Sunday, 3 June 2018

Richard Murphy’s strange ideas on banking.

Richard Murphy takes issue with Positive Money today in an article entitled “It’s time the world’s economists woke up to reality.”

The article actually starts by linking (in the second para) to an earlier article of his entitled “Why Positive Money is wrong.” So I’ll start with that “linked to” article. Dealing with the latter article actually occupies most of space below. However, some of Murphy’s points in the more recent article are just a repetition of points in the earlier article, so to some extent dealing with the first article also addresses Murphy’s claims in the second. Also the first article is much longer.

Unelected committees.

His first objection to PM is: “I object to any unelected committee taking control of our economic policy. I object to the current sham of central bank independence and I object to alternatives to it. We elect governments to run economic policy and not unelected 'wise people' whose status may well be challengeable and most of whom will be slaves to some long-dead economist.”

Well Murphy’s first blunder there is his suggestion that PM’s “committee” would “control economic policy”. Had Murphy actually studied PM proposals he’d have discovered that PM propose the committee being limited simply to deciding how much money to create. I.e. the committee does not have overall control over the totality of “economic policy”.

Moreover, controlling the amount of stimulus the economy gets over the next six months or so is pretty much what the Bank of England Monetary Policy Committee (BoE MPC) DOES ANYWAY: i.e. the BoE MPC (as I’ve explained a dozen times on this blog) has the power to override what it sees as excessive fiscal stimulus. I.e. under both the existing system and under PM’s system, a committee of the latter sort has the final word on stimulus. Much the same goes for other nominally independent CBs.

Plus doubtless unbeknown to Murphy, Ben Bernanke gave his blessing to a PM type system under which a CB committee decides how much money to create, while politicians decide exactly how  to spend that money. See Bernanke’s para starting “A possible arrangement…”

And while on the subject of the rather large number of formidable opponents that Murphy has which he does not seem to be aware of, Keynes in the early 1930s in a letter to Roosevelt backed the idea of having government print fresh money and spend it in a recession: exactly what PM advocates. See Keynes 5th para.

Re what Murphy refers to as the “sham” of CB independence”, no one has ever suggested that so called “independent” CBs are totally and completely independent. Same goes for the Army, Navy, Oxford University, the National Health Service, you name it. That is, all entities which are funded or part funded by government or which are part of the state apparatus have a DEGREE of independence, and that degree of independence varies from country to country, and indeed varies within particular countries at difference points in time. E.g. Gordon Brown gave the Bank of England nominal independence in 1997.

In short, Murphy’s use of the word “sham” is itself a sham.

Something wrong with the 2% inflation target?

Murphy’s second objection to PM is: “I object to inflation being at the core of money policy. Of course it is vital, but most especially to the interests of those with wealth. The object of money creation should be to ensure that there is enough to create full employment and rising median wages.”

So what’s that supposed to mean? Is he saying we let inflation rip a la Robert Mugabe or what? He doesn’t tell us.

Note also that those first two objections by Murphy ARE NOT specifically PM policies: that is they are policies widely accepted in the economics profession. Thus so far as those two points go, Murphy is up against a much more formidable army of opponents that he realizes.

Indeed, Murphy’s opponents include several economics Nobel laureates: i.e. several Nobel laureates have backed full reserve banking which essentially what PM proposes.

What is money?

Murphy’s third objection starts, “this policy fails to understand what money is. Money is, in the modern world, simply a promise to pay.”

Well that’s news to me and news to dozens of central banks (CBs) around the world. For example BoE £10 notes say “I promise to pay the bearer on demand the sum of £10” (in gold presumably). But if you turn up at the BoE (or any other CB) demanding to be paid gold or anything else, you’ll be told to shove off, which makes a nonsense of Murphy’s “promise to pay”.

Next, Murphy says “So, governments create money when they promise to pay when spending…”. Nonsense! Governments (along with their central banks) create money when they pay – using money they’ve created on keyboards. Full stop.  There is no need for promises of any sort. Indeed, Murphy seems to admit much in his second last para where he says base money is created “by government spending”. Nothing about promises there.

Far from PM not “understand what money is”, it’s beginning to look like it’s Murphy who doesn’t understand. Anyway, to continue….

A couple of sentences later, Murphy says that PM claim “…there is something called 'central bank money' and that a stock of this can be created and distributed for use to banks.”

Well, again, it’s not just PM who claim there is such a thing as CB money: almost the entire economics profession makes the same claim! Yet again, Murphy criticizes PM for making a claim which is not specifically a PM claim, but which is rather one which is accepted by most of the economics profession.

Moreover, having suggested there is no such thing as CB created money, Murphy then says in his penultimate para that the commercial bank created money system could not operate without CB money (base money). Well unless my understanding of the English language and logic are severely defective, Murphy is saying that base money does actually exist!!!

As to the name given to CB created money it actually has several names (for some strange reason): those include “base money”, “high powered money”, “vertical money” and “sovereign money”.

Next, in the latter quote from Murphy’s article, he objects to the idea that base money can be “created and distributed for use by banks”.

Perhaps Murphy hasn’t heard of QE: a process that involves CBs creating money and using it to buy up government debt. That new money swells banks’ reserves, which puts them in a slightly better position to lend.

Note that I am not say QE is a particularly effective form of stimulus – I expressed doubts about its effectiveness about ten years ago when it was first mooted.

Should money be rationed?

Murphy’s fourth objection is that apparently under PM policies, money is rationed.  As he puts it, “the PM proposal rations money”. So money is totally unrationed under the existing system, or something?

Try going along to your bank and ask for a few tens of thousands. You’ll find they won’t let you have it apart from on VERY strict conditions, including most probably, the need for you to hand over the title deeds of your house.

Murphy’s main objection to rationing money is that “….the limitation on money availability constrains growth…”. Well of course rationing money can constrain growth, but PM advocate issuing ENOUGH base money to keep the economy at capacity: i.e. the level at which growth is as fast as it can be without giving us an unacceptable level of inflation.

In short, money creation under PM’s system DOES NOT “constrain growth” – unless the BoE MPC is less than entirely competent. But then the BoE MPC is doubtless less than 100% competent under the EXISTING system: i.e. growth is probably sometimes ALREADY constrained to some extent that committee.

Would Sterling be undermined?

Murphy’s fifth objection to MP is “PM would also hopelessly undermine the use of sterling. The reality is that people borrow and spend in sterling because they need to pay their taxes, and a banking system that can create credit to meet their needs lets them do so.”

Well the first flaw in that argument is that I doubt many people or firms outside the UK use Sterling to pay taxes. Certainly there is no need for anyone in the Eurozone to do so: they have Euros. Same goes for the US: they have US dollars. Same goes for China, Russia, Canada, India…..I could go on, but you doubtless get the point.

Moreover, not even in the UK is commercial bank created money any use for paying taxes!!!  The UK tax authorities just won’t accept it.

To be more exact, you can pay the tax authorities with a cheque drawn on Lloyds or Barclays if you like. But the tax authorities won’t accept it: what they do is to go running along to Lloyds, Barclays etc and demand base money instead of the cheque. That process of replacing commercial bank created money with base money takes place behind the scenes at the end of every working day at the BoE.

And finally in his last few sentences, Murphy suggests PM gets to grips with Modern Monetary Theory. Well that’s a laugh because PM and MMT have much in common. Indeed there’s an article on the PM site which argues that PM and MMT should join forces.

MMTers do not advocate full reserve banking, but they do tend to  claim that come a recession, the state (i.e. government and CB) should simply create base money and spend it. Indeed, one of the most common criticisms of MMT is that it is just Keynes writ large. But Keynes (as mentioned above) advocated “print and spend” as a cure for recessions: exactly what Murphy claims to oppose.

The word “schizophrenia” springs to mind.

Murphy’s second article.

One of the first claims in this article is that debt is inherent to base money which remember, according to Murphy, doesn’t exist….:-)

More specifically, he claims base money is of value because it is used to pay taxes. As he puts it, “A currency achieves that (i.e. “value”) by being issued into existence by a government that accepts it back in settlement of legally due tax obligations.”

Well it’s certainly true that throughout history there have been several examples of kings, rulers etc creating a form of money and demanding that taxes be paid in that form of money, or else you go  to prison or whatever. Needless to say that gives an incentive to obtain that form of money.

However, the latter threat is not ESSENTIAL in order for something to become the accepted form of money in a country or society or tribe. The evidence from history and from anthropologists is that an almost limitless number of items have served as money, and moreover, without any tax being collected! I.e. the above tax point certainly helps make a particular form of money the dominant form of money, but it’s not essential.

Accurate forecasting.

Next, Murphy claims CBs will not be able to accurately forecast the amount of money that needs to be created and spent. As he puts it, “it assumes that the central bank is capable of accurately forecasting this. I have to say I have absolutely no such confidence.”

Well is the EXISTING system much better in that regard? I.e. are CBs able to accurately forecast the best rate of interest for the next few months, or are finance ministers and politicians able to “accurately forecast” the amount of fiscal stimulus? Of course not!

Indeed, in that fiscal stimulus consists of government borrowing money, spending it and giving bonds to lenders, the Republicans in the US have proved themselves GROSSLY irresponsible and utterly dishonest. That is, when not in power a few years ago, they complained incessantly about excessive government deficits and debts (at exactly the time when a big deficit was needed to escape the recession). But now that they’re in power and the economy has recovered, which means a big deficit is not needed, they let the deficit go thru the roof. Moreover that’s nowhere near the first time Republicans have complained about deficits when not in power, only to implement record size deficits soon as they’re in power.

Plus the Tories in the UK have been up to similar trickery.

I’d rather see the Marx Brothers, Al Capone, the Simpsons and Laurel and Hardy in charge of the economy.

Excessive or too little credit.

Next, Murphy worries about whether there’ll be enough credit or too much credit under PM’s system. As Murphy puts it, “…it assumes that the market will adapt and that there will be no resulting shortages or excesses of available credit money for settlement of obligations due within an economy.”

Well firstly, it’s a bit of a joke to criticise PM’s proposed system for possibly creating too much credit given that the reason we had a bank crisis ten years ago was irresponsible credit creation by the EXISTING SYSTEM!!!

As for the idea that there’d be LESS CREDIT under PM’s system, there probably would be. I.e. I’d guess interest rates would probably rise a bit under full reserve banking, and for the simple reason that under that system, loans are funded via equity (or something similar) rather than by deposits, with taxpayers picking up the pieces when “deposit funding” doesn’t work, as it inevitably does with monotonous regularity. That is there have been bank crises roughly every 30 years over the last two centuries.

However, interest rates are currently at record lows, so a rise in interest rates by two or three percent would not be a disaster. Plus in the UK in the 1980s, those with mortgages were paying almost THREE TIMES the rate of interest they do nowadays. I didn’t notice the sky falling in the 1980s.

CBs  control credit???

In his final paragraph, Murphy displays a total ignorance of PM’s system (aka full reserve banking) when he suggests credit creation, i.e. loans, are controlled by the CB. As he puts it, “But handing all credit creation to the central bank is not only technically impossible in a modern economy, it's a dangerous folly.”

Under full reserve banking, commercial banks can lend any amount they want: it’s just that loans must be funded via equity and or relatively long term deposits.


  1. PM have actually changed tack on the full reserve banking isssue, in fact they are sounding increasingly more and like MMTers. This sounds more like a territorial spat like that between the Judean People's Front and the Peoples Front of Judea.

  2. Ralph, you say towards the end of an interesting commentary, that deposits fund loans! Surely that is incorrect? The double entry regime allows banks to create loans ad infinitum - and they appear to do just that and thus beget crises. As far as I, a purely layperson, am aware, this is common knowledge.

    There does indeed appear to be great alignment between MMT and PM, which must be good. I'd be interested to know what Bill Mitchell thinks about PM.

  3. Anon,
    We all hope, 'civil war' is pointless on this issue and the JG, UBI, LVT debate.

    Ralph actually says, 'Under full reserve banking, commercial banks can lend any amount they want: it’s just that loans must be funded via equity and or relatively long term deposits.' :)

    Crudely PM wants to turn banks into the 'loanable funds' institutions, that mainstream economics and voters think they are. To be fair to Murphy, he has come under fire for attacking this core unrealistic assumption. Critics recently jumped over him ,forgetting/overlooking that he was responding to Steve Keen making the point too. Keen's goal is to force realistic assumptions about finance into the economics mainstream.

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