Saturday, 5 May 2018

Ann Pettifor’s bizarre criticisms of Sovereign Money.

Chapter 6 of her book “The Production of Money” is entitled “Should Society Strip Banks of the Power to Create Money?”, and stripping banks of the right to create or “print” money is the basic objective of what is sometimes called the “Sovereign Money” movement. Other names for the same set of ideas include “full reserve banking” and “100% reserves”. The book was published last year: 2017.

Her first criticism of Sovereign Money (SM) is that it “shows little concern for high interest rates” (p.94), and certainly interest rates would tend to rise under SM.

However, the first answer to that is that with interest rates currently at record lows, half the country is worried about the undesirable effects of those record lows: in particular the fact that record amount of borrowing, lending and debt that results from those lows. A second possible effect is asset bubbles.

Also in the 1980s, the rate of interest paid by UK mortgagors was almost THREE TIMES the rate they pay nowadays. But for some strange reason the sky did not fall in the 1980s, nor were the streets of lined with the homeless. Indeed, if anything homelessness is worse now than twenty years ago.

However, while the latter points about record levels of debt and house bubbles have an emotional appeal for the economically less literate, the important and crucial question is this: what regime brings about the OPTIMUM or GDP maximising rate of interest?

Well it is widely accepted in economics that GDP is maximised where prices are at the free market level, except where there is a clear social case for setting them at some other level, as is the case with kid’s education, which is available for free. And banks are pretty bog standard commercial operations, thus there is no obvious reason for interest rates not being at free market rates. Put another way, borrowing and lending are straightforward commercial activities: not activities with any obvious social implications in most cases.

Of course there are SPECIFIC types of borrowing where there may be important social considerations, e.g. pay-day lending or lending to less well off or first time house buyers. But as a general rule, and to repeat, borrowing and lending are bog standard commercial activities.

So what sort of regime brings about a genuine free market rate of interest? Well it’s very definitely not one where private banks are allowed to print money. The latter is an obvious subsidy of private banks, just as letting garages print money would be a subsidy of garages. (Although perhaps I should have said “one of the numerous subsidies given to banks” rather than “a subsidy”).

And subsidising an industry results in that industry being able to charge an artificially low rate for its products. Joseph Huber in his work “Creating New Money” (Ch4, p.31) explains how the right to create money enables banks to lend at a lower rate than they otherwise would.

As for any reduction  in demand that might stem from higher interest rates that is easily countered by having the state print and spend more money (and/or cut taxes).

“Herculean” matters.

Next, at the top of her page 98, Pettifor claims that having just the state or central bank create money is a “Herculean” task. But she doesn’t specify exactly what the big difficulties are. Perhaps she can’t think of any. Milton Friedman claimed that the switch to a Sovereign Money regime would be relatively simple and straightforward. As he put it in Chapter 3 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”.

Incidentally, I won’t deal with EVERY point Pettifor makes in her chapter, otherwise this article would end up as long as the chapter itself. I’ll just deal with SOME OF the points where she goes off the rails, rather than with some of vaguer criticisms she makes of SM.


Next, Pettifor claims that Keyes (in a letter to Roosevelt) argued against a money supply increase. That passage in Keynes’s letter starts:

“The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money.”

Incidentally it is not entirely clear what the relevance of this is to the SM argument: Pettifor does not explain. But presumably she has in  mind the fact that some SM advocates argue for having the central bank create and having the government spend an amount of money each year depending on how much stimulus is needed.

Anyway, and returning to Keynes’s letter to Roosevelt, there is a glaring problem there, namely that Keynes contradicts himself. That is, while he seems to argue against a money supply increase in the above passage, he argues IN FAVOR of such an increase in favor a recession in paragraph 5 of his letter. He says:

“Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.”

Indeed, as you may have noticed, Keynes latter “print and spend” idea is almost identical to the “print and spend (and/or cut taxes)” policy advocated by Positive Money and other SM supporters!

Debt free money.

Under the heading “Should or can money be debt free”, Pettifor says “..debt free money is an oxymoron. There is no such thing as debt free money…”.

Unfortunately she completely fails to deal with the basic debt free point made by SMers, namely that there is an important distinction between central bank issued money and commercial bank issued money (base money). In the case of commercial bank issued money, for every dollar of money there is a dollar of debt, as indeed Pettifor herself rightly implies. In contrast, in the case of base money, there is certainly an OSTENSIBLE debt: it’s a debt owed by the central bank to the holders of base money. And indeed, that money appears on the liability side of the balance sheet of central banks.

And not only that, but on Bank of England issued notes, it says (alongside the signature of the BoE’s chief cashier) “I promise to pay the bearer the sum of £20”. Well that all seems a pretty convincing evidence for the idea that base money is a debt owed by central banks. Unfortunately all is not as it seems.

First, as regards the latter “promise to pay”, that’s nonsense: if you turn up at the BoE and demand £10 of gold or anything else in exchange for your £10 note, you’ll be told to shove off, accompanied by the police if you don’t shove off immediately.

Second, government (which owns the BoE) is entitled to grab any amount of base money off the private sector whenever it wants via tax. And that makes the so called “debt” owed by the BoE to the private sector a strange debt. It’s the exact equivalent of me being “indebted” to Barclays Bank on account of the mortgage they granted me, at the same time as me having the right to walk into Barclays Bank any time and grab wads of £10 notes so as to pay off my “debt” to Barclays.  If that is a debt owed to Barclays, it would be debt quite unlike any other debt.

As Warren Mosler (founder of MMT) put it, base money is like points awarded by a tennis umpire: that is, base money and tennis points are assets as viewed by those holding base money or tennis points, but they are not liabilities as viewed by central banks or tennis umpires.

To summarise, there is clearly a distinction between commercial bank issued money and base money. The former is definitely a debt. As to whether base money is a debt or is “debt free” that is far less clear. “Debt free” is not a bad description if one is going for brevity.

The circulation of money.

Finally, under the heading “Does money just circulate”, Pettifor makes the bizarre charge against SMers that they claim money “just circulates” rather than doing various wondrous things which apparently only Pettifor has thought of, e.g. that it “creates purchasing power” and “gets used up as investment and in the creation of employment, economic activity and income”. And with a view to tugging at our heart strings, Pettifor also says (as if this is some sort of revelation) that money can also “finance cures for plagues and disease”.

Well the answer to that is that every ten year old has worked out that money can be used for a VAST variety of purposes: including gambling, other nefarious activities, paying for investments, enabling families to do day to day purchases at supermarkets, and yes….paying for research into curing diseases.

It’s amazing that I need to spell this out, but when a firm borrows to make an investment, like a new piece of machinery, the relevant money pays the wages of employees working for the firm that makes the machinery. Those employees spend the money on paying for food and clothing, which in turn pays the wages of those making the clothes and growing the food, etc etc etc. In short, money…….wait for it…..CIRCULATES!!!!!!


Hopefully I have said enough to establish that Pettifor is a long way short of totally clued up when it comes to money and banks.

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