Martin Sandbu wrote two articles in the FT last week (very paywalled) that look at issues arising from this weekend's referendum in Switzerland on banking reform.
Let me be clear: I oppose the proposed reform because I think it embraces all the worst features that Positive Money propose for the banking system and if adopted this would, firstly, be harmful to the Swiss economy and, secondly, be prejudicial to the necessary real monetary reforms that are required in most countries at present. I explain why in some detail, here.
Bizarrely, Sandbu has, despite his obvious overall sympathy with reform, managed to write the pieces without the slightest reference to modern monetary theory. It is as if he, like so many economists, thinks that money exists as a phenomenon separate from the economy as a whole. I've already noted similar traits from The Economist and John Kay in the last few days. And it is as if he, like they, thinks, quite erroneously, that money can have a value as if it is a commodity in its own right.
Sandbu gets this wrong. Money has no value of its own, and it never has. Both physical cash and ancient and modern intangible forms of money (to cover all forms of ledger based monetary creation - which are in essence identical however the record has been maintained) get their value from recording debt. A currency achieves that by being issued into existence by a government that accepts it back in settlement of legally due tax obligations. Bank created money, which because it is always denominated in a government created currency is always a derivative of it and so of secondary standing, exists because of the debt that exists from a lender to the bank that extended them credit.
Sandbu, and those suggesting banking reform in Switzerland, ignore this reality. Alternatively, they are saying that a central bank must decide the quantum of monetary debt denominated in a state's currency that should exist in an economy. This is deeply dangerous for three reasons.
First, it assumes that the central bank is capable of accurately forecasting this. I have to say I have absolutely no such confidence.
Second, it assumes that the market will adapt and that there will be no resulting shortages or excesses of available credit money for settlement of obligations due within an economy. Again, I do not share that confidence.
But, most importantly, and third, this assumes that recourse will not be had to alternative currencies. I can think of no better way of promoting their use than the adoption of this reform. Far from a central bank, and so a government, having control of their macroeconomy as a consequence of this reform they would instead, I suggest, lose it as a result: no country where two currencies are in widespread common usage can ever be subject to effective macroeconomic management in my opinion.
Sandbu seems to recognise the issues he is addressing, saying:
The most generous way to interpret this objection is as a worry that a full-reserve system will not, in practice, generate as much credit as the fractional-reserve system. (This worry is expressed by the Swiss central bank head in his opposition to Vollgeld.) Even this is not obviously bad for growth if credit supply is only moderately more tight-fisted but much less volatile. But the broader point is that there is no inherent reason why a full-reserve system should lead to less credit creation (over time) than the status quo. That depends entirely on the policies pursued by the central bank in the new system.
What those policies should be deserves its own debate. One thing that is clear is that central banks would have a wider range of tools – and so the range of possibly policies is correspondingly broader (including policies that would mimic today's system). It would be surprising if something better than the status quo could not be found.
It's hard to disagree with the conclusion: we all know the status quo is not working. But complete credit control is no solution at all. I have no problem with directing credit, and controlling its excesses. But handing all credit creation to the central bank is not only technically impossible in a modern economy, it's a dangerous folly. Modern monetary theory provides a better answer (so long as tax is a fully integrated policy issue). It's time the world's economists woke up to that.
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Wake or work. The trouble with economists in general is that they do not wake up until around mid day. Then by the time they get to work it is already late afternoon. Academically speaking.
Corrected!
“..no country where two currencies are in widespread common usage can ever be subject to effective macroeconomic management in my opinion.”
Does the Swiss WIR not count?
It looks like the Bristol Pound
It is also very small
So, no it does not count
Typo woke not work I think
Corrected
Thanks
Richard,
Being aware of the Swiss Referendum and the “Positive Money” mob I propose the following analysis:
To begin with what we are seeing with both of the above is an attempted revival of 2 things:
1. The Quantity Theory of Money
2. Milton Friedman’s ‘Monetarist’ approach – revised.
The revision in this case acknowledges (implictly at least) that Friedman’s monetarism failed because it did not recognise or sufficiently address endogenous money (a.k.a. ‘private bank’ or ‘credit’ money).
The Positive Money mob are seeking to revise Friedman and rescue capitalism by totally eliminating endogenous money (which they erroneously refer to as ‘fractional reserve banking’).
This, as they see it, will rescue the system by eliminating the credit expansion that drives the asset price bubbles and all the instability, crises, crashes etc. that come with them.
There are, as you suggest, better ways of doing that and, for reasons I needn’t repeat I don’t think their proposal would work all that well. Even if it did the result would be a Calvinistically austere, tight-fisted, no-inflation, high interest rate regime that could scarcely be described as a success.
For the Positive Money gang and their fellow travellers that is the price of saving the system and they are happy to go along with that. Thankfully, many of us are not inclined to think that the system is particularly worth saving and certainly not at that price.
One thing for sure the Positive Money push isn’t progressive despite its pretense. They are pro-regulation Conservatives with an extreme concept of regulation.
Agreed
Positive Money are dangerous though
The Greens buy their ideas
So too does the New Economics Foundation
And yet they’re monetarists when monetary policy has almost no role left to play in modern macro
MMT on the other hand is fiscal policy. They’re chalk and cheese
A word to the Greens and NEF is due. I’d like to see them explain the benefits of a tight, no-inflation, high interest-rate austerity regime.
Perhaps they weren’t paying sufficient attention.
A hopeful sign.
Green MEP Molly Scott Cato is sharing a platform with MMT economist Steven Hail at a public meeting on Friday 29th June in Oxford (hosted by the Oxfordshire Greens).
Details here… https://www.facebook.com/green.modernmoneytheoryandpractice/posts/1734868263262976
It’s another meeting I was invited to and cannot make
Friday nights have to be reserved for offspring…
Maybe these writers are fire-fighting, desperate to throw distraction before the relentless advance of MMT in the hope of delaying its recognition by the majority. This says little for their loyalties if true.
this weekend’s referendum in Switzerland on banking reform.
That needs amending to ‘next week’s referendum’. It’s on June 10th.
Apologies
“Sandbu, and those suggesting banking reform in Switzerland, ignore this reality. Alternatively, they are saying that a central bank must decide the quantum of monetary debt denominated in a state’s currency that should exist in an economy. This is deeply dangerous for three reasons.”
You can barely believe economists have learnt nothing from the failed Thatcherite experiment of Friedman’s Monetarism namely that the amount of money in circulation does not correlate directly to inflation:-
https://artsonline.uwaterloo.ca/rneedham/sites/ca.rneedham/files/needhdata/documents/CollapseofMonetarismdelivered.pdf
Where there is strong correlation is in the rise in oil prices because modern economies are heavily reliant on the use of oil:-
href=”https://mythfighter.com/2018/03/17/what-is-the-complex-relationship-among-inflation-deficits-interest-rates-oil-prices-tax-cuts-and-gdp/
Apologies. Here’s the correct web link reference:-
https://mythfighter.com/2018/03/17/what-is-the-complex-relationship-among-inflation-deficits-interest-rates-oil-prices-tax-cuts-and-gdp/
I agree that positive money solutions are dangerous. I don’t want to be too unkind to them though, since it was their website that explained to me the process of bank credit creation and got me interested in the subject.
There are better ways of controlling asset bubbles than simply banning bank credit as PM suggest. The work of professor Richard Werner has impressed me. He proposes smaller community banks that are not too big to fail, so cannot hold the state to ransom for bailouts. He also proposes that only existing credit should be used for funding asset purchases, eg by the sale of morgage bonds to savers. The creation of new bank credit must be directed to increasing productivity, after all productivity creates wages that allows debt to be repaid.
Personally I don’t think we will see any change in banking until the corporates consume everyones wealth, only then will civil unrest create change.
I have to say I think Richard’s work is very hard to follow – and I simply don’t get it right now
He has a new book coming out and maybe I should read it but all I have read by him of late suggests he too does not get it
This is an article he wrote about the quantity theory of credit. It may help explain better. Basically asset bubbles are due to the allocation of bank created credit. http://www.res.org.uk/view/art5jul13features.html
But that’s monetary policy then – and that’s my issue with him, I think
I stress – I am still working on this one
I’d always thought that Richard Werner is on exactly the same page as your good self as demonstrated by his deconstruction of the Central Bank promoted myths
https://professorwerner.org/shifting-from-central-planning-to-a-decentralised-economy-do-we-need-central-banks/
He isn’t just proposing smaller community banks he’s actually moving forward with it since he’s behind the Local First CIC (http://local-first.org.uk/?p=1015), and the Hampshire Community Bank (http://www.futuresolent.org.uk/our-programme/hampshire-community-bank/)
I believe in central banks though – albeit under control
I can’t understand where Richard is on the issue right now – and that’s my concern
Local is fine – but they still need a currency that is managed
I agree Richard, a currency does have to be managed. And small community banks still need a central reserve to balance end of day accounts with other banks. If not they could not create credit. The idea of not for profit community banks allows better loan risk assement to small businesses, as the manager would better know the character of the person asking for the loan. The banks profits from lending are reinvested into the community.
Richard Werner realises that credit is just a temporary expansion of money supply, since repayment destroys the credit. So it is non inflationary over time. By using credit to inflate existing asset prices our current system expands credit with no productive value added. So in the end it will cause deflation as asset prices become too expensive, which is why we now see the younger generation forced to rent. As borrowing falls consumer demand falls as money disappears. It is the use of new bank credit for existing asset purchasing that creates the boom bust cycles.
I have no problem with that
But it is a micro issue
I agree with most of the comments above.
Positive Money miss the fact that the real problem is distributional, and the way to solve that is fiscal not monetary.
In contrast, MMT focuses on the real resource issues, e.g. job guarantee on human resources, and Green New Deal on energy resources – you cannot do much without people and energy. Money has to be understood as the means to facilitate the maximisation of resource with the limits set by environmental sustainability not money.
Well summarised Charles,
Positive Money is the wrong answer to the right question. It sees that the bubble world of de-regulated finance has fully undermined monetary policy leaving it stuck at the Zero Lower Bound with nowhere to go.
The Positive Money solution, however, is not only an undesirable piece of overkill, it misses the point completely. They are barking up the wrong tree. Rescuing monetary policy (and capitalism) is not a worthwhile aim in itself. It does not, as you say, solve or even address the distributional issues. Fiscal policy does that.
There is no mystery in the fact that Positive Money is pre-occupied with inflation with little or nothing to say about unemployment. Their priorities are clearly apparent.
I love MMT. I never understood money before and now I know why – it’s not part of the real economy. This is why imports are a benefit – they increase the quantity of real things in the economy.
[…] I suggested that economists need to wake up and see the world as it really is yesterday. […]
Well as a supporter of Positive Money I would just like to put in a few defenses of the organization. I would firstly like to add I do like MMT too, anything that gets the usual debate about money going(and the supposed lack of it)has to be a good thing.
I really do not see a need for either movement’s view to be protective and or exclusive to the other. A lot of ideas are crossed and as a long time follower of PoMo, I have seen its policies evolve to something closer to MMT.
Prof Werner also has some good ideas re small banking and non-inflationary lending to SME’s which has been sadly ignored and dwindled under our current banking system. Though he now too dislikes PoMo, but for reasons to do with him distrusting centralized central banks and the incumbent power that goes with it. Personally I believe him to be slightly paranoid re that issue, he is a tad eccentric that way, but otherwise has a very sound understanding of our banking/gov finance systems.I do see that he does make a good case for allowing money creation in such instances i.e for non-property and share loans.,While not a PoMo policy, I can see as a potential halfway house to an acceptable and preferable system.
You cannot force banks to lend to businesses and in the UK they are increasingly reluctant to lend to SME’s, not that they have ever given much lending to that sector historically. UK banks are obsessed with property lending in the main, allocating more than half of all bank lending to that sector in the 10 years prior to 2008 (a figure that has remained about the same). So let’s not kid ourselves about bank lending to the real wealth generating parts of our economy. All bank lending currently does is create assets bubbles in property and stock markets(which consumes another 35% of all bank lending). As such the current banking system is not worth saving, so I would disagree with some on here on that point. Mainly because Leopards do not change their spots.
There are other ways to get banks lending. National /regional Investment banks, small saving and loans banks(as promoted by David Fishwick and his Burnley Savings and Loan bank),or any other lender that lends depositors money on without creating new money eg peer to peer; crowdfunding or credit unions.
As to distributional effects, again I do not recognize that PoMo is advocating anything like what is portrayed here. What we have been asking of late is that the BoE have new tools that would allow monetary stimulus for the real economy, but we want better communication between the Treasury and central bank which is key. Monetary policy can and should be used in conjunction with fiscal policy. But interest rates are not the way to do it. Even Freidman laughed at Tory efforts to do so, this was not true monetarism in his view, he said it would fail and it did. That said what PoMo advocate is not monetarism.
This may remove the central bank’s independence, but so what? No one elects the central bankers, they should come under more control from elected MP’s. So PoMO is moving more towards MMT than is probably recognized here.
I believe we would all gain far more talking to one another about these details than falling out over perceived policies, none of which are written in stone as far as I have seen. PoMo is an ideas /debate organization, not a cult.
I wish I could agree with your last comment: I admit I do not
Positive Money is promoting a dangerous and potentially repressive form of monetary policy
MMT is all about fiscal policy
They really are fundamentally different
Positive Money looked at a problem and got the solution wrong because they thought money was the problem
MMT looks at the same issue and says it is the economy that is wrong and money could put it right
It is that stark
Well, I just don’ t see that at all from all my years following PoMo.They would in fact say the same,i.e the economy is awry and money can help put it right. We have monetary and fiscal tools, we can use both not just one. We just need to get them working in harmony, not against each other as they currently are. Current monetary policy via interest rates is not working, we need new tools for the CB’s. If gov’s want to raise money, this seems the sensible way to do it. As long as it does not cause rampant inflation.
PoMo do not want a rigid gold standard style money supply. I fail to see how that is” repressive”, they are perfectly happy with the gov and central bank working together to create state issued money to spend as and where the gov sees fit and then having the gov taxing it back out if needed. This is a flexible solution to suit the demands for money in the economy.
Crucially PoMo have more or less dropped the call for full reserve recently. They are sounding ever more like MMT ers. They are concentrating on getting gov’s to use the CB to create money for the gov to use directly into the real economy as you seem to want too. This may be enough to succeed of itself, who knows. One thing it will do is reduce the amount of money we now required to be created by banks ,which is a win in my book even if we do not go as far as full reserve banking.
If PoMo as you call them dropped full reserve currency – which has been a millstone around their necks for ages – they would be making real progress
Until they do, they’re a problem
And then maybe their PQE would be more like mine
We may find evolution beats revolution regardless of this debate. A future in coming where national digital cash issued by central banks will provide a secure way to hold money (reserves) at the central bank, obliviating the need to have a bank account .Which would become a far riskier way to hold money and make payments(see recent Visa shut down debacle.)
This advent will finish bank money creation as it currently exists, banks will become mere intermediaries of money, which is effectively a full reserve system.
Another Martin Sandbu article here
https://www.ft.com/content/9f44d9cc-676a-11e8-8cf3-0c230fa67aec
And then the central bank takes on a wholly different role?
Do they want it?
Will politicians let them have it?
Are you sure?
Bill,
And then the central bank takes on a wholly different role?…..yes for sure, that is the whole point.
Currently, it focusses far too narrowly on the banking/finance sector leaving everything else secondary.
Do they want it?….No idea, they may have no choice in a way, but they have commissioned Ben Dyson who set up Positive Money to carry out research on how they could use it. It could help in implementing monetary policy
http://positivemoney.org/2018/05/positive-moneys-digital-cash-proposals-find-support-new-bank-england-research/
Will politicians let them have it?…. Positive Money recently carried out a poll on MP’s and found 85 % do not understand how money is created in the modern economy. If they all eventually get educated about this subject to actually make an informed opinion on the matter, then it is then entirely up to them…and us. But that situation has not arisen as yet.
Are you sure? …I am never sure about anything, but CB’s all over the world are looking at this now. The Chinese have started experimenting with the idea.So it may well be the way it goes in future.
Note: positive money is about monetary policy
And that’s supply side thinking that crushes economies
Vince, what happens when the central bankers of the day don’t like you and decide to block your digital account? How do you live, given we don’t have access to land to support ourselves either? There need to be alternatives to prevent this sort of situation from arising.
Hello Bill,
Well, it wouldn’t be much different from now, you can always use hard cash. Unless they make that illegal, though I see some countries already voluntarily opting not to use cash anyhow. My daughter who is 20 years old never uses cash, she pays everything by card.
What do people do now if they can’t have a bank account or have no credit? This has no bearing on the current debate, to be honest, people today are excluded from access to credit and money. But I would add that having money in a CB digital account would be pretty failsafe, you can’t go overdrawn and you can borrow it and go into debt and it cannot be used by banks to leverage into infinity. Seems a good prospect to me.
Sorry typo,last para should read CAN’t borrow it not CAN borrow it.(digital cash)
Hi Marco,
I work for Positive Money and I’d be interested in knowing the last time we advocated a “no-inflation, high interest-rate austerity regime”!
I feel like most of such accusations come from people who haven’t been paying attention!
Simon
We don’t mind what you say. What this blog does is go beyond the superficial and look at the consequences of what people say.
I have observed what PM has said for some time. So have others. Our criticism is of your model, which we find deeply troubling because we think it has the consequences noted. And full reserve bankiong is what PM propose, which I and others think monetarist by nature, and aking to the restoration of the gold standard in its likely consequences.
If you would like to explain why that is not the case I will provide you with the space to do so. But this response is not adequate: please do not ‘play the man’ with my commentators: I do not appreciate it.
Richard
Apologies, Richard. My intention was not to ‘play the man’, but rather to point out that Positive Money’s ideas are frequently being misrepresented by those who have only engaged with our early, rather than more developed work. Our approach is much more Keynesian than Monetarist: http://positivemoney.org/2017/10/keynes-not-friedman/
Then as media officer I will tell you that you have a long way to go because right now we are not convinced
Hi Simon,
Positive Money may not knowingly or directly advocate a “no-inflation, high interest-rate austerity regime” but I conclude from their own proposals that they are most certainly doing so in effect.
As I recall my contribution to the Positive Money discussion in this blog began when Richard Murphy published a piece that included this:
‘The idea I take issue with is this, which PM say is core to their policy proposals:
“The central bank would be exclusively responsible for creating as much new money as was necessary to promote non-inflationary growth. It would manage money creation directly, rather than through the use of interest rates to influence borrowing behaviour and money creation by banks. Decisions on money creation would be taken independently of government, by the Monetary Policy Committee (or a newly formed Money Creation Committee). The Committee would be accountable to the Treasury Select Committee, a cross-party committee of MPs who scrutinise the actions of the Bank of England and Treasury. The Committee would no longer set interest rates, which would now be set in the market.
The central bank would continue to follow the remit set for it by the nation’s finance minister or chancellor. In the UK this remit is currently to deliver “price stability” (defined by an inflation target of 2%), and subject to that, to “support the Government’s economic objectives including those for growth and employment.” The inflation target acts as a limiter to stop the creation of money becoming excessive, but subject to that, the central bank is able to create additional money. ”
https://braveneweurope.com/richard-murphy-why-positive-money-is-wrong
If we combine the quote above with Positive Money’s well known commitment to Full Reserve Banking (FRB) I can safely deduce the following:
1. That Positive Money’s proposals effectively assume the Quantity Theory of Money and echo Milton Friedman’s Monetarist theory (both of which are related) with the core difference between Friedman and Positive Money being that Positive Money specifically recognises and seeks to eliminate the endogenous, ex-nihilo creation of private bank, credit money.
2. That according to the P.M. proposals (with reference to point 1) central banks would no longer target interest rates but determine quantities of available money and those quantities would be constrained by a tight 2% inflation target. Interest rates would be wholly left to the market to determine. With tight monetary controls and FRB those rates would be high .
3.That if these were the primary changes being proposed in the context of the capitalist society that we currently know (with no significant fiscal changes) the result would be a very tight regime for
credit, spending and investment. In other words a disinflationary, high-interest rate austerity regime.
I agree
“But, most importantly, and third, this assumes that recourse will not be had to alternative currencies. I can think of no better way of promoting their use than the adoption of this reform. Far from a central bank, and so a government, having control of their macroeconomy as a consequence of this reform they would instead, I suggest, lose it as a result: no country where two currencies are in widespread common usage can ever be subject to effective macroeconomic management in my opinion.”
Richard, I suggest that you read this: http://positivemoney.org/2017/04/sovereign-money-is-not-full-reserve-banking/
“Sovereign Money is different from the current system and the FRB proposals, where two types of money circulate separately — central bank created reserves which are only used by the banking sector, and commercial bank created deposit money which is used by everyone else. Under a Sovereign Money system, there is no longer a split circulation of money, just one integrated quantity of money circulating among banks and non-banks alike.”
I fear that Positive Money’s proposals are being incorrectly conflated with full reserve banking and the work of monetarists like Friedman.
Regardless, as Vince rightly says, Positive Money is not a dogmatic cult. We do not believe that our solution alone is the only solution, and we are keen to work alongside anyone else who believes the power to create money could be better utilised for public good. I am personally a big fan of your work and hope we can develop a more productive relationship with yourself and other MMTers, who we ultimately agree with more than we disagree.
First, PM has promoted FRB: you even admit it
I do not accept the distinction in your comment either: since no one could tell in reality the difference between central bank created reserves and bank created money – and they are, in any case, all sterling – the distinction that you put forward appears entirely artificial
And yes, your proposals are being conflated with full reserve banking, because that is precisely what they look like
If PM adopted MMT it would have a valuable role to play. As it is it plays a dangerous one, giving quite dangerous ideas far too much cover
I only just got ’round to reading this: anything with the words’ Economists’ and ‘Reality’ goes in my leisure reading list, alongside all the other science fiction and fantasy I read.
The reality that economists cannot face up to is that their community is primarily devotional, defined by declarations of faith to demonstrate group loyalties and confer social status; and the efficacy of these rituals is directly correlated to their divergence from observed economic effects.
I look forward to their ad-hoc acts of faith making the transition to a formal auto-da-fé, where the term ‘stakeholder’ has a liturgical significance involving a stake, combustible materials, and matches.
[…] From Tax Research reader Marco Fonte: […]
“…they would instead, I suggest, lose it as a result: no country where two currencies are in widespread common usage can ever be subject to effective macroeconomic management in my opinion.”
Do you have any initial thoughts on the practicalities or otherwise of the current Italian aspiration to issue some kind of parallel currency which would run in tandem with the euro but would be issued by the sovereign Italian government in an attempt to presumably enable its use as purely a payment of taxes et cetera but using the euro for all other day-to-day commercial transactions.
No I don’t understand it either .
See this
http://www.taxresearch.org.uk/Blog/2018/05/21/the-bots-are-coming-and-we-should-all-take-note/