Messers
Kumhoff and Benes produced an IMF working paper last year advocating full
reserve banking. (Their paper is NOT official IMF policy, by the way.)
B & K’s
ideas have much in common with the ideas put by other advocates of full reserve
banking, in particular:
1, that full
reserve would ameliorate booms and busts,
2, it would
eliminate bank runs and sudden bank failures, and
3, that
where stimulus is needed, the government / central bank machine should simply
create new money and spend it into the economy (and/or cut taxes).
However,
there is one element in their paper which is very different and with which I
don’t agree: they advocate a huge debt jubilee and general hand out of central
bank created money to the citizenry – amounting to 100% of GDP. Well the effect
of that will be rampant inflation won’t it?
Their basic
argument is set out below, complete with some of the balance sheets that
Kumhoff shows in a presentation he gave in January of this year. Incidentally
when you see something like “XX.00” below, this refers to the relevant number
of minutes into the presentation.
For a
clearer view of Kumhoff’s balance sheets than you’ll see in the video, see
here.
The material
below is a summary of Kumhoff’s argument. Obviously readers wanting a fuller
picture can look at the presentation. I’ve put Kumhoff’s actual words in
brown/purple.
The starting point.
Kumhoff
starts off with an aggregate balance sheet of the whole US banking system
(11.50). As he puts it:
“This is our best rendering of the
aggregate balance sheet of the US financial system. We really went into the
figures to try to get this right. And all numbers are in percent of GDP. And we
include the Federal Banking system. This is important because we don’t want to
leave that out of our analysis because it is actually slightly larger than the
regular banking system in the US.”
The balance
sheet is as follows.
Assets
|
Liabilities
|
|
20
Government bonds.
|
184 Deposits.
|
|
100
Short term mortgage loans.
|
||
80
Investment loans.
|
||
16 Bank equity.
|
He continues
(11.50), “Now
the Chicago plan says those deposits, 184% at the top right, need to be 100%
covered by reserves, so the banks have to borrow reserves from the government
and we put that on the asset side of the balance sheet. On the liability side what emerges is of
course the IOU to the government for providing these reserves. So the government
doesn’t just provide these reserves as a gift. There is an IOU. And I call that
Treasury Credit.”
The
resulting new balance sheet is below. (Note: the cells or boxes in these
balance sheets are not EXACTLY to scale. That is, the height of each cell only
ROUGHLY corresponds to the “percent of GDP” number that appears in each cell.)
Kumhoff
continues (12.30): “Now I can split this institution into what I call money
banks at the bottom and credit investment trusts.”
Transition
to Chicago plan – Step 2. Banks are split into money banks and credit
investment trusts.
|
Credit Investment Trusts.
|
||
Assets
|
Liabilities
|
|
20 Government bonds
|
184
Treasury Credit.
|
|
100 Short term and mortgage loans.
|
||
80 Investment Trusts.
|
||
16 Bank equity.
|
Money banks.
|
|
Assets.
|
Liabilities.
|
184 Reserves.
|
184 Deposits.
|
Kumhoff
continues: “Money banks are just a money warehouse that manage the payments system.
And they can manage the payments system without having any concern in the world
about the asset quality on the other side of the balance sheet, which means
they can manage the payments system in a completely risk free way…..”
“….And so we say this Treasury
credit is shared with citizens. But first of all it does something else: it
cancels government bonds. That’s 20%...”.
I haven’t
specifically shown the effect of that in the balance sheets here as the 20% is
a relatively small number. But the net effect is that the total of the
liabilities side of the “Credit Investment Trusts” balance sheets shrinks from
200 to 180.
Now comes the coup de grace.
But then, as
if by magic, 100 out of the 184 that banks owe to the Treasury is converted to
“citizens’ accounts”. Lucky old citizens!! (See top right in the balance sheet
just below.)
Transition
to Chicago Plan Step 4 – Part of treasury credit is distributed as citizens’
dividend.
|
Credit Investment Trusts.
|
||
Assets
|
Liabilities
|
|
100 Short term and mortgage loans.
|
100 Citizens accounts.
|
|
64 Treasury credit.
|
||
80 Investment Loans.
|
||
16 Bank equity.
|
Money banks.
|
|
Assets.
|
Liabilities.
|
184 Reserves.
|
184 Deposits.
|
As Kumhoff
puts it: “Treasury
credit - we now pay what I call a citizens dividend. The government pays a
certain amount to every citizen.”
He
continues: “The same amount for everyone in the economy would be one way of doing it
– into citizens accounts. And the mandatory first use of this money would have
to be to repay any outstanding debt. And we’re assuming it would be paid to
households and what I call manufacturers to repay all the mortgages and short
term loans. Credit investment trusts would be a lot shorter.” (I.e. he
means the balance sheet shrinks, presumably).
Transition
to Chicago Plan Step 5 – Mandatory first use of citizens’ dividend is repayment
of any debts.
|
Credit Investment Trusts.
|
|
Assets
|
Liabilities
|
100 Short term and mortgage loans.
|
100 Citizens accounts.
|
80 Investment Loans.
|
64 Treasury credit.
|
16 Bank equity.
|
Money banks.
|
|
Assets.
|
Liabilities.
|
184 Reserves.
|
184 Deposits.
|
Then we have the credit investment
trusts still financed by treasury credit, and they are only engaged in a very
narrow function which is to finance productive loans to firms that make
something.
Credit investment trusts.
|
|
Assets.
|
Liabilities.
|
80 Investment Loans.
|
64 Treasury credit.
|
16 Bank equity.
|
Money banks.
|
|
Assets.
|
Liabilities.
|
184 Reserves.
|
184 Deposits.
|
Kumhoff
continues:
“I’m papering over the fact that households are very heterogenous and there are
still going to be some households that are very rich and have money to lend and
households that even after the
citizens’ dividend, have some borrowing needs….”.
No inflation?
He then
actually addresses the main point I’m making here, namely that the K&B
scheme will dramatically boost inflation. So it seems that others have made the
same “inflation” objection that I’m making.
He says
(16.30), “The
supply of money is completely constant. People say government is printing a lot
of additional money here. Nonsense. It is not. What government is doing is
requiring that the existing money be backed by reserves. Because the only money
that matters is in people’s pockets or their bank accounts.
That remains at 184% of GDP
throughout this whole episode. But it represents something. In the beginning it
represented a debt. And that’s very fragile. It’s what someone at the ECB
called “destructible money” because when the banks decide they don’t want to
lend so much any more, some of that money gets destroyed. Because it all depends
on what happens on the asset side of the balance sheet. When we are the end of
the Chicago Plan, we’re in a situation where all of this money is backed by
100% reserves. That’s indestructible money.
That’s what changes. Not inflation.
This is the change in the government’s balance sheet.”
Are you baffled?
Certainly I
am. It is true, as he says, that the stock of money that existed at the outset (184%
of GDP) is backed by reserves. But as he also says there is an additional
handout to all citizens. To repeat what he said above:
“Treasury credit - we now pay what I
call a citizens dividend. The government pays a certain amount to every
citizen. The same amount for everyone in the economy would be one way of doing
it – into citizens accounts.”
Put another
way, what started off as a debt owed by banks to the Treasury is simply
converted to a debt owed by the Treasury or government in general to citizens.
That’s the 100% of GDP which is deleted above with the two red crosses. And
that debt or money is simply dished out to citizens.
In other
words, every citizen gets a sum of money equal to one year’s disposable income
or take home pay, PLUS a sum equal to their share of government spending. So on
the simplifying assumption that GDP is split 50:50 as between private and
public spending, then everyone gets a sum of money equal to twice their annual
take home pay.
Now what’s
the reaction of the average household going to be when they get a cheque equal
to twice the household’s annual take home pay? In the case of household with no
debts, the champagne corks will be flying, and new cars will appear in
driveways. In the case of heavily indebted households, the celebrations will be
more muted but there’d be expensive celebrations nevertheless.
So what’s
the best way to convert to full reserve?
I suggest the
following.
Prior to “conversion
day”, all bank depositors have to choose approximately how much of their money
they want their bank lend on or invest, and secondly, how much they want kept
in a 100% safe and instant access fashion. AFTER conversion day, they are of
course free to shift money between their 100% safe accounts and investment
accounts.
Notice that
other advocates of full reserve (Positive Money, Prof. Richard Werner, the New
Economics Foundation, Laurence Kotlikoff and William Hummel) advocate this
basic split between “loaned on” money and “100% safe” money. For an exposition
of the system advocated by the first three, see here.
As to loaned
on or “invested” money, that is no longer money. For example if (as per
Laurence Kotlikoff’s system) all such money goes into unit trusts (“mutual
funds” in the US), then depositors then hold unit trust units, not money. And
unit trust units are not counted as money in any country.
Moreover,
those unit trusts / mutual funds are SPECIFICALLY
PROHIBITED from issuing cheque books, credit cards, and so on. And that solves
what is perhaps the FUNDAMENTAL PROBLEM in banking, namely that banks promise
to return SPECIFIC SUMS OF MONEY to depositors while investing in assets which
can fall dramatically in value: making it impossible to return depositors’
money. As George Selgin put it in his book “The Theory of Free Banking”
(available for free online), “For a balance sheet without debt liabilities,
insolvency is ruled out….”.
As to 100%
safe money, that’s just deposited at the central bank. If the total that
depositors want kept in 100% safe and instant access fashion equals banks’ existing
reserves, then no further action is required.
In contrast,
if depositors wanted MORE of their money to be 100% safe than the total of
existing bank reserves, then some “Kumhoffing” would be needed: that is, have
the central bank LEND RESERVES to the relevant commercial banks. But that loan
would remain as a loan: it would not (as per Kumhoff) be dished out to the
population. So there is no inflationary effect there.
Another group
which advocates full reserve (Positive Money) also advocates “Kumhoffing”, but
(as per my suggestion above, and in contrast to Kumhoff) they don’t advocate
that the relevant sum should be immediately dished out to the population. See
Andrew Jackson and Ben Dyson’s recently published book “Modernising Money” (p.230).
The latter
authors DO SAY at the bottom of p.230 that “Under normal circumstances the Bank
of England will be required to automatically grant the money paid to it as a
result of the Conversion Liability to the Treasury to be spent back into the
economy.” And that could be taken to
imply that in fact the authors DO ADVOCATE (like Kumhoff) a distribution of the
relevant money.
However,
Positive Money stress over and over in their literature that the government /
central bank machine (GCBM) should only create and spend money into the economy
to the extent that stimulus is needed. Thus the above point about spending “Conversion
Liability” back into the economy is really superfluous. That is, even if there
were no Conversion Liability, GCBM would be creating and spending as necessary.
Moreover, there is no good reason, given the existence of the Conversion
Liability, for GCBM to create and spend in an amount that would cause excess
inflation.
And that’s
simpler than Positive Money & Co’s system.
The system advocated by the three authors mentioned above involves the central bank
opening an account that corresponds to the total amount that depositors want to
be kept in investment accounts. I suggest that is totally unnecessary.
Under full
reserve (at least as advocated by Laurence Kotlikoff) the so called “money”
that a depositor has invested in a unit trust is little different to a trade
debt (e.g. the debt that a car manufacturer owes a car part maker before goods
supplied by the latter are paid for). There is certainly no need for central
banks to get involved in trade debts, and I suggest equally little need for
central banks to get involved when someone buys shares on the stock exchange or
buys into a unit trust.
No comments:
Post a Comment
Post a comment.