The esteemed science fiction writer and Professor of Biochemistry at Boston University, Isaac Asimov once said that the most interesting phrase to hear in science is not ‘Eureka! I’ve found it’, but ‘gee, that’s funny.’ It turns out that the ‘gee, that’s funny’ moments are the most exciting because they can set you on a path to find those ‘eureka’ moments. Ten years ago, when I was a graduate student at York University I had my own ‘gee, that’s funny’ moment.  I was having lunch with a well-respected visiting professor of political economy and we were casually discussing the state of the world economy just before the global financial crisis. Eventually, it dawned on me to ask him where money came from in the first place. He said he felt embarrassed, that he used to know, but had somehow forgotten the answer along the way to his professorship.

‘Gee, that’s funny.’

I figured if one of the world’s leading critical political economists didn’t seem to care much about how new money entered the economy, then it might not be important. At the time, I was finalising my PhD on what I thought (at the time) was a completely different topic, so I didn’t think to pursue my question any further. But not knowing continued to gnaw on me, particularly because I considered myself a critical political economist and this means a critical engagement with the history, theory and practice of capitalist accumulation. If the main goal of capitalists is the pursuit of evermore money, it would be a pretty good idea, I thought, to know how new money is produced.

Surprisingly, the literature in International Political Economy (IPE) was of very little help in my search. I canvassed all leading IPE textbooks and not one discusses the history of money, how money is produced or the problems and consequences – read: relations of power and inequality – of the present monetary system. I also canvassed leading textbooks in political economy that have a less international focus.  Same thing. How is it, as scholars and educators of IPE, that we have not addressed these questions? In my estimation, the oversight is nothing short of scandalous given the centrality of money to everyday life, well-being and the ebbs and flows of the global political economy more generally.

With some considerable exceptions in heterodox political economy and sociology, much of the extant literature is uncritical and lacks deep historical and theoretical analysis. At the moment, I’m finalising my literature review for a new book with Richard H. Robbins called Money: A Critical Introduction, due out with Routledge in early 2017. The book aims to offer an accessible introduction to the history, theory and literature on money with a critical analysis of how new money enters the economy and the consequences and power relations that result. We intend it to be a companion volume to our recently published Debt as Power with Manchester University Press in the UK and Oxford University Press in the USA.

In Debt as Power we consider the ubiquity of debt at all levels of the global economy and argue that debt is a technology of capitalist power known by its effects on bodies, built environments and nature.  As we claim in the book:

the world is awash in debt and though we should recognise that debt levels and access to credit are radically unequal within and between countries, the commonality of all modern political economies is not so much that they are market oriented but that they are all debt based political economies. Indeed, as Rowbotham noted: ‘the world can be considered a single debt-based economy’ (1998: 159).  To take an international perspective, according to the global management consulting firm McKinsey and Co., as of 2012 the total outstanding debt across 183 countries was US$175 trillion (Update: it’s now US$199 trillion as of a 2015 McKinsey Report). In 1990, the same figure was only US$45 trillion or a 288% increase over the period. As identified in Table 1.1, all categories of debt have increased considerably with government debt, financial industry debt and securitised debt (e.g. mortgages, commercial real estate) leading the categories by percent increase.

Table 1.1 (2012 dollars)

Type of Debt
1990

US $Trillion
2012

US $Trillion
Percent Increase

Government Bonds
9
47
422%

Financial Bonds
8
42
425%

Corporate Bonds
3
11
267%

Securitized-Loans
2
13
550%

Non-Securitized Loans
23
62
170%

But the concept and prevalence of debt in capitalist modernity needs to be critically theorised. Our starting point, and primary argument, is that debt within capitalist modernity is a social technology of power and its continued deployment heralds a stark utopia. Our claim is not that debt can be thought of as a technology of power but rather that debt is a technology of power. By technology we simply mean a skill, art or manner of doing something connected to a form of rationality or logic and mobilised by definite social forces. In capitalism, the prevailing logic is the logic of differential accumulation and given that debt instruments far outweigh equity instruments, we can safely claim that interest-bearing debt is the primary way in which economic inequality is generated as more money is redistributed to creditors.

This fact not only has implications for growing inequality and the rise of the 1% and billionaire class. As many of us are aware in IPE, the fear of ballooning public debts is virtually always the perennial justification for neoliberal austerity politics. It seems that almost everyone is living beyond their means but the bankers and the 1%. But when we critically examine how new money enters the economy, the need for neoliberal austerity policies should be understood as a political choice rather than one that is historically inevitable by some iron law of debt and public spending. These policies (privatisation, fiscal discipline, deregulation, cutbacks, layoffs, user fees, more indirect taxes, tax cuts for the wealthy, etc…) also tend to cause incredible damage to the livelihoods and well-being of ordinary people, not to mention the most vulnerable.

So why are neoliberal austerity policies a political choice rather than a historical necessity? The story in brief, drawing from Debt as Power and the additional work to come, can be told as follows.

First, let us consider the simple fact that there is considerable mystery when it comes to understanding money and specifically how new money enters an economy.  It is highly likely that our politicians do not have a clear understanding of monetary mechanics and are themselves beholden to ‘received truths’ passed down by generations of faulty or misleading scholarship – particularly in Economics where money is treated as unimportant and a neutral veil. In our view, money and particularly the production of it, is far from neutral and involves perhaps the most important power relationship in capitalism (see the seminal and vastly understudied work of Geoffrey Ingham, The Nature of Money). So our first point is that we are governed by politicians who likely have: 1) no understanding of how money enters the economy or 2) have a faulty, muddled or outdated understanding of how new money enters the economy.

As it turns out, this is an excellent situation for the private social forces that actually do own and control how new money enters the economy. Our money supply, as it were, is capitalised by the owners of commercial banks. So now, let’s take a closer look at how new money actually does enter an advanced capitalist economy like the United States.

Many would be surprised to find out that the vast majority of the money supply in leading capitalist countries (we have focused on the US and UK in our research) is issued by commercial banks when they make loans – over 90% in most advanced capitalist economies. Most of this money does not consist of notes and coins, but numbers in computers organised by double-entry bookkeeping. This form of bookkeeping is an historical creation that has been naturalised and taken for granted rather than critically examined for its effects.

But now is not the time to take double-entry bookkeeping to task.  Let’s focus on why the fact that banks create money is crucial for understanding neoliberal austerity policies as a political choice rather than a product of some iron law that must be followed to the letter.

The important point is this: most people assume that banks are intermediaries. That is, they take money in from savers and because it is assumed the savers don’t need their money right away, the bank is able to lend some of this money at interest to willing borrowers. This view is completely wrong. In reality, when banks make loans to willing borrowers – individuals,  businesses and governments – they are creating new money as deposits in the accounts of their customers. For example, if I take out a loan or a credit card for US$10,000, the bank records this as a liability (they owe me this credit facility) on their balance sheets. To offset the liability side of the balance sheet, they record my promise to pay (remember, we sign a contract for loans and credit cards) as an interest bearing asset. The contract is the bank’s asset and the loan/deposit, the bank’s liability.  This has been confirmed by the recent work of Josh Ryan-Collins et. al., Where Does Money Come From?.  It should also be noted that Post-Keynesians and neo-chartalists have also recognised endogenous money but have oddly never problematised the fact that banks create new money when they issue loans. While this research has hardly caused a dent in mainstream or popular thinking across the world, even Martin Wolf of the Financial Times had to recognise the glaring facts in a 2014 article.

What this means is that our democracies have relegated the power to create new money to privately owned (though publically traded) commercial banks (with a key role for central banks of the world not discussed here). There is a rich history of how this arrangement came about and we explore this in our work, but the key point to emphasise in this blog post is that if our governments want to spend more money than they take in in taxes, fees and fines, they are structurally forced to borrow at interest. There is no legitimate reason why this has to happen, but there is a historical one and it has to do with power, inequality and ultimately a very tiny minority getting something for nothing. Put simply, there is a structural reason why the collective ‘national’ debts of the world’s governments currently stands at US$ 58 trillion and counting according to the Economist’s debt clock.

So the question now becomes who are our governments borrowing from? As it turns out, there are five major sources: 1) individuals/families who purchase government debt as a safe investment – typically through a financial vehicle and/or intermediary; 2) non-financial corporations can place surplus cash in government interest bearing securities; 3) foreign governments and corporations; 4) domestic commercial and central banks; and 5) government entities.

But of these five options, it is only the domestic commercial and central banks that have the power to create money for the purpose of purchasing government securities. In other words, whereas the other four options involve investing money that is already in existence, when domestic commercial and central banks purchase government securities they do so by creating the money and expanding their balance sheets accordingly.  Effectively, this means that the owners of commercial banks are getting something for nothing. The implications of this are vast and the subject of the second part of this post, next week.

The following post is based on a longer review of the book to be published in September 2016 issue of the Cambridge Review of International Affairs.

If you were to enter a cryogenic sleep in 2008, wake up in early 2016 and take a quick glance at the fortunes of Western capitalism, you would be forgiven for assuming that you had only spent a month frozen in time, rather than eight years. Indeed, if you were to wake up in the middle of Chancellor George Osborne’s grim Budget 2016 announcement, it is highly likely that the only difference you could immediately notice would be the identity of the person delivering the speech, not the bleak economic outlook that accompanied it. Eight years on, Western capitalism is still struggling to find a way out of its economic cul-de-sac and facing the intensifying political and social repercussions of its metastasising slump. In the intervening years, the expansion of credit and the ever-increasing reliance on private debt have become the lifeline of capitalist economies that are unable and unwilling to alleviate the crisis of social reproduction faced by their populations.

Enter Susanne Soederberg’s Debtfare States and the Poverty Industry: Money, Discipline and the Surplus Population—an outstanding study of the precise mechanisms with which the instrumentalisation of credit and debt have given birth to a ‘new form of governance’ responsible for keeping capitalism on resuscitation. In the following post, instead of summarising Soederberg’s impressive analysis, I would like to briefly highlight a number of themes that emerged from my reading of the book with regards to the questions of methodology, critique and political practice.

Debtfare States accomplishes the difficult task of designing a robust theoretical framework and weaving a consistent analytical thread that effortlessly feeds from this conceptual infrastructure. This feat has been recognised with the 2015 British International Studies Association International Political Economy Group Book Prize. According to the judges, Soederberg should ‘be commended on the fact that she does not advertise her theoretical erudition; instead, the book was infused by it, which ensures that the book [is] eminently readable and accessible for the much wider audience to whom the conclusions will pertain’. This is an important statement given the broader theoretical landscape of the debates the book aims to intervene in and problematise. As Soederberg explains at length:

[M]uch of the literature on financialisation and consumer society stops at the realm of exchange without venturing into the wider capitalist relations of production and by extension, accumulation. This is the root of their explanatory weakness in grasping the origins of social transformation, the social power of money and the social reproduction of credit in neoliberal capitalism. A related issue in theorising finance as a separate entity from the social relations of production is the over-emphasis on finance and its tendencies toward greed-driven speculation, as the primary source of crises and immiseration in contemporary times. While financial speculation and predatory forms of consumer credit have played important and detrimental roles in destabilising societies and dispossessing hundreds of millions of people, there are deeper structural factors involved in neoliberal capitalism that have helped to legitimate, reproduce and stoke the dominance of interest-generating income over productive-based profit since the early 1980s.

In contrast, Soederberg’s own tripartite framework—which fuses Marxist theories of money, crisis and the state—invites the reader, following Marx, to leave the ‘noisy sphere’ of exchange and enter ‘into the hidden abode of production’. It is within these parameters that Soederberg conceptualises money, not as a ‘thing’ or a mere ‘commodity’, but as a specific commodity that serves to conceal exploitative class dynamics inherent in capitalist social relations of production.

Soederberg’s theoretical discussion is relevant and essential not only for those who study contemporary finance, credit and indebtedness but also for the broader disciplinary fields of International Relations (IR) and International Political Economy (IPE). This is the case because Soederberg convincingly reasserts why historical materialism is best positioned to interrogate not only the economic, but also the political and social components of contemporary capitalism. It is thus not surprising that the book prefaces its theoretical discussion by a thorough critique of those tendencies that charge Marxist analysis with economic determinism and reductionism. Rather than rejecting these criticisms tout court, Soederberg shows how the approaches that charge Marxism with economic determinism themselves are guilty of uncritically accepting ‘the economic meaning of money’ which then results in the naturalisation of ‘the social power inherent to money and its ability to neutralise, individualise, level and normalise highly exploitative and unequal relations of power between people in capitalism’. Soederberg argues that the critical treatments of finance and money offered by ‘Foucauldian and other post-structuralist analyses’ fail to move beyond the ‘realm of exchange’ as they ‘assume’ rather than ‘explain’ the roots and role of credit in capitalism by ‘[separating] the discussion of money from the dynamics of capital accumulation’. These approaches, furthermore, fail to confront the depoliticisation of credit as they ‘[vacate] the economic forms to study the cultural and social features of credit’. Soederberg’s dual positioning of her theoretical framework/critique thus provides both a compelling organisational structure for the study and a demonstration of how the approaches targeted by Soederberg are marked by significant lacunae that ultimately result in a fundamental inability to address the core dynamics of contemporary indebtedness and credit-led accumulation.

A similar move is visible in Soederberg’s periodisation of capital accumulation. Soederberg retraces the emergence of neoliberalism—or the dominance of ‘credit-led accumulation’—by recapitulating a familiar neoliberal ‘origin’ story. In this account, neoliberalism emerged from ‘the underlying tensions and crises in capital over-accumulation’ inherent in Keynesian and Import Substitution Industrialisation (ISI)-oriented accumulation models. In response to the accumulation crises and ‘social fallouts’ that beset these state forms, neoliberalism rose upon a number of ‘rhetorical and regulatory’ pillars, including ‘a withdrawal or abstention by the state in economic matters; the shifting into the private sector (or, the contracting out) of public services and the commodification of public goods such as health, housing, safety, education and culture’. While the historical account largely reflects a conventional narrative of neoliberal ascendancy, it is important to note that Soederberg refrains from reproducing what Damien Cahill has called an ‘ideas-centred explanation’ of neoliberalism with which the rise of neoliberalism is understood as a direct consequence of the policy-makers’ adoption of neoliberal ideas. Instead, Soederberg’s account of neoliberalisation serves as an introduction to her extensive analysis of ‘debtfarism’ which is located as one of the four elements of contemporary neoliberal governance, along with monetarism, corporate welfarism and workfarism. The corollary of this approach is recognising neoliberalism not as a monolithic set of policies, designed and implemented in a uniform manner across different contexts, but as a strategy—and often a desperate one—to offset the crises of capitalist accumulation that all varieties of capitalist state forms face at regular intervals. Perceiving neoliberalism in such terms, in contrast to projecting a triad of functionalism, instrumentalism and statism as some critics of Marxist explanations have argued, enables an appreciation of how a myriad of policies act and emerge as strategic state responses to such accumulation crises.

Finally, revisiting the ‘hidden abode of production’ raises some important questions for anti-capitalist organisation and taking concrete political steps to pacify the worst effects of financialisation and indebtedness. As Soederberg’s study reveals, the issues of indebtedness and dependence on credit cannot be resolved without simultaneous interventions to augment workers’ wages and to re-establish non-corporate forms of social security. And even then, since Soederberg chastises the debtfare state for not ‘providing workers with social protection against market forces through, at a minimum, a living wage’, it is safe to assume that the author considers living/social wage as a necessary criterion to weaken financial bondage, not a sufficient one. This is an important point given the salience of ‘basic income’ proposals and living wage campaigns that are gaining traction in advanced capitalist countries. While the progressive appeal of the basic income proposals is clear, some concrete plans are clearly anchored in a right-wing agenda to shift the ‘burden’ of the welfare state onto individuals with marginally increased consumption capacities—an agenda that is geared towards dismantling universal welfare provisions while invoking the sacred neoliberal tenet of financialised personal responsibility.

Soederberg concludes the book by stating that her study aims to ‘raise pertinent questions about how to radically re-think’ the role of money in neoliberal governance, rather than offering ‘blueprints and roadmaps of how struggles should proceed’. True, the book does not provide systematic ‘blueprint and roadmap’ for individuals and collectivities struggling against the increasingly disciplinary forms of neoliberalism, but it does offer an equally important insight by rendering naked the mechanisms and champions of credit-led accumulation that extend well beyond big business, banks and mortgage companies—conventional targets of many important contemporary radical movements. Soederberg’s critique expertly reaffirms the deleterious role these actors play in entrenching inequalities and indebtedness, but the book’s real strength lies in its determination to frame and target the state as a pillar of the neoliberal assault on social reproduction. Consequently, the book invites us to reassess and design existing ‘blueprints and roadmaps’ that either underestimate or wholly eschew the questions of state power and political organisation as well as coordination beyond localised grassroots efforts.