“Banks fundamentally run on double-entry book keeping“

In an interview, the Australian economist Steve Keen answers the question how money gets created. Moreover, he suggests a “polite way to get rid of an excessive banking sector.“

By Lars Schall

Steve Keen, born 1953 in Sydney, is an Australian economist, who taught economics and finance in Australia and the UK. Keen differs from the norm for critics of conventional economics by being highly mathematical in his own research, criticizing modern neo-classical economics as inconsistent, unscientific and empirically unsupported. His main research interest is in developing mathematical models based on Hyman Minsky’s “Financial Instability Hypothesis.“ In 2001, Keen’s book “Debunking Economics: The Naked Emperor of the Social Sciences“ was published, and a new, expanded and extensively revised version of “Debunking Economics“ was released in 2011. In 2017, he published “Can We Avoid Another Financial Crisis?,“ and in autumn of 2021 “The New Economics: A Manifesto“ followed (for reviews see here, here, and here. A free online companion to it is “Modelling With Minsky“ – which you can find here: www.profstevekeen.com/minsky/.) Notably, in 2009, Keen received the “Revere Award for Economics“ from the “Real-World Economics Review“ for predicting the financial crisis of 2007/08 before it happened. Currently, Keen plans to run for parliament in Australia in next year’s election – see here. His work can be found online at http://www.profstevekeen.com/ and www.patreon.com/profstevekeen.

Lars Schall: Steve, is the issue of money and how it gets created a blind spot in mainstream economics?

Steve Keen: It’s total blind spot, and in fact, they maintain a mythical view of how money operates, because if they actually would had a serious view of how it operates, they couldn’t maintain the rest of their theory, and this is so common in Neo-Classical Economics. You and I both know the work of Paul Krugman, of course, and Paul Krugman has been vigorously pushing the loanable funds model of banking for the last 15 years at least through his blog on The New York Times, and in academic papers and in his book, “End This Depression Now!“ – it’s all about loanable funds. The loanable funds model imagines that lending is one non-bank lending to another non-bank. Then I had a fight with him, you might remember, back in 2012 over my model of Minsky, and he actually said at one stage in that discussion: “I’m all for including the banking sector in stories where it’s relevant; but why is it so crucial to a story about debt and leverage?“ (1) And he just recently started doing a MasterClass, one of these courses that you can do on the Internet, and as part of that he is explaning what economics is all about, he talks about clearing away excessive detail and simplifying to understand the economic system. He declares: „It’s about people, it’s not about money“.

Now, that’s a Noble Prize winner writing one of the influential macroeconomic textbooks and that’s his opinion, and that is shared with almost all neo-classical economists. The only neo-classical economist I know of who understands money is Michael Kumhof, who works as an economic advisor to the Bank of England. He is a very close friend actually.

Michael worked as a banker before he became an academic, and he said, I know banks create money, because I used to do it when I created loans. So, Neoclassicals have a completly false model where banks don’t create money, banks act as what they call intermediaries – they introduce a saver to a borrower, and then they charge an introduction fee, and that’s exactly how Krugman modelled banking at one stage in a paper he did with Eggertsson to explain the financial crisis. (2) But they don’t understand money and banking at all, which is ironic, because most people would think that economists are experts on money. In fact, mainstream economists are experts in inventing reasons why they don‘t have to analyse money, or to analyse capitalism, and they are completely wrong.

LS: Why is it important to have a realistic view on how money gets created?

SK: Fundamentally, because money is part of aggregate demand, or rather the change in money is. This is something on which there has been a long running dispute in Post Keynesian Economics as well. If you go back to the original paper in Post Keynesian Economics on banks creating money and not being controlled by reserve ratios and central bank reserve creation, that was Basil Moore with “The Endogenous Money Stock“ back in 1979 in the Journal of Post Keynesian Economics, and since then it has become absolutely standard to accept that money is endogenous, that money is created by the banking sector, loans create deposits, and the Bank of England, of course, has come out, saying that the Post Keynesians are right and the Neo-Classicals are wrong. (3) So, that’s like the institutional structure. But there has been a long running dispute whether it actually matters to macroeconomics or not; to some people all that means is government can control the interest rate but not the quantity of money – that’s fundamentally, I think, how Randall Wray interprets endogenous money.

But from my point of view – and I’ve done the proof of this in a paper in the journal of the Review of Political Economy (4) –, change in money is part of aggregate demand and aggregate income. So, the change in the money supply, which is equivalent to change in private debt, is literally a component of both aggregate demand and aggregate income. This is not the sort of thing that I can explain quickly in an interview, but imagine you lend me some money, that means your spending power falls and mine rises, and fundamentally the two cancel each other out. So, that is personal lending, that is what the Neo-Classicals say what banks actually do, they intermediate, so when a saver lends to a borrower, the saver’s spending power goes down and the borrower’s spending power goes up, and the reverse when the debts are repaid, and so there is no real significant impact apart from differences in how fast they both consume from lending.

But when a bank creates money, its assets rise (which is the debt) and its a liabilities rise (which is the money), and nobody borrows for the sheer pleasure of being in debt; you borrow to spend. So, when you borrow that money, you spend it. And when you look at the actual dynamics, credit is part of aggregate demand and aggregate income. That’s essential. And when you take a look at how volatile credit is – now my best example is Spain (though America is also quite good), but I use Spain during the financial crisis: change in debt in one year in Spain was equivalent to 40 per cent of GDP; in the depth of the crisis it was minus 20 per cent of GDP; so, you fundamentally had a 60 per cent of GDP swing from positive to negative credit demand. Now, if you leave that out of your analysis, which is what Neo-Classicals do, you can’t understand capitalism.

LS: You deal with the question how money gets created in your new book, “The New Economics: A Manifesto.“ May you be so kind to explain to us how money gets created?

SK: This is one of the things on which you can find quotes on the Internet, saying: It’s so disgustingly simple that if the public would find out about it there would be outrage – and that’s pretty much true. Banks fundamentally run on double-entry book keeping. So, a bank first of all has to have positive equity, and if you go back in history, often banks are formed by having long-term assets like land that get valued in the currency at some substantial sum; with that positive equity they have assets and no liabilities; their initial equity is equal to their assets, and they can lend. As they lend, the assets that they have in the form of bank loans rise, and the liabilities they have of the deposit accounts also rise equivalently.

So if you, for example, get a loan from a bank of a million euro to buy a house, then the bank’s assets rise by a million euro, because that’s the debt that you now owe to the bank and you have to pay interest on that over time, but your personal bank account goes up by a million euro, and then what happens is, to buy the house you transfer that one million euro from your account to the person you are buying the house off. That has created money, which is now in the pocket of the vendor; you have a debt to the house equivalent to the amount of money borrowed; and the bank has an asset. It’s a double-entry book keeping engine that enables banks to create money, and there is really no limit to it beyond the potential for the banks to create so much debt, that when some of those debts go bad, their equity collapses. This is one of the reasons why we get caught up in asset bubbles. But fundamentally, it’s a very simple operation: the bank increases its assets, which increases loans, and increases its liabilities, which increases deposits, and that is how money is created.

LS: Is there a difference between how a central bank creates money relative to how money is created by commercial banks?

SK: Central banks don’t actually directly create money. This is one of the important things to get our heads around. I’ve been involved in modelling this in my Minsky software, which was designed specifically to enable the modeling of monetary dynamics. A central bank has two primary liabilities; if you look at the central bank, the central bank has as its customers the treasury and private banks, and the assets of the treasury and the private banks are liabilities of the central bank.

But let’s talk about Quantitative Easing, because in that particular case the central bank can create money, but it creates it just for the financial sector. If the central bank practises Quantitative Easing and it buys bonds off a private non-bank institution, it credits that private institution’s account with money and it takes the bonds off their hands. That is the situation in which you can create money.

But probably the important point to establish straight away is the question, what is money? And the answer is, money is deposits in private bank accounts plus cash in circulation. To create money, you must either change the amount of cash in existence, or you must increase the amount of recorded numbers in deposit accounts of private banks. So to create money, in the goverment’s sense, you have to go out and put money into the bank accounts of people like you and me. Now, the central bank can’t do that directly, but the treasury can. The treasury spends on you, let’s say, a thousand euro more than it taxes you, then it has created a thousand euro worth of money in your bank account, and on the private bank’s balance sheet that turns up as a thousand euro increase in the bank’s reserves, but not on its loans. The same story in general applies: the assets of the banking sector rise, but it’s reserves not loans, and the liabilities rise, which are your deposit account.

LS: And in quantitative terms, we use more money created by private banks than money created by the government?

SK: That’s a more complicated story than most people realize, because yes, definitely, most money is created by private banks. But when the government runs a deficit, whatever is necessary to enable to run the deficit in the first instance in terms of legal requirements – I had a few discussions in the past with lobbyists in the area of monetary reform arguing that government must have money in its treasury account before it can spend that money, and yes, there are mechanics that are necessary there, but the fundamental act of government spending that creates money is government spending exceeding taxation. That is the essential step, and that’s what creates money.

Private banks create money by lending out more than they get back in repayments, and as I have said like in the case of Spain, in one year that was equivallent to 40 per cent of GDP – a huge increase in money. In America, during the last year before the financial crisis hit in 2006/07, the increase in private debt was 15 per cent of GDP – that’s a substantial amount of money to create. But at the same time, a government running a deficit will in the first instance create as much money as is equivallent to the deficit. If you have a government running a deficit of, let’s say, 5 per cent of GDP, then that creates the equivalent of 5 per cent of GDP new money. However, then the government will back that by selling bonds to the private banks through treasury auctions. Now, that doesn’t change the amount of money in existence, but it gives the private banks bonds that they can trade. And if the private banks then sell those bonds to the non-bank sector – and that can include financial companies like pension funds, insurance companies, and so on, as well as individuals –, the public buys the bonds with money, and that then reduces the liabilities of the banks to the individuals, the individuals get bonds, which generate an income flow from the treasury, but that reduces the total amount of money created. Let’s say the government ran a deficit of 5 per cent of GDP, and then the private banks sold 80 per cent of the bonds they bought to back that, then you only have 1 per cent of GDP of money creation coming out of the government deficit.

LS: What was surprising about the issue of money to figure out for you personally?

SK: Probably the most interesting thing was actually how do you properly model monetary dynamics, because right from my beginnings in economics, I realized how essential endogenous money was. Without the private banking sector being out to create money, you wouldn’t get Minsky’s Financial Instability Hypothesis – and, of course, that’s what I was attempting to model. And, in fact, Basil Moore, who became a good friend, visited my university when I was a student there in 1987/88 in Australia, so I got first hand arguments about endogenous money from Basil. But the part which was hardest to handle, if you think about the framework that neo-classical economists have about trade: they have two individuals, two commodities, trying to work out a relative price in terms of one commodity versus the other, and they might use a third commodity in numeraire – that’s the typical neo-classical vision. However, in a monetary economy, and the insight that let me really understand this came from Augusto Graziani, who wrote a brilliant paper, you may be well aware of this one…

LS: “The Theory of the Monetary Circuit“?

SK: …exactly, that’s the paper, published at Thames Papers in Political Economy in 1989, and before I read that I was struggling how do I actually properly bring in the banking sector into the system, and what Graziani said was that rather than having two people each with two commodities trying to work out a relative price, you have a seller with a commodity, a buyer with money in a bank account, and a bank or banking system, and for the buyer to get the good off to the seller, the buyer has to transfer money from his or her account to the seller’s account. So what he said was, in that case all monetary transactions are triangular; they involve a payer, a payee, and a bank that does the transfer. That’s was a brilliant insight from first principals of how do you distinguish a monetary economy from a barter system. That was the basis for me building the Minsky software.

LS: Is it true that the money gets wiped out if the debt by which the money was created is paid back?

SK: Yes, it is true, and I got this wrong initially, I have to say, and that is actually one reason why I am writing a third edition of “Debunking Economics“, because I wrote that back in 2010, published it in 2011, but I didn’t start building the Minsky software until 2012, and the process of building Minsky taught me an enourmous amount about double-entry book keeping. Initially, I resiled against the argument that banks could create money and then destroy it; it just seemed ridiculous. If you‘ve created money, why would you ever destroy it? This seemed silly. And in “Debunking Economics“, I used the vision effectively of a 19th century private bank, where those banks created their own notes, this was quite common in America, Australia and parts of Europe, there were private banks back then with not government issued currency but with their own physical notes, and that’s why I used that as the analogy for money creation in “Debunking Economics“.

But then, as I‘ve learned more about double-entry book keeping by building Minsky, what I realized was that money these days fundamentally are entries in the liabilities of the banking sector, and debt is entries in the assets of the banking sector. Let’s say you have a bank account with a million euro and you owe 900.000 euro to the bank, if you allow your bank then to reduce your liability by 900.000 euro, they will reduce your debt by 900.000 euro, so the liabilities fall, which means you’re destoying money by repaying debt. Both Minsky and Graziani said, repaying debt destroys money, and I thought that’s wrong, they got to be wrong here, but I had to admit that they were right and I was wrong. Once you understand double-entry book keeping, if you repay a debt you‘re destroying the debt on which the money is based and the money as well

LS: Why is gold in a monetary economy no money?

SK: Gold is fundamentally a speculative commodity. Its price can rise or fall, depending on people‘s opinions about the stability of the monetary sytem they‘re part of and what is happening in international conflicts, and so on. But it fundamentally is not something that you can go shopping with. The only time when gold and silver actually turned up as a forms of money – and this is well documented in David Graeber’s book “Debt: The First 5000 Years“ and also in Felix Martin’s, “Money: The Unauthorized Biography“ – , it was during enormous conflicts like the 100 Years War, the War of the Roses, and so on, where as a mercenary soldier you wouldn’t accept payment in a king’s currency, because the king might get killed. So, you would insist on payment in something that you could use regardless of which king won the battle. In times of enormous conflict, commodities like gold and silver became money, but fundamentally with a failed social system. Money has been fiat, and it has been fiat for 5000 years. Only in the case of social breakdown, gold becomes money.

LS: But isn’t it also the case according to the paper that you’ve cited, The Theory of the Monetary Circuit,“ that gold is commodity money more or less in a barter sytem?

SK: If barter systems existed, but this is again where David Graeber’s and Michael Hudson’s research is so useful: anthropologists have never found a society that functions on barter. You can find a couple of societies that interact with each other in a ritualized barter fashion to prevent the outbreak of hostilities, more often than not. And you can find elements of barter in a complex manufacturing system, where like the Russians, for example, used barter for their international transfers to get sugar from Cuba and the Cubans were getting goods back, that sort of thing. And there are instances of barter exchanges with actual large companies even today. But fundamentally, barter has never been a major form of commerce. It’s just a myth of economists that made us imagine we can modell a capitalistic economy as a barter system.

LS: Is it nevertheless of interest in a debt crisis that gold has no counterpart liabilitiy unlike any other financial asset? The IMF writes, for example: „…The gold bullion component of monetary gold is the only case of a financial asset with no counterpart liability.” (IMF BPM6)

SK: I actually disagree with that. They got this wrong, there is another asset as well, and this is actually something I am just encountering with my Minsky software. As you know, I’m running for parliament for a new political party in Australia, and as part of that I had to design a housing policy, and in doing so I started to include housing as an asset in Minsky. Whoever owns the house, the house is an asset – I thought, for whom is the house a liability, and the answer is nobody. The mortgage you have is an asset for the bank and a liability for you, if you borrowed money to buy the house, but the physical house itself, once you have the ownership of that, it’s your asset and nobody else‘s liability. That’s fundamentally a non-financial asset.

Gold is the same; if you have holdings of gold, then that is an asset for you which is not a liability for anybody else. There are elements of the financial system which are non-financial. However, if you wanted to use that gold to go shopping, you can’t just walk into the local supermarket and say, I’ll have a can of Coke, thanks, here is a fifteenth of a gram of gold. You got to sell the gold for fiat money, and then use that to buy your can of Coke. And that means that the money is actually the fiat system. The commodity that you have is a non-financial asset, whose price can fluctuate. You can, with a time delay, turn it into money, but you have to get rid of it before it becomes money.

LS: But couldn’t we argue that gold is not used for transactions as money because there are laws given by the government, which benefits from the fact that we are using only its fiat currency?

SK: This is one of the reasons why, there are many others. When we talk about gold being used for transactions, I imagine something like the Wild West – the more I see about America, the more I see a society build in violence and robbery, the foundation of American capitalism is armed robbery, and in that situation you carry your gold around with you and you‘re trying to steal of somebody else. It’s an awful situation, who wants that for our bloody world? But gold is inconvenient. The amount of gold in existence, I’m still not sure of this, but I have seen arguments that if all the gold, certainly in the earth’s crust, was accumulated together, it would fill one Olympic swimming pool.

LS: Or, if you would make a cube out of it, it would fit under the Eiffel Tower.

SK: There you go. To actually physically use that is ridiculous, which is one reason why we had silver when we did have coins as part of the monetary system, and even those coins were a fiat sytem, I cover that in my new book with the example of the kingdom of King Offa in the UK, which Christine Desan at Harvard University has done a brilliant study on, (5) and I put that into a mathemetical modell. But yes, gold and silver were used as the basis for the coins, but the actual value of the coin was above the gold and silver content under the whole idea of fiat. But given the trivial physical amount of gold, it’s a very antiquated notion to believe that gold should be money.

LS: Now, if we have a system that depends on liabilities as money, the debt (respectively the interest it bears) needs to be served via economic growth, and that can only be achieved with the consumption of energy – that is, the ability to do work. Therefore, I would like to know if energy is really the basis that makes our money system possible?

SK: I think it makes our entire social system possible. This is a huge blind spot not just in Neo-Classical Economics, but even Post Keynesian Economics hasn’t yet properly integrated the role of energy in production. That has been another focus of my research; how do you bring energy into production? The simplest vision of that was something that occurred to me literally just walking through a room full of statues one day, thinking: “Labour without energy is a corpse, capital without energy is a sculpture.“ If you want actually have a person do work for you or a machine convert something from a useless form into a useful form, you got to put energy in. So, energy is absolutely the foundation of our capacity to have an advanced civilization.

I am working now with people who are specialists in Thermodynamics, one of them is Tim Garrett, who is an atmospheric physicist at the University of Utah, and he fundamentally argues that if you think about humanity as a system, then we have a very high level of energy; the energy consumption we have is well above the energy consumption that is possible for strictly biological species, and the reason why we can do that is in the environment we‘ve found these reserves of energy that no human ever made and no human can make, reserves of elements we can use for energy – coal, oil, and ultimately nuclear as well, and by exploiting the intense amounts of energy in those deposits, we‘ve pushed our society well above the thermodynamic equilibrium of the planet. Without energy we couldn’t do that, so energy is absolutely critical for the existence of human society.

LS: If you take a look at our consumption of crude oil and the development of the global population, there is a correlation between both. (6)

SK: They’re tight. Tim Garrett‘s arguments are that energy is correlated to wealth – which is a long-term argument about the fact that ultimately everything decays, the law of entropy rules; even the useful things we are consuming right now will end up being waste at some point, the clothing you and I wear will be waste one day, the chairs we sit on will be waste, et cetera, et cetera. So, all goes to waste. But fundamentally, he relates change in energy to GDP. In my own work, I am working more on the short-term cyclical nature of capitalism, but at one point I got a data source from the World Bank on global GDP and a data source from the International Energy Agency on global energy consumption. Between 1970 and 2014, the correlation of the change in energy to the change in GDP was 0.83 at the global level. Fundamentally that is saying that GDP is energy turned into useful work.

LS: And that’s a blind spot in economics?

SK: Totally. One reason I didn’t get involved in the environmentalists debate until after 2016 was that until then I hadn’t worked out how to include energy and production myself. I knew it had to be essential. And when I looked at how economists of all persuasions handled it, what they would do is include energy as the third factor of production – so you have labour, capital, and energy. If you look, for example, at the 1974 papers in The Review of Economics and Statistics, where neo-classical economists were responding to “The Limits to Growth“, both Stiglitz and Solow had a production function involving output as a function of labour, energy, and resources. They took the Cobb-Douglas Production Function and simply added Resources (R) as a third factor:

Where the exponent for R was 0.03, 0.05—the amount that energy makes up of GDP.

That was imagining that you could use energy (resources) as an independent factor of production to labour and capital – and that just never made sense to me. It’s sort of saying, you put workers and machines inside a factory, and then hit the factory with a lightning bolt, and you can produce goods and services – no, you can’t. You have to control the energy, which is what humans and machines actually do. Then what I did with the insight that “labour without energy is a corpse, capital without energy is a sculpture“, is to say that energy is an input to both labour and capital, without which they can’t do work. Then what you get out of that in the Cobb–Douglas production function form, which is a stupid modell, but it’s what neo-classicals use, that means if you take energy as a seperate input to production, which is the way they normally try to handle it, then you get:

With just this change, the exponent for energy input into machinery goes from 0.03 to 0.3. And when you do a cross-country analysis, on which there is an excellent paper by Gregory Mankiw from 1995, (7) looking at cross-country comparisons using the Cobb-Douglas production function – the only way you get it fit the data was making the exponent to capital .8, which contradicts the whole marginal productivity theory of income distribution. But that also applies to energy. So, energy is by far the dominant factor determing our capacity to produce output.

LS: You write in your new book, economics is no science at all. How come?

SK: For a whole lot of reasons. I mean, you and I have been railing against this in our independent comments on the Internet for decades now. But what occurred to me was a fundamental insight – if you read Max Planck’s autobiography, then he makes the classic statement, which is paraphrased as, “Science advances one funeral at a time.“ (8) And if you take Thomas Kuhn’s approach to defining how a science proceeds, you have some new paradigm being formed – let’s take Aristotle’s paradigm of the universe: so the earth is the center of the universe, and the sun, the moon and the stars orbit the earth on perfectly circular, concentric orbits, and you got this tight compact universe with the earth as the center. And then Ptolemy comes along and covers the fact that that paradigm can’t explain why the planets change direction all the time. So, Ptolemy says, yes, there are spheres, and yes, the earth is almost at the center, not quite, because the earth isn’t perfect, the actual location of the center of the universe, which he calls “equant,“ is almost the earth, and then there are spheres circuling this orbit, which is slightly off center for Earth, and on each of the spheres there are planets, rotating on these spheres, and then there is an enormously intricate task trying to fit this paradigm to the data. And then along come Copernicus, Galilei, and Tyhco Brahe and they all say: No, it doesn’t work, the earth is not the center of the universe, the sun is. Ultimately, you get a revolution, a complete change in the paradigm, and that old theory gets thrown out.

Neo-Classical Economics hasn’t let that happen. You have a crisis strike Neo-Classical Economics for all sorts of reasons – empirical ones, like the Great Depression that wasn’t supposed to happen, neither was the Great Recession, or you have intellectual ones like the Capital Controversies where Samuelson conceeds you can’t build an aggregate model of capital that can explain the rate of return on capital. All these things come along and neo-classicals ignore them, and they can ignore them because they are historical events – whether that’s the intellectual fight like the Cambridge Controversies, or the Great Depression itself as an event, or what we’ve been just through in the Great Recession back in 2008, and they forget it, and they can forget it because they can recruite students who find the neo-classical vision of capitalism just as seductive as their teachers do. The vision that Neo-Classical Economics gives people, is a perfect anarchist society: no government, it functions better without government; no power concentrations; and you get paid what you’re worth, marginal product – it’s a vision of a perfect society without power, without exploitation.

Neo-classicals get seduced by that vision, and they can always get new students coming in who also fall for that vision, even during crises they can continue to reproduce all of this, whereas if you think about things like the Michelson-Morley experiment that effectively proved there was no “aether” – so the Maxwellian explanation for why light could make it from the sun to the earth, white waves pass through an aether, that was no longer possible, and the black body radiation issue as well. Max Planck resolved that with quantum mechanics. We get a particle, which is a wave, that travels through a vacuum and brings the energy to us, but energy comes in discrete units called “quanta“. Planck didn’t actually understand it himself, he was perplexed as to how it worked; it wasn’t until Einstein came along with what became the Photon Theory of Light that gave us the explanation that made sense to Planck himself. Planck only knew the way to solve the phenomena of black body radiation was that energy came in discrete chunks called “quanta.“ He tried to persuade his Maxwellian colleagues, and they couldn’t accept it. But those same Maxwellian scientists tried to resolve that within their paradigm and also tried to teach that paradigm with tweaks to explain the phenomena to their students, and the students wouldn’t accept it. If they wanted to, the students could reproduce the Michelson-Morley experiment themselves, show that the Maxwellian explanation didn’t make sense.

And then what would happen is, ultimately those professors would fail to recruite any new recruites to the paradigm; they have to replace themselves – you get old, or you die, you retire; you have to hire new students; the new students come in accepting Planck’s concept – and you have a scientific revolution. That doesn’t happen in economics. We‘ve been stuck with the neo-classicals ever since 1870 – that was the last revolution, from the Classical School to the Neo-Classical, largely because the neo-classicals provided a way to avoid Marx using the Classical School in his critique of capitalism. So, because there is not this scientific revolution process in economics, it is not a science.

LS: Coming back to the issue of money, in your new book you call for a debt jubilee. Why so?

SK: Largely because having ignored the issue of private debt completely, we’ve enabled the greatest level of private debt accumulate in history, not just in capitalism, but possibly of humanity. Richard Vague’s work on that front is extremely worth reading, he has a wonderful little book, “A Brief History of Doom,“ and checking through the last 1 ½ centuries of data through all major economies, he found about 150 instances of financial crises, and every last one was a credit crisis caused by the private financial system. If you have too much debt, then credit can be too much of a component of aggregate demand, and you can have a plunge in aggregate demand and credit turns negative, and that’s what causes our major financial crises. So, if you take a look at the American data, there was obviously a period of negative credit during the Great Depression, there was negative credit during the Great Recession, and when I first put the data together, I spotted negative credit in 1837. I thought, what happened in 1837? I had to go take a look at history books and read about the panic of 1837. I didn’t know it existed; I identified it through this negative credit phenomenon. Every major credit crisis in capitalism and most of its major wars have been driven by a financial crisis caused by too much private debt.

If you want to make capitalism more stable, we have to reduce the level of private debt, and we can’t let the private banks determine how large it gets. Private debt should be as important an indicator for the state of the macroeconomy as the rate of inflation and the rate of unemployment. It’s reached well above critical levels – the private debt ratio to GDP is at least three times what it should be for a sustainable financial system. We need to eliminate it, but we can’t eliminate it in a way that only helps out debtors. In ancient society, when there were debt jubilees, that freed people who had become debt slaves – they abolished all household debt, and therefore people who had been forced to become debt slaves going to work on property of a money lender knew that they could go back and work on their farms again, and you got a boost to output out of it, and the only people who suffered in that sense were the money lenders, but they were too tiny a group, and you wanted to restrain their power anyway.

I never bought an asset on a speculative basis; I own houses, but I bought them normally, virtually outright, so I haven’t borrowed a large amount of money, I am not in debt right now. If we would have an old-fashioned debt jubilee, I wouldn’t get any money, whereas anybody who had taken out a mortgage would get some money. In a modern debt jubilee, you use the state’s capacity to create money to inject the same amount of money into everybody’s bank accounts. Now, what that would mean, Rupert Murdoch would get 100.000 dollars, and so would I; and Rupert Murdoch if he would have more debt than 100.000 dollars, and he got billions of dollars of debt, he can pay his debt down by 100.000 dollars. It wouldn’t matter to him, but it would matter to somebody who is renting a house and living on credit card debt, and stuff like that – we’re equalizing society for starters. What you would do is drastically reduce the debt burden; redistribute money from the wealthy towards the poor; and actually increase the level of economic activity through the whole process – I’ve modelled that in my Minsky software, and I got quite a surprise to see that the real distribution of money itself caused a stimulus to the economy, because fundamentally more money had been added to poor people’s accounts than had been added to rich people’s accounts, so nobody actually lost out, and because the poor won more, there was more economic activity, and the overall economy got boosted as a result of it.

I think we have to have a debt jubilee to get rid of this mistake of letting far too much private debt accumulate, and because we have an ex fiat credit system these days, it’s feasable to do it, whereas  the old-fashioned way was effectively wipe out the wealth of the money lenders, and if they complain, execute them. So, this a more polite way to get rid of an excessive banking sector.

LS: Thank you for this conversation, Steve!


(1) Cf. Paul Krugman: Minsky and Methodology (Wonkish). The New York Times, March 27, 2012; https://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/

(2) G. B. Eggertsson / P. Krugman: Debt, Deleveraging, and the Liquidity Trap – A Fisher-Minsky-Koo approach. Quarterly Journal of Economics, 2012, 127, pp. 1469–1513.

(3) Michael McLeay / Amar Radia / Ryland Thomas: Money Creation in the Modern Economy. Bank of England, Quarterly Bulletin, 2014 Q1; https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy

(4) Steve Keen: Emergent Macroeconomics – Deriving Minsky’s Financial Instability Hypothesis Directly from Macroeconomic Definitions, Review of Political Economy, 2020, 32:3, 342-370; https://sci-hub.se/downloads/2020-11-05/7a/10.1080@09538259.2020.1810887.pdf

(5) Christine Desan: Making Money – Coin, Currency, and the Coming of Capitalism. Oxford University Press, 2015.

(6) Cf. Oskar Slingerland / Maarten van Mourik: The Misunderstood Crisis – It’s The Energy, Stupid! L’Artilleur / Les Éditions du Toucan, 2013, p. 60.

(7) N. Gregory Mankiw / Edmund S. Phelps / Paul M. Romer: The Growth of Nations. Brookings Papers on Economic Activity, 1995, No. 1, pp. 275-326.

(8) “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.” Max Planck: Scientific Autobiography and Other Papers. Philosophical Library; Williams & Norgate, 1949, pp. 33-34.

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