THE coronavirus pandemic is a moment of reckoning for our international financial system. It has shown us how unjust the system is towards low-income countries, given us the opportunity to imagine another economy, and served as a warning. If we do not fix the system to prepare for the coming, graver crisis of earth systems’ breakdown, the survival of humanity is at risk.
Just as it was hard for the ancient Israelites to imagine an economy apart from the Egyptian military-industrial complex on which they had become dependent, so it is hard for us to imagine another economy. “Would that we had died at the Lord’s hand in the land of Egypt, as we sat by our fleshpots and ate our fill of bread,” the Israelites complained.
We, too, struggle to imagine an international economic system apart from the “fleshpots and bread” of today’s globalisation. Before the pandemic, we enjoyed the privilege of international travel and tourism. We enjoy making endless purchases on the internet, paid for with credit cards issued by global banks. We take for granted goods and food flown from abroad and delivered to our supermarket or front door at the click of a button.
These luxuries are made possible by capital mobility — the movement of money across borders by those who own capital: investors, creditors, and speculators. At the start of the pandemic, investors panicked and shifted about $100 billion of capital out of low-income countries (“emerging markets”).
That caused their currencies to crash, and costs of vital imports to rise. Some of these countries were downgraded by “rating agencies”. Downgrades raised the cost of existing debt, and made new and necessary borrowing very expensive. All this happened at the worst possible time for low-income economies: the onset of a plague.
Capital mobility is one of the “fleshpot” equivalents of today’s international system. It serves a powerful elite: the one per cent. It is both profoundly unjust and unfair, and it is not sustainable.
We do not have to live under such a system; we can transform it, just as we did after the crises of 1929 and the Second World War, when governments worked together to build a new system.
FAITH, honesty, and trust are the foundations of law, and of monetary systems, including the international system. All money originates as credit, or, as the economist Joseph Schumpeter explained: “A promise to pay”. Promises, and the trust that promises will be fulfilled, are the foundation of the international system.
Maintaining trust in the financial system is vital. Faith organisations have traditionally been upholders of society’s ethical principles that underpin the system: principles that stand in opposition to theft, fraud, and false witness; adherence to truth, honesty, and fair dealing.
Today, actors in the international financial system make “gods of gold”, treat the owners of capital as gods, and routinely disregard the commandment “Thou shalt not steal.” By devising fraudulent schemes and flouting taxation laws and regulations, individuals in international financial firms eschew honesty and the law, and, instead, steal — often openly — as the Financial Times revealed of last week’s Wirecard scandal.
The consequence of a deregulated and privately managed international financial system is that society’s values are corrupted by private self-interest. Undermining society’s values erodes trust. Worse, it undermines the financial system’s ability to deal with long-lasting economic failure from Covid-19, and hinders society’s ability to finance future climate shocks.
If trust is upheld, if credit is regulated by public, not private, authority and aimed at productive, sustainable economic activity, it is a gift, a blessing. Credit-based monetary systems are a great advance in civilisation: they are developed over time to enable societies to undertake transactions and put unique human abilities to work to address crises such as war, plagues, poverty, unemployment, and climate breakdown.
That power was fully used this spring when the public institutions of the monetary system — the US Federal Reserve, the Bank of England, the ECB — were able to generate more than US$21 trillion in liquidity to help rich economies survive the pandemic. Most of these funds were generated as very low-cost loans and were aimed at the private finance sector. They were of little help to the millions made unemployed and laid low by the lockdown.
A sound monetary system, managed in the public interest, ought to make it possible and affordable to serve the whole of society, to create well-paid jobs, especially in the care sector, and to end poverty and inequality. If properly managed, it could enable societies to transform economies to move them away fossil fuels, and to implement a Green New Deal, but only if we maintain trust in the system by ensuring public authority over it. People of faith have a critical part to play in upholding society’s ethical principles to restore trust in the system, and therefore public authority over it.
THE first step in re-imagining is understanding. People cannot transform things that they do not know or understand. The financial system is deliberately opaque, intangible, and detached from regulatory democracy. My book The Production of Money, written in plain English, seeks to widen public understanding of the system.
Second, communities of faith must speak truth to the powerful. Voices must be raised against the rentiers, who aim to get rich by effortlessly extracting wealth from others and from the ecosystem. Thieves and law-breakers must be confronted and shamed. People of faith, and of good faith, must re-engage with political power, and reassert their position as fierce defenders, promoters, and upholders of society’s ethical values, of honesty and truth — not just in their local community, but nationally and internationally.
Third, and, as Alice Walker once said, “The most common way people give up their power is by thinking they don’t have any.” We need to understand that we have power. We would not feel so powerless if we understood that the private, globalised financial system depends utterly on our granting permission for governments to use public, taxpayer-backed resources to bail out private creditors, investors, and speculators.
We could withhold that permission. Or we could agree only on terms and conditions that benefit society as a whole. But, because we are ignorant of our potential power, we remain silent and irrelevant.
Understanding the value and power that we have as law-abiding, tax-paying citizens must embolden us to demand that honesty and decency be upheld by the public authority of the law: the State. This can be achieved by demanding stronger regulation and public oversight by the Bank of England, the Treasury, and HM Revenue and Customs, ending the decades of “self-regulation” that have led to periodic financial crises.
Fourth, we must demand game-changing international-policy remedies. Cross-border capital mobility must not be left to the “invisible hand” of markets and the self-interest of speculators and investors. In a world of capital mobility, tax evaders can simply move profits and capital gains across borders and into tax havens. We must demand that our Government work with other states to manage cross-border capital flows, if billionaires, oligarchs, and global corporations are to pay reasonable rates of taxation on profits, and on the capital gains made in-country.
Finally, credit-creation must be managed by public authority, to ensure that it is aimed at sound economic activity with the purpose of protecting human civilisation. It will be hard to give up our attachment to the “fleshpots and bread” of today’s globalised financial system; but, if we are serious about tackling income inequality and injustice, ending poverty, and preparing for the coming shock of climate breakdown, it will be essential.
- Understand the financial system, and acknowledge the power that ordinary people hold
- Demand stronger regulation and public oversight of the financial system by the Bank of England, the Treasury, and HM Revenue and Customs.
- Demand that the Government works with other states to manage cross-border capital flows that avoid taxation.
Ann Pettifor is Director of Policy Research in Macroeconomics (PRIME).
Read the articles in our special post-pandemic issue here.
The Case for the Green New Deal by Ann Pettifor (Verso, 2019).
The Production of Money by Ann Pettifor (Verso, 2018).