Rohan Grey’s flawed variation on Positive Money’s Sovereign Money system.

Grey’s variation is set out in this Progressive Pulse article which is not actually written by Grey. The title of the article is “Rohan Grey’s ‘Banking Under Digital Fiat Currency’ Proposal.”

However, Grey gives his blessing to the article in this tweet, so presumably the article is a fair description of Grey’s proposal. I would normally go to the original source of the idea, i.e. Grey’s own article, but that seems to be behind a pay-wall.

The first problem with Grey’s proposal is that it involves the central bank in giving commercial banks the base money they need to make loans in exchange for the mortgages granted by commercial banks. So do central banks do detailed checks on millions of mortgages before dishing out money, or what? This sounds like a bureaucratic nightmare.

Second, central banks are not supposed to be into commerce.

Third, the system gives an artificial preference to banks vis a vis other entities (e.g. non-bank firms and households), and I think we've all had enough of preferential treatment and subsidies for banks. To illustrate, take an economy in stable equilibrium. Banks then spot new and viable lending opportunities. If the CB supplies them with the necessary base money, demand rises, ergo taxes must be raised (or demand reduced some other way, like cutting public spending) So essentially taxpayers fund the new loans, which doesn’t make sense.

In contrast, under PM’s system, if banks want more funds to lend, they have to attract funds from depositors. That raises interest rates, which means the people who OUGHT to fund loans, i.e. savers, actually fund the extra loans. That ought to give a genuine free market rate of interest, which ought to maximise GDP / output per hour.