Nonsensical article by Brendan Greeley, a Financial Times journalist.

 

In his para starting “Well yeah…”, he claims that governments do not create money from nothing. And in an attempt to substantiate that claim, he says “If you live in the US, the dollars you use most often in your daily life are bank dollars. Your bank creates them when it loans you money, then deposits them in your account.”

So how does the fact that commercial banks create money prove that governments and their central banks DON’T CREATE MONEY? Bit like saying that because my farmer friend John grows food that therefor my other farmer friend Peter DOESN’T.

Then in his next para, he tries to support the latter argument by saying that commercial bank issued dollars have value because commercial banks are backed by the FDIC. Well clearly Brandan Greeley needs to study the history of banking: had he done so, he’d discover that commercial bank created money had value centuries before deposit insurance was introduced, which was relatively recently (1933 in the US) compared to the total time for which banks have been up and running: arguably several thousand years.

He then claims (para starting “Now take the Fed…” ) that the Fed is little more than a bog standard commercial bank which creates money when it grants loans. Well the flaw in that idea is that while central banks do indeed on occasion lend to various entities, they money they issue IS NOT NECESSARILY a loan: for example as Neil Wilson and co-authors showed in their work “An Accounting Model of the UK Exchequer”, normal procedure for public spending in the UK is for parliament or the Treasury to approve various expenditure items with the Bank of England then supplying the Treasury with the necessary money. No loan is involved there! It’s simply a gift by the BoE to the Treasury. The BoE may or may not subsequently borrow more from the markets depending on whether it thinks the inflationary effect of that extra spending is excessive. 

But even if Wilson & Co are not right, or my interpretation of their work is not right, there is nothing in principle to stop a central bank simply creating money and giving it to government to spend: indeed, as everyone (apart from Financial Times journalists seemingly) knows, various irresponsible governments have done that on an excessive scale for decades, and of course suffered the inevitable inflationary consequences.
 
Moreover (and ironically, given the prominence that Bernanke gets in Greeley’s article) Bernanke himself actually advocates the latter “give to government to spend” idea. That was in a Fortune article by Bernanke. See his para starting “A possible arrangement…”.

PS. Hat tip to Mike Norman Economics for alerting me to the Greeley article.

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P.S. (5th July 2021). I see Ann Pettifor approves of Greeley's article on social media. So big surprise that, given her own ignorance on the subject.