Cooking the Books 2 – An April Fool

On the First of April the Guardian seemingly pulled off a good April Fool as many people wouldn’t have recognised it as such. They published an article by a ‘Stuart Kells’ who argued that banks can create money out of thin air and that governments don’t need to tax or borrow money.

‘Stuart Kells’ begins by criticising a scene in the 1946 film It’s a Wonderful Life in which:

‘depositors demand their money from a small town building society. Its manager, George Bailey (in an unforgettable performance by James Stewart), explains that the money is not in the building society’s vault; it has been lent to other people in the town. “The money’s not there,” Bailey pleads. “Your money’s in Joe’s house … and in the Kennedy house, and Mrs Macklin’s house, and a hundred others.”’

The joke consisted in claiming that this explanation of how a bank works is incorrect:

‘Banks don’t lend out money from reserves or deposits or other sources of pre-existing funds. (…) When you borrow money and your bank credits your loan account, the account is created anew, “from thin air” …’

If by this point Guardian readers hadn’t realised that the article was an April Fool, they just needed to consider how a building society operates. If it could create a mortgage out of thin air why would it need to attract depositors? Why do building societies compete with each other by offering savers an attractive rate of interest on their deposits? And why did Northern Rock go bust?

That James Stewart was correct was confirmed when in 2022 central banks raised the bank rate, as the rate of interest at which they lend money to commercial banks. As a result, the rate at which banks lend to each other via the money market, if at the end of the day the money they have paid out is less than the money that came in, also went up. As banks were paying more to borrow ‘wholesale’ they had to raise the rate of interest which they charged those they lent money to. They were slower to raise the money they paid savers who lent them money ‘retail’ but eventually they had to as borrowing from savers is cheaper than continually borrowing from the money market.

The financial media rediscovered the concept of ‘net interest income’ as the difference between the income from the interest the banks charged borrowers and the amount they had to pay those they borrowed money from. That banks — and, more obviously, building societies — are basically financial intermediaries borrowing money at one rate of interest and re-lending it at a higher rate was evident for anyone to see.

Perhaps the Guardian was relying on this for its readers to realise that they were dealing with an April Fool. In case this was not enough, ‘Stuart Kells’ went on to claim that governments don’t need to impose taxes or borrow money and that they should simply create and spend it. Governments have been known to try this, as in Zimbabwe, but the result has not been quite as intended. And, why do governments borrow money and pay interest for it when they don’t need to?

Maybe it was us who were fooled as it turns out that Stuart Kells is a real person and the author of a book entitled Alice TM: The Biggest Untold Story in the History of Money from which the article was extracted. Knowing how the Guardian allows funny money merchants free range in its columns — in this case, MMT, which stands for Modern Monetary Theory and Magic Money Tree — we should have realised it wasn’t intended as a joke after all.

Next article: Proper Gander – Going public about going private ➤

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