Monday, 13 January 2014

Martin Wolf supports Positive Money – sort of.

Positive Money literature often quotes this passage by Martin Wolf: “The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending.”
But there is another Martin Wolf article where he expands on that point. The article is entitled “The case for helicopter money” and it’s reproduced here by Gonzalo Raffo.
Some quotes from the article:
“Why should state-created currency be predominantly employed to back the money created by banks as a by-product of often irresponsible lending?” Why indeed? Would some representative of the City of London or Wall Street care to answer? Or can some politician responsible for bank regulation answer?
Of course they won’t answer because they can’t. Private banks favour private money creation because they profit from it. As to politicians, either they’re clueless on this issue, or like banksters, they also “profit from it”. That is, if you’re a politician looking to have someone pay your election expenses, some bankster will be only too happy to oblige: as long as you vote the right way on sundry banking issues.
Martin Wolf also tumbles to another point. As he puts it, “What makes this policy so powerful is the combination of fiscal spending with monetary expansion…”. That is, if a deficit is funded by new money, that by its very nature involves combining fiscal and monetary policy.
And he tumbles to something else. As he puts it, “This would require discussions between the ministry of finance and the independent central bank. So be it.”
However, Positive Money has thought thru that point much more thoroughly. As PM has explained over and over, cooperation between monetary and fiscal authorities would certainly be needed. In fact PM advocates the setting up of an independent committee specifically tasked with determining the amount of new money to be spent into the economy.
That is, under PM’s system the amount of new money to be spent into the economy (aka stimulus) would be determined by that committee. In contrast, strictly political decisions like what proportion of GDP was allocated to public spending, and how that was split between education, defence, etc would be left entirely with the electorate and politicians.


  1. "[A growing capitalist economy] requires, above all, a monetary and banking system that enables capital investment to increase in response to inducements, so as to generate the savings required to finance additional investment out of the addition to production and incomes. This is the real significance of the invention of paper money and of credit creation through the banking system. It provided the pre-condition of self-sustained growth."
    -- Nicholas Kaldor, "The Irrelevance of Equilibrium Economics", Economic Journal Dec.1972.

    Its very hard to imagine that this could be achieved with Positive Money's idea of a new undemocratic "Money Creation Committee" of technocratic "experts". Wasn't Alan Greenspan once considered to be a supreme expert?!

    Sure there is a problem now of how to regulate the current banking system.
    But how would you regulate PM's Money Creation Committee?

    1. I agree with Kaldor in that he is saying we need an efficient way of connecting savers / lenders to borrowers / investors. That’s one of the main activities of banks. Walter Bagehot pointed to the failure in his day of France to connect lenders to borrowers: that is the French tended to keep spare cash under their matresses.

      Re Kaldor’s “credit creation”, that’s more dodgy. If he is saying that private banks should be able to print money and lend it out, which is what banks currently do, then Positive Money would disagree and so do I. That is, I think money creation should be done only by the central bank.

      PM’s Money Creation Committee wouldn’t be much different from our existing Bank of England Monetary Policy Committee, or the Office for Budgetary Responsibility. Those committees are composed of suitably qualified individuals. Same goes for PM’s MCC. The design of the army’s next tank is decided by a committee, as is the design of the next power station. How else do we take these sort of decisions?

  2. In order to satisfy a rush of new orders by customers, I urgently need a short term loan. Under Positive Money's 100% reserve requirement demand banks don't make loans.
    Other financial institutions can't lend me the funds until they can attract more savings from the public or there are repayments of their existing loans.
    I can write to PM’s Money Creation Committee, but they won't lend to me directly and don' meet until next week or month. And when they meet, any decisions they make won't affect the economy for several months.
    This is no substitute for the flexibility of a bank overdraft facility.

    1. Fair enough question. My answer is thus.

      The fact of someone having an “urgent need” for a loan is not a reason to lend to them. A loan should be made if the borrower looks creditworthy. In fact if someone has an “urgent” need for a loan, that’s grounds for thinking they can’t manage their cash flow: a good reason NOT TO lend to them.

      But suppose the borrower really is creditworthy, it’s fair enough to point to the fact that preventing banks creating money out of thin air and lending it out puts a restriction on what they can lend. However, billions of pounds worth of loans are REPAID every week, so banks always have SOME MONEY to lend out, under PM’s system. All they’d do is award to loans to the most creditworthy or viable borrowers.

      You could argue that if a string of viable borrowers suddenly appeared one week that banks would have to turn some of them down. But given the tens of thousands of loan applications made every week, it’s a statistical near certainty that the number of viable applications won’t vary much from week to week.

    2. Good answer.
      But repayments of old loans won't cover the needs of a growing economy, and the Money Creation Committee's forecasts may well be wrong.
      However, this may not be such a terrible issue these days. Only a small proportion of productive investment is now financed by bank loans - most is financed by retained profits.
      Even so, I have greater trust in HMG Treasury than the "experts' in the BoE's Monetary Policy Committee or PM's Credit Creation Committee.


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