Policy Research in Macroeconomics

Out of thin air – Why banks must be allowed to create money

‘I know of only three people who really understand money. A professor at another university; one of my students; and a rather junior clerk at the Bank of England.’  Attributed to Keynes [1]

In a recent paper, ‘Money creation in the modern economy’[2] Bank of England staff explained that:

‘[B]anks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits … Commercial banks create money, in the form of bank deposits, by making new loans.’

Because there is widespread confusion about the role of banks in creating money, it did not take long for the Bank of England’s report to ignite debate on the comment pages of the Financial Times. In his regular column, Martin Wolf called for private banks to be stripped of their power to create money. [3]

Wolf’s proposals are radical, and would give a small committee – independent of the state – a monopoly on money creation. His ideas are based on the Chicago Plan, advanced among others by Irving Fisher in the 1930s, and shared today by the UK NGO, Positive Money. They agree that all ‘decisions on money creation would … be taken by a committee independent of government’.

Furthermore, Wolf argues, private commercial banks would only be allowed to:

‘…loan money actually invested by customers. They would be stopped from creating such accounts out of thin air and so would become the intermediaries that many wrongly believe they now are.’

Because I am a vocal critic of the private finance sector, many assume that I would agree with Wolf and Positive Money on nationalising money creation. Not so.

I have no objection to the nationalisation of banks. But nationalising banks is a different proposition from nationalising (and centralising) money creation in the hands of a small ‘independent committee’. Indeed, the notion to my mind is preposterous. It is an approach reminiscent of the misguided and failed monetarist policy prescriptions for controlling the money supply in the 1980s.

Second, the proposal that only money already saved should be made available for lending assumes that money exists as a consequence of economic activity, and equals savings. But that is to get things the wrong way around. Rather, it is credit that functions as money, and it is credit that creates economic activity and employment. Deposits and/or savings are the consequence of the creation of credit and its role in stimulating investment and employment. Employment, as we all know from our own experience, generates income – wages, salaries, profits and tax revenues. A share of this income can then be set aside as savings.

To restrict all economic activity to savings would be to contract economic activity to an ever-diminishing sum of existing savings. Furthermore, the restriction of all lending to existing savings would lead to higher rates of interest, because the level of savings is much lower than the level of potential economic activity and employment. Savers would be in a position to demand a higher return on the loan of their savings. This would return society to the dark ages, when investment and economic activity was subject to the whims of great feudal landowners, putting the financial elite in control of society’s surpluses or ‘savings’.

Money in an historical context As Douglas Coe and I explain in a recent PRIME report,[4] the UK monetary system – complete with the power to create money ‘out of thin air’ – was established back in 1694 with the goal, among others, of facilitating commercial transactions and the financing of the king’s wars. But there was an additional and just as important goal: to mimic the Dutch in reducing the rate of interest facing commercial interests. British firms, households and individuals were keen to bring rates down and into line with those that prevailed in the financially more advanced Netherlands. Lower rates made investment and employment viable.

A return to a system based on existing savings would cause rates to rise, and once again harm both commercial activity and employment. And this is not to mention the role that high rates play in stratifying the imbalance of power between creditors and debtors, and with it poverty and inequality.

Society’s long struggle to evolve away from dependence for economic life on the savings of the few (the ‘robber barons’) was precisely the point of the development of a sound monetary system. It called for a financial system that could provide the whole spectrum of society – individuals, farmers, entrepreneurs and the state – with affordable finance for the achievement of personal and public economic and social goals.

If directed at productive activity, affordable finance can be used to meet society’s essential needs. In countries without sound monetary systems, there literally is no money. In these countries, only the savings of the fortunate are made available for lending at, invariably, usurious rates of interest. The result is that poverty is deeply entrenched, investment negligible and unemployment high.

Money creation in a wider economic context Money creation must be understood within the context of the economy as a whole. To do so, it is important to emphasise that the money for a loan is not in the bank when a firm or an individual applies for a loan. It is the application for a loan that results in the creation of deposits, as the Bank asserts.[5] Without applications for loans, there would be no deposits.

In other words, while the banker or bank clerk plays a critical risk assessment role in the ‘creation of money out of thin air’, and while the state plays an equally critical role in transforming that private loan into public fiat money, it is the myriad numbers of Britain’s borrowers who are the real spur for the creation of money. When entrepreneurs and other borrowers apply for loans, they help create money (deposits) ‘out of thin air’.

If entrepreneurs and other borrowers do not apply for loans (because interest rates are too high, terms too tough, confidence low or business slack) the money supply shrinks, as now, and deflation may ensue. If the demand for and supply of loans exceeds the economy’s real potential then the money supply expands and inflation (of assets as well as wages and prices) is an inevitable consequence.

In a well-managed monetary system, private bankers should be regulated by the central bank to ensure that applications for loans are carefully assessed as both affordable and repayable, and that loans are aimed at facilitating transactions between economic actors engaged in productive, income-generating activity. Lending or borrowing for gambling and speculation would be restrained or even prohibited. Speculation, after all, does not increase an economy’s productive capacity, but speculative fevers increase both the risk that borrowers will not make the capital gains needed to repay debts and wider systemic risk.

Money’s dual nature While a sound monetary system such as our own can, like the sanitation system, be used to promote the interests of society as a whole, the system can also be captured by what is often described as ‘the money interest’ or ‘money power’.

As Geoffrey Ingham explains, money has a dual nature: it is ‘not only infrastructural power, it is also despotic power’.[6]

It is the fate of the British economy presently to be in the grip of a small, wealthy elite who effectively wield ‘despotic power’ over society as a whole. Wrenching that power away and ensuring the monetary system serves not only the private interests of the wealthy but all of society, including the public sector, is a vital challenge to our democracy. Ensuring that the financial system is the servant, not master, of the economy cannot be achieved on the basis of flawed monetary and economic theory. Nor can a more democratic allocation of finance be achieved by centralising the creation of money in the hands of a small, unaccountable committee of men and women.

The Wolf plan and flawed monetarist theory Monetarist policy prescriptions have arisen from flawed orthodox monetary theory. Remarkably, orthodox economists do not attach much theoretical importance to money. And when they do theorise about money, ‘Austrian’ economists conceive of it essentially as barter, based on a commodity. So for most orthodox economists, money, like gold or silver, is simply the most exchangeable commodity.

This conceptual error discounts money as credit, based on trust – a major flaw. For as we all know, most economic transactions are based on trust. To quote a Tory pamphleteer writing in 1696: ‘No trade is managed but by trust.’[7]

The ‘natural rate of interest’ is, according to the flawed conceptualisation of money, a consequence of the supply and demand for the thing that is money. Managing the supply of money came to be regarded by monetarists as essential to restraining inflation.

This is in stark contrast to the understanding of those who founded the Bank of England in 1694, and to that of our greatest economists. Money in their view is not the commodity for which we exchange goods and services; but the thing by which we undertake this exchange (increasingly, a bank transfer, credit card or prepayed card, such as London’s Oyster card). My credit card is not the thing for which I exchange goods and services, but by which I exchange those goods and services.

And that exchange is based on trust reinforced on the one hand by state institutions, including the legal, accountancy and criminal justice systems, and on the other (in the case of the UK) by a currency whose value is determined and issued by a nationalised central bank.

But the key to the UK’s money supply lies with borrowing decisions made at a micro level by hundreds of thousands of economic actors. It is in this sense that ‘money creation’ is a bottom-up, even democratic, process. To strip both entrepreneurs and bank clerks of decision-making about loans would be to strip society of many varied decisions about the necessity for and affordability of money. Yet this is what Martin Wolf and Positive Money effectively call for.

While wider debate on the nature of money and banking is to be welcomed, this debate must take us forward, not backwards to the flawed monetary theories of earlier generations.

Ann Pettifor is director of Policy Research in Macroeconomics (PRIME). The article was originally published in IPPR´s Juncture 21.1 Summer 2014.

[1] Quoted in Lietaer B (2001) The Future of Money, London: Random House. [2] McLeay M, Radia A and Thomas R (2014) ‘Money creation in the modern economy’, Quarterly Bulletin, 2014 Q1, London: Bank of England. http://www.bankofengland.co.uk/publications/Documents/ quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf. [3] Wolf M (2014) Financial Times, 24 April 2014. [4] Coe D and Pettifor A (2014) Bringing money back from ‘the underworld’, London: PRIME. [5] McLeay et al 2014. [6] Ingham G (2004) The Nature of Money, London: Polity Press, p4. [7] Quoted in Martin F (2013) Money: The unauthorised biography, London: Bodley Head, p129

87 responses

  1. This is exactly the keynesian view on economics that brought all of the worst financial crises. The system fractional reserve banks use would be labeled as fraud in any other domain. Just imagine this: I buy a car and decide to leave it parked at the dealership’s parking lot. Then another guy comes and wants that car, then the dealer proceeds to sell that guy the same car. This can go on forever until i or any other guy who bought the car comes to claim it. Now, this would certainly be labeled and punished as ”fraud”. The banks use the same system but they are considered to be operating within law. Any paper notes loaned that are not backed by savings are fake notes that create inflation and artificial booms that are, by definition, succeded by busts, or recessions, in which the economy, if left untouched by government central banks, contracts in order to restore its natural state.

  2. Does the proposal below to nationalise demand deposits have any merit? It is significantly different from PM’s.

    1. All commercial bank deposits that can be withdrawn on demand are nationalised (this would include deposits which incur penalties for withdraws without due notice etc.).
    2. The benefit of commercial banks not having to repay deposits that can be withdrawn on demand would be offset with a liability to repay a loan to the B of E equal to the value of the deposits nationalized. This loan would be a preferential loan, repayable before shareholders and bond holders and other creditors, secured on all the commercial bank’s assets. Repayment dates for this loan to the B of E should reflect the repayment dates specified in the loans that had earlier been funded with broad money created by commercial banks (as this would facilitate repayments and should not de-stabilise the financial markets).
    The above measures would return the benefit of broad money created to society and transfer the risk of corporate failure from society to the bank’s shareholders and long term investors.
    Society has acted, and been encouraged to act, as if deposits that can be withdrawn on demand are risk less. This belief will now become a reality.
    Nationalising demand deposits would inevitably cause a desirable correction to the market value of a weak bank, that had benefited from an expectation that the government would rescue a failed bank, and shares, bonds or other investments in this bank would suffer a decline in their value. Professional investors have always accepted that the risk of receiving higher interest rates or larger dividends could have a down side.
    3. Before the above nationalisation occurs the government would prepare for the privatization of the administration of deposits. In particular it would offer commercial banks an opportunity to tender for a contract in the administration of the deposits that are to be nationalized. This would enable existing personnel and computer facilities of a commercial bank to be gainfully employed (and provide the bank with some contact with its former customers). The commercial banks, when administering deposit accounts, would however be an agent of the state performing a role similar to that of a post master.
    If no commercial bank, or any other business tendering in the privatization, wanted to administer a particular bank’s customers’ accounts, then the nationalization of this bank’s deposit accounts would be widened to include nationalizing the personnel and assets that had been used to previously administer these accounts.
    4. After the nationalization commercial banks will be prohibited from creating money (see footnote I) and the responsibility for creating broad money would be transferred to the B of E.

    In this way the transfer of deposit accounts to the B of E should not involve a significant strain on the financial system during the transitional stage but would change the control of deposits held in the UK and end the risk of deposits, lent to risky third parties, being lost. Commercial banks would not have to be rescued by the government if they fail. Economies of scale would be achieved and this would benefit society. A major economy would be the speed of settlements. Settlements have been, and will continue to be, made from current bank accounts but, after nationalization, these accounts will be controlled by the B of E. After nationalization, and when the computer systems are appropriately aligned, settlements could become instantaneous.

    The broad money the B of E will electronically create should not be a problem. The B of E has substantial experience in selling gilts, gold bullion etc. to the capital markets ii. The new broad money created should be sold to any party that wants to lend money and not be restricted to commercial banks. This would create a much more competitive lending market because commercial banks currently can lend money they created at zero cost and other lenders cannot compete against such an enormous advantage. This advantage caused commercial banks to have a monopoly to lend money in the UK. 

    Other problems, such as the treatment of deposits that cannot be withdrawn on demand, must be addressed but not in this comment.

    1. The existing laws prohibiting forgery and counterfeiting money should be extended to include commercial banks.
    2. For example the ILTR auction example uses a ‘uniform price’ format. See http://www.bankofengland.co.uk/markets/Documents/money/iltrauctionexample.pdf

  3. Under an endogenous system (which virtually all modern financial systems are) a central bank reacts to the demand of private businesses and the public for new credit and currency by practising open market operations (buying and selling of Treasury securities) as a mechanism for targeting what is considered to be an acceptable range of short-term interest rates. Note that this is a reactive mechanism, not a command and control mechanism. Putting it another way, interest rates are the primary driver and the volume of money is a residual.
    What many monetary reformers do not seem to realise is that it is entirely possible to have an endogenously operating financial system in which all money used within the economy is created by the state (i.e. no money is created by commercial financial institutions). Thus, having an exclusive monopoly of money creation by the state is not necessarily synonymous with having direct control of the money supply by the state.

  4. Well, I’m just trying to follow the arguments. Ann’s piece initiates a critique of PM which seems to completely misunderstand it. She then refuses to respond to the authors she’s just attacked.
    I don’t myself claim to understand the full balance of costs and benefits of PM but I come to a site like this to try to see people discuss it.

    I have no idea what Ann’s motives are, but they look like the cowardice of an impostor who doesn’t really understand the arguments and doesn’t want that exposed in the ensuring discussion.

    1. Nicholas insulting people is not the best way forward. To accuse the author of “cowardice of the impostor” is simply abuse posturing as comment. The comments from every quarter to Ann’s original article are available to all to read and think about, we don’t need personal insults to improve our understanding. There is no rule that an author has to respond to all the comments received. If you were to apologize for going over the top that would be appreciated.

    2. Jeremy, with respect…. Ann is stuck in a belief system – worship of John Maynard Keynes and the “Golden Age”, she responds only selectively when she thinks that belief system makes sense and might sound convincing. However, she has been unable to convincingly argue that money should be created by banks. The simplest argument for monetary reform is that the government can create money without creating a corresponding debt. Banks cannot, when they create money they must create a corresponding debt; this has warped society and has it dripping in debt. If they were forced to be pure intermediaries (100% money) then the debt in society would be completely under control. There need be no shortage of credit as the treasury/BOE could lend it to banks to be on lent to customers, this way the seignorage would benefit the tax payer. Ann in my opinion has most of her economics correct, however, with regards to who should create our money she has made a massive intellectual error.

    3. Thanks Jeremy,
      It’s very nice of you to request an apology – I mean that – it’s very gentlemanly.

      I don’t hold any particular candle for the model that Ann has written an article attacking. It seems to me that she’s misunderstood what she’s attacking, but having attacked, when her opponents respond and seek to do what one does in a debate – test arguments and identify common agreement – she draws up stumps and won’t play. It made me wonder whether she’s faking it – whether she fears that proper engagement might reveal that she doesn’t understand what she’s talking about.

      That’s not an insult – or perhaps it is – but what I can say is that it was my first reaction when I saw her response. It does seem that she has the intellectual background to understand what she’s arguing about – so perhaps my initial reaction is wrong, but that just makes the mystery deeper. Why would she go to the trouble of starting a debate that she then won’t participate in?

    4. Nicholas, you – like others commenting on this site – make my point. No more need be said.

  5. I am late on this scene as I arrived only after watching Ann at the Al Jazeera interview with a reconstructed Lord Adair Turner in a Head to Head programme last week.There are a lot of good ideas circulating and my goodness we certainly need to sort out the money business.
    Here in Scotland I have recently finished a book co-authored by an economics graduate who became a senior trade union official. |Together we set about tailoring a banking and monetary system for an independent country starting from scratch – which Scotland might very well become in the near future.
    That focuses the mind upon practicalities. We came up with an eclectic combination of political logic in Part One and in Part Two set out a programme of banking and monetary policy called Constitutional Money.
    I believe it addresses all the points raised in this conversation save those of Prof. Dirk Bezemer which I regret seem irreconcilable with any significant change from the status Quo.
    The book is called Moving On and is reviewed on
    and if it seems of interest it can be purchased directly from this website.

  6. An excellent article.
    I was quite shocked when the normally acute Martin Wolf promoted the “Positive Money” agenda. I have the greatest of respect for him, but he did seem to fall into the trap of confusing currency and credit. If only more economists would spend a bit of time understanding the modern monetary system (that is, fiat) and throw away all those books which think that leaving the gold standard didn’t change things.

    Only the government creates currency. The laws are clear, and enforced by violence. That gives the currency value. And creation of currency (that is, private sector wealth) is done by running a government deficit. Which should always be subject to democratic accountability, since it can be abused.

    The banks, regulators and politicians have failed in their mission of directing credit creation towards productive assets, as opposed to financial assets. But the system is reasonable. People need to up their game.

    Banks create credit, not currency (although the credit they create may stimulate economic activity, and thereby justify more issuance of currency).

    And there is no such thing as a debt free currency.

    Without an obligation (a debt) it is worth nothing. Money is nothing more than a quantification of social obligations (favours earned, favours owed) in a modern society where the actors do not know each other, and require a third party to keep the ledger.

    That party is the state.

    1. kim,
      This debate is filled to the brim with people like yourself who believe their opposition do not understand…. yet you yourself possess an enlightened understanding on the topic. I disagree with most of your analysis.

      “There is no such thing as a debt free currency”. The currency is not the issue. It is how the money comes into existence that is the issue. The current system is a debt based monetary system. This point is not superfluous and giving the banks the power of issuance via the creation of loans is not a necessity nor should we prefer it as the mechanism of issuance. The nation should and could issue the currency without any debt to anyone as has happened at certain times throughout history. Taxes would be lower, that’s just the beginning of the benefit.

      As for the gold standard that’s simply not the answer nor are your anarchist sympathies….

  7. Ann Pettifor’s response to Ben Dyson above is stupid and offensive, and for the following reasons.
    First, she claims: “Positive Money’s approach is so incredibly narrow. Money creation is just one part – a cog in the wheel – of how the economy works. It cannot be discussed without discussing the rate of interest, employment, and control over the mobility of the money created…at the very least.”

    As to interest rates, had AP bothered reading PM literature, she’d have discovered that PM and co-authors had plenty to say about interest rates in their submission to the Vickers commission. Specifically they argued (as have others) that interest rates are a poor way of adjusting demand. Thus if PM do tend to ignore interest rates, it’s for some well thought out reasons.

    As for the idea that PM is not concerned about “employment”, there again, if AP had actually bothered read PM literature, she’d find the words “employment”, “unemployment” and similar mentioned in about every other paragraph.

    As for “control over the mobility of the money created..” God knows what that’s supposed to mean. But under full reserve, those with money are about as free to do what they want with it as under the existing system: with the obvious exception that (as part and parcel of the rules of FR), people cannot have their money loaned on and keep the interest while sending the bill to the taxpayer when it goes wrong.

    As for AP’s claim that PM regards interest and employment as “areas that you have in the past dismissed as irrelevant to the debate” that is just thick headed, moronic, stupid, offensive, insulting drivel, and for reasons I’ve spelled out above.

    Then AP claims “I also think there is a danger of Positive Money turning into a kind of cult.” Well that’s a charge which is ridiculously vague and impossible to prove one way or the other. One can perfectly well call AP fans and every religion and political party a “cult”.

    Next, AP claims: “..the way in which its (PM’s) protagonists insult and attack others, goes beyond the normal debating rules”.

    Wow. In view of AP’s own above mentioned moronic insults directed at PM, all I can say is the words pot, kettle and black spring to mind.

    On a positive note, however, I should give AP credit for something: she allows ANY comments to be published here. I.e. she is happy with free speech. That’s in contrast to another anti-full reserve blog which adopts the Stalinist approach to free speech: you can say what you like as long as you agree with me. That’s the University of Missouri at Kansas City blog: “New Economic Perspectives”. Although authors at the latter blog HAVE SWITCHED over the last few weeks from screaming abuse at full reserve to admitting that they themselves aren’t 100% clued up on the subject (painfully obvious to anyone WHO IS clued up on the subject).

    1. Ralph, our general principle is to accept comments unless they are very insulting, offensive , illegal, racist, utterly excessive (i.e. if one person posts endlessly, or provides an over-long comment), or completely irrelevant to the issue. We try to err always on side of accepting comments as part of the give and take of debate. But we do not undertake to accept or leave up absolutely ANY comments… And Ralph your comments here do border on the gratuitously/unreasonably insulting, in fact in truth they go well over the line between strong debate and simple insult. Calling someone’s comment “thick headed, moronic, stupid, offensive, insulting drivel” is not really a positive manner to take debate forward. I would ask you to keep comments on this site within more reasonable adjectival bounds please in future. We ask readers generally to remain polite in form even when they strongly disagree with someone else’s article or comment.

  8. RE:
    “..the restriction of all lending to existing savings .. return society to the dark ages .. putting the financial elite in control of society’s surpluses or ‘savings’.”

    What is the difference from today in this regard ?

    In the usa for example, you have a small number of anonymous owners of the federal reserve, a private organisation, who get paid 6% annually on the mountain of electronic money the fed has created out of thin air. Does this not amount to quietly stealing a fraction of the wealth of every citizen who holds cash ?

    Furthermore, the ability to ‘print money’ at whim creates an irresistible temptation for governments to spend irresponsibly, and worse in the case of the USA whence plane loads of freshly printed dollars head into conflict zones for purposes like bribery of and what not.

    RE the ‘dark ages’ reference, interestingly while Europeans were first bumping into each other in the dark after climbing down from the trees, for centuries there had been a flourishing set of civilisations in the East, that used gold and silver as currency. (So much wealth in the East in fact, it set the Europeans drooling once they discovered these places, with sad consequence like invasion and enslavement and even forced drug addiction imposed on the East by the West when they ran out of silver to buy things from china..)

    It gets better. There are documented examples from North Africa and Turkey for example, where they simply could not find any recipients for charity. The collected Muslim poor-dues (zakat, 1/40 of one’s excess wealth) was then left out in a public place for anyone who found themselves in need, to take what they needed. This with NO income tax.

    What a contrast to the unbroken 30 years of deficit spending by successive british govts, spending more than they take in tax, only sustained because interest rates on govt borrowings kept falling from the 80s. But these are now at rockbottom, and as they say ‘The only way is UP’…

  9. Answer to Frank Restly’s most recent comment above:
    “And so the committee under PM’s system is not truly independent of political influence.” Wrong again. The committee decides what STIMULUS is suitable, as do existing central bank committees, like the Bank of England Monetary Policy Committee. The fact that the committee needs to get an idea as to what government might spend stimulus money on before stipulating the total amount of stimulus money does not mean that politicians have any say WHATSOEVER on the total amount of stimulus that is suitable.

    Suppose a garage is given the job of putting enough fuel in a car to get the car to go 200 miles. The car owner would need to tell the garage owner what sort of car was involved and how fast the driver intended driving otherwise the garage wouldn’t know how much fuel to put in. That doesn’t mean that the driver has any influence on how far he will get with the fuel (assuming he’s truthful about what sort of car is involved and how fast he intends driving). The distance the driver will get is set at 200 miles.

    1. Ralph,
      “The fact that the committee needs to get an idea as to what government might spend stimulus money on before stipulating the total amount of stimulus money does not mean that politicians have any say WHATSOEVER on the total amount of stimulus that is suitable.”

      Think about what you are saying here. Just because the committee decides that $100 trillion or $1 billion or whatever amount of money they recommend is the right number DOES NOT MEAN that a bunch of politicians will spend all of that money into the economy. The committee could print up any amount of money that they want, the politicians could simply refuse to spend all or part of it.

      Hence, the committee needs a political commitment that funds made available by the committee will actually be spent. You seem to be jumping to the conclusion that any amount of money made available by the committee will automatically be spent by the government.

    2. Ralph,
      “The fact that the committee needs to get an idea as to what government might spend stimulus money on before stipulating the total amount of stimulus money does not mean that politicians have any say WHATSOEVER on the total amount of stimulus that is suitable.”

      Committee decides that $100 billion is suitable. Politicians spend $30 billion of that available $100 billion.

      Politicians (not committee) have made the decision that $30 billion is suitable.

  10. Ann – in answer to your early point stating: “……. the proposal that only money already saved should be made available for lending assumes that money exists as a consequence of economic activity, and equals savings.” implies a basic and unfortunate misunderstanding of Positive Money’s position. I quote from the FAQ section of the PM website:”There is no reason why lending should be more restricted in the new system. If there is a lack of credit for businesses banks will be able to borrow from the Bank of England to on lend into the economy. This could be through standing facilities at the Bank of England (i.e. overdrafts). So there need not ever be a lack of credit. “

    1. Dear Sue, SPOT ON!!! This is the crucial blow to Ann Pettifors argument that can not be denied. There never needs to be a shortage of credit, hence her argument that we’d go back to the middle ages is absurd to say the least.
      If the BOE can originate the money to be on lent into the economy this solves the crucial problem. This way the tax payer receives the seignorage and society will tremendously benefit from the change.

  11. With apologies for having arrived late on the scene and read only the article and none of the comments but Anne P is mistaken in her understanding of the proposal. There as a pool of money set by this Committee (this part of the proposal IS moot) that circulates debt free to match the productive capacity and ‘speed’ of its flow through the economy. Once issued it STAYS THERE going round and round (albeit some at different rates to others). Sir Simon Jenkins likens this to the way blood circulates in the body. I liken it to oil in the sump of a car engine.As the economy expands (or contracts) the Committee (akin to MPC) deems that more (or less) of THIS be issued/withdrawn. This variable part corresponds with Social Credit’s National Dividend. PROVIDED THAT people spend all there earnings back into circulation (Say’s Law) there is no reason for any lending. There is enough money (as set by the Committee)to buy all we produce.
    In practice, we get Banks to settle our various transactions with each other and in doing so some/much of this debt free money goes on a slight diversion. Few spend all their earnings back into circulation, preferring to save some for various purposes. This is purchasing power foregone by savers available for someone else to borrow to purchase the goods (consumption or capital) that would otherwise go unsold. This is another diversion from the main money loop. It is this tertiary loop that Anne P seems to think PM advocates as the main loop.
    I have only recently been introduced to PM and have just completed reading the book “Modernising Money”. If I, as a humble engineer can see why can’t Anne?
    Do I need to say more?

  12. Frank,I can only reiterate what Ralph said to you.I am not here to debate how we spend our state money,mine was just a suggestion.(hopefully a useful one)What we would actually spend our monet on is a matter for full and open democratic debate.If you do not like wars then do not vote for politicians that send us to war….though that is very difficult I know.

    Importantly by the same token if the economy was in full boom mode then one would expect that there would be a need to curtail state spending and even raise taxes.During such times surplus funds for foreign expeditions would likely disappear,besides our defense budget hardly varies year to year and we have to act within that parameter by and large.

  13. Ann,
    I am also a follower of the “cult” of Positivemoney.(Funny how groups subject to disdain are always referred to as cults)I think I choose to agree with them through my own experiences and not through any brainwashing.I am always looking for a killer argument to blow a hole clean through PM, but I have as yet, not heard a decent one anywhere.

    I think the reason PM plays down unemployment is that it is at its worse as a symptom of economic busts that are caused by crashing domestic property values or other market speculations.Holding down the money supply is only half the story, the second half being PM’s Sovereign Money proposals which will create the demand where the private banking system cannot take up the slack.The government can create jobs directly and has no need to wait for investors to take up the daunting challenge of getting business going again.

    For example,the government could simply hire building firms to build more affordable housing.This would create employment and produce cheaper houses in one stroke.More employment means more money in bank accounts and the money supply is boosted, with the added bonus we would then have lower mortgages and rents for everyone.
    Seems logical enough to me ,what is not to like?

    1. Vince,
      “For example,the government could simply hire building firms to build more affordable housing.”

      Or it could hire soldiers to invade a foreign country. The problem with thinking like this is that it ignores the politics of the role of government.

      Politician group A would say that invading the foreign country because such and such leader looked at us funny is a power relegated to the federal government. And so group A (under the auspices of a Constitutionally limited government) says money should be spent on soldiers.

      Politician group B would say that having the federal government build affordable housing improves social welfare even though there is no Constitutional mandate for affordable housing.

      Politician groups A and B get together, and in the spirit of “fairness” approve both or neither expenditure.

    2. Frank,
      Had you actually read Positive Money literature, you wouldn’t have made that comment. Under the system PM proposes, their money creation committee (which in the UK is in effect just a merging of the existing BoE MPC and the Office for Budgetary Responsibility) that committee decides how much money is to be created and spent net of taxes. It is then ENTIRELY UP TO the democratically elected government of the day to decide how that money is spent, and/or whether it’s used to cut taxes. Thus your group A and B problem just doesn’t arise.

    3. Ralph,
      PM system creates $1 billion. Congress decides to pay soldiers $1 billion to burn corn crops. Price of corn rises.

      PM systems creates $1 billion. Congress decides to pay farmers to plant $1 billion in corn seed. Price of corn falls.

      Was $1 billion in created money too much or too little? How does the money creation committee decided whether too much or too little money is created without any control over how that money is used?

      Government can use money to subsidize either production or destruction. Political Group A wants government to subsidize destruction. Political Group B wants government to subsidize production.

    4. Frank,
      Good question (except that I think deliberate destruction is a silly example to illustrate your question: governments don’t actually go in for deliberate destruction, unless you count war as deliberate destruction).

      Anyway, all you’re saying is that multiplier will be different as between types of spending, and as between extra spending and tax cuts. Thus the money creation committee could not simply say “you, the government, can spend an extra £Xbn in the next six months or cut taxes by £Xbn or whatever combination of the two you like”.

      But that “multiplier difference” is a problem that exists under the EXISTING SYSTEM, so PM’s system is no worse in that regard. That is, under the existing system, if government wants to implement fiscal boost to the extent of $Y, government economists are well aware that the multiplier is different as between different types of spending (or at least they OUGHT to be aware of that point).

      In short, the committee under PM’s system would need to liaise with government when deciding how much money to create (i.e get some idea first what government intended spending the money on, or how much of the money was devoted to tax cuts).

      Re your final paragraph and political group A and B, you still don’t get the point that there is only ONE POLITICAL GROUP: the democratically elected government.

    5. Ralph,
      “…except that I think deliberate destruction is a silly example to illustrate your question: governments don’t actually go in for deliberate destruction, unless you count war as deliberate destruction.”

      Not so silly. See:


      “The Agricultural Adjustment Act (AAA) was a United States federal law of the New Deal era which reduced agricultural production by paying farmers subsidies not to plant on part of their land and to kill off excess livestock.”


      “In short, the committee under PM’s system would need to liaise with government when deciding how much money to create…”

      And so the committee under PM’s system is not truly independent of political influence.

  14. Ann,
    You have presented an argument why banks should be able to create money out of thin air via the lending process. I will add that the lending / repayment process allows the money supply to both expand and contract at the will of private actors.

    I agree that banks should be permitted to create loans and deposits at the will of potential borrowers, but two questions arise:

    1. Should the government be a participant (borrower / loan repayment) in the money creation and destruction process?
    2. How should a government regulate the creditor / lender relationship when it is itself a creditor?

    Chicago plan supporters would say that government should print / destroy money as needed and rely on 100% reserve lending to regulate the private banking industry. Hence, the government’s financing needs do not compromise it’s regulatory power.

    The problem with this approach is that if you accept the government’s ability to print money on a whim, why would you need a banking / credit system in the first place. Lose your wallet – have the federal government replace the contents. Lose your job – have the federal government replace your wages. A credit system of money creates accountability for your actions.

    I think a better approach would be for the government to rely on taxation and equity claims against future taxes for it’s financing needs while retaining the central bank as lender of last resort for private financing only.

    1. “I will add that the lending / repayment process allows the money supply to both expand and contract at the will of private actors.” Hilarious. That “will” resulted in private banks in the UK expanding the stock of private bank money like there’s no tomorrow prior to the crunch. Then came the crunch (partially caused by that “will”). Then private banks brought their money creation process to a grinding halt, as they always do in a recession, thus exacerbating the recession.
      Yep: allowing that rapid expansion and contraction of the private money supply is a real genius of an idea.

    2. Ralph,
      “That will resulted in private banks in the UK expanding the stock of private bank money like there’s no tomorrow prior to the crunch. Then came the crunch (partially caused by that will). Then private banks brought their money creation process to a grinding halt, as they always do in a recession, thus exacerbating the recession.”

      Please explain how things would have been any different under a Chicago Plan 100% reserve system. As I understand it, a 100% reserve system still allows for private credit, and that private credit can still expand and contract. Even if we fix the amount of dollars available to lend (100% reserves), that does not mean that all 100% of the available reserves will be lent out. The amount of reserves that are lent out at any time is still subject to the will of the bank and the will of the borrower.

      Does free will enter into your economic thinking or is it assumed away?

    3. Full reserve won’t totally do away with outbursts of irrational exuberance or the opposite. However, under full reserve, lending is funded just by shareholders and those shareholders know they’ll lose out if their money is loaned out in silly ways. That concentrates the mind. In contrast, under the existing system, the private banking system can embark on an orgy of silly lending, sure in the knowledge that government will bail it out when it goes wrong.

    4. Ralph,
      Does the act of selling shares create reserves available to lend?

      With a credit monetary system both a loan and money are created in a single act – money is lent into existence. Does it work the same way with shares in a bank – money is created by the sale of shares?

      “However, under full reserve, lending is funded just by shareholders and those shareholders know they’ll lose out if their money is loaned out in silly ways. In contrast, under the existing system, the private banking system can embark on an orgy of silly lending, sure in the knowledge that government will bail it out when it goes wrong.”

      The bail outs that you refer to normally involve the federal government taxing its citizens to pay for the mis-judgements of the few or putting those private mistakes on the government credit card.

      The simplest solution is to tear up the government credit card and don’t let the government print money. Whether bail outs happen or not is left to the voting public, but if they happen they are funded by either taxation or government equity.

    5. One of the problems is that Governments can no longer literally print money into circulation. In the ’30s that was what Keynes suggested. He encouraged HMG to undertake a programme of infrastructure work. But because of the UK truck Act (now demised) it was obliged to pay the workers in “coin of the realm”; hence “Printing Money”.Lord Skidelsky has called for a modern day version of this but none has been found; we no longer use vast amounts of token money, it all being created on the ledgers of the banks. It seems to me that PM wants to replace such ledgers with the ledgers of a Money Issuing Committee (MIC). So are PM’s critics taking the mic?

    6. This is a comment on Frank Resty’s piece of July 1 talking of Governments Printing Money. It has been wrongly inserted (mia culpa!)

  15. In practise, it would not take long for independent committee of experts to come up with crank theories why slack in the economy was not caused by lack of aggregate demand.
    They could theorise that high unemployment is ‘structural’ caused by labour unions distoring natural labour market activity, unemployment benefits discouraging job seeking, and minimum wage making labour too expensive.

    Reason for keeping unemployment high could be a want to make economy act like a ‘screening system’ that separates ‘bad’ people from the rest – bad people being those who would be unable to find jobs when jobs were limited. So it would be a system that automatically screens out and punishes bad people. We have to remember that we live in a world where racial hate is a thing, and haters do not want good things to happen to people they hate, it is quite the opposite.

    Some say that it may have already happened, to some degree.

    1. My variation on PM’s MCC would be to declare it Autonomous rather than Independent(just as is today’s MPC actually) charged with determining the level of money supply needed to balance unemployment and inflation. The Government of the day would set the parameters (equivalent to the present 2% +/- 1% inflationary target of the MPC).However, to be honest, I have a better method up my sleeve but on that, I am keeping my powder dry. I need PM’s revolution to succeed before undertaking a counter one. The only difference in my scheme is that the MCC would become redundant because HMRC now has the necessary information to do the job automatically. Is that tantalizing or not?

  16. Ann,
    Your claim that Positive Money and its supporters ignore “the rate of interest, employment, and control over the mobility of the money created…” is patently ridiculous. To illustrate, the submission to the Vickers done by Positive Money, Prof. Richard Werner and the NEF went into great detail and cited numerous works to back their claim that interest rate adjustments are a poor way of regulating the economy.

    As for the idea that Positive Money and its supporters (e.g. me) are unconcerned about employment and unemployment, that is a grotesque and totally unwarranted insult. If you bothered to look, you’d find I’ve written a lot about unemployment. Never mind the concern shown in Positive Money’s publications for the unemployed.

    You then have to cheek to accuse people of “insulting and attacking others”. Moreover, even if some people have an abrasive style, that is totally irrelevant. Tim Worstall regularly uses the “f” word and the “c” word in his blog post. That’s not my style, but I find it funny. It’s his style and bully for him. It doesn’t alter the fact that he is smart: at least the Adam Smith Institute regularly publishes his articles.

    The reality is that you just can’t answer the criticisms of your arguments put by Positive Money and others, isn’t it?

    1. Ralph,

      The debate will continue regardless. The new generation of economics students will most certainly focus on Money & Banking out of need in the years to come. The simple truth is that with interest rates at near ZERO and debt so high globally we need an alternative to a debt based monetary system. If we raise rates it would be suicide but if we continue to create more and more debt it will also be suicide – the current system is trapped between a rock and a hard place & academics will realise that you’d hope!!!

    2. Long before my conversion to PM (just to wind up those who think it’s become a religion), as a control system engineer I worked out that the use of Interest Rates to stabilise the economy was at best unsatisfactory, with far too many side effects. In the days prior to this policy, we did at least have proper fractional banking. The authorities used the numerical value of the fraction as a control lever. Joining the EEC put an end to this!

  17. VII – THE DIRECTION OF FUTURE POLICYIn the question of what steps should be taken to put matters right, I can only suggest the general direction in which our future policy should point; for I myself do not believe that there exists any perfect cut-and-dried scheme which is likely hereafter to be adopted, lock, stock, and barrel, as our future monetary system. Moreover, there are many other technical and psychological considerations which would be necessary in order to achieve peace and contentment amongst the people. The main objectives however, should include:-
    1.) State control and State issue of currency and credit through a central organisation managed and controlled by the State.
    2.) Stabilisation of the wholesale price level of commodities. That is to say, a fixed and constant internal purchasing power of money; so that a pound will buy to-morrow what it bought yesterday; an honest pound, not a fluctuating pound. And this can be done by so issuing and regulating the volume of available credit and currency that it shall at all times be adequate to permit of the purchasing power of the consumer being equated with the volume of production; not by limiting the purchasing power, but by firstly increasing purchasing power more in proportion to the productive capacity of industry.
    3.) Fixation of foreign exchanges by foreign exchange equalisation funds, and agreement with Empire countries and all other countries willing to fall into line; and, once this was accomplished, the removal or diminution of trade barriers which to-day protect the countries from the results of a bad monetary system.
    4.) Any additional supply of money should be issued as a clear asset to the State; so that money will be spent into existence, and not lent into existence.
    5.) The fluctuating quantity of gold lying in the vaults of the banking system should never be permitted to govern the volume of credit and currency needed by the country.
    6.) The elimination of slumps and booms; and more direct procedure for eliminating unnecessary poverty
    7.) The abolition of the Debt System where all credit is created by the banks and hired out at interest to the country.
    8.) Absolute State control over all foreign lending; and the adoption of the general principle that our foreign trade should be so conducted as to preserve –
    (a) the interests of the Home Market,
    (b) the interests of the Empire countries and the English-speaking nations,
    (c) the interests of Foreign nations, and that this principle should particularly apply in the case of Home production and foodstuffs.


    1. The previous paragraph is worth quoting:
      6.) That the true wealth of the nation does not consist in the hoarded gold of the Bank
      of England, nor in the book-entries standing to the credit of merchant bankers. The
      wealth of the nation lies in its capacity to produce goods, and its capacity to consume
      goods, and its capacity to exchange its surplus goods for necessary importations from
      other countries. If the City of London, with its banks, its gold, banknotes, and its
      money, were suddenly to sink into the bowels of the earth and be no more, the
      country would go on, and, with incredible rapidity, would recover from the shock and
      build a new and perhaps a better City. But if the country vanished, the City of London
      would be dead for ever. In the last resort, production and consumption could continue
      without money; but money would be useless dross without production and consumption.

  18. Ben…thank you for the comment. I really see no point in responding to the points in your articles. Sadly, we have so little common ground. My concern in particular is that Positive Money’s approach is so incredibly narrow. Money creation is just one part – a cog in the wheel – of how the economy works. It cannot be discussed without discussing the rate of interest, employment, and control over the mobility of the money created…at the very least.
    And these are areas that you have in the past dismissed as irrelevant to the debate…So I see no basis for a debate.

    PS: I also think there is a danger of Positive Money turning into a kind of cult. The way in which its protagonists insult and attack others, goes beyond the normal debating rules. I find the debate very unpleasant, and that is another reason I do not want to engage. Life is short, and there are far more important things – the plight of Argentina for example – to do than engage with abusive characters…

    1. Dear Ann,
      RE: Your response to Ben Dyson.

      I think to be fair the abuse was a two way street. In the April/May discussion on your blog Neil Wilson (who clearly shared your views) was particularly abusive to say the least against those voicing genuine arguments. Rather than respond specifically to genuine points raised by myself and many others he simply used labels and was particularly rude. “You’re all religious nuts” & “you’ll all be disappointed in the end”, “just change your beliefs”.

      I agree with you that this type of behaviour isn’t helpful and despite our passion for this topic we should always be polite at the very least to one another. The emotion needs to be removed from the debate if we are ever to come to some sort of consensus. I myself am very happy to be proved incorrect as it moves one closer to truth, a better economic system and a better society.

      But by the same token I think it would be a shame for the debate to stop here. The debate will have to continue regardless at some stage as the financial system continues to eat the real economy alive.

      I think what bothers PM and its members the most is that you haven’t actually responded to their counter claims whereas they have to you in a very timely fashion. Denial of that fact can only be described as cognitive dissonance.

  19. Dirk,
    Your first paragraph is nonsense. You start by saying, quite rightly, that there is a large amount of trade credit and other forms of debt. You then say “If official money is constrained the public invents new forms.” Those are two completely unrelated statements.

    I.e. you seem to be under the impression that trade credit is a form of money. It isn’t. Money is a debt (or anything else, e.g. gold coins) which is widely accepted in payment for goods and services. That’s the definition you’ll find in economics dictionaries.

    Now you try going to your supermarket and buying groceries with a “promise to pay” issued by some local plumbing or engineering firm. You’d be laughed out of the shop.

    Next you ask: “Also, how would 100% reserves work?” Well can I suggest you read some of the material written by proponents of full reserve? You want to know how car engines work? I suggest reading a book on the subject or doing a course at a local college. Anyway for a brief introduction to full reserve, I suggest the following.



    Milton Friedman’s book “A program for monetary stability”, 2nd half of Ch3.

    Last and least, there’s a brief introduction to full reserve at the start of the paper of mine linked to just above.

  20. The problem here seems to be “money interest”. We need a level of interest to restrain excessive borrowing, especially for speculation in financial instruments or non-productive resources, such as homes. But. it is wrong for banks to get a ‘free ride’ from this interest. Banks do need to charge a certain level of interest to repay their depositors for the fraction of their loans that can be attributed directly to their interest bearing deposits, but most of their loans do not arise from deposits.
    So, I await a response from a monetarist who has a solution to this “interest challenge”:
    How to set a fair return to the banks while still encouraging credit for productive activities?

    1. My reading of PM’s proposal is that interest rates will be set by market forces to balance the wants of borrowers with the propensity to save, encouraged by the reward of “interest”. Borrowers will pay the savings interest rate plus the entrepreneurial cost involved in being the matchmaker (as if interest). If there are insufficient saving rates will increase, if excess they will drop.

  21. This a non-discussion. A quarter of GDP runs on trade credit. Much of the rest is car loans, students loans, supermarket credit, … If official money is constrained the public invents new forms. Neither central banks nor commercial banks control the money quantity. Effective “100%” money woudl require additional regulation to stop and strangle all that. But even in the USSR that was not possible – huge grey economy. It would be a regulator’s nightmare.
    Also, how would 100% reserves work? The CB must provide reserves on demand if the system is short, unless it is happy to see interbank rates shoot to infinity. So the market leads reserves, not the other way round. Positive Money say CB would determinine quantity but the market would determine allocation. The distinction is a fallacy. If the market sends 90% of redit to mortgages, is the CB going to sit on its hand and let nonfiancial busienss starve of credit? Of coruse not. So again, market allocation leads CB quantity.

    Positive Money promote a phantasy.

    1. Dirk, thank you very much for this comment. Great to have your very sound voice in this debate…and yes, I agree: Positive Money are promoting a phantasy…Unfortunately it has confused many. Having said that, the real cause of the confusion is the failure of the academic economic profession to gain and promote some real understanding of money – and to ensure that education on the subject is sound…
      No other academic discipline is guilty of such a profound failure in the understanding of a basic tenet of the subject: the economy as a whole…Imagine if physicists did not understand the nature of the molecule!

    2. This is for Ann. If the teaching of economics can ignore Say’s Law and explain fractional banking the way it does (as a geometric series) and then pretends that fractional banking still exists, it is no wonder economic thinking is in such a mess!

    3. “Neither … banks control money (supply)”. Absolutely right. There is no control, that’s why we’re in trouble. The banks lend money ad hoc. PM addresses that problem! The MCC takes control!

    4. Dear Dirk
      I have deep respect for you, and have read some of your articles with big curiosity and inspiration. Also i agree with you that most GDP run on trade credit, and that we can probably never hinder that some kind of fractional reserve banking will evolve, but that is not the important point about the Positive Money proposal.

      What they give people is a choice of freedom to not being part of banks credit system. The kind of credit system you put forward is the internal credit systems run by productive companies and organisation, which the proposal say nothing about. That a big companies give credit to other companies is not a problem because they bare the full risk themself. In the framework of the ‘Money View’ put forward by INET economist Perry Merhling, Positive Money’s proposal first and foremost work on leveling out the higher layer of the money hierarchy and give anyone access to the same quality of money in a given country. Today your forced to be customer at a bank, and use their credit as money, as that is the only kind of credit you can pay your taxes with.

      I think that banks would go bust long before you would see interest rate go to infinity, which is actually another very important thing about the proposal. If there came a pressure on the need for reserves, fully implemented, the Positive Money system would let banks go bust, rather than expand the amount of reserves.

      You need discipline at some point – someone or something need to bust at some point in time. Thats pure debt-deflation theory. You need to deflate something, and in the end you need to deflate the amount of debt, so rather do it instantaneously and at all time, than postponing the inevitable. I would prefer that kind of system dynamics, to the one we have now, where we keep on postponing this dynamics.

      The mortgage problem you raise, would probably not be solved solely by Positive Money’s proposal, and would most likely need support by some kind of credit guidance. Still the proposal actually contains some degree of credit guidance, as at least, new money wouldn’t be spend on mortgage debt.

      You could work the other way around Positive Money’s proposal. Why should only high-street banks be allowed to run a account at the central banks? Why shouldn’t everybody? With the technology we have today it would be easy to give everybody access, and it would definitely be more efficient and effective, as you wouldn’t need the ineffective clearing circus every banks need to go through every single day.

      I hope you will look into the Positive Money proposal, because as the debt crises is still running on full scale, i am very sure its not the last we have heard of these kind of proposals

      Best regards M.Sc. Rasmus Hougaard Nielsen from Denmark

  22. Danny,
    Re your claim that debt free money is an oxymoron, where is the debt element in “money” where money takes the form of gold coins?

    As to the claim by Positive Money that base money is “debt-free”, they’ve got a point, though it’s not 100% valid.

    Bank of England notes (e.g. £20 notes) say that the BoE “promises to pay the bearer on demand the sum of £20”, which implies the BoE is in debt to a holder of a £20 note to the tune of £20. But that of course is nonsense: if you turned up at the BoE and demanded £20 of gold (or anything else) in exchange for your £20 note, you’d be told to shove off, assisted by the police if necessary. So Positive Money is right so far.

    However, a characteristic of a debt is that it can be used to cancel an equal and opposite debt. Now if the tax authorities demand £X from you, then you’re in debt to government to the tune of £X. But you can cancel that debt by offering the tax authorities a bundle of £20 notes worth £X. So to that extent, base money really is a debt, and PM are wrong.

  23. Ralph, I will respond to your blog….in short I don’t agree with you and I suspect the problem is that I meant society must continue to borrow more and more…I wasn’t talking about an individual borrower. This is where it gets tricky. But if you follow the trail a debt based monetary system definitely requires constant growth of the money supply, debt.

  24. The excess of money creation through speculation is the object. Do we correct it by changing the credit system or by correcting it. Positive Money wants to do both. It is the speculators in charge of the system, not the system who need to be reined in.
    Japan’s control of credit in the 1980s, when it led to focused investment and an export sector that was going to dominate the world is sometimes cited as an example of using bureaucratic controls. The property bubble notwithstanding, Japan did not escape what might be called “speculation.” Guidance, yes. A bureaucracy that is going to get captured by the sector it is supposed to control? No.

    Don’t shoot the horse.

  25. I agree with Ann Pettifor that banks should be allowed to create money “out of thin air,” and therefore disagree with Martin Wolf that such function should be entrusted to a “small committee” (obviously a very special committee composed of very special people.) I would go further, and suggest that anyone and therefore anyone has the power to create money. If a bank can lend “money” to Ms. A, based on its estimation of Ms. A’s ability to return the “money” with interest, why not I? The questions then are two: first, will Ms. A accept my “money”; secondly, will anyone else (upon whom Ms. A must rely) accept my “money?” My money is as good as the bank’s money only IF the borrower will accept it and IF others will accept it when the borrower presents it.

    1. Re the “committee”, stimulus and money creation are ALREADY DECIDED to a significant extent by an “undemocratic” committee: it’s called the Bank of England Monetary Policy Committee!!!!!! But it gets worse: various “fiscal responsibility committees” are springing up round the world. So even if we don’t adopt full reserve, it looks like BOTH monetary and fiscal policy are going to determined by determined by those horrible committees.
      “If a bank can lend “money” to Ms. A, based on its estimation of Ms. A’s ability to return the “money” with interest, why not I?” Answer: for reasons which are clearly spelled out by advocates of full reserve. How about actually READING the literature before commenting?

    2. This is to Ralph Musgrave just in case it gets misplaced. The sequence is this. First issue all the county’s money supply debt free instead of allowing the Banks to do so by debt. Then oblige Banks to lend no more than they have on deposit because if not it upsets the MCC’s determination. The proposal is not based on eliminating fractional banking per se, that’s a by-product. And in any case we have not had fractional banking since about 1970!

    1. Precisely. And that is exactly how we must perceive and understand it. The paradigm of Debt, amazingly and paradoxically within otherwise consistent free market economic theory, is a monopolistic IDEA. It has no countervailing IDEA/policy to balance it…and the economy. So what is the countervailing monetary IDEA/policy to Debt? INDIVIDUAL GIFTING as a policy for the CONSUMER. OMG! The mind reels with objections galore and the clank of economic orthodoxies can be heard from afar….but this would transform the economy and money system. Then of course you’d have to have some reasonable and ethical regulation of the economy and money system right along with that transformation…(more reeling and clanking), but this of course would only be taking adult control of these systems…instead of relating to them as if they were gods and would equillibrate themselves magically. Ann’s completely correct in her prescriptions…as far as they go. Transformation with a new balancing paradigm…is the only thing missing.

  26. “Second, the proposal that only money already saved should be made available for lending assumes that money exists as a consequence of economic activity, and equals savings. But that is to get things the wrong way around. Rather, it is credit that functions as money”
    Money can be anything, credit or equity. Gold was money. The gov could create money and recognize it as equity.

    “Furthermore, the restriction of all lending to existing savings would lead to higher rates of interest,”

    The gov can just expand the money supply at this point to bring down the rate like now.

    “This would return society to the dark ages, when investment and economic activity was subject to the whims of great feudal landowner”

    “Savers would be in a position to demand a higher return on the loan of their savings.”

    Returns on savings lending to banks would depend on how abundant savings are. If too scarce then rates will be too high but the gov can create more money which will increase supply of savings and bring down the interest rate.

    Supply and demand.

  27. Richard,
    While I support full reserve banking, your claim that borrowers have to borrow ever more in order to pay interest is a popular idea in pro-full reserve circles, but the idea does not stand inspection. One flaw in the idea is very simple: banks do not hoard the money they get by way of interest – they spend it back into the non-bank private sector. E.g. banks have to pay employees, shareholders, and pay for the upkeep of their offices, etc etc. In fact every penny that flows into commercial banks flows out again! Thus there is no obvious reason why non-bank debtors need to borrow more in order to pay interest.

    There is actually another flaw in your above idea, but I haven’t got time to spell it out. I set it out on my blog somewhere.

    Next, in your paragraph starting “How do you suggest…” you imply that switching to “debt-free” money will bring about a significant reduction in total debts. I agree that it will bring a FINITE reduction in total debts. Indeed, Ann said in her article that full reserve brings about a net reduction in debt/loans plus a rise in interest rates and I agreed with her in my above comment.

    But my hunch is that the TOTAL AMOUNT of debt reduction resulting from introducing full reserve won’t be spectacular. In fact I argued here that the amount of debt reduction will be near non-existent:


    1. We have a national debt which is really a savings account for folks with lots of idle dollars. This savings acct/debt is 12 to 17T$ depending on how you count it. It is safe; backed up by the BEP printing process. Banks have deposits, savings, CDs etc and their acct total or debt is about 19T$. If banks were made trusts, 100% and had to come up with 19T$ they would have to borrow from the US Treasure and then the US Treasure would be a few T$ in the black. So, yes, going to 100% reserve / trust status for banks would reduce debt.

    2. “Every penny that gets paid out…” yes true and into Banker’s Bonuses!

    3. Ralph too does not see the main circulatory loop of debt free money (money supply)and confuses it with the other two routes that his own blog recognises. See my main criticism of Ann’s case later on.

    4. Ralph stated
      “While I support full reserve banking, your claim that borrowers have to borrow ever more in order to pay interest is a popular idea in pro-full reserve circles, but the idea does not stand inspection. One flaw in the idea is very simple: banks do not hoard the money they get by way of interest – they spend it back into the non-bank private sector. E.g. banks have to pay employees, shareholders, and pay for the upkeep of their offices, etc etc. In fact every penny that flows into commercial banks flows out again! Thus there is no obvious reason why non-bank debtors need to borrow more in order to pay interest.”

      The debt that the borrowers owes to the banks is the principal and interest; the banks have paid out the principal only. Now the banks could pay an amount of money equal to or greater than the interest owed by the borrower to clean their office, and then the borrower could pay the bank that sum and be done with it.

      But this is a ridiculous example. The banks create debt for the entire economy, individuals, firms, and governments. Obviously the only way that this could be stable according to your model, is if a huge percentage of individuals and firms work for the banks. This isn’t going to happen; instead the banks issue more and more loans in order to keep their Ponzi scheme going.

      In the old days, banks would be destroyed as depositors rushed to exchange bank notes for gold; this put a limit on the extent that banks could control the economy. But from time to time in the old days, and continually in these ‘progressive times’, the banks refuse to exchange the notes for anything tangible. If the banks need more notes, the friendly central bank, privately owned and run for the benefit of bankers, kindly creates more notes.

    5. I completely agree with the biological example that Richard Dane gave and I would go even further; money should not be thought of as energy, capable of being of being accumulated, but more of as a chemical messenger such as a neurotransmitter which serves a function by directing the activities of cells, and then getting destroyed via a recycling process.
      The creative use of money as a chemical messenger would then be endless in society.

      The privately owned fiat banking systems in operation are nothing more than a means to control the output of societies by cynical individuals who have bribed their way to gained the sole monopoly of creating a nations currency (call it credit if you want as it makes no difference)

  28. Dear Ann,
    I just read your publication on this subject dated January 2013; “A review of Ingham’s Capitalism”.
    Putting the issue of who should create our money to the side I would have to say that I agree more or less with all of your analysis. I am particularly encouraged with your notion of an “ecosystem”. Over the last few decades many writers are starting to make that link which is extremely important for our world as our society is an ecosystem.
    However, allow me to take the analysis one step further: An ecosystem in nature evolves to create balance. An organism (individual plants, animals & human beings) is designed to constantly create homeostasis (balance) whereby its internal systems work together to achieve that end. All organisms create there own molecular currency – ATP Molecules. This Molecule is required for all of the bodies metabolic processes – which is why it is Called “The Molecular coin of the realm” by biologists. It is natures money – for plants, animals and human beings. The million dollar question is: Who creates the energetic currency? Well the organism does via photosynthesis (plants) or cellular respiration during digestion (animals/humans). The cellular currency is used for the metabolic processes of an organism based on need. Nature spends its currency into existence in other words. Natures money is created publically and used for public benefit. Food for thought!!!!

    1. Richard…thank you for that excellent analogy with biology. In economics that stability is defined as equilibrium – something very hard to achieve, with humans as our major actors!

    2. Thanks Ann,
      The equilibrium that you mentioned is definitely biology’s “homeostasis” 🙂

      My point is simply this: In nature, every organism (plants/animals/humans) produces its own cellular currency – ATP Molecules….Every organism uses it & every metabolic process requires it. If you ran out you would die instantly. This is why they call it the “biological coin of the realm”. Our society is an organism, a super organism comprising of many different systems that need to work together to create equilibrium/homeostasis – agreed? My argument is that public money creation (by our society – the “super organism”) being spent into society is exactly what nature does at its level.
      You suggesting that we should allow money to be created privately is like suggesting that the liver (this is the storage depo for the raw ingredients of ATP – glycogen)can charge the rest of the body interest for something that the whole body needs!!!! In nature it just doesn’t work that way and it doesn’t need to in our society…nor should it if we want to achieve equilibrium holistically. Stay tuned for my book!!!!

    3. Yes Ann (sorry about the added “e” in my later post) I too have likened the money flow to our blood supply. See below.

    4. John, I’m glad someone else is thinking in terms of biology. Only biology can set the example we need to clean up the mess of years of economic delusions. The reason biological systems work is that they have evolved to manage energy in a coherent fashion. Energy in the human body and all organisms for that matter is either glucose/glycogen or ATP molecules, the energy is allocated based on need. Our society totally violates that simple principle and the symptoms of failure are very clear to see – debt, poverty, suffering, inequality. Only an uninformed fool would think that these things are normal. THEY ARE NOT… they are a symptom of failure and the biggest failure of all is the idea that Banks should be allowed to create our money. This is the biggest mistake we have made in the last millennium from the point of view of how to run a system/society.

  29. Ann,The only way to level the playing field with respect to money is for it to be issued in a way that is fair to society. It must be issued debt free and spent into circulation without any debt to anyone.
    Allowing one section of society (the banking system) to issue it as debt is like allowing a player in a game of monopoly to lend new money (created out of nothing) into the game to the other players which they must find the interest for, to pay him, for his benefit!!!! Well, where will they find the interest? Well essentially they have to keep borrowing new money into existence…do you see the picture….. It is counterfeit and with interest rates at ZERO, lowering interest rates is no longer going to be a lever for our economy. Hence now we have moved to QE – essentially its a way to encourage the financial system to create more debt…out of nothing. A time will come in the not to distant future when the world will realise that the only way to solve the debt crisis and its associated problems is to create debt free money… How can you not see this?

    My questions to you are as follows:

    How do you suggest we reduce the debt burden on society in the absence of Public Money Creation assuming you want to avoid a debt crisis that causes a depression like in the 1930’s? Modern Day Debt Jubilee perhaps?

    Do you think that current debt levels are a problem?

    FYI – I agree with many of your ideas. I agree that Keynes designed a better system back in the mid 20th century than we have now with capital controls for instance. BUT, the greatest freedom that we can give ourselves is to create debt free money. Yes, a way of deciding the quantity injected must be appropriately designed to avoid corruption BUT to say that we cant trust government or an independent committee to issue it is like the fox saying we cant trust the hens to run the hen house. WE NEED TO FIND A WAY, that is the key.

    We don’t need to nationalise the banking system, we need to nationalise the monetary system, nothing else. It is the one function that is critically important & allowing money to be privately created is the biggest error we have made as a society.

    1. Yes Richard. In Keynes’ days we had a Truck Act obliging all wages to be paid in “Coin of the Realm”. This was issued debt free. That Act has been abolished and allowed Banks to capture the money creation process.

  30. Ann, your recommendation to maintain the present decentralized money creation but with significant additions in state controls seems sensible. The present descriptions about endogenous money generation do, however, omit the fact that money created at loan issuance time has only a lifetime up to the point where the money is used. This greatly limits the total volume. Endogenous money of any lifetime can be created by issuing interbank instruments. For related accounting details see http://olliranta.wordpress.com/endogenousmoney/

  31. Ann, you say in reference to the Positive Money / Wolf proposal, “….the notion to my mind is preposterous. It is an approach reminiscent of the misguided and failed monetarist policy prescriptions for controlling the money supply in the 1980s.” Really? It’s difficult to answer that point because you don’t tell readers exactly what the similarities are between Wolf’s proposal and monetarism. I can make a guess, but it’s not the job of readers to have to guess what an author is trying to say.
    Next: “Second, the proposal that only money already saved should be made available for lending assumes that money exists as a consequence of economic activity…” Well strikes me that money DOES INDEED “exist as a consequence of economic activity”: if there were no economic activity, there’d be no money!!

    Next, I do like the bit about higher interest rates taking us back to the “dark ages” with “feudal landowners” exploiting starving peasants etc. How do you explain the fact that interest rates for mortgagors in the 1980s were up to THREE TIMES their present level, yet everything functioned much as now? Indeed economic growth was far better in the 1980s than over the last 5 years when interest rates have been at record lows!

    Next, you claim that creating money out of thin air first occurred in 1694 in England. In fact Henry 1, who came to the throne in 1100 introduced tally sticks to England and issued large numbers himself. Tally sticks are essentially the same as the government / Bank of England creating money out of bits of paper with “£10” stamped on them: also a form of “thin air” money.

    “A return to a system based on existing savings would cause rates to rise, and once again doing harm both commercial activity and employment.” Oh yes? That would be true if the EXISTING LEVEL of interest rates, lending, etc were OPTIMUM. Now there is a good reason for thinking rates are below OPTIMUM and lending and debt are above optimum, namely that banks are subsidised. Moreover full reserve banking gets rid of those subsidies. Thus full reserve, which is what Positive Money proposes, is a movement TOWARDS THE OPTIMUM.

    Incidentally I realised long ago that the concept “optimum” is beyond the comprehension of 90% of the population, the so called “intelligentsia” included.

    But what really makes your point about less lending look silly is that every pound lent or borrowed is a pound of debt, and you yourself wrote a book deploring debt levels. Do you want more lending / debt or less? I’m baffled.

    “But the key to the UK’s money supply lies with borrowing decisions made at a micro level by hundreds of thousands of economic actors.” So money does after all come into existence “as a consequence of economic activity”. I thought you opposed that idea at the outset of your article.

    Moreover, the fact that commercial bank money comes into existence the above way, i.e via the “loans create deposits” phenomenon, doesn’t prove that that is the only or the only possible form of money. There is such a thing as “base money” (aka “high powered money”, aka central bank created money).

    Indeed, central banks have created UNPRECEDENTED amounts of that type of money over the last three years or so as part of QE. Or have I been dreaming?

    In fact about 20% of the money supply in the US is currently central bank created rather than commercial bank created, as a result of QE. Now if having base money (or “debt free money” as Positive Money calls it) play a much bigger role has the disastrous effects you suggest, how come a recovery (at long last) is taking hold there?

    Finally, you say “Nor can a more democratic allocation of finance be achieved by centralising the creation of money in the hands of a small, unaccountable committee of men and women.” So why haven’t you raised similar objections to the Bank of England Monetary Policy Committee? The committee proposed by Positive Money would do almost exactly the same as the BoE MPC, i.e. both committees decide on what stimulus the economy needs. Plus NEITHER COMMITTEE has any say on strictly political matters, like what proportion of GDP is allocated to public spending, or how much should be spent on health, education, etc. Positive Money is crystal clear on that point. In short, PM’s committee does not intrude on “democracy” one iota.

    1. Ralph,
      Thank you for your comment. I am strongly in favour of “economic activity” – for me it means employment….My biggest concern is that the monetarist proposal to contract economic activity by contracting the money supply, hits those who need employment most…I am a full employment advocate.

    2. Ann, what do you mean by the monetarist proposal to contract the money supply? Are you referring to PM or the erstwhile cr*p EU scheme we’er presently under? PM’s MCC sets the right amount of money, debt free, to maintain (full) employment. I think you are confused and I offer a fuller post to explain why later on. I hold the same position as above. Why is the MCC any different from the MPC (it’s just not cricket!)?

    3. “Out of thin air – Why banks must be allowed to create money”In less than 500 words:
      Because the present system is ‘systemically flawed’.
      Fiat must be created in order to redeem something of value into anything of value.
      If not, there would be only the impossible transferring value via barter.
      There must be a issuer of the sovereign currency be it colorful paper, coin, or printed dots.
      Call it a Central Bank, or a Monetary Group, whatever you like but it must exist and it must be able to control the quality and quantity of the sovereign currency. The total of which it is custodian of and not owned of, since the sovereign group being the owners of the entirety expect their sovereignty to redeem their fiat “on demand for any goods or services”.
      As per Frederick Soddy, Please read “The Role Of Money” (Free full download) http://archive.org/details/roleofmoney032861mbp
      Written in 1921,- 1934, Frederick Soddy not only explains the “systemic flaw” (allowing an entity other the the sovereign government the right to ‘print’ and ‘tax’ the sovereign currency; but also explains the unintended consequence of this awesome power.
      Quote Soddy, “It was recognized in Athens and Sparta ten
      centuries before the birth of Christ that one
      of the most vital prerogatives of the State was
      the sole right to issue money. How curious that
      the unique quality of this prerogative is only now
      being re-discovered.”
      Why should we never allow ‘Private For Profit Banks’ (PFPB) to
      ISSUE OUR CURRENCY AND TO TAX THAT ISSUANCE -That should be the question.

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