Ben Dyson of Positive Money authored an article in the Guardian earlier this week attacking fractional reserve banking. This blog article at the Financial Times authored by Izabella Kaminska responded. The latter’s attempt to demolish Dyson’s arguments are hopeless.
Dyson argues against the right of private banks to create money. The first five or so paragraphs of Kaminska’s article respond by pointing out that economists realised a century or more ago that private banks do this. Thus Dyson’s point, according to Kaminska is old hat.
The answer to that is that Dyson does not claim to be revealing anything that most economists are not already aware of. As Positive Money’s literature points out time and again, the object is to educate the PUBLIC. (I could cite ignorant economists who quite clearly DO NOT get Dyson’s point, but I don’t want to be cruel.)
Second, in the paragraph starting “Having staggered…” Kaminska claims that Positive Money “plans to end evil debt everywhere”. Wrong again. The advocates of full reserve banking (including Positive Money) are well aware that borrowing and lending will always take place. What advocates of full reserve object to is (amongst other things) the fact that fractional reserve exacerbates instabilities.
That is, during a boom, asset prices rise. It was primarily property prices in the run up the recent credit crunch, and in the late 1920s it was primarily share prices. This price rise makes assets better collateral to back further lending. That further lending boosts asset prices still further. And so on.
Third, and credit where credit is due, Kaminska claims that the whole full versus fractional reserve argument is complex. Agreed.
And finally, Kaminska makes the bizarre claim that “Without debt, after all, you can’t have money.” Oh yes? What about a commodity based currency, like gold coins? If I have some gold coins, exactly where is the “debt” associated with these gold coins? Answer: the debt does not exist!
And it’s not only commodity based money systems that involve debt free money. In our existing fiat money system, monetary base is effectively debt free. Of course monetary base IN THEORY has an associated debt: a debt owed by the central bank to holders of monetary base. Those £20 notes (which are part of the monetary base) have imprinted on them the phrase “I promise to pay the bearer on demand the sum of £20”. But of course that is meaningless: try going along to the Bank of England and demanding £20 of gold (or anything else) in exchange for your £20 note. You’ll be told to shove off.
In short, there is no debt associated with monetary base.
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Ralph,
ReplyDeleteThanks for this.
Unfortunate that the link says a hopeless defense of 'full-reserve' banking, which I am much more used to seeing on these MMT-related sites.
Joe
Ralph, this is nonsense. Money, always & everywhere is a form of debt. Fiat money is debt. Gold coins are debt. You really should read Mitchell-Innes. And the book on his papers. And Geoffrey Ingham. And Geoffrey Gardiner. And Henry McLeod (OK, I haven't read much, but I'm full-steam-ahead-name-dropping). And Keynes. And Commons. And Wray of course.
ReplyDeleteThere is no such thing as a commodity based currency. There are countries which foolishly (maybe with the exceptions of 1694-? England & ancient Mesopotamia) which ran a Gold or Silver Store, exchanging these worthless metals for their intrinsically valuable fiat currency. That is not the basis of a currency. The fiat bonds issued by modern fiat currency issuers like the USA or the UK are even less the basis of a currency. The only basis of a currency (=IOUs) is the ability of a currency issuer to impose debts going the other way(U-O-Mes).
Calagus, I’ve read Mitchell Innes and I realise that money is an abstract unit of account, and that coins just represent those units. I’m also aware that as you put it “The only basis of a currency is the ability of a currency issuer to impose debts going the other way.” In other words, the state’s money is dominant because everyone has to obtain the state’s money in order to pay taxes.
ReplyDeleteBut at the point where the state has spent money into the private sector, and before the state demands taxes, there is no debt associated with that money. Put another way, the debt that arises when the tax authorities demand money from someone is separate from any state money that person might have. (And that money can take the form of coins or book keeping entries).
That is all a bit different to what MMTers call horizontal money, i.e. private bank created money. Private bank created money always nets to nothing because for every $X of such money there is $X of debt.