Martin Wolf wrote an article in the FT yesterday in which he argued that the Swiss should vote for monetary reform this weekend.
I have already discussed the dangerously oppressive nature of these reforms which would remove the right of commercial banks to create credit, and pass the whole responsibility for creating the country's money supply to its central bank.
I have also drawn attention to the role of Positive Money (which Wolf supports) in promoting this idea.
Wolf argues three things. The first is that bank failures cost us a great deal. He's right: we know they do.
And he argues that reform has not happened since 2008. He's right. But then, he sat on the UK commission that created the absurdly feeble and slow-paced recommendations for reform that the Tories adopted, so I can lay part of the blame for that on him.
And third, he argues that in that case we have to do 'something'. As he puts it:
I hope ... that the Swiss vote in favour of the Vollgeld proposal in the referendum on June 10. Finance needs change. For that, it needs experiments.
With respect: no we don't need experiments. What we need is some recognition of the truth.
Let me first say what the truth is not. It's not, as Wolf puts it, that we need to:
...make the system safer [by] strip[ping] banks of the power to create money, by turning their liquid deposits into “state” or “sovereign” money. That is the idea backed by the Vollgeld initiative.
Of this Wolf says:
An alternative way of achieving the same outcome would be via 100 per cent backing of deposits by claims on the central bank – an idea proposed by free-market Chicago School economists in the 1930s.
Actually, they're the same, in effect. And that this is a Chicago School / Friedmanesque monetary policy is made clear by Positive Money in their claim for this policy which said:
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.
The objections flow, almost without limit.
First, this puts inflation at the core of economic policy. Put it another way, the interests of those who have money are prioritised. The 1% (or less) are favoured. Any other economic objectives, such as full employment, the creation of a sustainable economy, or the provision of high quality public services, are ignored. Money comes first.
Second, in the process Wolf, and those who promote this idea show that they have no idea what money is. Money is debt. It is only created by government spending and bank lending. It is literally the double entry that surrounds those two processes that create money: there has to be a debt and a creditor accepting obligation to each other for money to have value. But at the core of the Positive Money proposal, and at the core of what Wolf is suggesting, is the idea that you can, somehow, create and distribute money at the central bank as if it has some tangible real quality that simply does not exist. Quite literally printing a pile of cash does not create money: it only creates tokens that represent money. It is the spending of those tokens, and the government's willingness to accept them in payment of tax, that creates value, which underpins the currency. This is why it is so important that counterfeit money is challenged: fake currency undermines the value of the real debt that gives money its value. And the token money that the Swiss proposal would create would be exactly the same: they would be a fake currency because there would be no debt, in the process the value of this money would be undermined, or even destroyed. That's not an experiment anyone can want to participate in.
Third, the very real danger is that a central bank would underestimate the amount of money needed in an economy because their perpetual concern would be the risk of inflation meaning that they would always are on the side of caution. The consequence would be obvious: it would be perpetual underemployment, less than full capacity economic activity, the crushing of credit that creates business opportunity and indications this has the public services near-perpetual economic stagnation, if not the recession.
Fourth, give central bankers control of the money supply, and you can forget democratic control of the economy for evermore.
Fifth, since central bankers would also then control the ability of the government create money to spend on its own programs guarantee that this would also mean perpetual austerity, and enforced government balanced-budget, with all the crushing implications that this has the public services.
This, apparently, is what Martin Wolf wants.
And he wants this despite the fact that he, like Martin Sandbu, also of the FT, who I quoted recently, knows that the reality of money. They know it is bank made. They know banks are not intermediaries. They know money creation is costless.
And yet they don't want to use this knowledge to put money to use: instead they want to use it to constrain the use of money for the purpose of preserving wealth by promoting an idea that has banker control of inflation at its heart and which denies the very essence of what money is to achieve that goal.
There is an alternative, of course. It's hardly even an experiment. It's to simply use what actually happens for the common good, and that is modern monetary theory. As I have written recently:
As I explained in my Book ‘The Joy of Tax', if a government with its own currency in which it requires settlement of tax liabilities wants taxation to be paid then it must first of all spend to put the currency in question into circulation. No other option is possible. It does, as a result, follow that tax does never fund government expenditure. Instead, that expenditure is funded by the creation of new money on the government's behalf by the Bank of England, which it wholly owns. That the Bank of England can create funds in this way has been proven by the quantitative easing programme that has been in existence since 2009. £435 billion of new funds have been created by that programme without any cost to the taxpayer simply by the operation of double entry bookkeeping. The Bank of England acknowledged that this is the way in which banks, including themselves, can create new money in a paper published in 2014. The difference between new money created by government spending and taxation revenue received is at present made good by the issue of government bonds, although this is not strictly necessary: except for EU legislation that prevents direct lending from the central bank to the government that owns it this shortfall could, instead, be managed by an overdraft arrangement between the government and the central bank on which no interest would need to be paid.
The Bank of England might have acknowledged this reality, but as yet HM Treasury has not. The result is that is that it is not as yet acknowledged that the true role of tax in the modern economy (i.e. that where there is only a fiat currency, which has been true almost worldwide since 1971, at least) is to cancel government money creation for the purpose of controlling inflation. If this were understood there would be significant change in the way in which the government managed the macroeconomic environment in the UK.
We need no experiment. We just need to acknowledge this truth. And the fact that it puts employment and fiscal policy at the core of economic management.
We live in a dangerous time when the FT promotes a form of hardline, and deeply undemocratic monetarism.
It's dangerous that some on the left have bought into Positive Money's ideas.
The battle for money has begun. It is essential that it is won.
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Apparently Kenneth Rogoff called him ” … the premier financial and economics writer in the world”. That might give us a clue as to his credibility – lol.
I don’t have capacity to respond to all of your points properly at the moment, but just a few comments:
“First, this puts inflation at the core of economic policy. Put it another way, the interests of those who have money are prioritised. The 1% (or less) are favoured. Any other economic objectives, such as full employment, the creation of a sustainable economy, or the provision of high quality public services, are ignored. Money comes first.”
This is not necessarily the case. The central bank’s mandate is to be decided by government. A new government, led by the Labour Party for instance, could change the BoE’s mandate to target full employment and other positive social outcomes, which Positive Money would support. What Positive Money’s proposals demand is greater co-ordination between the work of the Treasury and the central bank.
In regards to your second point, I agree with you that money is created as debt, which is why (as far as I am aware) Positive Money has always stated that money is ‘destroyed’ when debts are repaid. As such publicly created money would be destroyed when taxes are paid, as I understand MMT argues.
“Fourth, give central bankers control of the money supply, and you can forget democratic control of the economy for evermore.”
This is why the proposals would be accompanied by greater democratic accountability over the central bank. Most BoE policymakers are appointed by a democratically elected government however, which is more than you can say for commercial bankers, who control most of the UK’s money supply, and have misused this privilege by directing funds predominantly towards property and financial speculation.
Essentially I feel most of your criticisms of Positive Money’s proposals are based on the assumption that inflation targeting will be the primary policy objective. However Positive Money are not inflation hawks – most of our advocacy work is based around creating money to meet social goods, such as investment in public services, green energy, and full employment. I feel like we agree with you on far more than you might think!
Simon
I have to say that you just don’t get it.
What is ‘it’?
It is having a central bank that can set policy. Maybe you can’t remember when that was not the case. But it was once upon a time normal. Government did economic policy. It was neoliberalism, and monetary policy that changed that.
It is putting monetary policy at the heart of economics when there is no prospect of rates being anything but near zero.
It is the inevitable sidelining of fiscal policy that follows
It is the failure to put people, full employment, and the environment at the heart of policy
It is thinking bankers could ever do these things if asked to do so – when they have no skills whatsoever to do so. and no tools either.
It is asking bankers to pick winners and losers in the market when they can only back property, as all the evidence shows
It is thinking bankers might even understand business when all they really know about are rents
It is, then, getting the whole structure of policy management wrong.
And it is giving control of that incorrect structure to those who do think money is the heart of all issues – as bankers will inevitably do
And it is losing control
The fact is central banks can’t run an economy
Only governments can
And central banks can’t run fiscal policy when tax is not within their remit
And central banks can’t promote employment because they have no mechanism to do that
You might like to think you agree with us
Maybe you do
But in that case change PM’s policies on these issues and then we will know you do
But right now you are promoting fundamental monetarist policies that will crush the UK economy
And there is no way why what you propose can do otherwise
That’s why we think you’re wrong
You might like to think you’re doing the right thing
But you’re not
And in some ways that’s the biggest concern of all.
Richard
Hi Simon,
You asked me a question in the forum of this post:
http://www.taxresearch.org.uk/Blog/2018/06/03/its-time-the-worlds-economists-work-up-to-reality/
I answered it there (just so you know) . Sorry for the late reply.
“….to “support the Government’s economic objectives including those for growth and employment.” ”
That is most definitely not the policy of this government, and that anyone purporting to have any understanding of the current economic situation is prepared to say that, more or less instantly destroys any claim to plausibility.
In fairness to the UK gov (I have no idea why I said that) they just “printed money” to support the Hitachi nculear project on Anglesey – 5 billion pounds of it & took a stake – the money is not a loan. Whilst I am not in favour of nuclear – nevertheless – this is one example of the Tories (exception Mr Deadwood) doing one thing but saying another (= govs don’t print money & then invest to suport the environment & employment). Doubtless the May-bot will dress it up as something else.
Anyone who claims that there has been ‘no bank reform since 2008’ clearly doesn’t have the faintest clue about the extent of bank regulatory changes and new requirements that have been implemented since 2008, affecting retail banking, investment banking and therefore the different types of customers of those parts of the banking sector.
There has been ample work by busy fools
But the essence remains unchanged
There I agree with Wolf
And on this we are both aware of what has been going on
Perhaps you should read “After the Great Complacense” – (a book on the financial crash) – conclusion – much bank reform has been at very best – window dressing. I would be genuinly interested to hear why the writers of the book were wrong.
Thanks for this – very interesting. I’m not entirely convinced by MMT but that’s more due to my lack of understanding at the moment, I’d like to read up a bit more if time ever allows it. Particularly I’d like to know what protections there would be against hyperinflation under a socialist government if the BoE is obliged to lend the government newly created interest free money. I think some inflation is good but couldn’t things spiral out of control quickly?
But the Positive money idea is clearly terrible. I think your point no.5 illustrates very well how dreadful an idea it is:
“Fifth, since central bankers would also then control the ability of the government create money to spend on its own programs guarantee that this would also mean perpetual austerity, and enforced government balanced-budget, with all the crushing implications that this has the public services.”
Also I don’t understand how you can stop business creating credit in reality. As soon as a company issues an invoice asking for payment within 30 days they’ve created credit, that presumably could be traded. Oops, they just created money! So do all goods have to be paid for upon delivery with no credit terms offered? Sounds bad for the economy.
Re the controls – there are none
If an elected government wants to create money it can
That is our democracy
The ultimate control is the ballot box
That, I presume, is how you expect a ‘socialist’ government to arrive
And if it failed that is how I hope it would depart
But I cna only think of one government that ever set out to wreck the economy – and that was Thatcher’s in 1979
“Oops, they just created money!”
Not quite I think. They have created a tradable asset. But not one that necessarily has the the same currency as money. Money is really a debt accepted by the government. The government may be willing to back commercial bank debt. But it is surely not willing to back just anyone’s. Businesses can create credit denominated in pounds sure but that is not quite money.
The question of who and what this Full Reserve Banking / Positive Money school represents is becoming very interesting.
In in the forums of previous posts including this:
http://www.taxresearch.org.uk/Blog/2018/06/03/its-time-the-worlds-economists-work-up-to-reality/
I have suggested that the Vollgeld / Positive Money agenda effectively represented a revival of the Quantity Theory of Money and Milton Friedman’s Monetarism with an important difference/update/revision – being that the newer school recognise the importance of (private bank) credit money – and seek to eliminate it with extreme, austere measures.
I also said that that the abovementioned agenda appeared to recognise that debt-fuelled asset-price inflation was the Achilles heel of neo-liberalism: the de-stabilising factor, and that their proposals sought to rescue capitalism with a new and severe discipline,
These suggestions were consistent with the comments of Richard and some other regular contributors. They were also met with rebuke from Positive Money supporters who complained of being misrepresented and insisted that Positive Money are progressive, pro-fiscal and ‘more Keynesian than Friedmanite’
I’d like to believe them (honestly) but I am yet to be convinced, especially so when I see that they have rapidly gone from obscurity to eminence with the assistance of some strange bedfellows from the conservative financial press and European political elite.
My current sense is that the cognizanti on the left and right of politics know that neo-liberalism is terminal and that this new monetarism is becoming the Right’s preferred solution.
Your last sentence summarises my fear
Totally agree Marco and Richard, anything to try and cover up the democratic deficit that exists in all the western nations which is becoming clearer to the populations of those nations by the day . If there is even the possibility of the framing of a new paradigm that deficit has to be a key component along with money being created by one means or another for real purposes and not as an end in itself ( aka speculation ) , but even these, as important as they are, are not the issue; the issue is cultural . Neoliberalism has monopolised the cultural space: that is, it IS the paradigm that we all live and breathe and to date I see only the vaguest of hints at what might replace it and at what cost to ALL of us. Because make no mistake when the earthquake comes all houses will fall . I have no wish to sound melodramatic, but I have begun to tire of these idiot nibbling around the edges proposals like this one by the Swiss to mend a system that is broken . Period. As I sing with my newest grandson ‘ All the king’s horses and all the king’s men couldn’t put humpty together again .’
I think the reason Positive Money has grown in stature is because we have a successful campaigning and influencing strategy. I don’t think anyone on the right is looking at us as neoliberalism’s saviour – from my experience most of these elites are not interested in our work on sovereign money systems, but rather the other work we are doing around green finance and digital currencies etc.
Happy to chat about it in more detail to assuage your fears, but I do not think it is helpful to suggest there is a conspiracy behind the success of Positive Money. Especially as I’ve repeatedly seen such lines of inquiry devolve into nonsense anti-Semitic theories involving George Soros/the Rothchilds etc, which bring me much concern.
Please do not make up allegations that have not been raised here.
It is very unbecoming and quite inappropriate.
We have raised substantial issues of concern. Why not deal with them instead of creating ad hominem diversions?
Simon,
3 points in response:
1. Having “a successful campaigning and influencing strategy” is not the same as having a good idea.
2. No one was suggesting that Positive Money would be “neoliberalism’s saviour”. Your proposals would most certainly do away with de-regulated finance and as such, neo-liberalism. The suggestion is that you would replace it with a revised and more severe version of monetarism.
3. The likes of Martin Wolf do not seem to be expressing an interest in “the other work (you) are doing around green finance and digital currencies etc.”
Richard’s 3rd point in this post is very pertinent.
Having read the Vollgeld proposal and some of the Positive Money proposals it occurred to me that a central bank’s control of the quantity of money issued is a very blunt instrument for controlling inflation. It is even blunter than the current interest targeting regime (of open market operations and manipulating the cash rate).
So if the central bank has a tight 2% inflation target it will be cautiously tight (too tight) with the supply of money as Richard suggests. If it is controlling supply rather than targeting interest rates, the rate of interest would (presumably) be left to the market. Combine that with an effective ban on banks creating credit and we would have a very bleak outlook for spending, borrowing and investment . Interest rates under these tight conditions would be very high.
It appears to me that Positive Money and their fellow travellers have concluded that 1980’s Monetarism failed because it failed to recognise the role and significance of endogenous (bank credit money). That is largely true but not entirely. There are other factors.
One is the fact that inflation can also be due to a lack of competition: the presence of monopolies and oligopolies (they are, sadly, abundant) can cause prices to be higher than they should be. Then again, even the monopolists face demand curves and prices can be low in a heavily monopolised market if the level of demand is weak enough: in a stagnant economy with ongoing unemployment and underemployment, for example.
This is where it gets worrying. If the the level of oligopoly is putting upward pressure on prices, and government’s only device for controlling inflation is through the money supply, the central bank will overcompensate by excessively tightening the supply of money. Economic conditions would stagnate but oligopolies can survive indefinitely in stagnant conditions. Lean and competitive businesses cannot, their margins are too slim for that. The effect would be such that stagnation and a non-competitive market would be mutually reinforcing (more so than they are now).
Another factor is that which was articulated by Keynes in his writings on uncertainty and liquidity preferences. In uncertain conditions savers will be risk averse and more inclined to put their money into low-risk, highly liquid assets (including gold, gilts, deposit accounts) – or stuff it under the metaphorical mattress. So if these new monetarists who are proposing “100%” or “full reserve” banking are assuming that all which is saved will be available for productive investment they can think again as there will always be a proportion of savings that is essentially hoarded and it more of it is hoarded in times when it most needs to be spent or meaningfully invested.
Keynes also noted that capitalism could plod along for very long periods at a level that was below full employment (before crisis inevitably occurred). I could go on. I won’t other than to say that Positive Money’s conservative friends seem to have found a new way of making austerity more sustainable (or so they would seem to think). They might be content with stagnation as the new normal, I doubt that most of us would be. There is no good reason why a more technically advanced society should live with lower expectations and resolving the instability in the banking sector (the Positive Money solution) doesn’t even come close to addressing our our most important priorities.
Marco Fante says:
“Richard’s 3rd point in this post is very pertinent…”
I hope you noticed that, Richard. By implication some of your points are only a bit pertinent. 🙂
Sometimes it’s not the original exposition, but someone else’s comment upon it which strikes a chord and you’ve just done that for me, Marco. (Of course it’s what a discussion forum is about amongst other things)
“Having read the Vollgeld proposal and some of the Positive Money proposals……”
I have no criticism of the rest of this I just, because of how my mind works, find it a bit tedious irrespective of it’s veracity. But after a while you throw this in:
” Economic conditions would stagnate but oligopolies can survive indefinitely in stagnant conditions. Lean and competitive businesses cannot, their margins are too slim for that. The effect would be such that stagnation and a non-competitive market would be mutually reinforcing (more so than they are now). ”
And a light-bulb switches on. Is this at the heart of the positive money gameplan, or at least the part that makes it interesting to those who are looking for a successor strategy after financial Armageddon. (Own the planet: Gobalisation 2.0)
If your assertion is correct the big beasts sitting on huge piles of virtual cash are going to be in a perfect position to pick-up all manner of juicy casualties at absolute rock bottom, firesale prices. They can afford to wait ……as long as we have mechanisms in place to ensure their booty from Globalisation 1.0 is still worth something.
Hence there would be great deal of interest in a programme called ‘positive money’, not least because it sounds a lot more promising than ‘Now we burn all this worthless junk paper’. Even better if the Friedmanesque cunning plan means that currency is in really short supply because of new ways to restrict its availability. (There being no banks left standing, for example)
Hmmmm…..
I think the origins of Positive Money were to get people to think of alternative ways of financing the economy, following the banking crisis/recession of 2008.
They are doing a good job of explaining where money comes from. And they promote the idea that money is to be spend directly into the economy by governments/central banks (although via bank loans). All this is useful for people who are interested.
But using Positive Money (or Vollgeld in Switzerland) is unlikely to be flexible enough to provide credit for the whole of an economy. Even if the government were socialist and tried to pursue socialist aims of “full employment at decent wages” or “green infrastructure projects”, the centralisation of power for money creation with the Central Bank/Treasury would be a bad idea. Even if “fighting inflation” was a secondary aim.
Positive Money would create a shortage of the stuff.
People would start to use alternatives to survive, like gold coins, cigarettes, nylon stockings, anything portable…..
Or Mini-bots as Italy is proposing
Surely monetary history shows the problem is the reverse. There is currently a shortage of money. A pillar of economics is that there is a shortage of resources relative to all the things we can do with them. Yet the key resource – labour – has between 1 of 20 and 1 of 10 idle. The complaint in many countries is that the private sector is sitting on money, not investing it in productive projects. But the private sector has limits. Its products are by definition not universal. Government provides the universal goods and services. There is a shortage of money to meet the demands for them. We could employ more daycare workers, infrastructure workers, public defenders, public housing builders, educators, nurses and other health care workers etcetera . Positive money would be used for that, Friedman’s money creation proposal would be used for that. That money would mean more income and more private sector demand. The infrastructure would be built by private sector. The added workers would buy more private sector goods and services. Friedman and Fisher saw that the depression and banking problems reduced the money supply. Simons saw that the supply of money should not depend on private banking. Keynes saw there was a resulting decline of aggregate demand. China owns its own banks – there is never a shortage of money for the private or public investment. The results are impressive!
Joe Polito says:
” There is currently a shortage of money. ..”
I don’t think you can just say that and accept it as covering the entire spectrum of the social economy. At the bottom end there is certainly a shortage of money and this is one factor that is causing distress in the retail sector. At the top end there seems to be no shortage at all and it’s doing an ‘admirable’ job of fuelling asset bubbles…. for the time being. There is clearly a distribution problem.
Does this ‘positive money’ prescription address that ? Or does it still remain entirely at the whim of the politicians who can have some of it ?
“A pillar of economics is that there is a shortage of resources relative to all the things we can do with them. ”
It’s not a pillar, I suggest. More of an elephant trap. The notion of finite resources is posited as fact without any empirical evidence that it matters within the parameters of human existence. We’ve been obsessing, for example about ‘peak oil’ for decades without actually bothering to consider how we might perfectly well survive without any oil. We managed for millennia without it. Albeit life was rather different. The future may be even more different; it always has been in the past…if you see what I mean.
“Yet the key resource — labour — has between 1 of 20 and 1 of 10 idle. [and the rest] The complaint in many countries is that the private sector is sitting on money, not investing it in productive projects. But the private sector has limits. ”
It is limited by how much money government throws at it. And it’s not using what it currently has access to for productive purposes so why chuck it some more ? (Obviously this is a generalisation and some businesses are performing quite effectively as they always do and presumably always will)
“Its products are by definition not universal. Government provides the universal goods and services.”
Yes but government isn’t doing …… that’s what’s wrong to a large extent. That’s what the past four decades has demonstrated as if we didn’t know and couldn’t predict the consequences.
“There is a shortage of money to meet the demands for them.[social and physical infrastructure]”
That’s the prevalent belief of the public encouraged by politicians who have bought in to the neoliberal monetarist fantasy.
“We could employ more daycare workers, infrastructure workers, public defenders, public housing builders, educators, nurses and other health care workers etcetera .”
Yes of course we could ! That is the basic revelation that comes from the understanding of the behaviour of money as explained by MMT. (That is to say ‘we’ in the UK could, but Greece can’t because it is stymied by having no currency control)
” Positive money would be used for that, Friedman’s money creation proposal would be used for that. ”
Forgive me if I’m sceptical of Friedman’s credentials having lived through his prescription of monetarism as implemented by successive UK governments. If a plumber fitted a central heating system for me that worked that badly I’d be looking in yellow pages, or asking for alternative recommendations.
” The infrastructure would be built by private sector.” Why ?
” The added workers would buy more private sector goods and services.”
Whether they were employed by government or the private sector they’d do that. And only assuming the private sector stopped playing casino and produced enough goods and services to meet the increased demand. Although I suppose we could import everything from a country with a functioning productive industrial base.
I’m not sure what you are ‘selling’, but we’ve already got one. What we don’t have is a government that knows how to ‘drive’ the (bloody) thing.
To Warren, I would reply that Friedman’s prescription is based on his mentors, and precedes later Nobel Prize winners. It is not about his other views, just money creation. The most accessible book I have read on the subject is by Professor Striner. He is an historian with an economics background. The preface, introduction and body of the book are only 100 pages. It explains the issue and history of the issue extremely well. You can read the first 20 pages on line with the ‘look inside’ feature.
https://www.amazon.co.uk/How-America-Spend-Back-Greatness/dp/1440838763/ref=sr_1_7?s=books&ie=UTF8&qid=1528475253&sr=1-7&keywords=richard+striner
I’ve recently accepted an invite to a Positive Money ‘head office’ get together where I shall try to persuade them that money is a social construct and that it is neither heaven nor earth but all of us peoples’ idea and the people’s purpose.
I know that’s basic but that’s where we should start. I give Positive Money time because they are literally alone in the UK (and probably the world) in talking specifically about MONEY. That’s why I think we should give them a bit of space. (Stephanie Kelton – see her twitter feed – please note).
From what I’ve seen, although they may have got it wrong I see no evidence whatsoever that they are a right wing plot.
So, so far, I live in hope!
We’ll see.
I am with Stephanie…..
Your objections are effective, but you do not provide an alternative solution which I would suggest Friedman, Tobin, Allais, Minsky … did. How can there be equality of economic opportunity if we accept a system which guarantees unemployment and poverty? That is the greatest discriminatory force in modern society. Our finance system needs to ensure that government can fully mobilize resources left idle by the private sector or international investment. When Lincoln could not secure loans to wage the Civil War, his treasury created it. Private banks are good at sorting out who should get loans for the most efficient employment of resources in the private sector. But if non-profitable universal goods and services are needed, or if the private sector can’t use all the labour, commercial banks should not be the source of funds. Friedman’s prescription summarized that of the great economists in the 30’s and many others since – that all government revenue shortfalls should be funded by money creation, not debt. https://miltonfriedman.hoover.org/friedman_images/Collections/2016c21/AEA-AER_06_01_1948.pdf
Consider these conflicting facts:
1. Yes money is debt, but in the West, not enough is being provided — which is why there is unemployment. There should be a shortage of labour ( a wonderful driver of productive innovation). China owns its banks, hence it appears to be providing the funds necessary for all the private enterprise and government investment until they run out of labour. Consequently China seems to be outpacing the world.
2. When private banks run out of deposits they can create credit to make further productive, profitable loans to credit worthy customers for further investment in the private sector
3. When government runs out of tax revenues to mobilize productively all the labour the private sector does not use, it must borrow the money rather than create the credit.
b. Government must continue its vital services in recessions – that is why conventional government debt accumulates. If there were not private sector recessions, debt would be very modest. Unemployment, layoffs, slowdowns, creates government debt — which eventually stymies its ability to use all resources
c. In the private sector lots of debt is forgiven, we have bankruptcy laws etcetera. That process permits more investment opportunities.
4. Central banks (or treasuries) were the lenders of last resort during financial crises in history – 2007, the forgotten double UK crisis of 1914 in which the banks were saved and the government war effort was financed http://www.lbma.org.uk/assets/blog/alchemist_articles/Alch73Roberts.pdf, The American Civil war … etc.
5. Central banks are lenders of last resort ‘sometimes’ for government – they do provide some funds for governments, they do buy some government debt with created money – but not all of it – why not? Why not follow Friedman’s prescription?
6. So governments are constrained by something the private sector is not. Banks will create all the money necessary to meet the needs of the private sector as long as the resources can be put to use productively and profitably. But governments are somewhat bound by private sector credit rules – which guarantees unemployment and poverty – that is idle resources.
7. The only real concern is inflation control. A Levy Institute paper suggests that more central bank funding of government investment is no more inflationary than more private bank funding of private investment. http://www.levyinstitute.org/pubs/wp_848.pdf
Joe Polito says: (amongst other things)
“3. When government runs out of tax revenues to mobilize productively all the labour the private sector does not use, it must borrow the money rather than create the credit.”
The experience of the last ten years would seem to refute that assertion. That is not how the banking crisis was solved. (That the fix is not sustainable is a separate issue)
Money creation was used to bail out the banks and firms like General Motors, not so much for the governments. Governments went into enormous debt at the same time.
If you look at the 1914 UK crisis, not only were the banks saved, the treasury bought the war bonds of the government. https://bankunderground.co.uk/2017/08/08/your-country-needs-funds-the-extraordinary-story-of-britains-early-efforts-to-finance-the-first-world-war/
It was covered up – https://www.livemint.com/Politics/CbDKdJ2iFbGjX1t3tWVncN/Bank-of-England-1914-war-loans-and-a-patriotic-coverup.html
To your Andy’s concern about what I am “selling” – I am just repeating what I have learned. I studied Economics and Finance in university and taught Economics in high schools. The most accessible book I have read on the subject is by Professor Striner. He is an historian with an economics background. The preface, introduction and body of the book are only 100 pages. It explains the issue and history of the issue extremely well. You can read the first 20 pages on line with the ‘look inside’ feature.
https://www.amazon.co.uk/How-America-Spend-Back-Greatness/dp/1440838763/ref=sr_1_7?s=books&ie=UTF8&qid=1528475253&sr=1-7&keywords=richard+striner
The Bank of England has an excellent website for high school students on subjects like Money Creation and Quantitative Easing – http://edu.bankofengland.co.uk/knowledgebank/
The Bank had done surveys and was shocked at how little people knew. The same is true of politicians who decide our economic fate.
I have looked at the BoE site and commented on it
I would suggest that it is deeply misleading in that it offers a very singular view
Joe Polito says:
“The Bank [of England] had done surveys and was shocked at how little people knew. The same is true of politicians who decide our economic fate.”
Some people have been fairly shocked at how little senior staff members at the BofE seem to know, and I have to say I was not much impressed with Mervyn King’s apologia in the wake of 2008. The performance of Yellen Draghi and mark ‘Fred’ carno are not inspiring of much confidence either.
(Presumably Her Majesty was rather more impressed by MK, or he’d be languishing in the tower.)
I have been frequently appalled at the utter piffle spouted by ‘reputable’ academic economists.
I hope your student fees will be paid off before you retire and you consider the expense justified.
To Richard’s evaluation of the educational website – I agree on – http://www.taxresearch.org.uk/Blog/2018/04/30/the-bank-of-englands-new-education-programme-gets-about-3-10/
But the site for the older students seems much better. I liked the item on money creation for students:
http://edu.bankofengland.co.uk/knowledgebank/how-is-money-created/
I also thought the item on QE was useful – http://edu.bankofengland.co.uk/knowledgebank/what-is-quantitative-easing/
Both would be helpful to adults – and politicians 🙂
I have heard politicians say, “Isn’t our money system based on Gold?”
I will take a read
Joe Polito supplies a link to Milton Friedman in which he (Friedman) states:
“The basic long-run objectives, shared I am sure by most economists, are political freedom,
economic efficiency, and substantial equality of economic power.”
There in a sentence is the lie that has underlined four decades of misery and chaos.
At best IF (and I doubt it) that was the intention of ‘most economists’ they should be first against the wall come the revolution because they have failed abjectly.
Your reference mis-characterizes the paper. His emphasis was on economic stability and full employment, a very important goal for his Chicago School Mentors from the Great Depression including Henry Simons. His paper very much reflected Simons book “Economics Policy For A Free Society”
A more important quotes is “Under the proposal, government expenditures would be financed entirely by either tax revenues or the creation of money, that is, the issue of non-interest-bearing securities. Government would
not issue interest-bearing securities to the public; the Federal Reserve System would not operate in the open market.”
As is “Another reason sometimes given for issuing interest-bearing securities is that in
a period of unemployment it is less deflationary to issue securities than to levy taxes. This is true.
But it is still less deflationary to issue money.”
In addition to hall of famers Simons and Fisher, other Nobel Prize winners said the same thing.
There are a lot of links cited here everyone can agree with, and some at least of the arguments presented. So far so good; but why (very precisely please) do we need Milton Friedman; right now, what is he ‘for’? Why is HE needed (beyond back-door rehabilitation of Monetarism….again?). Is there not a time (Monetarism is tarnished, Neoliberalism’s credibility undermined by the Crash), that it is better simply to stop trying to peddle a toxic, and frankly needless brand (or waste time trying to rescue someone who is forever to be associated with tarnished economic theory brands)?
I’m sorry Joe, but I don’t think Striner quite gets it either. On the one hand he says ‘ Banks create our money supply ..’ and on the other he quotes Bernanke saying that the government ( aka the Fed ) make it up on a computer. What he doesn’t get is that the government creates money when it spends directly on its programmes ( whatever they are ) as it does in the US and here and the banks under license create money when they make loans. When tax is paid and loans are repaid money is destroyed. That’s it . Part that is from the little bit that is cash.
I haven’t read him
I won’t bother now
to John Hope on Striner.
He is not rigid about money creation, as the Pure Money or 100% systems are. He is ok with the banks creating money for the private sector. He feels though that the central banks can do more for the public sector, just as Bernanke did for the private sector (as per your reference.)
His conclusion is that we should introduce more QE for government in stages to determine how much is doable and practical … how much productive investment can be added, how many more people can be employed, how much poverty can be reduced, how much more stable the economy can be. He would phase in the concept of creating money to meet tax revenue shortfalls.
In 100 pages he covers a terrific amount of history, of evidence and commentary by hall of fame economists that monetary system needs to be improved.
to Richard Murphy on reading Striner. Though I would suggest he is the most succinct, down-to-earth scholar I have found on the topic, it might be better to stick to English History.
This book is a fascinating account of the largely forgotten 1914 Financial Crisis in England – which has similar historical lessons to Historian Striner.
https://www.amazon.co.uk/Saving-City-Great-Financial-Crisis-ebook/dp/B00G96ZJ8C/ref=tmm_kin_swatch_0?_encoding=UTF8&qid=1528515204&sr=8-2
Again the ‘look inside’ feature allows a substantial preview read, which is primarily a preface by Mervyn King.
At this time England required the banks to be saved, and the war bonds to be purchased by the Treasury. The term ‘Bradburys’ was from this period. Though the Stock Market was closed for ‘5 months’ during this period – there was no Lehman Brothers catastrophe.
Striner is primarily a scholar on Lincoln, and it would appear his work on the Greenbacks would have been a wakeup call to this monetary debate.
I’m beginning to wonder how much of the Tax Research archive you’ve bothered to read, Joe Polito.
You seem to be bringing up some well worn and threadbare ‘insights’.
There are only 15,000 posts to read
Joe, I think most of us who comment on here think that the money system could be improved, but the money system is engulfed by the neoliberal and unless and until that consensus is broken / destroyed then any improvements will be mere tinkering as has been the case since 2008 . I believe we are free to choose something better than the neoliberal consensus, but we just don’t know it yet and so at the moment we cannot imagine what it will look like . But if, as a species we don’t try to conceive of a loveable co-existence with our fellow beings and the planet we live on – and neoliberalism doesn’t, and cannot, offer such a vision – then we may not have a future to contemplate.
I agree
It needs to be 50:50 Sovereign to Commercial as it was in the UK [and most countries??] in the successful post WW2 years until banking deregulation from the late 70’s
In 1970 the ratio of Sovereign Money to Commercial bank Fiat Money was 50:50 – in the UK 97.5% of our money is privately created Fiat Money created as credit by commercial banks – i.e. as debt to the banks. Any form of austerity/reduction of debt destroys money and removes it from the economy. If all public and private debt were paid off there would be virtually no money left – and people wonder why the economy suffers from stagnation!
[…] One of Murphy’s commentors, Marco Fante, who we also quoted, made another astute remark on Murphy’s current post: […]
[…] Un des commentateurs de Murphy, Marco Fante, que nous avons également cité, a fait une autre remarque astucieuse sur l'article actuel de Murphy : […]
[…] One of Murphy’s commentors, Marco Fante, who we also quoted, made another astute remark on Murphy’s current post: […]
[…] Murphy raises an eyebrow at Mr Wolf’s call for change, saying that he had his chance when sitting on Britain’s […]
[…] On Sunday Switzerland is holding a referendum concerning banking and the creation of money. BRAVE NEW EUROPE is posting two contrary articles in response to a piece in the Financial Times by MartinWolf on the topic (unfortunately with paywall). The other article in BRAVE NEW EUROPE, by David Shirreff, is here. […]
Link to the 1200-words comment on ‘The battle for money has begun’:
MMT: Richard Murphy’s battle-for-money hoax
https://axecorg.blogspot.com/2018/06/mmt-richard-murphys-battle-for-money.html
This is so ridiculous I can dismiss it in seconds
There is apparently no government in your model
And no overseas sector
And all transactions are between business and households in perfect markets that fully clear
If you wish to make absurd assumptions you can prove angels really do dance on pinheads
And you can come up with this type of economics
MMT simply describes the world as it is – and the desire for full employment
You describe your fantasies. They might be best kept to yourself.
Richard Murphy
You say: “This is so ridiculous I can dismiss it in seconds. There is apparently no government in your model. And no overseas sector.
Obviously, you cannot read.
I clearly stated: “The complete Profit Law reads Qm=Yd+(I−Sm)+(G−T)+(X−M) and reduces to Qm=G−T for Yd, I, Sm, X, M = 0. Legend: Qm monetary profit/loss, G government spending, T taxes. In other words: Public Deficit = Private Profit. This way of money creation is NOT neutral with regard to distribution but is clearly for the benefit of the one-percenters.”#1
It is all there, government deficit/surplus (G−T) and the trade surplus/deficit (X−M).
Because of Public Deficit = Private Profit MMT policy amounts to an abuse of the fiat money system with massive and virtually unlimited redistributive effects in the interest of the one-percenters.
Your assertion: “Money is debt. It is only created by government spending and bank lending.” is provably false. Money is in the most elementary case created by the central bank financing the wage bill.
MMT’s money-creation/deficit-spending is profit making for the one-percenters.#2 Politically, MMT is a fraud and scientifically it is garbage.
Egmont Kakarot-Handtke
#1 MMT: Richard Murphy’s battle-for-money hoax
https://axecorg.blogspot.com/2018/06/mmt-richard-murphys-battle-for-money.html
#2 For the full-spectrum refutation of MMT see cross-references MMT
http://axecorg.blogspot.com/2017/07/mmt-cross-references.html
I have re-read what you have said and I can’t be bothered to engage with someone who tries to be as abusive as you
I am wholly familiar with the formulas you use and although you play around with them a little there is nothing you are saying that is that unusual with them
What you get completely wrong is what MMT is saying
MMT says that is it is true that the economy need never run out of money and that injecting more need not be inflationary is used to increase economic activity within the constraints of available labour and productivity growth (as you do) then, in Keynesian fashion, it is the governments job to kick start that growth in employment and productivity by stimulating demand i.e. by letting G > T.
And MMT says you stop when you have reached full employment at current levels of productivity.
The only claim you are making is that MMT should not say this. You have not shown there is a thing wrong with MMT, which is wholly familiar with and uses (I use in my theoretical work) the type of analysis you are doing.
Forgive me, but what are you actually saying which is original?
And what are you saying is wrong with MMT when you actually confirm money is G – T, which is a fiscal injection by government, after all.
And how do you then say that full employment is intended to favour the 1%
Candidly, it’s all very bizarre