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The Power of Money
Book

The Power of Money

How Governments and Banks Create Money and Help Us All Prosper

Paul Sheard
Matt Holt Books, 2023

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Editorial Rating

9

Qualities

  • Well Structured
  • Eloquent
  • Engaging

Recommendation

The last few financial crises – and now the battle against inflation – have shown how questions about money and government’s control of it can be important and contentious. Economist Paul Sheard explains how the seemingly outlandish claims of Modern Monetary Theory are true to a degree, while at the same time showing how governments refrain from abusing their extraordinary power over fiat money creation. Along with Sheard’s practical reflections on inequality and taxes, the euro, cryptocurrencies and financial crises, this book contains most of what you need to know about “the power of money” today.

Take-Aways

  • Commercial banks create new money when they advance loans.
  • Governments do not have to balance their spending through taxes and borrowing.
  • The real constraint on government spending lies in the resources and capacity of the economy.

About the Author

Paul Sheard is the former vice chairman of S&P Global and a former senior fellow at the Harvard Kennedy School.

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    M. R. 4 months ago
    In my opinion as an economist (and after only reading this summary), this book confuses many economic concepts around the basics of money and monetary policy. In most countries, central banks are indeed only semi-independent from the government, as claimed in the book. Nevertheless, usually only a country‘s central bank may create new money out of thin air to steer the total money supply. All other economic actors, including commercial banks - and as well the government - are restricted in the form they can create new money. The government for example needs to either issue government bonds to receive money from investors (does not create any new money, only transfers money from private investors to the government as sort of a loan), which it usually does through the central bank‘s money market department or provide collateral in the form of, e.g. government bonds, with the central bank to receive a loan from the central bank (does create new money, but through the central bank). As such, the government itself cannot itself create new money, but it can take up loans (directly as loans from the central bank or indirectly as bonds for private investors) and then use that money for fiscal policy, i.e. for targeted investments into, e.g. the train infrastructure of a country or new roads to boost spending and investments during an economic downturn. The central bank, on the other hand, should not - and is usually prohibited - from any direct investments and only controls the money supply to prevent inflation. Hence, fiscal and monetary policy are two very different instruments - fiscal policy is a targeted investment and does not create any new money, while monetary policy has a general effect on all economic sectors and activity and instead steers the money supply by creating (or removing) money in the economy as a whole to prevent inflation. There is no artificial boundary between fiscal and monetary policy, they are per definition not the same and fiscal policy does not create new money, while monetary policy usually does.