Positive Money is a proposal put forward in the U.K. 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.