[The fourth of a series of posts on MMT, ‘The Chicago Plan Revisited’, and related issues; see also part 1, part 2, & part 3]

Summary: MMT understands the monetary system in depth, particularly a fiat monetary system. “Full Reservers”, because they have not always fully grasped the significance of the fact there is no money multiplier and that the loanable funds model is wrong, often have a misplaced emphasis on the reserve ratio and sight deposits. Nevertheless, they can be understood ultimately to be worried about endogenous money, and in effect are arguing for a pure fiat money system. Steve Keen shows the magnitude of the negative effects of endogenous money on the economy. If Keen is properly understood, and what are in effect the anti-endogenous money policies of Full Reserve plans implemented, the end point is a pure fiat money system. And the starting point of a true chartalist system, the natural home for neo-chartalism.

There are actually two concerns most advocates of Full Reserves have

1. Solvency – there are few solvency issues with full reserves; not surprisingly a major concern in the 1930s for Simons, Fisher, The Chicago Plan etc.

2. (Endogenous) money creation

The second is much the more important, but the two are often confusingly conflated.
Partly this is because the significance of the fact that the loanable funds model is wrong and there is no money multiplier is not always fully appreciated by Full Reservers.

Banks do not make loans based on reserves or loanable funds but based on demand, perceived profitability, and the capital they hold. The government covers reserve requirements later. Raising reserve requirements can raise costs but does not stop money creation. Even the focus on sight deposits (i.e., PositiveMoney) misses the point – not only do reserve requirements not stop money creation, neither does stopping lending based on sight deposits. Banks loans pull money from the central bank, with the limit being the ratio of capital to risk-weighted assets.

So, unless Full Reservers are only worried about bank solvency, which is doubtful, they are really addressing concerns that have their root in endogenous money.

Anti endogenous  money, pro- true chartalism proposals

The main benefits of plans such as AMI, PositiveMoney, Kotlikoff, the Chicago Plan, Werner etc are, or would be with any needed tweaking, that:

Issuing fiat would be rightfully reserved for the issuer of the fiat decree: the government. A monopoly on money (but not on banks; entities that invest people’s money and distribute the gains would exist much the same as now). As L. Randall Wray notes, “money is a social creation. The private credit system leverages state money, which in turn is supported by the state’s ability to impose social obligations mostly in the form of taxes.” (Wray, 35)*. As the system stands, a public good is leveraged for narrow private gain, in a process that entails public costs through intrinsic systemic instability.

Implementing restrictions on the type of lending that leads to endogenous money creation would be “no big deal” according to Warren Mosler. (The details of how this would work, and why credit, investment in capital, and instruments for earning interest would still exist are in the various plans; Mosler suggests they would only be allowed to invest their equity capital. Some details are here).

The effect of this, however, would be a very big deal indeed. It would be the creation of a true fiat system of money, instead of the mixed state-credit financial system (as Steve Keen calls it) we have now. All money would be outside, exogenous, vertical, HPM.

Endogenous money creation is a vestige left over from older systems, where either banks were powerful enough to challenge sovereigns, or rich enough to buy off lawmakers, or where commodities actually were leveraged with bank notes. And before digital accounts, weakening banking regulation and related developments completely untethered credit-money creation from reality.

Whatever the past utility of endogenous money, in the modern economy it serves no socially useful purpose that could not be retained under a true chartalist,  pure fiat money system. Worse, endogenous money is increasingly understood to be extremely socially costly (especially in the work of Steve Keen).

Pro Full Reserve advocates, if the goals of their proposals and root of their worries are reviewed carefully and in light of the fact that loanable fund and money multiplier models are incorrect, are most concerned with the same problems Keen has also so clearly shown, that endogenous money is destabilizing and harmful.

It is evident that (neo)chartalist policies would work better under (true) chartalism than under the mixed state-credit financial system we operate under now.

That is why I say that Modern Monetary Theory & Full Reserve Banking are Connected by Fiat.

_______________
*L. Randall Wray “The Credit Money, State Money, and Endogenous Money Approaches: A Survey and Attempted Integration” Link

Although the simplifying assumptions are not perfect, Endogenous Supply of Fiat Money highlights some incentive problems with bank credit-money creation.

P.S. This post was partly inspired by a perceived lack of interest on the part of MMTers in full reserves, and vice versa (and downright hostility to MMT from the AMI Full Reservers). Good discussion here.

I see MMT, the aims of Full Reservers, and followers of the enlightening work of Steve Keen as natural allies.

Bob Mitchell (MMT), and Ralph Musgrave (pro-Full Reserve), both explicitly disagree, stating that MMT and Full Reserve have little in common. I will consider Bill Mitchell’s objections  in another post. In a nutshell though, Mitchell’s proposals (besides his analysis needlessly wading into the bogs that are Austrian thought) for banking are all very good, needed under any system, and I very much agree with him. However, they are to a large extent trying to undo the damage caused by an inherently flawed pseudo-chartalist system that has all the incentives wrong, a system that creates bank-credit-money bubbles that are the fundamental enablers of much bad activity in the financial sector. You might say that endogenous money adds fuel to the “FIRE” that Mitchell wants to extinguish. Excising endogenous money creation from our fiat money is needed to truly effect the changes Mitchell wants.