Articles by Steve Keen
Professor Keen is an Australian economist and author. In 1990, he completed a Master of Commerce in economics and economic history and in 1998 his PhD in economics at the University of New South Wales. In 2014 he became a professor and Head of the School of Economics, History and Politics at Kingston University in London. He is a fellow at the Centre for Policy Development.
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What Is Money And How Is It Created?
February 28, 2015
These should be two of the easiest questions to answer in economics; after all, money is the one thing that we all use in an economy—surely we know what it is, and where it comes from?
Unfortunately, we know what money is the same way the fabled Blind Men of Hindustan know what an elephant is: the one who grabbed the trunk knows it is “like a tree”, while the one who grabbed the tusk knows that it is “like a spear”, and so on. Money is such a multi-faceted and all-pervasive element of our system—the figurative “elephant in the living room”—that our capability to obsess about one aspect of it prevents us developing a proper appreciation of what it actually is.
Not knowing what it is, we develop “creation myths” about where it came from as well—and then we clash with each other over them, like a bands of rival religious zealots.At one extreme, you get people like Paul Rosenberg who argue that our monetary system is based on fraud (“That Couldn’t Possibly Be True”: The Startling Truth About the US Dollar):
Can you and I write checks “drawn on ourselves”? Of course not. We have to back them up with value. The Fed does not. So, the mighty US dollar is not backed by gold or silver or anything at all; it’s simply an accounting trick.
At the other extreme, you get mainstream economists like Paul Krugman, who argue that how money is created is no big deal, and that it’s in fact OK to ignore money when modelling the economy (There’s Something About Money (Implicitly Wonkish)):
there’s a bit of sleight of hand involved in the way we handle money itself: first acknowledge that it’s a special sort of good that people desire only because other people desire it, then ignore that specialness for the rest of the analysis.
They’re both wrong, and for the same reason: they haven’t worked out what money really is. Only one person ever really ever did—and no, it wasn’t Ayn Rand. It was Augusto Graziani, an Italian Professor of Economics, who died early last year. He understood what money is because he posed and correctly answered a simple question: how does a monetary economy differ from one in which trade occurs by barter?
This ruled out gold being money, since gold is a commodity that anyone can produce for themselves with a bit of mining (and a lot of luck). So even though gold is really special and incredibly rare, it is in the end, a commodity: an economy using gold for trade is really a barter economy, not a monetary one. As Graziani put it:
A true monetary economy is inconsistent with the presence of a commodity money. A commodity money is by definition a kind of money that any producer can produce for himself. But an economy using as money a commodity coming out of a regular process of production, cannot be distinguished from a barter economy. A true monetary economy must therefore be using a token money, which is nowadays a paper currency. [He wrote this in 1989, before our modern electronic money system had developed]
Banks create money by issuing a loan to a borrower; they record the loan as an asset, and the money they deposit in the borrower’s account as a liability. This, in one way, is no different to the way the Federal Reserve creates money, which Rosenberg
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Banks create money, fintechs don't
June 7, 2017
Interview with https://www.altfi.com/ - A news, views and events company for the rapidly growing alternative finance, digital banking and robo-advice sectors.
AltFi: Most people think money is created when central banks print it. But you say that most money is created by private banks - Barclays, Bank of America, Commonwealth Bank etc.?
Steve Keen: It’s double entry book keeping.
Central banks do create money. The government Treasury has an account at the central bank and they sell bonds to the central bank. The central bank then pays the Treasury and records its bonds as an asset. That creates money. This is the only mechanism most people know. So the government can create money by spending more than it takes in taxation and financing the difference with central bank purchased bonds.
But private banks also use double entry bookkeeping.
Let’s say you want to go buy a house in Melbourne
My favourite proof of this was the service station owner in New Zealand
Then what happens to the hard working school teachers and nurses who deposit money in the banks? Aren’t savers’ deposits getting lent out?
No. Not at all. Deposits don’t create loans; loans create deposits.
This is something that has been argued for 50 years by rebel economists like myself, starting with Basil Moore who made the first empirical arguments back in the 1970s. But finally central banks that know what they’re talking about - and this does not include the Reserve Bank of Australia
We use our bank accounts as transaction accounts. When you get paid your salary, you whack it into a deposit account at the bank. You can then shop with that money and transfer money from one account to another. But the level of loans is a decision from the bank. The money that is circulating is partly transactional money, partly loan money.
So money is the turnover of transactional money and the turnover of new debt.
Some people say this isn’t money that’s being created, it’s just transferrable bank debt.
People are always asking ‘what is money?’. Some people think it should be gold or a commodity or something else. But money has always been trust — however its manifest. So in that sense we trust the banks. If you give me a piece of A4 paper saying, “Steve Keen I owe you $100”, I might accept that for you to buy something off me for now, but you’re going to have to pay me back in cash at some point. But if you send me that exact same note with a bank signature on it you don’t have to pay me back with cash.
People can have all sorts of arguments about what money should be. But money, in practice, is bank liabilities. We accept the transfer of bank liabilities between ourselves as money....