Comment

The Elephant in the Room: Economic Determinants of Health

Richard Shelley and Sara McCafferty of Newcastle University argue that economic determinants of health have an equally if not more profound impact on individual and population health than the more widely discussed social determinants of health. Here, they discuss the creation and allocation of money, and how it impacts health through debt, inequality and economic crises.

Challenging the money paradigm

Few people will deny that one’s health is strongly influenced, especially at the lower end of the socioeconomic spectrum, by how much money one has.(1) Although it is common to think about this in terms of the individual, consideration at the societal level is perhaps more revealing. How our money supply is created, allocated and controlled determines what activities we are able to engage in and at what cost. This can be illustrated by inflation.

Inflation and electronic money

Inflation is the increase in price of a set of goods and services. This increase in price has been seen most dramatically in the cost of housing and it is used here to illustrate some common misconceptions of financial economics.

From 1995 to 2007 average house prices in the UK increased 350%.(2) It was portrayed by both the media and politicians that this was caused by a shortage of housing. However in this same period the population grew by just 5% and the total number of houses available (housing stock) grew by 10%.(3,4) Which raises the question: ‘What was the actual cause?’

The answer lies in the 630% increase in secured lending (i.e. mortgages) during the same period.(5) So where did all this money to buy houses come from? Did an army of savvy savers suddenly all take their money out from under the mattress and invest it in the banks so they could lend it out? The truth is much simpler but perhaps difficult to accept.

“When banks extend loans to their customers, they create money by crediting their customers’ accounts.” – Mervyn King, Governor of the Bank of England, 24 October 2012.(6)

The details of how money is created by private banks along with its implications are outlined in articles by Nobel laureates Milton Freidman(7) and Frederick Soddy(8) and by contemporary economics professors such as Richard Werner in the UK.(9)

Central banking regulations dictate the minimum fraction of cash deposits that each bank must hold for every unit of IOU represented by the electronic numbers in peoples accounts. This is termed the ‘reserve requirement’ and varies internationally and over time. Under this system private banks are able to benefit at our expense as the money they create and earn interest on dilutes the money supply and causes inflation.

They also determine where new money is allocated (in this case housing) and control the quantity of money in circulation through their willingness or unwillingness to lend, potentially giving them huge amounts of power.

How this affects our health

This relates to our health in numerous ways including: the burden of debt, problems caused by inequalities, and the psychosocial implications of the financial crisis. These three issues will now be considered in turn:

1) Debt

The existing monetary system means that virtually all new money entering the money supply is created as debt.(10)

From 2001 to 2008 the money supply doubled through bank created money from about £1tn to £2tn with a consequential doubling of debt.(11) Currently in the UK each household owes on average £5,972 (or, including mortgages £53,613).(12)

Increasing household debt (and by implication higher debt repayments) reduces the amount of money available for food, bills, rent and things like gym memberships or engaging in cultural or leisure activities. Debt and the financial difficulties it brings are known to be a major cause of stress.(13) They are also heavily implicated in family conflict, violence and break-ups.(14) This directly impacts individuals on a physical, psychological and social level leading to poorer health outcomes for individuals, families and in particular children.(15)

2) Inequality

Inequality is built into our privatised money system. Money is created, allocated and its quantity controlled by private banks for private profit yet guaranteed by the state and backed by the taxpayer who has to step in if anything goes wrong.(16) Firstly, compound interest has to be paid on all the debt that has been created (over £2tn).

This widens inequality as it draws money away from the poor and middle classes and towards the more socioeconomically privileged connected to the big banks and the financial centres they occupy.

Secondly, independent investors with sufficient capital to invest in property have been able to gain significant returns on their investment without actually creating any value, at the same time funnelling money from young to old and geographically from the poorer areas to the richer ones. For example, between 1977 and 2010 the income share of the top 1% has almost tripled and they now take home almost 9% of all income after tax.(17) These high levels of inequality are strongly associated with poor health outcomes as a country divides into ‘us and them’.(18)

3) The financial crisis

The financial crisis can be thought of as a bank run on a grand scale. When people were awakened to the fact that the banks’ financial stability relied on rising house prices (or at least stability of house prices) for the foreseeable future and noted that this was unlikely to continue, individuals and corporations came to claim the money represented by the numbers in their accounts.

However, under the current system banks only have a fraction of what their accounts say they have in terms of cash and central bank reserves (hence the term fractional reserve banking). The Royal Bank of Scotland for example held £1 of reserves for every £80 in its customers’ accounts at the time of the crisis.(19) With the overwhelming majority of money in the UK being digital(20) and the fear being that the electronic payment and ATM system could collapse, the Government decided to intervene. The higher levels of government debt which have followed the crisis have provided (controversially) the rationale for the austerity measures currently being experienced in the UK.

The immediate effect of the financial crisis was that it became much more difficult to borrow money from banks. This is of particular significance in our current system where people and companies are dependent on bank created credit to survive. When the rate of loans being paid back overtakes that of those being taken out the money supply starts to shrink and with it interest payments on personal and company debt (which have to be earned from the circulating money supply) become increasingly difficult to meet. As such bankruptcies and job losses have followed the crisis and with them depression and suicide, with one thousand extra suicides being attributed to the crisis in the UK alone.(21) Globally, tens of millions of people were pushed below the poverty line, which again implicates associated increases in morbidity and mortality.(22,23)

What can be done about it?

With such significant implications for public health, it is perhaps surprising that this issue is not more widely known about. Numerous sensible proposals exist for fixing this system including a recent publication from the IMF(24,25,26) but the prerequisite understanding of the how the system works eludes many. The issue of money as debt has been raised recently in articles that have been published in the Financial Times, The Guardian and The Telegraph and aired on BBC Radio 4 but it is still very difficult to say ‘banks create money as debt’ without the conversation closing down.

There is arguably merit in beginning the conversation again; in highlighting the health implications of these systems and advocating the need for a system wide, holistic approach to improving population level health and wellbeing. We encourage readers to engage in dialogue, in order to stimulate thinking and contribution to this discussion, to raise the profile of this issue within the public domain.

An excellent website with resources covering all aspects of this issue has been set up by the campaign group Positive Money for those whose interest has been sparked.

References: 

[1] World Health Organisation, Social Determinants of Health, accessed on 14/9/12 @ http://www.who.int/social_determinants/en/

[2] House Price Crash,  Nationwide average house prices adjusted for inflation, accessed on 17/9/12 @ http://www.housepricecrash.co.uk/indices-nationwide-national-inflation.php

[3] GOV.UK, Department for Communities and Local Government, Live tables on dwelling stock, table 101 and 611, accessed on 7/1/13 @ https://www.gov.uk/government/statistical-data-sets/live-tables-on-dwelling-stock-including-vacants

[4] Market Transformation Program. BNXS25: UK Household and Population Figures 1970 - 2030

[5] Bank of England Statistical Interactive Database, Series LPMVTVN

[6] King, M. (2012), Speech to the Governor of the Bank of England To the South Wales Chamber of Commerce at The Millennium Centre, Cardiff 23 October 2012

[7] Friedman, M. (1948), A Monetary and Fiscal Framework for Economic Stability , The American Economic Review, 1948

[8] Soddy, F. (1934) The Role Of Money, London, George Routledge & Sons.

[9] Werner,R. (2011) Economics as if banks mattered: a contribution based on the inductive methodology. The Manchester School, 79, (s2) p25-35.

[10] Ryan-Collins,J. Greenham,T. Werner, R. Jackson,A., (2011) Where Does Money Come From: A guide to the UK Monetary and Banking System London, New Economics Foundation.

[11] Bank of England,.  Statistical Interactive Database, Series LPWBF82 LPMAUYM

[12] Credit Action, (2012) Debt Statistics July 2012 accessed on 15/9/12 @ http://www.creditaction.org.uk/helpful-resources/debt-statistics

[13] Associated Press, Debt stress causing health problems, poll finds, 6/9/08

[14] Jewkes, R. (2002). "Intimate partner violence: Causes and prevention". The Lancet 359 (9315): 1423–1429. doi:10.1016/S0140-6736(02)08357-5. PMID 11978358.

[15] Smith, R. (2008) Financial crisis will hit mental health of the nation, warn Government advisors. The Telegraph, 21/10/08

[16] Ryan-Collins,J. Greenham,T. Werner, R. Jackson,A., (2011) Where Does Money Come From: A guide to the UK Monetary and Banking System London, New Economics Foundation

[17] Cribb, J. Johnson, P. Joyuce, R. Oldfield, Z. (2012) Jubilees Compared: incomes, spending and work in the late 1970s and early 2010s, The Institute for Fiscal Studies (2012),IFS Briefing Note BN128

[18] Wilkinson,R. Pickett,K. (2009) The Spirit Level: Why More Equal Societies Almost Always Do Better, 2009

[19] RBS (2008), The Royal Bank of Scotland, Annual Report and Accounts 2008. p29

[20] Bank of England Statistical Interactive Database LPWBF82 LPMAUYM

[21] Bar, B. (2012) Suicides associated with the 2008-10 economic recession in England: time trend analysis. BMJ ;345:e5142

[22] Dinmore, G. (2009)Anti-poverty campaigners appeal to G7 The Financial Times  14/2/2009

[23] Theis, D.  (2009) Crisis Hitting Poor Hard in Developing World, World Bank Press Release No:2009/220/EXC

[24] Positive Money, Our Proposals, accessed on 10/1/13 @ http://www.positivemoney.org/our-proposals/

[25] Benes,J. Kumhof,M.(2012) The Chicago Plan Revisited, IMF 2012

[26] Keen, S. (2012) Debt Watch, Manifesto accessed on 10/1/13 @ http://www.debtdeflation.com/blogs/manifesto/

About the authors

Richard Shelley is a member of Positive Money, has an MSc in Chemistry from Oxford University and was head of Math and Science at Tsinghua University’s School for Continuing Education and is currently in his final year of Medicine at Newcastle University. Sara McCafferty is a Researcher in Health Economics at Newcastle University; she is currently completing a PhD in Health Policy. The authors assume all responsibility for the opinions expressed. No competing interests declared, ethics committee approval is not applicable and no funding was received.