Richard Murphy: Why the Swiss Referendum Proposal of Giving the Central Bank Complete Credit Control is Dangerous Folly

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Yves here. We’ve gotten a few e-mails from readers asking why we aren’t supporting the monetary straitjacket reform proposed in the Swiss referendum, where voters go to the polls on June 10. The reason is we think it’s a terrible idea and contrary to what some have come to think, has nothing to do with Modern Monetary Theory.

Before we turn to Richard Murphy’s post at his site Tax Research UK, one of the comments on it and Murphy’s response provide some background.

From Tax Research reader Marco Fonte:


Being aware of the Swiss Referendum and the “Positive Money” mob I propose the following analysis:

To begin with what we are seeing with both of the above is an attempted revival of 2 things:

1. The Quantity Theory of Money

2. Milton Friedman’s ‘Monetarist’ approach – revised.

The revision in this case acknowledges (implictly at least) that Friedman’s monetarism failed because it did not recognise or sufficiently address endogenous money (a.k.a. ‘private bank’ or ‘credit’ money).

The Positive Money mob are seeking to revise Friedman and rescue capitalism by totally eliminating endogenous money (which they erroneously refer to as ‘fractional reserve banking’).

This, as they see it, will rescue the system by eliminating the credit expansion that drives the asset price bubbles and all the instability, crises, crashes etc. that come with them.

There are, as you suggest, better ways of doing that and, for reasons I needn’t repeat I don’t think their proposal would work all that well. Even if it did the result would be a Calvinistically austere, tight-fisted, no-inflation, high interest rate regime that could scarcely be described as a success.

For the Positive Money gang and their fellow travellers that is the price of saving the system and they are happy to go along with that. Thankfully, many of us are not inclined to think that the system is particularly worth saving and certainly not at that price.

One thing for sure the Positive Money push isn’t progressive despite its pretense. They are pro-regulation Conservatives with an extreme concept of regulation.

Murphy’s reply:


Positive Money are dangerous though

The Greens buy their ideas

So too does the New Economics Foundation

And yet they’re monetarists when monetary policy has almost no role left to play in modern macro

MMT on the other hand is fiscal policy. They’re chalk and cheese

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

Martin Sandbu wrote two articles in the FT last week (very paywalled) that look at issues arising from this weekend’s referendum in Switzerland on banking reform.

Let me be clear: I oppose the proposed reform because I think it embraces all the  worst features that Positive Money propose for the banking system and if adopted this would, firstly, be harmful to the Swiss economy and, secondly, be prejudicial to the necessary real monetary reforms that are required in most countries at present. I explain why in some detail, here.

Bizarrely, Sandbu has, despite his obvious overall sympathy with reform, managed to write the pieces without the slightest reference to modern monetary theory. It is as if he, like so many economists, thinks that money exists as a phenomenon separate from the economy as a whole. I’ve already noted similar traits from The Economist and John Kay in the last few days. And it is as if he, like they, thinks, quite erroneously, that money can have a value as if it is a commodity in its own right.

Sandbu gets this wrong. Money has no value of its own, and it never has. Both physical cash and ancient and modern intangible forms of money (to cover all forms of ledger based monetary creation – which are in essence identical however the record has been maintained) get their value from recording debt. A currency achieves that by being issued into existence by a government that accepts it back in settlement of legally due tax obligations. Bank created money, which because it is always denominated in a government created currency is always a derivative of it and so of secondary standing, exists because of the debt that exists from a lender to the bank that extended them credit.

Sandbu, and those suggesting banking reform in Switzerland, ignore this reality. Alternatively, they are saying that a central bank must decide the quantum of monetary debt denominated in a state’s currency that should exist in an economy. This is deeply dangerous for three reasons.

First, it assumes that the central bank is capable of accurately forecasting this. I have to say I have absolutely no such confidence.

Second, it assumes that the market will adapt and that there will be no resulting shortages or excesses of available credit money for settlement of obligations due within an economy. Again, I do not share that confidence.

But, most importantly, and third,  this assumes that recourse will not be had to alternative currencies. I can think of no better way of promoting their use than the adoption of this reform. Far from a central bank, and so a government, having control of their macroeconomy as a consequence of this reform they would instead, I suggest, lose it as a result: no country where two currencies are in widespread common usage can ever be subject to effective macroeconomic management in my opinion.

Sandbu seems to recognise the issues he is addressing, saying:

The most generous way to interpret this objection is as a worry that a full-reserve system will not, in practice, generate as much credit as the fractional-reserve system. (This worry is expressed by the Swiss central bank head in his opposition to Vollgeld.) Even this is not obviously bad for growth if credit supply is only moderately more tight-fisted but much less volatile. But the broader point is that there is no inherent reason why a full-reserve system should lead to less credit creation (over time) than the status quo. That depends entirely on the policies pursued by the central bank in the new system.

What those policies should be deserves its own debate. One thing that is clear is that central banks would have a wider range of tools — and so the range of possibly policies is correspondingly broader (including policies that would mimic today’s system). It would be surprising if something better than the status quo could not be found.

It’s hard to disagree with the conclusion: we all know the status quo is not working. But complete credit control is no solution at all. I have no problem with directing credit, and controlling its excesses. But handing all credit creation to the central bank is not only technically impossible in a modern economy, it’s a dangerous folly. Modern monetary theory provides a better answer (so long as tax is a fully integrated policy issue). It’s time the world’s economists woke up to that.

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  1. skippy

    To begin with what we are seeing with both of the above is an attempted revival of 2 things:

    1. The Quantity Theory of Money

    2. Milton Friedman’s ‘Monetarist’ approach – revised.

    This is what I have argued ad infinitum with the “science of money” positive money AMI camp for years. I do think though that the rhetorical goal post moving on shifting sands is reaching its limits, but think ultimately its just a foot dragging excessive whilst attempting to get in under the post.

    1. Paul Lebow

      Skippy – Just because you list these notions in bold doesn’t make them meaningful. These notions are usually thrown out without discussion, as if the terms themselves prove the point, QED. Milton Friedman is often invoked as a de facto guilt by association ruse – completely ignoring the slew of monetary economists on the left who support the concept of sovereign money.

      If you believe the quantity of money in the economy is irrelevant, please explain.

      1. skippy

        Because quality proceeds it e.g. you can still have smaller quantity’s of anything and it still is of low quality.

        Look below for a short list of other contributing factors that PM money cranks leave out – feature or bug – ????

  2. Ignacio

    Correct me if I get this wrong, but if the goal is to gain control on the economy it would be more important to set limits on capital entry or exit –rather than credit– that could fuel persistent current account imbalances and bubbles. But this is verboten, isn’t it?

  3. Sound of the Suburbs

    The FED is the most important central bank in the world and there is no evidence they know what they are doing.

    The FED’s track record.

    Alan “Kamikaze” Greenspan

    He’s forgotten the delays in the system.

    There were delays while the teaser rate mortgages reset; the new mortgage repayments became unpayable; the defaults and other losses accumulated within the system until everything came crashing down in 2008.

    Ben “Debt doesn’t matter” Bernanke

    Ben Bernanke is famous for his study of the Great Depression and here it is discussed in the Wall Street Journal.

    “Theoretically, neither deflation nor inflation ought to affect long-run growth or employment. After a while, people and businesses get used to changing prices. If prices fall, eventually so will wages, and the impact on profits, employment and purchasing power will be neutral. Borrowers suffer during deflation because their debts are fixed in value, but creditors benefit because the dollars they get back will buy more. For the economy as a whole, deflation ought to be a wash.”

    What has Ben Bernanke got wrong?

    The creditors are the banks and the repayments go into the banks reducing the overall debt and money supply.

    It doesn’t go to creditors who then get the money to spend.

    Debt does matter Ben.

    He can’t see the problem in 2007 because he doesn’t know where to look.

    Janet “Inflation Mystery” Yellen

    Richard Koo had got the answer to Janet Yellen’s inflation mystery.

    The West’s “new normal” of “secular stagnation” is Japan’s “old normal” of “secular stagnation”

    Richard Koo knew what would happen in 2008.

    It wasn’t hard.

    The West went through its Minsky Moment in 2008 as Japan had done at the end of the 1980s.

    Richard Koo has had twenty years to study it ……

    It’s called a balance sheet recession Janet.

  4. Sound of the Suburbs

    MMT has looked at publicly created money.

    The positive money people have come at it from the other angle. People like Richard Werner have been studying the problems with privately created money since the Japanese economy blew up in the 1980s.

    They have seen all the problems with privately created money and the positive money people were very pleased when the BoE confirmed their beliefs in 2014.

    The positive money people have come to the wrong conclusion through not understanding publicly created money.

    The MMT people can learn a lot about the problems of privately created money from the positive money people.

    The two camps should merge to get the big picture.

    I started looking into all the problems of privately created money after 2008 and was a latecomer to MMT.

    The two merge nicely when you think about it and realise the why the positive money people came to the conclusion they did. They just didn’t understand the way publicly created money works now.

    1. Sound of the Suburbs

      I saw a video from MMT with Stephanie Kelton and Warren Mosler, and Stephanie Kelton gave a family tree for MMT.

      Randall Wray was a student of Hyman Minsky.

      Hyman Minsky features in the family tree of the other side too, Steve Keen carried on the work of Hyman Minsky to see 2008 coming in 2005. 1929 and 2008 were Minsky moments.

      1929 – Inflating the US stock market with debt (margin lending)
      2008 – Inflating the US real estate market with debt (mortgage lending)

      Richard Werner was in the right place at the right time to see the first Minsky moment of our era, Japan after the 1980s and his work comes from investigating that.

      The false prosperity of neoliberalism comes from the private money creation associated with real estate booms, except Germany and China that run big trade surpluses.

      Hyman Minsky’s work followed on from Irving Fisher’s work into debt deflation in the 1930s.

      Fisher looked at 1929 crash and Great Depression, Minsky followed on with this work and Steve Keen followed him. The knowledge from one Minsky moment let Steve Keen see 2008 coming in 2005 through the debt-to-GDP ratio.

      MMT and the other side, come from the same theoretical root.

      Michael Hudson has found another big problem.

      Why did the jobs go to Mexico after NAFTA?

      The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of living

      The cost of living is too high in the US, and this has to be covered in wages reducing profit.

      Disposable income = wages – (taxes + the cost of living)

      The cost of living is covered by employers in wages as employees get their money from wages. They can make more profit almost anywhere apart from the West with its high cost of living.

      1. skippy

        Still needs to square wages and productivity diverging, equity as money, incentives [share holder value meme], Gates frictionless capitalism, LBO-PE SOP, Market fashion like offshoring, pay to play and skin in the game memes, massive gaming of risk tools for short term profit, I could go on.

        Best for last… the completely concocted in a can ideology that enabled it all…..

      2. Paul Lebow

        You will find Steve Keen, Michael Hudson, Joe Firestone, Stephanie Kelton, etc etc are not all on the same page – so just dropping names doesn’t really add much to the discussion.

        Of course, as you state, the private creation of credit-money is associated with the wild fluctuations in the economy. MMT completely ignores this point that you make.

        1. skippy

          Paul how you going to ban private credit creation of bar tabs or C-corps from issuing J-bonds to do stock buy backs.

          The two bullet points above speak volumes about the axioms that ultimately drive positive money theory, which IMO have serious anti democratic tendencies. The money part is just a leading edge of a whole lot more stuff.

  5. MisterMr

    “The Positive Money mob are seeking to revise Friedman and rescue capitalism by totally eliminating endogenous money (which they erroneously refer to as ‘fractional reserve banking’).”

    Wait – are they seriously proposing that banks can’t lend money???
    So what are banks for?

    1. Sound of the Suburbs

      Banks become the financial intermediaries Ben Bernanke think they are.

      Ben Bernanke is famous for his study of the Great Depression and here it is discussed in the Wall Street Journal.

      “Theoretically, neither deflation nor inflation ought to affect long-run growth or employment. After a while, people and businesses get used to changing prices. If prices fall, eventually so will wages, and the impact on profits, employment and purchasing power will be neutral. Borrowers suffer during deflation because their debts are fixed in value, but creditors benefit because the dollars they get back will buy more. For the economy as a whole, deflation ought to be a wash.”

      What has Ben Bernanke got wrong?

      The creditors are the banks and the repayments go into the banks reducing the overall debt and money supply.

      It doesn’t go to creditors who then get the money to spend.

  6. bruce wilder

    Fundamentally, money is a language in which we write fictions with which we paper over uncertainty. We need these fictions to tell the truth and the processes by which we constrain and correct the fiction to conform to true reality as the truth of reality is revealed and realized are essential functions in a money economy. Regulation of banks and financial accounting is more important than setting a short-term interest rate on marketable government securities. But, that there are marketable securities funded by taxes as certain as death and whose liquidity is guaranteed by a central bank forms a critical foundation for the fictions written in the language of money, a benchmark fiction coordinating millions of contingent stories.

    Positive money, with its demand for full reserves in banking, addresses one anxiety the contingent nature of the fictions written in the language of money occasions. Neoclassical economics acknowledges that money is the stuff of illusion, but insists that everyone sees thru those illusions, has “rational expectations” that are never disappointed (when in real life expectations are never perfectly realized) and so on. MMT, with its gleeful insistence that the scorekeepers need never run out of points to award the players, attempts to roll back the curtain on the misleading fictional political propaganda narratives that protect elite business domination of the political struggle over the distribution of income that occurs just below the surface of monetary and fiscal policy.

    I think of Jack Nicolson’s Colonel Jessup: “You can’t handle the truth!” But, in this case, it is, “You can’t handle the fiction!” We do not know the truth, though we find out bits and pieces as time passes, so financial fictions are written as contingencies and the integrity of those rules about what happens when promises are fulfilled (. . . or not) govern the distribution of risk in the economy, and the distribution of risk is the distribution of income and incentive.

    We are not going to be able to discuss the functions of money without addressing the pervasiveness of uncertainty and the contingent nature of financial fictions, and the importance of maintaining the integrity of those fictions against the forces of fraud and predation. Without enough of this context, I did not think Richard Murphy succeeded in his essay.

  7. djrichard

    I don’t know the details of the Vollgeld concept. I take it that this is not something akin to the Lincoln greenback? It seems that something like the Lincoln greenback would have killed two birds:
    – give the monetary powers to the fiscal side of the Fed Gov
    – supplant a fractional reserve liquidity pump and deflationary drain with a Fed Gov fiscal pump (and tax drain)

    Looking at the wiki page for Vollgeld concept, I saw the following

    Abba Lerner, in 1943, had advocated that the central bank could start “printing money” to match government deficit-spending “sufficient to achieve and sustain full employment.

    Not drilling into that, I’m guessing what Lerner was proposing was kind of a marriage between MMT and 100% fractional reserve. Maybe? If so, maybe the same could be done with the Vollgeld initiative? But if that’s the thinking by the Swiss thought leaders for the Vollgeld, it seems they should make this a center piece to their thinking. And really just cut to the chase and propose a Lincoln greenback concept instead.

    1. Mel

      Abba Lerner is quoted in the wiki page under “Criticism of the proposal”. I don’t know that he advocated 100% reserve banking.

      1. djrichard

        Yea, I’m probably misinterpreting that. My mistake. There’s a stew of ideas here and just trying to sort through them.

    2. djrichard

      I was able to get to one of the FT articles via this twitter link:

      Noticed the following, which suggests that there is a fiscal component to the proposal

      Those behind the initiative may have over-reached, however, because their proposal seems not only to require full-reserve banking but also provide for direct monetary financing of the government and state control of credit allocation. These are conceptually distinct from full-reserve banking and should be decided separately

    3. djrichard

      So skimming through their pamphlet, it seems the fiscal dimension is simply a vehicle for the central bank to spend more money into existence:

      To keep the amount of money in circulation stable, the Swiss National Bank will need to re-introduce this money into the economy. It can do this in one of several ways:
      – by buying assets such as securities or foreign exchange reserves (as it can now)
      – by lending money directly to banks
      – by handing debt-free money directly to the government to be spent back into circulation or to reduce taxes or to be given directly to citizens.

      So it’s not like the Lincoln greenback, where it was the generosity of the Fed Gov that spent it into existence. Rather, with the Vollgeld, it’s the generosity of the central bank that spends it into existence, e.g. using the Fed Gov. And one can imagine that the Central Bank would be less generous than the Fed Gov.

      Still, even with a Lincoln greenback based approach, I’m assuming the Fed Gov would still resort to sterilized spending by using a combination of taxation and bond issuance, just like they do today. Because it would always be near impossible to tax the currency hoards that are hoovered up by the bandits (banks, buffets and bi-lateral trading partners). The primary way to get them to cough up their currency hoards would be to sell them bonds.

      I always thought the value of the Lincoln greenback was that it was an easier way to get us out of the trap of austerity by eliminating deficit spending as an issue. That said, we do have an MMT narrative on why the deficit isn’t an issue. But that’s a harder story to sell; it’s not obvious for the lay man. I think the Lincoln greenback makes it far easier for the lay man to connect the dots. Because it would be easier to explain that the bonds aren’t being issued to finance the Fed Gov. Because obviously the Fed Gov will just print what it needs. Rather the bonds are issued to simply drain currency hoards. It’s simply a case of picking winners and losers when it comes to who gets penalized with taxes vs who gets blessed with bond issuance. “If you people don’t like getting taxes, well then help us go after the entities that have the currency hoards”.

      From what I can tell, the Vollgeld pamphlet doesn’t even weigh in on whether the Fed Gov would still engage in sterilized spending. Presumably it still does and still would issue bonds as part of that. Assuming it does, would the Vollgeld be similar to the Lincoln greenback in making it easier for the lay man to connect the dots that the float of bond issuance is not an issue? I don’t think it does. Given that the Fed Gov in that case is beholden to the central bank for new money issuance, people will assume that the Fed Gov still needs to be financed, just the way it does now. That said, they can still resort to MMT arguments, that this is not an issue. But it will still face the same challenges that MMT faces now. So from that perspective, the Vollgeld doesn’t seem to move the conversation when it comes to fiscal spending and arguments for austerity based on having too much bond issuance.

      1. djrichard

        P.S. and one big difference of course is that sterilized spending is not always required with the Lincoln greenback. The Fed Gov can spend more into circulation than it takes out. In particular, when the Fed Gov wants to create inflation.

        But I think the more interesting effect will be when the Fed Gov simply wants to increase spending. It can still do that and still it sterilize it at the back end through taxation and bond issuance. Essentially creating a bow wave that is re-absorbed.

        Compare to what we have now. The Fed Gov can increase it’s spending budget from year to year. But not without the ritual wailing and gnashing of teeth related to budget increases. I don’t see this being any different with the Vollgeld model.

  8. Susan the other

    Thank you for this post. Richard Murphy is very clear and concise. Positive money has been a little confusing because it is such an unrefined and halfbaked idea. Like Vollgeld is another variety of Vollkornbrot. Murphy’s point that private money (positive money) is always a derivative of a sovereign currency should educate those acolytes. I’m amazed that the Swiss are even considering this especially for the fact that they are constantly buying up euros to stabilize the SF. If they go whole-hog into a currency that is the mental equivalent of a hoard of private gold they’ll have to buy up all the euros in the EU. Not really a good business plan. Ben Bernanke once asked a blank-eyed congressional panel if they wanted the Fed to manage fiscal policy (since they had all refused to do so) and they mumbled ‘no’. But it would not be such a bad idea in the absence of poltical responsibility – as we have suffered for may decades. MMT is still the best option for social and fiscal management. And as Ann Pettifor reminds us (re fiscal and sovereign spending) ‘we the people hold great power’. Because the value of money is the direct reflection of a healthy and prosperous society. Nothing more.

    1. Paul Lebow

      You said, “Positive money has been a little confusing because it is such an unrefined and halfbaked idea. ” Its intellectual name-calling. In fact, Positive Money is a highly developed idea built on the shoulders of highly respect economists and historical examples. You’ve implied that Positive Money wants the central bank to control fiscal policy which is the complete opposite of what they are espousing. As is typical, people come in with confirmation bias, do not even take the time to read the proposals they criticize and then pull criticism out of a hat.

      Please be specific rather than relying on the uninformed opinion of Ann Pettifor. Think for yourself.

      1. skippy

        “Please be specific rather than relying on the uninformed opinion of Ann Pettifor.”

        Paul you just ran afoul of what you just accused Susan the other of, not only that, I can’t find any information in your comment other that rhetorical gesturing.

        You are aware that Wagner has suggested that government money supply be created by private bank loans right:

        he also suggested direct purchases of non-performing assets from the banks by the central bank; direct lending to companies and the government by the central bank; purchases of commercial paper, other debt, and equity instruments from companies by the central bank; and stopping the issuance of government bonds to fund the public sector borrowing requirement, instead having the government borrow directly from banks through a standard loan contract.[8][9]

        I have had over sometime time – issues – with the “Science” of Money camp due to duplicitous nature and rhetorical antics, too the level that I used to experience from the AET camp. I find this evident in your comment above, especially the – think for yourself – bit.

      2. Yves Smith Post author

        Your comments on this thread have been agnotology as well as personal attacks. And Ann Pettifor is a highly respected, and very well informed expert on this topic. For you to engage in utterly unsubstantiated attacks on her and on a reader is not on.

        Please find another site on which to peddle PM propaganda.

        1. skippy

          Ain’t these people a hoot Yves….

          Had this happen of late when linking to Ann:

          June 5, 2018 at 6:48 am

          Her book is not bad either…not perfect though.

          Then gives link to their web blog where reality is decanted.

          June 5, 2018 at 7:21 am

          “Her book is not bad either…not perfect though”

          “Perfect” is a strange word to use in this context oo7…

          Might have something to do with not starting off with some ideological axiom or a priori or epistemological territoriality with cash flow dynamics. I am constantly amazed at your propensity to – use – others works in bolting on your views, of course, after burnishing yours with agreement for the large part, but… >>>>insert ideological imperative<<<< like a mental parasite at the end.

          After a long and protracted marry go round as is want with some sorts I responded:

          Do I actually have to spell it out for such a smart person such as you like to claim.

          Your use of “perfect” denotes you are the arbitrator of what is “perfect” as an administer of truth [tm]. This is to set up the readers mind before even following to the link back to your site, this is basic psychology and marketing high-jinks 101.

          Hell I learned about this in primary school from a young teacher doing a advertising subject back in the late 60s, advanced through Uni and private sector experience.


  9. Paul L.

    If I didn’t know better I would chalk this article up to complete ignorance regarding the Vollgeld movement, 100% reserve banking, the quantity theory of money, Milton Friedman, etc, etc. On the other hand I can’t understand why the author would jump feet first onto the capitalist “free market” bank industry bandwagon of slurs, fear mongering and worship of the status quo.

    One thing is for sure, the author is correct, the Swiss initiative has nothing to do with MMT. The canard promulgated by the conservative press that somehow the democratization of money creation will lead to “inflexibility” in the “free” market of money creation by banks and will hurt the economy is based upon fear. Those in the financial and banking industry know that that the public is beginning to realize that the king has no clothes. They have convinced the author that only the banks have their fingers on the pulse of the economy and therefore must maintain the right to create all the money in the economy – they know better (pat on the head).

    Then there is the ridiculous claim that central banks, like the Fed, the keepers of the status quo, is the effective way to control the economy – yeah lets keep ridin’ that noodle-pushing pro-cyclic bucking bronco – go free market! Yee Ha! So lets defer to these central bank “experts” to keep the money supply commensurate with the needs of the real economy – how’s that overnight rate control workin’ for ya?

    The author denies the overt admissions of agencies such as The Bank of England and the Federal Reserve, that banks, not governments, create virtually all the money in the economy. Think about it – if you’re a banker, an underwriter, who are you going to rent your money to and give the lowest rates – Mr. & Mrs. J.Q. Public or an already well-off speculator in the market with the stellar credit rating? Finger on the pulse or tourniquet? Even a child can see how this drives inequality. The rich do get richer and its obvious why – they are first in line to the money machine.

    I want the author to give me an example anywhere in the economy where a private entity can create a “product” using no resources, no effort and no risk whatsoever and rent it out for a fee which is pocketed, and to have that product magically disappear when returned – only to be created again?

    So no, Vollgeld is not 100% reserve banking, it is not a rehash of Milton Friedman – do your damn homework. When the authors use slurs like “mob” and “gang” to make their case, its a dead giveaway that facts are not needed here. Minsky, in the last few years of his life came to realize the deep flaw in the current monetary system and strongly believed that a complete revamping of the banking system, the darling of the anti-Vollgeld “cabal”, was required. The Swiss will do this eventually and the finance industry is pulling out all the stops to stave off the inevitable.

    1. djrichard

      I wasn’t sold on the original posting either.

      That said, I had to do some soul searching. Yes, the debt pump is a basis for wealth inequality. If only everybody could play the game that the risk-protected play: “Climb that wall of worry” until the Fed Reserve “takes the punch bowl away” (inverts the yield curve). Or the game that the pirates play: using cheap debt to fuel pirate raids on institutions, or for that matter simple fraud.

      But there was a time when we didn’t care so much that that game was being played. Part of it was that the pirate raiders and fraudsters were hemmed in by governance. But a bigger component I think is that everyone had confidence in their well being otherwise. That in spite of the mafia being corrupt and getting rich at the top, the mafia was also taking care of their own. That quid-pro-quo deal is no longer operative – everyone is now on their own. And as part of that, more exposed to the pirates. E.g. loaded up with college debt and no good jobs to pay it off and real questioning about whether it’s worth taking on more risk: owning a home and starting a family.

      So what do we do to remedy that? Fundamentally I think we need a way to re-create that quid-pro-quo of the mafia, between the elites at the top and the rank-and-file at the bottom.

      Would cutting off the life blood of the pirates re-establish that? Maybe. But only as an outcome of last resort. Maybe it would dent the need of the fraudsters to find new markets for debt, like college students. But it doesn’t really deal with the risk that everybody is now exposed to.

      I think many see Fed Gov spending as a critical component to reducing personal risk. E.g. through Medicare-for-all, Jobs guarantee program, etc. But Fed Gov spending will always be challenged by the deficit hawks. So what’s needed is something to change the equilibrium on that front. And it doesn’t look like the Vollgeld initiative would do that.

      That said, I’m not sure that MMT arguments will change the equilibrium on this front either. The spending doves need safe harbor and MMT isn’t simple enough to articulate to provide that safe harbor. At this point, I see something like the Lincoln greenback as being a much better vehicle for making that future happen.

      And truth be told, to get to a future of a Lincoln greenback, it might be easier to get there after nationalizing the currency a la the Vollgeld initiative. Because then a next step could be to “nationalize” the central bank and give its money printing powers to the Fed Gov (fiscal side). That said, it would be a path fraught with risk. If after nationalizing the currency a la the Volgeld, the only reason to take the next step and give the money printing powers to the Fed Gov is if the central bank was failing at doing its job. But if the central bank is failing at doing its job, then an equally possible outcome is to unwind the whole endeavor which would set back an end-game for a Lincoln greenback by decades if not more. [Edit: who am I kidding. I think we’re centuries away from this to begin with, lol]

      A couple of other points.

      Even with a Lincoln greenback, would we have the “utopia” that I envision? One where the mafia elite are taking care of their own: the mafia rank and file? Hard to know.

      Lastly, along the lines of disabling the pirate class with respect to their funding apparatus (debt pumps), I think it’s actually more important to disable them with respect to globalization. As far as I’m concerned, the ability to outsource supply chains to the global supply chain or to make profits under the auspices of a foreign country in their foreign currency (as opposed to simple trade in goods and services) are pirate operations. Nip that in the bud and the pirate operators in our country will realize that the only bed fellows they have are the rank-and-file in their own country.

      I’m not sure if everybody else in this thread was going through the same soul searching. But that’s where I’m coming from.

      1. JTFaraday

        “Would cutting off the life blood of the pirates re-establish that? Maybe. But only as an outcome of last resort. Maybe it would dent the need of the fraudsters to find new markets for debt, like college students. But it doesn’t really deal with the risk that everybody is now exposed to.”

        Well, most private and public sector pension funds are plugged into the “piratical” (or parasitical) network. Insisting that everyone “earn” their retirements (and their every health benefit, etc) in this system turns it into something that is self devouring. This whole system is General Motors writ large.

        One can gripe and complain that “management” isn’t too keen on plugging more people into this system, but they’re probably not wrong that it’s not sustainable. They just have no idea how to fix it, only intent on grabbing as much as they can while they can.

        In another generation we will have a new system with a new understanding of how the government fits into it or we will have widespread “third world” poverty in the developed world.

  10. Paul L.

    Interesting – I think I agree but your analogies were a bit difficult to follow. You said:
    “But Fed Gov spending will always be challenged by the deficit hawks”
    As they should be under the current system despite the MMT Kool Aid. The solution of course (as I think you point out) is that under Vollgeld, or, in the US, the 2012 NEED Act (hb 2990 ) – there is no such thing as a deficit to be hawkish over. Their thunder is immediately stolen.
    Once the creation of money is democratized it then up to democracy to prove itself as a viable political system. Right now, there is no democracy in the creation of money – Seems after a century of failure its time to give the people rather than the bank underwriters a try.

    1. djrichard

      Well I have to admit I’m not fully versed in the 2012 NEED Act either. But it looks like there’s one obvious difference with the Vollgeld in that the 2012 NEED Act gives the power of the press to the treasury, not the central bank:

      Instructs the Secretary of the Treasury to originate United States Money to address any negative fund balances resulting from a shortfall in available government receipts to fund government appropriations.

      Which seems to mean the NEED Act is doing effectively the same as what the Lincoln greenback was doing. In that the currency is spent into existence by spending acts of congress. And it is drained from the economy through taxation (and I’ll maintain that you’ll still need to issue bonds to drain it as well, but that nuance isn’t critical to what we’re talking about here).

      In contrast with Vollgeld, from what I can tell, it is spent into existence (and likewise drained from the economy) based on decisions by the central bank, in particular based on the “float” that the central bank thinks makes sense at any given time. So presumably as part of that, the Swiss central bank would encourage the Swiss Fed Gov to be their conduit for getting the money into the economy, by spending it. And when that happens, that’s a nice win/win to stimulate the economy.

      But what if the Swiss Fed Gov wants to stimulate the economy, and the Swiss central bank isn’t on board with expanding the money supply? In that case, the Swiss Fed Gov has to run a deficit: collect less in taxes then it spends, i.e. resort to making up the difference by issuing bonds. At least this is what I’m surmising based on what little I’ve read. Let me know if I’m wrong on this. But if I’m right, then any perpetual increase in the deficit, like what we have in the US (and presumably what Switzerland has now) will be challenged by deficit scolds – because the deficit is “bad”.

      MMT is basically saying the deficit is not bad, it’s sustainable. Fundamentally, they’re saying that the Fed Gov is operating more akin to the Lincoln greenback model than people understand, that the Fed Gov is indeed spending money into existence and draining it through taxation and bond issuance. Personally, I can live with that, but I think that’s true only as an analogy – that operationally it seems the same because the Fed Gov will always be the risk-free lender of last resort (where the currency hoarders sink their currency when they’ve exhausted other things that are worth investing in), which effectively drains the currency from the economy. Or in fewer words, that the currency hoarders are more than happy to hoard Fed Gov bonds instead.

      Anyways, given the deficit is not bad, I think the MMTers would argue that we should be fighting and seeking consensus on that battle. That we can win that battle without having to change the monetary system. I’m sympathetic with that line of argument. But I don’t have high confidence in that plan either – if the MMTer arguments were a slam dunk, we would be there already. On the other hand, I’m betting on the Lincoln Greenback. What are the odds of that? The 2012 NEED act (which I see as being equivalent to the Lincoln Greenback) didn’t get very far. As I mentioned, I think we’ll need a couple of centuries before something like the 2012 NEED act is passed in the US. Perhaps the MMTers will crack the nut in the mean time in simply debunking the myth that the deficit is an issue.

      And there’s hope too that the private debt pump in the US will be tamed by then as well. So the pirates are hemmed in.

      That seems to be where people are hanging their hats.

      1. skippy

        I find the “money did it” hard to accept considering people make the decisions on distribution before its created, yet some have a fixation on the former.

        I think statements like working with angels and Adam Curtis is joyless by one postitive money proponent I’ve had sometime debating with speaks volumes. Also highly correlated to a UBI IMO.

        1. djrichard

          Skippy, not sure if this was directed at my thread as I was trying to avoid going there. But I’ll bite.

          Banks are debt mongers – they need to find markets for their debt.

          If they are restricted to their reserves, then that limits their markets. If they’re restricted to their reserves at 10-to-1 ratios, that expands their markets. And if there’s one thing we understand about bankers: they can get creative in finding new markets.

          Did I say 10-to-1 ratios? Banks were pretty clever in reaching beyond that in the build up to the GFC. The truly creative pushed it to 40-to-1 ratios.

          And who can blame them? All investments look good until the Fed Reserve inverts the yield curve. Indeed fraud itself would be more sustainable if it weren’t for that pesky Federal Reserve taking the punch bowl away. Did I say fraud? I meant creative destruction while they buy time for their new entrants to secure a more sustainable business model; a business model they can hopefully take over from an established player that can’t compete against cheap debt.

          1. skippy

            Sorry but that does not even begin to deal with what has occurred say since the great depression, nor does it square with the propensity of positive money proponents to forward a return to the free banking 1800s era.

            I could point you to say YS book or things like the Powell memo, Plaza, et al, all before risk in banking was spaghettified.

            Yet my issue is not money crankery, but what proceeds it, I have issues wrt the positive money camp that has nothing to do with money.

            1. djrichard

              There’s a reason it’s called the business cycle. The 1800s and free banking had their business cycle (whipsaw would be more like it). Adding a central bank didn’t change that except to back stop it and temper it. Nothing has changed since the great depression. Nothing.

              I think there’s legitimate question on whether the average joe is benefiting from the business cycle. I would argue not. Others would argue that there’s less creative destruction without the business cycle. But with where we are at now, is more creative destruction what the world needs? After the creation of the internet and smartphones, what else do we expect to be disrupted?
              And do we need access to a debt pump for those disruptions to come to market?

              In any case, that’s not the battle I want to engage in. But if prodded on the matter, I will engage. And again, I will maintain that nothing under the sun has changed since the Federal Reserve was put in place. The Federal Reserve is a mechanism for naked shorting the dollar, which can be weaponized, just in the same way that naked shorting stocks can be weaponized. More so, since naked shorted dollars aren’t limited to 3 day lifespan like naked shorted stocks are.

              My battle is for the Lincoln greenback – to give monetary authority to the fiscal side of the Fed Gov. It doesn’t need to supplant the federal reserve note. It didn’t supplant private banking notes when Lincoln issued them during the civil war. But it can supplant the federal reserve note. And if it did, I won’t shed any tears for the federal reserve note.

            2. djrichard

              And there’s a reason that it was played up that Ben Bernanke was a student of the great depression.

              Which brings up a point I think we’ve all been ignoring in this thread and in other parallel threads on NC. We’ve all been focusing on the demand side of the Fed Reserve’s liquidity pump: be it for sound business needs. Or not (pirates). See thoughts above and as I said that’s not necessarily my battle.

              But what happens when demand for that pump disappears because everyone is over-extended? Now this is where I do take more of a keen interest. Because this is where Bernanke and Japan and the ECB have done “whatever it takes” to keep that pump from going in reverse. Because in an empire created on naked shorts, the last thing you want is that pump to go in reverse. That’s not just creative destruction. That’s destruction: full stop.

              So Bernanke et. al. have figured out how to keep that pump from going in reverse. Simply prop up asset prices, e.g. by reducing the asset float in treasuries, MBSs, etc.
              And it worked. Yay! Right? If you’re an asset holder, you’re aces. If you’re not an asset holder, well you’re not doing so well. In particular, if you’re in that part of the economy which depends on the velocity of money. Because velocity is at a stand still. As another blogger I used to follow would say, price sans volume is not the right price. So from my perspective, Bernanke (and Japan) had to destroy their economies by replacing them with zombie economies to rescue certain players. Not just players, but playahs – the pirates that pushed us to this end-game with velocity. So the pirates are rescued. And the average joe inherits the after effects. But hey, those with 401Ks got rescued too, so it’s not all bad. And since the 401Kers are competitive, they generally found safe harbor in the job market too. Yay for them.

              So I do have a fight in this battle. If we were not on a debt-based monetary pump, we would not end up with a zombie economy. One which the Fed Reserve can’t figure out how to solve except for creating even more demand at the debt pump, even more over extension to mask the issue only to fall back within the same trap again. From what I can tell, we are truly in a doom loop and at present I don’t see any creativity in getting us out of this doom loop.

              So the vollgeld initiative would ostensibly be a way to extricate an economy from that doom loop. I suspect the Swiss don’t really need it as much as other nations. But why get in the way of that type of creativity?

              And I would just add that supplanting the federal reserve note with a Lincoln greenback type of approach would work just as well. Even better since it gives the monetary powers to the fiscal side of the Fed Gov.

          2. vlade

            Here’s a surprise for you. A large number of banking system does not operate ANY reserves (off the top of my head, the UK, Canda, Australia, New Zealand.. ). So you have numbers worse than what you quote – in fact, infinity!

            I’d suggest you get up to the speed on how banking, banking systems, and money work, but that’s really a point that could be made to most of the population.

            1. The Rev Kev

              Read a story once of how an experienced combat officer said he could always judge the rank of an officer by the type of battalion battle plan that they drew up. Thus a brand new lieutenant would commit the whole of his battalion to an attack. A Captain, however, would have a company as a reserve force while committing the majority of the battalion. A Major would send half the battalion while holding the other half in reserve. A Colonel would commit just enough to accomplish an attack and would hold back the rest in reserve. Just a story.
              I am afraid I do not have that much confidence in modern banking and I do not think that I am alone when I note that countries like Germany, the Netherlands and Turkey have repatriating their gold reserves back to their own country. It has also not escaped my notice that whenever the west smashes up another country such as Libya or the Ukraine, the gold is the first thing spirited out of the country within days or even hours. I go by what I see countries and their banks are doing, not what they say they are doing.

              1. skippy

                Sorry Rev but that has about what relevance to the topic, anecdotal is being kind.

                Gold is a commodity of which is part of a basket of assets which nations use in putting a floor under their balance sheet or as dynamic risk aversion management. I mean have you ever looked and the U.S. Z1.

                That does not even start getting into even under a commodity backed currency that law establishes it and sets the price, further complicated by QTH and EMH antics.

                Look I have a lot of issues with the way things are run, but, the nature of fiat and basic banking is not one of them. I focus my thoughts on the ideology that proceeds.

                1. The Rev Kev

                  Yeah, that was just me being obscure. My real point was that any banking system, before anything else, has to be sustainable and I mean has to be. Any world banking system that comes up with world debt reckoned to be about $237 trillion ( is anything but.
                  The current banking system is in need of a total redesign and overhaul. The rush to repatriate gold and other country’s smash and grab tactics for gold suggest to me that some countries are taking precautions in case the current system goes belly up.
                  That military anecdote, by the way, was saying how vital having any sort of reserves is in real life. With the subject of reserves, I am a suspenders and belt man myself. When vlade said that so many banks had no reserves, I wondered briefly it this was a new twist on the fractional-reserve banking system – by having no fractions at all.

                  1. skippy

                    OK so now were talking about debt as a monolith without reconciling productive debt and unproductive or say rentier.

                    So what distinguishes the two and what incentives drive it e.g. does the thing drive men mad or is it how they view it or think about it and whom establishes that and why.

            2. djrichard

              So I admit, I had to look that up. According to wikipedia, they use capital requirements instead. So it’s not infinity.

              As I said to Skippy, my main interest is in giving more life blood to the fiscal side of our Fed Gov. That can be done without depriving the life blood to the pirate side of our economy. That said, if there’s a way to knee cap the pirate side of our economy by depriving them of their life blood, I’m not going to shed any tears. Even if it penalizes the non-pirate functioning in the economy.

              Not all that different than my position on free trade. If there’s a way to knee cap globalization, I’m all for it. Even it if means penalizing the non-globalized part of our economy.

  11. Sgouris

    One aspect that is not covered in this discussion so far is the relationship between the financial system’s built-in growth requirements and physical resource consumption limits. A proposal for controlling unchecked private debt issuance from the banking system along the lines of Fisher’s ideas but allowing expansion based on the availability of (sustainable) resources might be a workable solution for transitioning to a more sustainable economic system.

    A more detailed discussion can be found here:

    The universal adoption of fiat currencies and of the fractional reserve banking system coincided with access to and ability to utilize energy-dense fossil fuels leading to unprecedented rates of economic expansion. The depletion of economically recoverable fossil fuels though sets the stage for systemic crises as it is not adequately priced in the current market system. An energy-based system of exchange can be adopted in parallel to or in place of fiat currencies in order to facilitate a sustainable energy transition (SET) and mitigate the impacts of such crises. Energy-backed and energy-referenced currencies are discussed as two possible variants for their ability to realign the economic system to the thermodynamic limits of the physical world. The primary advantage of an energy-referenced currency over the current mechanisms for SET (like feed-in-tariffs or carbon taxes) is realized with the decoupling of the monetary and credit functions, especially when debt is tied to future energy availability. While energy-backed (credit) systems can be easier to adopt on a regional scale, the full transition to an energy-reference currency system requires significant reform of the financial and monetary system although it would not radically disrupt the current economic valuations given the high degree of correlation between value and embodied energy.

    1. vlade

      I’d like to point out one thing, that growth does not necessarily mean using more resources. In fact, historically, a lot of growth was using existing resources more efficiently (for example, for the same energy expenditure we can now grow/manufacture/transport much more stuff). That’s what ‘productivity’ growth is – you can do more with the same inputs.

      Quite a lot of growing use of resources is in fact caused by population growth, rather than just productivity growth (or I’d say can be. Compare Europe and US). In turn, quite a lot of growth is caused by the demographic growth, alhough there is of course the ‘hey, we can do more, so we can consume more’ factor too.

      For a time, I actually really liked energy-tied currency, but the problem with it is that it’s not really a currency – it cannot circulate. That is, a real energy-tied currency would be perpetually created and destroyed, and I’m not sure that would practically work well (in theory, the constant creation, destruction and limitations on store-of-value part could be positive traits, but socially would be very very hard switch). There would also be some perverse incentives, like if you get energy inflation (i.e. too much energy in the system), it would encourage future profilgacy, and not just todays, as most of the energy consumption happens in the future (i.e. your car/house/etc. uses energy from the time it’s created all the way to the future, not just here and now).

      1. skippy


        To boil it all the way down currency facilitates – Trade – [Graeber et al] in enabling goods and services to flow e.g. the value of that currency is depending on the strength of said trade internal and externally with the understanding that not every country’s economy exists on the same level.

        Sadly I think some game the levels according to time lines not unlike Summers infamous memo, tho then again that says a lot about the psychological condition the dominate ideology forwards.

      2. Sgouris

        Apologies for the delay in response – I was just about to board a long-distance flight when I posted this. Overall, the energy currency can work in many ways. The two discussed in the paper are quite different implementations: one – energy credits – is simply a means to control the use of energy in an energy constrained system in near real time. It works almost like tradeable call minutes for a cell phone plan (discussed in some more detail here (paywall): )

        The second, that is more relevant for this discussion, is exactly as Paul L recognizes below – it can work with long term perspective. The Central Bank (named as convention for the entity that acts as the controller of a sovereign money system) controls money creation to align with the long-term energy availability (e.g. planned expansion of renewable energy supply). In this case, the monetary system is using the energy system as a measure to control the monetary supply expansion but they are not tied to each other – i.e. there is no constant energy money creation/expiration. Of course, other resources can be included and create a basket of resources to act as the control. The argument in the paper is that this may not be necessary given how correlated energy use is with GDP.

        The two systems can be implemented in parallel or independently.

    2. Paul L.

      If I follow, this is precisely the argument for a sovereign money system where money creation is tied directly to a measure of available resources, not just energy, (natural and human – 2011 NEED Act hb 2990). Inflation will not occur if the money and its velocity matches the available goods and services it serves to transfer. This is why fiscal policy is such an important component since by setting spending priorities, latent resources that have been grossly neglected due to greed and short term corporate policy, can be released and accessed by society. For instance, free education and training would lead to a workforce capable of providing services that are now not available.

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