Remarks on Positive Money

Positive Money is a proposal put forward in the UK that is explained succinctly and accessibly in a free document, The Positive Money System in Plain English. The explanation is based on a book that I have not read, Modernising Money, by Andrew Jackson and Ben Dyson, which, according to the Positive Money website “in turn builds on the work of Irving Fisher in the 1930s, James Robertson and Joseph Huber in Creating New Money (2000), and a submission made to the Independent Commission on Banking by Positive Money, New Economics Foundation and Professor Richard Werner (2010)”. The proposal is quite interesting and might make for a decent discussion. In an effort to get things rolling, I will summarize the key aspects of the proposal and offer brief remarks. It should be noted that banking is not my forte, so I will mainly be interested in the reactions of those with more knowledge in the area.

Brief Summary of the Positive Money Proposal

In a nutshell, the proposal calls for:

Debt-free new money. All money creation would be carried out by the central bank (Bank of England) crediting the Central Government Account. Such money would be non-repayable and so debt free. There would be no issuance of government debt, this being viewed as an unjustified positive return to riskless behavior. The government could then spend from its account in accordance with its socioeconomic program.

The amount of money creation. Although new money would be created by the Bank of England, the amount to be created would be determined by an independent Money Creation Committee rather than the government. The committee’s criterion for determining monetary growth would be low and stable inflation, based on the current approach, but the elected government could change the criteria.

Interest rates. According to the proposal, the central bank, since it would not issue debt, would no longer set the rate of interest. All rates would be market determined.

Private banks. Private banks would no longer be allowed to create money but would still create loans for investment purposes. Rather than loans creating deposits, as is currently the case, the banks would only be allowed to lend money that had already been entrusted with them by savers willing for their funds to be used, for a specified period of time, for investment purposes. The person or institution providing the bank with funds would be able to specify in broad terms the type of investment activity it could be used for (e.g. for small business, renewable energy, mortgages, etc.). The private banks would be required – subject to a regulator’s oversight – to indicate the level of risk as well as the rates of return that would be paid to a saver in the event of a successful investment and the proportion of the saver’s money that would be returned in the event of failure such that both the bank and the positive-interest saver faced risk. There would be no bailouts.

Transaction Accounts. Savers who wished to avoid risk could instead opt for zero-interest Transaction Accounts, with payment services offered (e.g. cheque book, ATM, cash handling, etc.). Private banks would provide these services at a fee plus profit, with competition intended to limit the cost to savers. The Transaction Accounts would not be the liability of the private banks but instead be held with the Bank of England and guaranteed without limit. The private banks would merely be middlemen when it came to these accounts.

Further details can be found in the document, but the above brief overview hopefully provides sufficient context for discussion.

Remarks on the Proposal

In my view, the aim of debt-free money is a good one, but the particular form it would take under the proposal seems undesirable in key respects.

The biggest problem is the notion of an undemocratic, independent committee determining the government’s capacity to create new money (create additional net financial assets, NFA). This in itself seems enough to make the system worse than the current one. At present, the central bank’s independence is more appearance than reality. Whenever the central bank has a positive interest target, its actions are purely passive and therefore dictated by fiscal policy. Under present arrangements, central bank actions largely leave NFA unaltered, simply modifying their composition. To take the level of NFA injection out of democratic control would be highly undesirable.

There appear to be other problems as well. The automatic stabilizers would be compromised in downturns if the government could not make transfer payments until an undemocratic committee had its next monthly meeting to determine if such payments should be facilitated.

In terms of theory, advocates of the proposal appear to hold a monetarist belief that inflation is always and everywhere a monetary phenomenon, suggesting that controlling the money supply will control inflation. This ignores not only supply-side factors but the effects on demand of alterations in non-government net-saving intentions.

Personally, I very much like the aspect of the proposal that would eliminate government debt and deficits, because these terms are taken to be pejorative by many. But there is no need for this to be done in an undemocratic fashion. Either the government could direct the central bank — if there is one — to credit the government’s account with the amount to be spent, or the government through its fiscal authority could spend new debt-free money into existence.

I also like the proposal’s elimination of risk-free interest in the form of government debt or current accounts. There is no reason individuals should be receiving more money simply for already having some, and receiving even more, the more they already have. Retirement should be covered by a universal pension, paid through the issuance of new money. It would then be of little concern if savers could not fully preserve the real value of their savings in a risk-free manner.

Contrary to the proposal, I see little point in the private banks playing middlemen for a fee plus profit in the case of the guaranteed Transaction Accounts. These could just be administered by the central bank. There would then be no need for a profit margin.

Nor do I see value in the idea that banks should have to lend out of existing deposits. The current arrangement in which loans create deposits is flexible and reflects the fact that investment and other injections generate a corresponding level of leakages. This banking activity involves horizontal transactions and so does not in itself alter net financial assets. The government still retains control of NFA creation through its fiscal decisions.

This aspect of the proposal seems to be an attempt to get reality to resemble the loanable funds doctrine. It may also be motivated by a desire to give savers more power in determining interest rates, which would be highly undesirable. In this regard, it seems noteworthy that the Positive Money advocates want markets to determine interest rates. This, also, seems highly undesirable. For one thing, people wanting to take out mortgages for home loans would be at the mercy of savers when it came to the terms on which loans were granted.

The real question to me is not whether private banks should be allowed to create money through the lending process, but whether – and to what extent – there should be private banking at all. Nationalized banking, at least the nationalization of big banking, should be considered, in my opinion.

Nationalizing big banking would be a way of partially euthanizing financial rentiers. Interest payments on loans to corporations, once received by a nationalized bank, would function like a tax. The part of profit that would have gone to financial rentiers would instead be captured by the government. If desired, these funds could then be distributed as a dividend to citizens, in this way giving everybody a share in the rent. Alternatively, the interest payments could just be treated as destroyed money, which would provide more room for public spending in other areas.

A nationalized bank could also provide interest-free loans on low-cost housing below some threshold, if free low-cost housing for all who want it is not yet on the political horizon.

There could still be a significant role for a competitive sector of small private banks, although personally I would prefer local government to take over that role. I am not in favor of interest income on loans going into private hands.

Anyway, these are just intended as tentative — and somewhat opinionated — responses and policy suggestions. Hopefully they can prompt some discussion.


7 thoughts on “Remarks on Positive Money

  1. I have similar reservations.

    The main issue of course is that loans always create deposits and banks expand debt in the usual fashion. If you want to call them something else and deny their existence then that is fine but they never go away!

    Very simply, Person A comes in for a 25 year loan. While that is being processed, the funding department secures funds from Person B on a seven day term and issues an investment account. That swaps funds from the Transaction Account to the bank’s Investment Account.

    The loan is approved and the funds are swapped from the bank’s Investment Account to Person A’s Transaction Account. Person A then pays Person B for some real assets. Person B has the funds back in their Transaction Account and holds a seven day bond as well.

    The seven day funds are a deposit – created by the loan request.

    Seven days later Person B asks for their money back and there is a liquidity crisis. 🙂

    It’s simplistic, but the presence of maturity transformation means that there will be a liquidity or solvency crisis at some point. It’s just a mistake of analysis of the weaknesses of the current system to presume anything else.

    In the current system anybody holding above the deposit protection limit is similarly a ‘senior bond holder’, and we can see from the machinations in Cyprus that is causing all sorts of fun.

    Bear in mind that in the UK there is already a ‘safe harbour’ option for individuals. It’s called ‘National Savings and Investments’. 1.5% interest up to £2 million.

    I see the proposals as increasing the cost of mortgages, eliminating free banking, rotting away pensioner’s nest eggs (either take risk or watch your nest egg rot away with inflation) and increasing the cost of working capital loans to businesses while championing a system that will essentially deliver more tax cuts to rich people funding the lobbying process.

    There’s clearly an ideology backing the proposals. There is just no need to throw the baby out with the bathwater like this.

    The current system is slanted towards debt and power in the hands of private banks. These proposals slant the system towards equity and power in the hands of the wealthy. The money the banks currently put into the economy is intended to be given to the profit class via the virtual elimination of taxation. You will then have to go cap in hand to them rather than the banks if you want to do anything – and they will want part ownership in return for investment.

    You only have to look at the people doing the funding and supporting of the organisation to see what the end game is. Even if the propaganda they put out tries to be ever so reasonable.

    I much prefer the MMT approach where the central bank is brought back under the direct control of parliament and both lending and spending have equal distance access to the central bank.

    As Randy’s paper on the subject suggests, the only service we are buying from private sector banks is their ability to capitalise and underwrite an income stream effectively – for which they should be paid. Whether that is done ‘outsourced’ via an interest rate markup or as a salary from a public investment bank is up for debate.

    But ultimately these regulated banks are branches of the central bank and should behave as such. If that requires compulsory fitting of bowler hats, then so be it. It’s time for the central bank to stop being a shrinking violet and take charge of the distribution of its currency.

    There are some good elements in the proposals though – particularly in the UK where we already have the APACS clearing system and the LINK ATM network. Therefore it wouldn’t be a particularly big leap to make all bank accounts operate centrally and allow banks to service them on an agency basis. That would make it much easier for people to move between ‘service portals’ – you wouldn’t even have to change your bank account number.

    But I can’t support the overall proposals because of the underlying ideology.

  2. While most of the provisions are fine and I especially like the one about debt-free money issuance from the sovereign, I really can’t support the requirement to make banks fully fund loans from savings. The whole benefit behind loans are that they can be created on demand. If I want to start a small business I shouldn’t be at the mercy of some other person having enough savings to invest. I go to the bank, and on my good credit and sound business plan alone, they make an investment in me. They essentially create money on demand if you would like to view it that way. Removing that ability will severely limit the ability of people to actually invest in productive business. Investment creates savings, not the other way around.

  3. The problem with “no bail-outs” including deposit insurance is that when push comes to shove, a govt will always step in to rescue its financial system and economy as it deems necessary. Indeed, it is obligated to do so, and failure will result in a new government. Therefore, such plans are politically unrealistic regardless of how good they may sound financially and economically from a theoretical point of view.

  4. We can blame banks as much as we want but we also cannot deny one simple function that banks generally perform and which noone else can do as good as they do. That is profit maximizing risk taking on behalf of the whole society. Without anyone taking this function progress will grind to a halt. If that is the goal then such proposals will definitely reach it. However if we still want progress and we still want higher quality of life and more free time and etc then such proposals are a disaster. What we need instead is to create an environment where banks will be risk taking and profit maximizing (even if short-term, remember they take risks of behalf of society) in order to reach the goals set by society. The last valid goal was “housing for everybody”. Did banks fail? Banks did an outstanding job! Well done and they deserved their bonus! It was *us* who screwed up by giving them such a goal. Stop blaming banks. It is like blaming a hammer after smashing your own finger. Banks are just a tool, and a very good and probably the most efficient one, which we can either use or misuse. Our collective stupidity prevents us from using it for our own benefit. Without a hammer nothing can be ever built.

  5. The way someone put it that I cannot now recall is that narrow banking is about risk management, for which banks get govt guarantees, explicit and implicit. What banks do now, especially the big banks, combines risk management and risk-taking with the emphasis on risk taking, which is where they make most of their money. Warren Mosler’s proposals for bank reform involve limiting banks to risk-taking and regulation through the asset side.

  6. Oops. Should be “Warren Mosler’s proposals for bank reform involve limiting banks to risk-management only and regulation through the asset side.” Warren’s proposals would eliminate risk-taking from banks with govt back-up and access to the payments system.

    What the crisis did was to fold the investment banks in to the banking system, further complicating the problem while temporarily resolving the liquidity crisis and masking the solvency crisis.

  7. If you accept that money is endogenous, I don’t see how the putting the decision, as to whether to increase the supply or not into the hands of a money creation committee, can be anything other than a disaster.

    The supply currently expands and contracts for a reason, be it innovation, investment, private debt levels etc. To me that still makes more sense.

    There is still a massively important role for the State in that. They just need to play that role this time and act, using interest rates and tighter regulation.

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