Positive Money and Monetary Progress

I’ve been having some encouraging converstions with Positive Money (PoMo) members.

First, let me be clear, I use MMT (Modern Monetary Theory) in the sense that the Theory is the Job Guarantee and the Modern Monetary bit is a statement of fact. This is the view that Prof. Bill Mitchell himself takes, having in fact, based the Job Guarantee on the wool clip price guarantee for Australian sheep farmers.

Although PoMo used to consider that 97% of money is issued by private banks – this is beginning to change and now even the Bank of England suggests a lower figure. Indeed the Bank of England is also asking about the future of money –here -perhaps it might be because they have got only 39 likes on their original article!

Many are becoming convinced of the correctness of the idea that government creates money when it spends, and that destruction occurs, in effect a contra-entry when they then receive tax, thus destroying both the entry and money.

Some PoMo members still have – understandably – banking anger. And their 2008 idea of 98% of all money created out of thin air by private banks is a bolt of truth.

Destroying that belief is, again understandably, quite difficult.

But for believers in PoMo, if private banks create money out of thin air, then it seems not to be understood why the government itself might prevent its very own bank from doing the same?

Well – this is also an argument that is more difficult than it should be to counteract, because most see that the EU Lisbon agreement probably outlawed state money creation. I’ve no special evidence one way of the other, although I inderstand that to be the case, but the fact is that Alistair Darling did create money- as he actually said – albeit in a circumlocuitous (alright, timid and deceptive) fashion in his letter to the Bank of England of January 2009. And the European Central Bank has followed suit. So, even if it used to be – allegedly – illegal under EU law, I very much doubt it can be said to be so now.

But to me the closing issue is that if the government requires payment of its taxes in sterling, which it can, alone, create, why would anyone suggest that it had always outsourced its currency creation, and so was powerless? It issues banking licences which are rescindable and conditionally granted. And even if perchance it had forever outsourced currency creation to private enterprise, then why does that also indicate it is actually incapable of doing it itself, when it has its own nationalised bank (that is the Bank of England -100% nationalised from 1946)?

In many ways this is the knub of the issue. In 1694, the date of the foundation of the Bank of England, currency creation was indeed partially outsourced, but once it was, in fact, entirely nationalised in 1946, surely this changes everything?

As I’ve previously suggested, democratic governments create money on the basis of democratic consent.

Anything else is another branch of neoliberal deceit.

….I’m beginning to wish there was still a USSR.

At least then TINA (There Is No Alternative) might actually not be, to some, so obviously evident. Because most have never even thought of the economy of China…




  1. Vince Richardson -

    Hello Peter,

    PoMo would agree with you and MMT in general that the state can and should create our money,QE was indeed a very good example of a gov doing just that.Sadly that type of financial sector targeted QE has not trickled down to the real economy but simply inflated non-productive assets again…property and shares.
    The problem we still would face however,should we use QE for better causes, would be that banks would still be allowed to commence with the destructive lending once the economy recovered under the present set up.So all our hard work would be in vain. Allowing banks to create money is an invasion of sovereign power. Banks should just be money intermediaries not money creators and as such they would cause no significant harm to the economy,nor could they claim such generous rewards for doing what is a rather humble job. This is not about bank anger it is about a systemic failure of a whole system,from banks up to central banks.

    The current system is also is a massive subsidy to the banking sector,one that no other business sector gets. Not only are banks allowed to create our money,they get state backing for deposits to encourage us to bank with them and limitless very cheap emergency funding when they get it wrong.
    Pomo have also calculated that having the banks create our money cost the Exchequer £23 bn per year in lost seigniorage that could be used towards other spending needs.


    So we have a huge publically backed and subsidised banking sector that costs us very all very dear for very little in return.

    Whether central banks are nationalised or nor makes no difference,they still rule over a money creating banking system. A nationalised BoE changed nothing and the banks would of course rather keep it that way.

    1. Peter May -

      Having a nationalised BoE means that the government has an opportunity to properly control the private banks, direct them and so on.
      But I don’t understand if PoMo is really saying that the banks get £23bn from seigniorage. It is a notional calculation based on the banks’ interest rates they offer to depositors as against what they would have to pay if they had really to borrow the money. It doesn’t become available to suddenly spend elsewhere because the system changes.
      And I’d suggest that when the state creates electronic money the seigniorage is pretty much the same as the amount created.

      1. Vince Richardson -

        Yes , the gov would save £23 bn per year in having first use of that money.But it is a very real benefit to the state. It would effectively save the taxpayer. The money created this way instead would also be better invested in the economy by our politicians not bankers…who do like a property boom. This a forfeit we all make to allow banks to do what they do.

        This is money we (the state) surrender to allow banks to create our money.

      2. Vince Richardson -

        As to controlling the banks, I do not think the BoE did a good job controlling our banks. The QE and emergency lending happened much the same as in the USA,the Fed being partly privatised.

        The ownership of the central bank does not affect bank crises arising nor the responses,they are pretty much the same

        Fundamentally banks care about one thing, retaining the ability to create our money via lending to us. They will take any amount of regulations(though they will still lobby hard to remove/neuter them)as long as they hang to that power because that is where they make their money.

        A very telling quote shere from Rothschild

      3. Peter May -

        If money is created out of thin air it doesn’t save the taxpayer in any shape or form…
        However I’ve long been in favour of a bank seigniorage tax!

    2. Vincent Richardson -

      That is a good point,if only we could get governments to do this.

  2. Bruce Gray -

    Worrying about who creates money in the economy is maybe missing the larger point. Modern economies rely on both private credit creation (endogenous money) and government money creation (exogenous money) in the economy; so the larger question is what is the proper role for the respective forms of money based on desired economic outcomes. Heavy reliance on private credit creation can lead to accumulation of excessive private debt, financial crisis (GFC), and/or debt deflation, and excessive government (deficit) spending can lead to inflation and currency devaluation. The key is finding the proper balance. Neoliberal ideology of course over relies on endogenous money and monetary stimulus (QE), which is what led to the GFC and the subsequent slow recovery.

    Since U.S. went off the gold standard in 1971, private credit creation represented about 87 to 92% of the M2 money supply until about 2008 and the GFC. In response to the GFC, the U.S. Federal Reserve conducted 3 rounds of QE to revive the economy, which pumped over $3T of reserves into the banking system to stimulate private credit creation. This didn’t actually didn’t do much for the economy, as private credit creation also requires qualified borrowers willing to borrow, which were in very short supply at the time. The result of QE was the ratio of private credit creation in the M2 money supply dropped to 65% and interest rates fell to 0. The economy didn’t start to revive until the private sector was able to significantly deleverage from the debts (primarily mortgage) that were left in place by the neoliberal Obama administration. The economy of course would have recovered more quickly if private debts were written down and the government created more money through fiscal, rather than monetary, stimulus.

    As a reference, the link below shows the ratio of the U.S. Monetary Base (reserves + currency) to the M2 supply (MB plus bank deposits) since 1960. Private credit creation is currently at about 75% of the M2 supply due to the lingering effects of the GFC and QE.


    1. Vince Richardson -

      Yes no doubt Obama should have continued further with his $ 1 trillion fiscal rescue package,but he relented to neoliberal thinking.It turned out that that was not enough,he U turned to soon, but I also recall the Republican/Tea party doing all they could to thwart even that. Same happened in the UK when the Cameron led coalition went for austerity too soon after early Labour fiscal stimulus.

      The concerns at the time being that the market would punish lax public spending/deficits.So the misery went on longer than it needed to for fear of falling foul of the markets.

      But for it to have reached that situation was unprecedented. Huge private debt levels were the direct cause here, not public debt. How governments/central banks tried to cope with it is moot but we should never allow ourselves to ever get back to that situation.Pomo would say systemic bank reform is badly needed.

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