OMFG, MMT & Positive Money Get Along

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{OMFG = Overt Monetary Financing of Government}

 

Introduction

 

Economies run on tokens from two balance sheet expansions:

  1. (The sum of) Banks’ balance sheet expansions, where bank loans create deposits (also called “horizontal” money)
  2. National, where the government spends into the economy expanding the national balance sheet (aka “vertical” money)

Two observations:

1) It is desirable, especially evident after 2008, to more carefully regulate the horizontal sector, which would also reduce its overall size significantly.

2) In the current economic climate it is desirable to expand the vertical balance sheet, both to maintain/increase aggregate demand and to foster activities that the public desires that increase the public’s well-being (infrastructure, education, healthcare etc.).

Note that although more carefully regulating the horizontal side would decrease aggregate demand (especially given the overheated credit impulse/acceleration Steve Keen has so usefully highlighted) this would be balanced by increasing the vertical side.

What do MMT economists and Positive Money propose regarding these two systems?

Both agree that the vertical side should be larger and the horizontal side more regulated with the resulting smaller horizontal component made up for by expanding the vertical side.

 

On The Vertical Side

The crucial fact about the vertical side is that the fact that a nation is not like a household is evident regardless of the operational details. Positive Money is wrong in their belief the current system must be changed to achieve the type of government spending they want.

However, this does not mean that Positive Money is flat out wrong. Key MMT people would be perfectly happy to spend vertically in the way Positive Money wants, which is just PQE/OMF by another name. This is especially so given that OMF procedures would be transparent and thus politically advantageous.

MMT scholars just do not believe it is remotely as urgent as Positive Money because they realize the current system is already capable of spending into the economy in the same way that PM wants to (Wray 2001, Fullwiler 2011 ). Also, many have rejected PM more or less out of hand because of Positive Money views or perceived views on the horizontal system [which we turn to below].

At any rate, regarding the vertical system – The crucial thing is to get the vertical system to do what is good for the economy – functional finance – regardless of the operational details.

From a political point of view it is better to have a clearer more straightforward system [PQE/OMF]. This is a substantially less fundamental problem, however, than what Positive Money thinks it is doing; in saying that, however, the practical and strategic importance of making the changes to a straightforward system perhaps should not be underestimated.

Scott Fullwiler himself has noted the fundamental agreement on vertical money issues:

“interestingly, understanding how DFM [Debt Free Money] works also illustrates the MMT view of government spending and government bond issuance. Logically we should expect that DFM supporters could join MMT in rejecting otherwise widespread concerns about government solvency, China refusing to purchase US national debt, the financial sustainability of entitlement programs, and so forth.” (Fullwiler 2014)

(relatedly and importantly, both Positive Money and many MMT economists propose ZIRP; another post for that though)

On The Horizontal Side 

As noted, MMT rejects Positive Money mainly because of PM views on the horizontal side – in the past PM stated they wanted to eliminate the horizontal altogether and essentially create a loanable funds system. Contrast this to MMT, for which overall pre-2007 regulating the horizontal side was not a primary focus (not to ignore the Minsky-Wray connection and other pre 2007 work of course, but banking regulation was/is not the overarching focus of MMT). [Update: please see Scott Fullwiler’s comments on pre-2007 bank regulation/MMT)

However, both sides have moved closer together on horizontal money, to the point where in practice the horizontal systems they advocate would be similar.

MMT increased the emphasis on limiting the horizontal after 2007 (Mosler 2009, Mitchell 2009, Mitchell  2010, Wilson 2017).   Crucially, the Mosler/Mitchell/Wilson proposals would be far more significant and profound in their effects than they are given credit forEasily enforced common sense rules (that did not exist in 2008) to force banks to hold the loans they make, operate on a single balance sheet, and not accept financial collateral already clears up most of the problems with banking and would leave a drastically shrunk but drastically more healthy horizontal money and funding system in place.

Simply put, this puts MMT closer to the goals of PM on horizontal money than is generally recognized.

Conversely Positive Money has moved to allow what is in effect horizontal money creation (whether “nationalized” or not makes little difference if regulated in the proposed ways). This pushes PM substantially towards the same horizontal system that would result were the Mosler/Mitchell/Wilson proposals to be put into practice.

(The similarity in views on this are evident in these quotes by MMT scholars and Positive Money:

“Right now, we have far more finance than we need. Exactly how much of it we could eliminate as unnecessary is up for debate. I wouldn’t be surprised if our economy would actually run better if finance was downsized by 90%”
L. Randall Wray 2014

“The correct approach, as highlighted by the MMT view, is to reduce bank lending by banning its use for anything that isn’t constructive. Bill Mitchell regularly suggests that 97% of financial transactions should be illegal.”
Neil Wilson 2014

“The central bank would be willing to create additional money, on demand, in response to banks that are able to lend that money to non-FIRE sector businesses. This protects the level of lending to businesses.”
Positive Money 2015)

 

Conclusion

There are two monetary systems, vertical and horizontal. Both MMT and Positive Money want to see the vertical increased in size to maintain aggregate demand and increase the general welfare; both MMT and Positive Money would like to see a more straightforward (PQE/OMF operations) vertical money system that would allow mainstream economists and the public to understand that a nation is not like a household (Positive Money makes the mistake of not realising that the current vertical system can already do what PM wants; MMT could perhaps make even clearer than they already do that the current system can do this without structural change).

Both MMT and Positive Money would like to shrink the horizontal system through reducing it to funding only real production. The two schools of thought come from utterly opposite directions on horizontal money; however in practice both of their suggested horizontal systems would be for all practical purposes the same – limiting banking to a completely safe payments system and to an investment-side that is regulated to only expand enough to fund productive investment but not to allow asset bubbles via a non productive FIRE sector. Whether the horizontal side is “nationalized” or not is merely a distraction – banks under the Mosler/Mitchell/Wilson rules providing for capital development based on solid credit analysis would operate the same regardless of their formal status vis-à-vis government. Positive Money is wrong to think this can be done in a loanable funds system (future post), but plain vanilla 1960s banking works fine.

~~~

March 28, 2019  UPDATE: The Intro to Economics textbook is finished! Live on Amazon here –

1000 Castaways: Fundamentals of Economics

 

 

 

 

 

 

Question for Mosler/Mitchell/MMT: Bank Reform, Assets or Liabilities?

Warren Mosler, in his excellent recommendations for bank reform (similar to Bill Mitchell’s proposals
and others )focuses on the asset side of banks, and writes:

“The hard lesson of banking history is that the liability side of banking is not the place for
market discipline.”

Mosler doesn’t discuss this history or reasoning any further though. Can anyone elaborate on this banking history? And how it shows that disciplining the liability side of banking is not a good idea?

TOWARDS A PURE STATE THEORY OF MONEY

Knapp State Theory of Money cover, 1905[Prologue to this post]

MODERN MONETARY THEORY (MMT) notes correctly that money is a creature of the state, and that important macroeconomic and policy conclusions follow from this understanding, e.g., sovereign states are not revenue constrained and spending is primarily limited by inflation. Taxes give value to state money and maintain its value (i.e., inflation can be controlled through taxes).

One (among many) key policy insight is that a job guarantee is possible. A job guarantee not only achieves what many think should for myriad social reasons be a primary goal of macroeconomics but also further creates a buffer stock (the most useful one of any imaginable given the social reasons just mentioned) that achieves an additional primary macroeconomic policy goal – stability.

However, there is no state that operates under a pure state system of money. Most of what serves as money in most banking systems in the world is privately created credit money.

We can compare the current most common banking system with a pure state system of money:

PURE STATE SYSTEM OF MONEY

 

CURRENT SYSTEM

Money is a creature of law.

Money is a creature of law.

Money is valued because it can be used to extinguish debt to its issuer.

Money is valued because it can be used to extinguish debt to its issuer.

The issuer is the state.

The issuers are the state and private banks.

Taxes move resources into the public sector

Taxes move resources into the public sector.      Loan repayments move resources into the private (often finance) sector

This raises important questions. If the state is not a monopoly issuer of money, do other neo-chartalist/functional finance/MMT insights hold?

A sovereign currency issuer is still not revenue constrained. And it can still spend towards full employment and other public purposes.

One major worry, however, is whether, because the state does not have a monopoly on money creation, it can set prices in the ways MMT argues. Especially, trying to do so while not having a monopoly on money creation may be inflationary even with otherwise appropriate taxation.

So what are the possibilities? Let’s imagine a system where the state truly has a monopoly on money creation. The state creates money and a payment system. There can still be loans and borrowing, but borrowing will be from someone else giving up use of their money, just as if you loaned a friend a tenner from your pocket. The risks and rewards of this can be pooled for large capital projects.

Let’s ignore the sometimes heard first criticism of this: “deflation!”. Imagine moving to this system in a portfolio neutral way, so that essentially all M’s (M2 and beyond) are, through bookkeeping entries, changed to M1 in a one-off system change. (There are also worries that this “creation” of M1 would be inflationary by others; they seem not to understand what “portfolio neutral” means.)

The obvious advantage is that bank runs will be a thing of the past – assuming a few other obvious regulatory moves (on securities and such) and all bad loans will be losses to individual investors, never systemic (this incidentally puts the incentives for loan quality and underwriting in the right places, raising the quality of loans in the first place). If Joe doesn’t pay you back his tenner, you are the only loser and there is no amplification of this loss. Cascading liquidity crises simply are not possible under this system.

THERE ARE THEN TWO RELATED objections – first, that without continued private credit money creation, this new system would still be deflationary. The related objection is that the “dynamic” private credit money system is behind much innovation and growth, and this would be lost.

On the first – this is interesting as it highlights a major question on the purpose and effectiveness of government. If money is a creature of the state, and a sovereign government cannot be insolvent, then it cannot be that a pure state money system will be deflationary because there is not enough money. The state can create as much money as it needs to re-inflate an economy.

The worry, then, must be that somehow the state will not be able to get the money it can endlessly create into the right hands, while somehow the private credit money system does. This highlights the fact that the worries about abolishing private bank credit money creation cannot truly be about the quantity of money or credit but about how and by whom the money and credit needed to keep the economy from deflation is created and spent into the economy.

This gets to much of what is the core concern of a pure state money system by both advocates and detractors alike, although often they are not nearly as clear as they could be about it.

What serves the public purpose more- having only the state create and spend money and credit into the economy, or allowing the private sector to control part of this public utility?

We already saw that one concern is that private credit money may force a tradeoff between public spending and inflation. What are some other potential costs? What is the real value and real cost of funding borrowers’ needs by allowing credit money to be created privately?

Costs

We already mentioned policy space – the current system of substantially privatizing a public utility seems to move many resources into the private finance sphere, arguably reducing the policy space for public purpose (job guarantee, education, health care, etc.).

A major tenet of MMT/Functional Finance is that it is how we utilize real resources now that matters, not deficits, and that we cannot borrow from the future. Money creation through credit likewise does not magically transport future resources to the present, it can only redistribute existing resources. Ceteris paribus (on taxes, policies, and who is utilizing the money) there is X amount of money that can be spent into an economy without inflation. Credit money creation can only redistribute this X amount of money and the real resources it affords (or cause inflation), and it is not clear that the private system does this in an equitable, nor necessarily the most efficient, manner.

Where private money creation is combined with maturity transformation, as in the shadow banking system, money market and many bond funds, there is a distorted yield curve on interest rates. Some, especially Austrians, view this as leading to market inefficiencies in the long run, in addition to being severely unstable. This system allows narrow private benefits at the expense of widespread socialized costs and chronic instability (Maurice Allais’s non-Austrian work on this seldom receives the attention it merits, especially in the English speaking world.)

Instability – allowing credit money has time and again led to intense and highly damaging episodes of instability. Diamond & Dybvig formalized the multiple equilibrium nature of banks runs; there is no stable equilibrium of credit-money creating banks without a lender of last resort. The true costs of instability are seldom weighed as a whole, nor presented in a way the general public can understand. What is the true and total cost to the public of the crises of 1907, 1929, 2008, the many smaller crises such as S & L, the Japanese asset price bubble, LCTM, banking crises in Finland, Sweden, Asia, Russia, Mexico, Argentina, Ecuador, Uruguay, and throughout Europe, the dot.com and housing bubbles, the bailouts of AIG, Northern Rock etc.? Is it truly, with proper accounting, worth the growth that some defend the current private system as promoting? On balance, a stable economy without socialized losses may be more dynamic and productive and allocate the real resources of the economy more efficiently than the current system, if judged with proper accounting standards.

This leads to another point: Reality. The government already funds the banking system, both with occasional trillion dollar bailouts and on a daily basis. “Private” systems have shown time and again to be backstopped by governments (e.g., the U.S.and U.K.bailouts). The US government has proven to de facto guarantee the entire U.S. financial system (and the UK government the British system and so on), and lenders know it, much to their advantage (and distortion of the real economy). As someone else has written* “When A guarantees B’s liabilities, B needs to be on A’s balance sheet. This is accounting 101, folks.”

MMT very correctly insists that an economic theory, to be worth considering at all, must at a minimum match real bookkeeping. To meet basic standards of accounting we would have to “[c]onsolidate the entire financial system onto USG’s balance sheet. While we’re at it, merge the Fed, Treasury, Social Security and Medicare into one financial entity. Clean up the whole mess of interlocking quasi-corporations. The US government is one operation. It should have one balance sheet.”* Again,  this is Accounting 101.

 IF IT IS INDEED THOUGHT that the benefits of credit money creation are worth the instability and other costs this system incurs on society, this raises another question:

Can a government duplicate credit money creation while distributing the gains and losses more equitably (i.e., socialized gains as well as socialized losses, instead of the current system that is mostly private gain and socialized loss)?

As we noted, in the current system, in addition to the money that people and businesses already have, they often want more money for productive and socially useful purposes. We further noted that there are two ways to get this money:

1. through other people loaning money that they already have or

2. through private credit money creation.

The first is not problematic, while the second is.

Would it be possible for the state to maintain something like the current system operationally, just making the parts of it that already are backstopped by the state actually state? This raises questions: Could this system be kept apolitical? (this potential political downside has to be weighed against the already existing downside: our private system has already experienced extensive regulatory capture). Could it be kept as competitive as it is now? Would it be as unstable as now with a truly “risk-neutral non-liquidity-constrained economic agent” (that is, the government) behind it?

This system could be thought of in this way:  Individuals and businesses that desire more money for productive purposes than they can get from other money holders are granted the privilege of additional state money created just for them; alongside this special privilege they voluntarily accept an additional tax burden to maintain the value of the money system. Let’s add that (in bold) into the comparison we made above between a pure state theory of money and the current state/private hybrid system:

PURE STATE SYSTEM OF MONEY

 

CURRENT SYSTEM

Money is a creature of law.

Money is a creature of law.

Money is valued because it can be used to extinguish debt to its issuer.

Money is valued because it can be used to extinguish debt to its issuer.

The issuer is the state.

The issuers are the state and private banks.

Taxes move resources into the public sector

Taxes move resources into the public sector.       Loan repayments move resources into the private finance sector

Some businesses or individuals want to borrow money. There are two ways to do so. One is for others to loan their existing money. This may be too restrictive and keep growth at suboptimal levels. The other is for new money to be created. 

 

Some businesses or individuals want to borrow money. There are two ways to do so. One is for others to loan their existing money. This may be too restrictive and keep growth at suboptimal levels. The other is for new money to be created.

The government creates this new money. The individual or business pays an additional tax for this privilege.

 Private banks create this new money. The individual or business pays the bank interest for this privilege.

The “lender of last resort” is the lender of first resort. There are both private and social gains and corresponding private and social losses.

 

Privately created money is inherently unstable without a lender of last resort. The government is the lender of last resort. There are private gains and socialized losses

 As a monopolist over its currency, the state has the power to set prices, including both the interest rate and how the currency exchanges for other goods and services. As a monopolist, the state can fund a job guarantee and other public goods without causing inflation.  In a system with “redundant currencies” (Innes 1914) the state may not be able to achieve macro policy goals and prevent inflation simultaneously
 The system is inherently stable. Stability leads to optimal investment, insurance, and allocation decisions and optimal long-term growth and welfare. Redistribution of private and social gains and losses is minimized.  The system is inherently unstable and uncertain. Chronic instability and uncertainty leads to suboptimal investment, insurance, and allocation decisions and suboptimal long-term growth. The system continuously transfers unearned wealth into the private (often finance) sector, furthering suboptimal economic performance and incentivizing rent-seeking and regulatory capture.

 

Currently, many of the most important neo-chartalist/MMT functional finance insights are not applied in the US, UK, and other countries, and they are clearly desperately needed. However, even if they were applied, the private credit money system would still interfere, possibly greatly, and would still lead to the same type of instability it always and everywhere has. The ongoing “crash” of 2008 seems to be fundamentally and deeply related to issues of private credit money creation, not the equally important issues of state money that MMT has so usefully brought to light. A true state theory of money must address the fundamental instability and inequitable nature of what Innes (1914) called a situation of “redundant currencies”, a system of both state and private money creation, and to be fully consistent, integrate it into its framework completely. It is not enough to “agree with the MCT folks” (or vice versa). The two must be a seamless whole.

~~~

* This wording is by an arch-Austrian good with pithy wording; I am not “Austrian” but on this issue, at least, he has interesting observations.

(Previous post: TOWARDS A PURE STATE THEORY OF MONEY, PROLOGUE: A NOTE ON KNAPP & INNES )

TOWARDS A PURE STATE THEORY OF MONEY, PROLOGUE: A NOTE ON KNAPP & INNES

Neo-chartalists rightly look to Georg Friedrich Knapp and Alfred Mitchell-Innes as brilliant forefathers of a state and credit theory of money. However, Knapp and Innes* of course wrote in a different time and had their hands full with explaining the fallacies of metallism and explaining why money is credit.

Now, however, the problems of metallism and the idea of money as credit, and in turn the functional finance implications, are well understood. Besides the contributions of Knapp and Innes to these areas, what did they think about private credit money creation? There is, given their focus on metallism and other issues of the time, relatively little on private money creation in their work. The past century, as mentioned, has seen the development of more or less a full understanding of the implications of the ideas of Knapp and Innes. However, there have been numerous relatively small crises in the past century (just since the 1980s: Savings & Loan in the US, the Japanese asset price bubble, LCTM, banking crises in Finland, Sweden, Asia, Russia, Argentina, Ecuador, Uruguay, and throughout Europe) and two massive economic crises (1929, 2008) that have had much or most of their basis in the private credit money creation realm of the economy. In other words, although a great deal of the suboptimal performance (sustained unemployment, lack of investment in infrastructure, education, and healthcare) has been due to a failure to understand and apply readily implementable state money & functional finance insights, there has also been another major source of economic suffering, resulting from the non-state-money side of the economy. The worldwide private credit money system has caused untold suffering and misery for millions. This side of the equation must be integrated into any functional finance insights that arose from Knapp, Innes, and others (the subject of my next post).

Although the answers to questions about state and private credit money stand or fall on their own merit, it is perhaps useful to note what Knapp and Innes thought about the private credit money side of the financial system.

Knapp does not focus on this area, perhaps in part why subsequent neo-chartalist developments did not either. The most interesting passage in Knapp on the subject may be the following:

  “It is a great favour to the banking world that the State permits the issue of [bank] notes. As is well known, other business men may not issue notes, or private till-warrants. Certainly the State also controls the business by law, for it rightly counts it of public utility. But it is nevertheless remarkable that the profits which are increased by this means, of a magnitude only explainable by the note issue, should flow exclusively to the owners of the capital. The State is giving to the holders of bank shares a means of increasing their profits which it absolutely denies to other businesses.” (Knapp 1924 [1905], 136-137)

It seems somewhat surprising that many (by no means all) of the others who built on Knapp’s work did not focus more on integrating this “remarkable” “great favour” of the state to “the owners of capital” and the social and systemic implications for a state theory of money (again, some have; I think not enough).

ON INNES

Innes, of course, wrote from within the Anglo-American financial milieu, and, it is important to remember, immediately after the creation of the Federal Reserve and under the gold standard.

In his two influential papers (1913, 1914) in The Banking Law Journal he develops the credit theory of money which Wray (Wray, working paper**) and others show is consistent with and reinforces Knapp’s state theory of money. Innes only turns his attention to private credit money at the end of the second paper (1914).

Innes, before considering private credit money, discusses a mechanism for inflation of state money under the gold standard. He then goes on to argue that the system where government money is leveraged by private credit money creation amplifies this inflation significantly, and that this is “by far the most important factor” in inflation. (Innes uses the common yet mistaken “fractional reserve” argument for how this leveraging occurs. Considering how common this mistake is, and that he was writing only 1 year after the creation of the Fed, this is understandable in his case).

In my opinion it is difficult to tell where Innes is laying the blame here (and he warns that he does not fully understand this area of money). He uses the term “redundant currencies” several times (all quotes from Innes are from Innes 1914, p. 166-167), which implies he thinks that this mixed system is somehow flawed. It seems, however, that in one case the “redundant currency” is private money, and in another use, it is state money.

Innes makes clear, (in his notes and several other places) that he views private money creation as a natural state of affairs, although he also seems to see the modern mixing of the two systems as possibly problematic (“in old days…it was easy to draw a sharp distinction between government money and bank money”). He also, however, implies that it is merely the way the system is being used (“ignorance of the principles of sound money”) that may be the problem.

As mentioned, Innes cites “this redundant currency” in a way that it seems he is referring to private credit money in the first use. But in the second use of “redundant currency” he seems to be referring to HPM (state money) – a “redundant currency operates to inflate bank loans in two ways, firstly, by serving as a ‘basis’ of loans” (Innes is assuming a loanable funds system).

At any rate, I do not want to make a claim that Innes was against either state (in favor of some kind of free banking) or private money (in favor of some kind of narrow banking system that would soon be in vogue – e.g., by Soddy, The Chicago Plan, Fisher etc.).

But it is clear that Innes saw the state/private hybrid system, as it was in his time, as deeply problematic and the root of inflation.

“Just as the inflation of government money leads to inflation of bank money, so, no doubt, the inflation of bank money leads to excessive indebtedness of private dealers, as between each other. The stream of debt widens more and more as it flows.

That such a situation must bring about a general decline in the value of money, few will be found to deny. But if we are asked to explain exactly how a general excess of debts and credits produces this result, we must admit that we cannot explain. ” (Innes 1914, 166)

I do not want to misrepresent Innes, so I include the entire passage below, with what I see as some of the more relevant parts in bold. I do want to make clear that I am not making, nor do I think Innes actually meant to make, an anti-Fractional Reserve argument, but rather, had he understood that loans create deposits and reserves are not of much importance, Innes would simply have stated his concerns as being about the relation of private to state money.

“Again in old days the financial straits of the governments were well known to the bankers and merchants, who knew too that every issue of tokens would before long be followed by an arbitrary reduction of their value. Under these circumstances no banker in his senses would take them at their full nominal value, and it was easy to draw a sharp distinction between government money and bank money. To-day, however, we are not aware that there is anything wrong with our currency. On the contrary, we have full confidence in it, and believe our system to be the only sound and perfect one, and there is thus no ground for discriminating against government issues. We are not aware that government money is government debt, and so far from our legislators realizing that the issue of additional money is an increase of an already inflated floating debt, Congress, by the new Federal Reserve Act, proposes to issue a large quantity of fresh obligations, in the belief that so long as they are redeemable in gold coin, there is nothing to fear.

But by far the most important factor in the situation is the law which provides that banks shall keep 15 or 20 or 25 per cent, (as the case may be) of their liabilities in government currency. The effect of this law has been to spread the idea that the banks can properly go on lending to any amount, provided that they keep this legal reserve, and thus the more the currency is inflated, the greater become the obligations of the banks. The, importance of this consideration cannot be too earnestly impressed on the public attention. The law which was presumably intended as a limitation of the lending power of the banks has, through ignorance of the principles of sound money, actually become the main cause of over-lending, the prime factor in the rise of prices. Each new inflation of the government debt induces an excess of banking loans four or five times as great as the government debt created. Millions of dollars worth of this redundant currency are daily used in the payment of bank balances; indeed millions of it are used for no other purpose. They lie in the vaults of the New York Clearing House, and the right to them is transferred by certificates. These certificates “font la navette” as the French say. They go to and fro, backwards and forwards from bank to bank, weaving the air.

The payment of clearing house balances in this way could not occur unless the currency were redundant: It is not really payment at all, it is a purely fictitious operation, the substitution of a debt due by the government for a debt due by a bank. Payment involves complete cancellation of two debts and two credits, and this cancellation is the only legitimate way of paying clearing house debts.

The existence, therefore, of a redundant currency operates to inflate bank loans in two ways, firstly, by serving as a “basis” of loans and secondly by serving as a means of paying clearing house balances. Over ten million dollars have been paid in one day by one bank by a transfer of government money in payment of an adverse clearing house balance inNew York.

Just as the inflation of government money leads to inflation of bank money, so, no doubt, the inflation of bank money leads to excessive indebtedness of private dealers, as between each other. The stream of debt widens more and more as it flows.

That such a situation must bring about a general decline in the value of money, few will be found to deny. But if we are asked to explain exactly how a general excess of debts and credits produces this result, we must admit that we cannot explain. (Innes, 1914, 166-167)

Again, I am not sure on how precisely to interpret Innes’ argument or intentions here. He clearly felt something was wrong with the system but, as he says, he is not entirely sure what. Had Innes lived to see the demise of the gold standard and other developments in the financial sector, one can’t help but wonder what he might have thought about state money, private bank credit money, inflation, and financial instability.

 ~~~

* Although it seems his correct name was Aflred Mitchell-Innes, references to him as both Mitchell-Innes and Mitchell Innes can be found. Innes’ original Banking Law Journal articles did not use a hyphen, and in them, Innes allows himself to be addressed in a letter as “Mr. Innes”, so I will use the shorter of the two.

** L. Randall Wray.  “The Credit money, state money, and endogenous money approaches: A survey and attempted integration.”

Knapp, Georg Friedrich. (1924 [1905]. The State Theory of Money. Clifton: Augustus M. Kelley.

Mitchell-Innes, Alfred (1914), ‘The credit theory of money’,  Banking Law Journal, (Dec/Jan.), 151-68.


(Next post – TOWARDS A PURE STATE THEORY OF MONEY)

 

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