The African Foundation for Development UK (AFFORD) invited Ann Pettifor to give the keynote speech at its Africa-UK Diplomatic Engagement Evening Monday evening, in the presence of the High Commissioners of Sierra Leone and Cote d’Ivoire.
Speaking on the theme of “Enterprise, Workforce and Institution Building in Post-Conflict States” Ann emphasized the vital importance of post-conflict African states building sound monetary systems. She argued that such systems should be designed to give African politicians the policy autonomy needed to formulate and execute their own monetary policy – and with it the domestic economic policies that will protect the interests of their people, and support their country’s advance.
Read a full summary of Ann’s speech:
Many African nations exhibit a chronic inability to forge stable domestic monetary systems, in which promises to pay are produced in a settlement with major economic interests – the government’s debtors (taxpayers) and its creditors. Ann maintained that “monetary disorder prevails during and after conflict. Domestic monetary order should be a major priority for post-conflict states in Africa.”
Ann pointed out that successful money in modern capitalism consists in the institutionalization of two reciprocal relations between a state and its citizens–taxation and the national debt. The willingness of the state’s foreign and domestic creditors to fund further national debt is to a large extent dependent on the state’s capacity to generate income for its people and revenue through taxation, at a level that creates confidence in the ability to pay interest on, and principal of, debt. (Generating revenue through taxation is best achieved by establishing full employment of the nation’s human capital – as it is employment in the formal sector that expands and simplifies the collection of tax revenues.)
Relations between states and major economic interests must be governed by transparent procedures: denominated in the state’s money of account, linked in a settlement whose legitimacy is framed by public law, the honouring of contracts, as well as sound economic policy and good fiscal and regulatory practice. It is this relationship of the state to domestic creditors (and debtors/taxpayers) in its fiscal constitution that is important in securing legitimacy – both at home and abroad.
The civilizational advance that is bank money
Ann stressed that contrary to orthodox economic teaching, banks do not act as intermediaries between savers and borrowers. Instead licensed banks, both public and private, enjoy the power to create credit ‘out of thin air’ – by assessing risk, and then entering numbers into a ledger, and ensuring the loan is guaranteed by a) collateral and b) the promise to repay.
In OECD countries, central and commercial banks have for many centuries, created credit ‘out of thin air’. This arises from the discovery by e.g. Florentine bankers that credit in excess of savings could be created as ‘bank money’. This discovery represented a great civilizational advance. It both increased the availability of credit, democratised its allocation to borrowers and lowered its ‘price’ – the rate of interest. This ‘public good’ – a sound banking system – was and remains a great civilizational advance, achieved at great cost to society. For sound banking systems did not evolve without periodic bank runs and failures, financial crises and steep financial losses – for individuals, corporations and governments.
So while sound banking systems are a great civilizational advance, unsound systems can represent a profound threat to society. Captured by vested interests, the banking system can quickly becomes a ‘despotic power’ – to quote Geoffrey Ingham, the Cambridge sociologist.
Today the process of central banks creating credit out of thin air is known to the public as ‘Quantitative Easing’ (QE). The purpose of central bank credit creation is to provide their ‘franchisees’ – commercial banks – with financing. The idea is then that this credit cascades down through the private banking system, and finances projects in the real domestic economy.
Unfortunately central banks have lost control over the credit creation process. They have sanctioned global capital mobility and embrace ‘light touch regulation’. They both decline to, and are unable to regulate credit creation by their domestically licensed ‘franchisees’ – private, commercial banks. As a result, and with time, the unregulated finance generated by commercial banks tends to gravitate away from sound, productive activity undertaken in the interests of society, and towards high, short-term gains won from reckless and often fraudulent credit inflation, gambling and speculation.
There need be no shortage of finance for reconstruction.
Since banks do not act as intermediaries between borrowers and lenders; and since credit is not a commodity, and is not subject to the laws of supply and demand– there need be no limit to its creation. For investors that operate in monetary economies, there need, therefore, be no shortage of money for sound productive economic activity. The relevant consideration is the availability of finance, not savings.
Contrary to classical or orthodox economic theory, credit creates economic activity. In other words economic activity need not be financed by ‘savings’, it can be financed by well regulated credit. Economic activity in turn, generates deposits and income. Income then generates savings or tax revenues. And savings can be used to repay debts.
Just as work makes things affordable for individuals, so too for society. A nation’s prosperity follows from its employment – and not the other way around.
In a society with a sound banking system, managed to meet the domestic needs and demands of that country and its people – and not the needs and demands of international bond and capital markets – there need be no shortage of money for reconstruction, for housing, education, health, adaptation to climate change, for building beautiful cities and creating works of art. But only if the monetary system is managed and regulated in the interests of society as a whole, and not in the interests of tiny, ‘despotic’ elites based at home or abroad.
Ann concluded that it is of vital importance that African post-conflict states establish the ‘public goods’ – institutions, legal and regulatory frameworks – needed to manage and regulate their domestic money systems in ways that are stable and sound. Such a monetary system must be designed so that it becomes servant to, not master of, the economy – and stimulates and supports domestic economic priorities, not the priority of international financial institutions. In particular a sound banking system should support labour-intensive activity in areas such as agriculture – vital in states recovering from conflict.