Saturday, 21 May 2016
Malcolm Sawyer’s flawed criticisms of full reserve banking.
As an advocate of full reserve banking, I’m always interested in criticisms of the idea. So far I haven’t come across any I can’t deal with, and Sawyer’s criticisms come into that category, that is, they are easily disposed of.
The first two sentences of the abstract read as follows.
“The idea of full reserve banking (under various names) has been adopted by parts of the green and ecological movements (e.g. Green Party of England and Wales). The paper argues that full reserve banking (FRB) would represent a ‘green monetarism’”.
Well there’s a bit of a problem there, which is that full reserve banking has been advocated for a good two centuries and normally with no mention of matters green. For example David Hume, writing over 200 years ago advocated the idea, as did Abraham Lincoln, as did Milton Friedman in the 1960s. None of those individuals were much concerned with matters green or ecological.
That is, full reserve banking and the idea that we should be more environmentally responsible are two quite separate ideas, though obviously, as is the case with any pair ideas, those two ideas CAN BE merged. But Sawyer doesn't actually deal with the COMBINATION of full reserve and green policies: that is, he deals just with full reserve. Thus references to matters green and ecological are irrelevant.
Next, the first sentence of the main text starts, “There have been a number of similar proposals under headings of full reserve banking, positive money, sovereign money and 100 per cent reserve banking…”.
Now hang on: I’ve never heard of a “proposal” called “positive money”. In contrast, there’s an ORGANISATION called Positive Money (with capital letters), which advocates full reserve banking or similar.
You might argue that the above “green” and “capital letter” criticisms are minor criticisms. Perhaps they are: but that number of mistakes that early in a paper does not give me confidence that the rest of the paper will be worth reading.
Anyway, to continue, the rest of the first page describes full reserve banking, in an accurate manner. So no complaints there. As Sawyer says, the existing system is an endogenous money system: we let private banks issue money as they see fit. In contrast, full reserve is an EXOGENOUS system: only the state creates or prints money.
However, things go wrong again at the top of p.2 where Sawyer says, “Under this exogenous money situation, a mismatch between the amount of money which the central bank creates and the amount of money which the public is willing to hold. This leads to a situation of either ‘excess money’ (more money issued than people willing to hold) or ‘deficient money’ (less than people wish to hold for transactions purposes), though the usual emphasis has been on the ‘excess money’ case.”
The above first sentence doesn’t have a verb. But never mind: I make the odd typo myself. More important, are the IDEAS there.
Sawyer is of course quite right to say that there may be a mismatch between the amount of money a central bank (CB) issues and the amount the amount the “public is willing to hold”, and that if the CB issues too much, excess inflation might ensue. But then exactly the same problem applies to every alternative method of implementing stimulus: whether it’s interest rate adjustments, QE, or budget deficits, it’s common for CBs and governments to get it wrong!
What Sawyer should have explained, and in detail, is exactly why regulating demand via the above “print and spend” policy is more difficult that via interest rate adjustments, QE, etc etc. However, he doesn’t explain.
Instead of explaining that point, Sawyer then (half way down p.2) claims that full reserve “shares many similarities with the ill-fated proposals of Friedman and others for the achievement of a specified growth rate of the stock of money..”.
Now the big problem with that claim is that full reserve no more “shares similarities” with Friedman’s monetarism than do EXISTING policies. You may have noticed that over the last five years or so, CBs have organised a massive and totally unprecedented increase the the stock of base money, and they’ve done it via QE.
Moreover, the full reserve system advocated by Positive Money, the New Economics Foundation and Prof Richard Werner (which Sawyer cites) does not rely just on the money supply effect. That is, given inadequate demand, the work linked to just above argues that the state should print money and spend it (and/or cut taxes). In other words there is a clear fiscal element there as well.
Indeed, the beauty of that system is that it doesn’t matter whether the stimulatory effect comes primarily from the latter fiscal element or the monetary effect. I’m prepared to bet my house there’d be some sort of effect. As to whether the effect comes via the monetary or fiscal channel, I couldn’t care less. Why should that matter?
The next three or four pages of Sawyer’s paper are then devoted to attacking monetarism. Well as far as I’m concerned that’s a waste of ink and paper. To repeat, full reserve (at least as advocated by the latter three authors) does not absolutely depend on the idea that the quantity of money is of crucial importance. Though frankly it would be a bit strange if the quantity of base money had NO EFFECT. Robert Mugabe demonstrated very convincingly that if a country prints ludicrously excessive amounts of money, hyperinflation is the result: a point which I imagine is obvious to the average ten year old, even ten year olds who have never picked up a book on economics.
Then on p.10-11 Sawyer explains, correctly, that under full reserve (at least as set out by the above three authors), the deficit is not known in advance. That’s because the CB doesn’t know in advance how much stimulus the economy will need in six months or a years time. And apparently that’s undesirable because it's “Not a recipe for the good management of public expenditure”.
Well the problem with that argument is that NO government or CB knows what’s going to happen in six months time or a year’s time or two year’s time. Thus it doesn’t matter much exactly what system you have for implementing stimulus: one thing’s for sure, and that’s that governments and CBs are often forced to make unforseen changes in spending, interest rates and so on.
You might as well criticise interest rate adjustments because they aren’t a “recipe” for easy forward planning for those thinking of borrowing with a view to making investments, e.g. those contemplating buying a house with the assistance of a mortgage.
Well that’s it. I’m not minded to read any more of this work by Sawyer. He hasn’t thought full reserve through in any detail.
But that is not to suggest I think all his output is poor quality. I liked this work of his which criticised “employer of last resort” or “job guarantee” as it is sometimes called.