We can afford what we can do: monetary policy as a public good

Massive state action avoided a financial catastrophe last month when the large but rapidly collapsing Credit Suisse was taken over by its rival, UBS. Like the big state bailouts of shadow banks during the great financial crisis and the rescue of the shadow banking system in March 2020, the backing of the Swiss National Bank for the resolution of the crisis reminded venture capitalists and free marketeers of an important truth: only the state has the financial firepower to avert catastrophes.

Those are just some examples of the ability of developed monetary systems to tackle crises. And climate change is another crisis in which public institutions will need to step in when private ones are faced with collapse.

Given the nature of monetary systems which have been devised over centuries, when we’re considering transforming the ecosystem away from our dependence on fossil fuels, there should be no doubt in our minds that in the words of John Maynard Keynes: “Anything we can actually do, we can afford.”

There are certainly limits to what we can do, notably ecological limits. But within human capacity and ecological limits, we can afford what we can do.

Monetary systems as a public good

Society devised monetary systems in order to facilitate transactions, to enable us to do what we can do. Just as society devised sanitation systems – a great public good – to enable humanity to avoid disease and pandemics, and to thrive.

Contrary to much popular discourse, money is not a finite commodity like gold or bitcoin, but instead is a social construct, a promise to pay. A promise that is underpinned by banking, currency, accounting and criminal justice systems and institutions, designed to uphold the integrity of those promises. Money is limited only by the capacity of individuals, firms or states to pay or repay. That capacity in turn is limited by both the ecosystem’s and humanity’s finite resources.

At the base of our monetary systems is money. Both money and monetary systems are social constructs and public goods, built to serve and protect society rather than private interests.

Money, the ecosystem and the public good

While the public institutions of monetary systems are embedded in the state, the purpose of the system has always been contested. It has been subjected to tugs-of-war between those who would appropriate central banks to serve private interests, and those who would have the system serve the interests of society and the ecosystem as a whole.

Andrew Hauser, executive director of markets at the Bank of England, explained in a speech that central bankers, often loathe to support the public sector, expect the expensive and transformational task of ecological sustainability to be undertaken by the private sector.

“Governments may be responsible for the policies to achieve net zero,” he said. “But much of the emissions reduction itself has to come from the corporate sector. And that requires investment, and lots of it. In the UK alone, spending on low-carbon technologies and infrastructure will need to rise five-fold, from £10bn to £50bn a year, or 2.5% of GDP. Globally, that number is more like 8% of GDP. Much of the job of financing this investment programme falls to the financial sector: to banks, and to investors in companies’ equity and debt.”

The private finance sector, in turn, expects publicly-backed central bank and fiscal policies to serve their interests: to facilitate private sector investment in clean energy and other environmental programmes. And, above all, to guarantee private investments against losses. To “de-risk” private investments in (for example) forestry, energy and water, and to refrain from penalising carbon investments.

De-risking is the very reverse of the free market. It smacks of Soviet-style economics, where the state exercised the power to direct, guarantee and protect all firms from losses.

The difference today is that the state and taxpayer-backed central bank may not be exercising power over decision-making by company shareholders, but nevertheless guarantees and protects private investors, including fossil fuel investors.

Furthermore the state can also expect to carry the burden of losses, both financial and environmental and without enjoying the capital gains made from the extraction and exploitation of ecological assets that rightly belong to the community, or commonwealth.

In a world of borderless money and tax havens, private corporations make profits and capital gains. They seek public guarantees but work hard to avoid paying taxes.

The threat of climate breakdown now requires democratic societies to re-design and re-purpose the public good that is the monetary system. The task is to transform the system away from subordination to private interests and to aim monetary policy instead at public, ecological and societal interests.

We know we can do this, because we have done it throughout history whenever the state has embarked on war. The invasion of Ukraine is an example of how a powerful state – the USA – transformed the rules of the international monetary system to mobilise public resources for war and to freeze the belligerent’s access to financial resources.

Very recently, governments have transformed and adapted the system – sometimes overnight – to tackle financial crises like that which recently engulfed the US and its regional banks, as well as Switzerland and Credit Suisse.

Why we need a big green state to tackle climate breakdown

Our first task, therefore, is to demand that the democratic state, not the unaccountable private sector, must lead the way to decarbonisation of the economy.

The urgent and immense mission for central banks and the big green democratic state is to finance the transformation away from society’s addiction to fossil fuels in order to provide security to its citizens.

All these activities to protect human life on earth will take hard work and very large sums of money.

As a member of the Scottish government’s Just Transition Commission, I am fully aware of the costs of shutting down North Sea oil. Of dismantling oil rigs, compensating shareholders, and retraining and re-skilling the approximately 120,000 employees that support the North Sea oil sector to enable them to join more sustainable sectors. Of finding ways to compensate for the loss of an estimated £60bn plus in tax revenues from the sector. Of investing in both physical and social infrastructure in order to build resilience and protection for the young, the elderly and the vulnerable. Add to that the costs of recreating an economy based on self-sufficiency and on society’s finite needs for security, health, housing, education and other services, instead of infinite “wants” fuelling extraction, production and consumption.

We should not despair. The latest IPCC report is clear about the risks we face but is also emphatic in its optimism. The report’s scientists are at pains to remind us of the “multiple, feasible and effective options to reduce greenhouse gas emissions & adapt to human-caused climate change available now”.

That there is “sufficient global capital” is not contested. What is contested is whether that capital should be directed by democratic governments or by profit and rent-seeking private corporations. For humanity to survive the coming threats, I contend that society is required to wrench back democratic control over a valuable public asset – the monetary system – which is currently in hock to a small group of wealthy financial institutions.

In other words, to tackle climate breakdown we need massive state action. The kind of big state action recently mobilised – literally over a weekend – to protect a private Swiss megabank and its shareholders from making losses.