Yves here. At the beginning of the week, we republished a post by Richard Murphy which gave a high level explanation of why the Swiss banking reform referendum is misguided.
Remarkably, the Financial Times’ Martin Wolf came out in favor of the Swiss referendum. Or maybe not. Wolf is prone to pump for ideas of his influential friends whether or not they are sound. On the one hand, that meant that Wolf was a forceful advocate of financial reform….because he was thick with the Bank of England’s governor Mervyn King, who was just about the only central banker to call out bank misconduct and push for reform (the Bank of England, along with the FSA, wanted big banks to be broken up along Glass-Steagll lines. The Treasury beat their proposal back to mere ring-fencing). On the other, he’s also staunchly defended Ben Bernanke’s self-serving claim that a savings glut, and not deregulation, caused the global financial crisis.
One of Murphy’s commentors, Marco Fante, who we also quoted, :
The question of who and what this Full Reserve Banking / Positive Money school represents is becoming very interesting….
I have suggested that the Vollgeld / Positive Money agenda effectively represented a revival of the Quantity Theory of Money and Milton Friedman’s Monetarism with an important difference/update/revision – being that the newer school recognise the importance of (private bank) credit money – and seek to eliminate it with extreme, austere measures.
I also said that that the abovementioned agenda appeared to recognise that debt-fuelled asset-price inflation was the Achilles heel of neo-liberalism: the de-stabilising factor, and that their proposals sought to rescue capitalism with a new and severe discipline,
These suggestions were consistent with the comments of Richard and some other regular contributors. They were also met with rebuke from Positive Money supporters who complained of being misrepresented and insisted that Positive Money are progressive, pro-fiscal and ‘more Keynesian than Friedmanite’
I’d like to believe them (honestly) but I am yet to be convinced, especially so when I see that they have rapidly gone from obscurity to eminence with the assistance of some strange bedfellows from the conservative financial press and European political elite.
My current sense is that the cognizanti on the left and right of politics know that neo-liberalism is terminal and that this new monetarism is becoming the Right’s preferred solution.
By Richard Murphy, a chartered accountant and a political economist. He has been as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of . He is a member of the Originally published at
Martin Wolf in which he argued that the Swiss should vote for monetary reform this weekend.
I have the dangerously oppressive nature of these reforms which would remove the right of commercial banks to create credit, and pass the whole responsibility for creating the country’s money supply to its central bank.
I have also drawn attention (which Wolf supports) in promoting this idea.
Wolf argues three things. The first is that bank failures cost us a great deal. He’s right: we know they do.
And he argues that reform has not happened since 2008. He’s right. But then, that created the absurdly feeble and slow-paced recommendations for reform that the Tories adopted, so I can lay part of the blame for that on him.
And third, he argues that in that case we have to do ‘something’. As he puts it:
I hope … that the Swiss vote in favour of the in the referendum on June 10. Finance needs change. For that, it needs experiments.
With respect: no we don’t need experiments. What we need is some recognition of the truth.
Let me first say what the truth is not. It’s not, as Wolf puts it, that we need to:
…make the system safer [by] strip[ping] banks of the power to create money, by turning their liquid deposits into “state” or “sovereign” money. That is the idea backed by the Vollgeld initiative.
Of this Wolf says:
An alternative way of achieving the same outcome would be via 100 per cent backing of deposits by claims on the central bank — an idea proposed by free-market Chicago School economists in the 1930s.
Actually, they’re the same, in effect. And that this is a Chicago School / Friedmanesque monetary policy is in their claim for this policy which said:
The central bank would be exclusively responsible for creating as much new money as was necessary to promote non-inflationary growth. It would manage money creation directly, rather than through the use of interest rates to influence borrowing behaviour and money creation by banks. Decisions on money creation would be taken independently of government, by the Monetary Policy Committee (or a newly formed Money Creation Committee). The Committee would be accountable to the Treasury Select Committee, a cross-party committee of MPs who scrutinise the actions of the Bank of England and Treasury. The Committee would no longer set interest rates, which would now be set in the market.
The central bank would continue to follow the remit set for it by the nation’s finance minister or chancellor. In the UK this remit is currently to deliver “price stability” (defined by an inflation target of 2%), and subject to that, to “support the Government’s economic objectives including those for growth and employment.” The inflation target acts as a limiter to stop the creation of money becoming excessive, but subject to that, the central bank is able to create additional money.
The objections flow, almost without limit.
First, this puts inflation at the core of economic policy. Put it another way, the interests of those who have money are prioritised. The 1% (or less) are favoured. Any other economic objectives, such as full employment, the creation of a sustainable economy, or the provision of high quality public services, are ignored. Money comes first.
Second, in the process Wolf, and those who promote this idea show that they have no idea what money is. Money is debt. It is only created by government spending and bank lending. It is literally the double entry that surrounds those two processes that create money: there has to be a debt and a creditor accepting obligation to each other for money to have value. But at the core of the Positive Money proposal, and at the core of what Wolf is suggesting, is the idea that you can, somehow, create and distribute money at the central bank as if it has some tangible real quality that simply does not exist. Quite literally printing a pile of cash does not create money: it only creates tokens that represent money. It is the spending of those tokens, and the government’s willingness to accept them in payment of tax, that creates value, which underpins the currency. This is why it is so important that counterfeit money is challenged: fake currency undermines the value of the real debt that gives money its value. And the token money that the Swiss proposal would create would be exactly the same: they would be a fake currency because there would be no debt, in the process the value of this money would be undermined, or even destroyed. That’s not an experiment anyone can want to participate in.
Third, the very real danger is that a central bank would underestimate the amount of money needed in an economy because their perpetual concern would be the risk of inflation meaning that they would always are on the side of caution. The consequence would be obvious: it would be perpetual underemployment, less than full capacity economic activity, the crushing of credit that creates business opportunity and indications this has the public services near-perpetual economic stagnation, if not the recession.
Fourth, give central bankers control of the money supply, and you can forget democratic control of the economy for evermore.
Fifth, since central bankers would also then control the ability of the government create money to spend on its own programs guarantee that this would also mean perpetual austerity, and enforced government balanced-budget, with all the crushing implications that this has the public services.
This, apparently, is what Martin Wolf wants.
And he wants this despite the fact that he, like Martin Sandbu, also of the FT, , knows that the reality of money. They know it is bank made. They know banks are not intermediaries. They know money creation is costless.
And yet they don’t want to use this knowledge to put money to use: instead they want to use it to constrain the use of money for the purpose of preserving wealth by promoting an idea that has banker control of inflation at its heart and which denies the very essence of what money is to achieve that goal.
There is an alternative, of course. It’s hardly even an experiment. It’s to simply use what actually happens for the common good, and that is modern monetary theory. As I have written recently:
As I explained in my Book ‘The Joy of Tax’, if a government with its own currency in which it requires settlement of tax liabilities wants taxation to be paid then it must first of all spend to put the currency in question into circulation. No other option is possible. It does, as a result, follow that tax does never fund government expenditure. Instead, that expenditure is funded by the creation of new money on the government’s behalf by the Bank of England, which it wholly owns. That the Bank of England can create funds in this way has been proven by the quantitative easing programme that has been in existence since 2009. £435 billion of new funds have been created by that programme without any cost to the taxpayer simply by the operation of double entry bookkeeping. The that this is the way in which banks, including themselves, can create new money in a paper published in 2014. The difference between new money created by government spending and taxation revenue received is at present made good by the issue of government bonds, although this is not strictly necessary: except for EU legislation that prevents direct lending from the central bank to the government that owns it this shortfall could, instead, be managed by an overdraft arrangement between the government and the central bank on which no interest would need to be paid.
The Bank of England might have acknowledged this reality, but as yet HM Treasury has not. The result is that is that it is not as yet acknowledged that the true role of tax in the modern economy (i.e. that where there is only a fiat currency, which has been true almost worldwide since 1971, at least) is to cancel government money creation for the purpose of controlling inflation. If this were understood there would be significant change in the way in which the government managed the macroeconomic environment in the UK.
We need no experiment. We just need to acknowledge this truth. And the fact that it puts employment and fiscal policy at the core of economic management.
We live in a dangerous time when the FT promotes a form of hardline, and deeply undemocratic monetarism.
It’s dangerous that some on the left have bought into Positive Money’s ideas.
The battle for money has begun. It is essential that it is won.