Business and Society Economics Money and Banking

The Nature of Modern Money

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I posted this short piece on the Scotland Quo Vadis discussion site yesterday, in response to a piece by Gordon Morgan suggesting the ‘printing of money’ would be a better option than government spending cuts.

It’s important to take a step back and consider the nature of money in the modern economy. It’s taken me about 15 years to get to grips with it – but maybe I’m slow, and it could be done in 5…

All modern money is created as debt – government or private. It’s a symbol of a promise to provide some good or service in the future. Problems arise when promises are unfulfilled, either in the quantity or the quality of goods provided. If there’s a lot of money around and not many goods, prices tend to rise.

Problems also arise when not enough money is created, or the money created is not actually used to purchase enough of the goods provided. Then we have demand failure, recession and unemployment.

The matching of money and goods to provide stable prices and a stable level of employment may have been in the power of governments until around 1970. I think the complexity of the modern economy precludes this.

There needs, therefore, to be a better way to ensure that the promises to provide goods are matched with the goods actually provided. I would suggest that we have to broaden the basis on which lending and production decisions are made. This means a greater social dimension (through more ‘democratic’ banks and firms) to lending and production decisions.

How we can achieve this without excessively inhibiting freedom to trade and to innovate, seems to me the real debate we should now be having, in Scotland and everywhere.

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