This extract comes from a speech from the Bank of England's Minouche Shafik:
A key means by which the Bank of England pursues its mission of monetary and financial stability is through the provision of liquidity insurance to the financial system – something it has been doing in one form or another since David Hume’s time. In some ways, this makes the Bank of England the domestic safety net for the liquidity needs of solvent financial institutions. As Hume himself put it: “private bankers are enabled to give…credit by the credit the receive from the depositing of money in their shops; and the Bank of England in the same manner, from the liberty it has to issue its notes in all payments.
So David Hume understood that a country that can print its own money cannot go bust. And yet in the twenty first century we don't apparently get this. Our deficit denying politicians still imply the economy is like a household, and in the process ignore the capacity of the government to print money. In doing so they refuse to recognise that the means to create the liquidity that is required to make the economy work when markets refuse to supply it is in their own hands.
Why could David Hume see this and in the twenty first century so many cannot? Or,IMF you like,,why was he so enlightened and so many of our politicians aren't?
Answers on the back of a £5 note please.....
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Richard, I think your RSS feed is not working properly. My reader cant seem to be pick it up for the past 2 days. The error message is – “Error:XML Parse Error”
I am on it
Hah! So that’s how long its been known for.
Regarding his quote -“private bankers are enabled to give…credit by the credit the receive from the depositing of money in their shops;”, Dont know what was at his time with private banks and credit, but this is certainly not the case nowadays. With double entry book keeping they create credit and the deposits to hold that credit. They look for the deposits later to fulfill their legal liabilities. And if I understand correctly, the credit being in the national currency and its exchange with others gives it the semblance of money
Agreed
It was the role of BoE I was emphasising
Richard, I have a question. According to MMT, the government doesn’t need to have tax money first in order to spend. But to keep to their inflation targets, they would need make sure they get tax back so that they can spend accordingly. Doesn’t that then establish a dependency on acquiring the tax so that in the next financial year(s) the government can spend to maintain its inflation target? In other words, does this dynamic, if true, still make government spending dependent on tax? For example,we can only spend 100 billion if we get back 20 billion to maintain an x% inflation target.
It’s an inflation dependency, not a spending one though
And that changes all the understanding on tax
Ok. But to achieve that inflation target, it depends on how much we spend and tax(get in) right? What’s the exact relationship?
There are no exact relationships in the real world
There are only approximations
Agreed. But what about the first part of my question? If we dont get in enough, we might not be able to spend more in the future/next financial year because inflation depends upon how much is spent and taken out of the economy, as per MMT,right?
But you’re assuming not being able to get in enough
Why?
Ahh yes! Sorry I didnt explain it before. The question arose after a reading of you tax gap post(some time ago). I am assuming here that there will always be some amount of tax that remains uncollected right? In other words, there will always be some or the other kind of successful evasion?
Of course
That is inevitable
I accept there will always be crime and it will never all be detected or solved
Right. So my concern then is that can the rich then use tax evasion to influence central government spending?
Yes, of course they can
And do
Right. So that means that the state is still dependent on the rich for its spending? If so, I thought MMT tried to imply otherwise? Confused!
I have no idea what your logic is
A philosopher can think and debate unencumbered by the need to provide answers his sponsors require or to consider the need to get (re)elected. As Upton Sinclair pointed out ‘it is difficult for a man to understand something when his salary depends on his not understanding it’
I’m afraid you’re confusing the role of central banks as the last resort suppliers of liquidity to solvent banks when the supply of liquidity to these banks dries up with the ultimate financing of investment using what you describe as PQE. Central banks always have to be available to provide this emergency liquidity, but PQE is required only when capital markets fail or are in a funk. It’s difficult to decide whether the capital market is failing or many of its participants are in a funk. But banks are unwilling to create money by advancing loans to finance investment; investors are refusing to commit to finance longer-term, but badly needed, investments (because it would require them to forgo shorter-term, but potentially higher, though more risky returns); and companies providing utility or infrastructure services are refusing to invest unless they get cast-iron guarantees of investment recovery, eye-wateringly high rates of return and no-penalty exit provisions. I suspect the threat of even a limited amount of PQE might provide the necessary encouragement. But this is very different from the provision of emergency liquidity.
It’s your call, but I wouldn’t provide such an ‘open goal’ to the legions of nay-sayers who are queueing up to ridicule and rubbish the good sense you, mostly, advocate.
I am discussing a broader point appreciated, I think,ma long time ago and not apparently appreciated now
The back of my 5 pound note says Groupthink.
I don’t think it’s fair to compare our hapless politicians and the IMF with David Hume.
Firstly, David Hume was a genius. He thought that the human mind was made up of sense impressions linked together by custom. But only a person with the creative originality of Hume would think like that.
Secondly, David Hume had strong morals. On greed, for instance, he would say, “This avidity alone… is insatiable, perpetual, universal, and directly destructive of society.” Contrast that with Gordon Gekko’s “Greed … is good” (Wall Street, 1987).
But I think it is still a good question, why our politicians today cannot follow Hume’s logic and instead resort to hankering after deficit reduction. A few thoughts follow:
1. The lack of economic masters to follow since the time of Keynes. Economists and politicians have had to come up with their own solutions, as best they can.
2. Scientific reductionism. The success of twentieth century subatomic particle physics, for example, invites the less successful sciences to imitate their methods, by breaking their problems down into smaller pieces, and analysing them separately. The consequence is a loss of the big picture.
3. Pragmatic realism. It is generally accepted that economics will always contain uncertainty and risk. Therefore any policy which fits the mould of a rational course of action can command the greatest following with the public. In the absence of good teachers and an economically-literate media, it is not hard to see how a deficit cutting agenda fits the bill. Common sense rules the roost.
Common sense is a good thing. It helps get the world’s work done. But there is a point when common sense blurs with common nonsense, and then we need the brilliance and rigour of a David Hume to correctly analyse the situation and correctly prescribe the solution.
Or a Richard Murphy.
Richard, this question is about the demand and supply of money. If you are prepared to listen, I will explain to you why the notion of increasing the money supply in order to meet increased demand for money is a redundant proposition.
Normally, if there is increased demand for a good, eg. TVs, then supply increasing is the solution to this additional demand. However, money is uniquely different to every other thing in the economy. Money is unique in only having value in exchange, not value in use. That is why we demand money – for its purchasing power as a means of exchange. As a result it follows that changes in the supply and demand for money can always be brought about by changes in its purchasing power. If more people want to hold money they will sell their goods and services more, thus increasing the purchasing power of money. Therefore, any amount of money within reason is optimal within an economy. There is no need to physically increase the amount of money once the monetary unit has been established as money. The notion that the money supply must grow is a fallacy, because of money’s completely unique property of only being demand as a means of exchange.
And that’s it. And that’s why the central banks have got it wrong. And it’s why economies can grow without any change to the physical quantity of money. Because the purchasing power of money changes in accordance with demand. Supply automatically regulates itself. That process is the essence of money.
Oh no….Say’s Law
James, are you arguing for money supply targeting rather than inflation targeting, or are you just hankering after a gold standard?
Hi Frances, hope you are well. My point is that there is no need to target money supply or price level. Any quantity of money already does what we need it to do by responding via its pricing mechanism to demand and supply for real things. We should leave it alone. The entire point of money is to allow exchange through the formation of money prices reflecting real preferences of people. Including their demand for money. And yet we strangely believe distorting the money side will somehow improve money’s function to do this. It’s hubris. Best wishes.
I think most would think your view pure fantasy – it ignores so many of the functions of money it is almost bizarre
All the functions of money are derivative of its function as a medium of exchange. It is also not bizarre historically to not attempt to centrally manipulate the supply of money. It is a relatively recent phenomenon mirroring the establishment of central banks. Any study of money should consider such an approach and not dismiss it.
And I hear we all lived in caves once upon a time too
“nd that’s it. And that’s why the central banks have got it wrong. And it’s why economies can grow without any change to the physical quantity of money.”
I seem to remember that was the thinking in Britain for several years after a certain financial crash in 1929.
Remind me how that turned out again.
Well, I would disagree with Milton Friedman and yourself on this one. I think prices should fall following recessions and the attempt to keep them elevated prolongs the recession.
You are wasting all our time here
End of conversation
On reflection, we could have referred him (jamesg) to the Debt Deflation Theory at that point reminded him that it came from 1933 and that its now a recognised phenomenon, not a theory.
Oh, well not to worry.
Mind you, the unforgivable precept that “prices should fall following recessions” is precisely the folly that is being visited upon Spain, Greece & others at the moment (albeit in a different context).
Richard,
I’m sorry, but I think you have misunderstood this. David Hume was writing in a time when the UK was on a gold standard, having converted from a silver standard in 1717 when Hume was a child. Indeed Hume is famous for defining the “specie flow” mechanism that supposedly ensures that trade balances under a universal gold standard system. The central bank could itself run out of gold if the country ran a persistent trade deficit.
In this quote, therefore, Hume is only referring to the central bank’s ability to ease private bank reserve shortages by printing notes backed by its own gold reserves. He is not talking about fiat currency creation. Hume would not have understood your remark that a country producing its own currency cannot go bust. The UK did not issue its first fiat currency until 1797, which was after his death.
And yet the quote does make complete sense as I note it
And I think he may be saying exactly what I mean
And of course you could also be right
I’m sure David Hume would have understood Richard’s comments. As an enlightened man he would have been well aware that the American colonies did have their own fiat paper money, and that Benjamin Franklin put the colonies prosperity down to being able to issue their own money without borrowing and therefore without paying interest. It was the 1764 Currency Act that prevented the colonies from doing so (and led to the war of independence). That said, David Hume did spend most of his life warning that England would inevitably go bust given the huge explosion of public debt – but who knows whether he thought printing fiat money was a credible alternative.
Only a fraction of the issued money was supported by gold, of course. Gold was, in fact generally highly leveraged, so one could, perhaps, say that even with a gold standard the currency has fiat-like qualities.
It was Bradbury notes that prevented a big bank crash in Britain just before World War I. We were of course on the gold standard and there was a huge number of notes created against barely adequate gold reserves.
The government declared a bank holiday and when the banks opened up again, instead of being able to exchange bank notes for gold, they were given government-printed “Bradbury” notes instead. The gold stock were hence preserved and the crisis averted.
Financial rules will always be broken when the establishment are likely to be harmed.