The following piece is submitted by Chris Williamson as a contribution towards the development of our policy in this area.
MODERN MONETARY THEORY (MMT) FOR WPGB
No political party in Britain has ever expressly embraced the possibilities provided by the fact that Britain issues its own currency. Consequently, governments can never run out of money for anything that is available for sale in pound sterling.
This offers the WPGB an enormous opportunity. We can explain to the public that a good society is possible and that they’ve had the wool pulled over their eyes about the way in which the monetary system in this country actually operates. Henry Ford acknowledged this nearly a century ago when he said: “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Our job in the Workers Party GB is to facilitate that revolution. Tony Benn used to say that if we can find the money to kill people, we can find the money to help people, and he was right. But governments of every stripe have always insisted that the funds necessary to deliver a good society are limited and that tough choices have to be made. However, as Tony Benn pointed out, there is never a problem finding the money for military adventures.
The covid crisis proved that when there is political will, money is no object, even for a Tory government. Myths about the size of the deficit were thrown out of the window, only to be dusted off when the lockdown was over. The problem was that much of the government’s spending spree was squandered, and simply lined the pockets of their Tory friends.
But if the Workers Party embraces Modern Monetary Theory, we can use it to explain how we’d fund a good society without falling back on the myth about raising taxes to fund public expenditure. Such an approach is a trap that is used by the Establishment to ridicule socialist proposals and frighten the electorate. It also bestows a status on the billionaire class that they don’t deserve. When the billionaire, Alan Sugar, said he’d leave the country if Jeremy Corbyn was elected as prime minister, my response was to say, “good, I’ll happily drive him to the airport”. MMT also destroys Thatcher’s enduring maxim that: “The problem with socialism is that you eventually run out of other people’s money.”
I’ve drawn on the work of Richard Murphy, who established the Tax Justice Network, and was advising Jeremy Corbyn in his first leadership bid. In fact, it was Richard’s economic prospectus that resulted in Jeremy Corbyn’s economic agenda being labelled ‘Corbynomics’, but it was subsequently jettisoned by John McDonnell when he was appointed as the shadow chancellor.
Pound sterling is a fiat currency, which means there is no asset backing (like gold) to the money in circulation. Our currency obtains its value from the government’s promise to pay. The same is true of every major currency in the world. They have all been fiat currencies since 1971, when Richard Nixon scrapped what was known as the Bretton Woods Agreement.
It is important to recognise that the government has to spend money into the economy, before it can collect any taxes. The government creates money every time it spends by instructing the Bank of England to extend it the credit that makes this possible. It isn’t constrained by the availability of taxation funds when doing so and the Bank of England, will always act on instructions from the government, because it’s owned by the government.
Taxation is utilised to prevent this new money creating excess inflation by withdrawing currency from circulation. That is the primary fiscal purpose of taxation, but taxation has other significant, social functions as well.
Politicians and media commentators often talk about government borrowing, but that is a misnomer. A more appropriate description would be to refer to it as corporate welfare, whereby the government offers corporations and super rich individuals risk free investment opportunities in government bonds. Pension funds often hold government bonds as part of their overall portfolio, but the truth is government borrowing makes little economic sense. Furthermore, a government that only borrows (issues bonds) in its own currency cannot ever default on its own debt because it can always issue an instruction to the Bank of England to settle the debt whenever anyone wants to redeem it. This enables governments, with the political will, to face down the financial markets.
Although the primary purpose of taxation is to control inflation, its social purposes are also essential. It can be used to create the space for public spending priorities when the economy is at or near full capacity. Otherwise, inflation would be created because the public and private sectors would be chasing scarce resources. Taxation can also be used to address income and wealth inequality and incentivise or penalise certain activities like promoting healthy lifestyles by taxing smoking and reducing taxes on low emission vehicles etc. Tax is a reflection of society’s values and is the primary mechanism that governments have for reinforcing those values.
So, to summarise:
- The government can and does create money.
- Government debt is just a means for saving private wealth.
- Deficits are not a problem, as long as they’re not overheating the economy, but taxation can be used to stop the economy over-heating.
- Governments cannot create money without limit. The key is ensuring public spending is matched to the availability of real resources in the economy.
For further information, these links are useful:
This lecture by Stepanie Kelton is worth watching and her book ‘The Deficit Myth’ offers an excellent overview of MMT.
Carlos Hernandez’s book – ‘Fiat Socialism’ is also worth reading, as it explains how an MMT understanding can be used to implement a socialist programme. Copies of his book will be available at the WPGB congress.