This post documents a 2020 paper (updated in 2021) called An Accounting Model of the UK Exchequer, and my seven-part series of interviews with all three co-authors: Richard Tye, Andrew Berkeley, and Neil Wilson. The paper, which was published by The Gower Initiative for Modern Money Studies (or GIMMS), painstakingly documents… the accounting model of the UK Exchequer. In colloquial language, the paper describes exactly how the British pound is created, moves through the economy, and is ultimately deleted. Its analysis is backed by a large amount of references to primary government sources, including legislation, public records requests, and historical documents going back all the way to the 12th century.
Additional sources are provided to learn more, and at the end you will find a brief-as-possible summary of the UK Exchequer by co-author Andrew.
This post was written by Jeff Epstein, host of Activist #MMT, the podcast (Twitter, Facebook, web, learn-MMT resources). Here is the original version, which was published at activistmmt.org
The reality of economic systems of other countries.
The UK Exchequer paper describes the reality of the economic system in the UK. The following papers document the same thing in other countries:
- The United States: the 1998 paper by Stephanie Bell (now Kelton): Can Taxes and Bonds Finance Government Spending?
- 2018 paper by Asker Voldsgaard Ruge, Master’s Thesis: Money and the Fiscal Space of Monetarily Sovereign Governments: The Case of Denmark
This was a difficult paper for me. It’s also accounting heavy throughout. The authors explicitly decided to write a comprehensive reference, upon which more friendly works can be based. Before reading the paper, I recommend the following sources as important background:
- MMT Podcast interview with all three authors, parts one and two.
- Andrew Berkeley’s forty-minute presentation, as organized by my previous guest, Asker Voldsgaard (here’s parts one and two with Asker, which is on an unrelated topic)
My interviews with the authors
The individual interviews are largely personal and in the joint interview, I ask very specific questions on both the paper and the experience writing it. After consuming the above background sources and then reading the paper, I recommend listening to parts six and seven of the below interview series. Parts one through five can be listened to at any time.
- Part 1: Richard Tye: The history of the U.K. Exchequer (and interdisciplinarity)
- Part 2: Andy Berkeley, part one: Palestine and piano [NOT MMT]
- Part 3: Andy Berkeley, part two: Confirming the theory applies to the real world.
- Part 4: How Neil Wilson discovered MMT (and Reddit)
- Part 5: Neil Wilson: Real-world economics requires understanding dynamics.
- Part 6 and part 7: An Accounting Model of the U.K. Exchequer
A brief (as possible!) summary of the UK Exchequer, written by paper co-author Andrew Berkley.
The UK government spends by ordering the Bank of England to issue money. This process is mandated by law, with the Bank having no discretion in the matter. Rather, the only constraint on the ability of the government to spend is the authorisation of Parliament. In this manner, the UK Parliament essentially legislates money into existence.
When the Bank of England issues money in this manner it takes on a debt of the government as a balancing asset. In this way, the Bank hasn’t so much created money out of thin air, but has – like all banks – converted the IOUs of its customers into a form that can circulate more readily in the payment infrastructure of the economy, i.e. bank deposits. Most of the money used in the UK economy originates with commercial banks extending loans to the private sector in an analogous fashion. But with government spending, new money is held by the private sector (the recipients of the spending) without a corresponding private sector debt to the banking system. This new cash therefore represents a net financial asset for the private sector. The private sector’s net monetary wealth is supplied by the government going into debt.
The UK government’s IOUs are the most creditworthy IOUs in the economy because of the government’s unique ability to enforce taxation and the unquestionable claim over the nation’s resources that that implies. The government’s creditworthiness plays a highly significant role in the UK banking system and sterling monetary system more widely. Almost the entirety of the Bank of England’s assets are UK government securities and the government additionally supports the Bank’s activities with guarantees involving capital injections and indemnities. The UK government also provides guarantees to the commercial banking sector, with contingent liabilities in place to support failing banks and insure the deposits of their customers. The government’s creditworthiness clearly exceeds that of the institutions which create the instruments we think of as money (i.e. deposits and cash) and this money supply is ultimately underpinned by that security which is inherent in the UK government.
Some forms of UK government debt are held and exchanged by participants in the UK economy and as such fulfill a variety of monetary functions. Since the Bank of England undertakes an interest rate targeting monetary policy, it prefers to remove the central bank money added to the banking system by the government’s spending. This is achieved – at the discretion of the UK government – by selling to the private sector different forms of UK government debt known as Treasury bills and gilts (UK government bonds). With this, the private sector holds its net financial assets in the form of government securities rather than central bank deposits – the government’s debt is essentially shifted from the central bank into the private sector. The interest payments on this government debt are a straightforward consequence of the interest rate targeting monetary framework that motivated its issuance, and the circulating government debt represents the residual stock of central bank money that has been drained according to that policy objective. Banks choose to hold gilts and Treasury bills because they are the medium of exchange needed to obtain the central bank money that they require in order to settle payments between one another. Non-bank institutions such as insurance companies and pension funds elect to hold gilts because they are a more secure way to save very large balances in sterling when compared with commerical bank deposits – banks can go bust and default on their liabilities, whereas the UK government cannot (and only promises to guarantee a limited quantity of bank deposits per customer).
The UK government therefore underpins the entire Sterling Monetary Framework. It provides the central bank with the instruments which are used to undertake monetary policy. It supplies the most creditworthy monetary instruments to the private sector, which are then used by banks to access central bank funding and by savers as a supremely secure store of wealth. And it provides capital injections, guarantees and indemnities to both central bank and the commerical banking sector alike in order that their own forms of money (bank deposits) are sufficiently creditworthy for the maintenance of a stable monetary system. The government securities held by the private sector represent the provision of a net money supply. These securities are either held explicitly as monetary instruments by non-banks, or held by banks wherein they provide the basis for bank deposits to be issued without a counterpart private sector debt.
The government securities that fulfil these functions – both realised and contingent – are formally accounted for on a legal construct known as the Consolidated Fund, which governs the UK government’s tax and expenditure activities. Liabilities of the Consolidated Fund are created when Parliament authorises government spending, and are destroyed when that money is returned in the form of tax payments. To the extent that the cumulative historical spending of the UK government has exceeded cumulative tax receipts, the Consolidated Fund’s liabilities exceed its financial assets (although a formal balance sheet is not officially published!). This imbalance simply reflects the provision of a net money supply to the economy which has yet to be taxed, and the implicit, or sui generis, balancing asset is essentially the sum total of future government tax receipts. Whereas banks always create money as liabilities by taking a counterpart asset on to their balance sheet, the Consolidated Fund by contrast essentially creates something from nothing – a liability with seemingly no requirement for a formal counterpart financial asset. The Consolidated Fund can be seen therefore as the fundamental source of moneyness the UK economy.