Friday, 20 March 2015

Revelation: central banks can print money.

Positive Money has just produced this paper entitled "Would a Sovereign Money System be Flexible Enough". The paper deals with full reserve banking: that's a system where private banks cannot "print" or create money - only the central bank is allowed to. Certainly I see no reason why the profits derived from seigniorage (aka money printing) should be captured by private banks. 

The paper refers to a mysterious critic of PM’s ideas who claims that a Sovereign money system would result in “a shortage of money, high unemployment and low economic activity..”. But the critic is not actually named. Well after approximately 30 seconds of Googling, I tracked down the offender: it’s Ann Pettifor.

Tee hee.

Evidently Ms Pettifor hasn't tumbled the fact that the UK’s finance minister at the height of the crises, Alistair Darling, created £60bn of sovereign money (aka base money) at the click of a computer mouse for the benefit of two failing bank. Plus she is presumably unaware that the British state created vastly more than that amount of base money (also at the click of a computer mouse) to fund QE.

Lack of flexibility - my ar*e. Under a Sovereign money system, government and the central bank would have no more difficulty implementing stimulus (via creating and spending base money) than implementing the right amount of stimulus under the EXISTING system.

22nd March 2015.  On closer inspection I see the paper DOES ACTUALLY mention Ann Pettifor. Sorry about that mistake.


  1. "The paper deals with full reserve banking" .
    No it doesn't. Rather it proposes a very inferior version of full reserve banking as a means of controlling the money supply.
    And the paper completely fails to deal with concerns about flexibility. It is the opposite of flexibility to propose that the Central Bank might be able to assess the credit and economic worthiness of loans to businesses instead of local bank managers in the present banking system.

    If one follows Abba Lerner's principles of functional finance and MMT, the quantity of money should not be a policy target in the manner suggested by Positive Money. Indeed, the quantity of money is of little interest, being merely the outcome of Government fiscal policies achieve growth and full employment, coupled with monetary policies to achieve the target rate of interest.

    Full reserve banking is desirable in my view for the reasons often discussed in Ralphanomics. And it is fully compatible with Functional Finance. In contrast, Positive Money's focus on controlling the money supply is utterly incompatible with Lerner and MMT.

    Regarding flexibility, with full reserve banking finance firms and investment banks would quickly adapt to supply the financing needs of potentially profitable businesses. And the total supply of credit would respond flexibly to general prospects for profitability through international capital movements.

    1. KK,

      Thanks for that. I just assumed after a very quick skim thru the Pos Money work that my thinking was in line with theirs. I'll have a more detailed look at it and leave a comment here in a day or two.


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