies, recessions and unemployment.

10. Bank credit does not go into productive investment but into asset price speculation and ‘loans’ to other banks. When commentators refer to the banking crisis they are referring to the ongoing collapse of this classic pyramid or Ponzi scheme.

11. Banks expand and contract the money supply creating booms and asset price bubbles which collapse into recessions. This is called ‘the business cycle’ but there is nothing inevitable about it.

12. There must always be a deficit in the private or public sectors for the money system to function – someone somewhere has always to be spending more than they are earning.

13. There are only two ways that money can enter the economy: credit issued by private banks or government spending. If credit dries up, only government can make good the shortfall or else there is a recession.

14. If you think that you have ‘money in the bank’, think again. Bank accounts are only accounting entries representing the bank’s promise to pay, not real money.

15. Expanding the money supply by government-issued money is not inflationary except in conditions of full employment. Unlike bank credit, there is nothing intrinsically inflationary about government-issued money. Money issuance can always be controlled by taxation.'


  1. This is the financial literacy we need to provide our kids. My boys already know how this works and never stop going on about how stupid the system is :-)

    One of our problems is that people don't trust "the government". So I think it's still important to have an independent monetary authority directed by the government to provide stable and sound money.

  2. Interesting point - this goes to show how all these things need to be addressed together, if people have lost trust/faith in governments (and in some cases, rightly so) then we won't get the cultural shift by working on one aspect.


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