Friday, 12 June 2015

Richard Murphy puts his foot in it yet again.

It’s often claimed that base money is “debt free”. For example Positive Money often makes that point. Murphy tries to dispute the point in this recent article.

First, though, some background.

The vast bulk of money is created by private banks when they extent loans, as this Bank of England work makes clear in it’s opening sentences. That is, when obtaining a loan from such a bank, the bank sets up two debts.

First, the bank undertakes to owe the borrower £X, and it undertakes to transfer part or all of that debt or obligation to anyone else when instructed to do so by the borrower when the borrower uses his/her cheque book or debit card to issue the instruction. E.g. if I write you a cheque for £Y I’m telling my bank to reduce what it  owes to me by £Y and instead, owe the £Y to you.

Second, and at the above initial “set up” stage, the borrower undertakes to owe the bank £X in the sense that the borrower undertakes to repay the sum borrowed to the bank at some time in the future (a very long time in the future in the case of some mortgages). So, as you’ve doubtless gathered, there’s plenty of debt in the above money creation process. Put another way,  private banks cannot create £Z of money without someone going £Z into debt.

Base money.

In contrast to money issued by private banks, there is money issued by CENTRAL banks, or if you like, by the government / central bank machine. That is governments can simply print money (in physical form or book-keeping form) and spend it into the economy, as Robert Mugabe so ably demonstrated.

Now where exactly is the “debt” in that sort of money? It’s true that Bank of England £10 notes say “I promise to pay the bearer on demand the sum of £10”. But if you go the BoE and try to get £10 of gold or anything else in exchange for your £10 notes, you’ll be told to get lost. So what sort of debt is that? Contrary to Richard Murphy’s claims it just isn't a debt.

The only conceivable sense in which base money is a debt is that if the tax authorities (i.e. government) demands money from you, you can use a wad of £10 notes (or base money in any other form) to pay your debt to the tax authorities. That is arguably an instance of one debt being used to cancel an equal and opposite debt.

But that’s a very far fetched and unusual sense of the word “debt”. I.e. on any normal use or definition of the word debt, base money is indeed debt free.

The REASON why Murphy makes the mistake of thinking that base money is “debt encumbered” is that he is an accountant. And like many accountants, he sees things in terms of balance sheets and profit and loss accounts.
Indeed, in his article he sets out part of the Bank of England’s balance sheet and lo and behold, base money is shown as a LIABILITY of the BoE.

As Richard Murphy ought to know, while double entry book-keeping is a very clever and useful system, it often employs the concepts “asset” and “liability” in a very tortured way: a way that bears little resemblance to the words asset and liability as defined in dictionaries.

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