Transform the economy by subordinating the international financial system to the authority of elected democratic governments and a managed transition to an employment rich green economy advises Ann Pettifor, Director of Policy Research in Macroeconomics (PRIME)
November 26, 2019 Produced by Lynn Fries / GPEnewsdocs
RICHARD KOZUL-WRIGHT: The first question that we tend to get asked when presenting this is: This is all really very nice but we don’t have the money. Where’s the money? We don’t have the money.” It’s a funny argument given that we’ve spent twenty trillion dollars saving banks, which was more or less what we’ve done over the last 10 years. Twenty trillion dollars is at least the increase in central bank asset sheets. The idea that we don’t have the money just doesn’t ring true when you are trying to save the planet.
LYNN FRIES: It’s Global Political Economy newsdocs. I’m Lynn Fries. That clip was from a debate on how to finance a global green new deal at the Trade & Development Board Meeting at the United Nations, Geneva. The occasion was the presentation of the 2019 Trade and Development Report – Financing a Global Green New Deal. The clip featured at the open was of Richard Kozul-Wright, UNCTAD’s Chief Economist and lead author of the report.
On this occasion, at the invitation of UNCTAD, Ann Pettifor author of The Case for the Green New Deal was a key speaker. Ann Pettifor is the Director of PRIME, Policy Research in Macroeconomics and Research Fellow at City University, London. This newsdoc features the address presented by Ann Pettifor. We go now to the UN Geneva and our featured clips.
ANN PETTIFOR: For me what’s really important is we ought to understand the way the international financial system operates. I think there is limited understanding especially amongst economists who are predominantly micro-economists who are mainly concerned with the activities of the individual and the firm and not macroeconomists looking at the world in aggregate. Rana Foroohar is a columnist on the Financial Times and she’s written that: “To fix things we need to first tell ourselves the correct story of how we got here. Financialization is the least studied and least explored reason behind our inability to create shared prosperity – despite our [for example, Britain and the United States and others] being the richest and most successful nation(s) in history”.
And Gordon Brown recently complained that: “We are in a leadership world”. This point about the failure of multilateralism, the absence of international policy coordination, is a result of not having good leadership across the world. He argued that: “The cooperation that was seen in 2008 would not be possible in a post-2018 world both in terms of central banks and governments working together”. Now I want to dispute that because there was coordinated leadership between 2009 – 2018 but the coordinated leadership was by central banks whose purpose was to bail out the private finance sector not the world, right. So we have had leadership but it has not been for the rest of us. It’s been for the private finance sector.
This year, we reminded ourselves that it was a hundred years since the World War I declaration of armistice, the end of World War I. And when world leaders gathered in Paris to remember 100 years ago the Peace Treaty was being signed in the Hall of Mirrors in Versailles, France. John Maynard Keynes was there in 1919. It was chaos not just in France, of course, but across Europe. And it was clear to him that the leaders were not interested in helping Europe to recover. He also understood money as a social technology rather than the ‘real exchange’ based on barter. In the words of Joseph Schumpeter, money is nothing more than a promise to pay. That’s all it is. It’s a social construct and the way in which we manage it is managed as a part of social technology.
So the problem that Europe faced a hundred years ago was that the Germans owed the British money but had no capacity to pay, nor capital to invest in reconstruction of those assets that would generate income and enable the country to pay. The British owed the Americans money but they had not capacity to pay unless the Germans paid – which they could not. So Keynes came up with a revolutionary plan. German would issue bonds up to one billion pounds roughly. They would pay interest on that of about 4% and there would be a sinking fund to retire debt by 1925. Seventy percent of the money raised would go back to the creditors as reparations and 30% would be used for reconstruction. But they key point about these bonds was that they were going to be guaranteed by Allied governments, by governments. Germany would promise to pay and Britain, the United States, France would stand behind that promise, would guarantee that promise. That would give the promise value. That would make the German bonds a valuable asset. So the bonds would have priority over all other German obligations. And enemy nations would guarantee them jointly and severally. And the League of Nations would impose a penalty if Germany foreclosed or defaulted.
So Keynes took his plan first of all to Lloyd George and to his surprise both the British Treasury and Lloyd George supported it and so did the French. And then he took it to President Wilson of the United States of America. President Wilson overturned his [Keynes’s] proposal immediately. A letter came back straight away and said: This is not possible. There is a historian, an economic historian, Eric Rauchwaywho can now reveal that the letter wasn’t written by President Wilson. And this was not known until quite recently, until Rauchway uncovered Wilson’s correspondence. The letter was written bythis man, Thomas Lamont, Chief Executive of J.P. Morgan, who was an adviser to Wilson and who wrote the letter. So he argued that it was important for the finance for Germany to go through the “usual private channels”. So when he argued that, it was the usual private channels arguing that money should go through the “usual private channels”, right. In other words, he wanted Germany’s recovery to be financed by Wall Street not by the coordination of Allied governments.
So as a result, Keynes’s Plan which was for a redesign of the international financial architecture away from the gold standard, departing from the gold standard – and private authority over the financial system; in other words, then under the gold standard the international financial system was governed by Wall Street and by the City of London. And his revolutionary plan was to say no: Let’s reconstruct the international financial system so that it would be governed by public authority. It would be public authority that would guarantee the German loan. And this is the proposal that Wilson destroyed in his letter. Said no, the United States couldn’t back this. Instead Germany should rely on Wall Street.
The gold standard was: “A fantastic machinery of global self-regulation by international bankers and financiers…” The chaos was then caused by the restoration of the gold standard. The consequence of that was: We had passing of monetary hegemony to the United States; There was austerity between 1919-29; Central banks were made independent of political authority; Capital markets were liberalized; Money was expensive; Real high interest rates were charged by Wall Street and the City of London; And the UK’s colossal war loan of 2 billion pounds was issued at 5% which at the time was very high in real terms. That led to mass employment, deflation, industrial unrest in the ‘20s & ‘30s. The US depression of 1920-21 which many people overlook; the United States needed Europe to be able to trade. The United States needed Europe to recover but the bankers had undermined Europe’s recovery and that caused a depression in the United States between ’20 & 1921. Then there was in Britain the 1926 general strike. And then there was the roaring ‘20s; a massive credit inflation of debt which in 1929 deflated dramatically leading to the Great Depression of 1931. And with all that came the rise of fascism and another catastrophic world war. This was the consequence of leaving the international financial system to be governed by the private sector and by private authority and not by public authority.
The good news is that in 1933 Franklyn Roosevelt is elected as President. And he’s a monetary radical but in some senses is a fiscal conservative. He understood Keynes’s message of 1919. He understood the gold standard because he was governor of the state of New York house of cards collapsed in 1929. He watched as over 5000 American banks failed, an average of 100,000 jobs vanished each week and almost 25% of the American workforce was unemployed by the end of his governorship in 1932. So he lived through the crisis caused by a massive inflation of credit and then the debt deflation. So in his inaugural speech he talks about the: “Practices of the unscrupulous money changers [who] stand indicted in the court of public opinion, rejected
by the hearts and minds of men [and women]…Faced failure of credit they have proposed only the lending of more money…The money changers [he argued] have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths”. This is his inaugural speech on the Saturday afternoon. On the Saturday night, he began the process of dismantling the gold standard. He said to his staff all the banks have to hand over their gold back to the US Treasury: We are not on the gold standard anymore. I want them to hand over their gold tomorrow. And they said: You can’t do it because it’s a Sunday. It’s a holy day. He said: Fine. We are closing the banks on Monday. On Monday the banks have to hand over their gold. From now on, the health of the US currency is going to be determined by the health of the US economy not by Wall Street financiers basing it on limited amounts of gold in the vault of banks. And then immediately began to alter, change the currency, the value of the currency and improve prices for the United States’ agricultural sector. So he began this process of ending what Keynes had called a barbaric relic; the private authority over the global financial system by private banks that was the globalized financial system.
So his actions are often interpreted as ‘fixing the banks’. But he did far more. By dismantling the gold standard he transformed the international financial system. And it was system change that enabled him to ‘fix the banks’. But more importantly the United States was facing an ecological crisis; it was called the dust bowl. They had a big crisis in the Southern states where they had eroded the soil. They had over-farmed the soil. People were migrating in thousands away from the South. It was a massive problem. Under Roosevelt the finance was raised to plant 3 billion trees and restore the health of large sections of the United States. Now there is a lot that’s wrong about the New Deal but it was a green New Deal because it addressed an ecological crisis as we are today addressing a much bigger one. And he was only able to do that because the international finance sector had been subordinated to the authority of elected democratic governments and his government, first of all. Subsequently other governments followed and the gold standard collapsed in 1933. And then began a process of recovery and prosperity until unfortunately the war broke out. The reason I tell you this story is that it is so relevant to where we are today. Roosevelt achieved the restoration of public authority over the international financial system. That success had evaded Keynes in 1919. And so, we had twenty years of chaos as a result. So then we get in 1945, the Bretton Woods system which is not exactly what Keynes wanted. It’s far from what he wanted but it’s a beginning of a process which restores recovery.
This is a fantastic chart of private debt from 1740 onwards. And you can see how private debt in the 1920s, that spike just before the Great Depression…how the private authority over the financial system inflates credit massively until it peaks in 1929 and implodes and deflates and comes down. And then we see a period between 1940 and 1960 where the Bretton Woods system is introduced and there is public authority over the international financial system and the debt levels stay low. The gradually the bankers chip away at the system. They chip away and they try and break it up and they eventually and they eventually succeed and we see credit inflating massively once again until 2007-09. What we have seen now as a result of this private authority of the global financial system is volatile capital flows, illicit financial flows, phantom FDI [Foreign Direct Investment], international corporate tax [regimes] outdated and the rise of the digital economy and so on. But mainly we see this dramatic and so on. But mainly we see this dramatic number of phantom FDI.
We have to remember what Alan Greenspan told us. And he spoke the truth in 2005 when he said: “Thanks to globalization: Policy decisions in the US have been largely replaced by global market forces. National security aside it hardly makes any difference who will be the next President. The world is governed by market forces”. And that is the truth. The government of our international financial system is by something called the ‘invisible hand’; unaccountable invisible hand which is causing chaos as it did then. And as it did in the 1920s & ‘30s is leading to political insurgencies and the rise, let’s be frank about this, of a form of fascism in some countries. It’s a threat that arises from the economic failures of the globalized systemwhich has led to political uprisings. He argued: “Let ideas be international, goods homespun, but above all, let finance be national”.
And that is a message I think we have to take if we want to know how to finance the Green New Deal. Now I want to argue that financing the Green New Deal is utterly affordable. We’ve been told that it would cost about 90 trillion dollars according to the Global Commission on the Economy and Climate or about 8.2 trillion dollars p.a. over 11 years. There are only two sources of finance. The first is credit, the promise to pay. When you spend on your credit card, there is no money in your credit card account. You haven’t put your savings in the credit card account. You are promising to pay. You take your credit card and spend and then use income to repay. That’s the magic of the credit system. That’s the power of it and why it’s so important that it should be managed. Savings are a consequence of credit, of the ability to raise finance, to spend it, especially in employment. We all know from our own experience that if you get a job, you get income at the end of the month. Employment creates income. Not just for the employee but also for the government because people who are employed pay taxes both VAT both also income taxes. That goes back to the government as revenue to pay for the credit. That’s how the system is supposed to work if it is to be balanced but unfortunately what we have the moment is a massive inflation of credit but it is not invested in employment for the creation of income and the repayment of the debt. And so we have massive imbalances in the global economy but also in domestic economies.
So the great thing about a monetary economy, the great strength of it is that we do not need savings. It is not necessary to go with a tin and ask for somebody’s savings in a monetary economy. That’s why a monetary economy is such a civilizational advance. What we need is credit- the promise to pay and we need that credit to be backed up by guarantees. In the case of rich countries, it’s backed up by…in my country Britain it’s backed up by 30 million taxpayers. In the United States it’s backed up by 140 million taxpayers, people who are employed and pay their taxes. In poor countries we need more people to be employed in order to provide the tax revenues which provide the guarantee for a monetary system. So society is no longer dependent on those with savings or surpluses for finance or credit. Those with accumulated capital, they are no longer the sole providers of finance in a monetary economy. Credit creates savings. Spending generates income. Part of income generated is used to repay debt and keep the credit system in balance but only of spending generates employment and with it income.
So we’ve seen, as Richard has said, central bank balance sheets expand massively. I thought it was $13 trillion, he said it’s $20 trillion. These are numbers beyond our comprehension. But we know that governments have got savings. We know that pension funds have got $40 trillion in savings. That asset management funds globally have $87 trillion in savings. And according to the Financial Stability Board in 2019, global financial assets – any they may be savings but they may also be phantom – amount to something like $377 trillion. So, the idea that there is no money for a Green New Deal is utterly ludicrous. We know the shadow banking system has a $185 trillion. And that also National Development Banks have access to savings and that there are other savings institutions.
So there is no argument about how we can finance the Green New Deal. The argument must be what are we going to spend it on? How are we going to be it a labor intensive transformation?How are we going to substitute labor for carbon? Because we can’t burn carbon, we are going to have to in Britain grow our own green beans. We won’t be able to import them from Kenya in the future. But we are going to have to be more self-sufficient but it’s going to have to be labor intensive. It’s going to have to be an employment rich economy, a green economy. And in that sense, I think the Green New Deal offers a great deal of hope to the people of low income countries because it promises a transformation which will bring greater prosperity to millions of people not just to the few. Thank you very much.
LYNN FRIES: We have to leave it there. Thank you for watching and for your interest in this segment of GPEnewsdocs coming to you from Geneva as a guest contribution to Naked Capitalism at nakedcapitalism.com.
Ann Pettifor is the Director of Prime (Policy Research in Macroeconomics), an Honorary Research Fellow at City University, and a Fellow of the New Economics Foundation. She has an honorary doctorate from Newcastle University.
Richard Kozul-Wright, Director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development, is the author of Transforming Economies: Making Industrial Policy Work for Growth, Jobs and Development.
Originally published at Naked Capitalism
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