Friday, 8 June 2018

Jo Michell’s ideas on Vollgeld / Sovereign Money.

Jo Michell is an economics prof at the University of the West of England. I have plenty of respect for him.

He has recently produced three fairly short videos about Vollgeld / Sovereign Money (V/SM). They’re each about 10 minutes.  If you go to the latter link, note that the FIRST video is the 3rd one shown at the link: a bit confusing, but never mind. Also, underneath each video there is a transcript.

One point where I agree with Michell (which does not actually feature in these videos far as I can see) is that in the past he has criticized Positive Money (which supports V/SM) for getting environmental matters mixed up with the V/SM question. I agree with Michell there, as do some of the PM supporters in my area.

Of course being concerned about the environment is very much flavour of the month, thus to boost your cause in the eyes of less intelligent self-styled “progressives”, it’s important to put on a display of being concerned about the environment. Certainly the environment is an important matter, but actually proving there is a connection between the V/SM question and environmental matters is a separate issue, and I think Michell is right to accuse PM of having failed to prove the connection.

The first video.

I have no quarrels with the first video. It’s a good introduction to the subject, except to say that videos are not a good forum for dealing with technical issues like V/SM where the exact words and language used are very important. Put another way, I can spot a number of errors which are of the “slip of the tongue” type. But I’m concerned about FUNDAMENTAL errors rather than nit picking.

I have no quarrels with the second video either. In this video (among other things) Michell takes issue with the claim by PM that the existing bank system sucks money out of the real economy. PM’s argument is that since commercial banks create a debt whenever they create money and charge interest on that money, everyone has to pay interest just for the privilege of being able to get hold of money.

I actually criticized that PM claim a few months ago on this blog. My basic point is that when simply creating money, commercial banks do charge for ADMINISTRATION COSTS (which is certainly a flaw in having those banks create money), but they do not, strictly speaking charge interest. However, clearly they do charge interest for loans. But then they’d do that under a V/SM system. (Bit convoluted that: you may need to read the latter article to get the point.)

The third video.

The third video is where the serious errors are. First, Michell claims that V/SM is close to Milton Friedman’s monetarism, a claim also made by Ann Pettifor. In fact there is a big difference between the two.

Friedman advocated the same unvarying increase in the money supply each year, because he though (not unreasonably perhaps) that central banks and governments were so incompetent that they should have no discretion in this area.

In contrast, V/SM claims that central banks and governments should have much the same discretion as they do at present when it comes to deciding how much stimulus to impart.

Another weakness in the latter “similar to Friedman” idea is that the form of stimulus we have implemented over the last 5 years or so actually comes to the same thing as stimulus V/SM style. That is governments have borrowed, spent the relevant money and given bonds to lenders. Then under the guise of QE, central banks have printed money and bought back those bonds. That all nets out to “government and central bank print money and spend it, and/or cut taxes”, which is what V/SM proposes. But strangely we’ve heard to “similar to Friedman” complaints about that.

Moreover, in the early 1930s, Keynes advocated “print and spend”. I do not recollect any complaints to the effect that Keynes was a Friedman style monetarist.

However, Michell’s most important error comes in this sentence:

“Because the sovereign money proposal to strip the banks of the power to lend to bring money creation decisions into the hands of the government feels to me like a policy that kind of restricts growth of credit…”

Well V/SM just doesn’t “strip” commercial banks of the power to lend. They can lend as much as they like, or as much as they think is warranted by the availability of credit-worthy borrowers. The big difference between the existing system and V/SM is that under the latter, loans must be funded via equity or relatively long term deposits which can be bailed in if a bank fails.

Michell does not seem to understand that BASIC element of V/SM.

Also the phrase “feels to me like a policy that kind of restricts growth of credit” is sloppy. But that’s what happens when you try to deal with difficult technical subjects in video interviews.

Milton Friedman and Lawrence Kotlikoff advocated that under V/SM loans should be funded just by equity, whereas PM goes for the mix of equity and long term deposits.

And finally, re the latter “restricts growth of credit” V/SM certainly could result in interest rates rising somewhat: those supplying equity could be argued to run a bigger risk than depositors, though if banks are charged the full cost of deposit insurance which they certainly should be, it is not clear that the TOTAL cost of supplying equity to a bank is much different to cost of supplying deposits.

Moreover, interest rates are currently at a record low, thus a rise in interest rates would do little harm. Indeed, all the world and his wife is complaining about the excessive levels of lending, borrowing and debt that stem from low interest rates.

Plus in the 1980s, mortgagors in the UK were paying almost three times the rate of interest that they do nowadays. I do not remember the sky falling in in the 80s, nor do I remember the streets being lined with homeless folk who could not afford mortgages.

As for any deflationary effect of the latter possible rise in interest rates, that is easily countered with a dose of “print and spend”.


  1. Most criticism of V/SM are simply because the person making then has not read the proposals thouroughly.

  2. I do like this post and it will be a useful reference, as you lay out all the pros and cons quite cleverly.
    I think I have spotted one typo though.
    " But strangely we’ve heard to “similar to Friedman” complaints about that."

    Should that not read "But strangely we’ve NOT heard “similar to Friedman” complaints about that."


Post a comment.