Making Money Online

For many countries all across the world, debt has rapidly piled up due to the COVID-19 pandemic. The question of how to pay back this debt usually results in spending cuts or tax increases being suggested, but is there another way?

As lockdown measures ease,Guest Posting people return to work, and retailers open their doors once again, a big question is looming large in the background.

How are we going to pay for all this?

I am of course talking about expensive government policies such as the furlough scheme, small business rates relief grants, bounce back loans, self-employed income support payments, and the many other measures which were introduced to try and nurse the UK economy through the devastation caused by the Covid-19 pandemic, and associated lockdown.

The conventional knowledge is that public spending will have to be drastically decreased (which would harm public services), or taxes substantially increased (which would likely harm growth), in order to make a dent in the debt mountain which has piled up over the past few months.

For example, on July 11th 2020, The Observer published an article by former Treasury minister David Gauke, which was entitled ‘Tax Rises and Cuts Only Way to Pay for Covid-19’.

In it, Gauke stated that, ‘Once we are through the economic shock, the government will have to fill this gap with tax increases or spending cuts.’

Similarly, in an article published on the BBC website on July 9th 2020, which was called ‘Coronavirus: How much will it cost the UK?’ a conclusion of the article was that, ‘The deficit leaves the government with a choice: increase borrowing, raise taxes, or cut spending.’

However, the conventional wisdom is sometimes incomplete at best, and entirely wrong at worst. For example, it was once conventional wisdom that Earth, and not the Sun, was at the centre of the solar system.

In terms of the post Covid-19 recovery, inaccurate conventional wisdom has reared its head once again.

How To Make Money… Quite Literally

At this point, it’s worth remembering that money is a man-made construct.

Pounds, Euros, Dollars, or anything else, these currencies have all been created from scratch by human societies, in order to assist with the exchange of goods and services of value.

Also, if you were to ask people how money is created, most would probably suggest it was printed by the Royal Mint in the form of notes and coins.

This is true, but only to an incredibly small degree.

In actual fact, over 97% of the money in the British economy (and the figure is similar in almost all industrialised countries) is created when commercial banks (e.g. HSBC, NatWest, Santander) issue loans to their customers.

A 2014 bulletin by the Bank of England entitled ‘Money Creation in the Modern Economy’ stated this very clearly. The exact words they used were:

Where does money come from? In the modern economy, most money takes the form of bank deposits. The principal way in which they are created is through commercial banks making loans: whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money. This description of how money is created differs from the story found in some economics textbooks.

This process of ‘creating a deposit in the borrower’s bank account’ is as uncomplicated as it sounds. Perhaps even more so.

It simply means that the bank approves a loan, then types the numbers of the loan amount into the customer’s bank account. The process is entirely digital; no physical money has been created or exchanged at any point.

This has several implications.

Firstly, it means that individuals and businesses receiving loans from commercial banks is the source of nearly all the money in our economy. To put it more starkly – without people taking on bank debts, there can be no money.

This puts a different spin on the concept of ‘the irresponsibility of debt’.

I’m sure we all know of people who have taken out a bank loan, and then wasted it on trivial things. Often, we judge these people, calling them irresponsible or indulgent, and perhaps they are, but whenever anyone takes on bank debt, we too owe that person a kind of debt, as their taking out a loan has increased the amount of money in the economy which can be earned, spent, and taxed. This in turn means that a country’s Gross Domestic Product (GDP) will likely rise as the money supply increases.

‘But Why Has No-one Told Me This Before?’

Good question.

If the truth about money creation was news to you, you’re not alone. The overwhelming majority of the general public don’t know how money is created, and a 2017 poll by the campaign group Positive Money found that even 85% of MPs were unaware.

However, once you understand that money can be created out of thin air, with the push of a button, the debate on how to pay off the debts accumulated during the response to Covid-19, seems rather different.

This is even more true once you understand how central banks work.

Central banks are the national banks of specific countries. For example, in the UK, the Bank of England is our central bank, while in the USA, it is the Federal Reserve, and in the EU, it’s the European Central Bank.

Nearly every country in the world has a central bank, and much like commercial banks, they have the power to create money out of nothing – although central banks have the additional responsibility of trying to ensure the economy as a whole stays healthy.

But whereas commercial banks lend money to businesses and individuals, central banks chiefly lend money to governments, commercial banks, and other financial institutions.

The ability of central banks to create money and lend it to their national government, is of particular interest.

‘There’s No Magic Money Tree That We Can Shake, That Suddenly Provides For What People Want’

Those words were spoken by Theresa May on June 2nd 2017 when appearing on the television show Question Time, in response to a nurse asking why she hadn’t had a pay rise in 8 years.

And she was right; we don’t have a magic money tree that we can shake to raise money.

The truth is, it’s much easier than that.

All over the world, central banks have the power to create new money, which can then be used to pay for whatever is needed. And they certainly do use this power, although not in a way which benefits the general population as much as it could.

For example, in the UK, the Bank of England created £456 billion of new money between 2009 and 2017 through the use of quantitative easing, and this money went straight to commercial banks and other financial institutions, rather than into the hands of individuals or SMEs. Furthermore, none of this money has ever been repaid.

More examples of money being created to serve privileged interests, have come as a result of the Covid-19 pandemic.

A case in point, is the Bank of England’s Covid Corporate Financing Facility (CCFF), which has provided £58 billion worth of newly created money to some of the UK’s largest companies, including Easyjet, Greggs, and First Group.

In fact, the CCFF is not even available to small and medium sized businesses, as the terms of the scheme mean that, in effect, only the UK’s largest corporations are eligible for it.

Another example comes from the US Federal Reserve, who, in the early months of 2020, injected over $2 trillion dollars of newly created money into the American financial markets, in order to try and prevent a recession.

This proved successful to a large extent, but sending the funds directly to investment banks and corporate financiers means it is highly unlikely much of this money will filter down to ordinary working families.

Proof Of Concept

While much of the money which has been newly created by central banks in response to the Covid-19 pandemic has gone to the corporate class, the creation and distribution of these funds has at least shown what can be done.

Namely, money can be created from scratch by a central bank, and injected into the economy where it’s needed most. Indeed, the concept of a nation’s central bank creating new money to finance government spending, is not a new one.

It is a policy known as Direct Monetary Financing, and some influential supporters of Direct Monetary Financing include the economists Milton Friedman, Adair Turner, Willem Buiter, Jordi Gali, and Ben Bernanke, who was Chair of the US Federal Reserve between 2006 and 2014.

The Bank of England has in fact always had the power to create money for the UK government to spend in whichever way it sees fit, and occasionally this power is used. More specifically, the account which the government has with the Bank of England is called the Ways and Means facility, and every so often these two institutions work together to create new money, that the government can use to pay for the extra expenses which arise during challenging circumstances.

For example, following the 2008 financial crash, the size of the government’s Ways and Means facility (i.e. the amount of money the Bank of England created from thin air to assist with the government’s spending requirements) was nearly £20 billion.

And as a result of the Covid-19 outbreak, the UK government has already worked with the Bank of England to create new money, which will be used to help finance the government spending programs that have been introduced to protect the British economy through the pandemic.

Confirming this, a press release published by the Bank of England on 9th April 2020 announced that they had granted the Treasury a ‘temporary extension to the Ways and Means facility’ to help the government ‘smooth its cashflows and support the orderly functioning of markets, through the period of disruption from Covid-19’.

However, the Bank of England also said such an extension would be, ‘temporary and short-term’.

When reporting on this announcement, the Financial Times ran with a headline of ‘Bank of England to directly finance UK government’s extra spending’.

Making It Rain

So if money can be created by the government and the central banks at will, then why is this power not used more often to better fund the public services which we all rely on? Indeed, as Positive Money noted, the Bank of England creating money for the UK government to spend during the Covid-19 crisis, ‘demonstrates once and for all that the government need not depend on private markets to finance its spending’.

In short, if the NHS is low on funds, if schools are lacking resources, or if the police don’t have the equipment they need, then why can’t the government order the creation of more money, so all these things (and more) can be afforded?

Generally, the answer provided is that doing this would increase inflation.

This is not incorrect, but it is by no means assured that increasing the supply of money in an economy will make the goods and services more expensive.

The somewhat hysterical examples of Zimbabwe and the Weimar Republic are sometimes used as cases where the government creating money for itself to spend has led to hyperinflation, but when looking closer to home, both in terms of location and time period, it is easy to observe different outcomes.

Firstly, it is important to note that new money is entering the economy all the time, as a result of banks providing loans to their customers, foreign investment capital flowing into the country, and governments borrowing money from financial markets to fund their public spending commitments, yet whenever money from these sources enters the economy, the argument is never made that the increase in money supply will cause inflation to rise. And at times when inflation is high, rarely is the finger pointed at the money supply being too high.

Furthermore, as noted earlier in this article, the Bank of England created £456 billion of new money between 2009 and 2017 through the use of quantitative easing, yet inflation only rose by 2.77% a year on average in the UK for the period between 2009 and 2020. In terms of historical inflation rates for both the UK and other developed economies, this figure is remarkably low.

In fact, as a result of lockdown measures having reduced the amount of money being newly created by commercial banks granting loans (such as mortgages or startup loans etc.) over the past few months, some economists argue that we now have the opposite problem in the form of deflation, and that what we need now more than anything, is a fresh supply of money entering the economy.

For example, David McWilliams, a former economist at the Central Bank of Ireland, has said that:

We have an economic vaccine – it’s called money. We know the central bank prints it. It doesn’t even have to print it, it just has to put a zero after people’s accounts.

We have the vaccine, we know what to do. And amazingly, we’re not using it because of some morality idea that we can’t do this because it will lead to inflation, when we know we’re in a deflationary spiral.

It is absolutely nonsensical. It is as mad as a laboratory having the vaccination for COVID-19, and saying “we’re not going to use it.”

While Canadian historian Quinn Slobodian has noted of the US Federal Reserve injecting newly created money into the American economy, ‘Economists see no sign of inflation on the horizon. Some have become concerned about inflation in recent weeks, but others worry about the opposite – deflation.’

The Path Not Mentioned

Returning to the quotes at the beginning of this article from David Gauke, and from the BBC, about how the only options on offer to pay for the extra government spending that has arisen from the Covid-19 pandemic, are to raise taxes, increase borrowing, or cut spending, it should now be clear that this represents an incomplete set of choices.

One of the other options, which has been outlined in the article, but which (for one reason or another) is rarely mentioned by politicians, or by the media, is simply for the Bank of England and the British government to work together and create enough new money that the bulk of the Covid-19 spending commitments could be met through Direct Monetary Financing.

This is an option you may agree or disagree with, but knowing that it is even an option in the first place, will help us all to make properly informed decisions about where to go next.