Richard Murphy’s grossly incompetent criticisms of Positive Money.

Murphy in this article (entitled “Why Positive Money is wrong”) lists six objections to the basic idea which PM has always advocated, i.e. full reserve banking (aka “Sovereign Money”). To call Murphy’s article “inane drivel” would be far too flattering, as I show in the paragraphs below. 

His first objection is as follows (I’ve put all quotes from his article in green italics):

“First, 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 first, it is totally absurd to suggest PM claims an “unelected committee” should “take control of our economic policy”.  PM literature is very clear that the unelected committee (which could be a central bank committee, e.g. the Bank of England Monetary Policy Committee) decides just one item: the total amount of stimulus to be implemented over the next few months.

PM very specifically states that that committee does not decide the nature of that stimulus: e.g. whether it should come in the form of tax cuts or increased public spending. Nor does it decide the exact nature of those tax cuts or the type of public spending to be increased. In short, it is pure nonsense to suggest, as Murphy does, that PM claims the latter committee should decide all aspects of economic policy.

Next, as regards the “sham of central bank independence” anyone with half a brain has tumbled to the fact that there are all shades of grey between a genuinely independent central bank and a central bank which has no independence at all.

But that lack of total independence possessed by central banks does not mean there is no discussion to be had on exactly what decisions are best left to a central bank, and what decisions are best taken by politicians. The fact that universities, the army, navy, airforce, state schools, state owned hospitals (I could go on) are not totally independent  of central  government does not mean there is no discussion to be had on what decisions should be left to those state owned and funded institutions.

Incidentally Ann Pettifor, whose ignorance matches that of Murphy’s on the above topics, makes much the same mistakes that Murphy does. 


Inflation.

Murphy’s second objection is as follows.

“Second, 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. Since the only inflation that money creation policy can control will not happen until there is full employment making inflation the target is to get every priority wrong in that case, and to put the interests of capital over those of labour. And that's not what any progressive should be doing, in my opinion.”

Well the answer to that is that inflation is already very much at the core of money policy. As every ten year old probably knows, when inflation rises about the 2% target, the normal expectation is that the central bank will raise interest rates so as to counter that inflation. Thus the above “inflation” point is not a specific PM point!!!!


What is money?

Murphy’s third objection to PM reads as follows.

“Third, this policy fails to understand what money is. Money is, in the modern world, simply a promise to pay. It comes into existence when that promise is made. It ceases to exist when it is fulfilled. So, governments create money when they promise to pay when spending, and fulfil that promise when accepting the money that they create as payment for tax. And bank borrowers create money when promising to make payment of loans, and do so then they repay them. Conversely, banks promise to pay in the future when accepting net deposits: they say they will recreate the money when returning it. But in each case there is no physical thing called money. There is just a promise. That's all. But Positive Money do not appreciate that. They are saying there is something called 'central bank money' and that a stock of this can be created and distributed for use to banks. This is simply untrue: unless there is a promise to pay there is no money and you cannot distribute promises that do not exist between parties that are unaware that they might make them. The Positive Money idea is not possible unless the fourth objection applies.”

Well now, there’s a slight problem with Murphy’s definition of money, namely that it bears no resemblance to the definition found economics text books and dictionary of economics. The normal text book or dictionary definition is something along the lines of “anything widely accepted in payment for goods and services or in settlement of a debt”. Certainly my Oxford Dictionary of Economics says nothing about Murphy’s “promise to pay”.

But on the subject of “promises to pay” it is certainly true that commercial bank created money is a promise to pay central bank money: witness the fact that if your account is in credit at your commercial bank, you can go to an ATM and withdraw £10 notes, $100 bills etc, which are of course issued by central banks. 

But in what sense is central bank money a “promise to pay”? It’s true that £10 notes say “I promise to pay the bearer on demand the sum of £10”. (“I” presumably being the governor of the Bank of England).

But that promise to pay is simply a leftover of the days (well over a hundred years ago) when banks had to supply £X of gold to any customer who wanted gold in exchange for £X worth a paper notes. That promise is a complete farce nowadays.

So what is this “promise to pay” that Murphy refers to in relation to central bank issued money?  He says “So, governments create money when they promise to pay when spending, and fulfil that promise when accepting the money that they create as payment for tax.”

So apparently when government orders tanks for the army or a new stretch of motorway, it gives the supplier of those items some government / central bank created money, but that according to Murphy does not constitute payment!!!  Well assuming (for the sake of illustration) the payment took the form of wads of £10 notes, suppliers of the above items would very definitely regard that as payment.

Indeed, central bank money (whether in digital or physical form) is what is known as “legal tender”: that is, the relevant creditor cannot by law refuse to be paid with that form of money, and cannot by law claim, after payment has been made, that payment has has not been made!!

Thus Murphy’s claim that when government “spends” government / central bank created money, that payment has not been made is pure unadulterated nonsense. (Incidentally Ann Pettifor is under a similar if not identical illusion: she claims central bank issued money, e.g. £10 notes, is not a form of money unless recipients of that money supply the central bank with collateral.)

Moreover, what’s “payment of tax” ‘got to do with it? Any particular tranche of government / central bank created money may of course subsequently be used to pay tax. But equally it may not: witness the fact that the stock of government created money in the hands of the private sector has risen by unprecedented and astronomic amounts in reaction to the 2007/8 bank crises, and more recently in reaction to the Corvid virus crisis.

Next, Murphy says Positive Money claims “….there is something called 'central bank money' and that a stock of this can be created and distributed for use to banks. This is simply untrue.”

Whaaat? Far as I know about 99% of economists accept that there is such a thing as a “helicopter drop”: i.e. it is perfectly possible for government and/or central bank to create money at will (base money to be exact) and distribute it as they please.

If Murphy thinks those 99% of economists are all wrong, perhaps he could go into a few details on exactly why.


Rationing money.

Murphy’s fourth objection is that Positive Money proposes “rationing” the amount of money. Well shock horror: I have news, which is that the supply of money always has been rationed. Or do you really want a system where the supply of money is almost completely unrationed as per Weimar Germany or Robert Mugabe’s Zimbabwe?


Conclusion.

Well that’s about it. I can’t be bothered with any more of Murphy’s nonsense.