Policy Research in Macroeconomics

Why I disagree with Martin Wolf and Positive Money

The Financial Times is hosting a major debate on whether the private banking system should be allowed to continue creating 97% of the credit or money circulating within the economy. Martin Wolf, its respected economics commentator, supports the ‘Chicago Plan’ that effectively calls for private banks to lend out only as much as they have in “reserves”. “Banks”, writes Wolf  (FT  24th April), “could only loan money actually invested by customers.” Private banks would be prevented from creating money, and instead all money would be issued by the state. The quantity issued would be decided by an independent committee as argued by amongst others, the IMF’s Kumhof and Benes and Positive Money.

Because of the finance sector’s despotic power, about which I have been very vocal, many readers would expect me to support a proposal that prevents private banks from creating money, and to enthusiastically back the nationalization of money issuance. I do not however, and want to explain why.

While Wolf has helped bring the role of private bankers in “printing” most of the money in circulation to public attention, the proposal he advances is deeply flawed. It is not very different from the monetarist or neoclassical understanding of money, as based on a commodity. As such his proposal, like the Chicago Plan, would contract and restrict economic activity – to the level of existing savings. That is why the Chicago Plan was so enthusiastically endorsed by monetarists like Milton Friedman.

To understand why the plan is flawed, one has to first understand that credit is nothing more than a promise to repay, as Schumpeter once argued. Furthermore, the issuance of credit results in deposits, or bank money, as Wolf argues.

Credit or money created by banks does not necessarily correspond to what we understand as income. Nor does it correspond to savings. It does not correspond to any economic activity. The one-to-one link that existed between commodity money and economic activity in the Middle Ages does not exist in today’s banking system. Instead credit merely facilitates transactions – and in that way creates economic activity – investment, employment and income.

Unlike commodity money, which is of necessity scarce, credit is able to facilitate society’s myriad transactions, and to satisfy our varied needs. The issuance of credit enables society to do what we can do. And that is why it is a very good thing. Before the establishment of a banking system, society could only embark on ventures that could be financed by “savings” – inevitably the surpluses built up, stolen or appropriated by the already wealthy. Because savings were scarce, they would be lent out at high rates of interest – inhibiting investment, and above all employment.

Because credit (buttressed by contract law, the criminal justice system, the central bank and an accounting system) can be created with such ease, it is a great power, and must of course be regulated in the interests of society as a whole. If, as now its creation is not properly regulated, the finance sector’s hold over society becomes despotic. It is in society’s interests that credit is carefully regulated and directed at productive activity that generates income for repayment – and not speculation or the self-enrichment of bankers.

If the issuance of credit or money is to be restricted to equal the money set aside in peoples’ piggy banks – the “savings” that Martin Wolf refers to – then society would revert back to the Middle Ages, or to the age of the Gold Standard. We would have to restrict what society can do, in economic terms. That would mean a shortage of money, high unemployment and low economic activity – while those with savings would charge high rates and flourish.

Now many environmentalists want to restrict economic activity – and I agree with them. The creation of “easy” i.e. unregulated money has fuelled unsustainable consumption. Worse, credit has been directed at inflating the value of assets (e.g. property) that have enriched the rich, and impoverished those who do not on the whole own assets. Easy credit has been at the heart of the rise in inequality in western economies.

But while we may want to limit consumption, and re-direct credit to more sustainable, useful activity, it would be a mistake to limit the things that society can do. We need, for example, to tackle climate change, a major threat to a liveable future. That will require huge resources to be directed at transforming and de-carbonising the economy. Carefully managed and regulated credit will help finance those activities. The money in our piggy banks would be woefully insufficient.

This debate exposes a profound misunderstanding at the heart of economics, one heavily promoted by monetarists and the Austrian school: namely that it is possible to manage aggregate economic activity within an economy like Britain’s if an “independent committee” can just pre-determine money growth, and then shrink or expand activity.

This is very close to what monetarists tried to achieve, but failed to do under Mrs Thatcher.

It is also what economists and bankers tried to achieve under the Gold Standard. Then aggregate economic activity was expanded or shrunk to (apparently) equal a quantity of gold buried in the vaults of central banks. The result was predictable: a shortage of money, economic failure, instability, financial and currency crises and rising unemployment.

The reason why the Gold Standard was to Keynes a “barbaric relic” – was that gold in the bank could never be made to equate to society’s economic activity – and potential activity. By contracting economic activity to attempt that false equation – governments shrunk the availability of money, caused unemployment to rise, profits to fall and economic activity to wane.

Wolf’s proposal is problematic for other reasons. First, the idea that society can set up a single “independent” committee of men to make far-reaching decisions about the quantity of money needed by a nation of sixty four million people, all engaged in varied and complex activities – is bordering on authoritarian. First there is no possibility of such a committee being independent. One has only to think of the “independent” UKFI committee – set up to oversee the banks, including RBS, in which the state has a stake – to question the possibility of such a body being independent.

Instead I would argue, we should once again regulate the banks and bankers. We may have to begin by acknowledging that, without the guarantees provided by central banks, most banks are effectively insolvent, and will have to be re-structured. Because of their weakness, caused by their own greed and recklessness, they are unable to provide affordable credit in quantities needed by the economy. This is a major cause of ongoing economic weakness, falling incomes and high unemployment across western economies.

Next, banks’ retail arms should be separated from their speculative, “investment” arms. The creation of credit should be carefully regulated, managed and directed at productive, sustainable activity. Thousands of bank clerks should be put to work assessing the risk of every request for a loan, and determining whether that loan would be put to sustainable use and whether it would be repayable – just as was done until very recently. It was only thirty years ago that restrictions on the creation of credit were lifted under a measure wrongly defined as “Competition and Credit Control” – and bankers were freed up to aim credit at speculation. They were later freed up to use their great powers for their own self-enrichment, when the prohibition on mixing their retail and speculative arms was removed.

Restoring banking regulation to its proper place, and managing cross-border lending would once again restore balance to our financial system, just as it did in the period 1945-71. It would bring to an end the despotic power now exercised by bankers and the finance sector.

By contrast, outlandish proposals for nationalizing money and granting huge powers to a committee of men to decide how much money we should all have, and whether to shrink or expand the money supply and economic activity will only add to the economic confusion that shrouds the banking system.

Above all, it will ensure that things stay just as they are.

142 responses

  1. ContinuedI therefore concluded that any criticisms of Positive Money were based on the failure to understand (even be aware of) Say’s Law (You can buy all that you produce from the money earned in its production). Would critics above please either deny Say’s Law veracity (with proof) or review their criticism with this in mind.
    While I now accept that fractional banking no longer exists (just think of a number and use it!), this in no way invalidates my conclusions.

  2. With apologies, I have only read to half way down but am dismayed by what I have read herein after completing the reading of “Modernising Money” from cover to cover.Like Soddy, I too have come from the Physical Sciences background as an Electronics and Control System Engineer. In the course of trying to explain to myself why the economy was in a continual state of flux/instability I came across Say’s Law only to find that few (nil?) economists believed in its veracity. Eventually I found a way of demonstrating its fundamental truth with regards to Money as a Medium of Exchange. This neglect by economists (of dismal science) is akin to trying to design electronic systems contrary to Kirchoff’s Laws! None of us would dream of doing so, yet contributors above indicate no knowledge of this fundamental economic tenet.
    Starting from scratch and ‘knowing’ that banks indulged in Fractional Lending, I constructed a model of the economy in which a certain amount of money circulated through the economy time and time again without restriction having been issued once debt free and without recourse to the banking system. I then added the Clearing and Savings & Loans aspects of banking. I observed that as the economy grew the banks captured the free money circulation and charged interest on it.
    I then repeated the model with the fraction set to 100% and deemed that there needed to be a body to issue expanding debt free money to an amount consistent with the productive capacity of the economy.
    These two models very closely resemble the before and after models used by the Positive Money campaign. To be continued

  3. Steven Keen suggests (BBC Radio 4, LSE interview, 2013) that government should create approx 15% of money supply, to moderate private money creation/interest rates ( as well as, I’m sure, better regulation)…

  4. In 1926 Frederick Soddy (the 1921 Nobel Laureate in Chemistry) did a pretty good job of describing the way in which banks create money (and abuse that power). He suggested that we should abandon the gold standard, allow exchange rates to float and use monetary policy to control business cycles. At the time he was dismissed as a crank, but this is now economic orthodoxy with most governments (except the creators of the EURO). He also suggested that banks should not be allowed to create money, instead an independent statistical service should decide how much fiat money to create based on movements of the price index. In some sense, central banks already do this, but it is not a very effective instrument as long as the banks can create and destroy money at will.
    I agree with much of what Ann says, but not that banks should be allowed to create money: they will always have a strong incentive to abuse this power. Soddy’s argument was that most of the ills of the economic system, such as inequality, war and environmental degradation followed from this. Ann argues that credit creation by banks is necessary to finance productive investments, but Soddy has a rather subtle argument for why this is not necessary. It can be found in “The Role of Money” (1934). Incidentally, his analysis of the business cycle is much the same as Keynes’ and Minsky.

    If you choose to see this as a competition between physical scientists and economists, then the score is physical scientist 1, economists minus several million. Of course, Soddy was a polymath as well as a very brilliant scientist, so perhaps it is not a fair contest.

  5. While a little off topic, I wonder if drawing people’s attention to the fact that they have been kept in the dark about money would be useful? One way would be to use different language to describe different types of money. It’s much more useful to say German Shepherd vs Poodle than dog, for example. And they say that Eskimos have several different words for snow, as another example. So why not have different words for money?
    If I ask someone how much money something costs, I would get one answer.

    To raise awareness, at every opportunity, what if we were to ask everyone we meet how many slavery dollars or slave-units or slave-nits do I need for that…? It might create openings for “What’s a slavery dollar?”. To which a reply like, “Did you know that banks create money from nothing? And then they charge us interest forever on that? This turns all of us, and our children, and our children’s children, into their slaves. Every time we use money created from nothing by the banks, we sell ourselves deeper into slavery. Every time we use money created by the banks, we pull the noose around our own necks tighter. That’s why I asked many slavery dollars do I need, because banks have corrupted our government so badly, that it’s no longer money, it’s they bars to our own prison they get us to build.”

    As an exercise in the power of language, I invite you to take things that you have written, and do a search and replace on them for these and other words, to see how it reads.

    For Example:
    100% money -> credit dollars, government dollars
    private money -> debt dollars, slavery dollars
    monetary -> slavery
    money -> slavery dollars
    banking -> slave owners
    politicians -> slave traders

    I only recently stumbled across these conversations about the money system, through YouTube. A search for ‘money’ would not have brought me finding this. And conversations, in threads like this are sermons to the converted. With media owned by the money system, and the overwhelm of information on the internet (including me stumbling onto the conversation) the optimal means to raise awareness would be introducing language that goes viral in the common culture.

    If that occurs, then a search on the internet for “Slavery Dollars” (or whatever other word(s) that enable a clearer distinction) would make it easier to find relevant material for our own self-education; where a search for ‘money’ would not.

    Using the word ‘money’, in day to day conversations provides no opportunity to know whether the people we interact with are aware of their self-enslavement or not. Creating more descriptive names, and bringing them into the common vernacular may be one way to help grow awareness in general, and interest in possible solutions in detail.

  6. Ann
    How can someone (yourself) who’s published books about money and banking, and who is engaging in a critique of the PM/Wolff proposals, have been so careless as to have failed to inform herself about those proposals in detail and – as a result – have been guilty of misrepresenting at least one important aspect of them?

    To me that seems unpardonably sloppy work, and I note furthermore that you have completely failed to acknowledge (let alone retract) your misstatement although it has been pointed out to you by others.

    The PM proposal (to which Wolff refers) goes to some lengths to stress that it is apolitical in nature. The decisions (to be taken by what you dub “a committee of men”) are carefully circumscribed: what they are most certainly NOT are decisions about the form in which or the medium through which any new money created by government/BoE shall be distributed. It is repeatedly emphasised that that must be a decision for the elected government to make.

    1. Robert, it would appear that Neil Wilson and Ann Pettifor have run for the hills on this debate. When pressured they have resorted to labels and insults whilst monetary reformers would appear to have the logical arguments based on evidence and reason. The truth is that this system is impossible to defend from any perspective: morally, ethically, mathematically or economically . Monetary reform I believe will one day become inevitable….Why? Well it’s simple – interest rates can’t go any lower and the debt in the system is killing us. So if we need to inject new money into our system it will need to be public money, hence Monetary Reform. The evolution of the monetary system will lead to this I believe

  7. No I am not an economist. I am just an observer with an opinion, based on what I have learned and thought about out of these conversations to date.
    New money that enters the money supply dilutes the value of that money supply.

    The issue is whether the stimulus it creates through realized increased productive capacity restores the value of the currency, before anyone notices.

    The objective of any currency system should target that basic commodities be able to be purchased for the same price for all time WITHOUT controls and artificial subsidies. Unless that is set as an primary objective, the ability to drug people into believing that because the numbers in their account are the same, even though it affords them less, it’s all good.

    Also, comfort knowing the square foot cost of a home for example will more or less remain the same position, would enable people to make that level of commitment, when and only when it makes personal sense to do so, instead of the feeding frenzies that currently serve vested interests.

    Finally, of all the solutions that I have heard so far, they seem to have a fatal/lobbyable flaw. A small group decide for the many. And let’s be careful of giving groups a name, such as the banking system, or government. The issue here is that small groups of people named or otherwise will always arrive as yet underdetermined ways to control the masses for their own ends.

    Has anyone suggested a way to control the money supply by some form of voting mechanism? What if every person of voting age were given 20 poker chips that they could apportion to some kind of ‘board game like’ allocation board.

    This is off the top of my head, if only to people tell me why not.

    Step 1. The public is invited to put forth categories where some level of Government Created Debt Free money can be handed out. Each category MUST provide a objective measure by which to track their proposed effect, should that category receive funding. Arguments are allowed to be posted by anyone why or why not the measurement method would represent that spending category’s effect. The authors of the proposed categories can choose whether to adjust their measurement means based on the comments of others or not, prior to the vote for top categories.

    Step 2. The public places their 20 poker chips on their chosen categories, to distribute their vote for what categories should voted on, based on the projected (and debated) value of investment in that category. People first vote for the categories of spend they prefer by distributing their chips among the categories.

    Step 3. The Top 20 categories are identified and a 2nd vote takes place where again the public of voting age, allocates their chips where what portion of the new money will be vested or invested.

    Step 4. The effect of the investments are tracked, based on the documented measuring systems associated to each category. The accuracy of the measurements are debated during execution, but are left unchanged until the next round of public based category voting.

    It would take several years before the public would develop the dexterity to make workable choices for the common good. Learning to vote for the ideas themselves, versus our trust that small groups of always (it seems) corruptible groups, will act in our own interest, would move the accountability to those (collectively) affected by it.

    Step 5. Eventually (perhaps) politicians would compete to administer categories of ideas, and could be objectively measured on their degree of transparency in action, and effectiveness in maximizing the effectiveness of the results with the resources their categories are allocated.

    It will be interesting to hear opinions why such a process may or may not work.

  8. Richard,
    In the Public or Private money debate I agree with most of you that Public is best, but focusing on who gets to create/allocate is a bit like standing knee deep in water arguing over whether to use the bilge pump or the bucket instead of attending to the leak.

    Collectively we need money to be available and mobile in order to make/do and buy the things that sustain us. Individually we need access to money every day before we can spend it.

    So, if we want to redesign the system so that it works better, the first question to ask is how to circulate it?

    You don’t have to get very far into answering the question before you realise that an effective circulatory system makes most creation/allocation redundant. If we’re circulating money effectively the need to create/allocate it is (almost) redundant.

    Yes, we’d still need a trickle of new money from time to time to account for increases in population and the like but not the constant flood that we currently have or will need under PM’s proposals. An effective circulation of money means the MPC becomes a very minor player in the economy instead of the contentious fount of all bounty.

    The key issue that PM needs to address is the assumption that we will risk our hoarded money on productive investment. We don’t do it now. We won’t do it with 100% reserve. Under PM’s system most of us will keep our money in transaction accounts and never use it for investment. Some of us will invest but we’ll stick to low risk, easy to understand, profitable things like mortgages. Productive businesses will become even more starved of cash than they are now.

    An effective circulation system deals with this issue as well as demoting money creation/allocation to a minor role.

    1. Addendum to the above post:
      Public money creation/government spending will not fill the void left by the removal of credit from businesses. A few businesses who are on government procurement lists in the favoured sectors for government spending will benefit but most of the rest of us will shrivel and die from lack of maoney for investment.

    2. It would be worth a read of Bill Mitchell on the subject:- http://bilbo.economicoutlook.net/blog/?p=7299 .
      Remember that the US and the UK and most other countries do not have fractionally reserved (for deposit creation) banking. Not 100%, (fully) reserved banking nor any other “fraction” of 100%. Loans create deposits; deposits create reserves, in that order. Commercial Banks have automatic overdraft facilities at the Central Bank to cover reserve requirements they want or a regulator might want.

    3. Jasper,
      I’ve read the article that you linked to and, as ever with Bill Mitchell, it’s lucid and entertaining but it doesn’t attempt to look any further than the issue of who gets to create and allocate new money. There’s no discussion of what people need money to do for them, how that can best be achieved, and what role (if any) money creation/allocation should have.

      Bill’s position is similar to Ann’s. It will doubtless improve the stability of the banking system (as will PM’s proposals) but will it help productive people and their customers get access to the money that they currently struggle to get use of? No.

  9. Malcolm,I certainly haven’t been assuming that money is going to be invested into productive activities and i’m certain that Joe would
    not believe that either. A debt based Monetary system by its very nature will encourage speculation and it will generally lead
    to non productive loans based on the incentives and the business model of the banks. The bankers are motivated to increase the stock of money via the creation of debt. In the end, more and more money needs to be created for the system to continue. In addition banks like to lend to speculators who have collateral as opposed to productive entrepreneurs who have ideas without collateral. This is a real problem as it leads to asset bubbles and a massive misallocation of loans to non productive investments. However, its profitable for the banks…what do they care right!!! The key to making money work more productively is to move to 100% money. If, as Zarlenga says the money is created by the state then it begins productively by being used for produce Infrastructure, Healthcare, Education & in my opinion Technology Development (Research grants for instance to the private sector). A 100% money economy would definitely not lead to asset bubbles as it has in our current system. I personally think we should encourage the use of credit unions and peer to peer loans. The role of banks should diminish significantly.
    I think the people you mentioned have been focussing on the first and most important point: Public OR Private money? After which you are most certainly correct – we need to make sure loans and money is channelled into productive activities where possible. A 100% money economy would by and large minimise the affects of “the business cycle” which is a function of this system as opposed to being a natural occurrence. If managed sensibly a 100% money economy would pave the way for a more humane society. Its simple mathematics really. I think IF and when we ever find a way out of this system we will look back in a century or so and say “How did we ever allow this system”. The debt based monetary system amounts to debt slavery ultimately for those that rent the money created by the banks. The banks dont care how the money is used, they just care about profit. When it goes pear shaped they socialise the losses…..a dreadful system….

  10. To Richard Dane, Jasper Wentworth, Ralph Musgrave, Joe Bongiovanni,and others who have taken the time to read my posts above…
    I don’t come to this conversation uninformed. I am well aware of the positions taken by MMTers, Positive Money, Martin Wolf, Ann Pettifor, etc. and have learned from all and many more.

    The debate about money creation and allocation is merely one part of a bigger picture that can sometimes get overlooked.

    What happens to money after it has been created? Where does it go? Why do so many businesses struggle to find enough of it to do useful things? Why do so many individuals struggle to find enough of it to buy the things that they need?

    The short answer to all these questions is that newly created money goes through a few cycles in the productive economy before it is destroyed (as principal debt repayments) or it is removed from the productive economy (as savings) by those who are successful at capturing it.

    There is a net linear flow of money from creation to hoarding. That’s whay M4 grows faster than GDP. That’s how people get richer.

    If the purpose of money is to facilitate productive activities, and businesses and individuals are struggling to find money to facilitate these activities, and creation and allocation of money is a key part of the system, then we have to make sure that proposals for creating/allocating money meet these requirements.

    Everything that I’m reading from everyone above falls short because of some false assumptions.

    Everyone appears to be assuming that new money gets used for facilitating productive activity all of the time. It doesn’t. A lot of it goes straight from creation to hoarding. Most of it does nothing for most of the time. For every £1 of GDP each day there are approximately £500 sitting idle in bank accounts or being used for financial gambling.

    Everyone appears to be assuming that most savings get invested in productive activity most of the time. They don’t. A tiny fraction (0.0002% ?) of M4 gets invested into the productive economy each day. Private pensions and government borrowing add about 100 times more than investment. Money creation as debt adds about 230 times more than investment. The economy is not fueled by investment of savings in productive activities.

    Everyone appears to assume that wages and salaries are an effective method of distributing spending money throughout the economy. They’re not. They never have been and never will be. Less than half the population of the UK is in paid employment and a good chunk of these don’t get paid enough to meet their needs.

    Nothing that’s being proposed by Positive Money or Ann Pettifor will change any of the above.

    Apart from a little bit of money as leverage the vast majority of money that’s currently used for investment is credit – new money created as debt which is (near as damn it) risk free for the individuals who issue the credit. PM’s proposals rest on the assumption that we will risk our hoarded money in investment accounts. We don’t do that now. We won’t do it in a 100% reserve system so the productive economy will be starved of money.

    At best Ann’s proposal will merely continue our current system in which businesses and individuals struggle to find the money they need. More likely it will make things a bit worse because her diligent bank clerks will probably be more cautious about what they invest in compared to our current teams of loan retailers.

    For the productive economy to thrive money has to be available and mobile for facilitating transactions. Any reforms to how we create and distribute money have to take account of this requirement and include (or be part of) a mechanism that ensures money circulates reliably, diffusely and in sufficient quantity to ensure that everyone who wants to do something useful is able to do it, and everyone who needs/ desires the products/services that are offered is able to buy them.

    As a means of facilitating the production and distribution of the things that we need for our survival and comfort, money is genius. To insist on using it as a proxy for wealth is just plain stupid.

  11. The creation and use of money is not an either/or solution as the Positive Money supporters argue. It is one of maintaining minimal inflationary demand both through the creation, destruction and dissemination of money at the cheapest possible price and no price. Being in a position of large private savings surplus does not produce the cheapest possible price for money when that surplus is accompanied by a more than adequate and relatively stable income stream.

  12. Stamatis , your last paragraph is the crux of our argument and there is really no way around it.There is no way within this current system to escape the implications that have warped our economy.
    Public money is the only way forward to escape the debt rampage and to transform our current hamster
    Wheel system into something more humane for the 99 percent of its citizens

  13. Ann Pettifor confuses the case of base money of a gold standard, which are of fixed or limited variability, and the case of fiat base money, which are obviously unlimited.
    She challenges the case for a committee determining the added/subtracted quantity of base money, as compared to regulating private banks’ money creation and allocation, in a combined process. The comparison is between (a) supplying base money when there is motive and to where it seems fit, versus (b) trying to manage the *sometimes* spontaneous and continuous bank money creation, and having no alternative when banks lack the will to lend. It should be obvious which one has clear targets and is less prone to manipulation, and, thus, is easier to handle with an accountable process. In the first case, you need to justify and account for action, while, in the second case, you need to justify and account for re-action to the banking system. In the first case, the state has the power; in the second case, the state has the power to …regulate the power of the banks. Let alone the case when banks do not want to lend, which cannot be regulated meaningfully.

    Finally, the greatest problem of credit creation is not addressed: debt contracts, which represent rigidities in the economy. When too many debt contracts are not performing, the private sector has to take the risk of lending, which it will not, and which leaves the money supply crippled. In the case of sovereign fiat money creation, too much money is not too much debt, and the only thing needed to remove an excess, is to target taxation to those that can handle the loss or those that are not productive enough, or whatever public policy is prepared to be accountable for at election time.

  14. Neil, another point re: your May 1 4:37am contribution.Your correct in saying that it’s important as to what banks are allowed to do and lend for…
    I assume you are referring to loans for either productive or non-productive/speculative purposes.
    This is very important and the current system seems to have lost all checks and balances over that in the
    Modern globalised world with rampant financial deregulation.,etc,etc.
    However, the point your missing is that of seigniorage,. This is one of if not the main argument for monetary
    Reform which you constantly remain oblivious to! You think it’s inconsequential – this is nonsense. The loss of this is the
    Critical weakness of a debt based monetary system.
    In a debt based monetary system the money supply is created by the banks and rented to society. Clearly not a level
    Playing field.

  15. Neil,
    I have responded to all of your points. You haven’t had the courage or perhaps the knowledge to follow suit.

    N: Adjusting your beliefs would be more productive.

    R: Neil, I will adjust my beliefs when & if you provide a logical reason to do so. Again you have been unable to rebutt the obvious flaws of this debt based monetary system & have decided to respond selectively and very unconvincingly. I am very happy to change my beliefs when I see an appropriate reason to do so. It has happened before & I’m happy for it to happen again. You, it would appear are stubbornly adamant with a fixed viewpoint and are unwilling to change regardless of the evidence or the logic.

    N:We already have a mixed economy”

    R: Fine! – I was referring more specifically to finance and banking; ie. Nationalise Money’s creation & keep banks private.”

    N: The people in the ‘monetary reform’ movement are religious nuts and no amount of evidence will move them from their path of perceived righteousness.

    R: Now you’ve lost me Neil. You’ve devolved this conversation to insults as a pitiful means of defense as you seem unwilling or unable to defend based on logic, evidence or reason. Using insults like the above shows where you’re at. I have no problem with you being pointed but resorting to insults puts you well and truly in the camp of an internet troll.

    You haven’t provided evidence. You and Ann have simply described the leaves and the branches of our financial systems problems. You have failed to get to the root of the problem – Private Money Creation. Without getting to the roots then we can be certain that the same problems will re-occur at some stage in the future OR at the very least our system will never reach its full potential as was the case between 1945-1971 regardless of its “stability” as Ann has described it.

    N: And like the end timers and other rapture seekers ultimately they are going to be very disappointed indeed when nothing much happens……

    R: Fine, you sound like the Head of the Bundesbank who stated that there is no other way to run the system. This comment is your opinion, but also reflects your ignorance. You can’t possibly predict how people will think or what they will know in 10-20 years time. Necessity is the mother of invention & as people become more desperate (which they are day by day) they will look for the answers and be more open to monetary reform. We live in a time of rapid change & ideas are rapidly changing and evolving. Just remember the following: Martin Wolf is probably THE most influential economic journalist IN THE WORLD. If he’s brave enough to break the “taboo” then who knows what the future holds. Economics students are rapidly waking up to the flaws in the teaching, there was no signs of this AT ALL when I completed my Economics degree just a decade ago. You cant predict the future & your comment doesn’t dampen my enthusiasm in the slightest. If you want me to respond again then make your comments constructive going forward.

    1. Malcolm Henry,
      I suggest you study this subject before coming out with your claim that “full reserve banking as proposed by Martin Wolf and Positive Money will result in a lack of money available for facilitating productive activity.”. PM (like other advocates of full reserve and indeed very much like EXISTING government policy) propose having government and central bank create and spend enough money into the economy so as to bring about the maximum level of economic activity compatible with acceptable inflation: little different to the existing system. (I’m actually repeating Richard Dane’s criticism of your point, I’ve just noticed).

      Neil Wilson,

      You still don’t get the point (April 28, 2014 at 3:23 am) that under the EXISTING SYSTEM and under PM’s system, the central bank decides on the amount of stimulus, while democratically elected politicians decide on the DETAILS of how that stimulus is spend, and other strictly political matters, e.g. what proportion of GDP is allocated to public spending. About 95% of the population understand that point, but I guess it will always be beyond your comprehension. Seems that in view of Ann’s support for your comments, she does not understand that point either.

  16. Per Jasper
    In HSBC’s balance sheet if Winter Fuel Allowance = £200
    Dr Reserves at BoE £200
    Cr Jasper’s a/c £200
    Being recognition of liabilty to Jasper, asset at BoE

    In the BoE balance sheet
    Dr HM Govt £200
    Cr HSBC £200
    Being recognition of liabilty to HSBC
    Is it that simple?

    So where does the issue of Govt Gilts come into all of this? Does the Govt give the BoE a £200 Govt IOU as evidence of its liablty to the BoE. I recall reading somewhere that it can’t do this, Gilts have to be sold to the market?

    Jasper will spend the £200 and it will circulate in the economy until it some how gets paid back to HM Govt through taxation or being part of an unclaimed estate on death!?

    Dr Deceased a/c £200
    Cr HM Govt a/c £200
    Being recognition of a libilty to HM Govt rather than a/c holder.

    Does HSBC set off?
    Dr HM Govt a/c £200
    Cr Reserves at BoE £200
    Money destroyed

    BoE Balance Sheet
    Dr HSBC reserve account £200
    Cr HM Govt £200
    Reserves destroyed.

    I think HM Govt use Citibank and RBS to receive and make payments.

  17. Hi Ann,Another issue I didn’t cover in my earlier responses was regarding the Committee responsible for deciding on the creation of money which you have reservations about. You used the word “Authoritarian”.
    I think the important thing is for us to first decide as a society whether or not money should be created privately or publicly or perhaps a mixture of both. From my point of view, the answer to that is quite simple as I’m sure you would have picked up from my writing 🙂 – it should be public, 100%. So; this decision needs to be made first…independently of how we will implement the new system.

    The Bankers will always fall back on the argument “You cant trust the government to create the money supply” as its in their interest to do so. Professor Noam Chomsky has labelled this type of demonisation of government as an aspect of business elite propaganda. I can send you his discussion of this if required. This sort of propaganda has been very successful for the private sector & rampant privatisation (certainly in my country – Australia) is perhaps a perfect example of this success.

    In terms of setting up a committee I think as Bill Still has suggested we need it to include a broad range of individuals representing many areas of our society, some within the government and some not. We cannot just leave it to the so called experts who have got us into this mess in the first place, that i suspect we agree on.
    As our current system stands the quantity of money is primarily a result of the current mood of commercial banks as Pos Money has pointed out (watch their videos regarding money creation)…. This in my opinion is “authoritarian”… this is and has always been a dangerous delegation of the most important power in our society.
    My point is we first need to decide on private or sovereign money, THEN we must set up a process such as the one suggested by Pos Mon. To keep the current system simply because we can’t decide how to implement it or because we cant agree on a democratic process would be unfortunate. A lot of movements around the world (take a look at the 5-Star Movement in Italy) are pushing for political reform. I think we need to move to Direct Democracy, E-Democracy, etc. This 2 party system based on Campaign donations combined with excessive lobbying for private interest is another massive problem. If reformed, it would provide an even better platform for better sovereign money creation which could address your concerns.
    So its not just about monetary reform, its also about political reform… We need both :)Richard

    1. “My point is we first need to decide on private or sovereign money, ”
      It’s always sovereign money. Commercial Banks are licensed to create Sterling in the same way that Sita is licensed to empty dustbins. It’s called outsourcing.

      Anything that is pegged 1-1 to Sterling is the same as Sterling since there is convertibility in place. Pretending otherwise is a religious delusion.

      There’s no difference at all, and you can transform one system into the other by simply altering the accounting policy.

      The actual debate is whether central planning is better than distributed flexibility. The evidence of history is in favour of the latter.

      “In terms of setting up a committee I think as Bill Still has suggested we need it to include a broad range of individuals representing many areas of our society, some within the government and some not”

      We already have that. It’s called Parliament. Anybody can stand for election and those that are elected are returned to the chamber.

      We have already had a constitutional crisis that stopped an unelected body overriding the will of the elected chamber on matters of finance and taxation. I see no reason to re-run that particular part of history.

      Parliament decides. The monetary system executes without question. That is how the UK works, and there are no good arguments as to why that should change.

    2. Hi Neil,
      When I refer to sovereign money I mean Money created by the government, debt-free, to be used for the benefit of society by being spent into the economy, not lent. Perhaps my terminology could be adjusted.

      RE: “We already have it. It’s called Parliament”
      – Great! Then lets use that for the process of creating government debt free money.

      RE: “The actual debate is whether central planning is better than distributed flexibility. The evidence of history is in favour of the latter.”

      Neil, you need to understand that its who controls the quantity & issuance of our money that is paramount. If your whole argument is that this system is more flexible and that’s why we should keep it then your simply not accounting for the many externalities that this system is causing, now more than ever.
      A debt based monetary system (where the private sector creates the money as an interest bearing debt) creates the business cycle, it widens the gap between the rich and the poor, the debt can not be repaid in full without destroying the money supply & eventually it eats out the real economy as it has currently done. The power to create money is too greater power to be given to the private sector & as you will have noticed it has corrupted our political systems. There is now 5 financial lobbyists In Washington for every one member of congress. The creation of public money for spending into the economy for items such as Infrastructure, Education, Healthcare, & Research & Development is one of the greatest opportunities our governments could have if they can see the vision and manage it democratically and transparently. It goes without saying that a process must be setup so that it is not abused. However, could it be worse than the present abuse?
      Suggesting that all of the above is justified due to more “flexibility” is an extremely narrow, short sighted viewpoint and a complete denial of clear externalities. Don’t be fooled into believing Ann’s 1945-71 Golden Economic Era theory. Regulation of the current banking sector is simply not enough. We must go to the root cause of the problem which is private money creation. I suggest you read “The Lost Science of Money” by Stephen Zarlenga. This will give you a broader understanding of monetary reform & his analysis is exhaustive covering thousands of years of economic history. No stone left unturned.

    3. “Adjusting your beliefs would be ore productive,”How clever.
      Speaking of which, this, parenthetically:
      “”The actual debate is whether central planning(public money) is better than distributed flexibility(private money). The evidence of history is in favour of the latter.””
      Wedge-issue terminology aside, it is not.
      And it just proves Richard Dane’s point about the actual lack of science and history among MMT adherents, from wherever they reside.
      What we have is well-funded academic economics that is learned at our single-curricula bizschols where you graduate by mimicking Neil’s empty claims.
      Zarlenga has indeed taken on this public versus private riddle at length in his book, and anyone reading the real history and science of money conclude that public monies have always delivered their promise, while the private bankers got us here.
      Show some science and history otherwise.

    4. Neil,
      I have also noticed that you have used terminology such as “central planning” and “politburo” on this blog with regards to this issue. In other words, you are trying to link monetary reform to communism via association. I consider this manipulative.

      There is no reason we can’t have a “mixed” economy. There is no reason we can’t nationalise the money creation process whilst leaving the banking sector private as it should be. No one that I know in the monetary reform movement is a communist. We simply want a level playing field when it comes to money. Monetary reform is simply the only way to achieve that. Private creation of Money in the form of interest bearing debt allows a section of society to dominate monetary affairs in an un-level playing field. Free enterprise can still flourish in a Full Reserve Banking system, there is no reason why it can’t if designed holistically.

      I would also ask you to remind yourself of the following: Most ordinary civilians simply do not know or understand how the system works. When asked; they say that its the government that creates our money supply!…the truth is that they’ve never put much thought into it but assume that the government creating our money would make sense. Surveys mentioned in “97% owned” (a documentary by Positive Money) have shown that the vast majority of people…like 90% from memory think that the government creates our money. I put it to you that if everyone was informed about the true process that they would be absolutely furious. In such an environment your beliefs would be put to the test. As Henry Ford said they would March in revolution the next morning.
      More awareness on this issue is coming, its going mainstream – that is certain; especially when the next financial crisis arrives – which it will. Just remember, necessity is the mother of invention. The world needs public money, the world needs a way out of debt both public & private. Monetary reform is the only answer….not simple regulation of the existing parasitic system.

    5. “There is no reason we can’t have a “mixed” economy.”
      We already have a mixed economy.

      The people in the ‘monetary reform’ movement are religious nuts and no amount of evidence will move them from their path of perceived righteousness.

      And like the end timers and other rapture seekers ultimately they are going to be very disappointed indeed when nothing much happens.

    6. Milton Friedman also suggested the tokenization of money (i.e. one common means of exchange), which is basically what this is. He is hardly a communist.
      These religious nuts that you talk about constitute some of the most respected economists the world has known. Basically any major economist that has written and published on the subject of banking and money creation finds the current system crazy and wants reform.

      I can see however, that the creation of new money aspect of this is always going to be a political matter, due to the redistribution effects involved. Milton Friedman believed in a steady printing of 2% new money every year, set in law.

    7. So, there it is.Both near-venomous wedge rhetoric towards reformers(religious nuts), and the strategic call that nothing will ever happen there.
      Ignore the reform messengers because they’re powerless and ill-informed. Adept double-speak and reformers become their opposites, gold standard Austrians. This, rather than critique the evolving reality of former cental bankers and bankers(Turner and Kumhof) and monetary-economic researchers like Huber and Yamaguchi.
      If you read any of their stuff, you know immediately that they are anything but religious nuts.
      Speaking of belief systems, MMT would tell you that, today, the government is the monopoly issuer of the nation’s money, and at the same time that we live under an endogenous money system where banks create the money by making loans. Which is why the shoehorn is the favored teaching tool of the Theorists.
      This about modern money theory.
      What is the theory?
      MMT never posits a theory, rather they select and stylize bits of money history and science. By proffering progressive post-Keynesian economics, they are in favor of all the same public goods that reformers want, and MMT says they also want to use the money system to achieve those public goods.

      That’s what drew me, from a lifetime of study of reform, to study what MMT had to offer. I started to turn away when I understood the MMT claim that, today, the government creates money when it spends, and that this was possible since we got off the gold standard in 1971 because of the ‘policy space’ that this provided.

      For all purposes related to our domestic economy, this country got all the policy space we needed when we got off the gold standard early on in FDR’s presidency
      And nothing about that changed in 1971 that would result in the government, kind of magically, now creating the money when it spends.
      So, like, what changed?

      But MMT just wants people to come to a new understanding about how money works now, computers and accounting and all, and that new understanding will enable good social things, while maintaining the status quo in private money and banking.

      Not good enough.

      Back to the Minsky paper No 127 again.

      Reform the structure and the system to make it work for a progressive democracy.

      Because it is our money system.
      And we’re tired of renting it from the bankers.

    8. “The people in the ‘monetary reform’ movement are religious nuts and no amount of evidence will move them from their path of perceived righteousness”.
      Sorry, but to me it seems that the boot is if anything on the other foot.

      It is, after all, you yourself who constantly reiterates this mantra – that those whose views you oppose are peddling a religion whereas you, by implication, are purveying the one and only objectively-determined “truth”.

      In my ears, That resonates like the self-induced belief of one to whom divine revelation has been vouchsafed.

      Isn’t it possible to disagree rationally with you without being the disagreement being attributed to blind faith? If not, I think your argument is seen to be without substance.

    9. “The actual debate is whether central planning is better than distributed flexibility”.
      No it isn’t. The issue is what each intrinsically gives rise to, and which of those outcomes is the least injurious to our society. The first has an inherent tendency towards (yes) “authoritarianism” but in a democratic system that tendency is able to be checked-and-balanced (“able to be” still doesn’t guarantee that it will be, but at least the possibility is there).

      The second has an inherent tendency for wealth to “trickle up”, because unconstrained human acquisitiveness – vide bonus schemes – automatically produces that result unless prevented from doing so (ie coerced not to) by some outside (public) authority.

      In which system is public constraint aimed at promoting society’s good most likely to be effective? (A clue:- in the second it can only with difficulty come into existence, let alone be effective – in a democracy that is).

  18. I have no problem with that Jeremy, but in my defense it was Neil that chose to respond with insults, not me.

  19. Ann, I suggest you do your research and look throughout history, as to how this system has worked. England had this in the form of the tally sticks, and there was no booms and busts during the 700 year period which it lasted, there was only ripples in the economy. It only ended when The bankers established the Bank of England. Forcing everyone in the country and the colonies to become debt slaves to them. Likewise the system worked well in early days of the Roman empire. When debt free money was issued as copper and bronze. The system only started to fail when Julius Caesar forced everyone to use gold causing the money supply to contract by 90%, which predictably caused a liquidity crisis, which as you know always happens when you have your money backed by gold or other precious metals. The times when system has failed has always been during times of political instability. Such as war, rising tensions or mass counterfeiting.

  20. Surely the problem with +ve money is that it is control primarily via supply rather than demand, thus can never be truly flexible and responsive to the *demands* of an economy.

    1. “Surely the problem with +ve money is that it is control primarily via supply”
      More that the control will be by crisis. If you attempt to quantity control things then you will get wild interest rate variations, spikes and liquidity crises, which the Bank of England will have to respond to by being the lender of last resort again because of the political pressure that causes. Effectively +ve money’s release valve is endless ‘Funding for Lending’ Schemes, which switches the system back to price control again. And you’ve ended up changing nothing.

      That’s because it is attempting to address something which is a religious issue for a certain set of people, rather than addressing the actual practical problem on the ground.

      The practical problem is that demand for loans is intensely pro-cyclical and having a laissez faire attitude towards them leads to Minsky moments. Its what banks are allowed to do and what they are allowed to lend for where the issue lies, not whether the accounting policy is ‘in specie’ or ‘derivative based’ in design.

    2. Is it not a fact that the “pushing the interest rate string” monetary system of today is intended to produce the right amount of bank credit money to achieve growth potential without inflation?And also that the only way to achieve that GDP potential without inflation is to have the right amount of bank credit(money) in circulation?

      Promising and delivering the right amount of money is the main policy initiative in both cases, and its successful implementation with public money will bring real interest rates to zero at the floor.

      The flaw is not “If you attempt to quantify things”, because that is how all of this works, rather the flaw would be in failing to correctly quantify things.

      Sorry to say that MA money guesstimating is almost a self-fulfilling prophesy, rather than the harbinger of money-cost spikes and capital market illiquidity.

      If the “All-In” Monetary Authority (Committee) consensus is that the economy is going to need $350 Billion in new monies next year in order to achieve the natural GDP growth potential of 2.3 percent, and if $350 Billion is added to the money supply, properly done, then it’s pretty darned likely that the economy will grow at near the 2.3 percent forecasted.

      The only thing that could prevent such an outcome would be a scarcity of savings (available for lending), which means that part of the “All-In” consensus was wrong.
      The Kucinich Bill provides, as I believe does PM, the Guv to become the Lender of Last Resort in that case, lending all needed $$$ at “it’s” natural rate of near to zero.

      As to the “Minsky Moment”, please have a read of Minsky’s Working Paper No 127

      “”VII. CONCLUSION A Modest Proposal

      The time has come to open a national inquiry into the structure of the banking and financial system. The radical changes underway in technology, computing and communication mean much of what we now have may be obsolete. The sluggish economy of the past decades, combined with the apparent reluctance of the Federal Reserve to give full-employment a chance, can mean that our financing structures are not consistent with the needs of a progressive democracy.
      I suggest that enough is amiss in our financial and banking structures that it is time to go back to the drawing board and determine what monetary, financial and financing arrangements should be in the 21st century. A late 20th century National Monetary Commission should be on the public policy agenda.

      Financial Instability and the Decline(?) of Banking:
      Public Policy Implications

      Hyman P. Minsky*
      Working Paper No. 127
      October 1994
      The Levy Institute

      “”Our financing structures are not consistent with the needs of a progressive democracy.””
      Think about how badly our financial structures have become since 1994.

      Quotes from this paper shows that Minsky was embracing the call for 100 Percent Money late in his magnanimous career.

      The whole purpose of these reforms was to address the instability inherent in what Fisher called: “”the lawless variation in the supply of the circulating media”.

  21. Nearly all contributors to this debate fail to consider the effect of the charging of interest on all the loans which create (over 97% of?) our money supply. Margrit Kennedy has estimated that on average, about 50% of the cost of all we buy is due to interest-charges on loans used to facilitate their production (this was in 1980s Germany). Usury has been condemned for its socially destructive nature over millennia, but a money supply dependent for its existence on usurious loans, ‘justifies’ other usury, in the attempt to counter its effects.We are drowning in debt. Look at the statistics of its growth, especially but not only since the ‘bank-deregulation’ of the late 1970s. Money created by the State and spent into circulation gives the State, on behalf of its population, the seigniorage, and creates no debt in the process.
    Meanwhile, little attention has been given to the falsity of the ‘need for growth’ and for ‘full employment’. It was being argued in the 1920s that, given fair distribution of access to the wealth actually or potentially created, there was no problem in creating that wealth. The ‘struggle for markets’, which essentially caused both World Wars, could easily have been defused by the distribution of Basic Incomes sufficient to sustain health and wellbeing; the problem originated with the privatisation of the ‘commons’ – land and natural resource values, and, laterly of growing importance, money-creation.
    Ther has been much debate, and confusion, about ‘what is money?’. The ‘credits’ that banks create as they make loans serve effectively as medium-of exchange; they are, for all practical purposes, money. They are crete along with intersest-bearing debt, but are not themselves debt. a
    Money should be simply a circulating medium-of-exchange, not an instrument of power. Given the return to the State of the privilege of its intial creation (and of monitoring and adjusting the total in circulation, as need for it changes), and after the introductory stage, in which pre-existing debts were paid off, the need to borrow would be far, far less than now. There would be no problem with it co-existing with local/complementary currencies, but the probability is that this would not be much in demand, if the money-creation/withdrawal authority was doing a good job of calculating society’s needs.
    The Green Party of England and Wales, and that of the USA, have adopted the policy of money-reform assentially as proposed by Positive Money. Its Monetarry Reform Policy Working Group argues:
    “The Green Party aims to create conditions for humankind to live into the indefinite future in harmony with each other and with nature – the natural world on the health of which we all depend for our own health.
    We in the Working Group regard five main issues in economics as essential for this:
    1. fair distribution of wealth and access to natural resources, to be achieved by
    2. securing for communal benefit, by means of Land Value Taxation, the basic rental value of the land, in its unimproved, natural condition, and
    3. the value of natural resources before any work is done on them, to be collected by Resource Taxes, as well as pollution taxes, supplementing regulations restricting pollution, and
    4: the reform of the money system, to end the enslavement of humankind by the false debts which are generated by a money supply based on interest-bearing debt, created by the world’s private banks as loans of “credit”. We need instead to have a permanently circulating, debt-free supply initially spent into existence by governments, and ensuring that what is physically possible and socially and ecologically desirable is made financially possible.
    Given the above, the final requirement is
    5. the introduction of generous Citizens’ Incomes, to distribute to everyone their fair share of the value of natural resources as collected by 2 and 3 above, and of the “common cultural inheritance” of the infrastructure, knowledge and skills passed down from the efforts of past generations.
    The main obstacle to change as advocated above is the ‘power complex’ of banks, controlling TNCs, controlling governments and the public media. We live in a ‘Matrix’ of lies and myths supporting these institutions. The prime myth is that we live in a democracy!

    1. Brian,Thanks a lot.
      Yeah, the Green Party (US) has a money reform plank in its economic platform.
      It’s tough to keep having to remind ‘Greens’ that it’s there.
      But on that interest thing, and the debt thing……
      The banks create the money by issuing debt, and then re-issuing more debt so as not to reduce money, in perpetuity, all the while collecting interest upon every dollar they every created, in perpetuity.
      THAT’s the Ninety-Nine Percent issue.
      Money and wealth flowing upward through the money-creation process.
      Seems like it’s a good time to put an end to that corruption of our sovereign money system.

  22. What a relief to see Scott Baker`s reply. I was beginning to think the word LAND would never be mentioned in this debate. Speculation in Land (land-based property) has been the cause of all the booms and busts. See Fred Harrison`s Boom Bust and the Depression of 2010, published in 2005

  23. Quote; “the idea that society can set up a single “independent” committee of men to make far-reaching decisions about the quantity of money needed by a nation of sixty four million people, all engaged in varied and complex activities – is bordering on authoritarian.”
    This is precisely the problem with Positive Money/Wolf’s “solution”. But what you both suffer from is ‘single-currency-bias’ – which re-enforces the city of London’s totalitarian financial grip on the British Isles. Both sides of this debate are English authoritarian in nature. One side wants a unelected committee of men (as Ann rightly calls it) to control the money supply for the English empire while Ann wants to maintain control through an alliance between the central English government and the the banking cabal via more regulations.

    We need grassroot-based people’s money, for and by the people, as championed by the late Margrit Kennedy, and keep the control-freaks at bay!

  24. The housing bubble started the current crisis, but this was really land speculation at heart.Well, why not collect the private rent on land and put it into public hands? By collecting the rent, and making sure to increase it as price speculation starts to take hold, whether led by the banks or by buyers of land, you will dampen or even eliminate speculation in land, and then banks won’t go off the rails in producing money ex nihlo and creating a “housing” (read: land) bubble. In fact, all the major economic crisis’ since capitalism began have started this way, not surprising when you consider that 80% of what banks lend is for mortgages (so say Michael Hudson anyway). Most of that is on the land portion, and will be even more so as factories start to produce houses en mass via 3D printing: http://www.opednews.com/Quicklink/Building-a-Home-with-a-3-D-in-General_News-3d-Printer-Technology_Construction_Homebuilders_Homelessness-140429-314.html
    The house cost then, will become trivial, especially in locationally valuable cities, where most people now live.

    We can try to control money creation after-the-land-fact, but even with a government body set up to issue money only within certain inflationary targets, the shadow banking system, as you point out, and as China is already discovering, will find a way around that, if the banks don’t outright corrupt the Money Authority itself.

    We need to drill down to the core of what causes dangerous speculation in the first place: Land.

  25. Money in future will be a heterogeneous mix. It is already a mix of private money (bank-created via interest bearing loans) and public money (QE and base money). The arguments against both are dotted throughout the comments, but basically critics dont trust the banks or the government, sometimes both. Much of the discussion is about measures needed to keep the money issuer ‘honest’.
    While we wait for regulatory or policy change to change the private/ public mix or to improve the pathetic quality of money/credit allocation, people are finding ‘interstitial’ (see Olin Wright) responses via P2P, crypto, the sharing economy etc. The lack of meaningful change on the regulatory seabed is giving these responses time to mature. The responses often involve a degree of separation from the main economy, intellectually and transactionally.

    The question is will the main economy reinvent itself and address monetary dysfunction before it is rendered secondary?

  26. Hi Ann, I don’t agree with your article at all & you seem to be very conflicted in your viewpoints about banking & finance. Banks simply cannot be trusted to create our money supply as they have shown all throughout history. If you’d actually read the Proposals by Positive Money you would have seen there is many ways that money could be brought into our economy for the benefit of our society. If private money creation continues in our society then our poorest citizens will ALWAYS be hamsters on a wheel….period. Even though the system was more stable during the years you mentioned 1945-71, it was still a parasitic system, just better regulated. Fractional Reserve Banking is rooted in a fraud & has always been a scam but unfortunately it has been inculcated for generations & we can’t remember it ever being different!!! I would ask you to look at it again…Money is energy, it is the crucial unit for participation in our economy & it must be created for public benefit – not private.

    1. Thank you, Richard for these well-pointed observations.I think Ann is in one of those “public money can never happen” bubbles, and from there is unwilling to see the writing on the wall by Positive Money, Huber, Turner, Yamaguchi, Kumhof, and now Wolf.

      It’s clear time to burst that bubble, and based on her past performance, once she’s outside, Ann will be a formidable ally for our great struggle ahead. Thanks to Martin Wolf for engaging this former ‘taboo’, and to you for holding economic democracy dear.

    2. Joe, I find your comments patronising. And I have no desire or ambition to join the select group of converts, of whom you and Richard are members, that have apparently seen “the writings on the wall”.
      I am quite content to stand aside from the community that includes Positive Money, nef, Kumhof and now Wolf and don’t need to be “one of the boys” to pursue what I regard as “Just Money”.

    3. Ann, My suspicion is that you adhere strictly to the teachings of John Maynard Keynes. OK; fair enough, he has struck a chord with you. I like him too, 90% of the time :). However, I don’t think its constructive to attack basically all other economic schools & economists as you have in your article and in your responses, i.e. “Austrian clones”/Milton Freidman, etc. This creates division between us, not co-operation. I have found the best approach is to study all of the economists & take a holistic approach as to what will work. We need to see an economy as an eco-system & our society as an organism if we are to move forward to a more humane society & provide our citizens with a system that brings out the best in us.I myself do not subscribe to any one economist in particular. I agree with Keynes on Capital Controls for instance & Keynes was right to advice Roosevelt back in December 1933 (“Lost Science of Money”,Zarlenga, p.554) to increase public expenditure in order to escape the depression. However, he was wrong to advise Roosevelt to borrow the money (which he did). A government simply does not need to “Borrow” money or tax its citizens to build Productive Assets such as Roads/Ports/Bridges/railways. Thomas Jefferson & Benjamin Franklin were very adamant about this back when Politicians actually understood money and banking. It is insane to borrow money like Keynes has suggested to build public infrastructure, we should be creating the money & building it when required. What governments need to do is to create sovereign money for these purposes out of nothing; pay the workers, pay the engineers, pay the quarries, etc, etc. This will create new deposits that filter back into the banking system that can THEN be used by the banking sector to be lent to business or wherever else it is required. IF there is still a shortage of money then as Positive Money has correctly suggested then money could be auctioned off by the Reserve Bank to the banking sector. This way at least the tax payer receives seigniorage. The commercial banks need to be kept private BUT the creation of money MUST be for only the public benefit.
      You are concerned about the despotic power of finance as am I but you need to realise that even though things were more stable back between 1945-71 its simply not enough…it was orderly parasitism (fractional reserve banking) rather than the rampant parasitism we have today. Banking should be a very small part of the economy, it should be a service sector to the real economy ONLY. The only way to ensure this 100% is to take away its power to create money. Also, this system is a debt based monetary system which implies using pure mathematical logic that the debt in the long run CAN NOT be repaid WITHOUT DESTROYING THE MONEY SUPPLY! This system is also the main cause of the Business Cycle as Hyman Minsky & many other economists have insisted. A debt based monetary system is extremely flawed. The system needs to go. There is no other way in the long run to create a humane society…PERIOD.
      I believe this issue is the most important issue in economics, I truly hope as a society we can get to the bottom of this…sooner rather than later. Please keep talking, this is not personal, lets co-operate to create a better understanding for everyone.

    4. Dear Ann Pettifor,You certainly did make me think more than a bit about being ‘patronizing’ in my comments, a trait that I see can unintentionally come out of a belief in being right about something that is important. I do apologize and I promise to be more considerate, and to ask more questions.

      I apologize especially for casting that scenario of your capture by the ‘money-reform can never happen’ circle that leads the financial blogosphere intelligencia these days. My intention is always to advance the discussion around the ‘public money’ option, because it so often misunderstood and mis-characterized.

      May I question your offering for a rationale why you disagree with Martin Wolf and his Chicago Plan basis, here:

      “”the proposal he(Wolf) advances is deeply flawed.,……his proposal, like the Chicago Plan, would contract and restrict economic activity…””

      So, there is an issue. Indeed.
      I hope it is still debatable.

      In case you’re not aware of the outcome of the IMF modeling of the CP-based proposal by Dr. Kumhof, it found the opposite result.
      It found that public money advances the GDP potential, without inflation or deflation, while putting an end to government borrowing, and reducing private borrowing.
      Did you find the modeling flawed? Is that not good enough?

      Dr. Kumhof’s work followed on the heels of the far more sophisticated Systems-Dynamics modeling done by Japanese economist, Dr. Kaoru Yamaguchi, who advanced his earlier AMA domestic modeling to an open economy, and found the exact same results… inflation-free growth and reduced debts all around.

      Finally, if you read the non-classical, progressive offering of Fisher et al that I referenced earlier as The 1939 Program… , you will find this is exactly the purpose of the undertaking, with a promise for economic stability, and THAT, is why is was supported by Friedman.

      In explaining why the distinguished authors brought forward a new monetary program, it’s basic stabilizing goal was paramount.
      “”It is intended to eliminate one recognized cause of great depressions, the lawless variability in our supply of circulating medium.””

      And it did so by recommending the type of legislation needed to accomplish that objective.
      SO, beside that group of bad boys you mentioned, we have some 400 economists ‘publicly’ supporting the idea that today is advanced by Martin Wolf.
      When was the last time that happened?

      400 economists and modern macroeconomic modeling say the economy is stable and growing to potential, despite reduced debt all around, under Wolf and the CP.

      What does Ann offer for proof that, under a Positive Money or 100 Percent Reserve proposal, an insufficient supply of credit “would contract and restrict economic activity”…?


  27. Excellent piece, Ann. I agree with all. But your arguments could be buttressed further by the following:
    1. Businesses have to invest before they earn. Credit effectively means they can borrow from future earnings. Without this we would have no businesses
    2. Banks under 100% reserve would be exposed to the inevitable defaults and so their business model would not work
    3. Positive money is right in saying the government should create “sovereign money” with no debt attached to spend into the economy. (You will know when too much of this stuff is created not through a team of government soothsayers but by watching asset prices)
    4. This figure of 97% of the money supply being bank credit gets bandied about like a holy truth but it meaningless. All the measures of money supply are meaningless. You cannot count the money by counting the money – it is too elusive. The figure comes from the 1998 book Grip of Death – an impassioned and fascinating book with a few deep flaws
    5. Savers do not invest/speculate with their money, they place it securely. To do anything else would be madness. Investment money comes from three sources a. bank credit, b. venture capitalists, c. government grants. You cannot raid granny’s piggy bank to finance the future economy

    Our problem is in the size of banks. They should be replaced by hundreds of limited chartered banks, but the fractional reserve model is essential to banking.

    Martin Wolf and Positive Money are going for the wrong target. 100% FR is totally crackers

  28. As a brief supplement to Ann Pettifor’s lucid article and comments on the subject matter, my comments below on Paul Krugman’s article Is A Banking Ban The Answer offer an epistemological input to the debate:

    Paul Krugman: Is A Banking Ban The Answer?

    Further to my comments on the Chicago Plan for monetary reform earlier today –

    [Its] authors serve up a couple of loose screws, to wit:

    1. The volume of credit – not the volume of a circulating medium – has been the chief determinant of investment since time immemorial. Credit, in one form or another, is always and necessarily behind the supply of factor services to the production process.

    2. It is the prerogative of owners of factor services – not that of sovereign power – whether or not to supply factor services for investment in the production process.

    – here are Paul Krugman’s comments on a third loose screw as reflected in recent writings on the subject matter by two writers, including Martin Wolf of the Financial Times:

    “The basic idea both writers share is that banks as we know them — institutions that issue promises to pay money on, or almost on, demand, while holding liquid assets that cover only a fraction of that potential demand — are inherently subject to runs, self-fulfilling losses of confidence. So they propose that we aim to eliminate such institutions; there would still be things we call banks, but they would simply be custodians of government-issued liquid assets.”

    Any coherent plan is a structure of thought.

    One loose screw makes any plan incoherent.

    1. Gunnar,
      Thank you so much for this comment…such a relief from the stream of Austrian clones engaged in this debate. Would you add this in to a slightly longer piece that we could post on the site, and retweet to our followers? Let me know. Write to [email protected]

    2. Gunnar,
      These 3 screws are loose, you say. I wish you gave some evidence.

      1. PositiveMoney say credit can continue. But it will be properly regulated, based on a rate set by the central bank. The ‘factors’ will lend funds deposited by savers and make a margin on the two different rates. They will also be able to lend funds sourced from the BoE at the prevailing base rate. This makes the base rate a far more effective control on the money supply. We must expect every apologist for the current system to object to this, of course.

      2. Who is suggesting that should change? Sovereign power (delegated to a CB) has always sought to steer that activity though. If unreliably.

      3. How is that a loose screw (at least how is it different to the other two)? If you’re referring to institutions offering 100% guaranteed deposits, yes, that’s the plan. There would still be lending intstitutions though, carrying out their traditional function, but fully at risk.


    3. Gunnar,It’s kind of amazing that you focus to excess, using Krugman (I think), on the checking account side of the banking system after reform.
      “” So they propose that we aim to eliminate such institutions; there would still be things we call banks, but they would simply be custodians of government-issued liquid assets.””
      Nothing could be further from the truth.
      Krugman should have his mouth washed out with soap, or at least his brain.

      What about the Savings-Investment banking side?
      They are the ones to intermediate savings into new credit forms.
      There is absolutely no restriction on banks making loans using the monies available…. the savings/investment bank sectors are not merely ‘custodians’ of government-issued money.

      Neither Martin Wolf, nor the Chicago Plan, original or Revisited, nor Fisher with 100 Percent Money nor the 1939 Program (nor Kucinich) ever propose any such thing.

      The 1939 Program includes a section on the sources of funds available for bank lending after the full-reserve proposal is advanced, sources which are far more expanded today under our more modern monetary economies.

      From the Keynesians, post- and New-, to the neo-classicals, we see common, widespread misinformation, possible based on these kinds of widely-circulating misunderstandings, about the actual public money construct.

      Read Soddy for the modern foundational view of our school of thought.
      “The Role of Money”.
      “Wealth, Virtual wealth and Debt”
      “Cartesian Economics”, where he ties sustainability in our physical environment to how the money system works.


  29. Ann Pettifor thinks that democracy can only rule for the state to have deficits and taxes instead of managing money creation ? Very fishy instead… Me think that money creation with national SEIGNIORAGE replacing taxes is the biggest opportunity for a democracy today.

  30. Ann,I agree a committee of learned men seems unduly authoritarian as a solution but could you please explain how an unelected body of thousands of arbitrary bank clerks working for profit is likely to be more so? I mean our current system of democracy supposedly was designed to provide people with the opportunity to set checks and balances on the truly political decision of where in the economy money is distributed under what terms, yet it has failed us so badly on the monetary front. I did not understand (historically speaking) what makes you optimistic the alternative will succeed any better. Thanks for clarifying.

    1. Ben, thank you for this…A bit overwhelmed by work right now, but will of course comment and respond at some point.
      From my point of view the key thing is that the debate is out there; for which much credit to you, NEF and Martin Wolf. But its all just confused it seems to me…but hopefully out of confusion will come wisdom!

    2. Ann Pettifor,Such a wholesome response to this evolving reality about money.
      “….hopefully out of confusion will come wisdom.”
      Martin Wolf has opened a new chapter (I hope).
      New chapters lead to new debates, to new understandings, and hopefully, new ideas and the next chapter.
      Even the candid MMT leaders agree that there IS no broadly accepted science of the money system, and we add our meager paragraphs as whatever happens, happens.

  31. It doesn’t seem to bother Ms Pettifor at all that the debt-based money system basically means that the masses have to pay real wages over lifetimes for interest due on money created ex nihilo by these banks. This fundamental fact about the way this debt-money system works is the principal method that enriches the few at the expense of the many. It is precisely this relationship of interest payments from the masses to the few that David Graeber says was the origin of the caste system itself in the Himalayas. If we are going to find a money system that works, we are going to have to eliminate this nasty detail. The masses subsidize the owners of the money system by handing over years and years of their wages for loans of money created out of thin air! This really is theft.

  32. Amanda….Right on! Since when did minority stakeholders in a firm (and in our banks) gain such unaccountable powers? When we conceded these?….Again this is something we must reverse…and can only do with greater public awareness and understanding….

  33. Right now directors of private firms are bound, by law, to (first and foremost) maximise shareholder return.
    That’s the reason banks decide, hey, there’s more money to be made speculating than lending to business – so we have to do that.

    To stop this, we should change this ridiculous law – to “maximise shareholder return, except where this conflicts with the good of the people”. A word from the government to say “you are not lending enough money to business” and they’d immediately have to (or face jail).

    PS as per John QEC, can I please be a bank too? I’d love to invent money and loan it. Plus, I’ve worked in the financial sector I’d say I’m about 5000% more efficient than they are.

  34. Can’t we all just agree that I should be paid interest for lending out money that doesn’t exist? It would be a good gig for me, as I’m feeling a bit demoralised that my house is more economically ‘productive’ than I am when all it does is sit on it’s haunches all day, creaking and moaning and rattling it’s pipes occasionally. Please add it to the plan. And if I can’t be a bank, can I at least be a house? It will help my self esteem and increase my status in my community. Thanks. (If all else fails – a middling work by a living artist with a pig valve in his heart that isn’t expected to last another 5 years. I’m not asking to be a balloon dog sculpture – throw me a bone.)

    1. John aptly named Q.E. Citizen….thank you for this insightful comment!
      I would be delighted (if I had the powers of the bank of England) to bestow on you the power to lend out money that did not exist …But you need also to take account of the liability you will be incurring by doing so. In other words, you may enter numbers into a computer, and transfer that digitally to a customer’s account that happens to be held with the Bank of John Q.E. Citizen – but she may also choose to withdraw those funds from your bank – to deposit in the bank of the person from whom she has purchased a property…

      So you will have created an asset and a liability almost simultaneously. And if as someone new to banking, you were clever enough at double entry bookkeeping to keep those assets and liabilities in balance…then i would be happy to reward you with a small fee…which you might call interest. It becomes trickier if the person to whom you are lending is not creditworthy…and defaults on their obligation to repay the loan…after making good use of your newly created money!

      Better to be a house than a banker is my advice…You would not have to be good at sums/double entry bookkeeping/contract law/central bank regulations….and risk assessmenta of all the dodgy characters out there desperate for some quick easy cash, to finance a get-away at a high-class but hugely unaffordable resort frequented by celebrities ….Of course as a house you would face the risk of the odd burglary….but the risks would be insignificant compared to those faced by loan clerks.

    2. Liability management is no problem for any lender with access to the entire banking system, as all banks create money that is available to other banks for settling their accounts, and the CB creates all the reserves necessary for payments-system settlements.With a charter, access to those media is guaranteed.
      Why are you defending private bank credit creation over money creation?
      It seems way out of whack for NEF history.

  35. http://www.positivemoney.org/faqs/positive-money-reform-proposal-idea-monetarism-1980s/ Answer to your argument about monetarism.
    http://www.positivemoney.org/faqs/wouldnt-these-reforms-make-it-difficult-for-banks-to-lend/ Answer on difficulty of lending.

    http://www.positivemoney.org/faqs/wouldnt-stopping-banks-creating-money-lead-reduction-amount-money-creation-therefore-economic-contraction/ Answer about contraction.

    http://www.positivemoney.org/faqs/radical-surely-regulation-answer/ Answer to radicalism why.

    I am a staunch believer in breaking the monopoly of banks over society. We the people have had enough of economists who don’t understand the day by day problems of society as a whole, money is the most important commodity in the world it controls everything and whilst you insist regulation is the key, regulation gives nothing back to the people. We still have no control and we still wont see transparency, inequality will continue without a leveling of the playing field. Banks do not even play on the same pitch as everyone else nor are they accountable to us, however they are masters of our destiny.
    I believe once the crisis has been “over” for a few decades it will come back again as it always does, history has time and again shown this to be true. The banks have to be removed from the equation other than as intermediaries, they must not be allowed to be controllers. I disagree with your arguments and ask that you take a fresh look at alternatives without prejudice. Regulation can and has been supplanted and always will be by those that have vested interests, take away the vested interests completely.

    1. Rokall, I wholeheartedly agree that our banking system needs to be reformed so that it serves (rather than feeds off) the people who make the real economy work.
      But the links that you provide to PM show that PM has yet to recognise the key problem with our financial system – namely that it encourages us to use money as a proxy for wealth: we’re obsessed with hoarding it and gambling with it so that we have more of it.

      PM’s proposals will stabilize the banking system, which would be a big step forward, but will do nothing to solve the problem of the productive economy being starved of the money it needs to operate properly for everyone in it.

    2. Malcolm,Actually, it does.
      Economic democratization is a by-product of The Government determining where new money is first spent, as a mater of its budgeting priority.
      It’s YOUR budget.
      Make it as egalitarian as possible, and use the gain of seigniorage as the tool for achieving your goals.
      Did you have something else in mind?
      have you red Soddy’s “The Role of Money”……which role ultimately is to distribute national wealth?

      If you can see how the money system today is used for wealth ‘concentration’ ….you should be able to see how, in its proper role, it could accomplish the exact opposite.

    3. Joe,
      Even the most egalitarian government will tend to allocate newly created money to favoured parts of the economy. The only truly egalitarian solution is to allocate new money in equal share to every citizen.

      But regardless of how new money is distributed and allocated, where does it end up? As it flows around the economy it gets captured and hoarded by those who are good at capturing it. So we have to create more new money to keep the economy working, and it gets captured and hoarded, and so on.

      I’ve just posted a comment on PM’s blog on the reasons why hoarding is such a bad thing and why Ann’s and PM’s proposals will do nothing to solve the problem. If you’re interested in my reasoning you can find the post here:

  36. Thank you all for comments, and thank you Neil Wilson for your helpful responses…
    Jonathan Chiswell Jones asks: “Can anyone explain the constraint banks have in being forced to keep some reserves at the Bank of England? If they can multiply their lending by any factor of these reserves, how are they constrained?”

    The answer is that there is no restraint: the banks are not forced to keep some reserves at the Bank of England. After a loan is made, the Bank of England creates reserves for that bank – in response to demand – to enable banks to fulfil their obligations under the clearing process. So central bank reserves arise as a result of lending….And private banks never need to use reserves in order to lend. All they need is a risk assessment of the likelihood of the loan being repaid; a contract based on that assessment, an interest rate based on that assessment…and the bank account details of the borrower! If they do need tangible cash, they have to apply to the central bank…that is the only element of the loan that they cannot provide…

    Hope that is helpful. Frances Coppola had an interesting blog on reserves way back: http://www.forbes.com/sites/francescoppola/2014/01/21/banks-dont-lend-out-reserves/

    1. Hi Ann, interested to know your thoughts on 100 percent money now that PM has responded to you and considering all of the above?

  37. Dear Ms Pettifor.
    It’s not the quantity of investments that is key, but the QUALITY of them.

    There’s too much credit being pumped into the system at present and the banks are feeding on that supply through speculation, reckless lending, mortgages etc. The funds available for loans and investment must correspond in some way to the resources made available through the public’s savings patterns (postponement of consumption of resources). Otherwise where are said resources to come from? If we print and print and print additional credit, does it mean that more resources come into existence? No, we merely create MORE CLAIMS on the same pool of resources, and bias the structure of the economy towards the actors closest to the credit creation system.

    I believe that it is this process which has resulted in too many bad investments, and therefore a recession. The key is to have a money system which transmits the information that enables us, as a society, to make quality, sustainable economic investments, with the resources actually available to us..

  38. “State created money does this and one way is for government departments to spend it into the economy.”
    “You either create money in a distributed fashion close to the activity on the ground and pay people (via interest payments) for deciding what should be funded and what should not (which is what banks do), or you try and create money centrally, pay people to decide what should be funded and what should not (via public sector salaries).

    I interpret Neil’s statement as saying that you either let banks decide what should be funded or let public servants decide. It is important, though, to take into account the intent or motives of these decision makers. The banks are motivated by considerations of risk to them and what their self interests are. Their decisions are purely selfish and lead to lending little into productive enterprises and most into housing and the financial casino. A public body has strict guidelines with the public interest and the health of the economy in mind. They would be answerable to Parliament for their performance in controlling inflation. They do not decide what will be funded. The government does in accordance with implementing its policies. This is democracy. The banks are plutocracy.

    1. “I interpret Neil’s statement as saying that you either let banks decide what should be funded or let public servants decide. ”
      You interpret that wrong. There is no reason on earth why the distributed entities couldn’t be public servants. But they have to be able to make the lending decisions in the field heavily decoupled from the centre.

      Centralised is brittle and unable to flex. Distributed much more flexible to what is required on the ground.

      A combination of public banks, a distributed Job Guarantee and a sensible progressive taxation system would ensure that the fiscal automatic stabilisers dampen the business cycle and that the correct amount of lending occurs for the capital development of the economy.

      Beyond that parliament should decide on the big ticket items, and the monetary system should implement their will instantly.

  39. The banks are not equity constrained either. Loans create deposits. Those deposits chase higher returns – including bank bonds and equity. So bank loans ultimately create a demand for bank equity.
    The constraint is always one of price, not quantity – due to the circular dynamic nature of a sovereign monetary system.

    Trying to force the process into a quantity arrangement is denying the very nature of the system. It’s like trying to make birth control retroactive.

    1. Does that not take us back to “Too Big to Fail? What about Basel 3 Tier 1 equity leverage ratio, provisionally set 3 percent of Banks loan assets at face value? Is that not a badly needed equity constraint? Is not the one thing we do need to do “deny the very nature of the system” that crashed in 2008?

    2. “Trying to force the process into a quantity arrangement is denying the very nature of the system. It’s like trying to make birth control retroactive”.
      That’s very neat!

      So much so as almost to convince me to buy-into all the rest of your/MMT’s propositions. “Almost” but not quite.

  40. Neil W, I take your point, there is a problem here with the use of words and definitions. I said commercial banks were capital constrained when I should have said equity constrained. Equity is not “reserves” and banks do not lend “reserves” (@ Jonothan above), they lend on multiples of equity. There is no fixed “multiplier” of bank reserves supplied by the BoE, into loans to individuals or businesses. QE has proved that. Commercial Banks lend to anybody they think can pay it back with interest. They create the “money” out of thin air. They do not lend reserves. Have a read of this, http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf
    The MMT guys over at New Economic Perspectives (and Neil W himself),have the best explanation of the system. That is there are two types of what, for the sake of simplicity, we call “money”. Vertical money and horizontal money. In the vertical world, money is created from thin air at the top and goes back to thin air at the bottom. This is the currency “issuers” world, the government’s world in our case. There is no theoretical limit on how much “money” the government creates (spends) into the economy. Likewise, there is no limit to how much money it takes out at the bottom and sends back into thin air (taxes). The size of the lump that gets left at any moment between the top and the bottom is extremely important and is the engine of the whole shebang.

    The lump that gets left in the middle interacts with the horizontal world of “money”. The horizontal world can also create (loan) money, out of thin air but has to play a zero sum game because it cannot create more vertical money into the economy; Only the Government and its Central Bank (one and the same in reality) can do that. Hence in the horizontal world of money every asset has to be balanced out by a liability. Everything, (financial assets that is, we are not talking real assets, houses cars, here), sums to zero.

    My winter fuel payment, from the government, the currency issuer; gets keyboarded into my current account at HSBC. We are currency users. At the same time an equivalent amount gets keyboarded into the HSBC “reserve account” at the BoE. Without that reserve payment, the horizontal money world would not sum to zero. HSBC would have a liability to me, my WFP, with no asset to offset / pay for it.

  41. Did you just compare 100% money to Thatcher era neoliberalist monetary experiment and gold standard?? I hope I misunderstood something.
    In gold standard, new money comes into circulation only when more gold is digged up from the ground. If country imports more than it exports and digs gold, it has to (effectively) export gold and its money supply shrinks which leads it getting into trouble (among all the other problems with gold standard). In 100% money central bank can create new money with a flick of a switch. Big difference.

    The neoliberal attempt to set the amount of money in economy was always doomed to fail because they didn’t have the required tools. They were only able to set the base money amount, but they didn’t have control on money multiplier effect. There was no way of knowing if banks would double the base money or multiply it by ten. So they set the upper limit for money, but not the lower limit. If we have learned anything from Prof. Steve Keen it is, that in debt based monetary system, if the speed of getting into debt slows down (not to mention if the actual amount of debts shrinks), economy gets into trouble. So the monetarist experiment was newer going to work with debt based fractional reserve system.

    Lastly, it seems you have not even read the PM proposal [1] or IMF working paper. In both of them banks are allowed to loan money from central bank and intermediate this money for real economy investments. So actually those proposals allow credit creation for real economy and everything else must be done with existing money or savings. And banks’ retail arms would be separated from their speculative, “investment” arms as ordinary bank account would be 100% backed.

    [1] The Positive Money Proposal, Chapter: lending money into circulation and regional investment banks

    1. I did read the PM proposals.
      I read their proposed legislation. I saw enough off balance sheet hacks and unnecessary complication to know that this was a group of people trying to fit their beliefs into a working structure, when it was quite clear from the problems that it was the belief that was wrong.

      And the main objectionable idea is that you need a ‘Politburo Standing Committee of the Very Clever People Party’ with the power to override the will of the elected Parliament. Something even the House of Lords has been prevented from doing since the 1911 Parliament Act.

      That fails question 5 in Tony Benn’s questions of power: “How do you get rid of them”, and means that what Positive Money is proposing is not a democracy, but an Authoritarian State. It’s a disgraceful idea.

      The automatic stabiliser systems should be beefed up to acts as the dampener against the business cycle, and where that turns out to be insufficient to promote a recovery then it should be up to the elected Parliament to take action – having taken whatever advise and consultation the members deem appropriate. The monetary system should then implement the will of Parliament *without question*.

      If the politicians cock it up, then they answer for their failure at the ballot box and the other lot gets a go.

      That’s what democracy means – allowing the will of the people to prevail whether you like it or not.

    2. Sorry, I was actually commenting on the original article by Ann Pettifor.
      Democracy aspect is another point. I hope you understand that if suggestion like the one PM made, would say that Parliament gets to decide how much and on what new money is used, free market types would be screaming “hyperinflation” and the discussion would get nowhere. Of course the decision making could be given to them just as easily.

    3. It’s time to stop listening to free market types. They have nothing to add.
      Parliament should prevail in a democracy. That is the debating chamber of the nation where the vital decisions are made and there is nothing more vital than spending and taxing decisions. *Which is why the House of Lords does not revise them*.

      Do we have to got through the 1910 constitutional crisis again before we realise that the elected chamber must always get its Finance Act and the will of the people should always prevail?

      Does nobody read History any more?

  42. Adding basic income – which cripples half the automatic stabiliser system – to 100% reserve proposals would probably be the fastest way of discrediting both those silly ideas.
    Just need to add fixed exchange rates and government borrowing in a foreign currency (aka joining the Euro) to the silly ideas mix and we can probably get the economy completely trashed within about 18 months

    Then perhaps sense can prevail and we can design a system that works with actual human beings and actual human society rather than solely in the minds of those captured by some strange form of religious rapture.

    1. Neil, can you explain the reasoning behind your dismissal of a combination of 100% reserve and UBI as the method of recycling spending money through the economy?

    2. “can you explain the reasoning”
      I don’t need to. Minksy already did. It’s throwing the baby out with the bathwater and is completely unnecessary. There is no need to sacrifice the UK’s Free Banking system or the dynamic nature of the monetary system on the altar of ideology – just because you can’t get your head around the accounting or the nature of outsourcing and credit.

      The simpler system I put forward is the one proposed by Minsky and MMT, which is simply to make the Central Bank the main depositor in all the regulated commercial banks, and for any other bank like entity to be agents offering maturity matching facilities (Zopa style). The regulator responsible for managing the risk profile of loans is then the one carrying the can if it all goes pear shaped.

      Things do need to be simplified, and the risk of the loan has to be retained by the entity advancing the loan. But you can’t put the genie back in the bottle. Money is endogenous, and balance sheet expansion and credit is the way business works. You have to work with that reality, not against it.

    3. Thank you for the link to your blog which has reminded me of your position.
      You and PM are focused on reform of the banking system (which is badly needed) and appear to agree on everything apart from who gets to decide how much money is created and to whom it is allocated.

      Your method is more attractive to me than PM’s but neither of you appear to be looking beyond money creation and banking to consider the damage done to the productive economy by our use of money as a proxy for wealth (which encourages us to hoard money) and the related expectation of receiving an income from money that’s lying idle or rented out.

      These two conspire to starve productive people from getting access to the money that they need to be productive while at the same time forcing most of us to live with the fear of (or within the grip of) poverty.

      Neither PM’s committee/government or your network of underwriters will distribute spending money throughout the economy. All they will do is deliver new money to favoured sectors of the economy, just as happens now.

      Some of this money will trickle temporarily into the hands of some customers but it will sooner or later end up in the hands of the hoarders and gamblers who will not let it back into the productive economy. So more new money has to be created to facilitate productive activity, which soon goes the same way as all the rest.

      Yes, our banking system will be more stable under your proposals but the rest of the economy – the human bit of it – will continue to suffer from a lack of money to do useful stuff.

      What I’m proposing (which I don’t think you’ve taken the trouble to read) addresses this shortcoming and will result in a far more vibrant economy than those proposed by yourself and PM. Your underwriters will be an essential part of it. Money creation will play a minor role. On the occasions when new money is created all it will be distributed to the population in equal share, which is a lot more democratic than your/PM’s proposals.

    4. What you’re proposing doesn’t work. Because other people won’t let it. Even before we get onto the technical economic arguments as to why it won’t work, it is contrary to the nature of human beings and therefore falls into the category of neat, plausible and wrong.
      Humans need to see quid pro quo or they vote the other lot in and agitate for a benefit’s removal. We’ve seen it with unemployment benefit already. We’ve seen it with the state pension. We’ve had child benefit at £20 per week removed because certain people “don’t need it”. So how anybody can believe that a full salary or ‘dividend’ can be handed out to millionaires without complete uproar is frankly beyond me.

      It also cripples half the automatic stabiliser system, requiring the tax half to take the strain. That means additional earnings will be taxed at about 50% – which will add to the resentment issues inherent in the process.

      And then we get into the issue of what people do with their time. The plain truth is that a significant section of the population like and need to be told what to do. That is why the armed forces are never short of recruits.

      The correct way to enhance the auto-stabilisers is to provide things for people to do and pay them a wage for doing it. Those things will have to be what the local community considers adequate exchange for the wage paid.

      In other words people want jobs, they want the status that comes with a job and they want to be paid for doing something useful.

      So just provide those activities with a Job Guarantee. That then ensures people always have an income, an alternative and something useful to do with their time, and it also disciplines the other sectors halting the chase to the bottom in jobs.

      You can’t ignore the ‘something to do’ bit. People want to be more than just consumption units.

    5. Neil, I’m replying to myself because your last post didn’t have a reply link so I hope you find this.
      You’re assuming that I’m proposing UBI as some sort of gift handed out by government, funded by conventional taxation. If that was the case then I’d agree with your dismissal of it for the reasons that you state.

      I’m proposing a fund, created by fiat, that’s owned in equal share by all of us. That deals with the human nature bit. No-one can complain that anyone is being favoured or disadvantaged.

      On the first day of the month we each get our share of the fund paid into an account from where we can spend it as we like.

      The fund is replenished from the economy via a continuous negative interest rate that’s applied to all money in the economy wherever it’s held. The rate is set at a level that recovers the entire fund by the end of the month.

      Instead of recycling spending money by taxing productive activity (which is a spectacularly stupid thing to do) we recycle it by taxing money itself.

      The negative interest encourages people to spend, lend, and invest their spare money instead of hoarding it or demanding interest for renting it out, both of which stifle productive activity.

      The idea that people will not work if they get £1,000/month of UBI is ludicrous. If true why do we pay anyone more than £1,000/month? As you say, people want to work for many reasons other than earning money. That will not change with UBI.

      The idea that a Jobs Guarantee “ensures people always have an income” is also ludicrous. What about the young, the old, the feckless, the disabled, the carers, the volunteers, the home-makers? They make up more than half the population. What use is a Jobs Guarantee to them?

      Paid employment never has and never will be an effective means of distributing spending money throughout the economy. Why we insist on pretending that it does beats me.

    6. “That deals with the human nature bit. No-one can complain that anyone is being favoured or disadvantaged.”
      As I said: neat, plausible and wrong.

      The most vociferous critics of benefit payments to other people are benefit recipients. They of course are worthy of the money, but that lot down the street, well…

      I would strongly suggest reading some sociology research and understanding how humans actually interact. We are designing a system for them, not for some purely rational artificial life form.

      And stop ignoring the Child Benefit issue. £20 a week to all. No one could complain that any child was being disadvantaged or favoured. Except that they did and enacted legislation to remove it from a section of the population.

      But let’s not let a little fact get in the way of the fantasy.

    7. “And stop ignoring the Child Benefit issue. £20 a week to all. No one could complain that any child was being disadvantaged or favoured.”
      You miss the point. It was the taxpayers, not the children, who felt that they were being disadvantaged by forking out for the offspring of the wealthy. What I propose is equitable (everyone gets the same share of the fund) and doesn’t disadvantage anyone.

      As for understanding how humans actually interact I suggest you do some reading about basic income trials in places like Manitoba, Namibia, Madyha Pradesh, etc. In all cases the system was enthusiastically accepted and the payments increased economic activity.

      Try also reading about the history of the concept from Thomas Paine to Milton Friedman, and the growing support for UBI in Europe (Swiss referendum; BIEN) and the US (it’s even been hitting the mainstream media lately). People on the right are as attracted to the concept as those on the left – a wide spectrum of human nature.

      As for this…

      “The most vociferous critics of benefit payments to other people are benefit recipients. They of course are worthy of the money, but that lot down the street, well…”

      Clumsy, implausible, and wrong.

    8. This is kind of ‘baiting’ Neil.So, allow me.

      I support either the BIG or JG as proper socio-economic considerations for addition to our national political economy. How to do these is certainly open for discussion.

      They ‘negate the need for’, and do not ‘cripple’ otherwise, welfare and UIC programs for The Restofus…..by design. That is a good thing. Why not?

      Adding either to 100 Percent Money will become the way forward for the Restofus, when the present ‘fog around the money’, like your present offering, clears.

      Your adding gold and foreign borrowing as ‘examples’ of add-ons shows exactly how little you know of Fisher’s proposals, being meant, as they were, as a replacement of the gold standard with a ‘real-money’ standard, and shown as only workable in native currency debt situations.
      I saw Warren’s egregious and shabby claims for apocalyptic gold-fx deflationary collapse…..so I guess neither of you ever read Fisher’s “Debt-Deflation Theory of Great Depressions”, because if anyone understood the monetary relationship with deflation of the economy, it was Fisher, who designed the 100 Percent Money proposal.

      You have no more claim to understanding what is ‘real’ for we human beings, nor for society than anyone else, and certainly not the progressive monetary-economist, Fisher.

  43. “State created money does this and one way is for government departments to spend it into the economy.”
    *Sigh* Another statement up there with ‘let the free market decide’ in the neat, plausible and wrong category.

    What is it about this statement that is so seductive? You either create money in a distributed fashion close to the activity on the ground and pay people (via interest payments) for deciding what should be funded and what should not (which is what banks do), or you try and create money centrally, pay people to decide what should be funded and what should not (via public sector salaries).

    Central planning requires people that have the Wisdom of Solomon and it doesn’t work. Centralised systems are brittle and inflexible, but largely efficient in a lowest common denominator way as long as things don’t change (which they always do). Distributed systems are flexible and dynamic and responsive to change, but less efficient and tend towards variable delivery quality.

    If you push the government system towards distribution, then all you will end up doing is creating public sector banks!

    It’s a complete delusion to think simply changing to an ‘in specie’ system alters anything fundamental. It doesn’t.

    1. Sorry, this is false.The option for government money-creation through sovereign fiat payments within a budgeting process has zero central economic planning aspects beyond that required to bring the proper ‘quantity’ of money into existence…..being to balance GDP potential.

      That quantity of money becomes non-tax revenue, and thus income to the government, who merely decides on spending through its budgeting process. There is no difference between tax revenues and non-tax revenues in terms of where the new money is spent. That is no different from now(taxes plus debt-proceeds), so no more of a problem than now.

      It ALL ends up in private people’s bank accounts the next day, which private people determine what to spend and save and where it can be accumulated for investment.
      This central planning phobia is either misunderstood or purposed rhetoric against those ‘theoretical’ socialists out there……whomever they may be.

      Any ‘distributive’ gains……and there will definitely be some……. are automatically made only through what the government is spending on in the government’s budget.
      Solving inequality requires redistribution, and this is one way to to accomplish more equality.

  44. The management of the creation of money is not a exact science. Central banks make educated guesses, but many times they are late, or too early with their monetary policies. The tools they have to affect behavioral economics are inefficient and create the “herd effect.
    The 2% Policy is a better way of stimulating the economy, and controlling inflation, inflation psychology.

    The 2% Appreciation/Inflation Taxation Policy would be based on how the economy was performing each year. The US income tax code would remain as it is now, during the recession cycle, and while the economy is in near balance to maintain production, productive investment, and increase consumption in the economy. The tax rate on interest income, and long term capital gains would remain the same as it currently is. If the economy started to become over heated, and assets and real estate began to increase more than 2% a year, the income tax would automatically change based on the asset appreciation/inflation rate before the Federal Reserve raised short term interest rates, and tightened credit to the banks, to increase interest rates.

    How would the 2% Appreciation/Inflation Tax Policy operate?

    If asset and real estate prices were increasing more than 2% , the tax on savings and money investments (bonds and other debt investments) would decrease based on the asset appreciation/inflation rate, and at the same time the interest deduction would decrease based on the appreciation/inflation rate. This change in our tax code would slow the economy down without raising cost of production, and consumption. This change would also allow production the time it needs to balance supply with demand.

    Employment would be maintained, as the economy balances itself, therefore normal consumption would continue with the 2% Policy enacted.

    The 2% Policy will increase money (debt) investment and the savings rate during the high appreciation/inflation cycle, to give production the monetary capital it needs to increase supply at the lowest possible interest rate without increasing the money supply.

    During the high appreciation/inflation cycle, with the 2% Policy enacted, people would not feel as if they needed to spend their money, or invest their money to protect it against inflation, which increases demand unnecessarily, which increases the appreciation/inflation rate.

    The long term capital gains tax rate would be neutralized, during the high appreciation/inflation cycle, because the return on investment would be the same as on high appreciation/inflation derived profits, when interest income is being taxed at the same tax rate as long term capital gains.

    The almost 50% differential between the tax on long term capital gains tax, and savings and money (debt) investment would slowly be automatically eliminated until the high appreciation/inflation rate was reduced to 1 to 2 percent.
    Also during the high appreciation/inflation cycle the interest paid on loans would not be 100% tax deductible, which will reduce the stimuli in the tax code for people to increase their debt for unproductive investment, and speculation reasons.

    If interest rates are not raised to control inflation and inflation psychology, people living on interest income will not have an income increase, therefore they will not increase demand in the economy when less demand is needed to balance the economy. The cost of government programs that are index to inflation will not increase as much when inflation and inflation psychology is correctly controlled with the 2% Policy.

    The lower long term capital gains tax rate would still be available, and meaningful to those people who want to make, or sell productive investments.

    We have had a couple of periods in our history where the long term capital gains tax rate was the same as the tax rate on interest income, and other forms of income. From 1913 to 1920 and 1986 to 1990 the tax rates for both forms of income were the same, When we lowered the long term capital gains tax rate lower than other forms of income, economic activity increased, but if it was left at the lower rate for too long it contributed to excessive debt (money) creation, and high appreciation/true inflation rates in the private sector. This occurred when long term capital gains taxes were lowered in the recession of 1921, ending in the financial crisis of 1929, and the Great Depression. In 1990 and 1993 the top income tax rate was increased which increased the difference between the two tax rates.
    When the capital gains tax was lowered even further with President Bush’s tax cuts in 2001, and with the zero capital gains tax rate exclusion on up to $500,000.00 of long term capital gains on the sale of primary homes, that had been enacted in 1997, and the deregulation of the financial sector in 1999, to the way the financial regulations were prior to 1930, all three changes contributed to the financial crisis in 2008.
    When the high appreciation/inflation cycle is occurring in an economy, money (debt) is losing purchasing power. The 2% Policy is a way for borrowers, and the government to partially maintain the purchasing power of money (debt) without raising interest rates excessively. If the private sector, and the government create too much money (debt), which creates inflation, and unsustainable asset prices, the debt investor, or the saver will pay a little less income tax, with the 2% Policy in effect, at the end of the year. At the end of the year the borrower will pay a little more tax, with the 2% Policy in effect. There will be no loss of revenue to the government, because the exchange in value will take place between debt investors/savers and borrowers.

    With the 2% Policy enacted,employment will be maintained while the economy balances itself, therefore the States and Federal Governments will have less social expenditures maintaining the safety net, such as unemployment insurance, welfare, medical payments, food stamps, and many other programs that help people when they become unemployed, or if they cannot earn enough money to maintain a reasonable standard of living.
    All people and businesses would be included in the 2% Policy. The same as they are when interest rates change. All debt investors, savers and borrower would be affected by the 2% Policy. It is more important for a capitalist economy to have stable interest rates than the tax deductibility of interest cost. After the economy slows down, all the stimuli the tax code has in it, to invest in capital assets, will return as the tax rate on interest earned on savings, and money investments increases to their previous tax rate, and the interest deduction becomes 100% tax deductible again.

    To continue reading the complete article go to wp.me/p42WQA-21

  45. I agree that full reserve banking as proposed by Martin Wolf and Positive Money will result in a lack of money available for facilitating productive activity.
    I disagree that the solution lies in better regulation of the current banking system.

    Even if we have perfect regulation of the sort that Ann proposes (all credit going to useful, productive activities) the main problems of our current system will remain. There will still be a net flow of money out of the productive economy into the unproductive financial economy (hoarding/gambling), and an exponential growth in debt in the productive economy.

    The Wolf/PM proposals for 100% reserve banking are a good start but require the addition of a reliable mechanism for cycling money through the productive economy so that businesses and their customers always have enough money available to produce and purchase the things that we need.

    You can find a summary of one such mechanism here: http://basicincome.org.uk/opinions/2014/02/fund-universal-basic-income-without-scaring-horses/

    1. Malcolm, thank you for this. I simply don’t agree. We have lived through a very recent period in history when money was put to sound use, and the build-up of debt was not an issue…The fact is that money is not a a commodity nor can it be a fixed quantity: its a promise to repay, and is based on trust. And there can be millions of ‘promises to repay’….. The issue is this: to what use is the “promise to repay” being put? And at what rate of interest? If the “promise to repay” – backed by the full the full faith and ‘credit’ of the state -is put to good use at a low, repayable rate of interest, if that investment then generates income with which to repay the debt, and if this ‘virtuous circle’ is maintained… there should be no build-up of a burden of debt. However, if credit is directed at speculation …there can be no virtuous circle – only usurious gambles on the ability of the borrower to repay.
      There are countries in Africa that do not have a sound monetary system; credit is hard to come by, cheques and credit cards are not in use. As a result, there is no money to meet society’s complex and varied needs…

    2. Ann, I’m guessing your “recent period in history when money was put to sound use, and the build-up of debt was not an issue” is 1945 to 1970-ish.
      Yes, investment in post-war rebuild and new technology helped to recycle spending money for a while but money was invested not because it was morally or productively “sound”. Money was invested because it was profitable. It was an opportunity to capture and hoard more money.

      “The issue is this: to what use is the “promise to repay” being put?” Just so.

      A tiny fraction of these promissory notes are being used for productive transactions each day. The vast majority of them lie idle or are used as gambling tokens in the hope of capturing more of them. Why? Because holding money makes us feel good.

      In theory money may not be a commodity but in practice it certainly is. The desire to capture and hoard money is exactly the same as the desire to capture and hold gold.

      I don’t care how much gold you lock away in your vault: gold is of little practical use. Money, on the other hand, is essential. It’s the facilitating medium for producing and distributing every single thing that we need for our survival and comfort.

      A financial system that doesn’t recognise this, that doesn’t include a reliable mechanism for recycling spending money throughout the economy is not fit for purpose.

      Wages never have and never will be an adequate method of recycling spending money, no matter how much “sound” investing goes on because the desire of investors is to capture and hoard even more money than was originally invested, which sucks even more money out of the productive economy.

      Credit (no matter what the reserve ratio) is issued for the same purpose and has the same effect.

      The productive economy doesn’t need savings or interest, it needs cashflow. Investment is cashflow. Consumer spending is cashflow. If we want the productive economy to thrive we need financial systems that are geared towards making money available and mobile. The opposite is currently the case and this will not be changed by what you (or Positive Money) are proposing.

    3. Hi Malcolm,RE: your comment…
      “The Wolf/PM proposals for 100% reserve banking are a good start but require the addition of a reliable mechanism for cycling money through the productive economy so that businesses and their customers always have enough money available to produce and purchase the things that we need.”

      – These issues are thoroughly discussed in “Modernising Money” written by Positive Money. You should order it on their website, its a good read 🙂

      You’re right; we need money to be leant for productive purposes primarily. Ann Pettifor is correct when she suggests that banking & finance was regulated for more productive purposes in the era between 1945-71 & we had a banking system that was more stable. However, if we want a great society we need to go one step further this time. We need to regulate them such that lending is used for more productive purposes but in addition we need to give the power to create money back to the sovereign state.

    4. Malcolm, before you do that, play this video (see the video controls, volume up etc, at the top right of the home page). Reading the books mentioned may well put your economic knowledge, way above anyone who ever worked for the IMF. http://softcurrencyeconomics.com/ .

  46. ‘…..credit merely facilitates transactions – and in that way creates economic activity – investment, employment and income.’
    Credit, created by loans and so creating debt plus interest, is not the only way to facilitate transactions. Another way is to put money, purchasing power, into the economy. State created money does this and one way is for government departments to spend it into the economy.

    Problem solved.

  47. It’s not funding Jasper. It’s a collateral upgrade. The banks give the Bank of England charge over loans and in return they get a piece of paper issued by the Treasury which they can then use as collateral in the rest of the market (i.e. its a swap). The rest of the market prefers Treasury paper as collateral rather than a rag bag of loans and therefore will lend reserves at a lower rate, or it can be represented back to the Bank of England for cash.
    The Bank of England could just have easily given the banks reserves directly as the swap, but instead feels the need to go through this elaborate charade including Treasury for some reason. Whether its to do with which half of the government sector pays the interest, just keeping the whole thing off the balance sheet or some other religious belief is difficult to know.

  48. Ann reminded me about the BoE Quarterly Bulletin. In edition http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb1204.pdf , there is an explanation for how “Funding for Lending (+ Help to Buy)” is financed. It is at pdf page 35 titled Appendix A.
    Appendix A is an exercise in how to disguise a “fiscal stimulus” (government deficit spending) as a “monetary stimulus” operated by the BoE. You will appreciate that it is absolutely verboten for a Conservative Chancellor to be seen to be stimulating some part, if not all of the economy, by additional public sector spending. Particularly one who is hell-bent on a zero deficit.

    See if you can spot the conjuring tricks. Particularly, you are looking for how they keep the financing off the balance sheets of Treasury; Treasury Debt Management Office; Bank of England. And, most importantly, how the government’s Debt Management Office prevents the issue of stock for FLS, appearing as an increase in government deficit spending.

    This is all perfectly legal and demonstrates the shear beauty and flexibility of a sovereign fiat currency economy. Particularly when the government has to do a snow job on hostile media pundits and opposition politicians.

  49. As Ann Pettifor “credit is nothing more than a promise to repay” its just an IOU. Those IOUs are effectively new money in the system. Anyone can write out an IOU, and we do it all the time, or at least we used to, every time we wrote out a cheque.
    I think we all agree that banks do cause governments considerable problems as they blow hot and cold on their lending policies. It is they who are responsible for the boom bust cycles which cause so much economic misery.

    However, we need to consider the practicalities of any change in the age of the internet. It is quite possible for a bank on the other side of the world, well out of the reach of British jurisdiction, to write out as many IOUs in £ sterling as their capital base will allow them to guarantee. They don’t actually need any ££ themselves to be able to do this. If they are sufficiently well capitalised they’ll will be able to borrow them as needed. Just like UK high street banks can do now.

    So the challenge is to deal with the problem rather than just pushing it off-shore.

  50. The question of how interest-bearing money should be made available has to relate back to how Nature has “wired” us for survival. That “wiring” is the ability to act on both an individual and mutual basis according to the situation confronting us. This, however, results in good and bad Individualism and Mutualism. So you might argue, for example, Galileo Individualism good; Catholic Church Inquisition Mutualism bad. Accordingly because of our “wiring” when we examine how to make interest-bearing money available we find problems arising no matter how it’s delivered by the state, by the licensed private banks of the state or by shadow banking (P2P). Typically these problems might arise from ideology, from risk limitation and the balance between sovereign state created interest-free money and interest-bearing money channels stated above that affects demand. The following news articles give some idea of the problems:-



    Paul Meli challenges the notion that Ann Pettifor subscribes to in this article that the vast majority of our money is created by licensed private banks. Meli argues that economic instability is created when this private bank created interest-bearing money exceeds roughly 40% of the overall total money created by public and private sectors. Here are his arguments:-




    Given all these problems with making money available logically we can only seek to set up constraints to find a stable balance amongst the various methods and to do this we have to use the democratic rule making process. We should, however, consider two points in this process. Firstly, as Thomas Piketty’s book “Capital in the Twenty-First Century” argues, we don’t have democracy when only a few have control over major amounts of capital and therefore large income that turns into glut savings to be further lent out for more income with no pressure to seek low yield. Secondly, in the light of this, having a process to gain access to capital that is purely based on the assessment of risk in a competitive market and not a corruptible democratic process as Randy Wray argues and Ann Pettifor also argues is in a contradictory sort of way pure democracy! We just need to make it work properly with effective constraints which will involve creating true democracy.

  51. There really isn’t any need for fully reserved commercial banking in a sovereign floating fiat currency economy. It sort of defeats the object of having a fiat currency; we might as well go back on the Gold Standard. Unfortunately, our politicians still think we are on the Gold Standard, hence the hysteria over debt and deficits and this mistaken “balanced budget” pilgrimage.
    On the “reserves” question, it is worth having a look at the BoE Consolidated Balance Sheet. http://www.bankofengland.co.uk/publications/Documents/bankreturn/2014/140423cs.pdf .
    You can see the £61.6 billion of notes in circulation. The BoE is the only place you can get this printed money. Commercial Banks don’t print money they print numbers into ledgers, but they will exchange those numbers for some of that £61.6 billion if you want it. The BoE will print as much as the Commercial Banks need.

    The “other assets” currently dominates the balance sheet and tells you as little as possible. It is balanced out on the liabilities side by mainly QE “reserve balances”.

    1. Sorry, again, Jasper.As far as the gold standard being related in any way to reserves, full or otherwise, it is ‘reserves’ themselves that are the throwback to the gold standard, which required gold holdings as reserves against money in circulation.
      With resort to fractional reserve banking, the first tier of ‘deposits’ being held as reserves is a mimic for the gold holdings of the past.

      So, you, like most MMTers have it backwards.

      And you have obviously no understanding how full reserve banking works.
      Here is Fisher’s 1939 Program for Monetary reform……Fisher the full-reserve banking author, who picked up on CP-author Simons, who picked up on Soddy, who picked up on McLeod and Ruskin.

      Being a Nobel prize winner, and described by Shumpeter, Tobin and Friedman as the greatest economist in the history of this country, and whose theories on debt-deflation have a strong standing among post-Keynesians, should provide him with some ‘currency’ in these discussions.


    2. “should provide him with some ‘currency’ in these discussions.”
      Only if you’re dazzled by ‘appeal to authority’ logical fallacies.

      The system proposed achieves nothing other than religious glory for those daft enough to believe that it changes anything.

      Just like those people that believe issuing Gilts somehow restricts government spending.

    3. Always pointing the finger with the charge of ‘religiosity’ toward those who disagree with you.Four fingers pointing back at MMT.
      Proof being this meager posit is response to today’s rapidly evolving reality from Kumhof, Turner and now Wolf……. all in favor of public money.
      Any big bandwagon on MMT, excepting of course, the students at UMKC??
      The criticisms of MMT are legion today, not the least being that of Dr. Joseph Huber, German economic-sociologist, whose work here has depth and scholarship.
      As for 1000 percent reserves, I hope all can read one of his latest:


      Because there are so many false and misleading statements being made about this subject.

    4. 1000 Percent??Only possible with today’s feaux-reserves.
      LOL on me.

    5. The Univercity of Chicago wasn’t dazzled by it either, they wouldn’t publish it in its original form in 1933 or the referenced version JB quotes of 1939. There were a lot of “solutions” to 1929 knocking around at the time, not just the “Chicago Plan”.
      The US got out of recession of 37/38 caused by a sharp dose of government “austerity” and the Undistributed Profits Tax 1936; by Roosevelt doing $5 billion dollars worth of good old Keynesian fiscal stimulus, MMT style.

      Not sure how the Chicago Plan would have worked during World War 2?

    6. Fisher belongs to the neoclassical tradition, which is why it is surprising that he is so enthusiastically endorsed by “new” economic thinkers…. His paper on Debt Deflation is brilliant, and remains very relevant.
      However he is also the man who “famously predicted, three days before the crash, “Stock prices have reached what looks like a permanently high plateau.” On October 21, 1929 he announced that the market was “only shaking out of the lunatic fringe” and went on to explain why he felt the prices still had not caught up with their real value and should go much higher. On Wednesday, October 23, he announced in a banker’s meeting “security values in most instances were not inflated.” For months after the Crash, he continued to assure investors that a recovery was just around the corner.” Wikipedia…http://en.wikipedia.org/wiki/Irving_Fisher

    7. There is no surprise in why new economics thinkers use Fisher’s radical reform proposals, because they are built upon the legion of radical proponents: Simons, Soddy, McLeod and Ruskin, and then endorsed by one as conservaive as Friedman.It’s not that Fisher did not address the major issues of neo-classical economics, just like Turner today explains how banking and finance must grow out of the standard monetary economic construct. But how many economics students over the past 8 decades have had a course of study based on the the radical ‘public money’ approach evident in the 1939 Program for Monetary Reform, developed by Fisher, Graham and Douglas, etc.

      And when writers trot out Fisher’s historic errant investment advice, as to paint a picture of his failings rather than his incredible accomplishments, including the Nobel, well, the desperation of the writer is on the surface.

      Again, on Fisher’s 100 Percent Money, and the contrast with today’s ‘real money’ proposals.

  52. Can anyone explain the constraint banks have in being forced to keep some reserves at the Bank of England? If they can multiply their lending by any factor of these reserves, how are they constrained? Also I am not clear how the magic of quantitative easing changes the levels of these reserves, despite the explanation by Jasper Wentworth that the Bank of England swaps various interest bearing forms of debt for interest free debt. Or do the commercial banks get the interest free debt and the BoE gets the interest paying debt. I am confused you see. It seems to me banks are constrained in their lending today by the trail of bad debts the easy credit years led to. In other words they are afraid to lend, and afraid to take the risk of lending. This has little to do with their reserves…they might be awash with cash, but too cautious to lend.

  53. Ir’s good to see this erudite discussion is in such capable hands.
    I support Positive Money because of the sheer immorality and unfairness of banks issuing most of our money.

  54. Jasper,
    I agree with your comment, except that I don’t entirely agree with your last paragraph. That is, I don’t think there needs to be any special treatment for casino banks under full reserve.

    The basic split under full reserve is between, first, 100% safe state backed accounts where money is not loaned on (or maybe the money is just invested in short term government debt) and second, accounts / entities where money IS LOANED ON, but that’s funded entirely by shareholders / loss absorbers of some sort. As to exactly what the latter lend to, each entity (mutual fund under Kotlikoff’s system) has to inform shareholders what they’re investing in or lending to. Thus investors can fund safe morgtages, NINJA mortgages, or ultra-risky casino type banking if they want. It’s their choice. So no special measures are needed to cater for casino banks or “casino mutual funds” as they might be called under Kotlikoff’s system.

  55. Ann. The government does not just issue the tangible stuff, notes and coins, it issues “reserves” as part of the base money MB.
    Look at it like this. The government pays out “winter fuel allowances” (WFA), I know, I got some. That money appeared in my HSBC current account, the government put it there. So what happened to HSBC’s balance sheet? All of a sudden there is this deposit in my account. HSBC has unbalance in its balance sheet. I have got an asset, HSBC has got a liability it didn’t expect.

    The government always spends twice.

    That WFA in my current has to be balanced out in HSBC’s balance sheet. When the government keyboarded that money into my account, it simultaneously keyboarded the same amount into HSBC’s “reserve account” at the BoE. HSBC’s balance sheet balances again, all is well.

    I spend my WFA on some tyres and write a cheque to my mate to pay for them. He deposits my cheque into his current account at Barclays. Both Barclays and HSBC have unbalance in their respective balance sheets. To get the balance sorted HSBC transfers some of its “reserves”, (equivalent to my cheque) at the BoE to Barclays “reserve account” at the BoE. Both banks balance sheets balance again.

    I am thinking that the term “reserves” is not properly understood on this site, (you’re not alone).

    The total of “reserves” at the BoE is large at the moment. Far greater than required for Interbank settlement. The QE process swaps financial instruments, mainly interest bearing Gilts with various maturities for “reserves” of zero maturity; basically cash (which the BoE creates out of thin air). The commercial banks are using this asset to back “business as usual”; like 2008 never happened. Trying to lend loads of reserves to other banks, overnight, that don’t need it, means interest rates trend towards zero. The BoE can raise this rate by offering some interest on those reserves, (which it now does) inorder to achieve its policy “base Rate”. All part of Monetary policy, not Fiscal policy (taxes and government spending). The later is a far more powerful tool for affecting the “real” economy. Unfortunately, this involves politicians with simplistic ideas about deficits and debt, as if they were currency users and not the actual currency issuer, with no balance sheet to worry about only inflation, if it spends too much new money into the economy. BTW, the government always spends new money, taxes go back into the thin air from whence they came originally. Also, the government gets all its spending back via taxes eventually. The so-called “national debt” is all the government spending that we and some foreigners, are saving and haven’t given back yet in VAT and Fuel Duty etc. If the private sector households and businesses want to save, then, either the government has to run a deficit or we have to have a balance of payments surplus; more exports than imports, not likely this decade at least.

    I agree we need a 21st Century Glass-Steagall Act. Casino banking has to be separated from transaction banking (payment; clearing and settlement). The latter can usefully be insured by the central banks to some degree. Casino banks should be regulated by the Gambling Commission, they are basically “bookies” that serve no public or social purpose.

    1. Jasper,With all due respect, I think it is you who does not understand the nature of reserves as relates to ‘money’ in circulation.
      I explained elsewhere, they are not money.
      They have no purchasing power.
      They are not used as ‘universal means for exchange’.
      They are not circulated.
      Only bankers can possess them.
      They are not money.
      They are bank-CB settlement media that make the ‘payment system’ function in a bank-credit, debt-based money system.
      Under the Kucinich proposal, reserves would not exist, as the money being created is “money”. No need to reserve against people using real money.

  56. Tering Nering,
    The answer to your querie is very simple. Advocates of full reserve advocate creating enough money / credit to maximise numbers employed without exacerbating inflation too much. I.e. they’re quite happy with the standard 2% inflation target.

  57. Ann,
    The need to “decarbonise” the economy and other environmental stuff is an entirely separate issue to basic and strictly economic objectives. I.e. I’m all for doubling the price of petrol, subsidising windfarms and home insulation etc etc. But having done that, there remains the separate question as to how best to avoid banking shambles and subsidies.

    Ironically, Positive Money gets environmental and economic issues mixed up: i.e. I personally think (as do some other North East PM supporters) they should avoid environmental matters and concentrate on what they think they’re good at.

    Next, you say “the level of savings in the economy is insufficient to generate economic activity in the form of new investments and new employment..”. The answer to that is that there is no God given amount of investment needed to bring full employment. That is, the amount of investment per employee in every sector is very flexible. What brings more employment is more demand. As to investment per employee, that’s determined inter alia by interest rates, which in turn is determined by amongst other things, how heavily banks are subsidised. Now unless someone can prove some sort of market failure, the normal rule in economics is that subsidies are not justified.

    Re your 2nd paragraph and piggy banks and committees, Laurence Kotlikoff, Milton Friedman and Positive Money are VERY SPECIFIC on the point that the “committee of men” DO NOT decide on investments. The committee only decides how much stimulus is needed. As to investment decisions, those are taken by banks / bank subsidiaries / entities which are funded just by shareholders or loss absorbers who are effectively shareholders.

    Nor, contrary to the claims of Neil Wilson, does the committee over-rule finance bills: i.e. over-rule parliament’s decisions on the proportion of GDP allocated to the public sector, or over-rule parliament on decisions as to exactly how to collect tax or which government departments should get how much money.

  58. Distribute the new money equally to all eWallets on the basis of velocity (read in real time from the blockchain).
    To fund infrastructure like wind farms, issue tax-backed bonds.

    Tax ‘bads’ like carbon, congestion and idle land/capital.

    Ensure all planning regs result in walkable, people-first streets and neighborhoods.

    Velocity-linked money creation has gold’s benefit of inflation control, by taking money creation out of the hands of banks and committee; and fiat’s benefit of deflation control by printing when velocity falls.

    Your army of credit assessors can still assess p2p/100% collat loan requests.

  59. “the level of savings in the economy is insufficient to generate economic activity in the form of new investments and new employment…needed, for example, to finance the vast transformation needed to de-carbonise the economy.” — I can not understand how economists think one can “generate extra economic activity”* by issuing more credit, without negative consequences. Say vast amounts of credit are made available to build wind farms. What happens? This new money drives up prices of aluminium and other commodities needed for the wind farms. And it puts an upward pressure on wages of engineers. So other activities (“The Unseen”, Bastiat) are suddenly confronted with higher costs. Some activities will no longer be worthwhile, will not be undertaken, some companies that use aluminum and/or engineers will go bankrupt, that without this major credit-fueled push in one specific industry woud have survived.
    The net effect of this particular credit expansion is that indeed the wind farm will be there, but inflation will rise eventually and so the windfarm is effectively built with stealth taxation. [As history shows us, the amount of credit will not be reduced when the wind farm is finished, because of angst for deflation].

    *Of course one can ‘generate economic activity’, but not generate capital.

    Wealth is all combined capital, minus debts. A society can grow its capital by a few % per year, by labour and using energy and machines productively. Credit and other monetary flows (subsidies) only have zero-sum influence on total wealth/capital.

  60. Thank you for your comments…..Ralph: “The solution (to repeat) is to put more into people’s “piggy banks”.”….Ralph you are not tackling the key point: the level of savings in the economy is insufficient to generate economic activity in the form of new investments and new employment…needed, for example, to finance the vast transformation needed to de-carbonise the economy.
    And if “a committee” of men decide to increase the quantity of money, then how do they decide into which piggy bank to deposit the money…and on what terms?

    Jasper, the state only issues the tangible stuff: notes and coins. And today notes and coins make up only 3% of the money in circulation. The rest is created as bank money by private banks, and originates as loans which in turn create deposits. For more on this see my book: Just Money….And for more clarification visit the Bank of England’s website, and look for “money creation in a modern economy”…Quarterly Bulletin 2014. Q1.

    1. Ann, most of what you have said makes logical sense but you have repeated:
      “if “a committee” of men decide to increase the quantity of money, then how do they decide into which piggy bank to deposit the money…and on what terms?”

      I’m no economist nor academic but I’ve known for quite while that something is rotten in the state of financial markets, thanks to websites like Positive Money.

      Answer this, if “a committee” making decisions about where to put money to make it more productive is a bad idea then how bad is the existing system? The bulk of the activity does nothing productive except enrich the same group of people to the detriment of the general population. That can’t – and I believe won’t be allowed to keep happening. What will happen if (or when) the general populace get their heads around the fact that these people have been allowed to create money and used it to destroy the planet, bring the financial system to its knees and then billed the rest of us for their crimes? Yet they continue to enrich themselves via obscene bonuses!

      If that information is ever allowed out in a simple way that can be understood by all then the French and Russian revolutions will look like picnics.

      Regulating them sounds simple however we have seen how previous regulations have been systematically stripped away and destroyed to the point of being useless by vested interests. It is quite possible that we are beyond the point of being able to regulate these institutions. One of the older quotes around the matter but one which sums it up well:

      “Banking was conceived in iniquity and born in sin. Bankers own the Earth. Take it away from them but leave them the power to create money, and, with the flick of a pen, they will create enough money to buy it back again. Take this great power away from them and all great fortunes like mine will disappear and they ought to disappear, for then this would be a better and happier world to live in. But, if you want to continue to be the slave of the bankers and pay the cost of your own slavery, then let the bankers continue to create money and control credit.” – Sir Josiah Stamp

      The existing system needs to be torn apart and rebuilt, that’s a big omelette and is going to mean a lot of broken eggs.

    2. Tom…thank you for your comment. I have real reservations about concentrating all the power to create money in the hands of a small committee, what Neil Wilson below calls the “Politburo Standing Committee of the Very Clever People Party”…..And yes, I agree completely that our bankers and banks are a mess. But the reason for that is that economists stopped understanding/or deliberately turned a blind eye to money creation by the private banking sector – very convenient for reckless, greedy bankers. To this day, neoliberal or neoclassical economists still rant on about the role of the state in creating money – when 97% of money creation is undertaken by private bankers.
      But the reason that its better to have thousands of different bank clerks deciding on the allocation of millions of new loans (to fund e.g. the purchase of a washing machine, or investment in solar panels, or the expansion of a successful small business) is that it is better that these decisions are devolved and diverse. However, I am very clear that these clerks should – like dentists and electricians – be very carefully regulated so that they do not lend recklessly; and do not cause systemic failure…And we know we can do that, because we did so for the period 1945 – 71 widely known as “the golden age” in economics…when employment was high; consumption did not rocket; economies were relatively balanced and stable (largely because of the Bretton Woods arrangements) – and there was not a single financial crisis throughout this period! ….In economic terms the changes wrought by bankers’ lobbyists in the late 1960s and early 70s is a very short time ago. We can restore the earlier system of regulation – indeed the very good news today that mortgage applicants are going to be subject to three hour interviews – is a good step on the road to sustainable, repayable lending!

    3. I also share your difficulty with the concept of where does the money go.
      At the moment, the new money is getting injected into the economy via loans for housing. Which quite simply explains why house prices increase at a quicker rate than other things (apart from the other reason of not building enough of them), they are closer to the tap of new money.

      I would suggest that the correct way to inject new money into society, if your intention is to increase equality, would be by crediting of citizens of the country in their deposit accounts, equally, with the new money.

      But, even easier indeed, would be to not create any new money. In the end, if the rich hoard all the money, just tax them.

      The current system just transfers purchasing power from the asset poor to the asset rich. Then the income rich are taxed a little bit to give some back to the income poor. All very complicated, involving lots of administrators. Pointless and a waste of human intellect and skills.

    4. Sorry, Ann.I know that was for Ralph.
      The problem is not getting more money ‘from somewhere’ into the savings accounts so it can be used for investment…..getting the job-producing economy going; it is getting people to borrow more money into existence for that purpose in a balance sheet recession. Thus, secular stagnation advances.
      Money is in M-1 because people need it for paying their Bills. MMA balances serve the liquidity preferences of their owners, and there is little policy space to compel that into ‘other’ investment than what is already happening in the IB sector.

      “if “a committee” of men decide to increase the quantity of money, then how do they decide into which piggy bank to deposit the money…and on what terms?”

      I cannot imagine that any proposal for reform out there, either PM or the Kucinich proposal in the US, or Wolf’s, would have any provision for a monetary authority to determine “”into which piggy bank to deposit the money…and on what terms.””
      The more advanced Kucinich proposal has the MA determining only the “quantity” of new money, which becomes the ‘seigniorage gain’ addition to the income side of the government’s budget, and ALL expenses (which piggy bank) determined by the collective will of both houses of government……not a committee of nine.
      What evidence is there that either Martin Wolf or Positive Money has any notion that the ‘money-creation’ body would determine where that money went and its terms? I have never heard such a thing.

  61. In the UK, a sovereign fiat currency economy, all money IS “issued” by the state (base money = coins, notes and “reserves”); that is, the Treasury and its wholely owned subsidiary the Central Bank. Commercial Banks make loans that create deposits “out of thin air”, all of which sum to zero, they do not create new financial assets in the economy, but help to create “real” assets.
    Only the State can create new financial assets out of thin air because it is the sole issuer of the currency. Everyone else is a user of the currency. Hence a State can’t go broke in its own sovereign currency. It can pay any bill presented to it in its own currency. When a commercial bank makes a loan which creates a deposit in someones account, that someone can convert that deposit into the currency (notes and coins)of the state, at an ATM for instance.

    The central bank makes sure there is enough “cash” in the system but can print as much as it has to. The central bank has no obligation to convert your fist full of its “fiat” money into Gold or any other commodity; but, you can’t pay your taxes with anything else but its own fiat money. That’s what makes its money valuable.

    Commercial Banks are capital constrained, they don’t lend “reserves” in their BoE reserve accounts, except to other banks with BoE accounts via the interbank settlement process and do it at interest rate the BoE wants each day. They don’t lend retail deposits either. They lend to people they think will pay the money back with interest. The more they leverage their capital the more money they make with the risk that one bad loan will wipe out the bank capital at leverage of 30 to 50 times, as happened in 2008.

    1. Jasper,When we discuss ‘money’ and ‘money-creation’ within a political-economic discourse, we are discussing that which has the qualities of money, media issued into circulation to provide purchasing power for the means of exchange in the national economy.
      We agree that in the UK, both coins and paper currency meet those conditions, but central bank reserves do not come close.
      They are never circulated, they contain no purchasing power, they are not a means for exchanging goods and services, and you and I cannot posses them.
      I think you have been reading the MMT shoehorning brand of the Post-Keynesian construct of vertical money, a smokescreen for serious monetary system discussions.

      None of that ‘net-financial-asset’ stuff has any relevance to money, but to investment media. It is also irrelevant to money system studies.
      I suggest you search out a copy of Alexander Del mar’s “The History of Monetary Systems” for some balance against the misleading and error-filled MMT rhetoric.

      That the government is the ‘sole issuer of the currency’ is, excuse me, laughable.
      When talking currency and money and those ‘money’ qualities above, obviously the banks create 97 percent in the UK (closer to 99 in the US) of all that which serves as money….. the circulating purchasing power serving as the means for economic exchange, including taxes. It has NOTHING to do with creating ‘net-financial-assets’, which is the stuff of ‘financializationist’ fodder.

    2. “Kettle Pond Institute for Debt-Free Money, Specifically, we advocate:repeal of the current monetary system, which creates money as debt by the Federal Reserve and private banks, and a return of the money creation power to the federal government of the United States where the Constitution places it. Under the monetary system we advocate, the US Treasury will create our money debt-free and spend it into the economy. The banks, relieved of the task of money creation, will be free to concentrate on the business of banking again.”
      Frankly Joe, I didn’t understand it then and I still don’t understand it now!

  62. Numerous flaws in the above article. First, re the point that introducing full reserve would “restrict economic activity”, it’s pretty obvious that lending is constrained under full reserve (and given the dangerously high level of private debts, I’m not too worried about that). And the result would be a drop in aggregate demand.
    But advocates of full reserve are perfectly well aware of that. The solution is standard stimulatory measures (though the actual measure favored by full reserve enthusiasts is simply creating new base money and spending it and/or cutting taxes).

    Next, “Credit or money created by banks does not necessarily correspond to what we understand as income.” Whoever said it did? That’s to confuse stocks with flows. The amount of money (central bank created or commercial bank created) is a stock. Income is a flow.

    “Before the establishment of a banking system, society could only embark on ventures that could be financed by “savings”. That sentence implicitly breaks the laws of physics, never mind economics. I.e. if resources are to be consumed making an investment, that can only come about as a result of someone abstaining from consumption of resources, i.e. saving, assuming constant GDP.

    To illustrate, in the simplest economy of all, a Robinson Crusoe economy, if Crusoe wants to invest in a new fishing rod, he has to abstain from current consumption (i.e. “save”) in order to produce it.

    “If the issuance of credit or money is to be restricted to equal the money set aside in peoples’ piggy banks . . . . we would have to restrict what society can do…” That’s just a repletion of the above claim that full reserve initially reduces aggregate demand. The solution (to repeat) is to put more into people’s “piggy banks”.

    Next Ann makes the strange claim that having an “independent committee” determine stimulus is a specifically monetarist or Austrian idea. Well now, there is such a “committee” in the Bank of England. It’s called the Monetary Policy Committee and it has a big say on stimulus. And I’m 99% certain there’s an awful lot of economists who have no objection to that committee, and who would not count themselves as Austrians or monetarists.

    “This is very close to what monetarists tried to achieve, but failed to do under Mrs Thatcher.” It’s true that advocates of full reserve (just like the advocates of Modern Monetary Theory) claim that the size of the stock of base money (or more generally “Private sector net financial assets” to use MMT parlance) influences demand. To that extent, both groups have something in common with monetarists.

    However, advocates of full reserve (like the majority of economists, I’d guess) also claim that THE PROCESS OF spending extra money into the economy also has an effect. I.e. they claim fiscal boost has an effect. That is, and not to put too fine a point on it, if government decides to hire an extra thousand employees by this time next month and pay for that with new money, then employment goes up by a thousand, all else equal (assuming the extra money is not inflationary, i.e. assuming the economy was below capacity before the extra thousand were hired).

    Next, the paragraph starting “Wolf’s proposal is problematic for other reasons.” This paragraph simply repeats the idea there is something wrong with a committee of economists deciding on stimulus. OK, so there is something deeply wrong with the BoE MPC is there? If so, what?

    Next “We may have to begin by acknowledging that, without the guarantees provided by central banks, most banks are effectively insolvent” And there is no place in a free market for businesses than need subsidising, unless someone can produce very good social reasons for the subsidy.

    1. More than numerous flaws! Who funds this woman’s thin tank? Does she not know that promises to repay (Promissory Notes) have to be repaid in “sums certain in money”. That is the Law on Promissory Notes. However, what exactly, within the context of the law, is money? It is stated in law (Consumer Credit Act 1974 – meaning of credit) that credit has to be treated as “sterling” but what is “sterling” in the context of the law? Is it currency, is it a GBP? I have not found any reference to sterling in the Currency Act? I might be wrong but I for one cannot find it and it seems strange that a piece of legislation refers out to something called one thing (GBP/£) in one piece of legislation and another thing in another piece of legislation? Bear in mind that Prof John Finnis states about the person: [In short: juristic thought as such knows nothing of any human person save that person’s conduct as specified in legal norms, and does not have as its primary or any concern the interests and well-being of this or any other person], he seems to be saying that an object (in this case human person) does not exist in law unless it is defined somewhere within a legal norm. So where is sterling defined in law?
      I have also witnessed this woman trying to confuse the arguments presented to her at a Positive Money presentation. When challenged she returned with absolute nonsense, as though she had not read the proposals or listened to the presentation and quickly changed the subject when I tried to pin her down with what legislation gave private persons (banks) exclusive rights to create our money supply out of thin air and the power to decide who to, where within the country and on what this newly created money should be put to use.

    2. Neil,
      For future reference, “this woman” (you use this term twice) has a name, Ann, which you are free to use. But I do like your reference to PRIME as a “thin tank”, since I can confirm we are not funded by “fat cats”.

    3. Ann/Jeremy,
      In the first instance my sincerest apologies to Ann, my tone was out of order and Jeremy; you are thanked for scorning my poor behaviour and reminding me of my manners. Well done Sir and my sincerest apologies to you too. With regards to my reference to PRIME as a “think tank”, you refer to yourselves as the same on your website.

      Secondly, Ann points out that credit is nothing more than a promise to repay and as I have already pointed out, Promissory Notes, according to legislation, are to be repaid in “a sum certain in money”. But, given the fact that approximately 97% of our money supply is now created by private persons (Banks) out of thin air and loaned as debt with interest, I ask what I believe to be legitimate questions surrounding the lawfulness of this credit (as it is defined in the Consumer Credit Act 1974) and its relation, within the context of the law, to the substance defined by legislation as “a sum certain in money? To clarify the issue:

      Consumer Credit Act 1974 – Meaning of credit.

      (1 )In this Act “credit ” includes a cash loan, and any other form of financial accommodation.

      (2) Where credit is provided otherwise than in sterling it shall be treated for the purposes of this Act as provided in sterling of an equivalent amount.

      (3) Without prejudice to the generality of subsection (1), the person by whom goods are bailed or (in Scotland) hired to an individual under a hire-purchase agreement shall be taken to provide him with fixed-sum credit to finance the transaction of an amount equal to the total price of the goods less the aggregate of the deposit (if any) and the total charge for credit.

      (4)For the purposes of this Act, an item entering into the total charge for credit shall not be treated as credit even though time is allowed for its payment.

      So as a layperson looking in on this complex world of monetary wizardry I have to ask the simple questions which are:

      a) When you say IOU / promise to repay, what exactly do you mean? A promissory note or something else and where is this legally defined?

      b) Where, within the context of our Law, is our currency defined as sterling? I cannot find this term relating to any Act that legally defines our currency?

      c) Where within the context of our Law, is the term money, as it relates to the legal term “a sum certain in money” defined? I ask because it is stated here that credit is merely a promise to repay and the law states that promissory notes are to be paid in “a sum certain in money”.

      d) Does the credit that flows within the economy change from credit to money when it is used to pay an individual their wage or is credit actually money when it is created?

      Thirdly, I assume that a substantial proportion of our money supply is created when house purchasers take out a mortgage? I am led to believe that these loans are not covered by the Consumer Credit Act and thus the money (stuff) that is created here is not credit. Therefore if this newly created money (or stuff) is not credit, then what is it and where is it legally defined?

      Lastly, most people posting here will have undoubtedly worked out that I am not an expert on economic matters. However, I can assure you that I sincerely want to learn more about this very important subject and I have relentlessly tried in vain to obtain answers to the questions I pose. I am merely here hoping that someone in the know here may be able to assist by providing the answers to these simple questions and as time goes by I will endeavour to add value to this important discussion.



    4. Thanks Neil for responding positively to my earlier comment. Appreciated by us.

    5. Neil, thank you for this comment. I am afraid the law is not much help. You will need to consult economic texts…May I as a start recommend the Bank of England’s regular publication: Trends in Lending…This will tell you all you need to know about what loans are made for what sector of the economy.
      Please note that much lending today is negative…in other words the banking transmission system is effectively broken. Instead of lending into the economy, banks are borrowing from the economy. In other words we (small firms etc…) are depositing more in banks (in the form of savings etc..) than banks are lending into the economy…

      You will find the latest Trends in Lending here: http://www.bankofengland.co.uk/publications/Documents/other/monetary/trendsapril14.pdf

    6. Neil,A lot of really good points and questions.
      Please accept my suggestion in the spirit in which it is offered.
      Monetary law.
      “The Legal Aspect of Money” H.A. Mann.
      I think now it’s in its Seventh Printing, but any edition (later the better) would serve well for these answers.
      I got one (4th Edition) about 4-5 years ago online from a UK bookstore, hardcover, for 15 pounds.
      It is about the ‘settled’ international laws on money, notably terms and definitions.
      Good luck.

    7. Hi Ralph,”To illustrate, in the simplest economy of all, a Robinson Crusoe economy, if Crusoe wants to invest in a new fishing rod, he has to abstain from current consumption (i.e. “save”) in order to produce it.”

      That’s the hard (sacrifice of current consumption) way to go about. What Austrian economists have overlooked is Friday. Robinson can hire Friday to make him more productive fishing rod (investment), and stay indebted to Friday until Robinson’s more productive fishing (savings) allow him to pay whatever amount of fishes Friday wanted in exchange of his work. Please notice that its barter economy.

      Even if we analize Robinson alone (the situation not conceivable in modern economy) He hasn’t to sacrifice current consumption if he constructs new fishing rod in his spare time.

      Indeed the fear that amount of money available for private credit expansion is too small is unfounded. This variable depends on savers decisions to save. What’s certain however is that the cost of money in PM proposal is higher then ZIRP Central Bank can offer to borrowers. Moreover PM proposal doesn’t specify how it will promote lending to businesses to produce real output rather than to purely financial investments. With no explicit regulations nothing changes. Another drawback of PM seems to be promoting propensity to save long-term which policy is detrimental to economic growth. How are you going you to hamper boom credit expansion ?

  63. A point should be made about economic expansion and the supposed necessity of expanding money supply: economic growth drives costs and prices down – benign deflation – increasing real wages, which by itself works as if (the same nominal) money supply increased in real terms. That’s what happened in 1870-1900 (US).

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