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21 January 2019

Alexandria Ocasio-Cortez’s Green New Deal demands the courage of the Roosevelt era

To transform the economy, Democrats must first confront how money works. 

By Ann Pettifor

The genius of Alexandria Ocasio-Cortez’s Green New Deal is that it provides a comprehensive plan to transform the US economy and tackle climate change. If implemented, the plan could transform economies around the world and ensure a liveable planet in the future.

But – and it’s a big but – the Green New Deal will require financing on a scale comparable to national warfare. We know this can be achieved. In 1933, President Franklin D Roosevelt found the money to finance his New Deal and fight a war against unemployment and poverty. His administration did so by overturning neoliberal economics and implementing policies based on Keynesian monetary theory and policies.

Key to the New Deal’s success was the Roosevelt administration’s clear understanding of the nature of money, and how the publicly backed monetary system works.

Public hostility, private addiction

Europe’s aversion to public debt is embedded in the German psyche. The Germans have the same word for debt – schuld – as they do for “guilt”  Yet while fears about public debt occupy the minds of economists and journalists, it’s a different story for the finance sector. For bankers, the public debts of Britain, Europe and the US are gifts that keep on giving. They can’t get enough of them. Demand for UK bonds currently exceeds supply, with investors so keen to get hold of government bonds that they are willing to pay negative rates for them. 

This is because the sovereign bonds of advanced economies like Britain, Japan and the US offer the safest collateral in the world. And as anyone that has ever had to raise a mortgage from a bank knows, collateral is key to raising finance. Once investors and big financial institutions like BlackRock acquire government bonds, they use this collateral in shadow banking, and to leverage additional borrowing as well as yield income (interest or “rent”).                                                                                     

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The safety and value of this collateral is almost entirely due to publicly financed tax collection systems backed by millions of law-abiding taxpayers. Put simply, taxpayers are the collateral that guarantee the safety and value of government bonds.

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In the run-up to the crisis, financial speculators were overexposed to insecure private collateral, including assets like sub-prime property. Debt leveraged against the falling value of these sub-prime assets would never be repaid.  The collapse in the value of private collateral was ultimately the cause of the 2008 financial crisis.

To counteract the crisis, central bankers expanded their balance sheets. In exchange for assets (government or corporate bonds), they gifted the private financial system extraordinary levels of new credit in attempts to reverse the contraction of the money supply.

Central bankers only exercise the power to generate new credit because of the public collateral – citizens’ tax revenues – that back the central bank and the currency they create. This collateral is not a fixed, physical asset. It is made up of citizens’ regular tax revenues. The strength of a nation’s currency and its central bank is dependent on the number of citizens paying into its tax-collection system. In turn, this conditions the strength of a nation’s currency. The stronger the nation’s currency, the more valuable its bonds as collateral, and the more power central bankers possess to create new credit. 

We can better understand this if we compare the taxpayer collateral that backs up the US Federal Reserve with that of Malawi. The central bank of Malawi, like the Federal Reserve, issues a currency. But Malawi has far fewer taxpayers than the US. Thanks largely to IMF policies and colonial history, the country also lacks an independent central bank, an effective criminal justice system for upholding contracts, and a sound tax-collection system. Consequently, Malawi’s currency – the Kwacha – has little value compared to the dollar. The weakness of its public institutions means that Malawi has virtually no money. Instead the country is reliant on other people’s money.

The double standards of haute finance

It didn’t take long after the 2008 crisis before the ideology of austerity reared its ugly head. Encouraged by Harvard and Chicago economists, politicians like George Osborne in the UK and Paul Ryan in the US curtailed the growth of public borrowing and government spending at a time of private economic failure.

Austerity contracted both public and private economic activity and income, and inflicted losses, pain and suffering on millions of citizens in the US and Europe. It led to popular resistance and political insurgencies – the costs of which are now proving severe. 

The deep irony of capitalism’s obsession with both austerity and the need to shrink the state is that this approach has also shrunken the availability of collateral for the private finance sector. Players in the shadow banking system of free-wheeling financial markets are heavily dependent on the public debt of government bonds for collateral. There is no private collateral – property, works of art, yachts, race horses, jewellery – considered as safe as sovereign debt. By rendering public debt scarce, politicians not only harm the interests of their citizens, but also the interests of Wall Street and the City of London 

Given that safe public assets are fundamental to the health and stability of the globalised private financial system, why would right-wing politicians contract their supply? The answer is ideology: politicians on the right are opposed to the collective role of the state, and think financial markets should be detached from regulatory democracy.


Until we fully understand how the monetary system functions, a wealthy elite will continue to extract rent from publicly produced collateral. Economic inequality will continue to widen across the world, while public anger and discontent deepen.

If enough people understood the latent power that taxpayers have over the private finance sector, we could demand that government bonds were made available to investors and speculators only if certain conditions were met. These could include the payment of taxes and the management of cross-border capital flows.

Roosevelt had the understanding, political will and ballast to confront the interests of Wall Street. Any international movement for a Green New Deal will have to summon the same courage. Campaigners in countries across the world will have to discover, and then deploy, their latent power to subordinate global finance to the interests of society and the environment.

Only then will we discover that another world really is possible.  

This is an excerpt from an essay in State of Power 2019, an annual anthology on global power and resistance by the Transnational Institute (TNI). You can read the full version here.