Among the Post-Keynesian groups concerned with understanding and fixing problems that lead to the 2007/8 Global Financial Crisis (GFC) and other ongoing economic problems there are different areas of focus by circuit theorists, Modern Monetary Theory (MMT), Steve Keen’s approach to private debt, and other Post-Keynesians. (MMT, while often with a focus on other aspects of the economy [as L. Randall Wray writes, leading from neo-Chartalist and functional finance insights to fiscal policy] is nevertheless firmly grounded in endogenous money theory). Despite these various approaches having important disagreements and areas of interest all are grounded in reality & therefore their discussions on policy options are coherent and useful, unlike orthodox policy discussions.
There is another perhaps small but dedicated and often visible group of reformers that focus on the monetary system. Broadly these are the various groups that want to change the monetary system such as The American Monetary Institute (AMI), Positive Money (PM), economists associated with the New Chicago Plan and others. Their relation with the Post-Keynesian groups mentioned above is somewhat complicated, and the key reason involves endogenous money. Before continuing, it helps to divide these diverse money reforming groups into two broad categories:
I. A significant number of monetary reformers focus on a money multiplier (and often on fractional reserves). They are still stuck in a loanable funds world, probably because orthodox economics has been so successful in teaching their delusion that we live in a loanable funds world, so these reformers, despite being heterodox in their goals, learn their economics from orthodox sources. Of course, we are not in a loanable funds world, so there is no money multiplier (and here). This means this significant section of monetary reformers is (rightfully) dismissed by those who understand how banking works.
II. There is another group of monetary reformers that do understand that we are in an endogenous money – not a loanable funds – world. Their proposals do not focus on a (non-existent) money multiplier. Their proposals are aimed at actually making the current endogenous money system into a true loanable funds system. This would be a “no reserves” system. (Positive Money and related proposals are examples of this group).
For the second group above, this leads to a somewhat difficult intellectual position. Post-Keynesian economists have been trying to get orthodox economists to understand the way the economy actually works (with endogenous money) in the real world for decades, and have looked on in dismay as orthodox economists have spent whole careers writing about a non-existent loanable funds system and in turn giving terrible, indeed dangerous, policy advice. Thus it is natural to view holders of the loanable funds view as enemies who do real harm to the economy and the public. But it is different to be frighteningly delusional about reality (as orthodox economists are about loanable funds) than to understand that the current system is an endogenous money system and want to make it a loanable funds system (as PM-type proposals do. There are other main reasons many Post-Keynesians reject PM-type proposals. At times, though, it seems mere association with the muddled orthodox view of banking does influence how/whether some Post-Keynesians really weigh the details of PM-type proposals).
I think several points follow from making the above distinctions into two groups. Primarily they concern the possibility for PM type money reformers to strongly support some key MMT proposals for financial reform, and in turn good reasons for Post-Keynesians to be in dialogue with both types of monetary reformers, rather than seeing them as some misguided offshoot of the loanable funds mainstream.
On the AMI, PM, monetary reform side –
- Realize the danger of being thought “not to get” endogenous money (or of actually not getting it for those in group I above). Educate those who still talk about “full/fractional reserves” and a money multiplier that these are just not the issue. Irrelevant terms such as full/100%/fractional reserves immediately suggest that the banking system is simply not understood. The loanable funds system PM and others propose is a “no reserves” system, not a full reserve system. PM type proposals are about changing the endogenous money banking system to a (no reserves) loanable funds system.
- Strongly support MMT proposals that get part of the way to your goals, even if you ultimately want further changes. Warren Mosler’s proposals go a significant way towards reducing negative aspects of the current endogenous money system and are in accordance with PM type views; two in particular:
“Banks should only be allowed to lend directly to borrowers and then service and keep those loans on their own balance sheets.”
“Banks should not be allowed to accept financial assets as collateral for loans.” (Mosler)
Both of these would significantly alter and restrict the current endogenous money system in ways that move the system towards PM and similar plans’ goals. Indeed, PM itself lays out what their ultimate goals (brief version here) are and separately shorter-term goals that in part are similar to what many MMT and similar proposals for bank reform want.
Also – some MMT (and other Post-Keynesian) proponents are in favor of nationalizing banks, and/or of creating an additional system of narrow banking for those who want it. PM recognizes this as an important step towards their ultimate goals. Creating postal banks or any other narrow banking system as at least an option for the public is a logical and do-able goal that many sides could unite behind.
In other words, if PM type proposals want to move from “A” (today’s system) eventually to “D” (a loanable funds system), and Mosler-type proposals move the system to “B” (significant restrictions on the way endogenous money is currently created; the existence of a parallel narrow banking system for those who want it) then PM should be very much on board.
- Try (even) harder to teach monetary reformers that are erroneously still worried about a money multiplier (group I) that there simply is not one in the current system (I know – it seems they just won’t listen to good advice). If they understood endogenous money and that loans create deposits they would see that reforming a “money multiplier” is a waste of time. This might then lead them to see the logic of and support reform proposals such as Warren Mosler’s. Another possibility is that they would become part of group II above and at least understand the issues more clearly. This would make coherent discussions possible, and take one more group out of the spell of orthodox nonsense.
- Regarding group “II” above – Post-Keynesians should recognize that group II monetary reformers are different from orthodox economists in a crucial way – they get endogenous money – they just don’t believe it serves the public purpose. They truly believe that a real loanable funds model is possible to create and serves the public purpose better than the existing system. Recognize that real dialogue is possible with them unlike with the vast majority of orthodox economists. If a loanable funds model would not work or would be worse for the public, clearer statements of why could be made. I know there are essays by Post-Keynesians about some of these proposals; I think they could be better (more on this below). For example, usually one of the more conscientious writers of the MMT economists, Bill Mitchell, compares some of these proposals to the gold standard (although he seems to be considering some of the Austrian type proposals in part of the essay). Mitchell writes “There would be the equivalent of a gold standard imposed on private banking which could invoke harsh deflationary forces.” While under a true loanable funds system such as PM proposes endogenous private credit-money would not be created, it is obviously still a fiat system, and neo-Chartalist and functional finance insights hold: limitless (except by inflation) money could be pumped into the economy as needed through fiscal policy, tax decreases, and citizens dividends. The gold standard comparison simply does not make sense.* Ditto concerns about PM proposals being deflationary (not in the long run for the reasons mentioned, nor in the short run since the changeover would be portfolio neutral – I think the New Chicago Plan has a good explanation of this, page 49 ).
Although PM and similar proposals are not necessarily among the largest or most influential groups (compared to orthodox economists and their policy groups) they do have some visibility and any additional organized, visible support for much needed reforms, and any addition to coherent discussions of our endogenous money system should be welcome.
Rather than arguing among themselves, Post-Keynesians and PM-type groups should focus on the important overlaps of their bank/finance reform proposals. If those are achieved, then the further changes that PM type groups want can be discussed. And despite seeming to have radically different end goals (a fair, stable endogenous system versus a true loanable funds system) the most pressing immediate bank reforms are agreed on by most sides.
Both MMT and PM-type proposals are to use state money for public purpose. The real contention between MMT and PM lies in whether or not endogenous private credit-money creation also serves the public purpose.
The key issues:
Many of the concerns with the PM proposal I have seen brought up are actually discussed in some detail in the PM literature (and/or related points usefully discussed in the new Chicago Plan) and it often seems that critics of the plan simply do not closely read PM explanations of the details of the plan. However, of course there are serious concerns, perhaps the most consistent being:
Would the new system of exclusively state money be able to create a fair system for large business loans? How would that system differ from the current system?
Concerns with the current endogenous money system:
Does the fact that endogenously created private credit-money dwarfs state money restrict the ability of the government to act in the public purpose in the way MMT believes? (possibly through the inflation limitation – can the government really contain inflation while using state money for public purpose when such huge amounts of private credit-money are created?) Does this render MMT ideas on the role of the state in the economy unworkable? (An example of these worries is Cullen Roche’s criticism of MMT here).
Does the inherent instability and procyclical nature of endogenous money have too many social costs?
Does the endogenous money system stealthily but inexorably lead to regulatory capture? Relatedly – Does the endogenous money system have a systemic tendency to funnel wealth upwards & into the FIRE sector? Lead to unsustainable levels of private debt? To highly inequitable wealth distributions? [related post]
On these latter questions, Steve Keen’s work seems especially relevant, suggestive of the way in which in the current system of private credit-money seems to ratchet up private debt and credit-money and create crises and inflate the FIRE sector. (e.g., “Are We It Yet?“, “Deleveraging with a Twist” and others; also see important work towards reconciling MMT & Keen’s work).
There are plenty of critiques of MMT – most of which are completely misguided and due to fundamental misunderstandings of the economy due to orthodox economic blinders. I see the most important debate concerning the balance of state and private credit money in a state theory of money and what follows from a state theory of money. These are a few more discussions that touch on that area:
A debate on Endogenous Money and Effective Demand: Keen, Fiebiger, Lavoie and Palley
Modern Money Theory and New Currency Theory (book length version: Modern Money and Sovereign Currency) (the historical discussion of why MMT and PM-type proposals differ on banking is very enlightening; I disagree with Huber on important aspects of the second part of the paper, especially where he still falls into the household analogy trap, and his unfortunate and confusing use of the term “fractional reserve system” when that is just not the issue. He clearly knows the difference between a no reserves system and “full reserves” although I think there are simpler ways of explaining it).
The Credit Money, State Money, And Endogenous Money Approaches: A Survey And Attempted Integration L. Randall Wray
[Postscript – A few bits I cut from above for readability]
*On Mitchell’s comparison of creating a loanable funds model to a gold standard – Ralph Musgrave makes similar points concerning Warren Mosler’s light dismissal of Martin Wolf’s article on banking reform. (But please Ralph – quit talking about “Full/Fractional reserve! : ) The PM loanable funds model will be a “no reserves” system!)
PM-type proposals & MMT are in essential agreement that the state can and should just spend state money for public purpose, with inflation the limiting factor. This is sometimes unclear because of the operational peculiarities of various countries, not least of the US. Whether this is just through continued deficit spending, or a 60 trillion dollar coin or similar, circulating treasury notes (the same thing really), or whatever, ultimately makes little difference. PM-type proposals have long used the US Greenback – circulating (mostly digital) treasury notes, as a key example, and MMT economists have the same view.
A final note – sometimes in comments here and elsewhere a criticism is made that “there are more technical papers that do deal with ____, since you don’t have them here you don’t know what you are talking about!” and/or “this post only relies on other blog posts and simple sources, it is not useful/serious/informed! etc.” I do try to read more “official” and/or technical papers when relevant. Two points though – 1) If bits and pieces of answers to some of these points are buried in technical papers somewhere, that doesn’t help anyone too much – cite them specifically (& better yet – summarize them and why precisely they matter) and 2) I think when good economists like Keen, Wray, Fullwiler and Mitchell with technical work write their views in plain English those writings reflect – and quite often best reflect – what their technical work tells them is right.
I just noticed a querie you made on Twitter about full reserve / narrow banking. And someone referred to me. If it’s of any use to you, I just published a short book on the subject. You can download a free copy here:
There is an introduction to full reserve near the start. I’m currently going through a paper by Sir John Vickers on the subject. He opposes full reserve. I’ll put some criticisms of his paper on my blog in a few days time.
Hey Ralph – I just recently saw your book and downloaded it. First of all, congratulations! I look forward to reading it when I get the chance. I always enjoy your views – I’ll try to give you some feedback when I can, and post links to the book where I can. Cheers, Clint PS – Curious what the differences are in your plan and PM plans (?)
You fail to distinguish the important category III of monetary reform proposals which are far simpler and better than Positive Money’s peculiar ideas.
Under category III proposals the existing banking industry would be split in two. One part would offer depositors instant access accounts which are totally safe (or as near total safe as it is possible to get) i.e. FULL RESERVE.
The second part of the industry lends to mortgagors, industry etc. This part would be funded just by shareholders, or stakeholders who are in effect shareholders.
For more info and references see the Introduction to Ralph Musgrave’s free book:
Kongking – Ralph’s ideas look fine. There does’t seem to be much/any difference between them and PM proposals. It is not a “Full Reserves” proposal either, and it would be wise to drop that misleading old term for the reasons I mention in my post. Otherwise, same plan, although Ralph highlights some different points about it than PM does. More on that in another post perhaps.
Also – if you like Ralph’s plan, there is no reason to think PM’s is “peculiar”. Read it more closely, you will see it is essentially the same (I would have to look at Ralph’s in more detail to see what small differences there may be – Ralph – feel free to highlight those here – would be useful).
Great post Clint:
I would like to add one thing that I believe bears emphasizing as its relates specifically to MMTers (with our focus on fiscal operations). AMI and PM groups both understand the power of the Govt’s fiat monetary authority, and they would like to see Govts use this ability to better the economy. They just think we need to change the system in order to use this ability. Now I know that this difference is all bound up in the loanable funds vs endogenous money schism, playing out mainly with the orthodox dictum that deficit spending drives up interest rates. But I do think the difference is important.
Let me try to put this another way. You can acknowledge that the private banking system is endogenous and yet still believe that the Govt has a budget constraint in the current system. Mainly because people still think that the TSY bond market is some sort of private sector disciplining mechanism against deficits and debt.
Eureka! I’ve just gave the article a re-reading and found a perfect paragraph to sum up the important difference I wrote about above:
“PM-type proposals & MMT are in essential agreement that the state can and should just spend state money for public purpose, with inflation the limiting factor. This is sometimes unclear because of the operational peculiarities of various countries, not least of the US. Whether this is just through continued deficit spending, or a 60 trillion dollar coin or similar, circulating treasury notes (the same thing really), or whatever, ultimately makes little difference. PM-type proposals have long used the US Greenback – circulating (mostly digital) treasury notes, as a key example, and MMT economists have the same view.”
No, they are not in agreement and MMT economists do not have the same view. You even reference the problem when you talk about green-backs, the $60T coin, and TSY notes. PM-type groups think we need to use these gimmicks in order deficit spend on the public purpose. This is a non-starter for MMTers, as all these gimmicks are irrelevant, and worse, they perpetuate the loanable funds mythology that Govt’s can’t deficit spend unless we use these gimmicks. Which is antithetical to MMT. I’m glad I noticed the significance of that paragraph, it really does highlight a key problem that must be overcome for any important steps towards alliance between MMT and PM-type groups.
P.S. Cullen Roche is a horribly dishonest MMT critic, and you actually hurt the validity of your piece by linking to or referencing him. From the very 2ng pg in the link:
“MMT Monetary System; “money” comes purely from the Govt, deposits are not money”
I mean really? I cant imagine a more ridiculous strawman, but its not out of character for that guy. Anyways, I digress
Auburn – The Trillion dollar coin links in my post were either by MMTers or frequent supporters of MMT. The Platinum coin discussion was for twofold reasons (by MMTers and friends) – 1) to bypass and show the absurdity of political-based debt ceilings and 2) to show the inherent logic (especially in the case of the 60 Trillion$ coin) of MMT- that the household analogy is false and the ability of the US Gov to fund $ denominated fiscal policy is limitless except for inflation.
Greenbacks, floating treasury notes, and platinum coins – are NOT “gimmicks”. They just are what should be normal – the treasury can spend as much as it needs to bring the nation to as close to maximum productivity, with the limit being inflation. We can call this a “deficit” or a “platinum coin” or “greenbacks”. It doesn’t matter, it is all the same. The “operational peculiarities” I mention just mean that in the present US system this is convoluted with the Fed etc.; does’t change the underlying accounting though.
PS Roche’s criticism of MMT concerning private credit-money are well expressed. You can argue about them – that’s what I want! But they are well expressed and cogent. The MMT position on private credit-money, especially in light of Steve Keen’s work, merits clarification. Juxtaposing the MMT position on “state money” and the PM position is enlightening and addresses these fundamental issues.
“Greenbacks, floating treasury notes, and platinum coins – are NOT “gimmicks”. They just are what should be normal – the treasury can spend as much as it needs to bring the nation to as close to maximum productivity, with the limit being inflation. We can call this a “deficit” or a “platinum coin” or “greenbacks”. It doesn’t matter, it is all the same. The “operational peculiarities” I mention just mean that in the present US system this is convoluted with the Fed etc.; does’t change the underlying accounting though.”
You are missing my point Clint. I was not commenting on what you acknowledge or understand, I was referencing the PM-type groups that you wrote about. These groups do think that we need the Gimmicks in order for the “treasury can spend as much as it needs to bring the nation to as close maximum productivity…” MMTers understand that whether we use the “gimmicks” or just operate the exact same way we do today, then TSY spending is still not limited. This is the key difference that I mentioned.
As far as Roche goes, he’s just a dishonest critic, like I pointed out and you ignored. Reference whomever you like.
Auburn – Yes, but the key difference is MMT wants to continue allowing endogenous private credit-money to be created. The argument is whether this actually does limit what the treasury/State can do – 1) chiefly by creating inflation that the government cannot control (when, in most countries, well over 80% of what most people would call “money” is not state money, it is hard to imagine there is any kind of “monopoly” as MMT say there is, and yes, I know the arguments [link] ) which then does limit an MMT type fiscal program and 2) by allowing the FIRE sector [link] to more or less control the financial system for the gain of the “1%”, in many legal ways and worse, through creeping regulatory capture [link].
These are precisely the issues that need MUCH more clarification.
I want to see MMT and PM address these issues more clearly. And I did not ignore your comment on Roche. I addressed it – read his section on MMT and the idea [link] that the US (or any) government that allows endogenous money to be created has a monopoly on money creation and point out where he is wrong (and I initially felt this is a weak point in MMT and only then searched out writing on this, finding Roche’s early pieces, not the other way around, i.e., being influenced BY his writings; what’s obvious is obvious if you examine it carefully. And don’t forget, I am talking about this particular issue, not all of Roche’s ideas, some of which I disagree with strongly; it is not all of a piece, just each issue/facts alone matter).
That is precisely the debate we need, and I am trying to foster.
“The argument is whether this actually does limit what the treasury/State can do – 1) chiefly by creating inflation that the government cannot control”
None of this limits the technical ability of the TSY to spend, PM-type groups reject this. Societies (RE: Govts) are in charge of creating the rules that banks operate under. Again, these are political choices and have nothing to do with the technical reality MMT describes.
” well over 80% of what most people would call “money” is not state money, it is hard to imagine there is any kind of “monopoly” as MMT say there is, and yes, I know the arguments”
Obviously you dont know the arguments, MMT never says that “money” is a monopoly of the state. Only that state money is a monopoly of the state, obviously. There are many more type of money than state money.
“by allowing the FIRE sector [link] to more or less control the financial system for the gain of the “1%”, in many legal ways and worse, through creeping regulatory capture [link].”
Again, this is all political and has nothing to do with MMT and the way Govt’s do and can spend their money.
“These are precisely the issues that need MUCH more clarification.
I want to see MMT and PM address these issues more clearly.”
Again, the point of my comment is to bring up a very important area of disagreement that you did not mention in your post. PM-type groups think that issuing TSY securities is “borrowing” just like neo-liberals use the term. This is fundamentally erroneous.
Again, wrt Roche. Saying MMTers believe that Govt has a monopoly on money creation is a strawman. It is a misrepresentation. Given that you’ve made the same error, I guess its no wonder why you dont mind when Roche does it. Anyone can create MONEY, only the US Govt can create actual US DOllars, otherwise they are counterfeit.
“None of this limits the technical ability of the TSY to spend” –
No one says it does; MMT is very clear that inflation is the primary limiting factor; there is good reason to suspect that endogenous money creation exacerbates inflation.
“Obviously you don’t know the arguments, MMT never says that “money” is a monopoly of the state”
Mosler – “Money is a ‘simple public monopoly.’” Yes, they are often more specific and say HPM. You are avoiding the discussion – which is precisely this: Do those other types of money present difficulties for a “state theory of money”? Should they be limited?
“Anyone can create MONEY, only the US Govt can create actual US DOllars”
Again, you insert the word “actual” when you need to; what most people think of and use as US Dollars are the “dollars” in their checking accounts; this is virtually all endogenously created private credit-dollars, not HPM. Again, the discussion is about what the effect truly is on the gov and its abilities to control inflation while carrying out functional finance. And who benefits really from allowing banks to create private credit-dollars? Does this lead ultimately to systemic corruption?
“Again, this is all political and has nothing to do with MMT and the way Govt’s do and can spend their money.” Auburn – read Steve Keen’s work closely, and Bill Black’s. Endogenous money creation is precisely at the intersection of government, money, the private sector and seems to influence that nexus in ways that are beyond just politics, indeed are systemic. Again, the very question is whether, b/c of influence on the FIRE sector and through automatically exacerbating inflation the endogenous money system should be limited for pubic purpose.
“PM-type groups think that issuing TSY securities is “borrowing” just like neo-liberals use the term.” Can you clarify and provide citations please? PM type groups essentially want to circulate zero-interest permanent TSY notes. They, like MMT, know the gov does not need to issue tsy bonds for money; bonds might serve some other uses that MMT has usefully pointed out. “Tsy securities” is vague, and remember I pointed out there are two basic groups of money reformers. So please be more specific and give sources.
(PS you may enjoy TOWARDS A PURE STATE THEORY OF MONEY )
Auburn should probably read the prologue too: TOWARDS A PURE STATE THEORY OF MONEY, PROLOGUE: A NOTE ON KNAPP & INNES
[By Email from Andrew Jackson]
The only thing i would say about the article is that PM aren’t really about restoring loanable funds, rather they are about returning macroeconomic control to the government. All the money could be lent in endogenously in the PM system if desired, by banks having unlimited overdrafts at the central bank. The point is in the PM system this is a choice for the Gov, and they can switch the tap off if desired (unlike in the current system). What we actually propose for dealing with potential shortage of credit for businesses lending is that the central bank stands ready to lend to banks on the condition that they on lend to businesses. This lending could even be endogenized – i.e. banks could have overdrafts at the central bank. In this system there would be loanable funds for non-productive types of lending, and endogenous money for productive types of lending. This would be very similar type of system, at least in terms of economic effects, to what Warren Mosler proposes (i.e there would be plenty of money for productive purposes, but not much for speculative activities).
Finally, I think Neil is probably wrong about the deposit drain through national savings. This used to be the case, but since the Debt Management Office took over the running of the national debt any money raised but not spent by the government is automatically lent back to the markets to prevent shortages of reserves. But this only happened in 1997 so its understandable he hasn’t caught up yet!
Cheers, and sorry for the late reply again.
(PS I couldn’t post this to the website for some reason so feel free to post it if you like)
The Monetary Circuit & Compatibility of Marx, Kalecki and Keynesian Macro http://heteconomist.com/the-monetary-circuit-compatibility-of-marx-kalecki-and-keynesian-macro/