I've been in debate with Positive Money and its supporters on the issue of banking. I admit this was not intentional in that I was not seeking to provoke such an exchange at this time, but to give PM their due, they never miss a chance.
My concerns with PM's proposals on bank reform are fundamentally three fold. First, PM are aware, as I am and I hope all people interested in this subject one day will be, that with the exception of notes and coins all money is created by lending. PM take exception to banks partaking in this process, arguing with some good reason that to permit such a critical economic function to be undertaken almost entirely in the private sector and without effective regulation makes no sense from the point of view of regulating the economy or for reason of the enormous economic influence and gain that it provides to banking. PM's response to this, although they deny it, is to abolish banks.
This suggestion on my part that PM are seeking to abolish banks appears to be the first point of contention. They say the banks will continue in existence but will, instead of creating the money that they lend, act as the intermediaries that most people think that they are present, and will lend to customers funds that they have in turn borrowed from, or been allocated by, what PM calls the Money Creation Committee. This body would be part of the Bank of England, and I will return to it and its functions below.
I cannot accept the argument that if you remove the key identifying quality that defines a bank, which is its ability to create and so lend money, that it remains a bank. It does instead become a deposits and loan institution, which is something quite different, whilst its lending function is no longer about the creation and destruction of money but is, instead, more akin to being an outsourced credit committee of the Bank of England. I am aware that some PM supporters have suggested that I'm being pedantic for making this point. I disagree, unsurprisingly. If we are looking at fundamental economic reform then we should discuss fundamentals, and not semantics. The fact that under the PM proposal some institutions would retain the word bank in their title does not mean that they continue to be banks: their role will be entirely redefined. I cannot see how anyone from PM can argue otherwise.
My second concern is similarly fundamental. The follwoing quote is from Modernising Money by PM (I have a copy: I was sent it by PM):
The decision over how much new money to create/remove from circulation would be given to an independent body, to be known as the Money Creation Committee (MCC).
PM argues that:
The first (and most common) of these would be to grant the money to the government (by increasing the balance of the Central Government Account), which would then spend this money into circulation, as discussed in the next section. This process increases the amount of money in circulation without increasing the level of debt in the economy and can therefore be thought of as ‘debt-free' money creation.
The second method would be for the central bank to create new money via the MCC and lend it to banks, which would then lend this money to businesses and the productive economy (but not for mortgages or financial speculation). This increases the quantity of money in circulation but simultaneously increases the level of debt, and so does not constitute debt-free money creation. This option provides a tool to ensure that businesses and the real economy do not suffer from a lack of access to credit.
I admit that I have very real problems with these ideas. I am, of course, well aware that governments can create money. The whole logic of green quantitative easing is based upon that fact. But, and it is worth stressing the point, that process does, invariably, require the use of debt. Admittedly, as I argue in the case of green quantitative easing, by keeping both sides of the debt under government control the net effect is net money creation without addition to public debt, but debt has to be used to create money. What is more, creating money for the government but then not using it, is not, in effect money creation: that is creating the capacity to spend but such capacity has no impact until spending occurs. This essential point is missed in this account of creation of money for the use of central government, as is the matching, and essential, point that tax paid cancels this money. If it is the process of spending government created money into the economy that provides the substance of this money creation process, then the corollary of tax paid must, of course, negate it. I do not recall this issue being addressed in PM's work.
The second part of this explanation provides my third concern which covers a number of areas. The first of these is that money will, of course, be needed for mortgages and financial speculation. The second is that, as Ann Pettifor has argued, there is no way that a central committee can anticipate the needs of finance system for money in the following month. There will, inevitably, be credit rationing as a result for productive activities. PM's responses on this issue, including the argument that not all credit is money, are simply not credible: it is not reasonable to argue the businesses should wait to make settlement of commercial obligations because of a shortage of cash created during the course of a month by the MCC, which is what they imply. Like it a lot that will inevitably constrain economic activity.
Last in this group of concerns is this, which PM said in a response to Ann Pettifor that:
The Money Creation Committee will have no control over how the newly created money is used. Whilst the way the money is used will determine to some degree its effect on inflation, giving the MCC any influence over how the money is spent would introduce a conflict of interest, whereby its members might find that their judgement is swayed by their opinion on the merit of various spending programmes. In order to prevent this conflict of interest from arising, and to ensure that the MCC does not become politicised, the decision over how much money is created and what that money is used for must be taken by separate bodies.
There is something deeply, and even profoundly, troubling about this paragraph. First it implies that PM think that there is a stock of money which, somehow, exists beyond electronic debt. That is simply not true, notes and coins apart, and I presume that they are not proposing a return to their use for significant commercial transactions.
Then there is a suggestion that money creators should not be influenced by those demanding money. That is seriously worrying at two levels. First, this effectively says that this MCC will determine the level of government spending without any reference to the need that it might meet. That is monetary policy gone mad, and profoundly undemocratic and surely not what PM mean, in which case they need to make revision.
And it is also deeply troubling that the real economic consequences of money creation as indicated by the merit of various spending programme should have no influence upon the decision as to whether to create that money or not. In my opinion the exact reverse should be true, including in the private sector where the precise problem is that money has not been used for appropriate purposes.
I could expand all these arguments, of course. But what they suggest are real issues of concern and not petty sniping (in which I have no interest at all). I want banking and monetary reform. I want that to be used as the basis for a better economy. But I am deeply worried about making money creation so much a priority that government and economic activity is subjugated to it, and despite what PM says that seems inevitable to me.
Sp government has to be in control of its demand for money and the central bank has to meet that need.
And money creation has to be undertaken for directed purpose in the rest of the economy.
And banks have to be permitted to play a role in that process - subject to regulation, limitations on activity when appropriate and proper taxation. If that does not happen then we have a totally centralised and undemocratic economy which cannot be the aim.
So let me assure PM: I want the understanding and reform you do but please address the real concerns that many who have sympathy have with what you're saying. We're spending our time on this to make the process work. We'e worried you're not delivering a workable or democratic or accountable solution, and that's worrying.
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Am I misunderstanding, or are PM really proposing that banks be prohibited from mortgage lending?
I think not: that is a problem of their drafting, I think
No…you could still apply for mortgages from a bank, or whatever intermediary institution Richard would want to name it…
Any entity which issues commercial paper creates money. E.g. Krugman has emphasised role that the shadow banking sector played in the financial crisis. PM’s idea, that an arm of the central bank should create money and gift it to the government to spend as it wills, is sound. But its plan to outlaw banks is unrealistic: regulations on banking services with legal tender and deposit insurance can be tightened to the point that private actors find it more convenient to create their own money with their own paper. It’s (almost?) impossible to prevent private sector creation of its own money.
Agreed
“It’s (almost?) impossible to prevent private sector creation of its own money. – ”
No it is not – have you heard of something called the LAW? Have you tried printing your own money? What do you think would happen?
Banks are legally allowed to create money (Bank Deposits) by Law.
I am slightly sick of this “Oh we can’t do anything – so let’s not even bother” – attitude.
Explain that to your son or daughter in twenty years time when buying your own home is just sometihng that Grand Dad did in the old days, or having a Student Grant and Free Tuition is now a long distant memory, despite existing Politicians who benefitted from such a System.
All you have to say is “pay me tomorrow” to create credit and only time for such promises to become traded as if money
Tell me how you are going to outlaw that?
I’m sorry – but can we deal with the possible or not bother?
If you are saying that an individual or business could say “pay me tomorrow” then that is perfectly legitimate because they have provided some tangible “consideration” – an item or service. But a Bank creates the Money for the loan out of thin air – as you have correctly stated in another of your Articles.
“Consideration can be anything of value (such as an item or service), which each party to a legally binding contract must agree to exchange if the contract is to be valid. If only one party offers consideration, the agreement is not legally a binding contract”
A Bank does not provide anything in exchange as they create the “Money” out of thin air. Legally, if they loan money for the purpose of buying a House and the Borrower cannot pay – the Bank’s “consideration” is money that it created for the Loan so it has not lost anything while the Home Owner could lose their property. It is treated as if the Bank loaned money that had already existed and so would be “consideration” and would therefore be entitled to demand foreclosure on a Property.
I may not have explained this very well so I include a link to the Case of First National Bank of Minnesota VS Jerome Daly – December 1968:
http://mn.gov/lawlib/CreditRiver/1968-12-09judgmentanddecree.pdf
Banks cannot create money without there being a loan
In hat case there is always consideration: it is the promise to repay the loan that lets the money be created
This is the whole point: banks do not act in isolation
I agree with some of your statements:
“Banks cannot create money without there being a loan” – agreed
“banks do not act in isolation” – agreed
I – not being a Lawyer – the question whether a Bank has legal “Consideration” is a grey area as they have been granted the privilege of creating additional currency (that can be used to pay Taxes and other Debts) when they Lend. Is a House equivalent in value to Bank created I.O.Us? The borrower commits to paying back the loan in instalments and will have to use his time, energy and skills in some form of employment – providing skills and services to his Employer\Customers. He has agreed to pay back the loan with interest which equates to many hours, days .. years of his time and effort providing something tangible. The Bank has not lost any spending power of existing money, it has created new money in aggregate to existing Bank Deposits but would demand foreclosure if the borrower was unable to pay the repayments. This is a side issue and would accept if I was wrong but only in the context of a System which is flawed.
I believe that the symptoms of allowing a Bank to allocate funds and simultaneously create new additional funds is a flawed system. A Bank was a safe house – somewhere where we would keep our valuables – like coins. They developed from Goldsmiths who created receipts for deposits, they didn’t create the deposits out of thin air, that came later. So my view of a Bank is somewhere that should be custodian to our money and not legal owner of it. We lend Banks money we don’t actually ask them to keep it safe for us. If I lent you five pounds, I would lose use of that five pounds and would have to wait for you to repay me. Because I lent it to you it was effectively yours to spend in any way you wished. This point about Banks is widely misunderstood or ignored by many people not as interested in this subject as the commenters here. People put their money into a Bank and think that the Bank is just going to keep it safe for them – they don’t – the Bank will invest it as they are legally allowed to do as Bank Deposits are merely promises to pay at a later date – on demand for Current Accounts. So when a customer pays £10 to another customer of the same Bank, all that happens is that one ‘Promise to Pay Account’ is debited £10 and the other ‘Promise to Pay Account’ is incremented by £10 – no actual money is moved. Banks ARE the Money and so can never be held to account for mismanagement. This is inefficient because badly run Banks can not be so easily replaced with better run Banks.
With the PositiveMoney proposals (or proposals at least in that direction of more Publicly created money) the system becomes far more stable as their would be a foundation of publicly created money that would always there whether the Banks were lending or not. The Great Depression was caused by a sharp fall in the money supply after the 1929 Crash, which made Banks reluctant to lend. Despite having the FED in place after 1913, the money supply still collapsed and many Farms and Businesses were foreclosed upon. There was not a lack of Food, Workers, Materials or anything tangible. What caused people to lose their jobs and starve in some cases, was a lack of Bank created credit when it was needed, and too much – during the roaring Twenties, when it was not needed and mal-invested in Asset Price Bubbles – as you’ve also mentioned about our current system in some of your other articles.
So I think the case of a Bank’s “consideration” in a loan agreement is an interesting one but the morality of that is not important – it is whether the system as a whole is efficient and benefits people as a whole. with what I have personally witnessed over the last forty years, I would say with extreme confidence that our current system is fundamentality flawed and is in dire need of reform. Monetary Reform to me seems the best solution – at least to start with – as it takes account of the fact that rogue Banks may enter the system but would not require bailing out with public money/debt if they should get into difficulties. I heard that the American Constitution was designed around the same idea – that it should be able to cope with a Rogue President getting Elected, so other areas of Government were added to counteract the President’s Power – that was the hope at least.
I agree entirely that the system is flawed
But you cannot replace a flawed system with another
That would be very unwise
Hi Richard ,
Interesting points,here in Ireland we are looking at a different model of banking to take back some control of our financial affairs.This model is in the form of a publically owned bank run by stakeholders rather than private shareholders.For your convenience please see a link that covers the base points,and within that article are hyperlinks going into more detailed evidence that support such a bank and it’s behivour in thriving ecomomies. I would like to hear your experienced opinion on such a model being examined by our politico and should you need any further information/evidence I would be happy to provide via my email address provided.
Regards
Noel Kinahan
Ps.in this case The particular model for your opinion is the 200yr Sparkassen model that could be replicated within other European countries without to much legal changes as this model complies with all ECB regulation.
http://ellenbrown.com/2015/02/10/why-public-banks-outperform-private-banks-unfair-competition-or-a-better-mousetrap/
Noel
I have been hanging on to look at this and just have not had time
Sorry
Richard
As the business of the Ayr Bank and related financial sector in the 1770’s is of interest to me it is slightly spooky to see that in almost two and a half centuries we seem to have learned nothing and forgotten nothing.
Hi Richard,
I’ve written a quick response to this here:
http://www.positivemoney.org/2015/06/response-richard-murphys-concerns/
What can I say barring that you very clearly do not understand MMT, how government spending and tax works and to a very large degree how the real economy works
These reservations apart I am sure your proposals can work
But debate on a solution for a problem that does not exist – which is what you are offering – based on theories and understanding of money and government that simply do not bear a relationship with reality seems to me to be a waste of time
Sorry Ben, but we are a very very long way apart based on these comments which just reveal how little you have really grasped many of the basis issues surrounding money and, in particular, MMT
Richard
Having read your blog above, and also the Positive Money response (at the link above), it seems to me that it addresses all of your main concerns – clearly and persuasively.
The debate is healthy, but I don’t think simple assertions such as ‘you very clearly don’t understand..’ actually add much to it.
I’m interested in your opinion (and I’m guessing I’m not the only one)…
Without resorting to bland assertions, what responses do you have to the specific arguments which Ben Dyson has set out in his response?
Here’s the link again:
http://www.positivemoney.org/2015/06/response-richard-murphys-concerns/
Thanks
I’ve read it
If you understood MMT you would realise how wildly inaccurate many of the suggestions are
You don’t even have to do that to realise that much of what is said about the government and tax is wrong
I have not got time to write a long blog on why. But I think Positive Money has a very clear duty to get its head round MMT and to be honest the fact that banks aren’t and never will be intermediaries which, astonishingly, it does not seem to realise
What I strongly suspect is that the PM model was written some time ago and has not been updated as understanding has grown elsewhere. It would be wise for PM to acknowledge that and develop it in light of expanding understanding
OK, Richard. Your blog, your opinion. We’ll leave it there.
I am afraid we have to
But I think it is fair to say you are failing to make your case and that you also have much ground to cover on MMT and other issues before your suggestions are in any way credible, which I would clearly love them to be
Im sorry Richard, I would have to disagree. Ben has just written a response to your post. You have responded not by addressing to his points, but by condescendingly suggesting how little he knows…WHY EVEN INITIATE THIS DEBATE THEN? You knew that PM was going to respond to your critique…
I did
I share the same frustrations that Ann Pettifor does
We point out the weaknesses and no one listens
Richard, I’m coming to the view that MMT works but only in limited circumstances and that globalisation has acted as a brake on its usefulness.
Since the US came off the Gold Standard it has used oil in conjunction with its miltary might to back its reserve currency status. It has taken full advantage of this so the Japanese and later the Chinese have received billions of US dollars for their exports to the US.
The Chinese, I think hold about 3 trillion US dollars. If my understanding of MMT is correct then this shouldn’t be a problem but I’m not so sure this is right. I can’t help but wonder whether this view is slightly niave, because I’m certain that this scale of debt is being used as leverage by the Chinese in a number of different ways.
It is interesting to note that the Chinese (Russia and India too) are buying
that “barbaric relic”,gold. In fact the Chinese don’t export the gold that they mine and import gold too.
I believe that Greece would be in a far better position if it had its own currency and thus able to use MMT, but there are limits to MMT’s usefulness particularly if you are a country heavily reliant on imports.
Banks are authoritarian and have little concept of democracy, so I would have no objection to removing the power to create credit from them. In fact, makng the banks mere intermediaries in line wih the mistaken economic view seems a great idea to me. The sooner their wings are clipped the better. For far too long Banks have abused their power to drive up debt to such an extent now that it is damaging and constraining the real economy.
I agree though until we have a properly functioning democracy, fit for purpose, then we certainly couldn’t hand the power to create money to a committee, which would be prey to all manner of vested interests.
As for allowing this power to be in the hands of our politicians, while are some are dedicated and serve their constituancies well, I would not trust those currently in charge to run a bath!
Before we do anything we must get the current administration out by hook or crook and have one elected that truly represents the people.
Nick
I think you’re missing a point many have done here: MMT and PM are not alternatives
MMT is a theoretical explanation of how things actually work
PM is a policy choice
They are very different
MMT is a good explanation or not: I think it is good
PM is one of the ways of organising banking. I think it is not necessarily worse than what we have, and has some elements whose appeal is obvious, but I think it would fail to deliver because it is theoretically flawed and might (in fact, almost certainly could) only work in a closed economy
So I suggest that PM need to develop their ideas further. My concern is thathaving got so far in their thinking they have got stuck with a solution and I think that unwise
I certainly find what you and Ann Pettifor argue to be more convincing than positive money.
There are many reasons why I believe PositiveMoney are on the right track as far as attempting to improve our Financial System, these are:
1. They have spent much time and effort into researching how the current system actually works and have found that it does not work in the way that Economic Textbooks say it works. Up until a few years (even months) ago, the Bank of England would describe the Money multiplier model when asked about how the system works. The BBC would also provide misleading explanations aimed at students on how Banks operate.
PositiveMoney along with other organisations and their supporters have – arguably – influenced the Bank of England into releasing Reports and Articles giving a more accurate explanation of how the System works, including the grotesque amounts of Subsidies that the Financial sector enjoys – above other far more productive enterprises.
Hopefully, PositiveMoney and MMT can both agree that before attempting to propose changes, a detailed and accurate definition of how the system currently works must be studied. There is at least one Political Organisation that wishes to ban money altogther and it is evident form listening to their speeches that – although passionate about their cause – due to lack of understanding due to a lack of research on their part, they have come up with the total wrong solution and blamed it all on Capitalism and Money. This is the opposite of what PositiveMoney have done. Threy have studied how the system works and their proposals are sound and in the right direction. As Bank Created Money has increased, instability and debt has increased. It is therefore natural to assume that a decrease in Bank Created Money will lead to greater stability and less debt.
I for one would be a supporter of MMT if they could explain to me how increasing National Debt through Treasury Bond Issuance would help improve the Economy in the long term? When Banks are pushing for 100% Cash Free Economy – why would having a Money system which is completely dominated by unelected Private Banking Institutions going to solve the problems of increased National Debt, Overpriced Houses, Incresasing Student Debt, reducing resources for the NHS and Ever available Credit for speculative investments on existing assets ???
I’ve read Warren Mosler’s Book and my impression (as an Engineer and a non-Econmics Academic is) he seems to assume that Debt is not a problem? He does not seem to explain how the current system works and so is not able to demonstrate how the system is and has changed over the last forty or so years. Perhaps as far as the US Dollar is concerned as it is the Reserve Currency of the World, it’s assumed that it isn’t a problem.
MMT does not address the known facts: Bank created debt has increased over the last decades – if not centuries – with it – Personal, Private and Public Debt has increased. Banks are heavily subsidised and statements from our Political Leaders (such as Boris Johnson) imply the opposite.
If we had the same system after the Second World War that we have today (97% of money as debt) could we have rebuilt our Country just issuing endless Treasury Bonds?
I got to your first claim where you say they have found banks do not work as text books claim
True, they don’t but PM is hardly alone in saying that: I have for years
What is odd is that PM want them to work in the way textbooks say, which is bizarre
I confess I could not be bothered after that
The text books tend to talk about bank lending as being on a fractional reserve basis. Positive Money most definitely does not want banks to operate according to this model as you would surely realise if you had read the book they sent you.
1)Positive Money wants 100% reserve banking (not the perfect name for it but close enough)
2) Positive Money criticises text books for presenting a flawed version (fractional reserve banking) of how banks lend money.
3)Positive Money says that the way banks lend money in the present system is better described as 0% reserve banking and is even worse than situation described in the textbooks!
So to sum up, if the text books typically described banking as being 100% then you would be right to say that PM wanted banks to work more like that and there would not be anything bizarre about that.
If the textbooks typically described banking as being 0% then PM would not be criticising them for inaccuracy but neither would they be campaigning to move towards that model.
If the textbooks we are talking about are the ones that describe something like 10% reserve banking, then these are the ones about which PM says in effect,”the system they describe is flawed and we wouldn’t want it but actually, the way it really works is even worse than that.”
There really is nothing bizarre about the position that Positive Money takes.
Fran
I was making reference to the fact that text books have described baks acting as intermediaries when, as the BoE has now admitted, that is not what happens and those taxt books are wrong.
I was not referring to fractional reserve banking.
If I was not clear I apologise.
But I remain in disagreement: the position is that PM want to get rid of all private banking in the UK as we now understand it. Private banking is flawed, I wholeheartedly agree. But I do not think abolishing it when there will, for example, be no way that we could prevent people accessing banking elsewhere using is the wished eurosterling (the equivalent of eurodollars, and it does exist) then I remain of the opinion that the solutrion is bizarre because I can see no way it can or would work for many reasons, some of which I have outlined in detail
Richard
The one argument that I find hard to fathom is that: Why is it ok for Government’s to be able to create infinite amounts of Debt through Treasury Bond Issuance, but it’s undemocratic for the to create det free money for the public’c benefit?
Another point is that most credit is assumed to be good when it quite clearly is not. Allowing Banks Create unlimted credit for pumping into the housing Market does not benefit anyone except Private Banks, Estate Agents and Property Developers. It does not benefit the vast majority of the public who just want a affordable home. Allowing Banks to create credit for Speculative Stock Market Investments (another 40% of total lending) also does not help anyone except for insider traders who dump the stock just after the markets are manipulated downwards. We no longer have true Price Discovery (if we ever have) but allowing Banks to create various financial instruments like derivatives, CDSs, CDOs, MBSs and expand into shadow banking has created a World where everything is controlled by those who control the system of money.
MMT need to address these issues and communicate them better – making statements such as:
“But I think it is fair to say you are failing to make your case and that you also have much ground to cover on MMT and other issues before your suggestions are in any way credible …”
Does not attract you any extra supporters. Think Positive and be constructive.
I am not saying the government should not create money – green quantitative easing does exactly that and I propose it. In other words please note what I do say – not what you’d like to believe
And I do entirely accept that banks need fundamental reform and regulation to ensure they do not take the benefit from creating money or use it irresponsibly
But making claims that are wrong does not make your case and I have explained at length why they are
If you don’t want to hear please feel free to do so but don’t waste my time
“green quantitative easing” – I’ve had a quick look at your “How Green Infrastructure Quantitative Easing would work” article and I do like that idea very much.
If we could persuade the Government to adopt such a policy then I believe – not only would the Economy Improve – but other areas of our lives would also have a much brighter future (like the NHS) than the current “Austerity” and Privatisation Policy are precisely the wrong things that the Government should be doing as it shifts the burden of debt onto the Private Sector.
So I and glad to say that we do at least agree on something.
I would however, still ask you to reconsider your attitude towards a Money System that does have a greater proportion of publicly created money (which the Green Quantitative Easing proposal seems to do). You may not agree with 100% Reserve Banking but you may agree with at least 20% Publicly created money (as we had in the Sixties), or 40% as we had after the Second World War?
I would be interested to know if you believe whether a shift from 20% Publicly Created Money (1960s) down to 3% of total money supply is the cause of our recent Financial Problems (Crashes, Bailouts, Asset Price Bubbles) or whether it is some other cause?
Have a good weekend.
GIQE is government made money – just to prove I know what it is
And it would be spent into the economy by agencies specifically authorised to decide ow to invest it – what PM would call a bank
But the important point is that they are not banks
And it is a special case
But it also shows I have no problem with publicly created money (as I have said, all is at the end of the day as no bank can create money without a licence to do so)
However, fixed ratios make no sense at all – these things require judgement and change over time. That’s how economies are managed
PositiveMoney’s proposals are nothing to do with outlawing Banks – what utter nonsense.
Respectfully, that is exactly what they do
Definition of a Bank from the Business Directory:
“An establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers.”
Under the PositiveMoney proposals, the above definition would not have to be changed. In fact, I personally would hope that more Banks would be started to create greater competition and diversification – especially towards a more locally based Banking Sector.
In the Current System, it is far more difficult for new Smaller Banks to startup due to the amount of Reserves in proportion to size they would need as Larger Banks require less reserves as many transactions are internal between Customers who hold accounts at the same Bank. There would also not be a need for Bailouts or Depositor Insurance as Current Accounts would not be lent out, only Investment Account money would be lent with both Investor and Bank sharing risk. Bank Runs – which we saw with Northern Rock, would not occur.
I would accept that we do need to legislate changes to how Banks lend into the Housing Market – such a Loan to Rentable Value – as proposed by Steve Keen. Taking two peoples salary into Account when calculating amount of Mortgage effectively shackled both Partners of a household to fixed permanent Employment (with additional expenses for childcare) – with no backup plan if one salary earner loses their Job – as Elizabeth Warren has stated in her research of how our finances have changed over the last forty years.
And the Bank of England said in 2014 that most textbooks are wrong on banking
That one included
Richard Murphy does not seem to know very much about this subject. He appears to be unaware that what PM basically advocates (as PM themselves admit) is what’s called “full reserve banking”. And that’s a system that has been backed by numerous household name and Nobel Laureate economists over the years: for example James Tobin, Merton Miller, Milton Friedman, Laurence Kotlikoff, Irving Fisher (in the 1930s), and Prof John Cochrane (who currently teaches at Chicago University). At least Richard Murphy does not cite any of those authors. In short, Murphy is up against much more brain power than exists in the PM head office (though I’m sure they’re all reasonably intelligent folk there).
Next, the Securities and Exchange Commission in the US is actually imposing the rules of full reserve on money market mutual funds in the US. Perhaps Richard Murphy can tell us where the SEC has gone wrong.
I would really rather not be lumped in with Friedman and Fisher
Telling me I am wrong is also a matter that does not trouble me
I have been told I’m wrong so often on issues relating to tax that I have lost count of them and have almost invariably been proved right
I say almost invariably with care, but I m pretty confident here too
Sanjay,
I would take Laurence Kotlikoff’s views on banking with a huge pinch of salt.
He thinks governments – entities that create their own currency – are ‘like households’ and calculates the US is ‘bankrupt’ to the tune of $200 trillion!
http://www.zerohedge.com/news/2013-09-11/lawrence-kotlikoff-us-fiscal-gap-200-trillion-our-country-broke
Such an economist has zero credibility. These quotes from a recent NY Times article penned by Kotlikoff show him to be embarrassingly naive…
https://econoblog101.wordpress.com/2014/08/01/kotlikoff-revives-the-old-myth-that-a-government-spends-like-a-household-in-the-nyt/
I’m hoping you will cover this in more detail in your forthcoming book-although I concede that the essentials of both sides of the argument are well laid out here.
It is in there
I don’t understand why you say all money is created from lending apart from notes and coins. Surely central bank reserves are the same as notes. They both represent central bank money. So, either both are not created as debt – notes and reserves – or both are? Either way, notes are not out there on their own as unique.
Please read MMT
I have read Mmt. They don’t make a distinction between notes and central bank reserves. You are the first person I’ve seen do it, so I’m assuming you’ve just made a technical mistake, and when you talk of notes you also include reserves in that category of non debt money. If not, then you should explain why not, as your thesis would be unique as far as I can tell. Otherwise, you should clarify as it is important this discussion topic is accurately represented from a technical point of view.
Point accepted
I think what is fascinating about all of this is that PM and MMT are operating with a different linguistic base and within a different conceptual framework-and never the twain shall meet it seems-which is a shame.
For example we all think that Government bonds are ‘borrowing’ to spend -but MMT (Randall Wray in this instance) writes:
“Government bond sales are not really a ‘borrowing’ operation required to let the Government deficit spend. Rather, bond sales are really part of monetary policy, designed to help the Central bank to hit its interest rate target.”
Thus MMT is offering a very different ‘Gestalt’ that allows us to look at these mechanisms in a fresh way. I find this exciting (though I’m cognitively challenged by it, unfortunately!).
I think that is why MMT sees PM as trying to fix something that ‘ain’t broke’ because we’ve already got a Sovereign Currency but stymie ourselves with notions that borrowing has to take place before a Government can spend. Wray puts it wittily:
“Government can impose rules on its own behaviour, for example, rules that require it to sell treasuries and obtain deposits in its account at the central bank before it cuts a check. Once it has adopted such a rule, you could say it has no choice. This is much like the Jack Nicholson character in the movie ‘As Good as it Gets’ who had a self imposed series of actions he had to take before he could open the door. These are matters perhaps better addressed by behavioural psychologists than by economists.”
So MMT seems to encourage us to see the knots we tie ourselves into here. Of course there are all sorts of vested interests behind these ‘misunderstandings’ but it seems to me urgent that we work collectively towards clarity because we have a set up that is choking human potential -lets start helping each other!
Good points
I know that Richard can look after himself but he is basing his response on factual information concerning the creation of money – information, methods etc., that have been pushed into the long grass by neo-liberal economic thinking for the last 30-40 years.
This neo-lib thinking is designed to prevent Government controlling the supply of money for the good of all, so that vested interests can dominate and gain from it instead at other people’s expense. This is because too much new (fiat) money is being issued as interest raising debt, whereas really what we need is for Government to simply create fiat money and give it away to sectors of the economy where it will kick start business and sales.
As far as I can make out, during the last 30-40 years, macro economics has been actually practiced as micro economics with Government expected to behave like a company or household (the so-called ‘balancing your books argument’). Why? This is nothing but a relegation of the Government’s role to become sub-servant to the banks by the markets.
I’ve read PM’s responses and they seem to be wanting to placate people on the basis of these flawed and plain wrong theories of money creation because they seem to accept (rather weakly) that this is what stands for ‘knowledge’ – in fact it is nothing but received wisdom. PM needs to realise that the public need to be re-educated – not only about their own use of money (PM and others are really good about this) but about how money is created in the first place (PM are not so good – in fact very bad at this from what I’ve seen here).
Going with the flow (trying to work amidst theory that is just plain wrong) is easy but is like a pact with the devil and will only cause confusion. Trying to change people’s thinking about money creation is much harder – but it has to be done to get us out of this gridlock that Simon rightly notes above.
Never mind ‘agreeing to disagree’ – PM are agreeing to remaining wrong. And the implications for all of us are bad because things will remain as they are.
Please read Warren Mosler’s ‘7 Innocent Economic Frauds’ or Bill Mitchell’s blog. Or read Steve Keen or even Satyajit Das.
A whole generation (and more) has been lied to and it has to stop.
And for anyone who wants to waltz in and start banging on about how Government fiscal intervention causes inflation etc., before you do, ask yourself why since the early 1980’s we’ve had less regulation in the banking sector than ever yet we’ve had dot com bubbles, the 2008 crash, boom and bust throughout the 80’s, 90’s, the Libor scandal, Barings, BCCI, house price super inflation – I could go on – but all of this since deregulation and whilst Government has been forced to take a back seat as an a major economic player.
I’ve read Warren Mosler’s 7 Innocent Economic Frauds – and although agreeing that the Government should be spending more in times of economic recession, think that there could still be a problem with applying his policies if the only way to spend is to create Treasury Bonds. That’s all – apart from that Warren Mosler seems to be implying that only the Government should control the Economy through Treasury bond Issuance and reduce spending by Taxation.
Why is it necessary to issue debt when issuing currency by the Government – free from public debt – would achieve the same goal – that of having a stable currency circulating through the economy to facilitate the sale and purchase of goods and services.
I could be wrong, but I don’t recall Warren Mosler saying that we should address the problem of reduced Bank Regulation? He’s mentioned about creating new Government Debt to pay for youth unemployment schemes but does not mention (as far as I can tell) how to address the problem of Risky Banks and their control of the money supply?
I have already explained green QE fulfils this role
It is interest free money, albeit created by debt for public use
I have made clear that this is possible
Can you explain exactly how Positive Money’s description of the money creation process differs from the correct version? I am wondering if you have actually read any of the material on the website.
There is no stock of money
Shall we start from there?
Fran,
You ask: “Can you explain exactly how Positive Money’s description of the money creation process differs from the correct version?”
I’d start by pointing out the fallacy that any money can be considered “debt free” which is the PM view.
Let’s consider the creation of a new currency in a closed economy. We have 1000 participants who elect a govt. The governmnet issues the “crown” and give everyone two crowns as samples to start things off. The government now has 2k crowns as liabilities. The population has 2k crowns as assets.
We can open up the economy and introduce a foreign sector, introduce taxation etc but the government’s liabilities always equal the assets of the non-government sector.
Agreed
It cannot be otherwise
What do you mean by a stock of money? Can you tell me where exactly in their literature, Positive Money refers to a “stock of money” in a way that differs from your description,
(to the Scottish Greens before the election ) of 97% of our money as being electronic and only 3% as being notes and coins?
I have already quoted such comment in the post
Money is created and then lent according to PM
It just cannot happen that way
Richard you are splitting hairs to discredit PM by misrepresenting what they say about money creation. Talking about something as abstract as electronic money has its pitfalls and requires some generosity of spirit all round if we are going to have a worthwhile discussion. Your description of the process in the video of your talk to the Scottish Greens did not differ in any important respect, apart from its brevity, from the account given by the PM website and in the book Modernising Money.They do not say money is created and then lent,or if they ever do this is the verbal equivalent of the typos which make the last paragraph of your 8.06 reply so hard for me to understand.It is quite clear from the book that they are saying that the money appears simultaneously, as the loan is made.
Very clearly that is not true
They say money is made by one authority and lent by another
That is just not possible
Fran @ June 8 2015 at 10:50 am,
Your belief that electronic money is “abstract” and “has its pitfalls” is revealing.
In accountancy there is no abstract, there is only concrete. That’s the whole point.
MMT – which more properly should be called Modern Monetary Mechanics – gets its analytical power with respect to macroeconomics (and money creation!) precisely because it is based on “ineluctable..accounting logic”…
http://bilbo.economicoutlook.net/blog/?p=15842
As both an accountant and economist, Richard gets it. PM won’t unless they take Richards advice and read some MMT.
Richard,
As I’ve said before PM seized on that 97% (private bank-created money) figure in order to provoke outrage at the private banks as the root of all evil. It might gain them lots of recruits, but unfortunately that figure is selective…
http://www.taxresearch.org.uk/Blog/2015/06/03/its-time-regulators-understood-banking/comment-page-1/#comment-724745
However what concerns me Richard is if you mentioned that figure in a presentation to the Greens, you will have unwittingly confirmed to the Greens present in the audience/video viewers familiar with PM that PM are a credible organisation. Not your fault.
That is especially unfortunate as I am aware of PM making overtures to the Green Party all over the UK with some success (sadly their proposals ended up in the English Greens manifesto).
So did a lot of my tax stuff end up there
It did not one much good
But point noted and agreed
The 97% figure is an indicator of how much “money” or “credit” is created by Private Banking Institutions. To say that PositiveMoney have seized upon this figure to promote support is true – but the figure is true and is NOT misleading. It confirms something in a mathematical way that everyone here on this page understands – that Bank Credit has increased while Publicly created money has decreased (to 3%).
I will repeat what I have said before – in 1968 the amount of Publicly created money (free of interest to the public) was between 17 and 20%. This money was created by the Government and spent into the economy. In the 1940s it was closer to 40% – created by the Government and SPENT (NOT lent) into the Economy and circulated.
This 97% figure is not some abstract statistic of M4 Money, the fact that it has increased from 80% is highly significant as it represents a LOSS of revenue through seigniorage to the Treasury.
The increase in Bank Created Credit has been detrimental to the Economy and to the Public at large. It has been hugely beneficial to the Banking Sector and certain Politicians who benefit from Campaign Contributions.
The increase in the proportion of Bank Created Credit represents Bank de-regulation – allowing them to create more credit with less restriction. This has had the affect of higher house prices due to the expansion of credit. The most expensive item we will buy is now more than double the cost it was forty years ago. This has meant that Bank Reserves were allowed to dwindle from around 20.5% in 1968 down to 15.9% in 1978, 5% in 1988 and 3.1% in 1998 – and now is voluntary – Banks decided what reserves they needed right up to the point when we had the 2008 Crisis.
Richard mentioned the 97% figure in his speech and gave a very clear and articulate explanation to people there how Banks create money when they lend and how QE is like taking £20 out of your left pocket and putting it into your right pocket. Totally agree, but to ignore the relevance – or misunderstand the 97% and what it represents is a mistake. It basically represents: Asset Bubbles, Stock Market Bubbles, Low Interest Rates, High House Prices, Mal-investment, increasing debt and a Government that is subservient to the Banking Industry.
I agree with the policy of Green QE – but what other MMT ideas can help stabilise the Money Supply (even if it’s just taking us back to the 1968 level of 20% Publicly created money) to help prevent Houses from inflating even more? Spain built thousands of houses (and even a whole Airport) but once the Banks got into trouble and they stopped the spigots of credit – prices suddenly became unaffordable, so I don’t buy the idea that all we have to do is just build loads of Houses.
The idea of Green QE is good and if the idea is that with an injection of publicly created money that will reduce the demand for Bank created money – I think we will also need to have and increase a Bank Reserve Requirement, and also other regulations.
In summary 97% of we CALL money (what most people think of as “Money”) – ask your Auntie what she thinks the numbers in her Bank Account represent and she won’t say “Bank Created Credit” – she will say “Money” and use it like money – technically it isn’t but then Note’s & Coins are not really money either as they are FIAT. The only real MONEY is Gold or Silver. Money to be Money has to retain it’s value. But for the purposes of this discussion can we get around this argument about what money is and just accept that Bank Deposits, Notes and Coins are money please.
PositiveMoney are not trying to mislead anyone – they have helped shine light on the Banking System as MMT have so it would benefit everyone if spanners weren’t continually being lobbed into the discussion in an attempt to disrupt the conversation. Richard has already mentioned the 97% figure in his talk to the Scottish Greens. The 97% Figure stands. If anyone does not believe it please go to the Bank of England website and get the figures for M0 and M4 – 100*(M4+M0)/M4 = 97% (+/- 0.5%).
Conrad
To say the only real money is gold or silver is just so crass I am astonished I have let this comment on here
I will not do so again
This is not just naive: such beliefs have been the weapon of oppression
Richard
Stephen, PositiveMoney is NOT the Enemy, Banks are NOT the enemy – the System is flawed and needs fixing. Please focus on that. There’s no Good Guys and Bad Guys, there’s no White Hats or Black Hats in a “B” Rated Western – it’s the Banking System that needs to be fixed.
But it has to be fixed properly
Conrad @ June 9 2015 at 10:14 am & June 9 2015 at 10:22 am
Am well aware the BoE published that 97% figure (which they explain is the relative proportions of private bank loans vs sterling hard cash issued).
However, unlike PM, the BoE would never claim that it applies to ‘all money’, simply because such an assertion is FALSE. At the very least such a claim should also include government-issued e-money aka ‘government spending’ (which is a vastly greater amount than the notes and coins issued).
The 97% of ‘all money is bank money’ figure is pure PM propaganda.
PM are not the enemy, nor the banks. However the slick, but naive, PM campaign is sowing confusion in an already difficult-to-understand field. That matters because the target audience – progressive politicians – have limited time to spend on these complicated (to them) matters as it is.
In those circumstances the slick banking campaign (PM) might just break through and, in doing so, block something far more important and profound that those progressive politicians so badly need to hear (even though they don’t yet know it). Namely a far deeper and wider understanding of macroeconomics (MMT) that would allow them to coherently argue against austerity and for spending on much-needed climate action e.g Green QE.
Unfortunately this scenario seems to have played out already with the Greens.
Indeed
Conrad Warren Mosler on bank reform please see http://m.huffpost.com/us/entry/432105 really not hard to find.
I’ve already said that I’ve read Warren Mosler’s book.
“Does not mention (as far as I can tell) how to address the problem of Risky Banks and their control of the money supply?”
I have given you the link to an article by Warren on exactly this subject not a link to 7DIF.
Richard,
Dynamically what Sovereign Money proponents are proposing will change very little fundamentally – because of the nature of the way banks and building societies actually work. There is a lot of change proposed to hide what they actually want politically – which is essentially a centralisation outside the democratic structure (more autocratic rule by Very Clever People) and a regressive increase in bank costs for poorer people.
I can see value in pulling out the clearing system under the auspices of the UKPA and perhaps nationalising it – so that clearing can never be held to ransom by failing banks.
But really we need to narrow banks by regulating what they can and can’t lend money for and at what loan ratio.
I wrote a fuller critique which you may find informative: http://www.3spoken.co.uk/2014/11/the-sovereign-money-illusion.html
There are clear overlaps in our thinking by the look of it
Richard, it is just plain scaremongering to say that PM wants to abolish private banking as we know it! For a start it would be helpful to consider who you mean by “we”. If you mean the minority including yourself and PM who know what they really do, then yes,it is true and there is nothing odd or bizarre about that. If you mean they want to abolish private banking as most people think of it, including me until about 2 years ago,then no, they do not want to abolish banking in that generally understood sense.
I am engaging in technical debate, not semantics of whether or not an institution calls itself a bank, whether it is one or not
I think PM will abolish banking as we know it – where the bank creates the funds loaned
Is that true, or not?
If it is, I am right.
If not, then what are PM proposing?
Peter, there is a sense in which all money involves debt somehow. Money is not valuable in itself only as a token of what it can be exchanged for.In a sense, when you receive money in exchange for work done or a commodity,the money is a token of what you are owed in terms goods and services from the common pot.However I am guessing that this is not what you meant. Money deposited in bank accounts exists as a liability of the bank,so that is a kind of debt.However PM is only talking about stopping banks from creating new deposits as loans which have to be repaid in the future together with interest.It is not true that Positive Money’s proposed BofE created money ( which would of course exist as a number of a certain size in a government account rather than anything tangible,)would necessarily involve debt of this kind.
There have been many small scale examples in history, including, I believe, Colonial Scrip and the money created by the government of Guernsey to raise money for essential infrastructure projects at the end of the Napoleonic wars.
All money is based on debt
I am bored with hearing it argued otherwise
There is no otherwise
I am amused you refer to the Guernsey experiment – which was debt based! The loan notes used as money were, of course, repayable
The exercise was much more akin to Green QE than PM
Guernsey has issued State Notes in order to fund Infrastructure Projects – and very successfully. It did this because they could no longer afford borrowing the Money from Banks. It is very similar to your proposal for Green QE, true but it is still Government creating money to be spent into the Econmy directly which is very close to PM but without the restriction on Banks creating money.
The Notes created were legal tender and could be used to pay Taxes.
Colonial Scrip was also a Government Issued Currency which also was very Successful – too succesful as it was primarily destroyed by the British (us lot!) because it provided a Colony with too much Sovereignty. It was destroyed by Counterfeiting the Notes (by the British) which destroyed their value and eventuality led to the American War of Independence.
Benjamin Franklin was quoted as saying:
“That is simple. In the Colonies we issue our own money.
It is called Colonial Scrip. We issue it in proper proportion
to the demands of trade and industry to make the products
pass easily from the producers to the consumers. In this manner,
creating for ourselves our own paper money, we control its
purchasing power, and we have no interest to pay no one.”
We could go on to discuss the Greenback – which was issued by Lincoln –
“United State Notes”, not to be confused with “Federal Reserve Notes”. United States Notes were issued until the 1960s, and Silver Content in Quarters was 90% until 1965 when most of the Silver was removed as the purchasing power was drained from the currency due to the expected expense of the Vietnam War….
I do not believe you are correct when you say that the Guernsey Issued Notes were debt based.
Please provide evidence to that effect?
I think you are making claims beyond what is credible for a scheme in 1827
And it was certainly not linked to gold
As for the Guernsey notes – of course they were debt based – they were repayable!!!!!
“In the 1830’s the first commercial banks moved in; after some years of persuasion, Guernsey left this interest-free source of funds for public works and switched to interest bearing debt from the banks.”
The Note Issuance was an interest free source of funds (not linked to Gold as you say).
Out of interest (excuse the pun) can you say who it was repayable to?
And saying “of course they were debt based” doesn’t prove anything. Whose Debt? Repayable to WHO?
And if the scheme is not credible in 1827 when you’ve already related it to Green QE, are you now saying that your own Green QE is also not credible?
I am afraid I do not understand your attitude.
I am not sure what you’re claiming for this Guernsey scheme – which was of loan notes that had repayment dates on them
They look like bearer bonds
A long way removed from what I am discussing
I do not dispute they appeared to work though – it’s just the interpretation that, again, I am not sure about