The Truth about Money - Jeff McCracken-Hewson (April 2019)

Jeff McCracken-Hewson examines the role money plays in society and what it actually represents. He argues that reintroducing 'real money' and 'real people' into our world view is essential to correcting the mistakes of neoliberalism and classical economic thought. Jeff is on the executive committee of the Victorian Fabians and has a longstanding connection with the Australian Labor movement. He is also a member of the UK Labour Party and currently divides his time between Australia and the UK.




Two things are mysteriously missing from orthodox economics: real money and real people.

If they were not missing, its conclusions might have been very different. It might have been forced to see that the free market cannot drive the economy in the public interest; that there need never be a shortage of money to fund socially useful work and responsible public ownership; and that some flavour of state capitalism is probably the nearest we can get to socialism, unless we are prepared to abolish money.

Money enables relationships of trust and obligation between people.

It is created when credit is advanced, usually by banks; and it is extinguished when that credit is repaid. Money is debt. This point has, in recent years, been settled beyond any real doubt, with the Bank of England adding its confirmation.[1]

A series of political economists, since at least the start of the eighteenth century, have understood this. But the mainstream has side-lined them.[2] It presents money as a kind of commodity whose role is simply to lubricate the market.

Most people might imagine that money should be central to economic theory. But Steve Keen, one of the handful of economists to foresee the 2008 crash, points out that the model underlying modern neoclassical macroeconomics has “no banks, no debt, and indeed no money.”[3] And Milton Friedman’s monetarism, despite its name, did not understand money and its connection with debt. It denied money any real significance in its free market vision, beyond the idea that money “supply” should not be allowed to grow too fast.

Neither do orthodox economists see real people. They see individuals making self-interested choices based on rational expectations.[4] But real people live in communities. They care about each other and about doing the right thing. And they are strongly driven by emotion.

Why should a profession be willfully blind to two subjects that ought to be central to it? Is it not because economics without real people or real money is, like the myth of democracy, one of the pillars that support a fictional view of the world which serves powerful interests?

With real money and real flesh and blood people, the world looks surprisingly different.


When you think about it, money is very simple.

Let’s say you cut my hair. I give you some money. You give the money to a florist to deliver some flowers to a friend of yours. The money has done its job.

Money is simply a certificate that says someone should do something for you, because you have done something for me.
These certificates can also themselves be traded – bought, sold, lent, borrowed – on the financial markets. This can become extremely complex. As can the activities of governments and banks that are necessary to keep the money system functioning and on an even keel. But money itself is very simple.


In the example of my haircut and the florist, the three of us did not have any personal relationship. We didn’t even need to know each other or ever to have met or even to be in the same country: imagine that I had ordered an overseas delivery of the flowers online. Yet money enabled us to do things for each other.

That makes money a remarkable instrument for extending the reach and scope of human relationships. In the 300 odd years since it came to dominate economic life, it has enabled the world to become a vast and unprecedented human network. And that has enabled us to make unheard of economic progress.

Classical economists who, as I have argued, misunderstand the nature and importance of money, attribute all this to markets. If we focus on money, things look very different from what they tell us.

Money creates a turbocharged version of the relationships that are, and always have been, the bedrock of our entire human existence. These relationships are driven by what we think is right and proper. I call them “moral relationships”.

Relationships within moral communities - such as the family, groups of friends and neighbours, all kinds of cultural, academic, spiritual and political organisations, even the work place and, for some fields of endeavour, entire nations - are not driven by money. We would find it sordid and disgraceful if they were. We should act out of generosity, out of genuine concern for each other and for the wider good.

The money version of these relationships is turbocharged in two ways. Firstly, we do things for people beyond the moral community. Secondly, our lives become a relentless search for new and better ways to serve others, because our livelihoods depend on doing things they are prepared to pay for. This can be tremendously positive.

But we cannot gain from turbocharging human relationships if, in the process, we destroy or debase the very things that gave them value in the first place.

When money relationships are working well, we should feel and act as if we were in a moral relationship. A good hairdresser, when they cut your hair, really wants you to look nice. And you are grateful for that. A good florist picks flowers out carefully and is genuinely pleased at the pleasure they bring.

We are shocked if money-based relationships fall below the standards we expect from the moral relationships they mimic. We find it intolerable if employers mistreat employees, if sellers mislead buyers or if professionals operate in their own interests rather than their clients’. We rightly believe that these things are very damaging to our communities.

But money relationships, being self-interested, tempt us to do all these things.[5] So the moral communities that are the real bedrock of our human existence must step in. They must establish ethical and cultural standards, codes of professional conduct, consumer and worker protections and so on.

Moral communities may act through any institutions that genuinely represent them, including different levels of government, provided they are democratic. Political and economic democracy are dependent on each other.

Classical economists, who do not understand money or people, and have made them largely invisible, simply cannot see any of this. They can see only the market.

In his classic exposition of neoliberal ideology, Milton Friedman posited just two alternatives for managing the global economic community. One was tyranny: socialist central planning. The other was freedom: the unfettered market.[6]

According to Friedman, the best way “to co-ordinate the economic activities of large numbers of people … [is] … the technique of the market place”. And this technique “is fully displayed in the simple exchange economy that contains neither enterprises nor money.”[7] Friedman and his school are saying that the nature of money has no impact on the functioning of the economy. Money simply lubricates what is in essence an extended system of barter.[8]

Because he had made money irrelevant, Friedman could not see a third and better option: responsible management of money relationships for the public good.

One of the few legitimate functions of government, according to Friedman, is to “foster competitive markets.”[9] It is true that competition supports the turbocharged element of money relationships: the relentless search for new and better ways to service our fellows. A captive market can seriously weaken that. But to succeed in a competitive market, we don’t actually have to find new and better ways to serve our fellows. We only need them to believe we have. Or at least that what we are offering is the best of a bad lot.

Some firms have successful business models based on fair treatment of staff and customers. John Lewis Partnership in the UK is an outstanding example of that. But others compete precisely on how much they can mistreat their staff and how much they can mislead and short-change their customers. Not to mention how much tax they can avoid. You need look no further than Sports Direct in the UK, the banks in Australia, and Google and Amazon on the world stage.

If all we can see is markets without money, we simply cannot see the need for regulation in order to correct the moral dimension of the money relationships on which our wellbeing depends. We can justify regulation only to keep the market functioning, and we can very easily depict it as a threat to that.

If neoliberalism had not made real money and real people disappear, it would have struggled to convince anyone of its absurd proposition that “greed is good”.


There is another, well-known problem with the turbocharged version of human relationships that is created by money. In a moral community, when things are going badly, everyone rallies round and works twice as hard. In money-based relationships, the opposite happens. People become unemployed and sit around idle.

In the hairdresser/florist example, if I depend for my livelihood on growing fruit and there is a terrible drought, I don’t have any money for a haircut. So you don’t get any money to pay the florist, and you both sit idle. Things are looking grim, so you both stop spending. You “lose confidence”. If this happens on a broad scale, the whole system can spiral down to a standstill. We would all love to be doing things for each other, but no one has any money to pay us. There is a “lack of demand” in the economy.

For economic activity to resume, the moral community must step in to get new money created and spent. This was famously recognised by John Maynard Keynes and it helped to rescue the world from the Great Depression in the 1930s. It is central to Modern Monetary Theory today.

How then is this money created?

If I pay for something with my credit card, the bank that stands behind my card immediately creates a credit in the merchant’s account and a debit in my credit card account. The money to pay the merchant is created out of thin air. This is happening millions of times, every second of every day. When I pay off my credit card, the amount of money I pay is netted against my credit card balance and the money and the loan disappear back into thin air.

This process of issuing bank loans is better described as extending credit. Credit comes from the Latin, meaning belief or trust; and debt comes from the Latin for obligation. The bank is telling the merchant they can provide a service to you because you can be trusted to provide services to other people, of equal value. You will be obliged to do that in order to earn money to repay the loan.

When the community funds a job through bank borrowing, it is essentially saying: we will provide you with things that you need on the condition that you repay our trust (that is, our credit, our borrowing) by working at this job to provide things to us that we need. If this job creation is well targeted on socially useful work, it can only be positive. And it will not be inflationary. The new job will create additional goods and services for the new money to be spent on.

It is different if I, as a private individual, lend money to you. I have to lend money that I already have. I am not a bank so I have no licence to “extend credit”.

The Bank of England confirmed in 2014 that money is created by banks when they make loans.[10] And the anthropologist David Graeber has shown that money has been debt for as far back as we can go.[11] That is what it is and always has been.

It follows that banks do not lend out money previously deposited with them, as the monetarist Milton Friedman wrongly believed,[12] along with much, if not most, of the economics profession and the general public. This misconception led Friedman to his failed theories about money supply.[13]

Individual banks may find it difficult to attract and retain enough deposits to match their loans, as they are required to do, and so may face a “funding crisis”. But across the banking system deposits cannot be less than loans, because when a bank loan is created an equal amount of money is also created.

That is why it is pointless to worry about the level of debt per se. If one part of the economy has large savings, as in the Australian superannuation sector, another sector must have large debts.

What we do need to worry about is the quality of the debt: whether it has been advanced for socially useful purposes and whether it will actually be repaid. Yet whilst the world was building up a mountain of shockingly bad quality debt in the lead up to 2008, orthodox economists were completely unconcerned.

When a loan cannot be repaid, the bank must write it off. It disappears. But the integrity of the banking system depends on maintaining total money equal to total debt.[14] So when a debt disappears, an equal amount of money must be destroyed to keep the system in balance. This money is taken initially from the bank’s capital. The loss falls on its shareholders. But if this is exhausted, it falls to the wider community.

In the 1930s and in 2008 when massive amounts of bank loans and financial assets derived from them went bad, a massive amount of money had to be destroyed and taken out of the system.

After the 2008 crisis, many central banks embarked on an orgy of money creation. But this money was spent mainly on speculation in financial assets, not in the real economy. At the same time, in the UK, people were told there was no money to spend on their real, desperate needs so that austerity was needed.

Once we understand that money can safely be created for the responsible purposes of creditworthy borrowers, and that well-run governments are the most creditworthy borrowers of all, then the policy question becomes: what amount of money should be created for whom and where should it be spent?

This is a key proposition of Modern Monetary Theory, which also draws far more extensive conclusions about monetary and fiscal policy. Two of its exponents, Ann Pettifor and Stephanie Kelton, are economic advisers to the UK Labour Party and Bernie Sanders respectively.

So a proper understanding of money destroys another pillar of classical economics and neoliberalism: that while government spending might be nice, we simply cannot afford it. The common-sense idea, that we should all be working and deploying our talents to the full, and that we should not be downing tools when things are tough, turns out to be correct.


We also need to recognise that money relationships are essentially capitalist. Unless we intend to abolish money, we cannot overthrow capitalism. We can only harness it to the public interest. That is why all communist or socialist revolutions to date have ended up establishing some form of state capitalism.

Going back to the hairdresser example, before you could earn money from cutting my hair, money had to be spent to train you to cut hair (developing human capital), to buy scissors and so on (physical capital) and maybe inventing hair styles (intellectual capital) and so on.

Investors typically provide capital for enterprises which they do not work in themselves. To attract investment, enterprises must deliver what these investors want from them.

Private investors want a money return, in the form of dividends and capital appreciation. These depend above all on profits, either actual or expected. That is therefore where the enterprise is driven. But where investors are whole communities, they will be looking for different things, either instead or as well: environmental sustainability, social fairness and so on.

This is where competition can really be harnessed to the public good: competition for investment. The community can be an activist investor, but it can also rely on enterprises to understand the criteria which will attract investment from the community sector and perhaps the value of that to their brand.

There is great interest today in alternative models of public ownership: workers’ control, cooperatives, mutuals and so on. But the organisational form that has proved best adapted to capitalism and the money economy is the corporation. Why should this not apply equally to enterprises that the community invests in?

China announced in July 2017 that “All major Chinese enterprises owned by the central government will be turned into limited liability companies or joint-stock firms by the end of the year. [This] will separate government administration from management of day-to-day business operations, one step toward greater efficiency."[15]

State-Owned Enterprises (SOEs) are very significant players in the world today. The OECD reports that the proportion of SOEs among the Fortune Global 500 largest listed companies in the world, grew from 9% in 2005 to 23% in 2014, driven particularly by the growth of Chinese SOEs.[16]

The extent and style of community investment in SOEs can be finely calibrated to suit different situations. The community can take anything from a 100% stake in a listed or unlisted company, down to a majority stake, a minority stake or simply a small shareholding.

One way communities can invest is through Sovereign Wealth Funds (SWFs). In recent years, SWFs have grown in number and size and are now larger than the private equity and hedge fund industries combined. Norway’s SWF has ownership stakes in 1.3% of the world’s listed companies.[17]

There is a trend towards public-private joint ventures. This can be a win-win: socially responsible investment with due focus on the bottom line, provided the private investors do not take the public to the cleaners. But the community can hire the best brains in business and investment to look after its interests in all flavours of SOEs. The talented are already targeting such roles, judging by the glossy brochures currently being churned out by organisations such as the Australian Advisory Board on Impact Investing and Price Waterhouse Coopers.[18]

This is not a question of high-minded individuals and groups deciding to make ethical investments for the benefit of others, admirable though that is. This is about governments making hard-headed decisions on the most effective use of the public dollar to deliver policy commitments.

Corporations with community investment are typically required to extend their reporting and audit beyond the purely financial to include a range of ethical outcomes. There are many individual success stories.

Air New Zealand, re-nationalised in 2001, was not only spectacularly successful in its mission to stimulate New Zealand’s tourist industry, but was ranked top airline in the world in 2014 by Phnom Penh Water Supply delivered its goal of delivering clean water to every person in Cambodia and was the first company to be listed on the Cambodian stock exchange. Sweden’s state-owned alcohol retail monopoly is tasked both with delivering financial efficiency and reducing the impact of alcohol abuse.[19]

A correct understanding of money shows that governments can and should fund their investments in enterprises through debt, in other words, through the creation of money. Just as entrepreneurs in the private sector typically start out with a visit to their bank manager.

The UK’s massive post-war nationalisation programme was funded in precisely that way. Government stock to the value of about 25% of annual GDP was issued to former owners.[20] One asset – government stock – was exchanged for another asset of equal value.

The cost is literally zero if the process is properly managed. Government incurs the cost of a stream of future interest payments but against that it sets a stream of income from the enterprises it acquires. The profits that the former owners were going to extract from the community are simply replaced by a set of interest payments from that same community.

We do not know how far the tide of public ownership will advance or be beaten back. The OECD reports that it was receding globally during the great era of privatisation leading up to 2008, and this trend has not yet reversed. But there has also been a trend towards mixed public-private ownership of SOEs, and these SOEs may not be fully reflected in the figures.[21]

This issue will no doubt be fought over fiercely. But this does not need to be an out-and-out, winner-takes-all class war. It can be a gradual process. It is likely that some sort of mixed economy with a substantial portion in public ownership, significantly higher than we typically find today, will be the destination for the time being. It is quite possible that we will see some public stake, large or small, in most corporations.


It is only when we go beyond money relationships that we move from state or community capitalism to some kind of real socialism or communism. We should move in that direction. But we can expect the move to be gradual and limited.

Where we have free health, education and so on we receive services because we need them and can benefit from them, not because we pay for them. But service providers are paid and remain within the money or capitalist economy.

In pro bono legal or medical services, money does not enter into the relationship at all. “From each according to his ability, to each according to his need” in Marx’s famous words. True communism.


The truly socialist or communist sectors of our society will probably, for a long time to come, be elements in a mixed economy which is essentially an amalgam of private and community capitalism. This needs to be well regulated to ensure ethical standards, with money creation and direction under sound community management. Such a society, provided it is under true democratic control, has the ability to deliver a very good life to its members.


Jeff McCracken-Hewson

April 2019



[1] See for example McLeay, M., Radia, A. and Thomas, R. (2014). ‘Money in the Modern Economy: An Introduction’ and ‘Money Creation in the Modern Economy’, Bank of England Quarterly Bulletin Vol. 54(1),

[2] Pettifor, Ann (2018). The Production of Money: How to Break the Power of Bankers. Verso, (Kindle Locations 442 ff).

[3] Keen, Steve. (2011). Debunking Economics: The Naked Emperor Dethroned? Zed Books, (pp. 257-8).

[4] Keen, op. cit. (pp. 174, 248).

[5] The impact of money on human behaviour is studied in the philosophy and sociology of money, but this field appears generally to have no better understanding of the nature of money than classical economics. For examples of some recent thinking in this area see Bandelj, Nina et al. (2017).  Money Talks. Explaining How Money Really Works. Princeton University Press.

[6] Friedman, Milton (2002). Capitalism and Freedom: Fortieth Anniversary Edition. University of Chicago Press, (pp. 12-14).

[7] Ibid.

[8] Pettifor, op. cit. (Kindle Locations 1250-1251).

[9] Friedman, op. cit. (p. 2).

[10] McLeay, et al., op. cit.

[11] Graeber, David (2014). Debt - Updated and Expanded: The First 5,000 Years. Melville House (October 2014).

[12] Friedman, op. cit. (p. 47).

[13] See Friedman, op. cit. (Ch.3, esp. pp 46ff).  The New York Fed stopped targeting money supply growth in 2000 and it stopped even reporting money supply figures in 2006.  See Federal Reserve Bank of New York. What we do. The Money Supply. July 2008.

[14] For a thorough explanation of this whole topic see Ryan-Collins, et al. (2012). Where Does Money Come From? The New Economics Foundation.

[15] Reuters, Beijing, 26/7/17.


[17] Reported in: State-Owned Enterprises. Catalysts for public value creation? PWC. April 2015.

[18] PWC, op. cit., and

[19] Examples cited in PWC, op. cit.

[20] UK House of Commons Briefing paper Number CBP8325, 31 May 2018. (p6)  

[21] (p3).


The Fabian society was founded in 1884 by Edward Pease, Frank Podmore, and Hubert Bland, joined later by Bernard Shaw and Sydney Webb. In Australia, the first Fabian group was formed in 1891; the now Australian Fabian society is a national organisation.

The Fabian tradition is one of achieving social progress through research, education and debate. The Society has no policy beyond that implied in a general commitment to social democracy, and issues its publications as the opinions of their authors not of the organisation. The publishing program is designed to promote informed discussion on issues to further the goals of social democracy.

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  • Bruce Spiers
    commented 2019-05-22 11:27:40 +1000
    Consider economies that are not based on TRADE and which have no use for money as we know it, and that work supremely elegantly. The internal operations of each of our bodies is an example we can personally consider in a ‘knowing’ way, but every natural reality in the Universe operates on that basis.
    One of our great conceits is that we know better than natural processes do how things in the Reality of Man should look, be put together, directed and operated. Seven thousand years of political history, the maelstrom of the late Enlightenment to the Bomb, and the madness of six decades of political economic super hyperactivity are compelling evidence that we know next to nothing in such matters at all.
    Take TRADE out of the economic picture, and much better possibilities become possible – provided people everywhere think and behave as good, non-political human beings. Doing so is a habit we need to form. Everything good left in the human opportunity after the abuse our poitical reality ways has inflicted on it depends on us doing just that. If we continue politically, and economically as we do now, the Bomb that goes off may not be thermonuclear but it’s fallout will be unimaginably horrible, and sooner than almost anyone thinks.
    Political reality – and all its political ways of thinking, and behaving, inventions and conventions, its logics and its rationales – have consumed the happiness of people throughout history , have savaged the happiness of our surroundings for the past 200+ years, and have mauled everything good since modern economic madness got into full swing.
    Not content with taking so much, including so much and so many far better opportunities, it has fouled human existence and our surroundings with misery caused by its carelessness in using what it has made and disposing of its voluminous and frequently enduringly toxic collateral effects and wastes.
    Pulling TRADE out of our economies would be a major step. But we need to abandon political everything quickly and for all time. Doing so would reduce the costs of human reality deeply, so much that it could afford to address the many desperate needs of people and places that political reality has ignored and/or abused. The Gross Happiness Product of a good non-political human reality would be through the roof.
    Effectively, what we need to do is get quite past the conceits of gross slfishness, ambition, superiority and knowing that are the foundations of everything political and of political reality itself. Time presses us hard.
  • Kevin Conway
    commented 2019-05-11 13:46:05 +1000
    I agree strongly with Jeff’s comment that economists need to see people and communities and make decisions based on that and not simply rationalist theory. For that reason I would argue that The Productivity Commission should also have social workers as well as economists in making their decision. Having worked in Government programs assessed by the Productivity Commission such as Aged Care and the NDIS, we are seeing now the problems created by considering economic effects but not the people effects. It is a small part of the essay but an extremely important one.
  • Kevin Conway
    commented 2019-05-11 13:46:05 +1000
    I agree strongly with Jeff’s comment that economists need to see people and communities and make decisions based on that and not simply rationalist theory. For that reason I would argue that The Productivity Commission should also have social workers as well as economists in making their decision. Having worked in Government programs assessed by the Productivity Commission such as Aged Care and the NDIS, we are seeing now the problems created by considering economic effects but not the people effects. It is a small part of the essay but an extremely important one.