Positive Money – a good campaigning organisation, but with a missing link

‘Positive Money’ have a decent idea. Money should be created with the consent of the public. Governments that have served the financial sector must look instead to serve the public.

In this endeavour they want to set up a commitee to create it – rather like a Monetary Policy Commitee with extra powers, although in this case directly answerable to Parliament.

They point out that creating money is absolutley essential to society. It is.

And at the moment the big banks that create about 90% of it are self serving and do not have any view of how they should serve society. True again.

There is little doubt that Banks tend to create crises because they are so all embracing – every financial possibility is considered to be also their interest. The ill conceived idea that they should be kept absolutely as they are is rather like planting one variety of potato and supposing that blight will affect only an infinitessimal amount of the crop. You’d have to be delusionally confident or else just simply lucky. This is not a policy.

So Positive Money suggest that creating money should be considered one of the ‘separate’ powers:  Legislature, Executive, Judiciary  – and Money Creation.

This is certainly an arguable case.

So create the money independent of private PLC banks. Itself an interesting idea.

But if money creation is a separate power shouldn’t taxation be a separate power too? Or is there too much concentration on the money creation at the expense of the money destruction?

Should we further revise the Separation of Powers to give us the Legislature, Executive, Judiciary, Money Creation, and then also Money Destruction (this means, in effect, Taxation).

Yet shouldn’t the Department of Money Creation and Department of Money Destruction -surely basically the same department, perhaps be merged?

If they should, then surely we end up with Parliament? They’re in charge of tax and spend – or as we now know, spend and tax.

Parliament’s members are the people who really need to know where money comes from.

Positive Money propose doing another survey of MP’s, which is certainly good news, but is it not also time for an Ofsted style report on all prospective MP’s? Surely if MP’s are unaware of where the nation’s resources come from they shouldn’t be allowed to stand?

And of course Positive Money need themselves to understand that ‘Positive Tax’ is their corollary and also equally essential –indeed perhaps  more so.

 

Comments

  1. Charles Adams -

    I do not really agree with positive money that banks should just become intermediaries, but they have done a lot of good work raising the issue of money creation.

    I think it is ok for private banks to create money, it is a service, and the mechanism of debt tensions money creation to real economic activity. But with that freedom comes responsibility. The problems arise if private banks become too big to fail. Too big to fail banks lend irresponsibly because they can walk away with the profit while the rest of us pick up the bill for the bad loans.

    The Thatcher Reagan deregulation of the 80’s let the finance sector run riot and led directly to the global financial crisis. The bankers claim it is better now but I am not convinced. We need to break up large banks and keep the risky investment banks separate from consumer banks. No bank should be sufficiently large that its failure is a systemic risk to the whole economy. I would not take away their right to make loans and thereby create wealth, but they should carry the full risk and not offload it onto to the collective – that is crony capitalism.

    1. Peter May -

      Entirely agree.
      I dread to think of the machinations of an all ecompassing money creation administration choosing between lending the Dog and Duck money for expansion and leasing to the local coach firm for a new vehicle. Because of the democratic accountablity it would be bound to fall into the same problems as the bank of Bournemouth (now deceased for exactly this reason).
      I think Richard Werner’s ideas that commercial banks should be ‘directed’ to lend to certain economically beneficial categories, and if they don’t the loan contracts would simply be unenforceable, is more than adequate. And as you say, the banks risk of failure should be asbsolute for their sharehoders – which is why when Positive Money say the bank payment system should be under BoE control I think they have a point.
      I agree too that investment banks neeed to be completely separate. But we also need more banks and particularly local ones. The market needs to be diverse. And I think the government should also be prepared to do more spending money into existence. I know that affects the pension industry – but, in due course that could change.
      And meanwhile, pension bonds could be issued for specific purposes – railway electrification springs to mind – in order to give certainty to infrastructure sectors and put an end to stop go. Which is so destructive in any sector but particularly those where time scales are generations rather than one Parliament or a few months (such as the financial sector).
      No wonder so many engineers go to work abroad.

      1. Phil Tyler -

        Thinking that PM is proposing for Government would to be involved in deciding if a loan for ”, money for expansion and leasing to a local coach firm for a new vehicle,”, other than a good tool for making your point, is at least an overstatement. How and who makes decisions about individual lending agreements is an issue. Central government money being involved in providing money for lending and so leading to over bureaucratic systems could be a downer.
        In terms of the who and how the decision to invest in particular areas, I can never quite pinpoint where the difference between the directing of banks to lend money in certain ways, and government creating money to be invested in certain ways? Is one more technocratic than the other? I do see the difficulty of creating and enforcing a regulatory regime that would really work for long.
        That the pretty much uncontrolled ‘too big to fail’ banks are a liability and that smaller banks with more focus are preferable is widely understood. Werner’s sterling work in this area for some time, is notable but would not BoE money to grease the wheels not encourage the growth of this sector.

      2. Peter May -

        Positve Money may feel it shouldn’t have to involved in lending decisions in Little Pudlington on the Myre but if it wants to have a committee in charge of creating money it will be limiting supply to someone, somewhere. My view is that limiting the supply is harmful. I’m with Richard – in effect it replicates the gold standard. I come back again to the the essential control that is needed is for money’s destination and purpose rather than its quantity. One source of money creation is too rigid and limiting and I think it is much more bureaucratic and less flexible than ‘directing’ banks. We need a more diverse banking sector and small banks and regional banks, once they are set up, get to create their own money.

    2. Phil Tyler -

      Just to clarify, PM has no ambition to take away the right of banks to make loans, only that the loans should be equivalent to their deposits. Pretty much all money in the economy is held by banks as a deposit so there need not be less money to lend. It is just that the money would be supplied by the BoE.

      1. Peter May -

        But surely with the supply of money coming from the BoE then if it is unlimited we are where we are now and if it isn’t we don’t have as much money to lend as we do now. As I’ve said before, the essential control needed is for money’s destination and purpose rather than its quantity.

  2. Richard Murphy -

    I think PM’s idea that banks be intermediaries suggests that they really think there is something called ‘money’ that is tangible and real and not debt related.

    The difficulty of that is that this is the route back to the gold standard, credit rationing, and deep austerity and so recession.

    Money is debt. I am not saying it need not be regulated: it should be. Its use can be and in some cases should be controlled. But to pretend there is a thing called money that exists independently of the debt relationship that actually creates it shows a lack of understanding of money, which is pretty worrying in an organisation that campaigns on the issue.

    1. Peter May -

      On the grounds that every pound in your pocket is government money not taxed back yet I rather agree. But surely Building Societies were intermediaries before they demutualised on a large scale? Agreed that they are allowed to work only in property and now they seem to create money like the banks. Perhaps PM are harking back to a rosier age…I think, in the end, Positive Money have a particular dislike of interest bearing debt. And if you follow their proposals to the letter they may have even more than one missing link!
      But I’ve found them very open to new discussion of different ideas and in the end they are the only national member-led organisation we’ve got (apart from the RSA which is a bit ‘top down’) that is trying to communicate how money is created, so I feel we’ve got to make the best of it.

    2. Richard Shelley -

      Richard, I think there is a clear distinction to be made between money as debt and money as interest bearing debt. I know that positive money are well aware of this and it is unfortunate that this has not come across in the material you have seen. Perhaps this a learning point for them.
      Money as interest bearing debt is the key issue here as Peter has pointed out. If money is issued by a central authority free of compounding interest in a regulated way, so as the money supply is maintained, there is no need for the gold standard, credit rationing and austerity that you mention.

      1. Charles Adams -

        A few late comments. I am not so keen on the idea there there is more than one type of money. You can only make a distinction if one type of money is not exchangeable for another type which is generally not the case.

        Whatever you do, you need to tension money creation against activity in the real economy. Debt is the link.

        If we accept this link, then the only debate is about how much of that debt do you want to fall onto individuals and how much should be shared collectively. The ability of collective debt to deliver public goods is an amazingly fruitful, much more efficient than market solutions where rent extraction takes over.

    3. Phil Tyler -

      Just to question your statements, as if it is a fact that ‘Money Is Debt not anything else’ and ‘thinking anything else is pretty worrying’.
      I think the belief that any particular view about economics ideas as an unbreakable rule is limiting the open mindedness that is required to find the answers to the reform of our economy. The context of money’s use, from the point of view of the different agents involved, changes its nature and so is something often discussed. Viagra was meant to be a drug to treat angina. Apologies to Zarlenga as I recast from “The Lost Science of Money” (They are his words not mine). I use his example as his name was raised in a previous comment by Andrew Dikie.
      Is Money an artefact of law, whose value is derived from (Payment of taxes and legal tender law) then it is only proper for the government to issue and control the money supply.
      If money is a commodity then it needs to be backed by a commodity such as gold.
      If money is credit then it makes sense that the banks should control it.
      If a money system does not take, at least, these three ideas into account can it have credibility?

      1. Peter May -

        I like Charles’s idea that money is a promise and whilst I think it isn’t a commodity it can still be credit and a legal artefact (though I prefer a ‘social construct’) that you mention. Perhaps it is easier to think of money indicating a debt rather than being debt – just like tally sticks did.

    4. Phil Tyler -

      Just to question your statements, as if it is a fact that ‘Money Is Debt not anything else’ and ‘thinking anything else is pretty worrying’.
      I think, my view, the belief that any particular view about economics ideas as an unbreakable rule is limiting the open mindedness that is required to find the answers to the reform of our economy. The context of money’s use, from the point of view of the different agents involved, changes its nature and so is something often discussed. Viagra was meant to be a drug to treat angina. Apologies to Zarlenga as I recast from “The Lost Science of Money” (They are his words not mine). I use his example as his name was raised in a previous comment by Andrew Dikie.
      Is Money an artefact of law, whose value is derived from (Payment of taxes and legal tender law) then it is only proper for the government to issue and control the money supply.
      If money is a commodity then it needs to be backed by a commodity such as gold.
      If money is credit then it makes sense that the banks should control it.
      If a money system does not take, at least, these three ideas into account can it have credibility?

  3. Andrew Dickie -

    It’s worth observing that the American Monetary Institute argued for the creation of money being a government function, as the “fourth” arm of the state, alongside the executive, legislative and judicial arms.

    Their website, (at http://www.monetary.org/) is headed thus:

    Over time, whoever controls the money system,
    controls the nation.”
    – Stephen Zarlenga, Director

    The site also offers information on former Congressman Dennis Kucinich’s monetary reform Act – N.E.E.D -which, of course, never got passed, and which can be accessed here http://www.monetary.org/seamlesstransition

    I don’t, as someone more interested, and to some extent qualified, in law and the constitution, feel competent to pass judgement on the merits and demerits of N.E.E.D., either on its own, or in comparison with PQE and Green New Deal, which seem to have similar objectives, but those of you who are so qualified might care to comment on the thinking behind, and objectives of N.E.E.D. and the American Monetary Institute in General, a useful summary of which is contained here on Wikipedia.
    https://en.m.wikipedia.org/wiki/American_Monetary_Institute

    1. Peter May -

      Very interesting links, thank you.
      As a non expert many of the ideas are similar to Positive Money. And N.E.E.D still seems to suffer from the lack of diversity and increased rigidity that a money system entirely issued by the government would result in. As I mentioned above, the essential control needed is for money’s destination and purpose rather than its quantity.
      But they are right, controlling the money system is controlling the nation (as the banking crisis of 2008 demonstrated).

  4. Simon Cohen -

    I think Richard is misinterpreting a solecism that Positive Money have slipped into:

    Unfortunately Positive Money have used terminology too loosely. They don’t really mean ‘money is debt free’ in nature as Richard seems to think (I’ve pointed this out on Richard’s blog before) but that MONEY CAN BE ISSUED WITHOUT CORRESPONDING DEBT. They have just used the term ”debt free’ too loosely.

    According to MMT we’ve already got sovereign money while PM claim we haven’t got it yet which I now see as a serious mistake. As I understand it, MMT see the system in its most basic form as:

    1) Government issues money (it’s NEW money!)
    2) Bonds take the equivalent amount OUT of reserves as an interest rate control (NOT as borrowing in order to spend)
    3. Taxes ‘destroy’ money and create fiscal space (spending) as well as redistribution and behavioural constraints.
    Where all the juggling around with Consolidated Fund and National Loan Fund and separate taxation accounting as a ‘veil’ which covers those basic operations.

    I agree with Charles that banks need regulating and credit controls are the main thing that will stop asset bubbles ( as well as judicious taxation). Housing only started bubbling when credit controls were loosened.

    If you look at a graph of House prices since 1960 (http://moneyweek.com/money-morning-the-charts-you-love-to-hate-uk-house-prices-in-gold/) you will see it is pretty stable until the early 70’s when heath loosened credit controls and there was the first (relatively small) of a series of four bubbles (we’re now in the fifth) crescendoing undo Blair’s Labour between 1997-2007 where mortgage lending increased by 370%.

    Positive Money has done a great job in pointing these things out as well as showing us the startling ignorance of at least 90% of M.P’s regarding our monetary system which has led to the ‘depoliticisation of politics’ ( try saying that fast!) where politicians no longer see themselves as ‘steering the ship’ but are passive observers of events at best or active agents with the status quo at worst.

    It is not sustainable. The question is, can we take control of the steering wheel are do we wait until societal breakdown forces our hand?

  5. David Moon -

    I confess I drafted this earlier so apologies if some of the points already covered or answered above.
    As an active supporter of Positive Money I agree that they are an excellent campaigning organisation. Their campaign has really helped bring the subject of money creation into the public dialogue helping highlight the work of academics like Professors Richard Werner and SteveI Keen. Along with fellow PM members I have read Ann Pettifor’s excellent “The Production of Money” where she expresses strong disagreement with Positive Money’s solution whilst complimenting their campaigning efforts. I understand the arguments that Money is just a social contract (David Graeber’s Debt, the first 5,000 years) and the balance of lender and borrower can and should be a very free and democratic process. Positive Money’s proposal is viewed as very bureaucratic “big brother” idea. Much much tighter regulation of banking might be the answer along with breaking up the big banks and having far more local banks as proposed by Richard Werner. I am very doubtful about a free market in Cryptocurrencies as advocated by free market ideologues.

    I am less convinced by the comparison of Positive Money’s debt free Fiat money with commodity money such as gold which it is claimed could lead to a restriction to flexibility and growth.

    If one follows the MMT ideas then the issuer of money is also taxes not as a source of income but to control the total amount of money in the system, that would seem to work quite well with Positive Money’s debt free money whilst still allowing for commercial banks to make loans using existing money, 100% reserve banking. I accept that markets will still find some way to create credit but presumably to a much more limited extent than currently.

    If we simply look at a moment in time money is circulating round between the Government and the Private sector, it matters not who started the ball rolling, right now the Government spends money and receives taxes and if the books don’t balance they borrow money from the private sector, money created by private commercial banks. So money being added to the system is not being created by the Government but by private banks. Yes, the private sector may be willing to lend to the Government at even negative rates and this bringS us into the complexities of the bond markets and how pensions etc are financed. Gosh, it get confusing! At least the Positive Money proposals are easy to understand!

    1. Peter May -

      I would say it is obvious who set the ball rolling – it is the Government owned Bank of England, who currently contract out most money creation to the private sector (though the £435 billion of Quantitative Easing they produced themselves).
      I confess I don’t know what PM thinks of bonds but I do think we should beware of talking of the ‘complexities’ of the bond markets. The people who operate in them would be pleased we think they are complex, and horrified if we said the government was going instead to spend money into existence. (Even if we financed pensions in a different way some bonds would probably have to remain as Britain runs such a large trade deficit.)
      But we shouldn’t believe that is particularly complex!

  6. Vince -

    Tax is a political issue,basically it is a redistribution of wealth.It may also be used by a governement to encourage good actions and deter bad actions.These are political calls which should be made by politicians and as such should rightly come under democratic scrutiny.In this case we elect MP’s to do as we wish and hold them accountable.
    The actual decision on money creation is really not something we want politicians allowed anywhere near,nor the public.That decision is best left to independent central banks who will look carefully at how much money is needed in the wider economy.Pretty much as they do now setting interest rates ,though they of course do not work anymore(if they ever did).That seems a sensible enough separattion of powers and is all we need. i.e CB’s only decide on quantity levels of money creation/destruction and politicians then decide on where that authorised newly created money is spent(increased spending or tax cuts) or in the opposite scenario ,destroyed(spending cuts /tax increases)
    All in all I believe Positive Money have it right on that score.

    1. Peter May -

      There’s a distinct democratic deficit in letting a Central bank decide how much money to create. How do they decide and who are they accountable to?

    2. Charles Adams -

      Ignoring QE, all the central bank does is set interest rates which puts a cost on new debt and thereby tries to implement a self-regulating negative feedback loop on new money creation, but when interest rates hit the zero lower bound then this feedback mechanism fails.

      The idea of leaving it to the central bank does not work. The last decade has taught us that.

      When government is 40% of the economy you need smart fiscal policy which does not mean austerity when everyone else is trying to save.

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