David Graeber recently wrote an article in which he appears to make two claims arising from a recent quarterly report by the Bank of England that we believe are wrong. The first is that the report “throws the theoretical basis for austerity out the window”. The second is that money functioning as an IOU is an incredible and interesting recent discovery.
Mr Graeber’s claim that the report throws out the basis for austerity is unfounded. To begin with, he doesn’t define the “theoretical basis” for austerity at all, or even which aspect of austerity he is addressing. The vague implication seems to be expansionary austerity, but this is never clearly stated. It’s possible that he’s trying to infer that his supposed revelation is going to destroy consumer confidence in the system, destroying at least one benefit that austerity is purported to provide. However, if so, it’s worded so poorly the message gets completely lost.
Further, instead of explaining his central claim about austerity, it appears that Mr Graeber is claiming that in the modern banking system there’s no downside to producing unlimited money. However, the Bank of England paper directly addresses the inability of banks to produce unlimited money (“Although commercial banks create money through lending, they cannot do so freely without limit”), and explains in detail how monetary policies ensure they cannot (“Monetary policy acts as the ultimate limit on money creation”). It’s possible that Mr Graeber believes that these governmental policies could be removed to increase the availability of money; unfortunately, neither he nor The Guardian makes inflation disappear or nullifies the risk of expansionary bubbles. There are many arguments for and against austerity, but Mr Graeber has addressed none of them. Indeed, the report that Mr Graeber is quoting states the exact opposite to what he claims about monetary creation, and it never references austerity at all.
Mr Graeber’s other inferred claim – essentially, that money being an IOU is an amazing new finding – is similarly baseless. In fact, if we read a previous article of Mr Graber’s from 2011, we find that he says: “… another definition of money is an IOU, a promise – money is just the way we produce promises that can be precisely quantified and therefore passed around”. This isn’t strictly an IOU but leaving semantics aside, we can consider money to be a promissory note whereby you perform or provide a good/service to someone and receive money in exchange, and are able to swap that money for a good/service from someone else. This isn’t new, though; nor is it radical. The entire purpose of money is this – from the use of shells to gold and silver to our current fiat system, this “IOU” function is why money exists.
The other problem of course is that the suggestion that money can be created in limitless supply means that the IOUs are essentially worthless. This is the problem with limitless monetary creation eroding the purchasing power of the currency, and isn’t addressed by Mr Graeber at all. Indeed, if we are to take away from his piece that he believes expansionary austerity should be invalidated by this report, then he is also (if pushed to its logical conclusion) suggesting that money itself should no longer exist (as the IOU functionality would become rapidly meaningless in a scenario similar to the Weimar republic). If this is the case, he should be far more explicit. It’s more likely, however, that he simply hasn’t thought it all through.
Currency and the banking system is complicated enough – trying to link a Bank of England report in a baseless and sensationalist way to “[throwing] austerity out the window” purely to support your beliefs is quite irresponsible. Mr Graeber’s 2013 claim of his opponents’ behaviours applies equally well to himself: “… the theory is selected to suit the politics”.
Image: ‘”It’s cheaper to print this on money than paper”‘ by Joaquim Rendeiro, https://flic.kr/p/8oh3Xv. Licence at https://creativecommons.org/licenses/by-nc-sa/2.0/.