Post Keynesianism, MMT, & 100% Reserves Project, Post No. 2

Bank of England

Taken from the comments on my last post on MMT/Chicago Plan/FRB & several similar pages the Questions below seem to be the central questions/objections between FullRB & MMT (or Post Keynesian, or MR).


  1. Would Post Keynesians and/or Modern Monetary Theorists favor the elimination of endogenous money (bank credit-money creation)?
  2. If so, by what means (FullRB or other)?
  3. If not, why not? What positive or necessary purpose does endogenous money serve?
  4. Do Full Reserves actually even stop credit-money creation? [Scott Fullwiler writes “(Aside from the fact that 100% reserves doesn’t eliminate banks’ abilities to create deposits out of thin air–but save that for another time after they’ve at least come to grips with accounting)”]
  5. Does stopping credit-money creation have serous negative effects which outweigh the positive effects Benes & Kumhof, etc. claim? 


  •  Pro-Full Reserve people. You would do well to abandon trying to claim money is not debt. It is not a needed argument, and not a winnable one. (I’m looking at you, Zarlenga/AMI).
  • [Update-After a comment by Musgrave—I am not referring to FullRB criticism of endogenous money being debt, more or less the raison d’être of AMI etc.; I am referring to criticisms of AMI & similar groups that they seem to think the government can somehow issue {exogenous} money that is not debt]

“(STF) If they would just say “govt money only” or “pvt debt free money” they wouldnt sound like they have no clue what they are talking about.”  And “(“all they’d have to do is just have to stop saying “debt-free money.” What they want is a world of fiat money only and 100% reserves–is that so hard to just say?”

  • But MMT people, I think it is fair to recognize that under the system Full Reserve proposals call for, money would indeed act differently than what we usually think of as debt. Basically, the debt claim would hit a wall with the Government (or “the people”). In effect saying “we have created a common good by fiat and declare it to function not like debt” (and yes, this is do-able). Now, technically, ultimately it is a debt (and Zarlenga wrong), but that would only ever become evident if the (let’s say U.S.) Government became so weak (war, revolution, whatever) that it could no longer back up its claim that the circulating greenbacks had value simply “because-we-say-so-end-of-story” [& the power to tax of course, which amounts to the same thing]. As I pointed out before, Fullwiler likes the way the platinum coin resolution to the Fiscal Cliff highlights a basic MMT point about  money. But I also think it highlights a basic Full Reserve point – we can essentially have the last word on debt by the Gov/people bound up in a symbolic platinum coin (to be clear, I am not advocating a “platinum standard”. The platinum coin is a just a somewhat hilarious loophole Beowulf taught us all about that technically would work, but could be achieved more directly by just letting Treasury issue notes). “The Buck Debt Stops Here” in way, somewhat literally. Technically that platinum coin is a claim of trillions of dollars against the U.S. people, but in practice it represents the end of the line on debt claims for the greenbacks it would represent.

So on debt, I do think the two sides are talking past each other– yes money is always debt  but yes a system can be made where fiat money acts as if it is the end of the line on debt claims and acts as if it were a token and can function as a token in a banking system. Indeed, Full Reserve people are saying that is what we need to have a stable, fair system.

Beowulf writesIt would make life simpler if Tsy issued consols [consolidated stock]— the lack of a guarantee to repay principal would seem to put outside the debt ceiling– which is nothing more or less than a cap on total amount of principal guaranteed repayment.

However, aside from political framing, it doesn’t really make a difference whether you call outstanding Treasuries “equity”, “debt” or (as banks are wont to do) “deposits”.”


Overall, I still don’t see where the split is once the details are looked at between much MMT and the smarter Full Reserve People (unless it is political – yes, Full Reserve people do want to smash the power of the banks, to make that clear, and it seems that at least some MMT people do not).

On MMT and FRB getting along – Scott Fullwiler writes in a comment “AMI’s policy proposals–as Neil points out above–could only work as they want them to in the context of monetary operations that MMT’ers have actually been arguing in favor of for some time.” 

So what is the problem?

Every time I look closely at FullRB and MMT, it seems to me like they reinforce each other, not contradict each other. FullRB creates a simpler, more direct system to achieve MMT functioning; MMT principles fill-in the missing details of FullRB proposals.

A note on Post Keynesian/Steve Keen on FullRB

As far as Post Keynesian and/or Steve Keen’s position, I think it is worth emphasizing Keen’s position:

“There are many other proposals for reforming finance, most of which focus on changing the nature of the monetary system itself. The best of these focus on instituting a system that removes the capacity of the banking system to create money via “Full Reserve Banking”…

The former could be done by removing the capacity of the private banking system to create money.

Technically, [AMI and Positivemoney] proposals would work.”

Keen then goes on to list some objections that I think are pretty weak (that is for another post), I also agree with Ralph Musgrave on the weakness of those objections.

94 Thoughts.

  1. Question 1. As I said in a previous comment, MMTers don’t have much to say about banking. MMT is compatible with either fractional or full reserve.

    Question 4. Re Fulwiller’s claim that full reserve does not actually stop endo, I’d like to know what his reasons are. I agree that a total and complete ban is impossible. After all, as Minsky said, “Anyone can create money – the trick is to get it accepted”. E.g. I can issue IOUs. If those IOUs become generally accepted in my neighbourhood as being worth their face value, then I’ve created money. But the latter point is pretty irrelevant. The important point is that controlling money creation by banks and the larger shadow banks is not difficult.

    That “creation of money by the people” can quite easily arise in unusual circumstances. E.g. there have been two strikes by bank staff in Ireland since WWII and the country ran short of physical cash. The response of “the people” was to pay each other with cheques, which themselves started to circulate. Another example occurred in the turmoil in Egypt a year ago. IOUs started circulating. However those unusual circumstances are not of much relevance.

    Question 5. Re “negative effects” of “stopping credit-money creation”, one alleged negative effect is that it might stop a bank to respond immediately to particularly profitable or worthwhile lending opportunities. On the other hand if a bank spots the latter sort of viable project and doesn’t have cash to lend (as might be the case under full reserve) it can always borrow on the inter-bank lending market. Second, if it cannot do that, all it will do is turn down the least viable lending opportunities available to it, and channel funds to the more viable opportunities. An economy does not lose much when the least viable projects don’t go ahead. Third, another alternative is for the potential borrower (if their project is really so wonderful) is to seek non-bank investors.

    Disadvantages of endo:

    “Pro-Full Reserve people. You would do well to abandon trying to claim money is not debt.” What???? It’s precisely the full reservers who DO MAKE a song and dance about endo money being debt. In fact I think they make far too much of that point. E.g. they claim that the fact that endo money is debt leads to increased indebtedness – something I don’t agree with. See:


    “AMI’s policy proposals–as Neil points out above–could only work as they want them to in the context of monetary operations that MMT’ers have actually been arguing in favor of for some time.” And “Every time I look closely at FRB and MMT, it seems to me like they reinforce each other…”

    As I’ve said before, what MMT and full reserve have in common is the idea that fiscal and monetary policy should be merged, i.e. that given a need for stimulus, the government / central bank should simply create new money and spend it into the economy. There are a host of arguments for and against that policy. MMTers concentrate on one lot of arguments and full reservers on another lot.

    • Ralph, on the part about debt – I agree with your point about endogenous money.
      I am referring to discussions I have seen on some claims (e.g., by Zarlenga) that exogenous money can somehow not be debt. Fullwiler’s point, I believe, is that it also is debt. My point in turn is that exogenous fiat money can be backed in a way to make it do what AMI wants it to do, to function as if it is not debt, even though Fullwiler is correct that ultimately it is debt.
      I hope this point can be made clear; I think it addresses one of the fundamental misunderstandings between people like Zarlenga and MMTists and others who do not see what FullRB proponents are on about.
      UPDATE I think the back and forth on the status of exogenous money as debt (they may have used other terms; I think that is what is meant however) is here There are a lot of good comments on this page and some of the comments in this post come from it, not my first post (I should have been clearer on that). I think the MMT/AMI post there got a lot of comments in part because of the AMI piece on MMT, and in part because of the release of The Chicago Plan Revisited at about that time. At any rate, if you read through it I think you can see better what I meant with my comment about AMI and money as debt.

      • Clint,

        I could easily be wrong, but haven’t you got the words exogenous and endogenous mixed up above?

        Re Zarlenga I’d say at a guess that he is pro-full reserve, though after a few minutes Googling I can’t find any actual quotes.

        • Zarlenga, yes, the Dyson of America (well, sort of). What I mean is that Zarlenga and all pro-FullRB say (and I think there is no disagreement on this with MMT) that endogenous money is debt (“credit-money”). FullRB people would like to stop this endogenous credit-money from being created (as would Steve Keen I think). They want all money to be directly by the gov (exogenous). Their mistake is to then argue that this exogenous money is _not_ somehow a debt. It is true it is different – like High Powered Money today – but what Fullwiler is saying is that Zarlenga and others are wrong if they think this money is somehow magically not a debt – it is ultimately a debt the gov is backing. What I am saying is that all that is a digression. What matters is that the banks are not allowed to create endogenous or “credit-money”. This means that all the money in circulation will be exogenous money.
          So there is no disagreement on endogenous money, and a silly disagreement (By some FullRB people) on exogenous money that just doesn’t matter – everyone understands, or should understand, that what FullRB people want is all money to be exogenous, regardless of its ontological status as “debt” by the Gov or not (and FullRB people look stupid and weaken their case if they try to argue for exogenous money by saying it is not debt – the correct argument is just that exogenous money has a lot of benefits, and endogenous money drawbacks, namely, giving banks a lot of power and wealth that should accrue to the public who creates fiat money, creating instability and deeply skewing aggregate demand).
          That is also why I asked about Endogenous money in this post. As Keen especially has clearly shown, the reason endogenous credit money is a problem is that is leads to asset inflation and bubbles and ends up controlling aggregate demand (in ways that are not good for anyone). So we might as well talk about endogenous money per se, not Full Reserves, and that is why I ask if MMTists have any other suggestions for controlling endogenous money other than 100% reserves. (I still hope to hear from some MMTists or PKians on this).
          BTW – this is why I think MMT and FullRB should get along – MMT is known for saying that the deficit is far less important than most think it is- they propose as much deficit spending as needed to achieve full productivity and employment as long as it is not inflationary. FullRB would entail exactly the same thing, just under a more direct system than the one we have now (spending the only money there would be – High Powered Money in effect- into the economy to achieve the same MMT goals of full productivity/employment (stopping before it gets inflationary by legal mandate). The only real difference, then, is that under the FullRB plan banks would not have the extreme power they have now. Thus society (and politics) would be more equitable; also, the nation as a whole would be more productive, as 1.the current Rube Goldberg system has a lot of inefficiency through unnecessary complexity – those workers would be freed up to do productive jobs and 2. any gains the system does provide would be spent back into the economy rather than line bankers wallets. Also, increased stability and control of inflation should lead to more efficient investing and thus raise productivity as well.

      • Dear Clint,

        Firstly, thank you for providing this more neutral forum.

        With regard to your agreement with assertions that government money is debt, I have to advise you that the top accountants in the USA, the Federal Accounting Standards Advisory Board (FASAB), and the Board of Governors of the Federal Reserve System (the Fed), clearly disagree with those assertions:

        In their current handbook, FASAB says:

        “305. Seigniorage.—Seigniorage is the face value of newly minted coins less the cost of production (which includes the cost of the metal, manufacturing, and transportation). It results from the sovereign power of the Government to directly create money and, although not an inflow of resources from the public, does increase the Government’s net position in the same manner as an inflow of resources. Because it is not demanded, earned, or donated, it is an other financing source rather than revenue. It should be recognized as an other financing source when coins are delivered to the Federal Reserve Banks in return for deposits.”

        (SFFAS 7, p. 106-07:

        Since this seigniorage (via money origination) increases the Government’s net position, by definition it cannot be the Government’s debt (since debt does not increase one’s net position). The federal reserve banks’ balance sheet is unaffected, so their is a net financial gain to the federal government, and if spent into the economy, a net financial gain for the US economy as a whole.

        In the Flow of Funds Accounts for the U.S. economy, the Fed says that this seigniorage represents an asset value with no corresponding liability (and call it a “Discrepancy” – see table L.201, line 5: Although it’s recorded in the table with a negative sign, it’s actually a double-negative (-(x-y), where x>y), and hence, a net positive monetary value in the economy.

        The idea of monetary reform is that all money should be originated and treated in the accounts the same way as coins are now (but mainly as digital and paper “coins”), i.e., monetary assets that are distinct from other financial assets in that they are an asset of the holder and a liability to nobody. The accounting for these monetary assets is then simply a matter of transfers (with the initial transfer of new money being from the government’s “seigniorage account” at the central bank) by central bank and banks acting as custodians in a purely fiduciary capacity on behalf of money-holding customers (the same way as banks handle customer assets in custodial/fiduciary accounts now), with no separation of central bank money (“reserves”) and bank money (“deposits”), only simple plain money. Banks can still make loans and investments, the same way finance companies do now. If ever there’s a shortage of money to lend, banks can borrow more from customers, investors, other banks, and the federal government (via a revolving line of credit). It’s really that simple. A bill to do this has been introduced in the 111th and 112th U.S. Congress (, and can be introduced again.

        • Dear Jamie – “Firstly, thank you for providing this more neutral forum.”
          Thank you! I am trying to keep things on an even keel here, although don’t always manage I guess (including with myself).
          On money – I have been itching to get back to that post of mine and revise what I wrote – I leaned too far towards Fullwiler’s position there. It is sort of in a bookkeeping way right in that what the public holds is matched by a bookkeeping entry on the other side.
          But if money is debt, it is a mighty strange one – an IOU only redeemable in itself. And there are legal definitions of debt, which I think are the important ones for the working of the economy, where money certainly wouldn’t be a debt. I had some stuff planned to post on all this but got sidetracked. You picked up on my mistake. Fullwiler is just to stuck in a banal bookkeeping term in that debate.
          Anyway – thanks for the technical and legal stuff – the great thing about getting all this in blog form – you have added some great material I would not have known about. I have some more posts after this one on some of these issues – still need to correct some of my own mistakes and write it all better. I have also started this Wiki – feel free to add to it or edit it – it is brand new – to try and get some consensus on some of these terms and frame debates better.
          Kind regards,

          • Thanks Clint.

            I am one who thinks words do matter, and having a clear definition of what words mean is important, otherwise confusion is (even more) rampant. When it comes to matters of government and finance, in my experience, it is in fact the legal definitions of words that matter: they are the ones that are followed, in practice (at least at the end of the day).

            I have had a look at your new wiki and commend you for taking up this initiative. May I suggest that you start by using legal definitions of terms, as these are usually reasonably standardized and consistent in meaning, and these meanings generally accord with normal usage and understanding of the terms.

            Therefore, I suggest that you refrain from referring to money as “an IOU only redeemable in itself” as I think you will have a hard time finding a definition in law that supports this circular concept. I also have to ask, in a practical sense: if money is said to be an IOU, to whom is it owed, and why, and how is it to be paid?

            Before answering this question with reference to a “tax liability” being somehow a government “debt”/”liability”/”obligation”/etc., I suggest that you refer to page 42 of the Office of Management and Budget’s (OMB’s) current financial reporting requirements for U.S. Government entities (, which clearly shows that, as far as the OMB and the U.S. Government is concerned, the government’s imposition of taxes is accounted for as an asset of the government. It is clearly not accounted for on the government’s books as a “debt”/”liability”/”obligation” of the government, i.e., the government is actually the creditor in this situation, not the debtor. This makes sense when you consider that “accounts receivable” are an asset item on a balance sheet, while it is “accounts payable” which are a liability item (and these two items need not exactly match and offset one another in value).

            Words are what we use to communicate ideas and so do matter. People who use words in a unique, special or opposite sense to their legal, official and commonly understood meanings should make this very clear, up-front, for all to see and understand.

            Best regards,


            • P.S. Clint, do you think that the Federal Accounting Standards Advisory Board have got their bookkeeping wrong?

              If not, in what way is Scott Fullwiler’s position sort of in a bookkeeping way right?

              (And I do have respect for Scott Fullwiler and about 95% of what he says, I’m just seeking clarification on this point, to avoid misunderstanding.)

                • Thanks Clint,

                  In the present system, financial assets are almost offset by liabilities, but there’s still that thing called seigniorage in the Flow of Funds Accounts for the U.S. economy (which the Fed calls a “discrepancy”). Of course, at present, that discrepancy is too small to be noticeable on the graph you link to, but if it was the whole amount of U.S. money (say $12 trillion), that would be noticeable.

                  In any case, the sectoral balance analysis (the graph you link to) is arbitrary, and flawed (Steve Keen will be doing some work on this soon, so I’ll leave to him to open that can of worms).



                  • Yes – I watched the Fields institute videos, with Fullwiler and Keen together. Very interesting.

                    Can you give more detail on what you just wrote? ” the sectoral balance analysis (the graph you link to) is arbitrary, and flawed”

                    Fullfwiler and Stephanie Kelton would likely disagree strongly with you.

                  • Hi Clint and Jamie,

                    Re sectoral balances you are entering a minefield. Beware. Frances Coppola has just done a post on the subject:


                    And watch the feathers fly here:


                    And if you want several thousand words of impenetrable jargon on the subject leading nowhere much, try this:


                  • It’s completely arbitrary to divide society into “government” (or “public”) and “private” entities – we could split up society into any two or more groups, but it’s all the same society/people. Government is the people: individuals in the “private sector.” Whatever money the government has is the people’s (“private sector’s”) money, and all that money goes to the people (“private sector”), at the end of the day.

                    I know Scott Fullwiler and Stephanie Kelton like to say that the federal government deficit is the private sector’s surplus, but it’s not really. Whatever money wasn’t taxed from the private sector was borrowed from the private sector (as Steve Keen showed at the Fields Institute, it’s not created for the deficit) before being returned back to the private sector, but it also adds to the federal government’s debt, which is really the private sector’s debt, because the private sector has to pay for it.

                    E.g., If I have $2 and I pay $1 tax to myself and borrow $1 from myself and spend $2 back to myself, I still have the original $2; I don’t have a surplus of $1.

                    Steve Keen is developing a more technical argument against sectoral balance analysis.

                    • Do you know anything more (than what was on the Fields Inst. post by Keen) about what he is doing? Should be interesting.

                    • Dear Clint,

                      I honestly don’t recall anything about what Steve Keen is working on in that regard. And I don’t want to venture any further into that minefield (as Ralph rightly warns – thanks Ralph).

                      I suggest we just keep up with his blog and see what comes out (I suggest not pestering Steve about it, he’s very busy all the time).



                    • The division of society into government and private sector isn’t “arbitrary”. The important point about the division is that government debt (or monetary base) in private sector hands is viewed by the private sector as an asset and thus an inducement to spend. In contrast, government debt would not be regarded as a reason to desist from spending if government were run by MMTers.

                      Nor would government debt be regarded as a reason to desist from spending by those abiding by Keynes’s precept: “look after unemployment and the budget looks after itself”. Or to put it more bluntly, “just forget about the deficit and debt: just spend whatever is needed to deal with unemployment”.

                      Other and ostensibly similar divisions (e.g. dividing the population in to males and females or tall and short people) would not work the same way.

                      You also seem to suggest that government debt is really private sector debt because the private sector has to pay the debt back at some stage. Government debt is basically never paid back. Certainly government debt rises and falls from one decade to another, but US government debt as a proportion of GDP was around 75% in 1934 and at much the same 75% figure 80 years later in 2010. Where is the “repayment” there?

                    • Dear Ralph,

                      1. On the supposed spending-inducing effect of holdings of government debt:

                      Are you saying that my holding a government bond will induce me to spend money (that I don’t have, since I used it to buy the bond) more so than my holding and spending the money I did have in my bank account, before I bought the bond?

                      I don’t see how that works: I can’t spend the bond, but I could (and did) spend the money.

                      From my observations, the opposite appears to be true: people and institutions that hold lots of government bonds don’t spend much at all, they just accumulate more and more holdings of bonds (and other non-monetary assets), often in some post office box in some tax haven.

                      2. On government debt and unemployment:

                      You say: “just forget about the deficit and debt: just spend whatever is needed to deal with unemployment”

                      Why issue government debt, why not just create the necessary money and spend it in useful ways?

                      No amount of government debt will be able to deal with automation replacing jobs and imports replacing domestic production, only debt-free seigniorage income and money circulation will be able to deal with that (and other things like climate change, energy supply, biosphere conservation and ageing populations).

                      3. On divisions of the population:

                      I think dividing government from society is worse than dividing males from females or tall from short people as government represents all people; it is not a sector separate from the private sector, it is more like an overlay of the private sector.

                      I think democracy is in big trouble if/when we think of government as something other than ourselves.

                      If males borrowed from some females and repaid that borrowing by forcibly taking money from almost all females, would most females think this was a good deal? Would most females consider the male borrowings from some females as their personal “asset”? I don’t think so. And if the males kept this unfair system going constantly, I think that would only make it worse.

                      4. On the supposed non-repayment of US government debt:

                      To my knowledge, the US government has always repaid all principal and paid all interest due on its debt. There have been periods when more old debt is repaid than new debt issued, so repayment is being effected.

                      As long as there is government debt, there will be taxes from almost all of the private sector going towards paying for it. That tax money then goes to some in the private sector and others in the foreign sector. I see it as a constant drain on the resources of most of the private sector/society.



                  • Correction: I think the graph you linked to is flows not stocks (it’s too small for me to read it), in which case, if an increase in the money supply was all seigniorage to the federal government, that addition would be a percentage of the existing money supply (i.e., a flow adding to the stock), e.g., about 4% of about $12 trillion, say.

        • Jamie,

          On the vexed question as to whether central bank money is debt, I suggest it has SOME OF THE CHARACTERISTICS OF DEBT, but not others.

          It is clearly not debt in the sense that people can turn up at the Fed and demand $100 of gold or anything else in exchange for their $100 bills. On the other hand, a characteristic of debt owed by A to B is that it can be used to cancel out a debt owed by B to A, and central bank money does have that characteristic. I.e. if government suddenly says to you “you owe us $X in tax”, you can turn up at the tax office and cancel out that debt using $100 bills.

          • Thanks Ralph. Questions:

            1. In general, can a debt owed by A to B always be paid for with a debt owed by B to A, or only by prior agreement and/or mutual consent?

            2. Does your second example of a government imposing a tax on its taxpayers necessarily follow from your first example of debts owed between two parties?

            3. In your second example, if A is a taxpayer and B is the government, in what sense are $100 bills a debt of the government to the taxpayer? (I suggest that you refer to my reply to Clint above for consideration before answering this.)

            • Dear Ralph,

              I’m honestly a big fan of yours, so I’d really appreciate it if you could please answer my 3 questions.

              And one more:

              Do you think that the advice of the Office of Management and Budget of the United States Government on financial reporting requirements is wrong?

              (If so, shouldn’t someone tell them they’re making a big mistake? – I mean, if that’s what people seriously believe to be the case…)



              • 1. The law is that debtors and creditors can settle up any way they like (the mind boggles – if you’ve got a lurid imagination like me). But if the creditor gets choosy, there is one form of “settling up” that a creditor cannot refuse, and that is an offer by the debtor to pay with legal tender, i.e. the central bank money or the “state’s money” – £20 notes for example.
                2. Not sure what you are asking there.
                3. You ask “in what sense are $100 bills a debt of the government to the taxpayer?”. My answer is as above, i.e. a characteristic of one debt is that it can be used to cancel out another.
                Re p.42 of the Office of Management and Budget of the United States Government document to which you refer, I have no quarrel with them. They’re just saying that when a tax is imposed by government on a private sector entity, that’s a government asset. Quite right. And it’s a private sector liability. I.e. a private sector entity owes government. That debt can be cancelled out by the private sector entity giving government some $100 bills, which as I said above are a debt running the other way.
                But to repeat, I’m not saying that £100 bills or monetary base is a debt in the full and normal meaning of the word “debt”.

                • Thanks Ralph, and I apologise if I sounded a bit terse before, it’s just that I don’t see how people can say a government that imposes a tax on taxpayers has a debt to the taxpayers because of the money it originates, especially coin, which is booked as a pure monetary asset with no corresponding equal liability entry on the balance sheet of the originator (e.g., the U.S. Mint, and hence the U.S. Treasury and U.S. Government). Where is this supposed debt recorded? I’ve never seen it recorded anywhere.

                  Black’s online law dictionary defines debt as a sum of money due (see: Nowhere does it say the money itself is a debt.

                  That’s why I asked question no. 2; because I don’t see any debt running the other way, i.e., I don’t see a debt of the government to the taxpayer, so I don’t see that the debt of the taxpayer to the government is cancelled with a debt of the government to the taxpayer; it looks like a one-way debt situation to me, not a two-way debt situation. If I borrowed and used your lawnmower and then returned it to you, would your lawnmower be your debt to me? I don’t think so.

                  I know that under the present monetary system almost all money is originated as or with a debt, but it doesn’t have to be, e.g., coins aren’t, as the Federal Accounting Standards Advisory Board and the Board of Governors of the Federal Reserve System’s Flow of Funds Accounts show (see my comment to Clint above).

                  I think it’s a big mistake to assume that a special case (most of the present monetary system) is the general case, when there are infinite possibilities in a human construct such as a monetary system.

                  • You ask “Where is this supposed debt recorded? I’ve never seen it recorded anywhere.” Notes and coin are recorded as a liability of the Bank of England here:


                    Re your 2nd para, the fact that the concept “money” is not included in the definition of the word debt does not stop debt being a form of money. Large numbers of things have served as money thru history: gold, bronze axe heads in the bronze age, tally sticks, cigarettes in German POW camps, cowrie shells, cattle (in some African countries / tribes).

                    • Coins of the Realm are not liabilities of the Bank of England: they are issued by HM Treasury. HM Treasury carries coinage awaiting issue as an asset on its balance sheet (it has paid the Royal Mint the production costs) but it does not carry issued coinage as a liability. The Bank of England carries issued banknotes as a liability of its Issue Department.

                      The Office of National Statistics classifies non-resident holdings of both coins and banknotes in issue as liabilities of the UK with respect to the rest of the world.

                      The history of banknotes as liabilities derives from the time when they were promissory notes redeemable on demand in gold. In 1914 to conserve gold stocks to finance the war, the government ordered the progressive withdrawal of gold sovereigns and half-sovereigns from circulation, replacing them with £1 and 10/- Treasury-issued Currency Notes, which were, however, redeemable in gold coin on demand at the Bank of England on behalf of the Treasury.

                      In 1925 the UK returned to the gold standard but redeemability of the Currency Notes was cancelled and banknotes were henceforth redeemable in gold but only in amounts sufficient to purchase one or more 400oz bars. In 1928, the government transferred liability for the Currency Notes to the Bank of England and authorised them to use the notes to redeem their higher denomination banknotes and to issue banknotes of £1 and 10/- denomination (previously restricted to £5 and above). The gold standard was suspended in 1931 and banknote redeemability ceased.

                      The situation seems to be that for coinage a sovereign nation cannot have a liability against itself – its people, and for banknotes convention is an obsolete relic of history.

                    • Dear Ralph,

                      When I asked “Where is this supposed debt recorded?” I meant the supposed debt that a government supposedly incurs when it imposes a tax on taxpayers.

                      The web page you linked to shows the Bank of England’s liabilities and assets. You will note that the Bank of England’s liabilities are permanent and generally increase over time, they are not cancelled out of existence with the payment of taxes, they are recycled and remain on the balance sheet (as evidenced by the fact that they bear no relation to the pattern of government expenditures and revenues), i.e., banknotes are not “literally burned”/”shredded” with the payment of taxes, and neither are the various types of deposits with the Bank of England “wiped off the liability side of the central bank’s balance sheet” when taxes are paid, as some people insist.

                      The type of money I’m talking about is the type that is recorded as a monetary asset without an equal monetary liability (debt), e.g., coin in the present monetary system.

                      As you’ll see from the Annual Report of the Royal Mint (, the coins minted are not recorded as a liability on the Royal Mint’s balance sheet (the tax liability item on the balance sheet is for the operating profit of the Mint, not a liability of the Mint to UK taxpayers).

                      The coins of the Royal Mint are classified as “current assets” of HM Treasury, both in the manufactured form held as inventory, and as the deposits received from the proceeds of sales to banks for their face value. There is no offsetting liability item for these asset items. Page 170 of HM Treasury’s Annual Report for 2012 this explains the process that leads to the recognition of this asset item (and net seigniorage income gain):

                      Also note that seigniorage is regarded as income in this HM Treasury report ( on removing the seigniorage privilege that 7 UK banks previously enjoyed; an income they have subsequently lost. Nowhere does it say that these 7 banks had previously incurred a debt to UK taxpayers, and that they were relieved of this debt by no longer having a seigniorage privilege.

                      I searched the whole Annual Report of the Bank of England and the word “coin” (in this case as a noun, not verb) only appears once, in relation to the types of assets banks in Scotland and Northern Ireland must hold to “back” their banknotes. I also searched for the word “seigniorage” but there were no results.

                      Presumably the UK’s Office of National Statistics classifies non-resident holdings of UK coins and banknotes as “liabilities of the UK” (as Graham notes) because the holders may claim something of value from the UK with this money.

                      People are free to imagine imaginary debts in their heads if they wish, but don’t force them on me please. If a debt is not officially recorded anywhere, then I don’t think it should be included in any discussions of the way the present monetary system actually works (“operationally”), or could work.

                      All I’m trying to get across is that defining all swans as white or all cars as black or “all money is debt” is a big mistake, especially when it comes to money.

                      Sincerely and respectfully,


                    • As far as I can tell, the only authority for treating coins as liabilities of the issuer is the United Nations sponsored System of National Accounts at This is described as “a statistical framework that provides a comprehensive, consistent and flexible set of macroeconomic accounts for policymaking, analysis and research purposes.”

                      Paragraph 11.53 reads:

                      “11.53 Notes and coins are treated as liabilities at full face value. The cost of
                      producing the physical notes and coins is recorded as government expenditure and not netted against the receipts from issuing the currency.”
                      and para 11.46 states:
                      “Gold bullion held as a reserve asset is the only financial asset with no corresponding liability.”

                      It’s an analytical convenience therefore to treat token coins as liabilities.

                  • Hi Jamie,

                    I’ll take your points in turn. Government does not incur a debt “when it imposes a tax on taxpayers. It’s taxpayers who incur the debt.

                    Re the BoE’s balance sheet which shows monetary base as a liability of the BoE, I don’t attach a huge amount of importance to that. I dug up that fact in answer to your question as to where BoE money or “monetary base” is shown as a liability of the BoE. But I’m not saying that PROVES that monetary base is a liability of the BoE. As I said earlier, monetary base has some of the characteristics of debt, but not others. Put that another way, I think central bank balance sheets are very different animals to the balance sheets of private sector entities.

                    Warren Mosler described monetary base as being like points awarded by an umpire in a game of tennis. I don’t disagree with that description.

                    The fact that monetary base does not disappear when tax is paid does not prove much. When tax is paid, money is just shifted from the account at the BoE of the commercial bank acting for the private sector entity that paid the tax to the account of the tax collector at the BoE (HMRC). I.e. (assuming we count monetary base as a liability of the BoE and I agree that is a dodgy thing to do), then when tax is paid, the BoE effectively says “instead of us owning some private sector entity £X, we now owe the tax authorities £X”.

                    Exactly the same happens in the books of a commercial bank. E.g. if I make out a cheque drawn on Lloyds to you, and you bank at Lloyds, then Lloyds just shifts £X from my account in their books to your account.

                    Re coins, I agree they are treated differently to notes in the books of the BoE and Treasury. I actually had that at the back of my mind when I first lumped them together above, but glossed over the fact.

                    Re “all money being debt”, that is a big over simplification of the real world. According to Positive Money, and Michael Rowbottom in his book “The Grip of Death”, Commercial banks cannot create £X of money without creating £X of debt. Which leads them to conclude that without debt there would be no money. I challenged that view here:


                    To summarise, what I said in the latter link was that IN THAT commercial banks simply supply everyone with enough money do normal day to day transactions, no debt is incurred. However, when it comes to LENDING then debt does (almost by definition) arise.

                    And as distinct from commercial banks, there are central banks. There again there are differences: the argument as to whether central bank money is debt is very different to the argument as to whether commercial bank produced money is debt.

                    Complicated stuff this, I think.

                    • Complicated – yes. Looked at from different viewpoints it is ever shifting. I am following all this btw!

                    • Thanks Ralph,

                      I agree with everything you say here.*

                      The point I was trying to make was/is that (despite the UN – thanks for the information though scepticalh), coins in the USA and UK (and most other countries) are treated differently, and are not booked as or with debt on the books by their originator (the Treasury). That is why I think the claim that some people make that “all money is debt” is not a true and accurate way to define all money, i.e., all the possible kinds of money we do, could, and might have.

                      (I’ve read your linked article also Ralph.)

                      * assuming you made a typo when you say at the end of paragraph 4: ““instead of us owning some private sector entity £X, we now owe the tax authorities £X”.” – I think you meant to say “owing” instead of “owning” – right? (Although perhaps “owning” is also appropriate, in another sense/common meaning of the word.)

                      Sincerely and respectfully,


                      P.S. My points in my previous comments are not aimed at you Ralph, they’re aimed at people who make claims about money and the present monetary system that, according to all of the evidence that I’ve been able to find, are untrue.

        • Whoops, that comment didn’t go where it was intended either. To correct my algebraic description of the Fed’s Flow of Funds Accounts table L.201:

          It should be “it’s actually a double-negative (-(x-y), where x<y), and hence, a net positive monetary value in the economy." as for some reason, the Fed reports the value as liabilities-minus-assets instead of assets-minus-liabilities (see:

  2. Personally, I wouldn’t favour the elimination of FRB, for two reasons:

    (1) I don’t see how this is possible – it would involve eliminating double entry bookkeeping. Credit is created every time a company defers payment of a bill and creates an asset for themselves plus a liability for the payer. It’s simply how capitalism works – I think this is what Fullwiller was getting at: 100% reserves would not eliminate this mechanic.

    (2) Without credit growth, we’d see very little actual growth. Full reserve banking is simply a straight jacket like the gold standard. Credit is required to fund business expansion and create investment.

    I’m not saying regulating the banks would be easy. But Full reserve banking would not really eliminate the problem of lending for speculation either; it would just stifle the economy in general.

    • I should look for another term than FRB – Unlearning wrote “I wouldn’t favour the elimination of FRB, ” I think you read FRB as “Fractional Reserve Banking” there.
      My bad.
      Readers – that sentence would be either “I wouldn’t favour enacting FRB (Full Reserve Banking)” or “I wouldn’t favour the elimination of FRB (Fractional Reserve Banking)”. Again, my fault for using the potentially confusing FRB. I will try to use something else in the future.

    • Any Full Reserve responses to this?
      “(1) I don’t see how this is possible – it would involve eliminating double entry bookkeeping. Credit is created every time a company defers payment of a bill and creates an asset for themselves plus a liability for the payer. It’s simply how capitalism works – I think this is what Fullwiller was getting at: 100% reserves would not eliminate this mechanic.”

    • Unlearning is right.

      Efforts to create ‘debt-free’ money are completely misguided. Credit:debt relations are natural ones that arise spontaneously in human interactions. A ‘debt-free’ money supply would not stop people lending money to each other on a fractional reserve basis and thus creating credit and debt.

    • Unlearningecon On your point 2, this is a misunderstanding. One, the government, under MMT principles, would spend towards full productivity/employment, with the only limiting factor being inflation.
      There would be loans & credit, just with people foregoing the use of that money (thus not causing credit-money creation, but with the benefit to the loaners of earning interest, of course). You have to look at the plans more carefully.

    • Unlearning,

      Re your point No 1, if that’s what Fulwiller meant, the he is wrong. It’s perfectly true that normal trade debts carry on just as before when full reserve is introduced. But those debts are not money. The standard definition of money is “anything widely accepted in payment for goods and services, or in settlement of debts”.

      What banks do is to set up creditor / debtor relationships, plus they arrange for those debts to “widely accepted in payment for goods and services..”. In contrast, normal trade debts are not “widely accepted”.

      Re your second point (“Without credit growth, we’d see very little actual growth..”) that just ain’t true. Under full reserve, government and central bank create and spend into the economy whatever amount of money is needed to maintain full employment, much as is advocated by MMTers or Keynes.

        • Unlearning – interest bearing accounts would in effect allow people to fund business & earn interest. The gov might play a role too – I will check, just as an example (there are other plans), the exact wording from the IMF Benes/Kumhof plan to see what they propose. Here is the IMF paper if you want to see what they have to say yourself. Cheers, Clint

        • Government’s don’t currently lend money to business, nor would they do so under full reserve. The only big exception – or should I say “monstrous” exception – are the billions of dollars worth of sweetheart loans granted by government / central banks to so called “commercial” banks during the recent crisis, and during the Savings and Loan fiasco in the US about ten years ago. That’s just one bit of evidence as to what a chronic system fractional reserve is.

          • I agree, I was being careful, though, because I thought I remembered something somewhere about a discussion of the gov being involved with “capital investment”; not sure where or what it is I saw though. I will try to get back to that.

            • The US Government, via agencies such as the Small Business Administration and the various components of the Farm Credit System, etc., does make a lot of loans to the private enterprise sector, primarily because the banking sector won’t.

              • Thanks Jamie! How big are these overall (relative to the larger economy)?
                Are they viewed as effective and efficient?
                Could they be a model for how a system with less private lending might work, or not?

              • Sorry Clint, my reply came under Ralph’s comment below.

                To (only partly) answer your question, there are dozens (maybe hundreds) of U.S. Government departments and agencies which make loans to the private enterprise sector, and if you include State and local government and other community agencies, that would be thousands of public lending institutions (maybe more in number than the ~17,000 depository institutions in the USA), so adding up all the loans of all those agencies is something I’ll leave for someone else to work out, but I’d guess that they have a significant effect on the economy, otherwise they wouldn’t have a good reason to exist.

                • Jamie, I’m guessing those agencies have opened bank money deposit accounts at commercial banks by transfering HPM from the government’s Fed account to the banks’ Fed accounts, and the loans they make are transferred from these deposit accounts to the borrowers’ deposit accounts. Here, bank money is created when the agencies fund their accounts and then simply transferred when the loans are made. This differs from the BoE Funding for Lending scheme. Here HPM is lent to banks under repo, so banks create a repo deposit liability in exchange for the HPM asset. Banks then create further bank credit deposit liabilities in lending to businesses. If this is correct, then the American system increases bank liabilities only by the amount of the commercial loan, whereas the BoE system doubles the increase.

                  • Graham,

                    1. With regard to U.S. government/public/community lending institutions:

                    Some of the U.S. Government agencies use the U.S. Treasury’s general account at the Fed, some have their own separate accounts at the Fed, some also have accounts with banks, and some only have accounts with banks. State and local government and community agencies have accounts with banks.

                    In the case of the U.S. Government agencies with access to accounts at the Fed, bank money would be created if/when funds transfer from their account/s at the Fed to a bank’s account at the Fed (but this is only recreating bank money previously destroyed through the payment of taxes by, or borrowing from, the non-bank public).

                    These agencies pass HPM and/or bank deposits through their accounts, they don’t create HPM or bank deposits to “fund” their lending like the Fed and banks do.

                    2. With regard to the BoE’s Funding for Lending scheme:

                    a) I thought the scheme entailed the banks obtaining more gilts first (“the Bank of England will lend UK Treasury Bills to banks and building societies” page 3: – no?

                    b) Are repos treated like customer deposit liabilities by the banks?

                    c) What is the advantage of doubling increases to banks’ liabilities via lending under the scheme?

                    Best regards,


    • I agree that the argument over whether exo money is debt is a diversion.

      “So we might as well talk about endogenous money per se, not Full Reserves….” Not sure about that: reason is that an endo money system is inherently fractional reserve, and an exo only money system is inherently a full reserve system. In fact you can pretty much define full reserve as a system in which all money is exo, seems to me. But that again is a minor “diversion” sort of point.

      Re FullRB and MMT, as we’ve both pointed out before, they have in common the idea that stimulus should take the form of simply creating new money and spending it into the economy (at least that is certainly true of Richard Werner’s version of FullRB). And that amounts to merging fiscal and monetary policy. But that “create new money” idea is not absolutely INHERENT to FullRB is it? I.e., far as I can see one could have a FullRB system and continue with the present system under which fiscal and monetary policy are separate. But I might have dropped a clanger there.

      • Clint, there are dozens (maybe hundreds) of U.S. Government departments and agencies which make loans to the private enterprise sector, and if you include State and local government and other community agencies, that would be thousands of public lending institutions (maybe more in number than the ~17,000 depository institutions in the USA), so adding up all the loans of all those agencies is something I’ll leave for someone else to work out, but I’d guess that they have a significant effect on the economy, otherwise they wouldn’t have a good reason to exist.

      • Ralph, whether state money creation amounts to merging fiscal and monetary policy depends on whether the money is created _in order_ to fund govt. expenditure (which seems to be the MMT position) or whether govt. expenditure is simply the means for getting into circulation the money that was created for the purposes of monetary policy (which is the PM position). However, it is correct, I think, to say that FRB can operate without involving govt. expenditure. Under the IMF-Chicago plan, money creation remains with the banks as a consequence of bank lending, but the rate at which it can be created is constrained by the rate at which the bank can raise the capital needed to fund the necessary reserves.

        • Graham,

          My interpretation of the Benes-Kumhof Chicago Plan paper’s preferred proposal is that banks would no longer be able to create money as a consequence of bank lending, they would have to borrow from a Treasury line of credit to obtain funds to make productive loans, with other lending being intermediated by investment trusts via equity investments.

          How have you interpreted it to be otherwise?

          Best regards,


          • Jamie,

            The Benes-Kumhof paper does not describe how the system would operate after the transition, but the following is certainly feasible:

            Bank A issues shares which a customer of Bank B buys. Bank B transfers reserves to Bank A in settlement and discharges its deposit liability to that customer to restore 100% reserve backing for its remaining deposits. Bank A now has increased equity and increased reserves, more reserves than deposits. One possibility is that Bank A can now extend loans to its customers by creating deposits until the excess reserves are matched. This establishes the principle that loans still create deposits. However, the overall levels of deposits is merely restored, not increased.

            The Plan is silent on the circumstances under which new reserves will be issued. Reserves are to constitute government equity but according to the Plan banks will have to borrow reserves, which implies a regime of repayments and rollover and also implies a requirement for collateral.

            Accordingly, another possibility is available to Bank A. It can buy eligible securities from other customers of Bank B and settle payment by transferring its newly acquired reserves, following receipt of which Bank B will increase its deposit liabilities to those customers. The reserves of Banks A and B are now both fully matched by deposits, but Bank A can now offer the securities it has purchased as collateral for a further loan of reserves and create further deposits on the strength of those reserves by issuing new loans. Aggregate deposits increase.

            Now in principle, Treasury has to complete the issue of new reserves before the bank can issue new deposits, but in practice, the bank only has to have acquired reserves sufficient to cover the new deposits before the next time its compliance is tested. The point is, no matter how many reserves Treasury issues, there isn’t going to be any money in circulation unless the banks create deposits. And banks create deposits every time they pay their staff and suppliers but they have no control over their levels of reserves. Either, banks are going to have to sit on a buffer stock of reserves, or the supply of reserves is always going to play catch-up.

            The only way under a full reserve system to prevent this softening of the Treasury control over reserves is for reserves to be persistent, not renewable, and to owned outright by banks, not borrowed.

      • Jamie,

        1. Thanks. I went into that level of detail because I had confused myself about what the BoE was doing.

        2a). Yes, I was wrong about the Funding for Lending Scheme. It’s not a loan of HPM to banks, it’s a swap of highly liquid Treasury Bonds for banks’ illiquid assets, so that banks can use the bonds as collateral for cheap loans from the money market. This is not a repo transaction of cash in exchange for a collateralised loan undertaking but a collateral swap, a mutual undertaking to supply to each other in due course securities equivalent to those which each have received from the other.

        b). Repos, the obligation to purchase equivalent securities from the counterparty, are included in the definition of deposits for regulatory purposes. Currently around 60% of UK banks’ repo liabilities are with non-bank customers.

        c). I thought I detected a difference in emphasis between US willingness to lend directly to the public and UK reluctance to expand the public sector balance sheet. Misunderstanding.

  3. As one who adheres to Austrian Economic principles, I absolutely, unequivocally, say end the FRB. First of all the FRB has NO reserves, it’s also a private bank that has zero deposits. There is nothing Federal about the FRB and the only way to encourage savings and maintain value is to allow competing currencies. The FRB has a monopoly on money creation and can manipulate the amount of money in circulation, depressions, bubbles, interest rates, and since the dollar/FRN is the global reserve currency the danger is also exporting inflation to other countries.

    In the United States Constitution it says only gold and silver as legal tender and ALSO the states are responsible to coin their money.

    When monopolies exist there can be no free market and since Austrians advocate free market principles the FRB/Central banking are destroyers of individual, economic freedom.

          • Ah yes, the Paul Grignon video. The good thing about that video is it gets the general public thinking about the effects of the banking system, something neoclassical gets wrong or ignores (yes, they have reams of papers on some aspects of it, but when Nobel Prize winners don’t understand endogenous money, the mainstream must be doing something wrong.)
            The bad thing about the video is it perpetuates a myth of commodity money and ignores how money has often (and most successfully) been created, through fiat. The funny thing is, (because Grignon and people focus on the money multiplier/fractional reserve system) – the truth is actually worse than what they worry about – credit money creation isn’t even constrained by reserves in practice. The reason to have full reserves is not really because of the fractional reserve system, but to stop endogenous “credit money” creation which destabilizes the system, leads to bubbles etc. (as the post by Keen discusses). At any rate, for all those who find Grignon interesting, the place to start understanding what the problems with endogenous money really are is the Keen link above. On money more generally the books by Graeber and Zarlenga are important (even if some don’t agree with Zarlenga, the book has lots of historical discussion). So start with this
            and then
            I am sure there are other shorter works on fiat money, how Adam Smith’s influence (among others) has helped perpetuate myths about commodity money etc.
            [for others, some fascinating monetary history is in this 2011 paper by Peter Bernholz on historical cases of “Thier’s Law” (Anti-Gresham) ]

    • Ah – I’ll have to read your post! Someone had to comment on it intelligently. The main thing is people like him see that _something_ is wrong, and pin it on fractional reserve. In a way you can’t blame them though – Neoclassical Economics in textbooks hammers away at the point that there is a money multiplier etc., and since at least Smith there are (often imaginary) stories about commodity money even in textbooks. At least Grignon is trying, it is not his fault if, as I said, people with Nobel prizes are telling him there is a money multiplier, and textbooks telling him that gold certificates are the root of the money system. And as I said, if Grignon ever grasped the reality off endogenous money creation (that it is not even constrained by fractional reserves) he would keel over. Or maybe finally see the sense in fiat money(?)

    • Ralph- you often mention that you think MMT and FullRB don’t have much to do with each other. But MMT is sometimes viewed as just modern chartalism, to which fiat money is central of course.
      But it is central to Full Reserve Banking as well.
      As the above discussion draws out, fractional v. full reserves is not really the issue at all.
      What is of importance is making all money truly fiat money, and not allowing it to be diluted by bank created endogenous“credit-money” which is highly destabilizing.
      I see MMT as central to this.
      The problems Keen and others point out about endogenous money creation mean that a _Truly_ “Modern” Monetary Theory (TMMT?) will not allow endogenous credit-money creation. It will thus be “Full Reserve” but primarily because this facilitates modern monetary management, or modern functional finance, not for the other reasons put forth by some in favor of FullRB (although 100% reserves will also nicely make checking account banks utterly stable as a side effect). A fiat money system with the vestigial apparatus of the gold standard in the form of bank-created credit-money is not modern at all, nor can it ever truly be functional. “TMMT” will happen when this artifact of the old system is finally discarded, and we have a system of pure fiat money that can much more efficiently carry out MMT prescriptions that let society produce at its true potential level. Endogenous money is a very serious destabilizer and net loss to society.

      Another way of saying it: We don’t have a pure fiat money system now – we have a fiat system with bank-created credit- money grafted on – no, totally dominating. For MMT (neo chartalism) principles to work, we need the system MMT is built to address – a pure fiat money system.
      Yes, smart MMT policies can be jerry–rigged to help make the mostly-credit-money-system we have work better than what “Neoclassicals” have managed. For MMT to truly function, however, it must be carried out in the environment it was designed for – and that is a pure fiat money system.

      • Clint, This getting complicated! You seem to be defining “fiat” money as money that is central bank produced. On that definition, I agree with your statement that “What is of importance is making all money truly fiat money…”. But that’s because full reserve is a system in which the only form of money is central bank produced, and I favour full reserve.

        However, the Oxford Dictionary of Economics definition of fiat money is “money which has no intrinsic value”. And certainly that’s what I understand by the phrase fiat money. Now one COULD HAVE a gold based currency with just the central bank being the issuer of such currency. Obviously government / central bank would have to own all the gold mines. Government would also need to control the export and import of gold. But that would be an example of a currency which is not fiat, but which is nevertheless central bank or government produced.

        Given the large number of currency systems that have existed throughout history, I bet there is an example of that system somewhere: perhaps Soloman and his silver mines.

        Re your claim that Keen and other full reserve advocates want to ban endo money “primarily because this facilitates modern monetary management, or modern functional finance…”, I definitely disagree with that. And this is the source of the disagreement between us, I think.

        Keen has reservations about full reserve, but in as far has he favours banning endo money, I think it’s primarily because of the asset price bubbles it creates or helps create. But if you have any quotes from Keen saying what you claim he says, I’d be interested.

        As to other advocates of full reserve, Irving Fisher’s main concern was the destruction of people’s savings (to judge by his booklet, “100% Money and the Public Debt”). He didn’t say anything about Knapp or chartalism, far as I know. As to Richard Werner, he sees the advantages of full reserve as being a more stable banking system, plus putting banks on what he calls a “level playing field” with respect to other lending / investing entities, like the stock exchange, credit unions, building societies, etc. I fully agree with those points.

        In short, the main advocates of full reserve do not advocate it because it brings, as you claim, functional finance. They have a different set of reasons.

        But clearly it’s nice that two groups come to a similar conclusion. Great minds think alike.

        • I probably got the Keen reason wrong, but I think, as you say, the convergence of good reasons for moving to Full Reserves shows why such a change is needed.

  4. Really the argument, AMI and others _should_ make is that what is needed a _true_ fiat money system (I think as a marketing tool positive money does this – “positive” = fiat really, in the way they define it).

    Once it is clear these groups are really just arguing for fiat money, I think many MMTers would happily sign on to that.

    I can’t see any reason why neochartalists would want to hang on to any vestiges of the gold standard, such as bank-created credit-money (in place of fiat money). Especially a vestige of gold standard banking that rather powerfully hinders the MMT goal of full productivity in the real economy through proper management of the monetary system.

    • Bit of a stumble there, Clint. The system we currently have IS FIAT. Put another way, and contrary to your suggestion, there are currently no “vestiges of the gold standard”. I.e. there is absolutely no tie between any major currency and gold, far as I know.

      Whether private banks should create what you call “bank-created credit-money” is a separate issue. Banks did that under the gold standard, and they still do it today in our non-gold standard environment.

      • Just now reading these – very quickly though- what I mean is that the fact that banks are allowed to endogenously create money is vestigial from the gold standard era (not that there is any connection to gold now). Perhaps allowing banks to create credit-money was useful or necessary under the gold standard. But it no longer serves whatever purpose it had then, and Minsky, Keen and others show clearly that it causes a great deal of problems now. I am tarring endogenous money (deservedly) with the gold standard brush on purpose – as an outdated and useless practice that causes real harm and no benefits.
        And as it is often translated fiat “it shall be” – this captures what I said much more wordily in other comments – the essence of fiat money is that the gov just says it has value, end of (debt) story. Zarlenga and co. take this too far, which then prompts others (such as Fullwiler) to correct them, it technically is a debt. But the fiat command lets it operate _as_ _if_ it were a token, and this creates a very diffuse and essential public good. Neo Chartalism should be the first to argue for a true fit system. That a true fiat system has no reason for destructive “credit money” is obvious if one starts from first principles. Describing this as “Full Reserves” is a bit backward really; a fiat system operates fine without some additional source of money-thing made by banks. A normal fiat system would have full reserves, yes, but this is not the essence of fiat, the essence is who controls money creation. What we have now is a fiat system that has been usurped by money-thing makers for no good reason. I guess the best MMT answer would be to quit accepting credit-money as payment for taxes. And as Mosler said (it amounts to the same, but sounds different) simply tell banks (by fiat) that they cannot loan money from checking accounts, “no big deal”.

        • Re paying taxes with credit-money, governments don’t accept that form of money in payment of taxes. You can send a cheque drawn on a private bank to your local tax office, but your national tax authorities will then in effect go running along to the private bank telling them their check is no good, and that they want “proper” central bank money. Private banks always comply with this request. Credit-money is not legal tender.

          Re the purpose that endo money serves under the gold standard, seems to me it is as follows. Under the gold standard, the monetary base is fixed (ignoring flows of gold in and out of the country). That fixed amount puts a constraint on economic growth, so private banks come up with their own form of money. So under a gold standard, endo money does serve a purpose.

          But we are now in a different scenario: the monetary base is infinitely flexible plus we’ve come to realise that governments and central banks can regulate economies (or make a total hash of regulating them). So the constraint posed by a gold monetary base is no longer there, which in turn raises the question: what’s the point of endo money? My answer is that there is no point: it does more harm than good.

          I’m going into that in a lot more detail in a paper I’ve written and which should be available on the net in January here:

          • Look forward to the paper Ralph. And we are in complete agreement here “which in turn raises the question: what’s the point of endo money? My answer is that there is no point: it does more harm than good.”
            As far as your first point, probably a confusion of terminology – pretty much all of the money in the UK, US and everywhere else is credit-money. i.e., the bank created digital money in all of our accounts that is legal tender for everything including taxes.
            Under a purely fiat system the (mostly digital) money would be spent into the economy directly by the government under neo-chartalist principles. There would be no need (indeed, it would be undesirable) for any credit-money to be added to the pure fiat system. No legal tender other than government dollars/pounds etc would be created (and this is not a problem for lending as is discussed elsewhere).

          • {Ralph, I only outline the above in detail for other readers, as I know you don’t need it of course).
            Mosler’s point was that the same thing is achieved just by saying banks can’t loan money in the way they can now. In other words – Stopping banks loaning in the way they do now, implementing Full Reserves, and/or implementing a true fiat money system all amount to the same thing.
            I propose framing the debate in the latter terms is better for a number of reasons.
            BTW, speaking of framing a debate on money, I am reading L Randall Wray’s series on “AN ALTERNATIVE MEME FOR MONEY” at So far very, very interesting. A lot to absorb.

  5. These seemed appropriate here: Paul Krugman’s flawed ideas on fractional reserve.

    “Should We Let Banks Create Money? George Selgin

    Ralphonomics’ response: “George Selgin’s flawed pro-fractional reserve arguments”

  6. “Do Full Reserves actually even stop credit-money creation?”

    No it doesn’t – for the fairly obvious reason that loans don’t happen at a point in time – there is a long process to go through that takes time. However the full reserve restriction is only enforced based on loans advanced – not loans in the pipeline.

    And that leads to the consolidation problem – which I believe is what helped bring about the massive consolidation of the UK building society sector.

    What you get is market power – via branding or whatever that allows a firm to sell loans at a slightly higher price than normal. In other words they can push prices following the Post Keynesian markup theories on business pricing.

    That gives you a pipeline of loan applications that you know are at a particular price. You then pass that onto the other side of the business – who then improve the offer on their loan bonds. The result is that extra loans are created, and money pulled away from weaker firms – leaving a systemic shortage that has to be filled by the government sector or which results in the weaker firms failing or consolidating. The latter of course has been politically unviable in the current crisis and there is no reason to believe it would be any more viable in the future.

    The lack of maturity matching means that loans can be pushed pretty much as they are now (where the brake on loan issue is capital requirements). Given that FRB simply increases the stock of money I struggle to see how 100% of a very large amount of money looking for a return is any better brake than 10% of a smaller amount of money looking for a return.

    So I don’t think there is any secret sauce in FRB. It won’t fix any of the banking problems we have today. It will be the same problems with bigger numbers on the balance sheets. Banks are still a pain and have to be managed. Loans still create deposits. You still need a way to allow banks to go bust without systemic meltdown of the payment system if you want to arrest loan growth.

    Whether politically FRB is a useful tool to get government back in control of the central bank is one others with a better view on that should make. It might very well be.

    But the magic is not in the percentage of reserves banks have to hold.

    • Neil claims that $X of loan made by a large entity at the expense of $X of loan made by a small entity leaves a “leaving a systemic shortage”. Bizarre idea!!! In the latter scenario, there is no change to the “system wide” volume of loans. $X – $X = $0, unless my maths is wrong.

      Obviously there are SOME ECONOMIES of scale to be reaped in banking, just like any other business, but if that factor is of overwhelming significance, how come we have hundreds of small shadow banks? And how come there are so many small banks in the US?

      Moreover, one of the main factors that gives large banks a competitive edge is the TBTF subsidy. That subsidy would disappear under full reserve.

      Re Neil’s point about “The lack of maturity matching..” that is just more evidence that Neil has not bothered reading the literature and has no grasp of this area of economics. Full reserve as advocated by Richard Werner for example advocates something much nearer full maturity matching than obtains at the moment. (Personally I think the maturity matching should be 100%).

      Neil then says “Loans still create deposits..” Complete nonsense, yet again. More evidence that he has not read the literature. Loans under the CURRENT system create deposits because when someone deposits $X in a bank and that gets loaned on, both the latter depositor and the borrower then have $X. I.e. $X has been turned into $2X. In contrast, under full reserve at least as advocated by Kotlikoff, the above original depositor would lose $X on making the deposit – but they’d get a $X stake in a unit trust (“mutual fund” in the US). In contrast, under Werner’s system, the original depositor loses instant access to their money, and may lose a sizeable chunk of it altogether if the loans / investments which their money funds goes wrong. So under Kotlikoff, there is no net money creation. Under Werner, THERE IS some money creation or “loans creating deposits if you like”. But that’s an aspect of Werner’s system which I don’t like. I.e. I.e. favour a total ban on the “loans creating deposits” phenomenon.

    • The magic is in having a true fiat system that allows MMT principles to function.
      Tacking a (massive) “credit-money” system onto the public good that is a fiat money system serves no useful social or economic purpose, and indeed does a great deal of harm, as Minsky, Keen and others show, through being destabilizing.

  7. Does full reserve stop banks being able to create money out of thin air.

    Quick disclaimer, I work for Positive Money.

    It’s interesting that you mentioned us alongside the Chicago plan in the first post. The Positive Money (PM) proposals do indeed have the same goal as the Chicago plan/full reserve/100% reserve proposals, that is to stop banks creating money in the process of making loans (or buying assets),. However, the method is different. In the case of Chicago plan they do it by forcing banks to hold reserves against their deposits. As some people have pointed out, this doesn’t necessarily stop banks creating money – that is it is quite possible for there to be money creation by the banking sector with 100% reserves (incidentally for exactly for the same reasons a 10% reserve ratio doesn’t constrain deposit creation, although it does require the central bank to play along).

    The PM proposal, on the other hand, does not suffer from this problem. Instead of backing deposits with reserves, we give people access to the state created means of payment itself. Thus, unlike in the current system where two types of money circulate separately – central bank created reserves which are only used by the banking sector, and commercial bank created deposit money which is used by everyone else – in the PM system there is no longer a split circulation of money, just one integrated quantity of money circulating among banks and non-banks alike.

    This is achieved by removing the sight deposits from banks balance sheets and placing them onto the central bank’s balance sheet (which will be called transaction accounts). The private banks then obtain a new liability of the same size to the central bank, and correspondingly the central bank an asset from the private banks. This banks’ liability to the Central Bank is to be repaid as their assets mature, with the money repaid in this way to be recycled back into the economy by the central bank granting money to government to be spent into circulation.

    In effect, the central bank has ‘extinguished’ the banks’ demand liabilities to their customers by creating new state-issued electronic currency and transferring ownership of that currency to the customers in question. In a sense everyone starts baking at the central bank (although we would hire the banks to administer our accounts for us).

    Lending occurs in this system when people move their money from their transaction account (held at the central bank) to an ‘investment account’. This will be broadly similar to a time deposit today – there will be minimum notice periods, however, unlike today they will also carry some risk (i.e. if the underlying assets go bad they may lose some of their money). The money transferred to the banks will then be transferred to a borrower. So in this system lending by banks merely transfers money around the system, no new money or purchasing power is created when loans are made. Because in this system because all money is held on the central bank’s balance sheet any bank can be allowed to fail, without any effect on the money supply.

    So with the PM system it is possible to achieve the aims of the Chicago plan, whilst retaining double entry bookkeeping. The question is then not if it is possible, but if it is desirable. Obviously you have covered the boom bust cycle, financial crisis etc. and the unemployment and high house prices that go along with it. However there are also other issues, such as higher taxes, the effects on individual debt levels, inequality (interest transfers money upwards), subsidies and the too big to fail problem etc.

    • Ralph Musgrave provided a great response to this in another post I thought it should be visible here as well.

      Ralph writes:
      100% reserve (or any other reserve figure) won’t stop commercial banks creating money if we continue with the current system under which (in the words of Steve Keen) “the tail wags the dog”. In other words if central banks insist on a particular rate of interest as part of their misguided attempts to regulate economies, commercial banks can force central banks to issue more reserves during a boom, else central banks lose control of interest rates. (That’s actually just a classic example of a point made in the basic economics text books, namely that a monopolist can control price or volume, but not both. In this particular case, the monopolist is the central bank which has a monopoly on the supply of monetary base.)

      And that point ties up very nicely with one made in the Positive Money / Richard Werner / submission to Vickers, namely that adjusting interest rates is a daft way of regulating economies (a point I fully endorse). I’ve set out a whole string of reasons to back that point. And my reasons are incidentally very “MMT compliant”. See:

      For the above “submission”, see:

      Re the rest of Andrew Jackson’s post I’m going to disagree on several niggling little points – though I fully support Positive Money and it’s full reserve policy.

      First Andrew says “we give people access to the state created means of payment itself…”. I suggest they’ve got such access anyway. E.g. suppose person X sells government debt to the central bank as part of the latter’s QE operation, X then holds base money – except they don’t actually have an account at the CB: a commercial bank acts as go-between.

      Next he says “This is achieved by removing the sight deposits from banks balance sheets…” Nope. Under both the Werner / Positive Money full reserve system and under Laurence Kotlikoff’s full reserve system, private sector banks (or in the case of Kotlikoff, other private sector “entities”) still offer sight deposits. I.e. you want to withdraw £500 in cash, you’ll get it “on sight” (assuming the funds are in your account).

      Next, the whole business of investment accounts and transaction accounts at the central bank strikes me being unnecessarily bureaucratic. (And if I’m right then that strengthens PM’s argument.) Reason is that IF YOU DO have those two accounts at the CB, you’re still going to have to do spot checks on commercial banks and their branches to make sure that sums that depositors believe to be “sight”, have not in fact been surreptitiously loaned on by the bank. And as long as commercial banks are not doing that (i.e. doing fractional reserve on the side), I don’t see the need for investment and transaction accounts at the CB.

      And if anyone who thinks those “checks” are a weakness in full reserve, they need to count the number of regulators who are now permanently installed in bank headquarters to control the current system: our fractional reserve system.

      Final point, Andrew says “So with the PM system it is possible to achieve the aims of the Chicago plan, whilst retaining double entry bookkeeping.” I don’t see why any of the versions of the Chicago plan make double-entry difficult or impossible.

  8. Hi Ralph,

    Hope you had a Happy Christmas!

    In response to your points:

    Point 1: “First Andrew says “we give people access to the state created means of payment itself…”. I suggest they’ve got such access anyway. E.g. suppose person X sells government debt to the central bank as part of the latter’s QE operation, X then holds base money – except they don’t actually have an account at the CB: a commercial bank acts as go-between.”

    I disagree, in the current system they don’t have access to the state created means of payment, they have a claim on a bank. The bank can then use this base money for whatever it chooses.

    Point 2: “Next he says “This is achieved by removing the sight deposits from banks balance sheets…” Nope. Under both the Werner / Positive Money full reserve system and under Laurence Kotlikoff’s full reserve system, private sector banks (or in the case of Kotlikoff, other private sector “entities”) still offer sight deposits. I.e. you want to withdraw £500 in cash, you’ll get it “on sight” (assuming the funds are in your account).”

    I don’t want to talk about the Kotlikoff proposals, but I can categorically state that under the PM proposals sight deposits are removed from banks balance sheets. Now individuals will still be able to withdraw their money on sight, however the legal and accounting relationships will have fundamentally changed – essentially they wont be withdrawing this money from their bank, instead they will be withdrawing it from the central bank.

    For example, in the current system current accounts are merely promises from banks that they will use their own money at the central bank to settle payments on our behalf. These promises are only worth something as long as the bank is able to stay solvent and liquid. In contrast, Transaction Accounts will be actual money at the central bank, which banks will administer on their customers’ behalf. This means that funds placed into a Transaction Account remain the legal property of the account holder, rather than becoming the property of the bank (as happens in the current system). As such these deposits are removed from the private banks balance sheets.

    The customer is in a sense hiring the bank to act as a middleman, whose role is to relay instructions and information between the customer and the central bank. The bank never actually takes possession of the money, and is not allowed to instruct to the central bank to transfer it without the customer’s express permission.

    This is why the positive money system is not a full reserve system – people don’t own bank deposits which are then backed 100% by central bank reserves, instead they actually own the ‘reserves’ themselves (obviously under a reformed system these reserves would just be money).

    Point 3: “Next, the whole business of investment accounts and transaction accounts at the central bank strikes me being unnecessarily bureaucratic. (And if I’m right then that strengthens PM’s argument.) Reason is that IF YOU DO have those two accounts at the CB, you’re still going to have to do spot checks on commercial banks and their branches to make sure that sums that depositors believe to be “sight”, have not in fact been surreptitiously loaned on by the bank. And as long as commercial banks are not doing that (i.e. doing fractional reserve on the side), I don’t see the need for investment and transaction accounts at the CB.”

    Transaction accounts are the only accounts held at the central bank and are essentially digital versions of cash. Banks, individuals, the government and businesses would all hold their own transaction accounts at the central bank and have full legal ownership over the money in them, as outlined above.

    On the other hand, Investment Accounts are not money and are not held on the central bank’s balance sheet (but are assets on private banks balance sheets. Any money ‘placed in’ an Investment Account by a customer will actually be immediately transferred from the customer’s Transaction Account (which represents electronic money held at the Bank of England) to the bank’s account (also held at the Bank of England). At this point, the money will belong to the bank, rather than the Investment Account holder, and the bank will record that it owes the Investment Account holder the amount of money that they invested as a liability to the customer. In effect, Investment Accounts are simply records of investments made by customers through a bank, equivalent to a savings certificate. When the money is then lent to a borrower, it will be transferred from the bank’s account (held at the Bank of England) to the borrower’s Transaction Account (also held at the Bank of England)

    Point 4: “Andrew says “So with the PM system it is possible to achieve the aims of the Chicago plan, whilst retaining double entry bookkeeping.” I don’t see why any of the versions of the Chicago plan make double-entry difficult or impossible.”

    I didn’t mean the Chicago plan did this, merely that some monetary reform proposals with the same aims as the Chicago plan promote a kind of ‘single entry’ accounting system, as in those systems money is considered a token that is an asset of the holder and a liability of no one (and so ‘debt free’).

    In fact whichever system of accounting is used is mainly a matter of taste and is largely immaterial. Accountancy is after all not the reality, rather it is the recording of the reality – it is a bunch of conventions thought up by men to help record financial positions, they are not laws of nature! The American Institute of Certified Public Accountants (AICPA) defines accountancy as:

    “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.”

  9. Tom Hickey said…
    Clint. I could not get past the spam filter at your place and lost my comment. I am posting it here.

    There is a difference between the MMT POV and its policy position. The MMT POV is simply a description of the currency monetary regime, which BTW is global and so there is a general description of how a fiat system with central banking operates and description of specific cases in different nations. MMT as a POV sets forth no policy in such a description. MMT also has a macro component that contains an analysis of the possibilities that a fiat regime provides wrt policy space and how to use this policy space to harmonize the trifecta of growth (production-productivity), employment, and price stability in order to achieve and maintain optimal use of resources, full employment and price stability.

    MMT economists do not have a general policy position that covers all policy, but none of them that I know of think that FRB is a policy that should be adopted in favor of any other in order to improve the existing system.

    There is never a “perfect” solution. All options have advantages and disadvantages. The MMT economists do not see the advantages of FRB over the disadvantages as being superior to all other solutions to the design problem.

    Warren Mosler has put forward an MMT-based policy position proposals that are available at Basically it involves using fiscal policy iaw MMT principles instead of monetary policy, formally consolidating the cb and treasury functions under Treasury, setting the overnight rate to zero, issuing tsys in max duration of 3 mo, and revising the banking and financial system iaw his proposal, which would return banking to intermediation (risk management) and end financial engineering and prop trading (risk taking).

    On the other hand, Bill Mitchell has said he would prefer nationalizing banking.

    Politically, the issue is distribution of power between the public and private sectors. There are a range of options between the extremes of 100% public and 100% private. The debate needs to be about the advantages and disadvantages of the various options.

    In the end, whichever option is chosen should the system be changed, it has to be compatible with the MMT POV, in the sense of being “ruled by arithmetic” and supportive of efficient and effective SFC macro-based economic policy.

  10. This is a reply to Jamie’s comment (4th Feb).

    I hadn’t heard of Fiebiger before. And now that I have, I’m not impressed. I thought one of the comments after his article was apt. The comment referred to Fiebiger’s “tendency to generate obscure terminology almost as an end in itself”. The less talented section of academia often does that – with a view to hiding its ignorance or hiding the fact that it has nothing useful to say.

    Fiebiger is essentially into a nit picking exercise: he gets concerned with details which don’t interest me, like whether the Treasury creates high powered money when it borrows and spends, plus he gets worked up about Treasury and central bank book keeping details.

    When the Treasury borrows $X, spends the relevant money back into the economy and issues government debt certificates to the tune of $X to lenders, the private sector’s net assets rise by $X. You could call the latter HPM. Or you could call it “incipient HPM” in that at some stage the central bank has to print real HPM and redeem the certificates. But who cares?

    The important point is the MACROECONOMIC point made by MMTers which is that the government and central bank (viewed as a single unit) can create and spend money into the economy in limitless quantities: the only constraint is inflation. Keynes made much the same point when he said “look after unemployment and the budget looks after itself”. That’s the important point.

    • Dear Ralph,

      1. “When the Treasury borrows $X, spends the relevant money back into the economy and issues government debt certificates to the tune of $X to lenders”

      When the Treasury does this, doesn’t it issue (new) government debt certificates at the same time that it borrows? Do you think the Treasury is creating $X of money (HPM , or bank deposits created to balance with HPM) when it does this? I ask because of:

      2. “The important point is the MACROECONOMIC point made by MMTers which is that the government and central bank (viewed as a single unit) can create and spend money into the economy in limitless quantities”

      The important question is does “the government” (Treasury, not the 12 private Fed banks with a fig leaf Board)* do this now?

      I don’t think the Treasury does do this now. I don’t think adding more Treasury securities to the private sector is the same as adding more money to the private sector. Yes, people can sell the securities for money, but unless they sell them to a bank or central bank (which until recently was not done to any great extent), that money had to come from the existing amount of money available, and is just an asset swap. What the central bank does at some (later) stage is a separate operation for a separate purpose, which the history of the past 50-300 or so years (especially the past 5 years) has proven to be quite ineffective.

      I don’t see how borrowing money and then spending it is the same as creating money and then spending it, which is what you appear to be saying in 1 and 2. Please explain how 1 and 2 are compatible.

      * Many central banks are completely private companies (e.g., the central banks of Greece and South Africa), or partly privately-owned entities (e.g., the central banks of Switzerland and Japan), or their operational parts are privately-owned (e.g., the 12 Federal Reserve banks), so lumping them together with national treasuries and calling them “the government” is in my view very misleading (as is lumping businesses and households together, in my view).

      Sincerely and respectfully,


      • Jamie,

        You ask “Do you think the Treasury is creating $X of money (HPM ….”. My answer is that (as intimated above) the Treasury is not literally creating HPM. But against that, government debt is HPM of a sort: it’s a promise by government to pay the holder of the debt some HPM at some point in the future.

        Plus government debt is money of a sort: short term government debt is accepted in lieu of cash for large transactions in the world’s financial centers.

        Next, if the Treasury were to borrow and spend with a view to imparting stimulus, the borrowing would initially raise interest rates. The central bank (assuming it agreed that stimulus was needed) would then buy back some of the debt so as to make sure interest rates did not rise, and that would feed HPM to the private sector.

        Re regarding treasury and central bank being a single unit, obviously under current arrangements they are not a single unit. But as far as I can see, most MMTers would like to see them treated as a single unit. I.e. most MMTers agree with both Keynes and Milton Friedman who both said that having government / central bank simply print money and spend it into the economy in a recession made sense. And if the economy is regulated that way, then Treasury and central bank work in unison: in effect, they are a single unit.

        A much more recent advocate of having government / central bank just create money and spend it into the economy when needed is the head of the UK’s Financial Services Authority, Adair Turner. See


    • Not much time here – I hope to have more time next week, but I agree with Ralph – I read the Fiebiger piece, and not impressed at all. I would respond just as Ralph does.
      Next week I hope to get some details on these issues up.
      BTW Ralph, if you read this – I wrote a long reply to one of your very good recent posts on your blog…and the computer froze in the Philippines and it didn’t get sent.
      I remember being impressed by several of your recent posts I read at that time.

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