Abstract. The main nonsensical claims made by Richard Murphy in his article are first that Positive Money wants a ban on all further increases in the money supply. Second he claims that neither Positive Money nor the Bank of England are aware the loans by commercial banks create money. Third, he objects to the fact that nothing is done with reserves at the BoE, i.e. he objects to the fact that those reserves are not for example loaned out by the BoE.
This article of his contains blunder after blunder. It’s entitled “Positive Money and the Bank of England are completely wrong….”. Apologies for the length of this article, but the sheer number of blunders will take time to address.
In reference to Bank of England proposals on Central Bank Digital Currency (CBDC) he says in his second para: “Quite staggeringly they (Positive Money) are using this proposal to demand the end to the right of private banks to create money, and as I note below the Bank of England will not want to take on that role.”
Actually the Positive Money article to which Murphy links in his 3rd para does not “demand” an end to privately created money (although PM do advocate such a ban). The PM article simply refers to the claim by a senior BoE official, Andy Haldane, that CBDC may herald the end of private money issuance, which is a fair enough point.
Next, Murphy seems totally unaware of the fact that PM is nowhere near the only lot to advocate the latter ban. That ban has been or is supported by a good sixty economists (including a clutch of Nobels). There's a list of those sixty here. The proposal to ban privately created money goes by various names: “full reserve banking”, “100% reserves”, “narrow banking”, etc.
Having said that numerous economists and groups advocate banning privately issued money, I should qualify that by saying the objective is actually to ban “privately issued and state backed” money (backed via deposit insurance, bank bail outs, etc). In contrast, there is privately issued money which is NOT state backed and which is thus clearly not entirely safe: e.g. Bitcoin. Indeed, there are any number of not entirely safe forms of privately issued money. At a stretch, you can use a bottle of whiskey as money, or at least you can try. Banning ALL FORMS of obviously dodgy money would be near impossible. But as long as everyone knows the risks (which in the case of Bitcoin they do), I don't see the much harm in those strange privately issued forms of money, though things are moving fast in this area and need watching.
PM advocates a ban on all new money?
Next, there's Murphy's claim that “ what Positive Money are proposing is that we crash the economy by denying it access to any new money.” Total nonsense. Under full reserve, as proposed by PM and dozens of others, the economy is not denied access to new money. The proposal is (to repeat) that the only form of totally safe money should be state issued money (which can be increased annually, as clearly explained by PM, by whatever amount government and central bank think appropriate.) There is no plan to ban all increases in the supply of money!!
Next, Murphy says “That is to say that we already have a digital currency in the UK. Your bank account is already part of a wholly digital currency system. So, there is no obvious need for a CBDC unless it does something better than your existing bank account or existing money can do.”
Well as anyone who has been more than half awake for the last year or so knows, the Chinese have actually implemented CBDC on a small trial basis. Plus central banks the World over are actively considering the idea. For example the Bank of England's latest proposals are here.
Plus Martin Wolf, chief economics commentor at the Financial Times says the Bank of England needs to get a move on with this. But no doubt Murphy thinks he knows better.
Wolf's reason (if I've got him right) is that numerous private operaters are forging ahead with CBDC like bank accounts: so called “stablecoins”. Thus central banks need to get a move on and set up their own stablecoin type accounts (i.e. CBDC) for those who want that. Plus central banks need to get a move on with regulating stablecoins, which is one of the main issues addressed in the latter BoE work.
Moreover, the brute fact of the matter is that people and money are moving into stablecoins in large amounts. If that's what the customer wants, then who is Murphy to deny them what they want?
Next, Murphy says “Then let me as clear as it is possible to be: no one, anywhere, has yet found any evidence that a so called digital currency of any form can do that.” (He's referring to CBDC “doing better” than existing bank accounts.
The answer to that is that the above mentioned Bank of England discussion paper cites at least a dozen ways in which CBDC might (at least in the eyes of some account holders) be better than existing bank accounts.
Seven arguments against CBDC.
Next, Murphy lists a number of reasons why he thinks CBDC would actually make people worse off.
The first is that he doubts BoE CBDC accounts would offer overdrafts. Well what of it? Some people don't want overdrafts. I haven't had one for twenty years!!
Plus the UK's government run savings bank, National Savings and Investments does not offer overdrafts. But millions of people have accounts there!! If that's what people want, why shouldn't the “consumer be sovereign”? Why not let people have what they want?
Murphy's second reason is that BoE CBDC will not offer credit cards. That's really the same as his point No.1 just above, and my answer is the same.
Murphy's third reason is just more of the same: he says BoE CBDC will not suit those with “chaotic financial affairs”. Well probably not: in other words BoE CBDC will probably not give overdrafts to those who cannot organise their affairs. But that's not a brilliant reason for denying the bulk of the population whose affairs ARE ORGANISED the type of bank account they want.
Murphy's fourth point is yet more of the same. This is getting tedious. He points out yet again that BoE CBDC won't offer overdrafts.
His fifth point is that what BoE CBDC offers essentially is a savings account on which customers can draw the digital equivalent of a cheque, making those accounts a form of current account (“checking account” in US parlance).
Well true. But that's what a significant proportion of the population want!! That's why billions have been deposited at National Savings and Investments.
In his sixth point, Murphy says “Nor is anyone discussing what the Bank of England might do with the funds deposited with it. That is the most massive going flaw in their whole paper - and in Positive Money's response to it.”
That point nicely illustrates Murphy's non grasp of how banks, commercial and central, work. The quickest answer to his “do with the funds” point is that central banks AT THE MOMENT do not do anything with the funds deposited with them. That is, reserves (i.e. base money) held by private / commercial banks are AT THE MOMENT deposited at the central bank - where (Murphy will be horrified to learn) those funds do not do anything – apart from earning interest for commercial banks. But the latter point is not of great relevance here.
Why central bank created money does nothing.
The actual reason central banks do not “do anything” with reserves, i.e. state created money, lodged at central banks is that central banks and governments have decided that central banks should play a SOCIAL role in the form of trying to create the optimum amount of a country's basic form of money, i.e. base money / central bank created money. And they have deliberately decided to abstain (rightly or wrongly) from COMMERCE, i.e. lending out money to mortgagors, corporations etc except in that they can play a social role by buying corporate bonds with a view to enhancing QE and raising demand.
I.e. obtaining a stock of that basic form of money and levering it up into a larger amount of money is a job governments wish to leave basically to COMMERCIAL banks.
The BoE doesn't know private banks create money??
In his seventh point, Murphy puts his foot right in it when he says “neither Positive Money or the Bank of England (based on some of their comments on their website in this proposal) seem to be aware that savings are not what creates the UK money supply. The UK’s money supply is created by lending.”
Er – actually one of the main points in a BoE article “Money creation in the modern economy” published a few years ago was PRECISLY that commercial banks create money when they lend (a point that Positive Money had been making for YEARS beforehand.) Indeed Keynes made that point in 1920s/30s in his book “Treatise on Money” as did Josiah Stamp, governor of the BoE in the 1920s. Plus David Hume made the point 300 years earlier.
Even more hilarious is that that BoE paper has been cited three hundred and seventy times. See here. In short, the entire World seems to be aware of that BoE paper apart from Murphy.