Econintersect: Chris Cook, a senior research fellow at University College London and a former director at the International Petroleum Exchange, has an insightful piece today (Sunday, 10 March 2013) in The Edinburgh Herald. His headline is "The Myth of Debt." But we have chosen to emphasize in our headline a most important argument that he develops in the article.
Cook discusses some of the operational details about money and banking that have often been covered in articles at Global Economic Intersection. One of these is that banks issue loans to create new money and thereby deposits. The common misconception is that banks take deposits in order to be able to make loans - the opposite is in fact the case.
Cook reaches two conclusions:
- Clearing banks cannot be trusted to freely create the credit which is modern money. If money is to be created by a middleman or intermediary then it should be either the central bank or the Treasury itself.
- The national debt is a misnomer; it is actually the national equity; we have saddled ourselves with a national debt delusion. The delusion has arisen because we have lost sight of the "true relationship actually is between public spending and taxation."
Cook goes back to medieval times to illustrate the true relationship between public spending and taxation.
Before the institution of banking developed as an adjunct to support the taxation process of governments (Cook gives the date 1694 for the Bank of England entering this role), money, goods and services were advanced by citizens to governments so they could meet current expenses and obligations. This was commonly done so that wars could be waged.
The medium of accounting in those pre-banking times was a system of tally sticks, which Cook describes. These tallies were records of obligations owed for goods and services delivered. They were also issued by sovereigns. The tallies issued by sovereigns represented a pre-payment (in current goods and services) of future taxes. Cook points out that the intervention of banking into this process has destroyed the logic of the relationship.
The logical flow of the process is that the goverment spends and subsequently taxes.
The inclusion of banking in this process has provided the veil that obscures the true relationship, according to Cook.
Cook also describes how the tallies issued were discounted against full value at time of return to pay taxes by being issued in excess of current value of goods and services delivered. He describes it thus:
Naturally these medieval taxpayers did not give the sovereign £10 worth of value in exchange for a £10 prepayment but received a discount for their trouble. The phrase "rate of return" literally means the rate over time at which the stock could be returned to the issuer, enabling the initial discount to be realised.
Cook says that the appearance of securities issued by governments to fund current expenditure to be debt is wrong. When the tallies were changed to treasury securities the confusion was created. Cook says:
These changed characteristics of a fixed date and rate of return made the pledges resemble debts. However these pledges are ownership claims created by an individual over his own income, whereas a debt claim is created by one individual over another individual's income. The correct analogy is to think of gilt-edged stock as akin to interest-bearing shares or equity bought by investors in UK Incorporated, but with a redemption date.
Editorial note: Why have these relationships been obscured from public knowledge for several centuries? You'll have to ask those holding the veil of obscurity: the banks.
This discussion provides the possibility of a completely different interpretation of the following graphic than you might have ascribed to before reading this article.
- The Myth of Debt (Chris Cook, The Edinburgh Herald, 10 March 2013)
Hat tip to New Economic Perspectives.