Wednesday, 2 July 2014

Randall Wray’s latest ideas on debt-free money.

Randy’s latest article on full reserve, Positive Money, etc is entitled “Debt-free money: a non-sequitur in search of a policy”.
The University of Missouri at Kansas City blog where the article appears often doesn’t publish all comments that are critical of their articles, which is one way of – er – “winning the debate”. Or perhaps they don’t publish all my comments because I leave too many. Whatever the reason, I’ll deal with Randy’s article here. The article is about 3,500 words: too long to reproduce here. However, the article boils down to a few very simple points, so I’ll summarise and deal with those points, and deal with a couple of mistakes in the article.

Randy’s first mistake is where, in reference to Positive Money’s proposed committee that decides on stimulus and how much money to create and spend into the economy, he says, “Second, I like highly decentralized and mostly small, heavily regulated and supervised, community lenders making decisions over how much lending and whom to originate loans for.”
Well that’s exactly what advocates of full reserve, Positive Money included also advocate!  At least they have no objection to lending in town X be decided for the most part by the banks which have a presence in that town.  Randy seems a bit confused as to what full reserve consists of.

Is base money a debt?
Next, Randy expends about 2,000 words making the following  points. First, commercial bank money is a debt. Indeed we’re all agreed on that. That is, as MMTers themselves often point out, commercial bank money nets to nothing. That is, for every dollar of such money, there is a dollar of debt . Positive Money also constantly bangs on about that point.
Second, Randy claims that base money is also a debt in that it can be used to cancel out an equal and opposite debt: taxes owed to government. As he puts it, “If you cannot redeem the token for . .  the taxes you owe, why would you want it?”
Thus, so he claims, there is no such thing as debt-free money. Well the flaw in that argument is that THERE IS a reason for people wanting to hold the state’s money other than for the purposes of paying taxes: it’s the simple fact that money is useful stuff. It’s useful for doing business.
That is, if government demanded no taxes at all, there’d still be a demand for its money because (to repeat) money is useful. And with a view to making sure its money was the dominant form of money, government could make its money the only form of legal tender (something governments actually do in the real world).
Conclusion so far: base money can be regarded as a debt, but it’s equally legitimate to regard it as being debt-free.
Indeed there are several examples, real or hypothetical, where base money is debt free. On a desert island where cowrie shells were the accepted form of money, that money would be debt-free. Same would apply in an economy where gold coins were the accepted and dominant form of money (assuming the face value of the coins was equal to the value of the metal content).

Abolish government debt?
The final mistake of Randy’s that I’ll deal with is where he says “The “debt-free money” cranks seem to hate payment of interest by government.”
Now that’s news to me. Positive Money certainly wants to see the national debt reduced, but that’s hardly a controversial idea. Everyone from the IMF to the OECD to Rogoff and Reinhart wants likewise.
Incidentally the MMT take on that point is much simpler and at the same time more sophisticated. MMTers claim that “private sector net financial assets” (which consists of base money plus national debt) should be enough to induce the private sector to spend at a rate that brings full employment. Ergo reducing the debt for the sake of reducing it is daft. And as to how much PSNFA should consist of debt vis a vis base money, that’s a subsidiary point. But that leads nicely to my next point.
Even if the “monetary cranks” do “hate payment of interest by government”, they’re not alone.  A leading MMTer, Warren Mosler, also advocates a system where government does not pay interest: i.e. doesn’t have any debt. See 2nd last paragraph here. And incidentally Milton Friedman advocated the same – see para starting “Under the proposal..”, p.250, here.
So (to repeat) even if those Positive Money “cranks” do “hate payment of interest by government”, they’re not alone in that hatred.


  1. Does it matter if money is "debt-free" or not? Maybe this is just semantics?

    For me the much more important part of Prof. Wray's new post is a few paragraphs near the start. Here he clarifies his position regarding Full Reserve/narrow banking. The biggest problem for Full Reserve banking advocates seems to be the strange views of Positive Money.

    Wray now says:
    1. "I’m not against the narrow banking proposal, in general".
    2. He prefers a Postal Saving System.
    3. He regards Positive Money as a "crank", but is open to persuasion.
    4. His main objection to Positive Money is the idea of "centralized committees headquartered at the thoroughly undemocratic and inflation-obsessed central banks."
    Instead of centralized committees Wray likes "highly decentralized and mostly small, heavily regulated and supervised, community lenders making decisions over how much lending and whom to originate loans for".

    Positive Money's advocacy of a new centralized committee is thus the big stumbling block for Wray, and also for many others.

    There are already established procedures and committees which determine macroeconomic policy, including the fiscal policy.
    There is no lack of "experts".
    And the system is "democratic" in that the government is answerable to Parliament and thence to the electorate.
    So why do we need yet another committee?
    And why at the central bank of all places? The CB has an implementation and advisory role in monetary policy, but why extend this to fiscal policy?

    1. KK,

      Thanks for your detailed thoughts. Re your point No.1, Wray seems to have shifted his ground. I got the impression he was flatly against anything resembling narrow banking or full reserve up to a few days ago. Now, as a result of the recent debate, he seems more favourable to the idea. But I may be wrong there.

      Re 2, and the “postal system” that essentially comes to the same thing as the money transfer system advocated by PM and other full reservers. Only difference is that everyone would have to set up a new account at the Post Office, whereas under PM’s system they can use their EXISTING bank. The latter strikes me as simpler for customers. In contrast, there isn't so much difference between Wray’s money transfer system and Milton Friedman’s or Laurence Kotlikoff’s full reserve systems. That is, both the latter involve everyone setting up new accounts.

      Re 3 and his claim that PM is “crank”, there is a very simple answer to insults: just return them. As you doubtless noticed I published a post a few days ago entitled “Randall Wray’s crank ideas on the Chicago Plan”.

      Re 4, you ask “Why do we need yet another committee”. The answer is: “We don’t”. That is, PM’s money creation committee would REPLACE existing central bank committees: it would not be in addition to CB committees. Moreover, in a country where there is a fiscal responsibility committee of some sort (as in the UK and US), PM’s committee would replace that as well. So on balance, that’s one LESS committee, not one more.

      Your final sentence asks what the point is of merging fiscal and monetary policy. It strikes me that the arguments for and against that merge are actually SEPARATE from the arguments for and against full reserve. However, PM are not the only lot in favour of that merge: most MMTers seem to be as well (and Wray is an MMTer). That is, MMTers tend to claim that in a recession, the authorities should simply create new money and spend it, and/or cut taxes. That proposal amounts to merging fiscal and monetary policy. I’ve actually written several blog posts in favour of the merge. E.g. see:

  2. The existing macro policy system may have imperfections but it does work and It is very doubtful whether replacing it with a new Positive Money committee would be any better.
    The case for Full Reserve banking does not depend on this issue. So it would be better to leave it aside.

    1. The simple statement that an existing system “may have imperfections but it does work” is a complete non-argument.

      The system for powering ocean going ships 200 years ago (i.e. sail) “did have imperfections but it did work”. Was that an argument for not replacing it with steam engines?

      “The case for Full Reserve banking does not depend on this issue.” What issue?

  3. Apologies for not being clear.
    The issue is "Do we need to change the institutional and political arrangements for determining and implementing macroeconomic policy?"
    PM wants a new committee of experts.
    I (and Wray?) are saying "if it ain't broke don't fix it".
    Isn't Full Reserve banking possible with existing (or perhaps sightly modified) CB and government arrangements.
    If so, is it wise to provoke a hornets' nest of objections by raising complex peripheral issues regarding committees and institutions?

    1. Good point. Yes, it would be possible I think to have full reserve while maintaining the existing distinction between monetary and fiscal policy: i.e. have government / treasuries / politicians responsible for fiscal, and central banks responsible for monetary which is the present set up.

      However, MMTers (of which Wray is one) tend to believe in merging monetary and fiscal policy: i.e. in a recession, they tend to say that the authorities should simply create new money and spend it, and/or cut taxes. And that “merge” inevitably involves some sort of committee deciding how much money to create and spend, while politicians still decide the strictly political stuff, like what proportion of GDP is allocated to public spending and how much of that goes on defence, education, etc. I’ve actually done a few blog posts on that merge:


      Alternatively, in a merged system, one could have politicians making the decision that the latter committee makes, but that involves giving politicians access to the printing press. And we all know where that tends to lead to.


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