Monday, 24 February 2020

Household name economist doesn’t know what the job of being an economist entails.

John B Taylor (inventor of the “Taylor rule”) claims the US deficit should be reduced by cutting public spending. That’s in his Project Syndicate article “Restoring Fiscal Order in the United States”.

Well the first bit of nonsense there is that it is not the job of economists to pass judgement on strictly political matters, like what proportion of GDP should be allocated to public spending, unless there are major economic consequences or implications deriving from a change to the latter proportion.  And it would seem that significant rise in the proportion of GDP allocated to public spending (as opposed to the cut in public spending advocated by Taylor) does not have major economic consequences. To illustrate, several European countries devote a much higher proportion of GDP to public spending than the US, and the “disastrous” consequences of that are what exactly? Scandinavian citizens are perfectly happy with their relatively generous social security system and enjoy standards of living much the same as Americans.

The above failure by economists to understand that it is not their job to pass judgement on political matters is actually quite common in the economics profession: John B. Taylor is far from the only one who does not seem to understand that point.

Second, what does Taylor think he is doing passing judgement on what the optimum size of the deficit and debt will be in ten or twenty years’ time? Barmy. It may be that the private sector will want to accumulate state supplied financial assets (base money and government debt) in ten years time, or it may not. If it does, and government does not supply those assets, then the private sector (and foreign government sector) will try to acquire those assets by saving rather than spending, and that will just give rise to what Keynes called “paradox of thrift unemployment”.

Again Taylor is far from the only economist who makes that mistake.
You really have to wonder whether some senior members of the economics profession have the faintest idea whether they are coming or going.

And finally I am always amused by the non stop attempts by Project Syndicate to get people to actually pay to read the nonsense they publish. What’s got into their head?

Sunday, 23 February 2020

Hot air from University College London.

One way to see if a paragraph or two are meaningless is to jumble up the words and see if it makes any difference. So I did that with the first paragraph of this UCL paper. I swapped four sets of words. E.g. that last sentence with just one pair swapped would read “I swapped four words of sets”.  See if you can tell which is the real, i.e. original version below. (Anything for a lark.)

Version No. 1:

Collective value is value that is created for a public purpose. This requires understanding of how public institutions can engage citizens in defining value (organisational competences), nurture dynamic capabilities and capacity to shape new opportunities (participatory structures); dynamically assess the value created (participatory evaluation); and ensure that societal value is distributed equitably (inclusive growth).

Version No.2:

Public value is value that is created collectively for a public purpose. This requires understanding of how public institutions can engage citizens in defining purpose (participatory structures), nurture organisational capabilities and capacity to shape new opportunities (organisational competencies); dynamically assess the value created (dynamic evaluation); and ensure that societal value is distributed equitably (inclusive growth).

Alternatively I could have constructed the fake version from this brilliant “meaningless phrase generator”....:-)

It's actually the SECOND of the above two versions of the UCL passage which is the genuine one. The eight words which have been moved from somewhere else in the passage (in the messed up version) are shown in red here:

Collective value is value that is created for a public purpose. This requires understanding of how public institutions can engage citizens in defining value (organisational competences), nurture dynamic capabilities and capacity to shape new opportunities (participatory structures); dynamically assess the value created (participatory evaluation); and ensure that societal value is distributed equitably (inclusive growth).


Friday, 21 February 2020

Positive Money says Sovereign Money and full reserve banking are not the same.

That’s in an article of theirs entitled “Setting the record straight: Sovereign Money is not Full-Reserve Banking.”

Unfortunately the article fails in its basic objective, i.e. to show how or why there is actually any difference between FRB and SM.

The article says “Sovereign Money proposals are often mentioned alongside FRB proposals. And they do indeed have a same goal; that is to stop banks creating money in the process of making loans (or buying assets).” (FRB is short for “full reserve banking”).

But the next paragraph says “In the case of FRB it is done by forcing banks to hold reserves against their deposits. As the Bundesbank correctly notes, this doesn’t necessarily stop banks creating money – that is, it is quite possible for there to be money creation by the banking sector with 100% reserves.”

Well in that case, according to Positive Money,  FRB fails in its basic objective, i.e. stopping money creation by commercial banks!

Well the first problem there is that numerous leading economists, including a clutch of Nobel laureates, have advocated FRB and precisely because (as the Postive Money article rightly suggests) they want to stop money creation by commercial banks. Those “leading economists” include Milton Friedman, James Tobin, Laurence Kotlikoff, Irving Fisher, to name just four. For a more complete list, see here.

So do we take it that those leading economists have all made a bit of a blunder and advocated a system which is supposed to achieve an objective, but which in fact fails to achieve that objective? I think not.

The second problem concerns the Bundesbank’s claim that FRB “doesn’t necessarily stop banks creating money”. Well it’s true that under FRB there are no auditors or bureaucrats breathing down the necks of every bank employee in the country every hour of the day, thus it certainly would be possible for a bank to create some money for a while under FRB. However, under FRB, as under the existing system, banks do get audited. And one of the jobs of auditors under FRB (a very simple job in principle) would be to add up the total of all deposits at a bank and see whether that tied up with reserves held by the bank at the central bank. If it turned out that deposits significantly exceeded reserves, then it would clear that the bank had been creating money, and to make FRB work, a penalty would be payable by the bank large enough to ensure the bank did not disobey the rules again any time soon.

The Positive Money article then says “Our Sovereign Money proposal, on the other hand, does not suffer from this problem. Instead of backing deposits with reserves, we give people access to the state-created means of payment itself.” Well PM’s SM proposal quite clearly does not necessarily do that: that is, SM does not necessarily involve everyone being allowed to have an account at the central bank. Indeed, PM article itself says as much!

That is, the article says “….we would contract with the banks and/or other financial technology companies to administer our accounts for us”. In other words under full reserve / Sovereign Money (as is explained in other PM literature) instead of everyone having an account at the central bank, they could continue with accounts at their existing commercial banks, with the total amount of money deposited at each commercial bank being deposited at the central bank at the end of each working day.


I’m not much impressed by this article. So I will continue to regard full reserve banking and Sovereign Money as essentially the same thing.

Thursday, 20 February 2020

Joseph Huber & James Roberton’s “Creating New Money”.


The above work (published around 2000) is a very worthwhile and widely cited contribution to the debate on how we ought to organise banks. One central claim is that commercial banks can lend at below the free market rate of interest because they can simply create or “print” the money they lend out. In the paragraphs below, I argue that actually there is no LONG TERM effect on interest rates, or the total stock of money, or the total amount of debt, however, the ability of private banks to have their money displace state issued money still results in the absurdity that having displaced most state money, the state is left with the job of having to stand behind privately issued “funny money”. And that of course raises the question as to whether that funny money should be permitted at all. In other words, the article below arrives at the same conclusion as H&R but in a slightly different way.

Moreover, Huber (but not Robinson) also claims that the issue of “debt based money” by commercial banks, as is current practice, does not increase debts (p.33). So that’s a second way in which the arguments below are not vastly different to H&R’s. 


On p.31 of their work, Huber & Robertson (H&R) say, “Allowing banks to create new money out of nothing enables them to cream off a special profit. They lend the money to their customers at the full rate of interest, without having to pay any interest on it themselves. So their profit on this part of their business is not, say, 9% credit-interest less 4% debit-interest = 5% normal profit; it is 9% credit-interest less 0% debit-interest = 9% profit = 5% normal profit plus 4% additional special profit. This additional special profit is hidden from bank customers and the public, partly because most people do not know how the system works, and partly because bank balance sheets do not show that some of their loan funding comes from money the banks have created for the purpose and some from already existing money which they have had to borrow at interest.”

H&R certainly have some sort of a point there. To show why, take a hypothetical economy where the only form of money is state issued money. Also assume the state issues enough money to induce everyone to spend at a rate that brings about full employment, while avoiding excess inflation.

In that scenario, people and firms would lend to each other, plus commercial banks would doubtless set up and accept deposits and lend on a portion of those deposits. In that scenario there is no obvious reason why the rate of interest would not be some sort of genuine free market rate.

But if commercial banks then start creating and lending out their own home made money, clearly they can do so at below the free market rate, as H&R suggest. But that’s not the end of the matter (as H&R seem to suggest). 

That additional lending (and the additional spending that derives from it) will raise demand. Ergo the state will have to rein in demand somehow or other, e.g. by raising taxes and confiscating a portion of the private sector’s stock of state issued money.

But note that that additional spending is only a temporary phenomenon: to illustrate, if I borrow to have a house built, that will raise demand as long as bricklayers, plumbers etc are involved in building the house. But once it is built, the demand increase that derives from building the house ceases. Likewise, the demand increasing effect of additional lending stemming from commercial banks issuance of their home made money will in the above hypothetical scenario also cease: i.e. some sort of fixed and higher level of lending will on the face of it then be established.

There is however another demand increasing effect, which is that the money I spent having the house built is still in circulation and will presumably raise the population’s stock of money to more than the above mentioned “maximum that is consistent with acceptable inflation” level. Same goes for the extra lending that stems from commercial banks starting to issue their own money.

In contrast to the latter extra dollop of financial asset in the hands of households, there is of course extra “negative financial asset” in that my debt is still in existence. But that won’t necessarily have much effect on borrowers weekly spending: reason is that if (and taking a simple case) the percentage rise in borrowing is the same as the percentage fall in interest rates, then the amount that borrowers pay by way of interest every month will remain unaltered. Ergo their total weekly spending will remain about the same.

Moreover, the fall in interest rates will probably induce creditors to want to hold an even smaller stock of money than they started with: why hold more money than you want unless you get paid a decent rate of interest for doing so? And that’s an ADDITIONAL inducement for them to spend away their excess stock of money, and thus exacerbate the rise in demand.

The net effect, unless I’m much mistaken, is that while the money supply increasing phenomenon to which H&R refer may operate temporarily, in the long run, the money supply and rate of interest will simply revert to their original levels, or at least something close to those original levels.

So the overall and final result is that totally secure state issued money is replace with insecure private bank issued money which the state then has to make secure via taxpayer backed deposit insurance and billion dollar bail outs for banks in trouble.

And that of course is a farce and it’s a farce which Prof Mary Mellor often alludes to in her two books “Debt or Democracy” and “The Future of Money”.

The solution to that farce is to return to something like that above starting point, where the only form of money is totally secure state issued money. As for LOANS AND INVESTMENTS, those who want their money loaned out or to invest their money (whether it's via banks, mutual funds, private pension schemes or to make stock exchange investments etc) are free to do that, but those investor / lenders carry the risks involved. And that results in a level playing field as between banks on the one hand, and other financial institution, in contrast to the present set up, where banks get privileged treatment in that those who lend or invest via banks enjoy protection gratis the taxpayer.

The latter arrangement is of course what is normally called “full reserve banking or “Sovereign Money”, exactly what H&R advocate, only the exact way in which I arrive at that conclusion is a little different to H&R’s.

Moreover, the latter set up (full reserve banking / Sovereign Money) is entirely consistent with a very widely accepted general principle, namely that it is not the job of government (aka taxpayers) to stand behind or in any way subsidise or assist strictly commercial activities, unless there is a clear social reason for doing so.

Tuesday, 18 February 2020

OMG: eugenics makes a come-back.

I’m much amused to see eugenics is making a come-back. That’s not because I necessarily support it: the pros and cons are actually a bit complicated. Reason for the amusement is that eugenics invariably sparks off a display of contrived righteous indignation among lefties, including stamping of feet, foaming at the mouth, appeals to the almighty and so on.

The display is as predictable as is the saliva coming from the mouth of a Pavlov dog.

And what adds to the amusement, is that eugenics was widely accepted in left of centre circles in the 1930s and early 1950s as pointed out here. That just confirms my above theory that a significant proportion of the political left are zombies or robots. That is, they can be programmed to accept eugenics (or indeed anything else); but if the “programmers” (i.e. the so called “opinion formers”) decide to change tack, then about 90% of lefties will change tack in sympathy.

However, I don’t want to suggest that zombie type behaviour is confined exclusively to the political left. Hitler managed to programme Germans, on the political left and right, into thinking that invading Poland, rounding up Jews and putting them in gas chambers would be a great idea. And citizens of every other country as doubtless just as gullible as Germans.

Sunday, 16 February 2020

Ann Pettifor’s absurd criticisms of Sovereign Money / full reserve banking.


The article below sets out the numerous mistakes in chapter 6 of Pettifor’s book “The Production of Money”. Title of the chapter is “Should Society Strip Banks of the Power to Create Money?”. Pettifor argues for private banks to be allowed to retain the right to print / create money. This is a long article because of the sheer quantity of nonsense in this chapter. The main mistakes are thus, while other less important mistakes are set out in the main text below.

1. She claims the Sovereign Money movement in the UK, i.e. the movement to stop private banks creating money, “has grown out of discontent” with the 2007/9 bank crises and its aftermath (her p.91). Actually objections to private money creation have been made for centuries if not thousands of years.
2. She seems to suggest (p.94) that Abraham Lincoln favoured money creation by private banks. In fact he favoured the abolition of private banks’ right to create money.
3. She claims Sovereign Money (SM) is “neoclassical” but completely fails to explain why it is any more neoclassical than the existing system (p.95).
4. She accuses SM (p.97) of attaching great importance to the allegedly “outdated” quantity of money theory. Well given the astronomic and unprecedented increase in the money supply brought about by QE in recent years, it is very debatable as to whether SM attaches any more importance to that “quantity” than the existing system, and she completely fails to show it does.
5. She objects (and indeed has long objected) to a committee of technocrats (based at the central bank) determining the amount of stimulus each year. There again, SM involves little change to the existing system in that central bank committees ALREADY have the final say on how much stimulus is implemented each year in that such committees can override fiscal stimulus decisions by adjusting interest rates.
6. She claims that under SM there would be no lending by banks. The idea that the clutch of Nobel laureate economists and other leading economists who advocate SM would advocate a system where there is no lending by banks is straight out of la-la land.
7. She claims (p.103) that SM advocates think economies are “stable”. In fact (amazing as this might seem) SM advocates are aware of the existence of recessions.
8. She claims (p.103-4) that inflation rose under Margaret Thatcher. In fact it fell.
9. She claims (p.104) that the real rate of interest paid by mortgagors is currently high. In fact that rate has fallen over the last thirty years.
10. She claims (p.122) that under SM, central banks would take POLITICAL decisions, like how much extra money to feed into the social security system as compared to how much is spent on infrastructure etc. In fact, Positive Money for example (which advocates SM) is very clear that under their version of SM, central banks decide JUST the AMOUNT of stimulus to be implemented, while democratically elected politicians retain control of strictly POLITICAL decisions, like what proportion of GDP is allocated to public spending. (Ben Bernanke actually gave his blessing to that sort of system.)


I actually dealt with SOME OF the errors in this chapter two years ago on this blog, but the sheer quantity of nonsense in this chapter is appalling. So I thought I’d have another go and work thru the chapter line by line and deal with several more of the mistakes in this chapter. Plus of course further material of relevance to this topic has been published in the last two years, so there’s no harm in doing an updated version of my criticisms of this book and taking that new material into account. 

This is not to suggest Pettifor is clueless on all aspects of economics and politics: I admire her support for the Green New Deal. But on SM (aka full reserve banking) she is clueless. Not that that greatly matters from her point of view: if your job is to write articles on economics for newspapers and similar, or pose as an economist on TV, any old nonsense will do: long as you include a few technical words and phrases and long as you make a few emotionally appealing remarks about “greedy bankers” etc. That will fool about 99% of your audience into thinking you know your stuff.

Unsurprisingly Positive Money published a review of Pettifor’s book shortly after it was published (authored by Fran Boait). Roughly speaking a third of the mistakes in Pettifor’s work set out below were spotted by Boait and dealt with much as I deal with them. Roughly a third were not spotted by, or at least not addressed by Fran Boait. And in the case of roughly a third, relevant mistakes by Pettifor were also spotted by Boait, but I set out below ADDITIONAL reasons for thinking those alleged mistakes are in fact mistakes.

Origins of the Sovereign Money movement.

Ann Pettifor claims on the first page of her 6th chapter than the Sovereign Money movement “has grown out of discontent” with the 2007/9 bank crisis and its aftermath. That’s a bit misleading given that objections to private money creation have been raised both in Britain and elsewhere for hundreds of years and indeed for thousands of years if Edward Fuller’s article “100% Banking and Its Advocates: A Brief History” is any guide.

Interest rates.

She then claims (p.94) that SM advocates “show little concern for high interest rates”..

Well first, she fails to actually demonstrate that SM DOES result in high interest rates. In fact she doesn’t even try! 

Second, assuming SM does actually raise rates a bit, it is not clear why that’s a big problem: low interest rates are not an unmixed blessing. They are often credited with stoking asset price bubbles. Indeed a Bank of England study attributes the large rise in house prices (in real terms) over the last twenty years almost entirely to the fall in interest rates.

Third, in the 1990s, mortgagors paid roughly THREE TIMES the rate of interest they do today, and the problem with that was what? Economic growth was better in the 1990s than nowadays and real house prices were a fraction of today’s prices!

Cross border flows.

Next, Ann Pettifor claims SM “shows little concern for cross-border financial flows”. What “cross border financial flows”? Does she mean the flows that result SPECIFICALLY from introducing SM, or flows that exist anyway? She doesn't tell us. Anyway, let’s assume to start with that she means the first.

Now if every country adopted SM at the same time, there is no obvious reason why those “flows” would be of any significance. And if some countries adopted SM while others didn’t, doubtless that could cause flows from “adopters” to non “adopters” or vice versa. But she fails to explain (or rather doesn’t even try to explain) why those flows would be large enough to cause a problem.

Alternatively if its flows that exist ANYWAY, then that problem that problem has nothing specifically to do with SM! You might as well blame SM supporters for ignoring AIDS or drunk driving.

Abraham Lincoln.

Next (bottom of p.94) Pettifor seems to suggest Abraham Lincoln backed private money creation. Actually he OPPOSED IT. To quote, he said, “The Government should create, issue and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest.” 

At the very least, it is misleading to mention Abraham Lincoln in this context without mentioning his very clearly expressed approval of what we nowadays call “Sovereign Money” or full reserve banking.

Things neoclassical.

Next, Pettifor accuses SM (p.95) of advocating a “neoclassical” system that apparently was “backward looking in the 1930s, and disastrous in the 1980s”. So what exactly is “neoclassical” about SM? She doesn’t say!

Neoclassical economics, according to my Oxford Dictionary of Economics is a system based on the ideas, first, that consumers and firms behave rationally, and second, that firms try to maximise profits. Well those assumptions, while doubtless not entirely accurate, are not particularly outrageous. But she totally fails (or rather doesn’t even try) to explain why SM assumes everyone behaves any more rationally under SM than under the existing system or why firms are more concerned about profits under SM than under the existing system.

The quantity of money.

Next, Pettifor accuses SM advocates of “harking back to the outdated quantity theory of money” (p.97). Well it’s not just SM advocates who think the quantity of sovereign money (i.e. base money) is relevant: QE is also based on the idea that increasing that quantity has an effect, and QE has resulted in a totally unprecedented and astronomic increase in the quantity of money!

Indeed, it would be pretty amazing if the quantity of money had no effect at all wouldn’t it? My guess is that if government and central bank created and spend $10,000 per head and distribute it via tax cuts and/or more generous social security provision, there’d be a pretty substantial effect: hyperinflation probably!!! But that of course is not to say that Milton Friedman’s claim that adjusting the quantity of money should be the ONLY method adopted to regulate demand and inflation.

In short, Pettifor fails to show that SM is any more dependent on the “quantity of money” than the existing system.

The Chicago Plan Revisited.

Then under a section entitled “The Chicago Plan Revisited” Pettifor starts “Full control of the money supply is a Herculean ambition to be undertaken, it is argued, by a small group of technocrats at the top of the central bank…”.

Well I have news for Pettifor: the size of the money supply is ALREADY to a large extent controlled by “technocrats at the top of central banks”. For a start, it was those wicked technocrats who implemented QE (after consulting the finance minister, Alistair Darling, in the case of the UK).  Second, in more normal times, central banks have long controlled or at least tried to control interest rates, and that is largely done by adjusting the money supply.

To be exact, to cut rates, central banks create money and buy up government debt, which obviously feeds money (base money to be exact) into the private sector. Second, the cut in rates induces commercial banks to create and lend out more money.

As to whether the switch to SM would be “Herculean”, Milton Friedman didn’t think it would be. As he put it in Ch3 of his book “A Program for Monetary Stability”, “There is no technical problem of achieving a transition from our present system to 100% reserves easily, fairly speedily, and without serious repercussions on financial or economic markets”. (100% reserves is just another name for full reserve / Sovereign Money.)

Keynes and Roosevelt.

Then half way down p.98, she quotes a very odd passage from a letter by Keynes to Roosevelt in which he denies that the quantity of money has any effect. I say that passage is “odd” because earlier in that letter, Keynes advocated EXACTLY the form of stimulus that SM advocates: i.e. having the state (government and central bank) create and spend money. To quote, Keynes advocates “the expenditure of borrowed or printed money”.

But it gets worse: in the same letter, Keynes says, “Since there cannot be rising output without rising prices, it is essential to ensure that the recovery shall not be held back by the insufficiency of the supply of money”. So is Keynes saying the quantity of money has an effect or not?

Well there is a possible explanation for that apparent self-contradiction from Keynes, as follows. While central bank money is a net asset as viewed by the private sector, commercial bank money is not: that is, for every pound or dollar of commercial bank money there is a pound or dollar of debt owed by someone to a commercial bank. Put another way, commercial bank money nets to nothing, as advocates of Modern Monetary Theory keep pointing out.

Thus if government and central bank create and dish out £X of new base money to everyone, and “everyone” deposits that money at their commercial bank, which in turn deposits it at the central bank, then “everyone’s” net financial assets rise in value, which will pretty obviously induce them to spend more. In contrast, a rise in the stock of COMMERCIAL bank money OF ITSELF has no effect, because there is no consequent rise in “Private Sector Net Financial Assets” (to use an MMT phrase).

Of course, a rise in the amount of commercial bank created money is NORMALLY ASSOCIATED with increased economic activity because there is no point in borrowing money other than to actually do something with it. But to repeat, a rise in the stock of that type of money OF ITSELF has no effect, which I take it was what Keynes was getting at when he said a rise in the stock of money has no effect.

To summarise, while Keynes presumably understood how the bank and money system works, he was far from clear in his letter on this point. In short, his apparently self-contradictory statements enabled Pettifor to pick one out that suited her case.

Is SM new?

Then at the bottom of p.98, Pettifor claims that when Messers Bennes and Kumhof advocated SM in 2012 in their paper entitled “The Chicago Plan Revisited”, SM “reformers greeted the paper “with enthusiasm, as if it were a radical, new plan”

Actually, had Pettifor read more of the literature produced by SM advocates, she’d discover that those advocates are well aware that SM was being advocated for decades if not centuries before Bennes and Kumhof. They most certainly did not think Bennes & Kumhof’s ideas were a “new plan”. (It actually seems, to judge by the opening sentences of an article by Edward Fuller, that SM was quite possibly being advocated best part of FOUR THOUSAND years ago.)

Simons and Fisher.

Pettifor then claims (half way down p.99) that Simons and Fisher (two advocates of abolishing money creation by private / commercial banks in the 1930s) thought “all money is ultimately government issued money”.

Well in that case why did Simons and Fisher (as Pettifor herself correctly points out) devote a lot of effort to getting private / commercial banks banned from creating money??

Next (bottom of p.99) Pettifor claims Simons and Fisher “struggled to understand or to fit credit into their theory of government issued money..”. So what evidence or explanation does she give for that charge? Absolutely none! Not a word.

I might as well claim Ann Pettifor “struggles” to do her laundry without providing a scrap of evidence to back my claim.

No borrowing?

Next, (p.100) Pettifor apparently thinks that under SM, there is no borrowing. At least she says: “There is no role for a nation of euphoric borrowers, or reluctant, lacking-in-confidence borrowers.” Plus she says “There is no room for income and employment creating activity generated by bank loans.”

It is hard to know what this passage of hers is supposed to mean, but it certainly seems to suggest there is no lending by banks under SM. That is just nonsense. As explained by numerous SM advocates, lending takes place under SM just as under the existing system, with the difference that loans are funded via equity rather than deposits.

Bank regulations.

Then in the final paragraph of p.100, Pettifor accuses Benes and Kumhof (authors of an IMF paper on SM) of ignoring the fact that bank regulation has an effect on what banks do. But she doesn’t quote any actual passages to back her claim.

Doubtless IMF economists are not perfect, but to accuse them of not taking account of bank regulation when discussing banks is plain absurd. It’s a bit like accusing someone if ignoring existing speed limits on roads when discussing speed restrictions on road: that is a mistake which only the mentally retarded would make.

Then at the top of p.101, Pettifor accuses Benes and Kumhof (or maybe she’s accusing SM advocates in general – it’s not clear) of labouring under the illusion that “the supply and contraction of credit is simply a matter of wilful choice by bankers”.

Well I’d suggest the average fifteen year old has worked out that a bank cannot lend money unless someone applies for a loan!

Gluts and shortages.

Then under the heading “Gluts and shortages of money”, she accuses Simons and Fisher of being unaware that money can be used to “satisfy the speculative motive”.

Well now Simons and Fisher did most of their campaigning for SM (as Pettifor rightly points out) in the 1930s, in the aftermath of the 1929 crash. Now what brought about that crash: it wasn’t by any chance using money to an excessive extent to “satisfy the speculative motive” was it?

The idea that Simons and Fisher would have been unaware of the problems caused by excess speculation is just laughable.

Next comes Pettifor’s paragraph starting “As a result…”. I’ve no idea what she is trying to say in this para, so I’ll skip it.

Then in the next para, she accuses Positive Money of being “relaxed about offshore capital and capital mobility”, while at the same time admitting that PM IS CONCERNED about tax havens and similar skulduggery. Bit of a self-contradiction there!

Moreover, there is no obvious reason why the latter skulduggery would be any worse under SM. Certainly Pettifor does not supply any reasons. Thus tax havens and so on are essentially a SEPARATE problem to arguments over SM: i.e. the tax haven problem is of no relevance to arguments over SM.


Next, (top of p.103) Pettifor says SM advocates claim “aggregate economic activity tends to be stable”. What – so SM supporters are unaware of the recession that started in 2007/8? Moreover, if SM supporters think there are no booms and slumps, one has to wonder why SM supporters have devoted millions of words, to explaining how they’d regulate demand. Indeed Pettifor HERSELF quotes Positive Money (an SM supporter) as explaining that demand would need to be regulated under SM just as it is under the existing system. She quotes PM as saying “The central bank would be exclusively responsible for creating as much new money as was necessary to support non-inflationary growth.” (p.96).

So that’s yet another “Pettifor self-contradiction”.

Margaret Thatcher.

Next comes a passage (p.103-4) which ends with the claim that Margaret Thatcher’s “failed catastrophically to control inflation”. Wrong again: whatever Thatcher’s faults were, failing to control inflation was not one of them. According to Pettifor herself (p.3) inflation stood at 21.9% in Thatcher’s first year in office which very much ties up with the chart below. And according to the chart below, it fell to around 7.5% when she left. The chart below is based on the one here.

  Usurious rates.

Next, under the heading “Usurious rates”, she claims that that someone or other has a “bias towards a rate that suits borrowers and savers, and not the many millions of borrowers.” It is not clear who this “someone or other is”: it could be central banks generally or it could be Benes and Kumhof.

So what evidence does she provide for this “bias”? Absolutely none!

Moreover, quite what this has to do with SM is a bit of a mystery, particularly given that Positive Money, one of the leading advocates of SM, is also far from happy about the use of interest rate adjustments to influence economic activity. (Word search for “interest” in this pro-SM work authored by Positive Money and others.)

Then at the bottom of p.104, and still on the subject of interest rates, she claims “real rates are very high”. Well according to my calculations the average real rate of interest on mortgages in the years up to 1987 was around 6%, whereas the average for the five years prior to publication of Pettifor’s book was 2.5%. My source of information for figures on mortgages was here, and my source for inflation is here. Do your own calculations and see what result you get – though a quick look at the charts will give you a ROUGH idea of how real rates have moved.

Borrowers not bankers….

Next, in the section entitled “Borrowers, not bankers determine the money supply” Pettifor argues (p.107, para starting “Since money…”)  that that an important MOTIVE for banning money creation by private / commercial banks is that a significant proportion of borrowed money is used for speculative purposes.

Wrong again: neither the word “speculate” nor any of its derivatives appear in the pro SM work mentioned just above (authored by among others, Positive Money).

Of course Positive Money, like many others, objects to the way in which a significant proportion of money borrowed from commercial banks feeds speculation, and suggests ways of cutting down on that speculation. But that desire to cut down on speculation has little to do with the pros and cons of SM, in that rules designed to cut down on speculation could be introduced under the existing system just as much as under SM.

Constraints on lending.

Then in the second sentence of that para, she says it is wrong for borrowers to be “constrained in lending”. Well they’re “constrained” under the existing system in numerous ways: e.g. banks do not lend to would be borrowers who do not seem credit-worthy. Plus extra “constraint” is put on borrowers when interest rates rise.

Then later in the same para, she claims that if a “committee of men at the pinnacle of a central bank” can constrain lending and borrowing, that would lead to “autocracy”. Well I have news for Pettifor: we ALREADY have wicked evil “committees of men” at central banks which can constrain borrowing whenever they want: in the case of the Bank of England, that’s the Monetary Policy Committee.

And amazingly, despite the BOE MPC doing it’s stuff for decades on end since WWII, there are no signs of “autocracy” breaking out!! Or if you want to accuse Boris Johnson of “autocracy”, you may have a point, but I don’t see that any such autocracy stems directly from a Bank of England committee adjusting interest rates.

Then in the final para of p.107, Pettifor argues that because central banks made a mess of bank regulation to an extent that led to the 2007/8 bank crisis, that therefor central banks should not attempt to adjust demand either. Well the problem with that argument is that we just HAVE TO make some sort of attempt to adjust demand: that is, if government just sat on its hands and did nothing come a recession, there’d be riots.

That is not to say that central banks (and Treasuries for that matter) have got the “demand adjustment” business down to a fine art, as they themselves would doubtless admit. But the idea that we should make no attempt at all to adjust demand is nonsense.

Then in the rest of this section, Pettifor says she wants to see power put into the hands of “entrepreneurs and workers”. Well that sounds wonderful and very PC, but how exactly do “entrepreneurs and workers” expand demand come a recession? Pettifor is silent on that.

Private deficits….

Pettifor’s next section, entitled “Private deficits cannot finance economic activity” starts with an obvious blunder. She says “The system of fractional reserve banking so enamoured of monetary reformers…”.

Well actually fractional reserve banking is exactly what “monetary reformers” OPPOSE.!!! That is, monetary reformers advocate what is sometimes called “full reserve banking” or Sovereign Money. And her reference to “fractional reserve” is not a typo: she makes exactly the same mistake in the preface of the book. Thus Pettifor presumably has her own and very unusual definition of the phrase “fractional reserve”. But that being the case, it’s up to her to explain to readers what she means by the phrase: something she fails to do.

Moreover, how does she reconcile her above reference to fractional reserve with her own claims in the past that “there is no such thing as fractional reserve”? (See opening sentences here.)

Incidentally Positive Money published an article a year or two ago claiming there are significant differences between full reserve and Sovereign Money. My answer to that is every advocate of full reserve / Sovereign Money (e.g. Lawrence Kotlikoff, Milton Friedman, James Tobin, Irving Fisher, Matthew Klein etc) advocates a slightly different version of the basic idea. Thus Positive Money may be right to say there are differences between their preferred version of Sovereign Money and various other versions. But the BASIC IDEA behind each version is the same, which is that deposits which depositors want to be totally safe are just that: i.e. they are lodged at the central bank, while banks wishing to make loans have to fund them via equity.

Then in the second half of p.109 she considers the idea put by Positive Money and others, namely that if SM resulted in an excessive rise in interest rates, the central bank could always create money specially for commercial banks with a view to encouraging them to lend more and cut their interest rates. (That incidentally is something central banks have actually done in recent years: for example the Bank of England’s “Funding for Lending” scheme. Thus the idea is perhaps less outlandish than Pettifor thinks.)

But she then expresses agreement with a claim made by the Independent Commission on Banking (ICB) to the effect that if the latter “special” money was not made available the result would be an “unprecedented contraction of economic activity – employment, investment and spending….”.  

Well the simple answer to that is that in the latter scenario there is no reason to assume government and central bank wouldn’t react in the way they normally do in a recession: i.e. implement stimulus! Indeed there is no more reason to think governments and central banks would fall short in that respect under SM than under the existing system.

The net effect of significantly higher interest rates combined with an amount of stimulus no less that would prevail under a non-SM regime would be a shift from loan / debt based economic activity towards non debt based activity. Given the hundreds of worthies (including Pettifor herself) who constantly complain about excessive levels of debt, it is not clear to me (and probably not clear to said worthies either) why that would necessarily be a disaster.

Inadequate bank lending.

Anyway, to continue, the next claim in her section entitled “Private deficits…” is that come a recession, a scenario where the private sector tends to run a deficit, some monetary reformers claim a solution is to RAISE interest rates!!  As she puts it, “Some reformers propose that banks can then simply raise interest rates…”. 

Well I’ve never known ANYONE, “reformer” or not, claim that interest rates should be RAISED in a recession!!!

She also claims that in a recession, where the private sector is in deficit, bank loans will decline under SM. Well same applies under the existing system, until something is done about it! That is, come a recession under SM, government creates extra money and spends it (and/or cuts taxes), and while some households and firms will choose to simply lodge some of that newly acquired money at the central bank, others will buy into mutual funds run by banks which grant loans to mortgagors etc.

Pettifor appears to be totally unaware of the latter point, which indicates she basically does not understand how SM works. 

Debt free money.

Pettifor’s next section (entitled “Should or can money be debt free”) starts, “There is no such thing as debt free money, or if there is, it is likely to be something quite different – a grant or gift.”

Well what about “base money” (aka central bank created money)? Governments and their central banks are free at any time to simply press buttons on keyboards and create money from thin air: exactly what Keynes suggested they should do, and exactly what they HAVE DONE over the last few years.

Incidentally the way governments have implemented stimulus over the last five years or so might not seem to involve simply “creating money and spending it”, however that is actually what they have done thanks to QE. That is, governments have implemented what might be called “traditional fiscal stimulus” (i.e. government borrows $X, spends it and gives $X of bonds to lenders). But central banks have quickly followed that up by creating / printing new money and buying back those bonds. That all nets out to “the state (i.e. government and central bank) creates money and spends it.

As to whether that money is distributed in the form of a “grant” or “gift”, that’s a relatively minor detail. Clearly a government and central bank can print money and distribute it to pensioners, in which case that could obviously be classified as a “gift”.  Alternatively they can spend the money on new infrastructure, in which case the money is not a “gift” to the contractors who build the infrastructure: those contractors have to provide millions of dollars worth of bridge, road or whatever before they get paid.

Another minor and technical point is that there is a minor and technical sense in which Pettifor could be said to be right in claiming there is no such thing as debt free money: that is, it HAS BEEN argued that base money actually is a debt owed by the central bank to holders of that money. For example UK £10 notes actually say that the Bank of England (to quote) will “pay the bearer on demand the sum of £10”. But that sentence is just a throw-back to the days when banks actually did have to give customers real gold in exchange for their notes when customers wanted. Nowadays there is zero chance of the BoE making good on its “debt” and giving you ten pounds worth of gold in exchange for your £10 note. So to that extent base money is not a debt owed to anyone.

As Warren Mosler (founder of Modern Monetary Theory) put it, central banks are similar to umpires in a tennis match in that points awarded by the umpire and money issued by central banks are assets as viewed by the players (and those holding base money), but those points are not liabilities of the umpire and base money is not a liability of a central bank.

However I assume the latter technical point was not what Pettifor had in mind: she certainly says nothing to that effect.
Moreover, I doubt she is even aware of the latter technical point.

Pettifor then continues with the above mistake in the next paragraph when she says “all money is based on a system of claims…”. Wrong again: £10 notes and $100 bills do not give the holder of those bits of paper any sort of “claim” on their central bank, or on anyone else, as Warren Mosler rightly said.

Does money just circulate?

Pettifor’s next section (which has the above title) starts by accusing some SM advocates of being under the illusion that money just circulates, without having real economic effects like funding investment, creating jobs and so on. Actually I’d guess the average intelligent fifteen year old has worked out that money does more than just go round in circles to no effect.

Her next section deals with Bitcoin. That is really a subject on its own and is not directly related to the arguments for and against SM. So I’ll ignore that.

Credit consumption and the ecosystem.

Then in the next section (with the above title) she claims banks should not lend money for unnecessary items, like cosmetic surgery. Well granted cosmetic surgery is not the most serious problem the human race faces, on the other hand if we are going to require banks to decide whether a loan is for important or unimportant items, where do we draw the line? What about someone who wants to borrow to buy a house or car which is a bit bigger than they really need? The bureaucracy involved in going into details there doesn’t bear thinking about.

Quantitative easing.

Next, there are a couple of sections on QE in Pettifor’s book. The first does not have any great bearing on the pros and cons of SM. In the second section, she opposes decisions being taken in relation to QE by “faceless bureaucrats or academics”. Well that is just a repetition of the point she made earlier relating to more conventional forms of stimulus. And the answer is the same, namely that “faceless bureaucrats and academics” have for a very long time taken the major decisions on stimulus.

Moreover, the decision to implement QE in the UK (to repeat) was not actually taken just by the Bank of England: the BoE consulted the then UK finance minister, Alistair Darling, before embarking on QE.

Plus, since Pettifor does not want a committee of experts taking major economic decisions, who DOES SHE WANT to take those decisions? A committee of plumbers or bricklayers? She doesn’t say.

Donald Trump.

Next comes a section entitled “Donald Trump and helicopter money.” Pettifor objects to helicopter money being distributed by central banks without “checks and balances” because helicopter money has “distributive  consequences”. Well Positive Money tumbled to that one ten years ago which is why PM have always advocated a system where the central bank decides the AMOUNT OF stimulus to be implemented, while democratically elected politicians decide EXACTLY HOW that money is distributed. (Incidentally Bernanke gave his blessing to that sort of system a year or two ago: see his para starting “A possible arrangement…”)
Then in the para starting “Lord Adair Turner…” Pettifor says she opposes inflation targeting by central banks. Well doubtless inflation targeting has drawbacks, but what maximum allowable rate of inflation does she envisage? 10%? 20%? She doesn’t say.

Criticism is the easiest thing in the World. The difficult bit is producing better alternatives.

QE again.

Next comes another section (p.124) which has “QE” in the title. This section returns to the point made by Keynes dealt with above. Ann Pettifor is clearly much enamoured of Keyes’s claim that the quantity of money has no effect, while of course she ignores the sentences of Keynes which on the face of it say the opposite. In short, she quite clearly does not understand the different effects of central bank and commercial bank created money.


In the final three paragraphs of her chapter, Pettifor makes the absurd claim that SM would result in us returning to a “barter-style economy”. Why on Earth? Under SM, government and central bank create and spend whatever amount of money is needed to keep unemployment as low as is compatible with acceptable inflation, while everyone continues with the sale and purchase of goods and services in the normal way: using money.

Are we to believe that a clutch of Nobel laureate economists and a dozen other leading economists advocate a system which results in us returning to barter, or do you reckon it’s Pettifor that has got it all wrong? Personally I vote for the latter.

Incidentally, for a list of some of the latter economists, see here.

Friday, 14 February 2020

George Selgin says fractional reserve banking is not fraudulent.

Summary.   The existing bank system, i.e. fractional reserve, is fraudulent because one of its main activities is, 1, accepting deposits, 2, telling depositors their money is safe, and 3, lending on or investing that money in a not totally safe fashion. Ergo it is fraud to claim deposits are safe. One of George Selgin’s answers to that (an answer which no one else supports far as I know) is that banks have never promised depositors their money is safe. I find the latter “never promised” claim bizarre. Anyway, the article below provides some evidence that ever since the Middle Ages, banks have actually promised depositors that their money is safe.


The phrase “fractional reserve” is often used to describe the existing bank system. The phrase is not entirely satisfactory, but let’s stick with it.

The basic reason for saying fractional reserve is fraudulent is that one of the main activities of banks is to accept deposits, lend on the money concerned and then tell depositors their money is totally safe.

That “safety promise” made by banks is fraudulent because “loaned out” or invested money is never entirely safe, as the numerous bank failures throughout history demonstrate. Indeed, financial institutions other than banks (e.g. private pension schemes, unit trusts, mutual funds, etc) are specifically prohibited from making the above promise. The only exception (a justified exception) to that being mutual funds (in the US) which invest just in US government debt.

In short, the idea that a particular activity is not acceptable when carried out by most types of financial institution, but perfectly acceptable when carried out by an institution that has the word “bank” emblazoned above its front door makes as much sense as saying murder is wrong, but it’s OK when perpetrated by people with red hair.

Incidentally, some readers may object to the above claim that banks lend on depositors’ money, and wish to claim that banks create money out of thin air and lend it out, rather than lend on depositors’ money. Well it’s certainly true that commercial banks can and do create a certain amount of “thin air” money every year. At the same time, a bank cannot create limitless amounts of such money without having money coming in from depositors, shareholders and bondholders – else it will run out of reserves.

Thus in effect, banks do actually lend on depositors’ money (as well as creating a certain amount of “thin air” money each year).

So what is George Selgin’s answer to the above “fraud” claim? Well he claims (in the comments after one or two of his articles) that banks have never promised depositors their money is safe, which I find a totally bizarre claim. Plus he asked me to provide evidence that banks have actually made that promise in the past.

Actually I think the onus is on him to provide evidence to support his point rather than on me to prove mine because my view of deposits and safety is the normal or common sense one far as I’m aware. Anyway, I’ve set out some evidence in support of my claim below.

Deposit insurance.

Of course, since the arrival of government backed deposit insurance, any claim by a bank that depositors’ money is safe is justified in that if the bank fails, government will rescue depositors, though the amount so insured is of course limited in every jurisdiction (e.g. €100,000 in  Europe).

So to re-phrase the above fraud point as it applies in 2020 one could perhaps say that in a country where government backed deposit insurance operates, the existing bank system (fractional reserve) is fraudulent, but any harmful effects of that fraud, when they arise, are made good by deposit insurance.

Why does Selgin make his “no promise” claim?

The answer I’m pretty sure, is that he is a keen advocate of what might be called an “extreme version of fractional reserve”. That extreme version is known as “free banking”. Under that system there is no deposit insurance, thus depositors are more likely to lose their money than under a deposit insurance protected system. But clearly Selgin does not want the bank system he favours to be tarnished by the “fraud” accusation.

What banks did before deposit insurance.

Deposit insurance was introduced in 1933 in the US. In the UK, it was introduced in a limited form in the 1970s & 80s, and in a more thorough form in 2007.

Unfortunately it is difficult to get hold of material published by banks prior to 1933 in the US, and same goes for UK material prior to 2007. So it is not all that easy to prove the point that prior to deposit insurance banks were promising depositors their money was safe, nor would it be easy for Selgin to prove banks were not making that promise. Or rather it would probably be easy to settle this issue by visiting Bank of England archives in London or similar national archives in other capital cities. But I’m based in the North East of England and can’t be bothered travelling 300 miles to London for that purpose just for the moment, though I’d be happy to make the visit some time in the future if need be. So the evidence below is what I’ve dug up from online sources and local libraries in the North East of England.

However, all the evidence I’ve dug up so far does confirm my claim rather than Selgin’s.

Why do bank runs happen?

Before setting out the evidence there is a theoretical point to consider as follows. Why do bank runs occur? The reason (a very obvious reason) is that banks have promised depositors $X back for every $X deposited, and when the suspicion arises that the bank will not be able to make good on its promise, best thing to do is get your money out and get your $X while you can,  instead of waiting for the bank to be wound up and getting $0.9X, $0.5X or whatever.

In contrast, if banks promise to depositors (a la Selgin) was for example that the value of each person’s account at a bank varied with the value of underlying assets (i.e. loans made by the bank), then those so called deposits would be in the nature of shares, i.e. equity. And in that case there would be no run: people or institutions which have bought shares in a stock exchange quoted corporation do not sell their shares en masse when prospects for the corporation decline: they accept that buying shares involves gains and losses.

Thus the simple fact that runs occur, supports the contention that banks promise depositors their money is safe.

A trite interpretation of Selgin’s claim.

A possible, and I think trite interpretation of Selgin’s claim is that banks do not promise depositors their money back in the sense that if the bank goes bust, everyone knows depositors will not get their money back (absent deposit insurance). But that’s the equivalent of saying that a promise by me  to mow my neighbour’s lawn is a nonsense in the sense that if I fall seriously ill for several years or get sent to prison for an extended period I won’t be able to fulfil my promise.

I.e. the normal understanding of the word “promise” is that if X promises to do Y, X will make every effort to actually do Y and will only not do Y if it becomes plain impossible, due to unforeseen circumstances. Moreover, the normal understanding of the word “promise” is that if in fact X cannot possibly do Y, that does not prove that no promise was made.

A bank advert from the 1920s.

One bit of evidence that prior to deposit insurance banks were promising depositors their money was safe was dug up by my friend Vincent Richardson (a Positive Money supporter). It’s an advert from the 1920s in the US (at the latter link and reproduced below). Notice that the bank is trying to persuade customers that money placed with the bank is “safe”.

Books on the history of banking.

Next, a number of books on the history of banking (i.e. a history of what was going on with banks prior to deposit insurance) confirm my claim and cast doubt on Selgin’s claim. Relevant passages from these books are as follows.

Money & Banking in the UK by P.Cottrel, p.249:

“In the boom of the early 1870s, there was a further flurry of bank formations and altogether between 1860 and 1874, 24 new domestic joint stock banks were successfully established. The new banks took up limited liability from their inception but the banks formed prior to 1854 remained on the whole unlimited. Many bankers saw an advantage in being unlimited as it provided apparently an additional element of security for their depositors.”

That of course does not prove banks were promising to return 100% of depositors money, but it is evidence that they were keen to give the impression they would. 

Money and Banking in the England by M.Collins  p.94 chapter entitled "The Business of Commercial Banking 1826-1913”:

“Through their willingness to accept money on deposit, commercial banks offer places of safekeeping (customers no longer need to keep savings under their beds!) and a form of investment (as customers can earn interest on those deposits). Deposits formed the great bulk of commercial bank liabilities, even in the nineteenth century a large proportion of these deposits was on 'current account' and, therefor could be withdrawn immediately by customers.”

That suggests the object of the exercise is “safety”: i.e. that depsitors get 100% of their money back, not 90%, 50% or whatever.

"Money Banking and Credit in the Medieval Bruges" Raymond de Roover, Ch13, p247:

“As we have seen, it had become customary in Flanders, by the second quarter of the fourteenth century, for merchants and private individuals to deposit with money-changers any cash which was not immediately needed. The latter did not keep all this money safely locked up in their chests but used the greater part of it for their own purposes.

This was not a breach of confidence. The money-changers were indeed expected to meet every demand for repayment at the first request.”

Well if those proto-banks “were expected” to return deposited money, that strongly suggests they were making promises that such money would be returned.

Scottish Banking: a History. S.G.Checkland. p.189 (in chapter entitled "The system by 1810"):

“Treasurers' bonds faded out after 1792. This left the two elements, cash accounts in credit (repayable on demand), and promissory notes (repayable on a time basis).”

Well the most reasonable and common sense interpretation of money in an account which is “repayable on demand” is that 100% of the money is repaid, not 90% or any other percentage.

Commercial Banks and Industrial Finance by M Collins and M. Baker, Ch5, p.83:

“In the second half of the nineteenth century it was more obvious to contemporaries in Britain than it is perhaps today that the business of commercial banking depended fundamentally on retaining depositors' confidence in the banks' ability to safeguard their balances and to repay promptly at depositors' convenience."

Well there again, how do you interpret that? I take it to mean that banks undertake to return all of depositors’ money, not 90% or any other percent.

Bank charges.

The only exception to the above “nothing less than 100%” point is where it is agreed in advance by bank and depositor that the bank may pay so little interest that that interest is wiped out by bank charges in respect of administration costs involved in maintaining an account.

Indeed, the latter is common at the time of writing given the very low rates of interest that currently prevail: in fact bank charges on my own instant access account at my high street bank exceed the interest I earn. 


I suggest it is now up to George Selgin to provide evidence from the days before deposit insurance that banks were not promising to return 100% of depositors’ money.