OMFG, MMT & Positive Money Get Along

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{OMFG = Overt Monetary Financing of Government}

 

Introduction

 

Economies run on tokens from two balance sheet expansions:

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

Two observations:

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

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

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

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

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

 

On The Vertical Side

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

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

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

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

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

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

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

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

On The Horizontal Side 

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

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

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

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

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

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

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

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

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

 

Conclusion

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

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

~~~

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

1000 Castaways: Fundamentals of Economics

 

 

 

 

 

 

Some pre- Great Depression roots of The Chicago Plan (& Minsky’s Financial Instability Hypothesis)

 

[This post is primarily focused on a sometimes underappreciated, though by no means unrecognized, pre- Great Depression direct influence on the architects of The Chicago Plan, with brief mention of related influence on Minsky & Milton Friedman. There is a tiny nod to MMT as well]

It seems to often be assumed that The Chicago Plan developed in direct reaction to the Great Depression (perhaps in part because Irving Fisher’s slightly later bank reform proposals are indeed thought to be). For example, Phillips 1992 outlines the early stages of the Great Depression and writes “It is within this historical context that economists at the University of Chicago presented their proposal for reform of the banking system.” (1992, 6).

Economists and historians are of course well aware of the long history of bank reform proposals before this period. But two strands that are sometimes neglected are worth remembering, especially as they relate directly to current renewed interest in The Chicago Plan and indirectly to the work of Minsky which is also appropriately receiving increased attention (they also relate through the same line to Milton Friedman and aspects of his work that tie in closely to bank reform and Minsky).

The direct link is from radiochemist Frederick Soddy (in the social sciences, best known for his 1926 Wealth, Virtual Wealth and Debt) who has often been criticized as a “crank” writing outside of his field and dismissed – perhaps incorrectly, as we will see – as un-influential (Soddy is usually associated with Full Reserve Banking – he was against the gold standard and for floating exchange rates – and/or known for arguments related to ecological economics). The degree, directness, and timing of Soddy’s impact may have been underestimated.
[To be clear: this is not an attempt to revive Soddy’s views, ahead of but still a product of his times, especially the ones on the tangent of energy, although these have some relevance to economics and environmental concerns , but merely to point out a somewhat surprisingly direct influence from his work].

Phillips (1992) does not mention Soddy at all. Another prominent and detailed work on The Chicago Plan, Allen (1993), writes that:

“In March  1933,  a  group  of  economists  at the  University  of  Chicago, evidently  with little if any  influence from Soddy,  gave  very  limited circulation to  a six-page statement..”(Allen 1993, 705).

Yet it seems both Phillips and Allen overlook a key piece of evidence that shows that the hugely influential Frank Knight, one of the original architects of the confidential 1933 memorandum on banking reform (and teacher of Milton Friedman, George Stigler, James M. Buchanan and senior collaborator with the young Hyman Minsky) was directly influenced by Soddy’s work. Perhaps more remarkably, Knight was influenced well before the Great Depression.

In 1927 Knight penned a short but in retrospect historically important review of Frederick Soddy’s 1926 Wealth, Virtual Wealth and Debt in The Saturday Review of Literature. Knight is highly critical of parts of the book, especially the mistakes Soddy as a non-economist makes and his neglect in realizing the extent to which economists had long struggled with banking and monetary issues. However, Knight also writes “These problems cannot be gone into here, but we can say with assurance that if this book leads economists to go into them as they deserve it will render the world a service of inestimable value.” Knight then concludes “The concepts of wealth, virtual wealth (money), and debt emphasize important and neglected distinctions, and in general it is a brilliantly written and brilliantly suggestive and stimulating book.” (Knight, 1927).

This is preceded by a still more remarkable passage, especially if we remember it was written in 1927 by a future primary author of The Chicago Plan and future teacher of Milton Friedman and especially developer of the Financial Instability Hypothesis, Hyman Minsky:

 “The practical thesis of the book is distinctly unorthodox, but is in our opinion both highly significant and theoretically correct. In the abstract, it is absurd and monstrous for society to pay the commercial banking system “interest” for multiplying several fold the quantity of medium of exchange when (a) a public agency could do it at negligible cost, (b) there is no sense in having it done at all, since the effect is simply to raise the price level, and (c) important evils result, notably the frightful instability of the whole economic system and its periodical collapse in crises, which are in large measure bound up with the variability and uncertainty of the credit structure if not directly the effect of it.” (Knight 1927, 732).

PS  The Peel Act, Soddy, Simons, Knight and Minsky

Henry Simons was of course a close colleague of Frank Knight (the second draft of The Chicago Plan was written by Henry Simons in close collaboration with Knight and other Chicago economists; they also edited an economics journal together I believe) and an even greater influence on Minsky than Knight (Wray writes that Minsky’s “biggest influences were…Henry Simons, but he also worked with Oscar Lange, Paul Douglas, and Frank Knight”; .Simons is thought to have been especially influential on Minsky through his 1936 article “Rules versus Authorities in Monetary Policy”, Moe 2012).

Simons seems to have been considering banking reform well before the Great Depression. He writes in a letter to Irving Fisher in 1933 that he had been interested from apparently as early as1923 in “trying to figure out the possibilities of applying the principle of the English Act of 1844 to the deposits as well as to the notes of private banks.” (Letter from Simons to Fisher, March 24, 1933, in Allen 1993, 706).

Much less known and rarely mentioned, Soddy had two earlier publications (and gave lectures) that discuss aspects of economics, his 1920 Aberdeen Lectures and 1921 Cartesian Economics: The Bearing of Physical Science upon State Stewardship.

Given that Soddy won a (real) Nobel Prize in 1921 I thought his other writings or economic lectures might have been noticed, and thought I would check if they seemed to have been of any influence on Simons, who, as we saw, said that he was interested in bank reform as early as 1923. However, as far as I can tell, neither of these works mentions the Peel Act nor much else that would probably have interested Simons in 1923. (Soddy cites as influences Silvio Gesell, who seems to have influenced Keynes as well, and Arthur Kitson – this is if nothing else a visually fascinating look at Kitson by the way)

At any rate, in the pre-Great Depression intellectual milieu surrounding Frank Knight and Henry Simons there seems to have been significant attention to ideas related to credit creation and financial stability, as expressed in Simons’ interest, apparently as early as 1923, in the Peel Bank Charter Act of 1844 and in Frederick Soddy’s documented influence on Knight in 1927, where he writes about bank credit-money creation leading to “frightful instability of the whole economic system and its periodical collapse in crises, which are in large measure bound up with the variability and uncertainty of the credit structure if not directly the effect of it.”

It is fascinating to see threads of connection running from modern work such Minsky, Steve Keen, or Benes & Kumhoff to the Bank Charter Act of 1844 (via Simons) and Frederick Soddy (via Knight), especially as Soddy was often dismissed as a crank writing outside of his field.

The MMT Bit:

I ran across these in Soddy 1921:

“Wealth is a flow, not a store…I can conceive no nation so barbaric as to regard gold as a store of value. Demonetise it and where is its value? Not a gold mine would be at work on the morrow.” (Soddy 1921)

money “ought to bear precisely the same relation to the revenue of wealth as a food ticket bears to the food supply or a theatre ticket to a theatrical performance.” (Soddy 1921)

A hint of MMT here – stocks & flows, state theory of money, and money as a token or a ticket. All within a few paragraphs.

Works Cited:

Allen William R. 1993, “Irving Fisher and the 100 Percent Reserve Proposal”, Journal of Law and Economics, 36: 2, 703-717.

Knight, F. (1927), “Review of Frederick Soddy’s ’Wealth, Virtual Wealth, and Debt’”, The Saturday Review of Literature Vol. 3 no. 38 (April 16), p. 732. Full text here

Knight, F. (1933), “Memorandum on Banking Reform”, March, Franklin D. Roosevelt Presidential Library, President’s Personal File 431.

Moe, Thorvald Grung 2012 Control of Finance as a Prerequisite for Successful Monetary Policy: A Reinterpretation of Henry Simons’s “Rules versus Authorities in Monetary Policy” Levy Economics Institute,Working Paper No. 713

Phillips Ronnie J., 1992, “The ‘ChicagoPlan’ and New Deal Banking Reform” Levy Economics Institute, Working Paper No. 76

Soddy,Frederick, 1920, Science and Life -AberdeenAddresses [1915-1919] (hard to find – ISBN = 0548629781 and 978-0548629789)

Soddy,Frederick, 1921, Cartesian Economics: The Bearing of Physical Science upon State Stewardship.

Soddy,Frederick, 1926,  Wealth, Virtual Wealth and Debt. The solution of the economic paradox. George Allen & Unwin.

Wray, 2012, Why Minsky Matters (Part One)  March 27, 2012 http://www.multiplier-effect.org/?p=4172

Note: This is by no mean an attempt at a resurrection of Soddy’s work, although Soddy 1926 certainly has some important points in it and in retrospect is clearly more than just the work of a “crank”. The main point here is simply to show that there is documented evidence that Soddy influenced Knight well before the great depression. Given Simons’ direct influence on both Friedman and Minsky, it is also interesting the evidence that Simons was, like Knight, interested in credit-money reform well before the Great Depression. Soddy should also be recognized for his influence on concerns about economic growth and the environment, remarkable for his time [although perhaps not surprising for someone educated in physics and chemistry].

April 1 2019 Update: The new book is finished and available! Live on Amazon here –

1000 Castaways: Fundamentals of Economics

More of Soddy’s economic writings:

Books

Soddy, Frederick, 1931, Money versus Man. London: Elkin Mathews & Marrot

___________ 1934, The Role of Money,London: George Routledge & Sons.

 

Other

“Economic ‘Science’ from the Standpoint of Science”, The Guildsman, No. 43, July 1920.

‘Money’, A lecture delivered to the Oxford City Labour Party in Ruskin College, 21st January 1923.

“What I think of Socialism”, Socialist Review, August 1928, pp. 28-30.

“Unemployment and Hope,” Nature, 1930.

Poverty Old and New, lecture to the New Europe Group,London, published by The Search Publishing Co. Ltd., 1932

“A Physical Theory of Money”, paper to the Liverpool Engineering Society, Transactions of the Liverpool Engineering Society, 56, 1934

“The Role of Money”, The Oxford Magazine, June 7. 1934

“TheNew BritainMovement”, Supplement to New Britain, June 20, 1934

‘Money as Nothing for Something’, Garvin’s Gazette, March 1935.

(A later volume – Garvin’s Gazette)

‘The Gold Standard Snare’, Garvin’s Gazette, July 1935.

The “Pound for Pound” System of Scientific National Monetary Reform in Montgomery Butchart (editor) To-morrow’s Money, Stanley Nott. 1936

‘Money and the Constitution: report of the Prosperity Campaign Conference’, DigswellPark, August 1936

Credit, Usury, Capital, Christianity, and Chameleons, The Economic Reform Club. 1937

The Budget, synopsis in one hundred verses of the author’s ‘Reformed Scientific National Monetary System’, Knapp, Enstone, Oxon. 1938

Money and the Constitution, Knapp, Enstone, Oxon. 1938

Social Relations of Science, Nature, 141, 784-5., 1938

Abolish Private Money, or Drown in Debt: Two Amended Addresses to our Bosses by Walter Crick and Frederick Soddy, 1939

“Finance and War”, Address to members of the Parliamentary Labour Party at the House of Commons , Nature, 147, 449, 1940

‘The Arch-Enemy of Economic Freedom: what banking is, what first it was, and again should be’, A reply to the Rt. Hon. R. McKenna’s ‘What is Banking ?’, Knapp, Enstone, Oxon, 1943.

Demand For Monetary Reform inEngland, a letter sent to the Archbishop of Canterburyand nine other clerical authorities, signed by thirty-two monetary reformers, Authored by Soddy and Norman A. Thompson 1943

‘Present Outlook: A Warning-debasement of the currency, deflation, and unemployment’, For Local Administration Authorities, September 1944.

(the more obscure works are from http://booksinternationale.info/pipermail/freshink/2009-July/002319.html )

Off topic but – While looking for Saturday Review of Literature Covers I ran across a number of interesting ones-

http://ecx.images-amazon.com/images/I/51h3%2BP52nQL._SL500_AA300_.jpg

Saturday Review of Literature August 8, 1942 Sergei Eisenstein Cover

Modern Monetary Theory & Full Reserve Banking: Connected by Fiat

[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.

Can Full Reserve Banking actually even stop credit-money creation? The Chicago Plan v. Positive Money

[This is a comment from a previous post on Post Keynesianism, MMT, & 100% Reserves Project, Post No. 2. It is in answer to the question “Do Full Reserves actually even stop credit-money creation?” Scott Fullwiler at one point said full reserves could not, as well as some other commenters.]

Andrew Jackson, December 25th, 2012

“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 [on call] 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 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.”

[Andrew Jackson works for PositiveMoney, their homepage is here]

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).

QUESTIONS

  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, positivemoney.org etc. claim? 

SOME OBSERVATIONS ON POST No. 1:

  •  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.

Post Keynesianism, MMT, & 100% Reserves Project: Question #1

I HAVE DISTILLED THE KEY POINTS IN THIS POST TO A SET OF QUESTIONS IN POST No. 2 HERE (Also the thread here is long; easier to comment there)

US Treasury

[This is part of an ongoing effort to understand and explain differences and points of agreement between Modern Monetary Theory, Full Reserve Banking, Post Keynesianism, Steve Keen’s work, and related approaches in as simple of terms as possible (difficult, as the debates hinge on complex and subtle concepts at times, but I will try). The goal is to create a resource for the general public to better understand these areas of study and why neoclassical economics fails, and to foster clearer communication between MMT, FullRB, and PK proponents.]

Ever since the Financial crisis of ~2008, there has been a real opening for improving economic theory & the financial system.

An ongoing project here is to better understand (for myself) and help put into clear language (to help effect change and to help the public better understand economics in general) important areas of economic advancement.

Two important strands of economic understanding have been waxing lately, which is a very good thing. These are Modern Monetary Theory (MMT) and Full Reserve Banking (FRB).

A simple Google search will suffice to find numerous good MMT resources.

FullRB is a little more tricky.

There are innumerable monetary crackpots out there, especially in the blogosphere, and it can be difficult for the novice to judge the quality of discussions of our monetary system. This is of course true of the net in general. But it is especially a problem with any discussion of money.

Also, a significant number of informed people interested in economics have been dismissive of FullRB for a variety of reasons in the past.

However, there has been a marked trend towards more serious discussion of Full Reserve Banking. And recognition that FRB has long been highly regarded by very well-respected economists. It is important to note that these have spanned the ideological range of economics, from those with “progressive” views concerned with equitable distribution to arch- free-marketers (I think this is a hint that there is indeed something to FRB.) At any rate, the work associated with Laurence Kotlikoff (Boston U.), Richard Werner (Southampton), Jaromir Benes (IMF), Michael Kumhof (Modeling Division, IMF) and others, and recently the buzz-creating “The Chicago Plan Revisited” released under the auspices of the I.M.F. (almost shockingly to some, a “magic wand”), has helped put Full Reserve Banking back into respectable conversation.

In the future I will begin to outline this project from first principles for anyone to read. For the moment, however, I am going to jump right in.

QUESTION (for MMT & FRB proponents):

In a 2009 post by Scott Fullwiler (leading expert on the details of our banking system, something mainstream economists ignored at all of our peril, and one of the leading MMTists) is answering a number of questions about FRB (The main relevant previous comments are by “RebelEconomist” and “RSJ”)

Fullwiler,  in the comments section, writes:

“Sorry for the delay responding, RSJ (and I’ll get to the others as time allows . . . apologies).1. Regarding 100% reserves, like Ramanan, I’m very skeptical that they will be able to constrain anything. Certainly under current operating procedures, they wouldn’t have any effect aside from the usual “tax effect” of RR, as the Fed provides reserves at stated rates. A much more constrained regime that required banks to only hold Tsy’s on the asset side would be different, but then you’ve just moved the endogenous creation of loans and their corresponding liabilities outside the banking system. The question there becomes who provides these latter institutions with overdrafts as they settle payments daily. If either banks or the Fed do, then you haven’t changed much, aside from regulatory structure. If nobody does, then you’ve set yourself up for a payments crisis at some point in the near future”

Fullwiler’s first point, so extemporaneous, seems worrisome for any FRB proponent. Does he have some argument that FRB just wouldn’t achieve what most view as its primary purpose, stopping the creation of vast pools of credit-money (that lead to asset inflation and instability among other problems?)

He then discusses a “much more constrained regime”. I think this shows what many see as a problem with some MMTists. Its followers rightly criticize mainstream economists for ignoring how the banking system works. MMT focuses on the real-world details because 1. they know they matter, and 2. because mainstream economists have neglected this critical area in the extreme. But sometimes MMT seems to fall in love so much with how the system actually is, and MMTists so tired of mainstream economists’ imaginary (delusional?) world, that they view negatively any imagined economy, even when, unlike mainstream economics, these possible economies are being designed on sound principles for good purposes. There is a big difference between the strange imaginary world of mainstream economists and the desire to change the Rube Goldberg dysfunctional system we have now. Back to FullRB –  Of course the point is to make money creation no longer endogenous, i.e., to move the credit-money creating power out of the banking system  That is where the benefit is! Fullwiler seems reluctant to move to it, I guess for the reason I mentioned, but I can’t imagine what he thinks Full Reserve s about  if not that.

So, let us imagine we have changed to a system where banks are not creating their own (endogenous) money. An agency of the gov spends it into the economy, with the legal mandate to target inflation, which without endogenous money creation it can very effectively do. Taxes and spending work in MMT prescribed ways.

Fullwiler then writes “The question…becomes who provides these latter institutions with overdrafts as they settle payments daily. If either banks or the Fed do, then you haven’t changed much, aside from regulatory structure. If nobody does, then you’ve set yourself up for a payments crisis at some point in the near future”.

Now, I am pretty certain that The Chicago Plan (even the old versions like Fisher 1935 or  Milton Friedman’s work {?} or Werner or others by 2009) have addressed these issues.

I am not sure, but I think part of the answer is that the part of the banking system that would be allowed to loan would operate separately, and with money largely obtained by others foregoing its use, so no “credit-money” is created. There is enough “play” in such a system as long as there are multiple entities that daily settlement is possible with no net credit-money creation (I know, “money like” instruments are always a problem, more on that later). So you have indeed “changed much” – radically much, a vastly more stable system, less risk of asset bubbles, and greatly facilitating the government’s ability to carry out other MMT approaches and keep inflation as close to zero as desired (basically, Milton Friedman’s monetarism actually works under a Full Reserve system – here we have the progressives and the free marketers happily combined). So as far as I can see, MMT and FRB get along just fine here.

At any rate, the question is:

Can pro- Full Reserve Banking people explain this better than I?

And/or, can Fullwiler or other Modern Monetary Theory proponents explain where the 2012 Chicago Plan or similar plans by Werner etc. are in error as Fullwiler 2009 believes above?

Cheers,

Clint Ballinger

UPDATE I have to note that the MR paper Cullen Roche suggests (this is from comments below) concludes “The Chicago Plan and Mosler/MMT both prescribe massive reserve funding of the negative state equity position. The difference is that the Chicago Plan focuses on the negative equity that has been created by the debt jubilee. The MMT plan focuses on the more typical balance sheet component created by deficit spending. Those two pieces are complementary and additive…” 

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