FAQs

We are a group of 3 women with a keen interest in politics and economics, but from a lay perspective rather than an academic one. We have come together from different directions but with a common understanding that the main economic position of our day fails to address questions of real resources and the impact of government policy on people’s lives. That is a real problem. We think that a good economic system should consider the effects of policy as an integral part of the design, not as an afterthought. Our personal studies have brought us together as proponents of Modern Monetary Theory (MMT).  

You can find out who we are here

To add to the mix, some people call it Functional Finance! Whichever term is used we are talking about a system which looks at the interrelationships between different sectors of the economy. It integrates money creation into the system and considers government economic policy in relation to the world’s real resources: the planet and its people. An awareness of MMT as a lens for understanding the economy is growing around the world. As the Gower Initiative our purpose is to offer a UK portal for that understanding. But this website is not an economics ‘textbook’ written by and for academics. We hope that people with no previous knowledge – and no particular desire to study economics as a subject – will find our website an interesting place to find answers to questions that affect our everyday lives, as well as those who wish to study the subject in more depth.  

To meet those objectives our website offers information from a beginner’s level through to books, videos and contact with academics around the world. We aim to develop those international links whilst broadening awareness that economics has higher priorities than balancing the books and that a government’s budget does not, in any way, resemble that of a household – a belief that has held sway in the UK for far too long. 

You can read our brief introduction to Modern Monetary Theory here. 

We all talk about economics in our everyday conversations. We talk about ‘macro’ and ‘micro’ economics, without using the jargon. When we talk about the government ‘having no money of its own’ or ‘having no money left’ or ask people canvassing for our votes on the doorstep with offers of improved services, ‘how will you pay for it?’ we are using our understanding of economics. That’s the result of politicians, pundits and presenters framing the economy in those terms. Over the last 40 years the profile and importance of the corporate sector as the generators of wealth and money has been raised above the importance of government as policy makers. In fact, in the current way of thinking, government is described as being totally reliant on taxes from the people and borrowing from the markets. This ignores the fact that we don’t use money from ‘The Bank of Barclays’ or ‘The Bank of Google’. All our money is from, or given its validity by, the Bank of England. The Bank is owned by the Treasury – that is to say, the government. How can a country which owns its central bank and which issues its own currency need taxes and borrowing before it can spend? This comes to the core of MMT which many people new to the subject find most difficult to get their heads around. It turns current thinking upside down. 

For a clear and easy explanation of this idea watch Stephanie Kelton at the British Library (2018) here. 

For a deeper read on the subject of currency sovereignty and its importance in a democracy, read Bill Mitchell and Thomas Fazi  ‘Reclaiming the State’. 

When the public reads headlines like:

“Government ‘hits the deficit target and borrowing is at its lowest since 2002”

“Chancellor ‘unveils lower borrowing forecasts as slightly stronger growth and higher tax receipts boost the public finances”

or “UK’s debt has increased by £555 billion”

 they are either impressed that the government is meeting its spending targets or horrified at its wastefulness. The belief that the government’s budget works in the same way as a household budget is ingrained in the public consciousness. Just as people believe that a government’s spending is limited by the amount of tax it collects there is a common acceptance of the notion that the UK government has to borrow money from the private sector to cover its deficit.

However, government “borrowing” is not really borrowing. The government, as the currency issuer, pays its bills by simply crediting bank accounts via entries on a computer screen. It does not need to borrow the currency that it has already issued.

In the UK, government offers savings accounts, known as gilts (in the US they are Treasury Bonds) and these can only be purchased with government currency. So, in order to purchase a gilt the buyer must already have the currency in his/her bank account. The bottom line is that the government has to spend its currency into the economy before anyone can buy a gilt.

 For more information on gilts and bonds, see our fact sheet here.

Quite simply, in accounting terms, the government (fiscal) deficit is the difference between what the government spends and what it collects in taxes.

The National Debt is the accumulation of that spending year on year. It represents the total amount of payments that the government has made into the economy and forms what is known as the base money supply.

From the government’s accounting perspective this is a deficit. But when the government has a deficit, someone else has a surplus. Who has the surplus?  It is the rest of the economy – households and businesses. As everyone knows balance sheets must balance. The government deficit, in fact, represents our savings.

QE is a tool used by the Bank of England to buy things like government gilts and other bonds in the open market. Those selling receive a bank deposit. Sellers tend to be Pension Funds and Insurance Companies, but can be other central banks and commercial banks.

QE does not print money and does not cause inflation. For the economy, it is an exchange of assets: gilts for bank deposits. Since bank deposits generally pay less interest than gilts, the economy receives less interest income.

The Bank of England hopes this reduced interest income will boost a wide range of financial asset prices. They hope higher asset prices will lead to banks making it cheaper for households and businesses to borrow money and that will lead to more spending.

For more information, please see our fact sheet at https://gimms.org.uk/fact-sheets/quantitative-easing/

Contrary to common belief the Bank of England is not a privately-owned institution.  It is owned wholly by HM Treasury, since being nationalised in 1946. In 1998 it was given certain powers, which are sometimes described as ‘independent’, but this does not alter the ownership. As the Bank describes it on its own website: “We are owned by the UK government. But we have specific statutory responsibilities for setting policy – for interest rates, for financial stability, and for the regulation of banks and insurance companies. And we carry those out (…) within a framework set by Government but free from day-to-day political influence.” We would argue that ‘free from political influence’ is not really accurate, as the framework set by the government for the Bank is designed to achieve its political objectives. 

Read more on the Bank of England’s website:

http://edu.bankofengland.co.uk/knowledgebank/who-owns-the-bank-of-england/ 

Also, see our fact sheet on The Bank of England

Fiat Money

Fiat is Latin for ‘let it be done’.  A fiat currency has no intrinsic value and is created into existence by law. The government commands it to be currency and so it becomes currency.

Prior to 1971 government spending was constrained by a gold standard system of monetary management which established the rules for international commercial and financial dealings. It was agreed at Bretton Woods and was set up in 1944.  Sterling wasn’t directly convertible into gold, but the value of the pound was fixed against the US dollar and that was convertible.  This meant that the government had to defend the pound in a fixed exchange rate system forcing it to adopt policies that were not in the best interests of citizens.

The number of pounds in circulation was restricted by the amount of gold and dollar stocks held by the government. In this way the government appeared to be revenue constrained and an illusion was created that it could only ever get its money from taxes with any shortfall made up by borrowing.

As a result of the first oil crisis, in 1971 Bretton Woods was abandoned and the pound was no longer pegged to the dollar. We entered the era of free-floating currencies. From then on, the value of the pound was decided on the international markets and this remains the case today. But the household budget narrative of taxing and borrowing to spend persists.

What gives fiat money its value? Professor L. Randall Wray explains the Modern Money Theory view that “taxes drive money.”

MMT most definitely isn’t, despite having the same acronym. The idea of the ‘magic money tree’ is designed to make people think the potential for public spending is a fantasy idea promoted by those who don’t understand the limits and constraints that government is subject to. Our argument, on the contrary, is that we are very conscious of the constraints but that they are real resources rather than fictitious accountancy goals. This can be explained in two ‘rules’ for the economy: 

1. A government with its own currency (like the £ sterling), its own central bank (like the Bank of England), a floating exchange rate, and no foreign currency debt, faces no financial budget constraint at all.
2. Such a government faces real and ecological constraints. As a society, we cannot run out of pounds, but we can run out of – or misuse – people, skills, technology, infrastructure, natural and ecological resources. There are limits, but the limits are ‘real’ and not financial. Governments should therefore focus their policies on human and ecological resources not the deficit.

The core international MMT team has spent nearly 25 years creating and developing this body of work. Understanding it leads to an appreciation that governments can only operate in a tightly disciplined fiscal policy environment if they want to be responsible and serve the community.

How we are taxed, the level to which we are taxed and the kinds of tax which are imposed on the different sectors of the economy is not a static issue. There are serious debates about the relative value of income taxes, land value taxes, corporate taxes, indirect taxes but despite these arguments the principles behind these taxes remain the same.  

The basic role of tax is to remove spending power from the non-government section of the economy so that the government can spend without inflationary consequences. Tax is a counter-inflationary tool in the economy.  

Tax also has a redistributive effect. This is often interpreted as money being taken away from the rich to spend on the poor. In fact, the redistribution comes from using tax policy to leave the lowest income earners a larger slice of their earned income than the rich. That redistribution is not being effective when we see a situation such as we have at the moment globally. We can see that those at the lower end of the income scale may need two or three jobs to make ends meet whereas at the top-end the rich are making so much excess wealth that they can donate large amounts of money to political parties in order to influence their policies. Redistribution can either increase or reduce inequalities depending on how it is used. 

Thirdly, taxes can be used to punish or reward certain behaviours. Tax credits such as family allowance or child benefit vary according to the government policy requirements for families to have smaller or larger families. Rates increase to encourage childbirth and drop to discourage it. Similarly, we have ‘sin’ taxes which are indirect taxes on such things as tobacco, alcohol and sugar. There is a popular belief that these taxes ‘pay’ for the additional burdens on our health services from smoking, alcohol and obesity related diseases but in fact, their purpose is to minimise these behaviours in the first place.

For MMT the question of taxing the rich and how much to tax the rich is a political question which is not directly related to the government’s ability to spend. Taxes do not fund government spending. 

For more information, please see Public Matters’ articles on National Insurance and Taxation.

There are three examples within the last hundred years of countries which ‘printed’ money wildly in excess of what their economies could usefully use or absorb. They are the Weimar Republic of Germany in the inter-war years, Zimbabwe after independence and, currently, Venezuela. In each of those countries there was hyper-inflation leading to the impoverishment of the general public. But it was not the excess of money that created the situation, it was the collapse of the supply of available goods. Their circumstances are specific to those countries and their era and whilst they are not unique and those situations could arise again, they are – in each case – related to major events such as war, major political instability or a complete collapse of domestic production. This is why in MMT we argue that in normal circumstances it is not the amount of money created nor the size of deficit or debt which are the automatic determinants of whether an economy succeeds or fails. It is always about the matching of money to resources and the dynamics between different sectors of the economy.  

For more information, please see our fact sheets on inflation and sectoral balances here.