Critique of Economic Imaginative Power
On the political foundations of money (creation) and its relation to economic imaginative power
In the journey so far undertaken, the project started with the aspiration:
to bring some sense of order to money and finance;
to understand banking as a prerequisite to understand money by having introduced ILF (I), FRC (II) and FMC (III) theories of banking;
to comprehend the mechanics of money as a means of payments as well as a source of funding; and eventually
to acknowledge the role of the state, central banks and monetary circuits in the money creation process via the emission of government bonds.
This project questions the conditions of possibility of knowledge in regards to monetary economics and keeps on investigating theories of banking and money creation as much as bankers’ practices themselves. Empirically, none of the presented theories of banking have been rejected but served instead to re-arrange their respective elements and hence build in that way a more robust understanding of the process itself. In the following will be argued that financial education is important and needs to include every angle to not limit economic imaginative power. All too often, the judgement of the human imagination is chained to the apparent budgetary constraints.
The British economist John Maynard Keynes dared to postulate as part of a series of a BBC broadcast on postwar planning as early as the spring of 1942 that
“anything we can actually do we can afford.” [1]
During this period, the Nazi submarine U-552, also infamously known as the Red Devil, was up to mischief in the Atlantic, responsible for the sinking of the U.S. civilian coastal steamer SS David H. Atwater, en route to its Massachusetts home port from Norfolk, Virginia loaded with 4,000 tons of coal. At that time, the United States of America was still recovering from the Japanese attack on Pearl Harbor in December 1941. John Maynard Keynes, as a newly appointed member of the Board of Directors of the Bank of England, was, as already indicated at the beginning, concerned with various ways of financing the war against the Axis powers as well as the reconstruction in a sustainable manner. In his view, the core of the problem was not the lack of money for financing, but rather the courage to do everything humanly possible to actually come closer to the two goals in the medium to long term. Keynes was well aware of the possibilities that presented themselves in view of the fact that Great Britain had already left behind the fiction of the gold standard in 1931. After all,
“in the long run, almost anything is possible.” [2]
One looks in vain for a similar conception of monetary sovereignty in contemporary Europe. The memories of the EU's misguided austerity policy of the 2010 years, based on the ideological corset of the Maastricht criteria, the European Growth and Stability Pact or the Fiscal Compact, are far too present. Fiscal asceticism or restraint is still part of the DNA of the European economic constitution. However, in order to come close to meeting the challenges of the 21st century, the current fossilised doctrines must be critically examined. It is fiscal asceticism that is based on a deep mistrust in the state's power to shape policy. With due respect to the challenges ahead, however, those require the courage to exploit every possible leeway.
Assuming that the responsibility of balanced budgets, which many countries claim as a reason of state, is politically and economically tenable: to what extent, for example, can the largest undertaking of the NATO countries with regard to the two-decade-long War on Terror be justified in this respect? Brown University's Watson Institute estimates the cost for the years 2001-2020 at about $6.4 trillion for the U.S. alone. [3] This is $320 billion a year that could have been invested in American education and health care, the country's infrastructure, or cutting-edge technologies. Not to mention the approximately 770,000-800,000 people who have fallen victim to this asymmetrical war.
Another miraculous example of the sudden appearance of money is the Global Financial Crisis of 2008/09, costing around $10 trillion according to an estimation published by the International Monetary Fund. [4] Since the events in the decade after indicate the severity of the impact of this crisis, it has certainly contributed to increased feelings of resentment, a regressive populist backlash in many countries, to increased mistrust in democracy, the political caste and erosion of trust in elites, including those engaged in empirical research.
The costs of the consequences of man-made climate change are on a similar scale. In a recently published report, the World Meteorological Organization (WMO) puts the cost at a staggering $3.6 trillion for the period 1970 to 2019. [5] The global death toll is at around the 2 million mark. A certain distorted perception and misjudgment of the risk profile for the preservation of human civilisation seems evident.
The Corona pandemic forced a more active role for the treasury again for the first time, in tandem with central banks to prevent a repeat of the Great Depression of 1929. To this end, fiscal rules were being temporarily suspended and, in the case of the EU, Corona/Eurobonds were being temporarily issued. Another step toward more monetary sovereignty for the still relatively young and incomplete project of a common European currency. While the ECB is trying to fulfill its mandate of price stability, there is still a lack of sustainable fiscal policy coordination and solidarity with the rest of the world among the member states. Pandemic control precisely does not work nationally, regionally, but exclusively globally, also to prevent a vaccine-resistant viral mutant. The number of covid deaths currently stands at around 6.9 million. [6]
This makes it all the more important to reorient the societal discourse around the constitutionally elevated, and self-imposed budgetary constraints embodied in the German "black zero" or debt brakes - and relate it to the process of money creation to a large extent depending on the risk appetite of the private commercial banking sector. After all, a state running a deficit is not the same as the legendary budgeting of a Swabian housewife. Governments do not finance themselves exclusively from tax revenues, but have the option of regularly issuing bonds and thus tying up the necessary funds on the capital market in order to invest in public infrastructure and services of general interest. In non-crisis periods, this approach increases economic activity, combats unemployment and puts public debt into perspective.
Private households do not have such privileges or opportunities. That is why the above-mentioned "reason of state" is not only wrong, but also dangerous, even life-threatening. In view of the fear of certain segments of the population of renewed migration movements from Afghanistan and Africa toward Europe and the consequences of the climate crisis, which are likely to increase in intensity and frequency, it is high time to reprogram the fiscal DNA in such a way that the state's power to shape policy can urgently meet these challenges in the dimensions already described. What is at stake is nothing other than the activation of society's overall potential and the courage to give state institutions the opportunity to exploit this expanded scope for action. The expansion and strengthening of this room for maneuver can be negotiated and determined politically and is absolutely necessary.
After all, the time horizon still available for averting the worst consequences of the climate crisis is only around ten years. What is possible must already be made possible in the near future. In that vein, the essence is of this argument is: 𝄆 Money = Political 𝄇
DISCLAIMER: This piece has not the aspiration of scientificity. It includes several value judgements and build on the substack post below:
Sources:
[1] Keynes, J. M. (2013) [1942] ‘How much does finance matter?’, in The Collected Writings of John Maynard Keynes Volume XXVII Activities 1940-1946, Cambridge: Cambridge University Press, pp. 264-271.
[2] Ibid.
[3] Watson Institute (2019) Costs of War, [online] available at: <https://watson.brown.edu/costsofwar/figures/2019/budgetary-costs-post-911-wars-through-fy2020-64-trillion> [Last accessed 28th April 2023].
[4] International Monetary Fund (2009) Global Financial Stability Report, 2009, [online] available at: <https://www.imf.org/~/media/Websites/IMF/imported-flagship-issues/external/pubs/ft/GFSR/2009/01/pdf/_textpdf.ashx> [Last accessed 28th April 2023], p. 41.
[5] World Meteorological Organization (2021) WMO Atlas of Mortality and Economic Losses from Weather, Climate and Water Extremes (1970–2019), [online] available at: <https://library.wmo.int/index.php?lvl=notice_display&id=21930#.YTz9Vi1HmfA> [Last accessed 28th April 2023].
[6] World Health Organisation (2023) WHO Coronavirus (COVID-19) Dashboard, [online] available at: <https://covid19.who.int> [Last accessed 28th April 2023].