“There is no Magic Money Tree,” said Prime Minister Theresa May during a speech in the House of Commons.
With that statement, she perpetuated one of the most significant political and socioeconomic lies ever told to the British public. Since the Gold Standard was abandoned partially in 1931, and then finally in 1971, the British government (and our banks) have created money literally out of nothing. We have what is known as a ‘fiat currency’. That means that our politics – and specifically our government – controls our nation’s money supply.
Modern Monetary Theory (MMT as it is also known) was born when we left the Gold Standard. ‘The Magic Money Tree’ is maybe a more accessible way for the public to think about it. So how does it work? Governments can pay for goods, services and create financial assets without the need to hold physical assets, or even to collect the tax or debt assurances, in advance of their spending. There is no one to force it to default on debt in its own currency. Banks are allowed by law to create money in the form of loans, aka ‘borrowing’. This word is essential, and we repeat it later on.
When you take out a loan or a mortgage, the bank creates the principal sum out of nothing. It simply writes the figure into your account when you make a formal agreement that you pay interest on it over a repayment period. When the loan or mortgage is paid off, the principal sum disappears again, leaving only the interest minus any costs the bank incurs in providing the service.
You may wonder how banks can create money out of nothing, while you or I cannot. It is because they have ‘political influence’. Banks have been close to governments for centuries. In the UK, they have been intertwined since the 1600s. The Bank of England was founded as a private bank in 1694 to lend to the government.
Both banks and governments would rather you didn’t know the details. This brings us to how governments use the Magic Money Tree and why they’d rather you didn’t understand that illusion either.
When the British government abandoned the Gold Standard in 1931, the United States followed in 1933. Major currencies moved away from having ‘intrinsic value’ (the value of the supporting gold or silver) to what is known as fiat currency status – meaning money has no intrinsic value in physical assets. The money we use every day is nothing more than a promise to pay, backed by the government that issued the currency.
A currency’s value is loosely controlled by public expenditure, inflation and trading currencies on the international market. It still has no intrinsic value; it is valued entirely by perception and trust. £1 is only worth ‘a Pound’ because we all agree, despite its exchange value constantly changing.
Governments control the supply of money via Central banks and banks (under cursory government supervision). Governments can therefore create money out of nothing and do this all the time. But they don’t want you to know that because governments are also driven by political ideology.
In 2008 during the banking crisis, we saw this in real-time. Governments worldwide shook hundreds of billions out of the Magic Money Tree to bail out a tsunami of toxic debts created by ‘lightly regulated’ banks. They called it Quantitative Easing (QE) to confuse us and dignify it as much as possible. Billions have been given to the banks via QE to prop up their balance sheets.
During the Covid pandemic, the same governments used MMT to conjure hundreds of billions to support businesses and pay for vaccines. In the UK’s case, £22Bn[i] for a test and trace system. Global institutions like the International Monetary Fund (IMF) agreed that governments should spend to end the recession and the recession expected in its aftermath.
So when governments need money, they can create as much as they want whenever they want to. But here in the UK, the Tory party doesn’t want us to know that. It wants to frame it as ‘public sector borrowing’. There’s that crucial word again; ‘borrowing’. The government wants us to think the money has come from somewhere and must be paid back; that it is ‘debt’ owed by us to someone. That is a vast political lie. The nation doesn’t have a credit card account. Debt spent on investment can be funded long-term, and it does not have to be paid back immediately.
Let us look at the money paid to the banks in 2008. Most of it went to cover short-term credit difficulties, which increased asset values, mostly of property. Governments saved their banking friends – and the debt? Some of it was ‘repaid’ by the banks as a gesture, but there was no need; it could have been carried for many years. So they went straight back to creating money for profit as soon as they could.
During the pandemic, the UK government has shamelessly used MMT to funnel vast sums of money to their private sector chums and donors. Billions have been spent, often in the form of overpriced contracts for PPE or services that didn’t work correctly in many cases.
These were all political choices. The money was always there when the government wanted it. It went to the people they wanted it to go to for political payback and ideological reasons. The UK could have spent its money on the NHS, the care sector, or directly supporting people in dire need, but this government didn’t. That is because they don’t want to. It doesn’t suit their political agenda.
So they have now stated that any new money must be paid for by tax. A tax on the people least able to afford it while those able to afford it pay nothing. That was entirely a political choice.
This ongoing political lie was the excuse for ‘austerity’ after the 2008 financial crisis. There was no need for it at all. It was a political choice to defund local authorities, social services, schools, hospitals, the Armed forces, and every other sector of public spending. It was a political project to shrink the size of the State, driven by an ultra-right, neoconservative dogma. A deliberate act of aggression against those most in need accompanied by massive tax cuts for the rich.
The argument against using MMT to support a more extensive public sector is that it causes inflation. But that is another lie. Investing in schools, hospitals, and other infrastructure does not cause inflation. Nor does investing in social services or the justice system or initiatives like the Green New Deal. Spending on the poorest in our society ends back in the economy, not in tax-havens and luxury lifestyles. It buys food, housing, educational materials and better lives. The media image of the ‘undeserving poor’ is not confirmed in research, and we need to start listening to experts and not the front page of the tabloids.
A well-run tax system is there to moderate inflation. Sensible, prudent government policy is there to moderate inflation, as are the international money markets. The choices governments make are political. If anything, the UK government has invested money from the Magic Money Tree in the private sector, where asset inflation will undoubtedly occur.
What it has done in the last 18 months is blatantly political, a form of deliberate harm to those in need and least able to pay. Many of the recipients of their largesse are donors to the Conservative party or beneficiaries of its policies and political choices. It is by any rational assessment, corrupt.
The financial cat is now out of the bag. The Magic Money Tree not only exists but has been there all along. It can be used for good or bad. A different government could make MMT work for us in a much more productive and positive way. It is now our political choice. Do we use it to save the planet, create a prosperous, happy and equal society? Or do we continue to stuff money into the pockets and off-shore accounts of crony donors to political parties?
One of the things political parties rarely get to know is which people are actively opposed to them. After elections, they all pore over the results. But in reality, there is no way of knowing which voters voted tactically against them. Or indeed voters’ real preferences had they been able to express themselves more freely.
I suspect (because we can’t know for sure) that a very significant proportion of votes are cast more to prevent a win by a candidate from a disliked party than through active support. Much more worrying is the proportion of people who don’t vote.
Anyone who has ever canvassed on the doorstep knows that plenty of people say they won’t vote. These are the three main reasons:-
“They’re all the same”;
“They’re all in it for themselves”;
“Nothing ever changes”.
None of these statements is true, but it is significant that so many people believe them and this stops them from voting. These are the same people who, if voting were compulsory, would demand an option to tick ‘none of the above’.
This disillusionment is yet another reason our First Past The Post (FPTP) voting system provides a very distorted version of ‘the will of the people’. It is a system that doesn’t get close to what people really think of the parties or want from their votes. But as pressure builds for Proportional Representation (PR), we need to think very carefully about it.
PR will allow representation in Parliament for some very fringe or extremist political parties and individuals. We could expect to see not only the likes of Nigel Farage, Stephen Lennon (aka ‘Tommy Robinson’) and George Galloway but also Laurence Fox and possibly even a candidate from the Monster Raving Loony Party. These are the risks of hearing from the majority.
So we will need a workable mechanism for expressing our disapproval of candidates and parties that has a measurable impact on the election outcome. One solution is to have two options on the ballot paper next to each candidate; one with a favourable vote for and the other to vote against them. The final tally would be determined by subtracting all the ‘against’ votes from each candidate’s ‘for’ votes. The critical point is not to make any restrictions on how many boxes can be used.
So how would this work in practice? The diehards in each party would vote for their candidate and against all the others. Some would select all the boxes; others would leave it all blank; either way, that is okay. Many voters, however, would be more nuanced in their selections. It would be possible to vote for and against more than one candidate. So, for example, a voter could vote for the Liberal Democrats and the Greens, leaving Labour blank and against the Conservatives, UKIP and any fringe or extremist candidates. Or one might wish to vote against the Conservatives and UKIP but leave everything else blank, in which case you’d be expressing more what you didn’t want than what you did. That would also be okay.
Under FPTP, this vote would produce a result that could be quite reflective of general preferences. However, it could equally be as unsatisfactory to many voters as the current single choice arrangements. Whereas ‘For and Against Voting (FAV)’ would be a considerable benefit under a PR voting system. It would tend to eliminate extremes, as most people on the political bell curve are opposed to extremism.
The benefit to the parties would be that – for the first time – they would be able to quantify not just how popular they were but also how unpopular. Let’s be honest – that alone would do them a lot of good. It might spur them on to talk less and listen more. It might make them concentrate harder on what matters to the public – devoting less energy to their internal squabbles and grand delusions. It would ultimately drive politics towards the central consensus, but that is no bad thing. It would at least be more representative of the majority position.
Most of all, though, FAV could have a huge impact on people who don’t currently vote. I love the idea of everyone voting, but compulsion is not the way. Allowing everyone the opportunity to express their real (and often complex) views in an election could draw millions back to the ballot box. It may start mainly being ‘none of the above’, but I suspect there are many who would either leave some blanks or even offer the odd vote ‘for’ or ‘against’ a candidate. Every piece of voting data improves what the nation will know about its preferences and how parties understand their policy messaging.
It may take a few elections to get the majority of the non-voters back, but I think, as the classic objections begin to seem less accurate, then we might start to see turnouts as high as 85%. Any increase in participation would be a good thing for democracy.
How we can learn to act together to achieve a better way of government.
I’ve always been a wildlife enthusiast and, like many people, have witnessed in real life a vast cloud of birds swirling about in the sky creating extraordinary, mesmerising shapes as they change direction, seemingly guided by a single, unknowable purpose. This is called a murmuration and in the UK it most commonly features starlings and is most commonly seen at sunset. You may wonder what on earth this has to do with politics but please bear with me.
Whilst studying a murmuration in my small rural home town I discovered something really interesting. I began to notice on my morning and evening dog walks that discrete groups of starlings would fly towards the specific place where the murmuration took place just before dusk, and in the morning would fly away from it. This huge group of birds was actually made up of numerous smaller subgroups.
The purpose of the murmuration is to gather in a huge flock prior to roosting for the night. They create a large swirling mass of birds because there is some protection from predators in behaving that way and then as if on some secret signal, they all drop down very quickly to the roosting trees. So in essence, what we have is a large number of different groups of birds coming together in a specific place, at a specific time and for a specific purpose for their mutual benefit.
It occurs to me that there is a lesson here for the way we conduct politics, especially on the centre-left, which suffers from what often looks like irreconcilable factions and splits. These never seem capable of coming together in one place, at one time for a specific or common purpose – especially at an election. Each group or faction, both within and between parties, spends a huge amount of time and energy differentiating themselves from everyone else, despite having very similar objectives.
A prime example is a common desire to beat the Conservatives yet these groups and parties are happy to split the progressive vote, which often guarantees they all get the one thing they don’t want; a conservative MP in a Conservative government. There are a number of reasons why this happens but primarily it is because each party or faction values its identity more than its policy aims and objectives. The more they lose elections the more and more frustrated they get with each other for splitting the vote, which then descends into a visceral hatred and a blank refusal to cooperate. They are often subconsciously (perhaps even deliberately?) blind to the number of policy objectives they actually share.
Most of the centre-left parties openly state they want Proportional Representation (PR) but have done nothing about it because of an innate delusion that they are the ‘chosen ones’ who will deliver ‘a better world’ just as soon as everyone sees that and votes them in. This party political narcissism is particularly true of Labour who, to be fair, have won elections in the not too distant past. I don’t say this to be unkind but in the current political climate, and especially under our First Past the Post (FPTP) voting system, that isn’t going to happen again. In order for PR to work it needs to be accepted as a given that cooperative forms of government will be a permanent feature of our democracy. Therefore, a major change of mental approach needs to happen.
The first thing these parties need to do is recognise that, in terms of 75% of what they want to achieve, they are all birds of the same political species. Beating the tories, introducing PR and a Green New Deal (GND) are all core objectives for Labour, Lib-Dem, Greens, SNP and Plaid Cymru. There are many more areas where their policy objectives will converge with a little tinkering and negotiation. All of these parties need to learn to politically murmurate, not just between themselves but also between the factions within the parties.
Again, Labour perhaps because it is the largest party, suffers from this more than the others. Their current splits and divisions are not only preventing them from winning elections but are also preventing them from being an effective opposition. This is incomprehensibly frustrating because the entire Labour movement was created and sustained on the principle of uniting around a common cause.
So how can this be resolved? It is perfectly reasonable for individuals and groups to have differing, passionately held views and identities. But what never seems to occur to them is that they could come together at election time, as a group of groups, to achieve their common goals. Instead, they see each other as enemies to be despised and defeated.
The trick is not to look for the things that divide you but the things that unite you. Another is to learn to let go of the arguments and battles you are never going to win. Lastly, it’s important to recognise that achieving 75% of what you want is a lot better than achieving nothing at all. There is no reason why all of these groups and factions cannot continue to exist after an event like an election so long as they never lose sight of their common objectives, win or lose.
To keep this all in focus we have to remind ourselves of the context in which this has become necessary; we have the worst, most destructive, undemocratic, mendacious, deceitful and appallingly incompetent government in our history. Its policies and style of government are, without exaggeration, killing us. They are destroying the fabric of our nation. They are destroying our international relations and trading, and have brought us to the point where our public services are incapable of keeping us properly healthy, educating ourselves, administering justice and maintaining our environment, let alone dealing with a pandemic or the climate crisis.
We have a common purpose and we can take the example of the starlings to put aside our differences, to act together at the right time and for the right reason; to make our lives better; to restore our democracy; to rebuild our institutions so that we can hold our heads high among the international community again. Not as vain conquerors but as a nation that is respected for how we conduct ourselves amongst ourselves and amongst them.