Monday, 15 February 2016

Randall Wray versus Positive Money.

Positive Money objects to the creation of money by private banks among other things because those banks create money when they grant loans, thus allegedly, privately created money increases debts.

Certainly commercial banks do create money when they grant loans. This Bank of England article starts, “This article explains how the majority of money in the modern economy is created by commercial banks making loans.”

Randall Wray is professor of Economics at the University of Missouri-Kansas City in Kansas City. In a recent article he argues that objections to the above “debt based” money are weak because debt is also inherent to the alternative form of money, namely state issued money (base money).

I’ll argue below that both Positive Money and Wray make a few mistakes there.

Does “debt based” money increase debts?

Positive Money claims that without “debt based” money, total debts would decline. That is, Positive Money argues for a “no privately issued money” system: a system which over the decades has been backed by a number of economics Nobel laureates, Milton Friedman included. (See in particular the second half of Ch3 of Friedman’s book “A Program for Monetary Stability”).

I agree with PM, Friedman etc that there is much to be said for a “state money only” system. However, I don’t agree that because money is made out of debt, so to speak, that that necessarily increases the total amount of debt. One reason is that the total amount of debt VASTLY EXCEEDS the total amount of money we need.

It’s a bit like the form of money issued by King Henry I of England (who came to the throne in 1100AD).  He decided to make money out of wood: that is, he introduced tally sticks to England in a big way. Now did that have much effect on wood consumption? I doubt it. Given the amount of wood used to build houses, ships and to simply burn for cooking purposes, I’d guess Henry I’s tally sticks increased wood consumption by a miniscule 0.00001% or so.

Private banks can create money without creating debt.

Another weakness in Positive Money’s argument is that in a hypothetical society where people wanted a form of money, but no one wanted to incur long term debts, private banks would have no trouble supplying what people wanted. That is banks would (as now) credit the accounts of those wanting a float to tide them over from one pay day to the next (maybe after asking for collateral). And assuming the amount in each account simply bobbed up and down above and below the amount credited, no one would incur any sort of long term debt. (I expand on that point here.)

To summarise so far, there are weaknesses in PM’s argument which Wray COULD ATTACK. But curiously he doesn’t: instead he tries to argue that debt is inherent to state issued money in much  the same way as commercial bank issued money is a debt. And that argument of Wray’s is decidedly weak.

A loan of $X creates TWO $X debts, not one.

For example a major flaw in Wray’s argument is thus.

When a bank grants a loan of $X, it sets up TWO $X debts, not one. There’s the $X debt the bank owes the borrower and which is credited to the borrower’s account. That debt is commonly known as “money”. Second, there’s an obligation on the borrower to repay $X to the bank at some stage.

Now what Positive Money objects to is the SECOND of those debts. That is, PM argues in effect, “Why, in order to create money, should anyone have to go into debt?” But what Wray deals with is the FIRST debt: that’s the debt owed by the bank (or state) to the holder of the bank’s or the state’s money.

In short, Wray aims at the wrong target: a target that Positive Money is not concerned about.

Redeeming debts.

But the basic argument put by Wray in his recent article claims that a characteristic of debt is that it must be REDEEMED, and that since (allegedly) base money also has to be redeemed, then it follows that base money is a debt owed by the money issuer, i.e. the state.

As he puts it in his conclusion, “When the sovereign issues currency, she/he becomes a debtor. The sovereign’s currency is debt. The holder of the currency is the creditor. The most fundamental promise made by any debtor is the promise to redeem, by acknowledging his/her debt and accepting it. Those who themselves have debts to the sovereign can submit the sovereign’s debt in payment.”

What Wray means by “who themselves” is people who owe tax to the state. I.e. he claims that if someone owes tax to the state, that is clearly a debt. And since that debt can be settled using the state’s money, then that, so he argues, amounts to using two equal and opposite debts to cancel each other out. Ergo, so he argues, the state’s money is a debt owed by the state.

Base money never is redeemed!

Well the first problem with that argument is that base money, over the long term, just isn't redeemed. That is, the stock of base money just grows and grows from one decade to the next.

It’s true that occasionally in particular years states run budget surpluses which results in a net withdrawal of base money from private hands. But to repeat, over the long term base money is not redeemed.


A second problem with Wray’s argument has to do with tax. 

It is true, as he says, that tax is debt owed by some private sector entity to the state. But what is tax? It’s the power of the state to simply grab any amount of money it likes off households and firms whenever it wants. And those who don’t pay go to prison.

Now that’s a very different kettle of fish to the debt you owe your bank in respect of your mortgage: you can’t just say to the bank, “Hi folks. I’m not happy with the $100k I owe you in respect of my mortgage. So from now on it’s going to be $50k. Any argument and you go to prison.” In short, to call base money a debt owed by the state to the private sector is odd, given that the state can just wipe out any amount of that debt it likes anytime.

State spending.

Wray and his supporters might argue that when the state grabs $X of tax off the private sector, the state spends that money back into the private sector, thus on balance the state in a sense is not confiscating ANYTHING from the private sector.

Unfortunately that argument is flawed  because there’s nothing to stop the state grabbing money off the private sector and then DOING NOTHING with that money: in effect, tearing the money up. Indeed Wray himself, as a supporter of Modern Monetary Theory (MMT) doesn’t object to using that tactic when the economy needs cooling down.

That is, as MMTers often put it, the purpose of tax is not to fund government spending: the purpose is to counteract the inflation that would ensue if government simply printed excessive amounts of tax and spent it. Or as Abba Lerner (often said to be the founding father of MMT) put it, “An interesting, and to many shocking corollary is that taxing is never to be undertaken merely because the government needs to make money payments...... Taxation should therefor be imposed only when it is desirable that the taxpayers shall have less money to spend, for example, when they would otherwise spend enough to bring about inflation.”


There are weaknesses in Positive Money’s argument which Wray COULD ATTACK, but he doesn’t. Instead he mounts an attack which is none too clever. But notwithstanding that weakness in Positive Money’s argument, I still support the basic PM claim that we’d be better off if just the state issued money, rather than private banks issuing money.

I hope that’s not so complicated as to have caused too many nervous breakdowns and visits to shrinks!

P.S. Eric Lonergan wades into the debate here: 

And Brian Romanchuk wades in here:


  1. L. Randall Wray makes his point even clearer in his latest post:
    "Debt-free Money Part 4: American Colonial Money"

    His core argument, as I understand it, is that "debt" is more fundamental than "money". Debt is fundamental to human social interaction, and money is just a handy way to deal with it (as also documented by David Graeber).

    1. The idea that debt is more fundamental than money is one of his SUBSIDIARY points, I think. His MAIN POINT, if I've got it right, is that because base money is redeemed, ergo it's a debt in the same sense as a normal debt because normal debts are nearly always redeemed.

  2. I think Mary Mellor puts it very well in her book "Debt or Democracy".Money issued by rulers(or possibly modern Parliaments)is the first issue of the money and is free to the monarch since he owes nothing to no one.He thus gets first use of spending that money and then, after a short while of his money circulating,he can tax it right back.Very convenient.


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