Book Review: The Production of Money – Ann Pettifor

If the Great Financial Crisis  “GFC” (Australian for the Great Recession)  taught us anything, and to date it appears not much has been learnt, it is that a solid understanding by the general public of what money is, how money is produced, and how it is managed or controlled after it has be170212-pettiforen produced, is of critical importance.

Until the broken and dysfunctional nature of our monetary system is understood by the general public (or at least a decent percentage of them) we have very little chance of addressing the issues that caused the GFC and are now leading us merrily down the path towards yet another period of financial system destabilisation and collapse and the politics of anxiety that accompanies economic distress and instability.

A forthcoming book from Ann Pettifor wades in to this critical issue.

This very readable and  engaging book ticks a lot of boxes when it comes to identifying both the nature and importance of the problem but the suggested reforms and the evaluation of reforms suggested by others received a cool reception in the Glass Pyramid reading room.

The argument of the book is as follows:

  • Our financial and monetary system has a terrible record of dysfunction and of causing damage. Chapter 1   (Tick)
  • A key problem is that there is general ignorance and a lack of public awareness about what money is and how it is created in our monetary system.  Chapter 2 and Chapter 3 (Tick)
  • That ignorance is unlikely to be an accident as a lack of information and understanding by the general public serves the interests of some (the wealthy) very handsomely. Chapter 5 (Tick)
  • That the current approach to the financial and monetary system is not the only one. Chapter 4 (Tick)
  • That Keynes had a good understanding of how the current monetary system works and tried very hard to have policies adopted that “put it on a leash”
  • After Keynes died some people worked very hard to persuade people that the leash was not needed and in due course the leash was loosened and then removed.
  • Those that think that we should reform the financial and monetary system fundamentally by giving a monopoly on public money to the public sector are wrong. Chapter 6
  • Rather than change the financial and monetary system, i.e. how money is produced, we just need to get everyone to agree to bring back a nice tight leash and find some guardians of the public interest to hold it. Chapter 7.
  • That international capital flows are also a major problem Chapter 8. (Big tick)

As Glass Pyramid operatives never tire of reading about the embarrassing/mendacious performance by orthodox / mainstream economics when it comes to the topics of money, debt and public finances, the book is worth  reading for that reason alone.

Pettifor applies a well deserved blow torch to a profession that would happily sit glued to their computer screens in a burning building if their ‘models’ proved that a building burning down was theoretically impossible.

As an aside, Pettifor also goes into bat strongly for John Maynard Keynes throughout the book and divines in his work both an understanding of the problem and some of the solutions.  She is seeking, as many have tried to do in recent years, to restore his reputation from the ‘tax and spend’ reductionism /smearing by the orthodox monetary myth peddlers.  This is fine as far as it goes.

The difficulty is that Keynesian archeology has real limits. Whatever the truth of the matter may be, he is long gone, people will argue about interpretation till the cows come home and invoking his name is unlikely to win the day beyond the already converted.

It is probably much better to just wield his best arguments and pithy lines, without any claim that they have merit simply because he gave them voice. If a new “Keynes” appeared today he is most unlikely to quote Keynes – he would just coin a bunch of new lines that would immediately be added to the canon.  In any event as Pettifor notes Keynes was himself seeking to restore earlier ideas about money that had been buried by the wealth distribution preservationists of his own generation.

Having made a compelling case that the financial and monetary system status quo is defective Pettifor moves on to the options for reform and this is where problems arise.  Whilst the Glass Pyramid makes no claims of expertise with regard to every flavour of ‘monetary reformer’ mentioned by Pettifor, there was a strong whiff of burning straw and of characterisations that seemed selective or likely to be taken out of context.  No doubt the supporters of each of those reform models will respond to Pettifor’s descriptions and criticisms if they feel mistreated.

The Glass Pyramid may attempt to deal with some of those points in a separate future post but for the moment we will simply note that Pettifor’s suggestion that “monetary reformers” are Monetarists in the Friedman 1980s sense of the word makes little sense. Earlier in the book she went to some pains to point out that the Monetarist project failed because it was ONLY concerned with publicly created money and NOT private bank credit as public money and that excessive creation of the latter and not the former resulted in inflation. Clearly she is acknowledging that excessive money creation (by the private banks in that instance) resulted in inflation.  Does anyone really doubt that excessive public money creation whether by the public sector or the private sector increases the risk of inflation.  There is a world of difference between an appreciation of issues relating to the money supply and Friedmanite 1980s Monetarism.

At a fundamental level Pettifor’s central criticism, that the “monetary reformers” display disturbing if unintentional tendencies towards undemocratic big technocratic government, sits uncomfortably with her own vision splendid of a public administration intervening ‘rigorously’ in the credit allocation process.  Pettifor’s sees the solution lying in having the government ensure that only “productive” loans are granted.

“…The quid pro quo for these public subsidies must be the right of central banks and democratic governments to intervene in the management of a public good: the nation’s credit production system..”

“…There is an arsenal of what are known as ‘macroprudential tools’ available to governments and central banks…’

“…While debt can indeed become burdensome and exploitative of the borrower, it is also a vital source of finance for the economy – which is why it creation by the private sector must be carefully and rigorously managed by a democratic nation’s public authorities..”

There is nothing wrong with calling for close and careful regulation of who has access to credit from the licensed banks, the terms on which that credit is extended and the purposes to which it is applied but you can’t do that and then imply, without attracting comment, that others are jumping on some slippery slope towards authoritarianism.

Plus Pettifor’s government loan approval officers and regulations to ensure “productive lending only” cut right across what Pettifor reckons is something very democratic about the current monetary model – at least when it is not blowing up the economy.

“….the monetary system is in a sense democratic. It is a bottom-up process ….The system depends for its health and profitability on the willingness of individuals or firms to take the risk of borrowing money from a banker or creditor for the purpose of creating economic activity..”

Huh?    But what if they encounter a government loan approval officer or “productive loan” regulation that does not share their idea of productive economic activity?

It seems that provided those on the bottom share the government’s “guardians” ideas about productive lending all will be good.

Why the inconsistency?

The reason that Pettifor appears to be recommending exactly what the monetary reformers are recommending (assuming you accept Pettifor’s characterisation) seems straightforward.

Once you have the important understanding that what is considered public money gains its force from its status at law (rather than some archaic or ahistoric commodity or barter concepts) then it is inevitable that the law and the institutions that make the law (the gummint) have a very large role to play.

The issue is then simply what should that role be and how do you ensure that the “Money Power” is used appropriately.   By the way an excellent read that examines the concept of “Money Power” through history is Stephen Zarlenga’s  “The Lost Science of Money

Before we can address that we need to address a preliminary issue. What should be the role of private banks?

The flaw in Pettifor’s approach and that of some other monetary system reformers is that they too readily accept the status quo where private banks have a licensed or franchised right to create private money that is given the status of public money at law.

A solid understanding of the operational reality of our currently monetary system should leave most thinking

“THAT IS NUTS – it needs to be reformed”

The question that needs to be addressed by Pettifor and others who would preserve the status quo (on or off a leash) – where private money created by a bank is treated as if it were created by the public – is the following.

“Why should a banker be permitted or licensed to produce something, with a trailing commission attached, which the public sector can create at zero cost and with no trailing commission attached”

It is a fundamental point and the Glass Pyramid has not yet encountered a convincing answer.

Pettifor does an excellent job in the Production of Money of explaining just what a dismal failure over hundreds of years of booms and busts the experience of giving bankers that extraordinary privilege has been.   But having done such good work for the prosecution she then insists that the way forward is to have yet another go at trying to control / regulate a model that has failed time and time again.

Why bother trying to control a beast with a leash if it should never be roaming the streets in the first place?

If for no other reason we know that the beast will fight to loosen the leash every single day after it has been tightened.   The last 50 years providing ample evidence of just how cunning and persistent that beast can be in deploying the juicy fruits of the extraordinary privilege.

But think of the Tyranny?

The answer that Pettifor gives for why we must persist with a clearly broken and dysfunction monetary model that has tyrannised large sections of the community is that to do otherwise is to invite ……..tyranny.

How is never made very clear – especially when Pettifor insists that her recommended leash for the banking sector beast involves pan-optical supervision by teams of guardians of every loan (or at least classes of loans) that a banker creates.

How that is not on the “slippery slope” she warns us of is anyone’s guess.

Where is the Tyranny?

Readers, who have reached this point, are invited to fire up their tyranny detection units and point them at the following short description of a reformed model for the creation and management of public money:

  • The elected government introduces new public money into circulation by running a fiscal deficit.   If it wishes to remove public money from circulation it runs a fiscal surplus. If it wishes to slow the rate at which new public money is introduced into the economy it reduces the size of the fiscal deficit.
  • The elected government receives regular recommendation from a team of empirical investigators as to the size of the fiscal surplus or deficit considered necessary to avoid inflation and deflation.    The process of making that recommendation may include public hearings.
  • The elected government determines the combination of taxation and spending that produces the recommended fiscal deficit or surplus.  Some governments may choose to increase or reduce spending, some may prefer to reduce or increase taxes on labour, consumption or wealth.   These decisions remain matters for the elected government and the processes of parliament.
  • The government remains free to ignore the recommendations of the team of investigators but if it does so it runs the political risks of doing so and being proven wrong by subsequent economic performance.
  • The Central Bank will create the money required by a fiscal deficit by crediting the exchange settlement “ES” account of Treasury.   If a fiscal surplus is adopted (thereby removing public money from the economy) the Central bank will debit the exchange settlement account of Treasury.
  • No charge of interest is made by the Central Bank on any amounts credited to the Treasury ES account.
  • This publicly created public money can then be spent and saved as the ultimate recipients of that money see fit.
  • Organisations can then provide a wide range of services bringing those who wish to save their public money into contact with those that wish to borrow public money deposits.    And yes Virginia….. limits on this business, including the rates of interest that can be charged, can be the subject of regulation as well but as the process is not creating the public money the need for regulation is likely to be considerably reduced.
  • As this public money is ultimately nothing more than accounting entries in the accounts of the Central Bank it cannot be destroyed by the panics and manias of financial speculators and their private banks enablers.
  • Nor will any credit extended using public money as collateral be treated as if it were public money.    In other words a bank’s promise to advance you money will not be treated as if it were public money.

As the Australian Federal Government Budget is currently approximately $420B per year and people debate the inflationary impact of deficits of circa $20B there can be no doubt that the government can create all the public money the economy requires doing nothing more than the usual and routine functions of government and taxing (low income earners perhaps) a little less.

The potential for tyranny under this simple model are far less than the current system where private bankers are creating over 90% of the money supply even if it was improved with a battalion of Pettifor’s public guardian loan approval officers making sure that loans/public money creation is productive.

The government creating public money by taxing low income earners or small businesses less seems a much simpler approach than supervising private banker lending decisions night and day.

But what about all the other money !!!!!!

One the strangest responses from those that claim we should maintain the extraordinary privilege of treating the private credit (or IOUs) of a specific and limited number of private organisations (aka banks) as if it were public money created by the public sector is that removing that privilege would still leave all the other forms of private credit floating around and some of that stuff is a bit like public money.

In essence the argument is that if you can’t regulate every form of private credit in the universe then you should never try to rationally regulate the creation of public money and NEVER remove the barbaric relic of modern banking – treating the IOUs of private banks as public money.

The response to that is simple:

  • Yes, there are lots and lots of forms of private credit that have money like features.  Frequent flyer points, bitcoins, warehouse receipts, accounts receivables, betting tickets etc.
  • Yes, they can have significant economic impacts as people make resource allocation and other economic decisions having regard to their interest or ownership of some of these forms of private credit.
  • Yes, they may require regulation if it considered that ‘buyer beware’ is not a sufficient basis for allowing people to freely deal with those forms of private credit as they see fit.


That does not make them in any way the same as public money.    They are not backed by the full faith and credit of the public and those that deal with them will be very aware of that. And if they are not and ‘do their dough’ they will not bring down the public money system unlike the current state of affairs.

And it does not provide any reason for not placing the control of public money where it belongs – under the control of the public and not a bunch of bonus obsessed bankers.

Let a 100 monetary flowers bloom

With a clear distinction drawn between public money that is backed by the full faith and credit of the public and private money that is backed by whatever faith and credit the private organisation issuing it can muster, there is no reason not to allow a 100 monetary flowers to bloom.

If private organisations of good repute or even private individuals wish to issue money backed by their own full faith and credit – let them.      Let them be their own central bankers if they choose.

They will ultimately all have an exchange rate with the public money and this will help keep both the private money and public money issuers honest.

OK so what about the Capital Flows?

A critical issue and excellent points made by Pettifor in that section of the book though the Glass Pyramid would note that countries can always resist unwanted capital inflows if they choose to do so as ultimately the inflows do not come unless you are willing to sell someone offshore an asset, a banking system deposit or a claim to some of your future income.

Close and careful regulation and restriction of capital inflows especially unproductive capital inflows is recommended for all countries.


Pettifor makes an excellent case for a prosecution seeking to indict the current financial and monetary model but then fails to follow through.

She seeks to preserve the core of something that has little to recommend it other than familiarity.    The clue to the problem is that in order to preserve it a team of “public guardians” will be required to succeed where generations have failed.

The powerful reform that Pettifor demands is not nearly so difficult as she imagines but it does require some small but bold steps outside the current banker’s credit as public money paradigm.

Categories: Macrobusiness

11 replies »

  1. How would one make the public aware of the need for money creation to be in the hands of publicly elected reps? anytime I say to people that taxes don’t fund things on a federal level and that bank credit growth is terminal, as it eventually ends up on debt servicing, they look at me as if I’m from outer space.

    Liked by 2 people

    • Yes,

      That is the challenge and it is a surprisingly real challenge. Mainly because people think the public sector already creates all the public money. “The queen is on it” they tell me.

      That is the core of the confusion. The way that “bank credit as public money” is concealed.

      I think the only way to get the public on board is to get them to accept and support the fundamental position that only publicly created money is public money – they think this already – and use that as the basis for moving forward.

      Once that position is locked down the implications and next steps can be discussed.

      New public money creation will usually require fiscal deficits.

      These deficits do not require government debt.

      The process of determining how much of a deficit or surplus will avoid inflation or deflation will be very public and transparent.

      The elected governments still makes ALL taxing and spending decisions.

      While that is happening “bank credit as public money” will be restricted and wound down and banks will become what they claim to be now ‘mere intermediaries’.

      The biggest barrier is not that the banks love their privilege and will fight to keep it but that much of the general public do not understand that the banks effectively control creation and allocation of the public money supply.

      Pettifor means well when says that better regulating the status quo is the easier option but I think it is actually harder because it maintains the facade and the confusion that is inherent in treating “bank credit as public money”.


    • A couple things that are helpful when trying to explain things:

      Do not tell them that a sovereign government can never go broke, default in its own currency, etc. That is one of the most bone headed things anyone can say yet certain groups keep on saying some variant of it. When they cop the inevitable ‘money printer’ label they are then forced to back pedal and qualify their original statement or carefully point to the obscure caveat. Talk about painting a bulls eye or a “kick me sign”!

      Government is always constrained and saying otherwise is just asking for trouble.

      Tell them that government is always constrained and must always be careful in the choices that are made BUT treating bankers credit as public money makes that task much much harder because bankers love giving credit to their mates, speculators and much of it gets pissed up against a wall. People understand that. When they understand that bankers credit is currently treated at law as if it were created by the public they are likely to look shocked and say something like “You are kidding, that is frigging nuts”

      Explain that creation of public money by the government will be watched like a hawk by everyone, constantly just like government expenditure and taxation currently is, which is streets ahead of the dodgy and secretive way bankers create their credit which is treated as public money.

      If people are worried about excessive money printing and inflation or deflation the biggest step forward is getting private profit chasing banks out of the process.

      Liked by 1 person

      • I do wonder if they will only see a need to change things if they are personally affected, otherwise the cog diss will continue and there will be no need for change. In the back of my mind I do wonder if that was the intention when we were sent down this path of massive household debt, however the steps taken by gov’t to prevent the banks from shutting their doors seem strong enough to never let it get to that point.

        Liked by 2 people

        • I think there is grounds for hope.

          I can think of a range of issues where community attitudes have changed dramatically over the last 30 years.

          Even 5 years ago I did not have much of a clue of the overall picture – but then I had tertiary economics exposure to overcome!

          I am not encountering much difficulty explaining the issues to people though they do express the view that nothing ever changes.

          Stuff changes all the time and quicker than we think.

          Trump’s win over the DNC and the GOP being just the most recent examples of a big unexpected changes. Walls get built and then get torn down all the time.

          Worth keeping in mind that the whole idea of extending the protection of the state to one particular class of private IOUs is relatively new and when it was done, gold was supposed to supply the ‘value’ foundation.

          What I think we are witnessing is the slowly growing realisation that once the ‘gold’ backing was removed and the pure fiat idea – money as law – took hold, the idea of giving state protection to banker’s IOUs doesnt make much sense.

          Fixing the issue is not as hard as the fear mongers make out.

          Bankers as intermedaries between savers and borrowers of public money is hardly a radical notions.

          It is not some magic bullet change of course but it does address one more barbaric relic of our earlier political and economic development and provide a pathway for more effective and responsive public administration of political communities.


    • The ignorance of money and the absolute ignorance of credit is stunning and not accidental – it’s reason I’ve always been such a strong advocate of bitcoin. Before BTC talking to people about gold & silver was a non-starter; who wants to carry it? How do I get change? It’s okay as an investment but, etc and so forth. But BTC is functionally equivalent to bank credit with the added bonus that a) the bank doesn’t create it, b) anything can be priced in BTC in real-time.

      Bitcoin has a very bright future just based on the BIS war on cash which is going to accelerate – but what I really hope is that it starts to raise questions about what money and credit actually are and their role in our economies…

      Liked by 1 person

  2. Ann Pettifor was always the ideal author of a book that shatters the fantasy of apolitical money and the toxic myth that monetary policy must remain a democracy-free zone. This book is now a reality.”
    – Yanis Varoufakis

    Good old YV, why can’t money itself be democratic – as in determined by usage not monetary policy?

    Thanks for the review and your own well argued addendum – I’ll put myself through the Keynes references, you’ve piqued enough interest and at 200p its hardly Piketty 😂


    • Yes – it is a good read and concise – which is a very under rated quality.

      While I did not agree with the conclusions, who wants to read something they fully agree with. Plus because it is clear and articulate it was easier to pin down the points of difference.

      Chapter 6 dealing with those that would remove the banker’s extraordinary priviledge was full of the sort of arguments that are trundled out time and time again. One that has merit is the rejection of the idea that the central bank gets to choose how publicly created public money gets spent. That idea, if any one actually holds it, reeks of the ‘elite knows best’ thinking that got us into this mess.

      There is a very weird dance going on where everyone is alleging the otherside is anti-democratic and elitist while formulating their own formulation where the best and brightest, the vanguard, lead us to a bright dazzling future.

      I just find futures where bankers continue to control the process of public money creation – regulated more rigorously or not – less appealing than control by the grubs we elect and can give the boot.

      Liked by 1 person

      • apologies for butting in,

        “less appealing than control by the grubs we elect and can give the boot”, problem is we elect an individual, that accountability gets lost in the party haze and their choice of individuals for key roles (sacrificial lambs).

        Would it not be better to bring it back to a more local level (eg councils) and smaller community bank types, which in a way we already have to some degree (eg credit unions) and equip them with money creation powers?. These powers could be directed at worthwhile projects/businesses that permeate based on a community productivity value (sounds communist, I know)? this would avoid them getting involved in derivatives and other complex financial instruments that risk savers hard earned. These councillors are directly accountable (cant hide behind the party curtain), something our federal politicians aren’t. At the same time we would avoid complex issues such as defense and international relations controlling our economic policy (eg money creation)?

        It seems to me there is no correlation between monetary policy (lower interest rates) and business investment, so the money creation power of big banks is distorting the allocation towards the industries they choose, in our economy. We need to restore that balance to communities and productive pursuits.

        I also apologise for not liking comments, seems I cant access my login, wordpress doesn’t recognise my email and cant find any correspondence in my junk folder.

        Liked by 2 people

        • Watson,

          That is certainly an option once the understanding that public money or more accurately ‘money power’ is the property of the public. There is no reason why money power should be monopolised by one level of government. It should be used by the legal of government for purposes most connected to their responsibilities.

          Professor Richard Werner has done a lot of work in this area, influenced in part by the way small community located / controlled banks have operated in Germany for decades.

          The critical point is that the ‘money power’ associated with control over the creation of public money should be in the hands of the public and its elected representatives, local, state or federal rather than private organisations on a regulatory ‘leash’ that quickly frays and in due course fails – time and time again.


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