Book Review- Ann Pettifor's - The Production of Money: How to Break the Power of Bankers

Ann Pettifor is a political economist who is part of the growing movement among economists, left leaning politicians, activists and pressure groups calling for a return to pre-1971 Keynesian understandings of economics and monetary theory. Her work on this has particular weight given that she was one of the economists to correctly predict the coming of the 2007-09 financial crisis in her 2006 book ‘The Coming of the World Debt Crisis’. In her book ‘The Production of Money: How to break the power of bankers’ Pettifor outlines issues with the way the modern financial system operates and her proposals to solve them. Specifically, Pettifor views the modern financial system as having subordinated its traditional role as a servant of society to become the master and has become the primary concern of governments operating within the neoliberal economics framework. This has happened, Pettifor claims, as the modern financial system based on the less regulated, neoliberal vision of free Market Capitalism of Thatcherism and Reaganism has led to a quasi-religious theocracy where questioning the efficacy of allowing the market to dictate the direction of society is seen as heresy. Pettifor points to mainstream economists’ poor understanding of finance and monetary theory to explain how this has come about; deregulation has allowed for the creation of easily obtainable but ‘dear’ (high interest) credit. This causes two major problems: credit to be used for speculative purposes has had particular influence in creating the financial bubbles which have led to the ‘boom and bust’ cycle so characteristic of economics today; credit used even for productive purposes has led to consumptionism, depletion of natural resources and exploitation of labour all so consumers could service debt. Pettifor asserts that the financial system of the ‘neoliberal era’ has therefore been inherently exploitative. Pettifor advocates increased regulation to discourage risky lending for speculative purposes and encourage lending for purposes that are likely to create productivity within the economy at reasonable real rates of interest. This book provides a useful insight into the growing field of criticism of neoclassical economics and proponents of a return to Keynesian economics in a way that is readily understandable and sets out solutions to these issues.

Pettifor’s intended audience isn’t entirely clear. In the Preface Pettifor states her two key aims are to (i) “simplify key concepts [of] money, finance and economics, and to make them accessible to a much wider audience, especially to women and environmentalists”; But then her second aims is to (ii) challenge the approaches of orthodox monetary economists and of civil liberty organisations (who are steering those with left-leaning economic views back towards using neoliberal economic policies to solve the financial crisis).

In this way, Pettifor seems to be striving for the impossible: providing wider education and a technical rebuttal all in one. The book assumes an in-depth grasp of economic concepts and history, making reference to concepts such as fractional reserve banking, Keynesian economics and the Bretton-Woods agreement with no background explanation given; thus, making arguably it too technical for the wider public to read without further research. Because of this, it seems unlikely that Pettifor’s work will help much with raising awareness; the book seems likely to be relegated to being only read by a relatively small group of sympathetic left-leaning economists. This can be particularly seen in Chapter Six where Pettifor outlines her own policy proposals and criticises the NGO Positive Money for its policy proposals.

Despite this, The Production of Money is a book which is comprehensible, even to students with a couple of months’ experience in studying economics, given careful reading. Pettifor outlines key themes (both in terms of problems with the current financial system and solutions for them) which run clearly throughout the book. There are several key themes in The Production of Money: the need for greater understanding of finance and monetary theory (by orthodox economists and the public at large); the dangers of credit creation for speculation; global capital, and the problems associated with it; environmentalism and feminism (though these aren’t explicitly addressed until Pettifor’s closing remarks in chapter 8); and Pettifor’s proposed solutions for these issues.

The Production of Money: How to Break the power of Bankers is therefore best understood as having four main sections: the first three chapters outline Pettifor’s assessment on the reality of how our monetary economy works; Chapters four and five outline the major issues caused by this current functioning; Chapter Six issues a rebuttal to the ‘Sovereign Money Movement’ (particularly from the NGO Positive Money); and Chapters 7 and 8 are a summary of Pettifor’s own proposals for reform. This review will give therefore give a short summary of each chapter which will be immediately followed by summaries of any authors or analysts who have used Pettifor’s work from that chapter in their own work. This will better allow for analysis of the relationship between the original book and those that have commented on it and will be done according to the four sections outlined above. The analysis of which will come at the end of this report.

The Monetary Economy: How it works currently according to Pettifor.

Pettifor’s first chapter deals with her criticisms of the modern banking system and orthodox economists, with particular reference to the blind spot between monetary theory when compared to monetary policies enacted in the real world. Here, she points to the disconnect between orthodox economists (who mainly understand money as a veil over economic activity [by facilitating transactions] and understand bankers as intermediaries between savers and borrowers) and the reality of the modern financial system, in which commercial banks create 95% of broad money through credit. It is the creation of this credit which kickstarts economic activity (not economic activity which creates credit as is supposed by the majority of people ( see Page 6)); With this in mind, it is entirely possible to view the financial system as a public good, used to generate funding for productive economic activity (if managed well). Pettifor argues it is poor management that has led to the ongoing cycles of boom and bust since deregulation of the financial system in 1971, with “productive actors in the real economy […] [being] periodically flooded with ‘easy if dear’ money [but just as frequently] starved of affordable finance” (see Page 8). She pins the blame for this poor management on orthodox economists who support the current system of easily obtainable loans that come with high interest rates.

Pettifor’s second chapter sets out the process by which money is created through the issuing of credit (or debt). She begins by again attacking orthodox economists, this time for seeing money as a commodity (with the associated scarcity value). Pettifor argues this is a wholly incorrect view; money (and the rate of interest) is not a commodity, but a social construct based on trust: the promise to pay. This is based on Keynes’, and, before him, John Law’s view on money. The rate of interest is therefore the measure of trust (or lack thereof) and money is the means by which (not for) we exchange goods and services. Pettifor uses this to outline how all actors within a monetary economy have an effect on each other through their use of this social construct (money). She illustrates this with savings; through saving money, actors within the financial system create relationships with one another in the form of claims; these claims take the form of liabilities or assets. These relationships of debts and assets create the income and savings necessary for the healthy functioning of the economy. With this understanding of money and debt, Pettifor argues that in a well-managed economy (one in which the total size of debt in the economy is never eclipsed by the ability to repay it) there need never be a shortage of finance for projects to create economic productivity. She sets two conditions for this to never happen: real rates of interest should be kept low to best ensure repayment; and lending for speculative purposes should be limited. Beyond savings, Pettifor demonstrates the efficacy of her view of money by showing how money is generated by private borrowers; commercial banks create 95% of broad money but can only do so (through issuing credit) when a loan request is placed by a private borrower. Institutions can tempt more borrowers with a raft of means, but ultimately can only issue money when asked by private borrowers. In this way, private borrowers ultimately control the size of the money supply.

Joe Painter strongly agrees with Pettifor’s assessment with the creation of money; he leans heavily on the Keynesian thinking Pettifor uses in his essay Why We Need to Talk About Money. In his essay, Painter argues that taxation is not necessary for the creation of finance for government activities because money is not a commodity. Instead, it is the use of government finance that generates economic activity, this productivity in the real economy then filters back into the government coffers through taxation. Painter uses Pettifor’s excellent explanation of public and private creation of money (in chapters 1-3 of the Production of Money) to illustrate his argument.

Painter does however have some differences in his discourse to Pettifor’s. Painter actually briefly examines the impact of what he calls the “not monetised” (see Page 36) economy. By this he means activity which happens outside of the debt framework which characterises the monetary economy which is made up of relationships of trust between all the actors within it. “Unpaid housework, caring for children and [the vulnerable], growing food for our own consumption, making things for our own use and mending them when they break or wear out, entertaining and educating ourselves and each other, are all activities that contribute greatly to human well-being and fulfilment without necessarily involving monetary exchange” (Ibid). In this way Painter actually takes the analysis of money further than Pettifor by illustrating aspects of the real economy which happen outside the debt framework.

Klaus Kraemer and his fellow researchers also concur with Pettifor on a number of her key themes relating to money in their 2020 essay ‘Money Knowledge or Money Myths? Results of a population survey on money and the monetary order’. Kraemer et al cite Pettifor for her work in highlighting the important work of heterodox economists in furthering understanding of monetary policy and money in general as being a symbol of trust between economic actors not a veil over an exchange as it is commonly mischaracterised (see Kraemer et al, Page 227). This correlates with money as Pettifor outlines it in her first three chapters where she adeptly explains the same.

Beyond the study that Pettifor is directly cited in Kraemer et al also agree with Pettifor’s analysis that the majority of the population have little to no understanding how money works in a post Bretton-Woods world. Though she is not credited in this section of the analysis Kraemer et al tally with Pettifor’s analysis of the situation regarding the understanding of money within the population at large (though the population sample is taken from Austria not the UK or US from where Pettifor draws most of her examples); namely, that the majority of the population do not understand that money is simply an expression of trust between two economic agents.

The third chapter deals with the price of money; in it Pettifor uses a Keynesian account of the creation of credit to outline how, with the creation modern bank money and credit creation systems, society has been able to facilitate the financing of many more productive economic ventures than would have been possible previously. Before this, the financing of projects would have relied upon the support of owners of surplus capital to provide loans (often at usurious rates). To illustrate this further, Pettifor provides a brief history on usury and how it led to the creation of the modern financial system; with financial systems being formed in the seventeenth and eighteenth centuries as a reaction to usurious exploitation. Despite these efforts, Pettifor argues, usury is widely accepted within Western financial systems today as a result of the “parasitic grasp” of finance capital (see Page 44) and high debts. These financial systems are therefore forced to chase ever greater levels of economic productivity to try and service these debts. This leads to the boom-and-bust cycle of the economy as debt bubbles burst, which in turn leads to ever greater consumptionism, depletion of natural resources, and the exploitation of labour all so consumers can service debt. Following deregulation of the financial system in 1971, real rates of interest have risen, and the cycle can be seen working in action with the cycling of unaffordable credit. It was this cycle, according to Pettifor, that ultimately led to the financial bubble which burst in the 2007-09 Great Financial Crash (GFC) leading to the collapse of Lehman Brothers and the period of economic failure since.

Pettifor’s issues with the Current Functioning of the economy.

Pettifor’s fourth chapter argues against the austerity measures used by many Western governments in response to the Global Financial Crisis of 2007-09. She juxtaposes the famous Margaret Thatcher ‘there is no money speech’ of 1983 with the extraordinarily fast response times of Western governments to provide economic bailouts to their ‘too big to fail’ financial institutions. Pettifor argues that by resorting to austerity, modern politicians have effectively returned to ‘gold standard policies’, exactly the standard that the Bretton Woods Treaty did away with. These policies, Pettifor argues, are unnecessary and hurt the majority of the population in the affected countries. They have also had a destabilising impact by opening up political space for the rise of right-wing populists in many Western democracies. Pettifor argues that rather than austerity, Western economies should be pursuing policies of financial expansion in which governments issue bonds and use the finance raised to reinvest further in economically productive activities. Through government-led investment, the multiplier effect would lead to a raft of positive outcomes and then secondary positive repercussions, and so on. Pettifor argues this would be much more beneficial for the troubled economies of developed Western nations than bailing out banks, as despite the low rates of interest offered by central banks these have failed to translate to falling real rates of interest for private borrowers.

Painter again in his 2017 essay ‘Why We Need to Talk About Money’ echoes many of Pettifor’s points (though he uses his own analysis) in criticising austerity policies. Here Painter agrees fully with Pettifor’s own assessment of the nonsensical nature of analogising macroeconomic fiscal policy with the “thrifty housewife” (see Painter, Page 37), a trope so often used to bash those on the left of economic policy who recognise that “balancing the books” (Ibid) and treating public finance as if it were balancing a household budget is nonsensical.

Pettifor begins her fifth chapter with another criticism of mainstream economics’ understanding of money in the New Keynesian understanding of money based on Paul Samuelson’s barter-based theory of money and credit. As a result of this ignorance, the finance system has remained largely unreformed even after the GFC of 2007-09 with mainstream economics obscuring the causes of the crisis (financial deregulation). This has meant that central banks continue to generate liquidity which can be used by commercial banks to fund speculation; orthodox economics provides no solution to deal with the crisis facing the world and as such many have simply adopted the view that this is an inevitable state of affairs (Pettifor points out that economist Larry Summers has claimed that the economic stagnation has been caused by ‘natural’ interest rates that have fallen too low). Not so, says Pettifor; there is much that can be done to solve the crisis, as Keynes would have understood. Pettifor then explains classic Keynesian understanding of monetary policy, particularly how Keynes understood the rate of interest as a social construct which can be manipulated to the benefit of wider society; low rates of interest favouring industry and labour and high rates of interest favouring finance. In the classic way, the benefits of monetary policy fall on the rentier class, while all the burdens are left for the working class to shoulder.

Sanghera and Satybaldieva strongly support Pettifor’s analysis in chapters four and five of the ways in which the neoliberal vision of a finance system has exacerbated divisions along class lines into the rentier and working classes in their 2020 work ‘The other road to serfdom: The rise of the rentier class in post-Soviet economies’. Sanghera and Satybaldieva take a very similar stance to Pettifor in their views on Rentierism which does not add value to the productivity (a major issue Pettifor has with financial Rentierism). Sanghera and Satybaldieva actually use Pettifor’s analysis for their own argument for the establishment of a fair credit system in the post-Soviet central Asian states of Kazakhstan and Kyrgyzstan. They demonstrate how the establishment of a neoliberal economy following the collapse of the Soviet Union led to the allying of political elites with plutocrats in order to further the interests of rentiers in the region. This also tallies strongly with Pettifor’s own analysis of the corrupting influence of deregulation on the political system as she outlines in Chapter four. Sanghera and Satybaldieva also agree with Pettifor’s views on the damaging nature of global capital blaming Western governments and international financial institutions for helping to liberalize, privatize and promote rent-generating sectors as Foreign capital was invested into rent-extractive industries, including natural resources, finance and telecommunications (see Sanghera and Satybaldieva, Page 530).

However, Sanghera and Satybaldieva also differ from Pettifor’s analysis in the fact that they are analysing post-Soviet economies that have transitioned into neoliberal economies rather than the economies in which neoliberalism first arose as an ideology (as Pettifor does in her analysis). This greatly changes the emphasis on the damage that neoliberal ideology as the population in these post-Soviet spaces have a real point of comparison to an alternative to neoliberalism within living memory (in the West the shift to neoliberalism has gone largely unnoticed as it was a shift from one capitalist ideology to another)

Pettifor’s stance on the Sovereign Money Movement.

In her sixth chapter, Pettifor analyses proposals from the NGO Positive Money and the wider sovereign money movement which argues for nationalisation of the money supply with the power to create credit transferred to the central bank. Pettifor approves of the movement’s anti-consumerist aims and she argues that easy credit has led to excessive consumption and argues against a ‘People’s Quantitative Easing’ and helicopter money, arguing that placing the creation of all money in the hands of a few technocrats who would effectively be civil servants; this would clearly therefore be very undemocratic and would negate the point of removing control of the money supply from for-profit private banks.

Pettifer’s sixth chapter comes under specific fire from Fran Boait, writing in defence of Positive Money’s proposals (and the Sovereign Money Movement at large) in her own 2017 review. Boait first acknowledges some of Pettifor’s arguments she views as having merit: credit guidance to prevent the continued funding of risky speculation, proper control of interest rates by central banks and governments to encourage healthy productive activity within the real economy and capital controls to halt the damaging way in which global capital is able to chase profits around the globe at the expense of the developed economies the capital is pulled from and the developing economies that it is used to extract usurious rents from. As well as this Boait argues that in the case of some of Pettifor’s criticisms she has interpreted a lack of abundance of literature from Positive Money as being assent; (this is with particular reference to capital controls). This is where Positive Money and Pettifor’s desire for reform diverges. Boait outlines Positive Money’s proposal for a society in which debt free money would be created for society from central banks (i.e. through a sovereign money system); this would allow for a raft of positive measures they argue, particularly a ‘People’s Quantitative Easing’. In this system the chancellor would be able to tell the bank of England to lend to the government to spend directly into the economy. Boait also makes the case for helicopter money, arguing that Pettifor has mischaracterised the concept as undemocratic and unreliable. Boait argues that Pettifor has misunderstood the purpose of the lump sum given to citizens as a standing solution whereas Positive Money is simply proposing the policy in addition to “much needed pay rises”.

Boait’s analysis of Pettifor’s criticism holds some merit. Pettifor does mischaracterise the void in Positive Money’s literature on high interest rates as meaning the movement agrees with them. This is of course not the case as can be seen in Frank van Lerven’s analysis of how monetary policy is broken in his article ‘No change in Bank of England Interest Rates: More of the Same???’. In this case while the lack of literature indicates a lower prioritisation of the issue it in no way reflects that Positive Money agrees with high interest rates. However, Boait’s rebuttal to Pettifor’s argument that money creation should still be left to private banks (in a more regulated framework) is not very compelling. The example Baoit gives of the Chancellor ordering more funding for the government is the perfect illustration of why Pettifor does not want completely centralised money creation: giving total control of money creation to a tiny group of mostly older male technocrats (who would also now be civil servants in Boait’s vision) is insanity; particularly given Pettifor’s feminist and environmentalist credentials.

Pettifor’s own proposals

Finally, in her last two chapters Pettifor sets out her own proposals on how to best deal with the problems caused by finance currently: macroprudential tools, monetary policy (based on Keynesian rather than neo-classical thinking) and an end to austerity budgeting, the reining in of international capital flows with proper management of “footloose” (Pettifor,2017. 146) mobile global capital (through a ‘Tobin Tax’) and the retaking of control over financial policy by democratic institutions by subordinating finance to the real economy. Most crucially, as she states in Chapter 8, educating the wider population and increasing economic literacy within democracies will break the power of the banks over society.

Pettifor’s solutions to these issues are supported by Svartzman, Dron and Espagne in their essay ‘from ecological macroeconomics to a theory of endogenous money for a finite planet’. In this they agree with Pettifor about the danger of an economy centred around growth and increasing productivity endlessly in order to service debt. This, they argue, has a hugely damaging impact on the finite reserves of nature present on the planet. They argue that through a more sustainable vision of finance ecological concerns and green investment might also be serviced alongside economic concerns and the need for continued economic activity. Specifically, they cite Pettifor for her analysis on the need for public finance to be used if the damaging nature of rent seeking private finance is ever to be reined in for the good of the environment.

Though not explicitly stated in Svartzman et al’s essay this also ties in to Pettifor’s arguments in Chapters four and five on the necessity for controlling global capital flows and controlling global finance if these ecological concerns are to be met. These ecological concerns being secondary to economic growth is also a theme reflected in Vandeventer, Cattaneo and Zografos’ 2019 essay ‘A Degrowth Transition: Pathways for the Degrowth Niche to Replace the Capitalist-Growth Regime’. In this they argue for the importance of subverting the central neoliberal tenet of always pursuing economic growth (failure to achieve this growth is viewed as a failure according to neoliberal doctrine) in favour of a more sustainable de-growth. They argue this is possible through the multi-level perspective framework. In the essay Pettifor is explicitly cited in Vandeventer et al’s explanation of how the capitalist growth system facilitates the ‘need factor’ of consumerism (see Vandeventer, Page 275).

The Relationship Between Book and the Works that use it

Overall, The Production of Money has been well received within the corners of academia it would be expected to be, namely, heterodox and left leaning academics and economists. Pettifor’s explanation of how money is actually produced in a monetary economy has been particularly well received. By and large the sources that can be found to have commented on ‘The Production of Money: How to Break the Power of Bankers’ have agreed with its premises and conclusions. The relationship between the book and those that have commented on it can be separated into four types of relationship. The first is where the commenter explicitly agrees with Pettifor by coming to the same conclusion as her using ‘The Production of Money’ as a point of reference. Painter falls into this first category. He uses Pettifor’s explanation of money to explain his own in his essay and explicitly cites her. He also explicitly agrees with Pettifor’s explanations and conclusion on the need to end austerity budgeting (though this is closely related to his work on money). Kraemer et al also explicitly agree with Pettifor’s ideas on how Orthodox economists have misunderstood the issue of money and the importance of this in driving discourse around monetary reform. Sanghera and Satybaldieva fall into this category too. In their essay their investigation on the dangers of Rentierism rely heavily on Pettifor’s work and they cite her directly in the evidence they use to draw their conclusions. Svartzman et al also explicitly agree with Pettifor’s conclusions on the danger of unregulated financialization to the environment. Vandeventer et al provide the final explicit agreement with Pettifor in this essay as they support her conclusions on the dangers of growth driven Capitalism.

The second category is where the commenter explicitly agrees with Pettifor though in this case using their own analysis and therefore doesn’t reference Pettifor (in texts where Pettifor is referenced elsewhere in the same text). Painter also falls into this as he also later in his essay goes beyond the scope of what Pettifor analyses by investigating the effects of the non-monetised economy. Kraemer et al have this relationship with Pettifor’s conclusions on the wider public’s blind spot to the working of money altogether. Svartzman et al’s analysis of global capital flows also fits into this category. The third category is where the commenter implicitly agrees with Pettifor by coming to a conclusion which we might infer Pettifor comes to from her analysis in the book though does not explicitly state because the finite nature of any book means it can never state all conclusions ever. Sanghera and Satybaldieva lie here as well as they are analysing Post-Soviet economies. Their conclusions therefore implicitly support Pettifor’s by demonstrating that Pettifor’s conclusions are valid beyond just the western world. Finally, those texts that disagree with Pettifor make up the fourth category obviously is Fran Boait and her counterarguments to Pettifor’s criticism of the Sovereign Money Movement. Overall therefore it can be seen that the relationship between The Production of Money: How to break the power of bankers and those that have cited the text in their own analyses is highly positive with most of these texts agreeing with Pettifor’s overall conclusions.