Thursday, 9 February 2017

Ann Pettifor says central banks don’t create money!!

To her credit, Ann Pettifor HAS GRASPED the point made by Keynes and which every MMTer understands, namely that deficits do not matter in a recession. She sets out that point in her book “The Economic Consequences of Mr Osborne”.  However, her grasp of other aspects of money is defective, to put it politely, if the talk she gave at the London School of Economics last night is any guide. The talk was entitled “The production of money: how to break the power of bankers”.

I’ll run thru one short passage of hers below, but note that this is a very rough and preliminary look at her ideas:  she has just published a book on this subject with the same title as yesterday’s talk, and the book will presumably set out her ideas in more detail. So I’ll review that in due course.

Anyway, well into the talk she says “So while all money is credit, and all credit is money, it is also the case that all money is debt, just as all obligations are simultaneously claims.” (That's at 35 minutes into this audio version of the talk.)

Er, excuse me, but trade credit is not money.

Trade credit is a debt owed by one non-bank firm to another, and the total amount is ASTRONOMIC: almost three times GDP in the UK.

Now there is no way you can use one of those debts to purchase your groceries or buy a car or a house. Thus trade credit is not money. AP continues…

“Now many of my friends in the monetary reform movement, especially those in the sovereign money movement, believe that debt and the power of the private bank system to create credit is a very bad thing. And indeed so it can be. If debts are allowed to expand beyond the capacity of debtors to repay, or even of the economy as a whole to repay, they become a burden round the necks of borrowers and countries.

But while banks have power over borrowers, and use inducements to flog loans, it is important to remember that it takes two to tango in this relationship.

Credit cannot be created till a borrower applies for a loan. There is always a counterparty when a bank or a shadow bank creates money, credit or debt. Private commercial banks cannot create credit or money out of thin air unless there are borrowers. Private banks cannot expand the money supply unless borrowers apply for a loan. In this sense it is the world’s borrowers, students, shopkeepers and governments who determine the creation of money, and whose borrowing expands or contracts the money supply. It is not as orthodox economists argue central banks that create the money supply.

While they are responsible for the issue of the currency, for minting and printing, and monitoring the value of the currency and using the bank rate as a tool, central bankers do not print the money supply. No, commercial banks working with their borrowers print the bulk of the nation’s money supply. As I said 95% in Britain and 99% in the US.”

So it’s not just “my friends in the monetary reform movement” who claim central banks create money: it’s now “orthodox economists” as well! Members of the monetary reform movement like Positive Money will be relieved to hear that! Or rather they won’t because they’re already aware of the point!

Next , it’s a bit of a self-contradiction to say “It is not as orthodox economists argue central banks that create the money supply” and then shortly thereafter say “commercial banks working with their borrowers print the bulk of the nation’s money supply.” Where does the rest, i.e. the “non bulk” money (to coin a phrase) come from? It comes from central banks!

Indeed, where does the money come from to fund the thousands of billions of dollars worth of QE that has been implemented in recent years? It comes from central banks!!

Moreover, Ann Pettifor’s “99% in the US” figure is way out, at least as far as the last few years are concerned. According to the Fed, the amount of base money (i.e. central bank created money) in the US has stood at around $4,000bn for the last couple of years. See chart below.

In contrast, the total money supply has stood at around $12,000bn. See chart below.

So central bank created money as a proportion of the total money supply in the US for the last few years would seem to be nearer 20% than Ann Pettifor’s 1%. Incidentally those figures are just a rough guide: there are several different ways of measuring the money supply. The total money supply chart above is M2 which is a popular measure.

Of course the effect of QE sticks out a mile in the above first chart.

But the really significant thing about the above first chart is that it demonstrates the validity of what “monetary reformers” and the “sovereign money” lot have been saying for years, which is that substantially increasing the proportion of the money supply that is central bank created is easily done, and increasing the proportion to nearer 100% would be equally easy.

Indeed, as Milton Friedman, one the several economics Nobel laureates who advocate the abolition of privately created money put it, “There is no technical problem in achieving a transition from our present system to 100% reserves easily, fairly speedily and without any serious repercussions on financial or economic markets.” 


  1. OK I will allow her that lending/borrowing is a two way sreet,it does take two to tango so blaming banks entirely is not totally fair.We can have today what we could not normally have afforded until tomorrow and many in society like that as it stands.However it was the sheer scale of the lending ,much of it on reckless property based loans, that was the problem.Every day folk are generally very bad at assessing what they can afford(risk) and often push their borrowings far too deep. Quite often in a vain attempt to keep up with the Joneses.Banks were supposed to be prudent,responsible and honest and not just join in with this kind of frivolity.Can we use any of those words about modern banks today?
    As to to regulators and central banks, where the heck were they?Trailing in the wake of private bank credit making machines, that's where.
    By orthodox economist I presume she means the Economic teaching profession which still teaches the incorrect Money Multiplier model of money creation to students.Something Positive Money has been saying is not what happens in the real world,banks make loans then look for deposits.They do not sit around waiting for depositors to come through a door and deposit money before making a loan
    She does seem way off on the 99% figure,be interesting to see where she get it from.99% or 95% does it matter really?

    1. Re the money multiplier, I don't think that's what's in her mind. I think it stems from her conviction that somehow only a debt that derives from a real transaction (e.g. sale of a house or groceries in a supermarket) constitutes money. I.e. she seems to think that if a central bank did a helicopter drop (say in the form of freshly printed £10 notes) that somehow those £10 notes are not money. Well as far as I'm concerned, the £10 notes that landed in my garden would be money. Still we'll get more details when her book arrives.


Post a comment.