What is money? A rabid free marketeer puts his foot in lots of notes

Fear the drunken sailors and their bottomless wallets

Oh yes, EVEN MORE footnotes

So, there has to be fiscal austerity in the economy to offset it and we do that by taxing back the right amount of that newly created money. Which is lovely, of course, and if inflation looks like getting a bit too high then just raise taxes so that there's more of that fiscal austerity to offset the monetary stimulus. Which is also lovely: but look at what the end effect of this can lead to.

Sure, we've changed the idea that the government must tax in order to be able to spend. But we've not changed the fact that if the government spends a lot, then taxes must rise. Our wallets still get sucked up to pay for the politicians' desires.

It's not exactly terribly different from our being taxed to hell to pay for diversity advisers if the tax is levied to stop the inflation from paying them or to pay them in the first place.

However, the truly scary thing to me of this idea is that they're right. Sure, government could just print all the money they want to spend and then use taxation as the inflation reducing policy. But think of what that does to the incentives of the politicians.

At present, there's at least some vague societal idea that we don't like paying taxes very much therefore there's a limit to how much government can spend. Once we relax that, well, how many politicians are going to limit their desire to buy baubles for the electorate just because of inflation? We get back to the political incentives that have been such a success in Weimar Germany, Zimbabwe and so on.

And then over and beyond this are people who are not correct at all (one such group is called Positive Money). There they note that banks actually create most of the money supply.

If we stopped them doing that and had government do it instead then government would have those hundreds of billions to spend. The misunderstanding here is that banks don't in fact create money. Yes, I know the Bank of England said they do but they don't: banks create credit, not money.

There's a significant difference between money, which is base money, or M0 in the jargon, and credit, or M4 in that same jargon. Banks do create about 97 per cent of credit, or M4, through their lending decisions. But they don't create M0, not one single iota they don't.

OK, so, but if banks create credit then why shouldn't the government do that itself? And if it does so then it gets to decide where that credit goes: which is much the same as being able to spend money, really. Deciding who gets credit is just about as good as printing all the money as a method of controlling the allocation of economic resources.

One answer, from some rabid free marketeer like myself, is that governments are generally crap at allocating credit so let's not do that. However, what Positive Money and some others (like an adviser to Bernie Sanders) go on to say is that that's hundreds of billions in profit from credit creation that will be brought under state control.

But that idea fails from its impact with reality.

If there are hundreds of billions in profit to be had from credit creation, then where the hell is it? The banks certainly don't make that sort of sum and they are doing 97 per cent of that credit creation.

So, where's it going? No, not even if we add up all the pay of all the bankers and include it, the banks aren't making that sort of money. So, obviously, given that those profits don't exist, then those profits cannot be nationalised by government allocating credit, can they?

So, in summation, the answer to the question of what is money is that it's a way of keeping score. Who owes what to whom, who has what size of claim on the general resources of society?

And for those who want a bit more on more detailed ideas, yes, government can indeed just go and print all the money it wants to spend, the Modern Monetary Theorists are quite right about that. And a truly scary thought it is that they are, too. Because there's just nothing to constrain those drunken sailors if they have bottomless wallets. ®

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