The Battle for Money Has Begun

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Yves here. At the beginning of the week, we republished a post by Richard Murphy which gave a high level explanation of why the Swiss banking reform referendum is misguided.

Remarkably, the Financial Times’ Martin Wolf came out in favor of the Swiss referendum. Or maybe not. Wolf is prone to pump for ideas of his influential friends whether or not they are sound. On the one hand, that meant that Wolf was a forceful advocate of financial reform….because he was thick with the Bank of England’s governor Mervyn King, who was just about the only central banker to call out bank misconduct and push for reform (the Bank of England, along with the FSA, wanted big banks to be broken up along Glass-Steagll lines. The Treasury beat their proposal back to mere ring-fencing). On the other, he’s also staunchly defended Ben Bernanke’s self-serving claim that a savings glut, and not deregulation, caused the global financial crisis.

One of Murphy’s commentors, Marco Fante, who we also quoted, made another astute remark on Murphy’s current post:

The question of who and what this Full Reserve Banking / Positive Money school represents is becoming very interesting….

I have suggested that the Vollgeld / Positive Money agenda effectively represented a revival of the Quantity Theory of Money and Milton Friedman’s Monetarism with an important difference/update/revision – being that the newer school recognise the importance of (private bank) credit money – and seek to eliminate it with extreme, austere measures.

I also said that that the abovementioned agenda appeared to recognise that debt-fuelled asset-price inflation was the Achilles heel of neo-liberalism: the de-stabilising factor, and that their proposals sought to rescue capitalism with a new and severe discipline,

These suggestions were consistent with the comments of Richard and some other regular contributors. They were also met with rebuke from Positive Money supporters who complained of being misrepresented and insisted that Positive Money are progressive, pro-fiscal and ‘more Keynesian than Friedmanite’

I’d like to believe them (honestly) but I am yet to be convinced, especially so when I see that they have rapidly gone from obscurity to eminence with the assistance of some strange bedfellows from the conservative financial press and European political elite.

My current sense is that the cognizanti on the left and right of politics know that neo-liberalism is terminal and that this new monetarism is becoming the Right’s preferred solution.

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 Wolf wrote an article in the FT yesterday in which he argued that the Swiss should vote for monetary reform this weekend.

I have already discussed the dangerously oppressive nature of these reforms which would remove the right of commercial banks to create credit, and pass the whole responsibility for creating the country’s money supply to its central bank.

I have also drawn attention to the role of Positive Money (which Wolf supports) in promoting this idea.

Wolf argues three things. The first is that bank failures cost us a great deal. He’s right: we know they do.

And he argues that reform has not happened since 2008. He’s right. But then, he sat on the UK commission that created the absurdly feeble and slow-paced recommendations for reform that the Tories adopted, so I can lay part of the blame for that on him.

And third, he argues that in that case we have to do ‘something’. As he puts it:

I hope … that the Swiss vote in favour of the Vollgeld proposal in the referendum on June 10. Finance needs change. For that, it needs experiments.

With respect: no we don’t need experiments. What we need is some recognition of the truth.

Let me first say what the truth is not. It’s not, as Wolf puts it, that we need to:

…make the system safer [by] strip[ping] banks of the power to create money, by turning their liquid deposits into “state” or “sovereign” money. That is the idea backed by the Vollgeld initiative.

Of this Wolf says:

An alternative way of achieving the same outcome would be via 100 per cent backing of deposits by claims on the central bank — an idea proposed by free-market Chicago School economists in the 1930s.

Actually, they’re the same, in effect. And that this is a Chicago School / Friedmanesque monetary policy is made clear by Positive Money in their claim for this policy which said:

The central bank would be exclusively responsible for creating as much new money as was necessary to promote non-inflationary growth. It would manage money creation directly, rather than through the use of interest rates to influence borrowing behaviour and money creation by banks. Decisions on money creation would be taken independently of government, by the Monetary Policy Committee (or a newly formed Money Creation Committee). The Committee would be accountable to the Treasury Select Committee, a cross-party committee of MPs who scrutinise the actions of the Bank of England and Treasury. The Committee would no longer set interest rates, which would now be set in the market.

The central bank would continue to follow the remit set for it by the nation’s finance minister or chancellor. In the UK this remit is currently to deliver “price stability” (defined by an inflation target of 2%), and subject to that, to “support the Government’s economic objectives including those for growth and employment.” The inflation target acts as a limiter to stop the creation of money becoming excessive, but subject to that, the central bank is able to create additional money.

The objections flow, almost without limit.

First, this puts inflation at the core of economic policy.  Put it another way, the interests of those who have money are prioritised. The 1% (or less)  are favoured.  Any other economic objectives, such as full employment,  the creation of a sustainable economy,  or the provision of high quality public services,  are ignored.  Money comes first.

Second,  in the process Wolf, and those who promote this idea show that they have no idea what money is. Money is debt.  It is only created by government spending and bank lending. It is literally the double entry that surrounds those two processes that create money:  there has to be a debt and a creditor accepting obligation to each other for money to have value.  But at the core of the Positive Money proposal, and at the core of what Wolf is suggesting,  is the idea that you can, somehow, create and distribute money at the central bank as if it has some tangible real quality that simply does not exist. Quite literally printing a pile of cash does not create money:  it only creates tokens that represent money. It is the spending of those tokens, and the government’s willingness to accept them in payment of tax, that creates value, which underpins the currency. This is why it is so important that counterfeit money is challenged:  fake currency undermines the value of the real debt that gives money its value. And the token money that the Swiss proposal would create would be exactly the same: they would be a fake currency because there would be no debt,  in the process the value of this money would be undermined, or even destroyed. That’s not an experiment anyone can want to participate in.

Third,  the very real danger is that a central bank would underestimate the amount of money needed in an economy because their perpetual concern would be the risk of inflation meaning that they would always are on the side of caution. The consequence would be obvious: it would be perpetual underemployment, less than full capacity economic activity, the crushing of credit  that creates business opportunity and indications this has the public services near-perpetual economic stagnation,  if not the recession.

Fourth, give central bankers control of the money supply, and you can forget democratic control of the economy for evermore.

Fifth, since central bankers would also then control the ability of the government create money to spend on its own programs guarantee that this would also mean perpetual austerity, and enforced government balanced-budget,  with all the crushing implications that this has the public services.

This, apparently, is what Martin Wolf wants.

And he wants this despite the fact that he, like Martin Sandbu, also of the FT, who I quoted recently, knows that the reality of money. They know it is bank made. They know banks are not intermediaries. They know money creation is costless.

And yet they don’t want to use this knowledge to put money to use: instead they want to use it to constrain the use of money for the purpose of preserving wealth by promoting an idea that has banker control of inflation at its heart and which denies the very essence of what money is to achieve that goal.

There is an alternative, of course. It’s hardly even an experiment. It’s to simply use what actually happens for the common good, and that is modern monetary theory. As I have written recently:

As I explained in my Book ‘The Joy of Tax’, if a government with its own currency in which it requires settlement of tax liabilities wants taxation to be paid then it must first of all spend to put the currency in question into circulation. No other option is possible. It does, as a result, follow that tax does never fund government expenditure. Instead, that expenditure is funded by the creation of new money on the government’s behalf by the Bank of England, which it wholly owns. That the Bank of England can create funds in this way has been proven by the quantitative easing programme that has been in existence since 2009. £435 billion of new funds have been created by that programme without any cost to the taxpayer simply by the operation of double entry bookkeeping. The Bank of England acknowledged that this is the way in which banks, including themselves, can create new money in a paper published in 2014. The difference between new money created by government spending and taxation revenue received is at present made good by the issue of government bonds, although this is not strictly necessary: except for EU legislation that prevents direct lending from the central bank to the government that owns it this shortfall could, instead, be managed by an overdraft arrangement between the government and the central bank on which no interest would need to be paid.

The Bank of England might have acknowledged this reality, but as yet HM Treasury has not. The result is that is that it is not as yet acknowledged that the true role of tax in the modern economy (i.e. that where there is only a fiat currency, which has been true almost worldwide since 1971, at least) is to cancel government money creation for the purpose of controlling inflation. If this were understood there would be significant change in the way in which the government managed the macroeconomic environment in the UK.

We need no experiment. We just need to acknowledge this truth. And the fact that it puts employment and fiscal policy at the core of economic management.

We live in a dangerous time when the FT promotes a form of hardline, and deeply undemocratic monetarism.

It’s dangerous that some on the left have bought into Positive Money’s ideas.

The battle for money has begun. It is essential that it is won.

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  1. skippy

    What fight – ?????

    You can’t fight something that has a propensity to shift shape every time evidence does not support its claims, only to get the emotive special plea treatment or worse, moral crucifixion for being a bankster apologist [wheeee logic owners e.g. something bad happened in the past and stuff was stolen].

    I regress….

      1. skippy

        Yes in the sense it attempts to take ownership of both ontological and epistemological preferences from antiquity as an authority by dint of followers. This is where the dramas reside – how many believers [tm] can one win over with Bernays like methodology.

        Per se MMT only attempts to quantify what is and what policy advocacy is on offer in facilitating sound social policy vs say PM proponents that say we have to completely restructure monetary architecture to facilitate some deductive based ideological outcome.

  2. Disturbed Voter

    Perhaps the cost of the 2008/2009 bailout was too high? And I don’t mean quantitively. It seems modern man has no sense of the qualitative.

    1. Odysseus

      The same money that went into TARP would have bought a whole lot of nonperforming mortgages. You wouldn’t have needed a large bailout if the money actually made it’s way to main street.

  3. PlutoniumKun

    Slightly off-topic, but if its true that this is a right wing proposal using naïve left/Green supporters to give a progressive fig leaf, it wouldn’t be the first time this has happened. You can see the same phenomenon with Brexit, where many supposed left wingers have often bought unthinkingly into many right/libertarian memes about ‘freedom’ from the EU. The core reason they could do this is the effective abandonment by the left of arguments about money and capital to the conservative and libertarian right from the 1980’s onward.

    One of the many reasons I love NC so much is that it has tried to fill the gap left by so much of the mainstream left and much of the Greens in analysing economics issues in forensic technical detail. Articles like this are absolutely invaluable in building up a proper intellectual program in understanding the central importance of macroeconomics in building a fairer society.

    1. Watt4Bob

      God, country, apple pie, balanced budget, freedom, democracy, pay-as-you-go, ingredients in the hash of right/libertarian memes, all supposedly ‘common sense’ but actually nonsense, spread thick, intended to distract us while our ruling class steals everything not tied down.

      I think the left saw its audience washed away by a tidal wave of this clever, well-funded nonsense, so they stopped arguing about money and capital because they found it embarrassing to be caught talking to themselves.

      Of course back in the 1970s, much of the working-class had was doing well enough that they thought the argument about money had been settled, and in their favor. Little did they know that their ‘betters’ were planning on clawing-back every penny of wealth that they’d managed to accumulate in the post-war years.

      So here we are, the working class that was formerly convinced that anyone could live well if they just worked hard, are finding that you can tug on your boot-straps with all your might, and get no where.

      1. Morty

        I think you’re right in that the wrong narrative is now dominant.

        I don’t think this was done intentionally – I think the people pulling the strings don’t know for sure what will happen, either.

        The ‘common sense’ you mention is the best explanation most people have available. They look at macroeconomics through the lens of their own household budget. Of course a balanced budget responsible application of money makes sense… Most people don’t have a money printer in their basement.

    2. Pym of Nantucket

      I’d say part of our problem as a species is that at the scale of billions of people, we end up having to default to false dichotomies to get any decisions made. I don’t know if I have a solution because the dualistic left/right model seems to spontaneously reappear into every single political article I read. Personally I try to reject it for myself, if even as an exercise in forcing myself to form opinions as a function of my understanding of the facts, instead of just agreeing or disagreeing based on what well known political figures support to oppose something. One of the most frustrating words in that mess is the word “liberal” which has literally opposite meanings depending on where you use it.

      I consider myself to be very left wing, but there are many “left wing” groups in the US I wouldn’t touch with a barge pole.

        1. drumlin woodchuckles

          Eugene Debs was not “left”? Others I could name were not “left”?

          If you are correct, then Berlin Walls and Gulag Archipelagos really IS all the “left” has to offer.
          And if you can convince everyone in the country that you are correct, and the Holy Prophets and Scriptures of the Orthodox Church of Marx Leninist are the only Holy Prophets and Scriptures the “left” has to offer, you will be dealing with a public which will go to any lengths to prevent a re-infection of society by the plague of Marxitis-Leningitis. We saw how the Red Death worked out for East Europe and USSR.

          1. skippy

            Sorry I thought the western leftist were skill tradesmen, marx came after, unless Carnegie took a powder to get a tan.

    3. Nell

      Totally agree. I was a member of Positive Money for a while. Part of my journey to understanding MMT. I went to a couple of meetings and the main campaigner was very clear about being ‘apolitical’. The problem with that is you don’t recognize when you’ve been politicized. Positive Money literally advocates for a panel of unaccountable ‘wise men’ who decided on how much government spending there should be every year. It was clear then that they were in very dubious political territory (ie anti-democratic). However, the mood music is all about environment sustainability, freeing householders of debt, and making sure government has enough money to support public services. In terms of political theory they are incoherent.

  4. vlade

    Once upon a time I though Wolf knew what he was saying. Now I suspect he just parrots what he heard from the last person he was in the room with.

  5. Norb

    The battle is for the soul of humanity. A leadership that is working toward reducing inequality and injustice in the world will adopt policies reflecting a more positive outlook on the human condition. Those implementing austerity revile the masses of humanity, wether stated or not. The masses are to be controlled, not enlightened or cared for.

    The West has gained supremacy in the world by using the strategy of Divide and Conquer. This thought process is so engrained in the psyche, that it heavily influences every form of problem solving by using outright war and financial oppression as primary tools to achieve these ends.

    There would need to be a fundamental shift in thinking from Western leadership in order to bring about a change that would focus on wellbeing over profit, which does not seem forthcoming.

    If Money=Debt, the battle over money can only be won by individuals wisely choosing whom they become indebted too. As the wise Michael Hudson points out, “Debts that can’t be paid, won’t be paid.”

    The main problem I see is the definition of what “Winning” would be. The definition determines the policy.

    1. Summer

      “There would need to be a fundamental shift in thinking from Western leadership in order to bring about a change that would focus on wellbeing over profit, which does not seem forthcoming.”

      Akin to a religious conversion.

    2. DHG

      Money is the creation of the elite to control the rest of the masses. It screws the rest of the masses by constraining what they can get their hands on while the elite can get their hands on anything they want. The tipping point will be when there are sufficient numbers who understand money isnt necessary to live and have nice things, it actually exists to deprive them of such.

  6. Watt4Bob

    We’ve been fighting this same ‘war’ for a very long time.

    Everybody now just has to make up their mind. Is money money or
    isn’t money money. Everybody who earns it and spends it every day
    in order to live knows that money is money, anybody who votes it
    to be gathered in as taxes knows money is not money. That is what
    makes everybody go crazy.

    -Gertrude Stein – All About Money

    As far as I can tell, about 1% of us believe that money is not money, and the rest of us believe that money is money.

    Most of us believe that money is money because as Gertrude Stein said:
    Everybody who earns it and spends it every day in order to live knows that money is money…
    So here’s the problem: the 1% of the people, the ones who believe that money is not money, are in charge of everything.

    It’s not natural that so few people should be in charge of so much, and that they should be in charge of ‘everything’ is truly crazy. (Please excuse the slight digression)
    The people who are in charge of everything believe that it’s right, proper, indeed ‘natural’ that they be in charge of everything because they believe that no one could do as good a job of being in charge of everything because they think they are smarter than everybody else.

    The reason that the 1% of people believe they are smarter than everybody else is rooted largely in what they believe is their self-evident, superior understanding of money; that is to say, the understanding that money is not money.

    The trouble is, the difference between the 1%’s understanding of money, and the common man’s understanding of money is not evidence of the 1%’s superior intellect, so much as of their lack of a moral compass and their ability to rationalize the depraved indifference they show to their fellow man.

    Read more;

    Watt4Bob FDL June 2014

    1. perpetualWAR

      I don’t believe money is money. Pretty certain I am in the 99%.
      “Money” or currency says right on the face that it is a debt instrument.

  7. Samuel Conner

    Maybe this thought is callous, but perhaps it would be useful to have a real-world demonstration that this is a bad idea. How systemically important is the Swiss economy? US abandoned its monetarist “quantity of reserves” experiment after a relatively short time. Again, it sounds callous, but perhaps a year or two of distress in a small test environment

    (that is starting from a pretty good place and has a good social safety net


    would be helpful to the world at large in terms of deprecating a bad idea. Perhaps MMT will be the last approach standing?

    Could it be that Wolf’s “we need experiments” rhetoric is actually opposed to “positive money”, but he recognizes that the idea won’t go away until it is badly spanked? Even if not, maybe there is something to the idea that experimentation could be used to distinguish bad ideas from less bad (the good ideas won’t be tested, I reckon, until all the various flavors of “bad” have been tried and rejected).

    1. TroyMcClure

      IMO the point of the article was to hint that objections (or refusal to engage with) MMT is largely political in nature. See Marriner Eccles and his observation regarding the political enemies of full employment.

      Skippy said it above: these are likely bad faith actors who disguise their classism and political desires with talk of “positive money” and the like. Debate clubs won’t win this one.

      If the Swiss go through with it and it inevitably fails there will always be an excuse. They didn’t do positive money “hard enough” or whatever.

      1. liam

        What I’d like to know is if the Swiss go through with it and it fails, is there anything other than central bank independence that needs to be changed? Fundamentally it’s still fiat, operating within a democracy. Does it not come down to who decides how much and for what purpose?

        Maybe I’m missing something, but it strikes me as the elites getting their revenge in first. There go my people… and all that. Maybe I am missing it.

    2. Watt4Bob

      the good ideas won’t be tested, I reckon, until all the various flavors of “bad” have been tried and rejected.

      So, you don’t think current conditions are convincing enough?

      As for me, I’m more than convinced, that left to themselves, our elites have an endless bag of bad ideas, and every one of them results in their further enrichment at our expense.

      1. Samuel Conner

        I’m convinced; have been persuaded that MMT is the right way to think about “money” since shortly after I encountered it almost a decade ago.

        As I understand it, this is a referendum. If the people don’t like the outcome, they presumably would have power to reverse it. Throw the bastards out and replace with new bastards who will try something different.

        1. Watt4Bob

          As I understand it, MMT is simply a more honest way of explaining the current reality, the problem being that the 1% would like to keep that a secret so that money is only created for the things that they can profit from, like war.

          So the issue is that since enough money can be created for the needs of the rest of us, why is that not happening?

          It would appear to me that almost any efforts by the 1% to create a ‘new’ plan is in reality, an effort to make sure that the 99% never reap any advantage even if we were to unanimously come to understand the MMT is really the most realistic perspective.

          It’s almost as if the 1% has decided to change the rules because the rest of us are starting to understand that there is no technical reason we can’t finance a more equitable economy.

          1. MyLessThanPrimeBeef

            It’s good to explain the current reality more honestly.

            Even more honestly would be to explain that reality, which is a man-made system, doesn’t have to be that way, unlike scientific explanations, for example, one for how gravity works. That particular physics explanation comes with the understanding that we can’t change how gravity works.

            The word ‘theory’ in the sense most people with more than 10 years of education associate with it is that

            1. You will fail to advance to the next grade, or the next class if you don’t understand it.
            2. If you don’t understand it, you are under pressure to show you agree with the theory, lest you fail the exam.
            3. The reality described by the theory is unalterable, which is often the case with natural science theories, but not really the case with social/economic/political theories, unless they deal with human nature, which is hard to change.

            If I say there is a theory to explain that on Mars, you drive on the right side of the road on odd-numbered days, and on the left side on even-numbered days, you would say, I appreciate the clear explanation of your wonderful theory, but I don’t like it, I don’t like how that system is designed. And I want to change it!!!!!!!!!!!!

            1. bruce wilder

              Yesterday, I watched one of many Mark Blyth videos on YouTube where he was talking about why people hold on to stupid economic ideas. He offered a variety of interesting hypotheses, most of which were not necessarily mutually exclusive.

              Even a theory that fails basic tests of correspondence with reality — neoclassical economics being the prime example — may prove to be a reliable means of coordinating behavior on a huge scale. That we indoctrinate people in colleges and business schools in neoclassical economics has been the foundation for neoliberal politics; even if the theory is largely rubbish by any scientific standard, the rhetorical engine is easy to operate once you have a few basic concepts down. And, immunity to evidence or critical reason may actually be politically advantageous.

              Econ 101 is taught as a dogma. The student is under pressure to learn the answers for the exam, as you say. All the rhetorical tropes — not just deficit hysteria, but regulatory burdens, tax incentives, “free markets” (you see many actual markets? no, I didn’t think so) and on and on — are as easy to recite mindlessly as it is to ride a bicycle.

              We have an ideology that prevents thinking or even seeing, collectively.

    3. Paul L.

      Well, your wish has been answered – about 160 years ago. Lincoln’s issuance of Greenback’s allowed the Union Army to exist. No borrowing, no MMT debt incurred.

      1. Yves Smith Post author

        “MMT debt” is a non-sequitur..

        MMT experts point out regularly that the Federal government spends out of nothing. Issuing bonds is a political holdover from the Gold Standard era, but separately, those bonds do have some use because a lot of investors like holding a risk free asset.

        The government spends by the Fed debiting the Treasury’s account. That’s it.

        We don’t go around worrying about issuing bonds to pay for the next bombing run in the Middle East. The US has all sort of official off budget activity as well as unofficial (why do you think the DoD is not able to account for $21 trillion of spending over time? No one points out this $21 trillion mystery is proof the USG actually runs on MMT principles).

        1. Older & Wiser

          MMT necessarily requires the exorbitant privilege of having the US dollar accounting for 60% of world trade & financial transactions with the US economy representing only 20% of world GDP.

          Such impunity is changing as we speak so for that reason only (there are others) MMT should soon find itself non-viable.

          1. Yves Smith Post author

            That is not correct. Any government that issues its own currency is a sovereign currency issuer and operates on MMT principles. Canada, Japan, England, Australia, New Zealand….the constraint on their ability to run deficits is inflation. They will never go bankrupt in their own currencies. They can create too much inflation.

  8. Adam1

    I have the same reaction to Positive Money ideas as I do to someone who talks about “parallel currencies”. They don’t understand money, banking and central banking.

    While I agree whole heartedly with Clive that establishing the mini-bot currency is subject to the law of un-intended consequences and would no doubtedly have a bumpy start and might not even survive; but it’s just another currency. Yes it would likely be subject to a discount versus the Euro, but so what. From a banking perspective there is nothing magical about state money or central bank money. These are the dominate means of clearing and settling payments today, but that’s because it’s currently cheaper, easier and less risky. But banking predates central banks by at least one or two hundred years (if not more). Thinking that if you put an iron fist on the usage of state/central bank money is going to stop banking only shows you don’t understand banking. Most economies already have dual currencies – state money and bank money – but nobody thinks of them that way because they trade one for one. But locking the banking system out of using state money to clear and settle payments created by lending only forces the banking system to find a new means of acquiring liabilities (I’d suspect they get called something other than “deposits” of course) and clearing and settling payments. It wouldn’t happen overnight but it most certainly would happen – there’s too much “money” to be made.

    1. Paul L.

      “Most economies already have dual currencies – state money and bank money” Give me the ratio please. Other than feeding the parking meter or doing your laundry what else do you use state money for?

  9. voteforno6

    It’s not exactly the gold standard, but it would have the same impact, I think. You have to give them credit, though – they keep finding new ways to dress up this very old idea.

    1. OpenThePodBayDoorsHAL

      Hard to get to a new answer if you don’t even start with the right question.
      Wolf asserts his obvious and unquestionable truth: “Money is debt”.


      J. P. Morgan didn’t think so. When he was asked:

      “But the basis of banking is credit, is it not?”, Morgan replied:
      “Not always. That is an evidence of banking, but it is not the money itself. Money is gold, and nothing else”.

      Ah yes, the shiny rare metal that served mankind as money for millennia.
      I have a gold coin in my hand. I can exchange it for goods and services. But I can’t for the life of me figure out whose debt it is.

      And no less than The Maestro (Alan Greenspan) opined the following last month:

      “The gold standard was operating at its peak in the late 19th and early 20th centuries, a period of extraordinary global prosperity, characterised by firming productivity growth and very little inflation.

      But today, there is a widespread view that the 19th century gold standard didn’t work. I think that’s like wearing the wrong size shoes and saying the shoes are uncomfortable! It wasn’t the gold standard that failed; it was politics. World War I disabled the fixed exchange rate parities and no country wanted to be exposed to the humiliation of having a lesser exchange rate against the US dollar than it enjoyed in 1913.

      Britain, for example, chose to return to the gold standard in 1925 at the same exchange rate it had in 1913 relative to the US dollar (US$4.86 per pound sterling). That was a monumental error by Winston Churchill, then Chancellor of the Exchequer. It induced a severe deflation for Britain in the late 1920s, and the Bank of England had to default in 1931. It wasn’t the gold standard that wasn’t functioning; it was these pre-war parities that didn’t work.

      Today, going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today we would not have reached the situation in which we now find ourselves. We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.”

      So let’s start with a simpler definition of money: “Money stores labor so it can be transported across space and time”.

      I grew some wheat, and want to store my wheat-labor so I can use it later, or spend it somewhere that is nowhere near my wheat pile.

      But this points out why money that took no labor to produce cannot reliably store labor. Our system materializes money from thin air. Which is precisely the point of gold: it takes alot of labor to produce, so it has reliably stored labor for centuries. In A.D. 250 if I wanted a good-quality men’s costume (toga, sash, sandals) the cost was one ounce of gold. Today one ounce of gold is +/-$1300, probably enough for a pretty good suit and pair of shoes. That fact is incredible: every other currency, money, government, and country have come and gone in the interim but gold reliably stored labor across the ages.

      Cue the haters: “But gold money allows deadly deflation!!!”. Yes, that scourge, when people benefit from rising productivity (lower costs of goods and services) in what used to be termed “Progress”. Instead we’re supposed to love being on a debt treadmill where everything costs more every year, on purpose.

      Free your mind.

      1. OpenThePodBayDoorsHAL

        Just to be clear, I’m not arguing that credit should somehow be abolished. Credit is critical, and hence so is banking. But separating money and credit would mean that every banking crisis (extending too much credit) is not automatically also a monetary crisis, affecting everyone, including people who had nothing to do with extending or accepting too much debt.

        1. Paul L.

          Yes, you are correct. No one in the monetary reform movement wants to abolish credit – an agreement between two entities – but to have that “credit” backed by the US government as real money – what a racket!

          1. skippy

            Sigh no such thingy as “real” money, same issue with using terms like “natural” as a quantifier.

            This also applies to say pods above statement about “freeing the mind”, especially when referencing or other AET affiliates.

      2. The Rev Kev

        Of course it should be noted that if you dig up a gold coin from two thousand years ago or even older, it still has value just for its metal content alone. It still holds value. This is never true of fiat currencies. In fact, it had never occurred to me before, but when you think about it – the history of money over the past century has been to get actual gold, gold coins, gold certificates, silver coins, etc. out of the hands of the average people and to give them pieces of paper and now plastic as substitutes. Even the coins in circulation today are only cheap remnants of coins of earlier eras that held value in itself. I would call that a remarkable achievement.

        1. skippy


          I think you should avail yourself wrt the history of gold and how humans viewed it over time, then again you could look at say South America from an anthro observation and the social changes that occurred between Jade and Gold eras.

          As far as value goes that is determined at the moment of price taking which can get blurry over time and space.

          Gold was used as religious iconography for a reason imo.

          Just from the stand point that gold was in one anthropological observation – a flec of gold to equal weight of wheat means the gold got its “value” from the wheat and had nothing to do with some concept of gold having intrinsic value.

          1. The Rev Kev

            Not particularly in love with gold nor am I a gold bug. My own particular prejudice is that any money system needs an anchor that will set some sort of boundaries to its growth. Something that will not blow through the physical laws of natural growth and will acknowledge that resources can and will be exhausted by limitless credit and growth. Personally I don’t care if it is gold or Electrum or Latinum or even Tribbles so long as it is something.

            1. skippy

              Yet MMT clearly states that growth is restricted to resources full stop. So I don’t understand your issues with anchor points, its right there in black and white.

              Look I think there is a huge difference between informal credit [Greaber] and formal credit [institutional] and the risk factors that they present. This is also complicated by not all economies are the same e.g. steady state. In facilitating up lift [social cohesion with benefits of currant knowlage] vs putting some arbitrary limit on credit because it suits the perspective of those already with claims on wealth.

            2. skippy

              In addition I would proffer that MMT is not supply side dependent, just the opposite. Economics would be much more regional in reference to resources and how that relates to its populations needs, especially considering the democratic governance of those finite resources without making money the linchpin to how distribution is afforded.

      3. Older & Wiser

        How dare you submit such irreverent goldbuggery ?
        Your line of thought is not politically correct Sir.
        Something for nothing is easier to sell and to live by, don´t you know ?… as long as it lasts.
        Problem is ( as HAL would say ? ) the 50 years are almost through, so it just can´t last much longer no matter how much we pussyfoot around reality.

        1. Plenue

          It has nothing to do with being ‘politically incorrect’. It has to do with goldbuggery being completely ignorant of actual history and facts. It ascribes to gold attributes which it never truly had even in the West, much less globally.

          Some examples from objective reality:

          When the Conquistadors arrived in the ‘New World’, they discovered an entire continent filled with easily accessible gold and silver, and yet neither was treated by the natives as money. They were shiny trinkets. Money was cocoa beans and pieces of linen.

          When the Vikings reached the Eastern Mediterranean, the Byzantines had a hard time getting them to accept gold as payment. Before that, the only ‘precious’ metal they had any interest in was silver.

          Going eastward, in feudal Japan currency was based on rice, not precious metals. Gold and silver were used as representative tokens of large values of rice. The source of value wasn’t felt to be the metal, it was what the metal represented.

          If civilization were to end today, the most well off survivors aren’t going to be the ones who stockpiled gold. It’s going to be the ones who stockpiled food and water (and/or the weapons to protect/seize such stockpiles). Gold has exactly zero inherent value. It’s a luxury item at best, in the same way fine art is. No one in the post-apocalyptic wasteland is going to be impressed by your lumps of heavy, soft metal.

          There’s plenty of information available from historians, archaeologists, and anthropologists (but emphatically not from mainstream economists) on the history of money. If you want to ‘free your mind’, you’d best start with one of these fields. Not some libertarian cesspit, where the ‘intellectuals’ are even more delusional than mainstream neoclassicals.

      4. Pespi

        That all sounds very neat but is not true. Money is not a labor token, it is not a token of anything but an act of accounting.

      5. todde

        Here is what happens in the real world, and not Mises website.

        Labor is a commodity, so when prices of ‘services’ fall, that means people receive less in wages.

        So if you are a Laborer, deflation doesn’t improve your economic condition.

        Let’s say you’re a person without any Capital and want to start your own business. You get a loan and buy assets to produce consumer goods.

        While you are in business, deflation occurs. You’re asset prices drop, your consumer goods prices drop, but your loan payments remain the same.

  10. templar99

    ‘ Everybody needs money, that’s why they call it money ‘ David Mamet ‘ Heist ‘

  11. The Rev Kev

    I’ll probably get slammed here for this but to tell you the truth, I see no justification for the shape and character of the present money system in use around the world. In fact, I absolutely refuse to believe that There Is No Alternative. The present system is one that has evolved over the centuries and for the greater part was designed by those with wealth to either solidify or expand their wealth.
    Yesterday, in a comment, I made the point that for an economic and financial system to work it has to be sustainable. Call that General Order Number One. But a survey of the present system shows a system that by its very nature is seeking to transfer the bulk majority of wealth to about 1% of the population while pushing about 90% of the population into a neo-feudal poverty. This is nothing short of self-destructive and is certainly not sustainable.
    We tend to think of money as something permanent but the different currencies in existence today make up only a fraction of the currencies that have ever existed. All the rest have gone extinct. I am given to understand that when the US Federal Reserve meets, it is in a room whose walls are adorned with examples of these extinct currencies. In fact, I even own a few German Reichsmarks from the hyperinflation era of the early 1920s for an occaisional bit of perspective.
    OK, maybe the Swiss referendum is being used, misused and abused but it is a sign of an arising discontent. It certainly surprises me that it was the Swiss as when I visited that country, they were the most conservative people that I have ever met as far as money was concerned. In any case, perhaps it is time that we all sat down and designed a money system from the ground up. Throw away the rule book and just take a pragmatic approach. Forget theories and justifications, just look for stuff that works.

    1. JEHR

      There is no need to “experiment” with other systems of money use: we just need to regulate the system we have but, unfortunately at present, we are in the midst of de-regulating everything–finance, environmental protections, healthcare, education, etc., and getting rid of other groups such as unions. The undermining of many (public) institutions is well on its way and I do not see it ending well. I think the rich have won this round just as they planned in the 1970’s.

      1. MyLessThanPrimeBeef

        We have to consider, think or experiment with other systems. The comment below by Anarcissie is a good start.

    2. Anarcissie

      I imagine you would want to start from value (a mental state of persons) and labor, things persons do to achieve stuff which they value. It would be convenient to have tokens which represented social agreement about value, valued stuff, and labor. The social agreement could be brought about by cooperative voluntary institutions (‘credit unions’) which would oversee and guarantee the issuance of tokens (debts) by members (persons). We already do this on a modest scale by writing checks, so it’s not unheard-of.

      If you want a system which doesn’t just feed the elites, you have to create one which doesn’t rely on institutions dominated by or entirely controlled by the elites, such as the government, the major corporations, large banks, and so on. You want something egalitarian, democratic, and cooperative. It’s not impossible.

      1. bruce wilder

        Indeed it is possible and has been done in the recent past.

        A key insight behind credit unions, mutual insurance and savings and loans back in the day was that these institutions were loaning people their own money savings and should be run without assigning hotshot managers the dubious incentive of a profit-motive or talking up “innovation”.

        One of the things I object to in Richard Murphy’s rhetoric and that of more careless MMT’ers is that they implicitly concede the premise that Money is usefully thought of as a quantitative thing, a pile of tokena circulating at some velocity. Financial intermediaries (and yes, Richard, they are intermediaries) do create “money” in the form of credit by matching ledger entries. For a savings and loan, which gives a mortgage to a depositor or just a checking account to a saver, this can be a key idea supporting mutual assistance in cooperative finance.

        But, if you insist that the bank is “creating” a quantity of money that is then set loose to drive up house prices or some similar narrative scenario, I do not see that your storytelling is doing anyone any good.

        Credit from institutions of cooperative finance — shorn as they must be of the incentive toward usury and rent extraction — is actually a very useful application of money, enabling people to take reasonable risks over their lifetimes. For example, to enable a young couple to form a household and buy a house and gradually build up equity in home ownership against later days. This is sensible and prosaic, a standard use of money to insure by letting a bank or similar institution help individuals or small businesses to transform the maturities of their assets and prospects, while certifying their credit. If your understanding of money does not encompass such prosaic ideas as leverage and portfolios or their application to improving the general welfare, then the “left” is up a creek without a paddle.

        1. Paul L.

          “Financial intermediaries (and yes, Richard, they are intermediaries) do create “money” in the form of credit by matching ledger entries. ”
          That is NOT what is meant by the term,”intermediaries” here. The common belief is that banks merely take in a depositor’s money and, as an intermediary, lend that money out. An intermediary, by definition, does not create anything. That is the accepted meaning of the term when discussing banking. You are free to use your own definition but it will lead to confusion.

          1. bruce wilder

            What is the accepted meaning of the term, “intermediary”, when discussing banking?

            I am unclear what definition you are referencing.

          2. Yves Smith Post author

            You are incorrect as to how banking works, and you have also jalbroken moderation, which is grounds for banning, as is clearly stated in our Site Policies, which you did not bother to read.

            Per your comments on banking, you are also engaging in agnotology, another violation of site Policies.

            Banks do not intermediate. They do not lend out of existing savings. Their loans create new deposits. Not only has MMT demonstrated, and this has been confirmed empirically, but the Bank of England has endorsed this explanation as correct.

            You are presenting the loanable funds fallacy, a pet idea of monetarists. It was first debunked by Keynes and later by Kaldor.

            Your idea of “accepted meaning” is further confirmation you are way out of your depth here and are a textbook case of Dunning Kruger syndrome.

  12. Anthony K Wikrent

    The matter of who or what controls money is actually secondary to the matter of what money is used for. Positive Money correctly identifies the fact that under our present arrangements in the USA, UK, and most of the West, money and credit are used almost entirely for speculation, usury, and rent extraction (though they do not, so far as I know, use the terms). If “the people” somehow were able to gain control of money and credit, and money and credit continued to be used almost entirely for speculation, usury, and rent extraction, society and the people would see no net advance economically.

    That’s the simple overview. Allow me to lay out a couple scenarios to show why just solving the problem of who controls money and credit does not really address our most urgent problems.

    For the first scenario, assume that it is right wing populists who have triumphed in the fight to seize control of money and credit. Recall that in the first and second iterations of the bank bailout proposals in USA, Congress was deluged by overwhelming public opposition to the bailout. But in the second iteration, the Democrats mostly folded, while on the Republican side, the closer you got to the Tea Party extreme, the stauncher the opposition to the bailout you found. So, under right-wing populist control, we would probably see prosecutions and imprisonment of banksters, which would likely have the intended effect of lessening rent extraction. But we would probably also see that right-wing populists are not much concerned about speculation and usury, so those would continue relatively unscathed.

    More importantly, we could expect right-wing populist control to result in severe cutbacks to both government and private funding of scientific research, most especially on climate change. We would be hurried forward on our course toward climate disaster, not turned away from it.

    For the second scenario, let us assume it is a left-wing populist surge that achieves control over money and credit. In this scenario, speculation and usury would be suppressed as well as rent extraction. On science, there would no doubt be a surge in funding for climate research. But I would greatly fear what left-wing populists might do to funding of space exploration and hard sciences such as the large Hadron collider at CERN. And what would happen to funding for military research programs like DARPA?

    Can you imagine the implications of cutting those kinds of science programs? Try to think of doing without all the spinoffs from the NASA Apollo moon landing program and the original ARPAnet, which includes much of the capability of the miniaturized electronics in the computer, servers, modems, and routers you are now using.

    The point is, that without restoring an understanding of republican (NOT capital R “R”epublican Party) statecraft, its focus on promoting the general welfare, and the understanding that promoting the general welfare ALWAYS involves identifying and promoting the leading edges of science and technology, any success in seizing control of money and credit away from bankers (whether private or central) does not necessarily result in victory. For an extended discussion of science and republicanism, see my The Higgs boson and the purpose of a republic.

    1. MyLessThanPrimeBeef

      There will always be right-wingers, left-wingers, progressives, imperialists, etc.

      One or more of them will seize control.

      It would seem, then, the first thing to do, is to work on human nature, and not discovering new devices for them (or us, ourselves), because we can not guarantee no harm to Nature will come from colliding high energy particles.

    2. Lord Koos

      I don’t really see the left as being anti-science, it seems to me that it’s the right that wants to deny scientific findings such as climate change, etc. There are exceptions of course, such as new-age/anti-vaxers, chem-trail theorists, etc but they are a small minority, and I find it hard to envision a scenario where a leftist government would cut science funding. As it is now, many if not most scientific and technical advances have originated from what was originally military funding, including the internet we are using at this moment.

      This is a model that needs to change IMHO, there is no reason that cutting-edge science has to be tied to the military, science could just as easily be funded for its own sake, without the pentagon getting the money first and then having the tech trickle down to the rest of us.

      1. MyLessThanPrimeBeef

        I am trying to come up with some examples where technological advances were not induced or misused by warriors and/or libido, from the dawn of humanity till now.

        Stone tools – misused for war.

        Bronze/iron tools – the same.

        The wheel – war chariots.

        Writing – to lord over the illiterate

        The steam engine – how the west was won with buffaloes going extinct.

        Gun powder – war, and above.

        The internet – surveillance and libido.

        The smart phone – above.

        Aspirin – that’s all good….maybe the example I am looking for…except I’m allergic to it.

        1. Anthony K Wikrent

          The technology of smart phones originated almost entirely with DARPA — see Mariana Mazzucato’s The Entrepreneurial State

    3. bruce wilder

      money and credit are used almost entirely for speculation, usury, and rent extraction

      Certainly on the leading edge, that is what money and credit are used for, but “entirely”??? In the main, money remains the great lever of coordination in an economy of vastly distributed decision-making.

      The forces of predation and fraud are seriously out-of-control and they use money for anti-social ends, protected by neoliberal ideology and the cluelessness of what passes for the political left. Like any normal bank robber, the banksters want the system of money to continue to work and it does continue to work, in the main, even as they play Jenga with the towering structures of finance.

      1. Anthony K Wikrent

        Well, I did qualify it with “almost” : ). Still, in the late 1990s I found that there was around $60 (sixty dollars) of trading in financial markets (including futures and forex) for every one dollar of GDP. That compares to 1.5 to 1 in 1960. The ratio probably dropped in the aftermath of the 2007-2008 crashes, but I’s be surprised if it has not surpassed 60 to 1 by now. Have mercy on me: I haven’t looked at a BIS report for a few years now.

    4. Paul L.

      Your first scenario is already in existence today, my friend. As far as the second scenario – what exactly is it that you have against democracy?

  13. Ignacio

    It is just intuitive that giving central bankers the monopoly for money creation is not a good idea

    1. Paul L.

      So your solution is to keep it in the hands of the elite?! Please note that the “central bank” under the Vollgeld initiative is completely redefined, not a central bank at all but a government institution controlled by a democratic process.

      1. Martin

        Many banks around the world started out as state-owned and have been privatised.
        I admit it is simplistic, but having a state-run not-for-profit bank being this “government institution controlled by a democratic process” has a lot of merit to me.
        It would have lending guidelines to aid investment in productive endeavours, limit the risk, and have no part in the insane fringe financial transactions that brought about the GFC, and who know how many other things that have gone under the radar.
        This brings all currency creation into a single place, so it needs transparency and a (proper) democratic governance.
        There would probably be fewer jobs I admit, but many of these would be the top levels enjoying fat bonuses based on winning zero-sum games.
        And as a final comment – should GDP include the transactions within the financial sector at all? Given the zEro-sum games involved, and the creation of losers as part of that, does it actually “produce” anything at aLL?

        1. Yves Smith Post author

          I hate to be a nay-sayer, but the reason there were once many state banks in the US and there is now only one is that they became cesspools of corruption. And having arm-wrestled with CalPERS for over four years, which is more transparent than a lot of places, good luck with getting transparency and good governance.

            1. Yves Smith Post author

              Mind you, that does not mean they might not be worth trying, but the assumption that they can just be set up and will work just fine “because democracy” needs to be taken with a fistful of salt. There needs to be a ton of careful thought re governance and lots of checks (an inspector general with teeth at a minimum, we can see from CalPERS that boards are very easily captured).

              1. Jamie Walton

                Agreed. Could a public banking option run through the U.S. Post Office be a better approach (they have branches and staff everywhere already)?

              2. Watt4Bob

                Bank of North Dakota has a fascinating history, being founded during the Progressive Era, when ND had a governor who was a member of the Nonpartisan League, a populist political party, and intended to save North Dakota’s farmers and laborers from the predations of the big banks in Minneapolis and Chicago.

                It remains the only state-owned bank in the country.

                The populist
                Nonpartisan League
                remains the most successful third party in history, and had remarkable impact on politics in North Dakota and Minnesota. It merged with the Democratic Party in the 50s.

                1. Yves Smith Post author

                  Ahem, I acknowledged that. What you miss is that pretty much every other state had a state bank and they were shuttered because they became embarrassingly corrupt. The fact that past “state bank” experiments almost universally failed makes me leery of the naive view that they’ll be hunky dory. They could be but the sort of cavalier attitude that they’ll be inherently virtuous is the road to abuse and misconduct.

                  1. Watt4Bob

                    Please don’t misunderstand my comment, I agree with your point, in fact one could say the exception proves the rule.

                    My main interest in mentioning the story of the BND is the fact that it was conceived by populists during the last century’s greatest conflict with the then criminal financial sector.

                    That, and the related story of a real alternative, third political party.

                  1. Watt4Bob

                    Not an advocate here, just pointing out an interesting history.

                    A lot changes over a hundred years.

  14. Wukchumni

    I was talking with my wife about DeBeers and the man-made diamonds they’re selling @ 1/10th of the price of the genuine article…

    …what if some neo-alchemist did the same thing with gold?

    It would in an instant, render all of it worth $130 an ounce, on it’s way to $13 an ounce.

    And more importantly, take away the only real alternative to digitally produced ducats.

  15. Jim Haygood

    Money is debt. It is only created by government spending and bank lending.” — Richard Murphy

    We’ve jumped through the looking glass. The former money, gold, is NOT debt. Debt-based money is ersatz, a ghastly fraud on humanity.

    In a normal economy, government spending is financed by taxes and borrowing, meaning that no new spending power has been created, as IS the case with new bank loans.

    Daniel Nevins’ book Economics for Independent Thinkers discusses how modern economists got misled into believing the money supply governs everything, whereas earlier 19th century economists understood that bank lending is what drives expansions.

    Poor Murphy, starting out with a wonky premise, only succeeds in careering into a briar patch and wrecking his bike. He should post his pratfall on YouTube.

    1. False Solace

      Fiat money can also be created without debt. That’s the whole point of MMT, but it makes Haygood’s head explode so he never acknowledges it (without muttering about hyperinflation, which never actually happens outside of disasters on the scale of a major war).

      When the federal government spends money into existence — which can be on the basis of a democratic agenda, in countries that have actual democracies — there’s no need for a corresponding issuance of government debt. Hence, spending power is indeed created. If the government does create debt, the bond is an asset on the ledger of whoever buys it, and the government spends the interest into existence. Which creates additional spending power for the private sector. The government can choose to, or not, collect a portion of this as taxes, which extinguishes the money. If the government collected as taxes everything it ever spent there would be no money in circulation.

      > In a normal economy, government spending is financed by taxes and borrowing, meaning that no new spending power has been created, as IS the case with new bank loans.

      Er, new bank loans also represent borrowing that has to be paid back. The spending power that gets created is extinguished by paying back the bank loan.

      1. MyLessThanPrimeBeef

        the federal government spends money into existence


        That’s a choice made by the designers of the current system.

        But not the only choice.

        The people, for example, can be empowered (or perhaps inherit that power, on the basis of the Constitution amendment clause* that any power not given explicitly to the federal government is reserved for the people), to spend money into existence.

        *The Tenth Amendment declares, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.”

    2. Susan the other

      So do you gold bugs want to dispense with double entry bookkeeping or keep it and adapt it to gold (would that entail both counterfeit money and counterfeit debt?) – gold as both credit and debt, or just what exactly? With the gold side weighing down the ledger it’s gonna get wobbly. Maybe have to start a war to fix it? The fog of positive money. Really, JH, you’ve been the best voice against war. How do you reconcile all the social imbalance that would follow with “positive” money?

      1. Wukchumni

        Nobody’s going to willingly go back to a gold standard, it would have to come about because money via digital deceit has failed in entirety.

      2. Jim Haygood

        Fiat money is war finance, made permanent. Even during the gold standard, governments would suspend gold convertibility during wars. Lincoln’s greenbacks and the UK’s suspension during WW I are noteworthy examples.

        So the gold standard won’t stop governments declaring national security exceptions — they’ve always done so. But permanent war finance is what sustains the value-subtraction US military empire, a gross social imbalance that already plagues us by starving the US economy of investment.

        Double entry bookkeeping doesn’t require that every asset have an offsetting liability. A balance sheet with no liabilities is all equity on the right-hand side. It’s what a bank would look like if it sold off its loan portfolio and paid off its depositors — cash on the left side, equity on the right. If the bank then bought some gold, it would be exchanging one asset (cash) for another (gold), with no effect on the liability/equity side.

        1. Wukchumni

          It is worth noting that the Federal government struck well over 10 million ounces of gold in coin form for use in circulation from 1861 to 1865…

          And the CSA?

          Not one grain worth

          1. Anthony K Wikrent

            I’ve gathered and read much on the greenbacks, but don’t recall that very interesting data about minted gold. Any sources you might recommend?

        2. Wukchumni


          We were never on a pure gold standard, nowhere close actually.

          The most common money in the land until the Federal Reserve came along, FRN’s not being backed by gold?

          Why, that would’ve been National Banknotes, which was the currency of the land from 1863 to 1935. There were over 10,000 different banks in the country that all issued their own currency with the same design, but with different names of banking institutions, etc.

        3. MyLessThanPrimeBeef

          Specifically, in this case:

          Assets = Equity (+ zero liabilities)

          The accounting identity is still good.

        4. Susan the other

          Very hard to argue with you, but I’m tripping over this: “If the bank then bought some gold, it would be exchanging one asset (cash) for another (gold) with no effect o the liability equity side.” Because in my mind cash isn’t an asset – it’s just money – a medium of exchange and a unit of account. Where we get all messed up is when the unit of account starts to slip (due to mismanagement) and people start to demand that money become a store of value. When the value is society itself. And blablablah.

          1. JTFaraday

            Sure, the value is society itself, I agree with this. But OTOH, it is for example much better to be a woman, black person, fill in the blank, even “working class” person with a lot of money than not in a sexist, racist, etc society.

            I can’t necessarily compel the forces of sexism, racism, old farts who don’t agree with me, etc through the “political process,” thereby bringing my will to bear on society. But I can move things with my dollars, This is how money gets its magic power. If people played nice with each other, we wouldn’t need money.

      3. Older & Wiser

        What about paper bugs Susan ?
        Has paper buggery helped any ever ?
        Why do fiat currencies always self-implode (in average) every 50 years ?
        You can fool part of the people all of the time, and all of the people part of the time...”

        1. OpenThePodBayDoorsHAL

          8 white men control > 50% of the world’s wealth. Let’s just keep going in that direction, to where it’s down to one white guy, and with debt-based money everyone else owes him all the “money” in the world. Then we can just strangle him in the bathtub and usher in an era of peace and prosperity.

    3. Older & Wiser

      Richard Murphy says that…” handing all credit creation to the central banks is not only technically impossible in a modern economy, it’s a dangerous folly

      What is QE then, Sir ?
      Our “modern” economies don´t have business cycles any more, just distorting credit cycles.
      There are no “markets” as such today, nor prices… only interventions.
      Even interest rates (the price of supposed “money” remember ?) are not priced by markets any more….

      1. OpenThePodBayDoorsHAL

        Ask any economist or banker what they think about fixing the price of goods and services and see how they answer.

        Watch their heads explode when you then ask if it’s a clever idea to fix the most important price in the global economy.

    4. Yves Smith Post author

      Help me. Gold is not money. And it does not have and never had immutable value. Even in the days of the gold standard, countries regularly devalued their currencies in gold terms. It was the money that was used for commerce, not the gold. When the US government devalued the $ in gold terms by 5%, bread at the store didn’t cost more the next day, which is what your “gold is money” amounts to. It’s not correct and you need to drop it.

      1. Synoia

        I visited a gold mine for a tour onec. At the end of the tour was the gold refinery, and on the floor two ingots of gold.

        They made the offer, “if you could life one with one hand, you could keep it.”

        I tried.

        And discobered that the ingit, was

        a) Pyramidal in shape so ones fingers slid off it
        b) F….. heavy. 140 lb.

        When you see gold “bars” being tossed around in the movies, it’s complete bs. Arnold at his best coud not toss them around.

        So we went an had a beer instead. Wiser, but not sadder.

      2. Older & Wiser


        True enough, gold today is not currency or legal tender anywhere, so (at least today) it is neither unit of account nor means / medium of payment.
        True enough, today you can´t legally pay for anything with gold.
        But gold was, is, and shall always be store of value vis-á-vis any currency it may back (which today do not exist, but should)

        The problem is the way in which you all have been applying (mis-using ?) the term “money” as a substitute for currency or legal tender which by definition by itself lacks store of value unless backed by gold for 5000 years of good reasons we should always have in mind.

        1. skippy

          Historically inaccurate on a global scale. Gold was not during your time line been the predominate means of exchange, more so, credit preceded it. Bimetallism was always just a legal means for the state to control taxation, was a means to facilitate the logistical dramas with of perishable goods et al.

    5. Plenue

      “The former money, gold, is NOT debt. Debt-based money is ersatz, a ghastly fraud on humanity.”

      You’ve been on NC for years. You have to know by now that this literally, objectively, isn’t true. It just simply isn’t. History and anthropology do not at all support your version of events. People like Hudson and Graeber have extensively documented where money came from. Debt and credit came first, then money as a token to measure them. We have warehouses full of the freaking Sumerian transactions tablets that show it! Money is debt, always has been.

      Actually, I say you have to know this by now, but given how conspicuously absent you seem to be in the comments of Michael Hudson articles about the history of debt hosted here, maybe you just aren’t reading them. Or you are and don’t like what they say and how it clashes with your pre-established worldview, so you just ignore them. Though even if the latter, it’s still telling how you don’t even attempt to refute them. Perhaps because you can’t.

  16. steven

    It’s not about money; its about creating and distributing wealth. That a trivial thing like a double-entry bookkeeping operation should stand in the way of creating the wealth the world and its people need to survive is, of course, insane. But it is also insane to expect different results from turning over control of the process of money creation to a wholly owned subsidiary of governments like those of the United States and Great Britain, bent as they are on global hegemony (“full spectrum dominance”) – at ANY cost.

    Whether or not China and other developing nations realize it, genuine wealth creation – not money as debt creation (‘finance capitalism’) – is THE source of national power. It is more than a little amusing to watch the neoconservatives fret about the rise of China after having joined with their neoliberal brothers in off-shoring US and Western wealth creation potential (in what they must have thought was an oh so clever attack on Western living standards by forcing ‘their’ people to compete with the world’s most desperate workers in a global race to the bottom so their 1% patrons would have an excuse to create more money as debt).

    So long as the West remains focused on ‘the price of everything and the value of nothing’ (like the human potential of their own people, for example), the developing world is soon likely to have a monopoly that will put OPEC and its Middle Eastern dictators to shame. In summary this is about FAR more than just about how a few ‘post-industrial’ democracies create their money. The definitive work on this topic remains Soddy’s Wealth, Virtual Wealth and Debt, 2nd edition.

    1. Paul L.

      Soddy doesn’t object to democratizing the money supply and turning over its creation the democratically elected government.

      1. skippy

        Soddys drama is making money a physical object when its a contract with time and space qualities,

        1. blennylips

          Just as a few days ago Carlos Rovelli, author of “The Order of Time“, has useful insights of the political significance of LSD, he has advice for this too in the same book:

          The entire evolution of science would suggest that the best grammar for thinking about the world is that of change, not of permanence. Not of being, but of becoming.
          We can think of the world as made up of things. Of substances. Of entities. Of something that is. Or we can think of it as made up of events. Of happenings. Of processes. Of something that occurs. Something that does not last, and that undergoes continual transformation, that is not permanent in time. The destruction of the notion of time in fundamental physics is the crumbling of the first of these two perspectives, not of the second. It is the realization of the ubiquity of impermanence, not of stasis in a motionless time.

          In other (his) words:

          “The world is made up of networks of kisses, not of stones.”

          Not bad for a physicist!

  17. djrichard

    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).

    But what happens when demand for that pump disappears because everyone is over-extended? 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 (currency creation today is essentially a naked shorting process), the last thing you want is that pump to go in reverse. That’s not just creative destruction. That’s house-on-fire destruction.

    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. 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.

    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.

    I posted a version of this last night in the previous thread. But suspect nobody is going to go to that thread anymore. So apologies for a repeat of sort. Not trying to spam.

    1. Wukchumni

      The idea of a real estate pumped perpetual notion machine, combined with essentially an interest free savings plan for the proles, persuaded them to come through and help rise all boats, and who could have figured on vacation rentals helping out housing bubble deux, the sequel.

      Looking @ the real estate listings here in a vacation rental hotspot is indicative, in that there are only a few $250k-$300k homes for sale now, whereas there used to be a dozen, always.

      Now, on the other hand, we’re swimming in $500k to $1m homes that don’t make the rental cut.

      That says a lot.

    2. Jim Haygood

      You probably read the Bernank’s naive confession yesterday that fiscal stimulus “is going to hit the economy in a big way this year and next year, and then in 2020 Wile E. Coyote is going to go off the cliff.”

      Three hundred shocked staffers in the Eccles Building cocked their heads to the side and gasped, “He said WHAT?” So I wrote this song Technodammerung for rogue banker Ben:

      He was just a Harvard hand
      Workin’ the QE he planned to try
      The years went by

      Every night when the sun goes down
      Just another lonely quant in town
      And rates out runnin’ ’round

      It’s another tequila sunset
      Fed’s old scam still looks the same
      Another frame

      1. Wukchumni

        {imagines Bernanke working tables @ South Of The Border, and typical waiter spiel going something along these lines…}

        “Bienvenidos amigos, me llamo Benito, may I start you with an endless supply of chips?”

      2. Alejandro

        Pardners in chime
        proseytizing in real time
        Preaching, if you can touch a dime
        Why wont paper rhyme
        But in their zeal and haste
        And self-righteous aversion to waste
        Recruit disciples in bling bling
        Preaching money is a thing thing
        While finger wagging the bloat
        Preaching fix the rate, dont let it float
        But beyond the noise
        Preaching with poise
        Its all about them
        Their stuff, jewels and gem

  18. Thornton Parker

    Might the actions of a bank be restrained more easily by requiring all payments and stock issuances to the executives and directors be put directly into escrow accounts to be metered out in small amounts if the bank stays healthy over time? If the bank suffers major losses, the escrow accounts would be the first source of funds to make up for them. No Federal Deposit Insurance or other government payments would be made to the bank until the escrow accounts have been reduced to zero.

  19. John

    Randall Wray could be made Sec Treasury, Stephanie Melton Fed Chairman and if the plutocrats still run the rest of the political show that sets priorities, we would still be screwed. The full employment guaranteed jobs could just as easily be strip mining coal from national parks and forests as installing a national solar grid. It could be done with forced low paid labor camps that maximize rent for the plutocrats. MMT seems morally neutral on how the money is spent. For a good portion of the plutocrats, helping the poor is morally suspect….if they consider it at all. That is the larger problem than acceptance of MMT.

    1. economicator

      Right on.

      I didn’t see any comment here going in depth with ideas on the binding money creation decisions with socially useful goals (saving TBTF I dont consider such a goal, except for emergency purposes), by what type of process and stakeholders – to avoid driving us toward becoming a 3rd world oligarchy.

      The rest is just mechanics – but the most important thing is what is the social control and social purpose of money creation. I am sure we could do just fine even with the present system (of course since it is a MMT system), if there were some limits on speculation with asset prices, less military spending, more democratic control of enterprises, including banks, severe constraints on the FIRE sector, etc, etc.

      In the end the problem of managing money well is a political problem. And not much is changing there for the better, despite a growing awareness that “we have a problem” as a society. Where are the politicians that will connect the dots and take on the responsibility to fix the travesty that we have?

      More questions than answers, I know. But what we need a change in politics – then banking will follow.

    2. Pespi

      This is a common fallacy, that MMT is bad because it isn’t about communal barter tokens or some other thing. MMT exists to empirically describe how money works in the existing economy today. You can be any sort of ideology and embrace it, anyone can use it, just like anyone can use science, it’s not inherently biased toward any ideology unlike neoclassical economics and its baked in neoliberalism. That doesn’t make it bad, that just shows that it is what it purports to be, an empirical description of money in our existing economy.

      You want a brand new type of currency in a whole new economy, well, start organizing your revolutionary army, because that’s what that will take.

  20. bruce wilder

    The Battle for Money — that much, it seems to me, is true. Neoliberalism is going down, brought down by its own (unfortunate in my view) success and hubris, and one consequence, on-going, is the urgent political need to re-invent the institutions of money.

    The institutional systems of monetary/payment/finance systems are always under a lot of strategic pressure: they tend to develop and evolve quickly and they do not usually last all that long — maybe, the span of three or four human generations — except in the collective memory of their artifacts and debris.

    There’s a natural human wish that it could all be made safely automatic — taken out of corruptible hands and fixed with some technical governor. Whether you are a fan of democracy or loyal to oligarchy really doesn’t take anyone very far toward devising or understanding a workable system of money.

    As I said in a comment on the earlier Richard Murphy post, money is a language in which we write (hopefully) “true” fictions to paper over uncertainty. Much of what passes for a theory of money is just meta-fiction, akin to literary criticism of a particular genre or era. That is certainly true of Quantity Theory (1.0 re: gold and 2.0 Friedman). It is true of related fables, like Krugman’s favorite, loanable funds.

    When Murphy rejects the quantity theory of money and then turns around and talks about the need to create “enough” money, I pretty much write him off. When he embraces the Truth of MMT, I know he is hopeless.

  21. Wukchumni

    Ideally in a battle of money…

    …a squadron of F-35’s would be pitted against a fleet of Zumwalt Class destroyers

  22. Summer

    It’s been discussed on NC before, but despite all the theories and figures, it’s really a battle of values. I’m not pushing religion, just saying it has all the makings of a holy war.
    (come to think of it, isn’t religion a big part of the history of monetary theory?)

  23. Mercury

    China has yet to fall under the thumb of private banks the way the west has. State still holds the reins of regulation tight and the government bank maintains a robust public sector. Michael Hudson just came back from China and has this to say:

    “The debts are owed to government banks. A government can do what the U.S. can’t do. The government can forgive debts, at least those that are owed to itself, without creating a political backlash. If a viable corporation has run up too much debt, the government can forgive it. This is better than letting the debt close down a factory or force it be sold to a predatory asset management firm as occurs in the United States. That is the advantage of having public credit and why credit should be public. That’s how it was in Babylonia. Rulers were able to cancel debts all the time in the 3rd millennium and 2nd millennium BC, because most debts were owed to the palace or the temples. Rulers were cancelling debts owed to themselves.

    China can cancel business debt owed to itself. It can proclaim a clean slate. It can minimize debt service to whatever it chooses. But imagine if Chase Manhattan and Goldman Sachs are let in. It would be much harder for the government to raise real estate taxes leading to defaults on the banks. It could save the occupants by making new loans to those who default – based on lower land prices.

    Well, you can imagine the international furor that would erupt. Trump would threaten to atom bomb Peking and Shanghai to save his constituency. His constituency and that of the Democrats are the same: Wall Street and the One Percent. So China may lose its ability to write down debts if it lets in foreign banks.”

    There are advantages to restoring financial management to the nation-state, as former Deputy Secretary of the Treasury Frank Newman has pointed out in books and lectures. The private banks have exhausted QE to the tune of $30 trillion, none of which was invested in the industrial economy. Why blame the Swiss for wanting to be like China?

  24. Grebo

    that this is a Chicago School / Friedmanesque monetary policy is made clear by Positive Money

    The Chicago Plan of the 1930s and the unrelated Friedman suggestion of 1948 were both predicated on the false fractional reserve theory of banking. Given that individual banks create credit unrestrained by reserves those plans would not have had the desired result.

    Positive Money knows this, though they do sometimes carelessly use the term ‘fractional reserve banking’. They think their plan is different and, to the extent that it would actually prevent banks creating credit, it is.

    It is silly to suggest that Positive Money is some Neoliberal front. Neutering the banks is the last thing Neoliberals want, and when they want something they don’t bother with democratic methods like public pressure groups, they use think-tanks and lobbying.

    Murphy’s main complaint is about handing the ‘quantity’ decision to the Bank. I don’t think Positive Money is wedded to that idea, it is just an attempt to defuse the ‘profligate politicians’ argument.

  25. Watt4Bob

    I’m sort of disappointed in this thread.

    Being that NC is the place I discovered MMT, and it’s been explained and debated so for so long here, I would have expected NC readers to more broadly understand that what we have currently would work for everyone if only our masters would allow it.

    IOW, it is not necessary to reinvent our system so much as insist that it be used to finance material benefits for all, as opposed to endless war, political repression and bail-outs for our criminal finance sector.

    How can it be that we can we finance $trillions for war at the drop of a hat, but cannot afford to ‘fix’ SS, or provide universal healthcare?

    It seems to me that it’s a political issue, not a technical problem, or am I missing something here?

    1. Korual

      It’s the difference between nationalization and centralization. We can change policy direction or we can double down, as the Swiss are considering.

    2. OpenThePodBayDoorsHAL

      Cui bono?
      The current mission of the custodians of our “money” is to keep banks afloat. It’s not to provide general benefit, or to even preserve the buying power of the scrip they issue, despite what you might hear about the supposed “dual mandate” (which is now a “triple mandate”: prices, employment, and the stock market).

      “Financing material benefits for all” could be a bank that extends credit to a small business. Take a look at commercial credit creation to see how well that’s been going. Take a look at velocity.

      The Fed gifted Citi $174 billion on a day when they could have purchased 100% of the Citi Class A common stock for $4B. This is the difference Michael Hudson points about about China: their instant ability to swap debt for equity because all banks are state-owned and because they’re Communists and nobody would blink an eye.

      Most interesting in The Middle Kingdom are the moves to protect the state-owned banks. They started about 18 months ago, when people were told they could only have one Tier 1 bank-linked e-commerce account. As a result 7.5 billion (with a B) accounts were closed. Next they said all payments systems (including WeChat and Alipay) must clear through a new central bank clearinghouse. Two weeks ago they said not only will everything clear through these but the actual funds will need to be transferred to the new CB account.

      Ant Financial announced that in the future they would be concentrating on services to finance and e-commerce companies, and away from providing those services themselves. They even anticipate a name change, from Ant Financial to Ant Lifestyle. All this makes perfect sense: President Xi will see every financial transaction in the country, and presumably apply a Social Score filter on whether he allows it to go through. 11 million people have already been denied the right to purchase train tickets or buy a house because they spat on a sidewalk, jaywalked, or made the wrong comments on social media.

  26. Paul L.

    Wow! We are clearly past the “First they ignore you..” stage and just on the other side of “…then they ridicule you..” phase. What a basket of slurs, gross omissions of fact and outright falsehoods is this current blog post.
    Anytime Milton Friedman is invoked to slur a concept developed before he was even born, should be an indicator that there is no substance to the argument against the democratization of money creation.

    Thanks to the internet however, one can easily visit the Positive Money site, the American Monetary Institute and International Movement for Monetary Reform sites to see those fake progressives in action. While you’re at it, go to the Vollgeld site yourself and read what those wolves in sheep’s clothing are really saying instead of the creative writing displayed in the blog.

    How can anyone who claims to be concerned over the excesses of capitalism prostrate themselves in front of the current banking system, the driver of capitalism as it rides off the rails.

    I can’t bring myself to respond to the stream of unsubstantiated assertions presented but need to remind people that banks, MUST create money first for the most creditworthy. I won’t insult the readers any further by naming who that class represents. A child can see that this, by definition, must lead to the accelerating inequality we see today.

    As a challenge, I ask the author to show specifically in the US code where it permits the Federal Government to spend before its accounts at the Fed are replenished either by borrowing or taxing. Stay tuned to these pages for the evidence….

  27. steven

    I’m sort of disappointed in this thread.

    I’ll second that but for different reasons. Buried not far beneath the surface of this issue (money’s creation, how and how much) are hugely important issues. But the discussion never seems to get beyond everyone’s favorite system for creating money. The assumption seems to run along the lines of: if we can just come up with some scheme for government or gold backed money, those who possess or produce the real wealth for that money to buy will forever be content to exchange it for the money we will forever create to pay for it. There seems to be a belief countries like China or Russia can never escape the ‘dollar trap’ – or if they try we can threaten and intimidate them back in line with our “full spectrum dominance” military. Money IS debt – and sooner or later those who hold it are going to want to call that debt in.

    Both Positive Money and MMT appear to me to just be attempts to continue ‘business as usual’, operating without a real definition of wealth and trusting / hoping ‘the market’ will sort it out.

    1. Paul L.

      Please explain your comment “Money IS debt”. Money may represent a debt but is not debt in and of itself.

      1. steven

        Money is debt, both functionally and conceptually. This is true for most of the money used in the Main Street economy. It is created as debt – yours to a bank when you use your credit card or borrow money; the bank’s to you when you deposit money with one. In its role as a medium of exchange money serves as a claim on society’s goods and services, its real wealth. You don’t exchange real wealth for fiat or bank-created money without the expectation you will at some future time be able to again exchange that money for real wealth at least equivalent to what you had to give up in exchange for the money originally.

        1. Jamie Walton

          Rather than a claim on wealth, money could be viewed as a representation of value. Value exchange is more like a giving/sharing economy, rather than debt-swapping. I think this psychological improvement will lead to many physical/social/environmental improvements.

          Of course, in any case, people need to be willing sellers/exchangers – it’s not automatic or universal; we need some freedom to choose, and the better the conditions are generally, the better the freedom we will have.

        2. Paul L.

          OK but the term, “money is debt” is used too loosely and can be very misleading. Money does not have to be issued as debt as claimed by MMT. In fact, money can first appear as equity on the government’s balance sheet with no counterbalancing debt. So this concept is grossly misused to imply money must be issued as debt when, in fact, once issued it may represent a claim on the wealth of society. Proponents of MMT first make the claim that money is debt, and that the notion that money can be issued debt-free is therefore false on its face. Pretty clever. They slyly blur the distinction between the creation of money by a government and the role of that money once in the economy.

          1. tegnost

            How can money first appear as equity? Isn’t the other side of that the deficit? Granted I am naive on these points but I thought money was a bond of zero duration.See skippy re time and space

            1. steven

              I don’t believe you are

              “naive on these points”

              . A question for Paul: Unless it is ‘privatized’ is there even such a thing as ‘government equity’? The way the West’s financial system works nothing that can’t be sold appears to have any value. What’s missing from that system – and the discipline of economics (see below) – is a definition of wealth.

              1. Paul L.

                steven –
                I believe we know what wealth is – but I don’t understand your claim that money needs to be privatized to be considered equity. The government declares by fiat that the money it creates can be used to purchase goods and services in the economy.

                1. steven

                  I believe we know what wealth is

                  I don’t believe this is anywhere nearly correct. From all over the political spectrum commentators lament the lost of trillions of dollars (or euros or whatever) of wealth. At least until the effects of a financial crisis start to take hold, no physical or intellectual capital is lost. The only thing that is lost are a few zeros on some financial ledgers.

                  As for money as equity, you may be technically correct, i.e. the rules of accounting may permit governments to count the stacks of paper currency they print (in any case, small change in terms of the total money supply) as ‘equity’. But for most of us the only thing governments possess that we would count as equity are asset classes like public infrastructure. And until the services they provide (or the assets themselves) are sold, that infrastructure would, from a business accounting standpoint, technically be ‘worthless’. (that last is a question?)

                  1. todde

                    Money isn’t debt, it is a construct.

                    It can be whatever we want it to be.

                    Bitcoin would be a real world example.

            2. tegnost

              I’ll add watt4bob has stated what I feel is true, which is that we have MMT right now, and it’s more commonly known as socialism for the rich

            3. Paul L.

              tegnost – There is nothing in the accounting standards that prevents the inclusion of equity on a balance sheet. If we were under the gold standard and you happened to find a nugget of gold in your back yard, are you telling me that you would have to imagine some kind of “debt” to balance your household balance sheet? When Lincoln issued the Greenbacks in the 1860’s there was no bond or debt associated with it. It paid soldiers wages and goods and services during he civil war.
              Just as MMT states the government isn’t a household, it also isn’t a commercial bank either. It has the constitutional power to coin money as needed, no debt involved.

              1. tegnost

                presumably you bought the nugget of gold when you purchased the property and it’s land use rights so it’s not a virgin birth, the debt is what you purchased the land for. Maybe one of those diamonds in the outback that hardy souls find, but those may have some territorial claim as well.

              2. Plenue

                The gold nugget has no inherent value. It’s just a lump of cold metal. It will only become valuable when you go to someone else with it and try to exchange it for something, whether it be a currency or some kind of good. And only if the other person agrees with you that it’s valuable. This is fundamentally what money is: a token of social interaction. The gold becomes valuable when you go to exchange it for something else. In other words when a debt comes into play. Money is debt. Or rather, it’s a measurement of debt and credit. ‘Store of value’ and all that econ 101 rot is so much gibberish.

                Once you realize that, then a question arises: “Well, why bother with rare metals or pressed coins? If it’s just a token, you could literally just take a stick and carve marks into it and it would be the same thing”. Yes, exactly. Which is precisely the sort of thing we see lots of in history.

                1. Older & Wiser


                  Have you ever wondered why central banks worldwide hold dozens of thousands of tons of your “lump of cold metal” ? Are many hundreds of highly tecnical staff worldwide all dead wrong, IMF included ? Do all of the world´s central banks (Fed included) safekeep so much “rot” for the sake of Econ 101 gibberish ?

  28. RBHoughton

    Murphy sounds like one of those indecisive chaps who dispute with everyone but have no ideas of their own. I shall ignore him. Good luck to Switzerland. They have the courage and political system to try the experiment and we will all know the result in early course.

  29. Scott1

    Way I learned it was that money had intrinsic value as in the case of gold that could be turned into jewelry, and currency was state debt represented as paper and numbers moved from debit to credit ledgers.
    The one tool the naked man had for thousands of years before accounting of grain turned into money, and money as currency, was a sharp hand axe made of obsidian.
    In the scheme of things knifes are more valuable than gold. That is one reason there are too many of them I suppose.
    Gold is not a good material from which to make knives, but I have made sure to have a very good knife.

    There is some saying about how a little bit of knowledge goes a long way. It is how you say it makes the difference. Little bit of MMT and lazy banking that makes credit money 80/20 real estate loans that push up land and housing till there is an epidemic of homelessness apparently makes more State control of the money supply sound righteous.

    In the US we won’t get infrastructure spending as one might expect directly from our Treasury because Wall St. has a strong interest in positioning themselves so they can skim off whatever would have gone into the many pockets and bank accounts of labor, first, and foremost.

    I mean, as Michael Hudson will tell you we are just existing to feed the Parasites, and that Piratical Parasitism has turned the US Treasury into the property, & reinsurer of Finance.

    It is true that MMT is the last option. However as Warren Mosler said when he was in Italy, (is he home yet) “There is a right way, or a wrong way.”

    What we need to have done interferes with the Washington Consensus Privatization agenda. What the right way to do it is, will not be done till the ideologues of privatization are defeated. They are in power. Their goals are to defeat the working classes.
    The academic collusion towards that end, appearing now as wage slavery caused by debt incurred getting a diploma promising a life of clean and less strenuous a work life at the price of wage slavery, is a demonstration of how unlimited wealth for the neo-feudalists ensured by compound interest if nothing else, means the university system is intellectually dishonest if its role is to lead with truth.

    With the IMF reversion to loans predicated on austerity, after a report of their understanding that it is wrong, was premature reason for hope. Appears to have been or at best a tepid flirt with principles of MMT. It is the same from the World Bank.

    The game is: Sell debt claiming it is wealth. When it is clear the debt will not be paid in currency, refuse the write down that debt, and take the money making assets.

    If a revolt, revolution is right around the corner, better make the last option the first, and defeat Modern Privatization Policy.

    What banks now are Industrial Service Banks? Which of them are now working as utilities?

    The ultimate insiders are the spies and the spies have their own VC company. Since they get 685 million a year to invest from the US Treasury they are an entity to follow. IN-Q-TEL is the name of the VC company. They could lose every cent and they would still bounce back. It is an example of Modern Militarized Capitalism, or something like that.

  30. Oregoncharles

    What am I missing? As far as I can tell, the proposal is just Modern Money with the central bank substituted for the Treasury. Yes, that makes it less democratic.

    MMT is inflation-limited, too. That’s how you know you’ve overshot your resources. In fact, MMT poses a technical problem: how do you know when you’ve reached resource limits, EXCEPT by observing inflation? Because without that, you have a ratchet. Of course, that’s just what we have, usually, so maybe that’s evidence for the theory.

    “First, this puts inflation at the core of economic policy.” – is a false claim. As quoted, it treats inflation as a limitation. The core is promoting adequate economic activity.

    Finally, he treats “money is debt” as doctrine. he doesn’t justify it and it makes little sense, ESPECIALLY in MMT. How can you pay a debt with a debt? Someone’s getting cheated. MMT actually proposes free money, to a point. I’ve seen elaborations of the idea, but they use a very extended sense of “debt.” And I don’t see how it’s even relevant to his overall thesis.

    The Swiss are pretty conservative, so I doubt they’ll pass it.

    1. Yves Smith Post author

      No, Positive Money is not remotely MMT. Wash your mouth out.

      The Positive Money types want to limit the extension of credit and put it under the control of what Lambert called “a magic board,” a regular gimmick from his days back in debate where someone needed to be in charge but no one wanted to think hard about who or how. In practice, a central bank would be in charge. So how democratic is that?

      MMT does not fetishize money the way the Positive Money does. MMT despite having Monetary in the name is about the role of government spending in a fiat currency system. MMT argues that (as Kalekci did) that businesses have strong incentive (not wanting workers to get uppity) to keep the economy at less than full employment. So the government can and should spend to mobilize resources. And it can because its role as the currency issuer means it can never go bankrupt, it can only create too much inflation. Taxes are what contain inflation in MMT.

      By contrast, the Positive Money types want to do it by limiting credit creation. And thus Murphy is correct. That means their priority is to preserve the value of financial assets, not achieve full employment.

      1. steven

        I don’t believe it is accurate to say that Positive Money “fetishizes money”. Irving Fisher acknowledged his debt to Frederick Soddy for the concept of “100% Money”, the intellectual foundation for the Positive Money movement. Soddy’s intent in limiting the creation of money to the stock of wealth available for it to purchase was to retain independence from the state in obtaining the means of subsistence. He compared the use of monetary policy to goose the economy to a merchant putting his or her finger on the scale, making it difficult to impossible for money to fulfill two of its primary functions: serving as a medium of exchange and a store of value.

        So long as there was wealth available for it to purchase, he – and presumably Fisher’s Positive Money crowd – would have no objection to creating as much money as needed to keep the economy running. What he and every other respectable economist have been trying to bring under control is the excess money creation fueling speculation and the seemingly inevitable boom-bust cycle accompanying the private creation of money.

        Rather than curbing that excess, however, the ‘solution’ that seems to have been adopted is for the US and other Western governments to absorb the excess credit (money as debt) creation by taking it on their (governments’) own books. Government debt is I believe called ‘near money’ in the financial markets. But neither the governments nor the bankers of countries that no longer create real wealth have any logical right to create the money to buy it. Just retaining the right to ‘print’ more money or ‘near money’ doesn’t change that, except perhaps in an absurdly narrow legal sense.

        There are, of course, some issues like globalization intimately connected with the construction of a logical and fair monetary system. But underlying them all, including for countries other than the US, is a logical definition of ‘wealth’:

        … a logical definition of wealth is absolutely needed for the basis of economics if it is to be a science.”

        Frederick Soddy, WEALTH, VIRTUAL WEALTH AND DEBT, 2nd edition, p. 102
        (Soddy might have added “if government is to be a science”.)

        1. skippy

          Here in lies the rub… economics will never be a Science.

          Firstly the medium used by most economics – philosophy – does not even have a functioning model of time and space and is prone to fads. Magnified by scale WRT elite tastes or self dealing. Wealth or Capital is also a bit complicated by say the Cambridge Controversy et al. So until some very fundamental flaws are sorted, that have nothing to do with – money – the concept of “Science of Money” is going to be a non starter.

          Worst is those that use such syntax and dialectal style are going to be called into question – over it.

          I mean we had political theory, then some bolted on science to it, and called it economic science. Which then begat a whole time line of dominance front running the political process regardless of political incumbents.

          I think Scientists that dabble in monetary theory fall victim to the same dilemma that say religious based views do – their optics are ground before looking.

          1. steven


            Probably best to start with the first part of Soddy’s (actually John Ruskin’s) observation, “a logical definition of wealth is absolutely needed…”. “Most economics” may indeed disguise its prostitution with a veneer of philosophy or mathematics. But I don’t think you can say that about Soddy’s:

            A definition of wealth must be based upon the nature of physical or material wealth, in the sense of the physical requisites which empower and enable human life-that is, which supply human beings with the means to live, and, as an after consequence of living, to love, think and pursue goodness, beauty and truth.p. 108

            (All citations are from Soddy’s Wealth, Virtual Wealth and Debt, 2nd edition- WVWD)
            For that matter, according to Michael Hudson, you can not accuse the classical economists of just dabbling in philosophy. They were ALL about freeing society from free-lunch economic rent seekers, freeing up the resources so they could be devoted as completely as possible to the development of “the physical requisites which empower and enable human life”.

            What we have to do to develop those physical requisites – and increasingly the limitations imposed by the requirements of sustainability – is pretty well known. Whether a science of money can be devised to help accomplish that goal or some other mechanism for distributing the wealth made possible by advances in science and technology is required is increasingly open to question.

            Take a look at Soddy’s –THE THREE INGREDIENTS OF WEALTH (DISCOVERY, NATURAL ENERGY AND DILIGENCE). p. 61 The first two are firmly embedded in time and space.

            1. skippy

              I have read Soddy, more so I have talked with PM sorts for a long time, hence I’m not ignorant of the camps views or actions during said time.


              “a logical definition of wealth is absolutely needed…”.

              I did reference the Cambridge Controversy, are you informed WRT this aspect.

              “A definition of wealth must be based upon the nature of physical or material wealth, in the sense of the physical requisites which empower and enable human life-that is, which supply human beings with the means to live, and, as an after consequence of living, to love, think and pursue goodness, beauty and truth.p. 108”

              Sorry but…. “consequence of living, to love, think and pursue goodness, beauty and truth” has nothing scientific about it.

              I reiterate – Metaphilosophy has no scientific underpinnings and attempts to “brand” it otherwise in only to burnish its credentials without any empirical satisfaction is just rhetorical gaming.

              “you can not accuse the classical economists of just dabbling in philosophy.”

              Hay I respect Hudson, that does not mean I worship him, hes been invaluable to the discovery process, but, that does not mean everything he has to say is the word of dawg, nor would I surrender my cognitive processes just because someone uses the term classical.

              If I have to go that space I would favor say Veblen or Lars P. Syll where if your to own a thing one must accept the responsibility from a social aspect and not one of atomistic individualism.

              But hay I regress…. because I’m still waiting for someone to show me a few decades of a labour market in “action”.

          2. skippy

            BTW it would be incumbent of you to redress my concerns above without forging a new path which excludes them.

            1. steven

              “BTW it would be incumbent of you to redress my concerns above without forging a new path which excludes them.” – Sorry if I did that. It was not my intent. Wikipedia is my only exposure to the Cambridge Controversy. As I understand it, science is supposed to be all about observing the real world and then drawing conclusions from those observations. It looks to me like the participants in the debate were looking at their models and maybe the logic they used to construct them, not the world they were supposed to be modeling.
              “Most of the debate is mathematical, while some major elements can be explained as part of the aggregation problem. The critique of neoclassical capital theory might be summed up as saying that the theory suffers from the fallacy of composition;”
              This kind of cant is a far cry from something like:

              “Though it was not understood a century ago, and though as yet the applications of the knowledge to the economics of life are not generally realised, life in its physical aspect is fundamentally a struggle for energy, in which discovery after discovery brings life into new relations with the original source. Evolutionary development has been parasitic, higher and higher organisms arising and obtaining the requisite supplies of energy by feeding upon the lower. But with man and the development of conscious reason, that process as regards energy is being reversed. ”

              (emphasis added)

            2. skippy

              “Wikipedia is my only exposure to the Cambridge Controversy.”


              Sorry all but GGFMD…..

            3. skippy

              Sorry YS but I’m going feral on this…

              Look steven you have already demonstrated your ignorance to a fault, you as a person have for what ever reasons decide to embrace some wonky illogical predisposition because it fulfills some rudimentary environmental bias – aside.

              Just the fact that the CC issue is outside of your knowledge baseline says you don’t have the knowledge to opine about anything.

      2. djrichard

        I’m assuming the positive money crowd embraces the Lincoln greenback as well. I know Zarlenga does based on having read his book and I believe he’s one of the powers behind AMI.

        Vice versa, I’m assuming MMT also embraces the Lincoln greenback as well as it gives the monetary authority to the fiscal side of the Fed Gov.

        Please somebody correct me if I’m wrong on either of the above.

        In which case, there should at least be consensus between both sides on that. It’s a puzzle to me why the vollgeld proposal isn’t based on that. Anybody know why? Have the MMTers pitched this to the vollgeld brain trust only to get it rejected?

        1. djrichard

          Did some digging and from what I can tell, L Randall Wray would not embrace the Lincoln greenback, even though it would put monetary control in the arms of the fiscal side of the Fed Gov. Per

          While our governments are large, they are not big enough to provide all the monetary IOUs we need for the scale of economic activity we desire. And we—at least we Americans—are skeptical of putting all monetized economic activity in the hands of a much bigger government. I cannot see any possibility of running a modern, monetized, capitalist economy without private financial institutions that create the monetary IOUs needed to initiate economic activity.

          In the grafs before this, he alludes to the greenback, so it’s pretty clear where he would land on the greenback.

          So doesn’t seem like there is any way to get consensus between the two sides.

  31. Sister Gloria

    Sorry, but where does Positive Money , in any of the publications and articles, propose any limitations on ‘credit’ ?
    I never saw that.
    Or AMI or any of these public money types for that matter?
    Thank you.

    1. Paul L.

      You are completely correct, they don’t. This is all made up propaganda against the democratization of the money supply. What PM proposes is sound credit creation.

      1. skippy

        PM wants to establish a non democratic administration of government issuance and then allow a return to the free banking period of the 1800s. All based on notions of EMH and QTM contra to all the historical data from that period. So on one had PM wants to lay claim to scientific methodology WRT money yet still cling to scientifically refuted EMH.

        As far as I can discern PM proponents advance the belief that this would compel banks to become investment entities for “productive” activities. Don’t know how that would work out considering how corporatism views society.

  32. 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.

  33. djrichard

    In the case of Japan, unless I’m misunderstanding things there, presumably they’ve embraced MMT out the wazoo, in that they’re willing to leverage federal gov debt out the wazoo. And yet I think the consensus still seems to be that their economy is still zombified (still not really recovered from the debt overhang from their go go years). In which case, why is that?

    Has Japan been hamstringing their use of MMT, so it’s less effective than it could be? Do they need to up the ante, employ MMT-on-steroids to overcome the trap that they’re in, say like the US needed WWII to get out of its trap?

    Withstanding MMT-on-steroids, should it be QE-on-steroids instead that get the animal spirits rekindled? I don’t have a strong sense of whether the US central bank has done more in that department compared to the central bank of Japan. Or if indeed, the US central bank has been more successful on that front. It’s clear that animal spirits are certainly rekindled in the US – the usual playahs are back at it. Though whether that’s unzombified our economy, I’m not so sure – I don’t think it has.

    If these hurdles are so difficult, seems to me we should have a monetary system that doesn’t result in a zombified economy to begin with, per the comment I was making further above.

    1. Synoia

      And yet I think the consensus still seems to be that their economy is still zombified (still not really recovered from the debt overhang from their go go years). In which case, why is that?

      Debt Peonage. For it to work there has to be a debt jubilee (a forgiveness of peoples debt).

  34. Older & Wiser

    China´s Battle for Money

    It seems there are greater similarities between China and the US than may be visible at first glance. China builds real estate for a shrinking population, invests for an over-indebted client (the US, which even insists on a drastic reduction of the bilateral trade deficit) and finances all this with money it does not have.”

  35. skippy

    MMT has always stated to whom the debt is owed is the crux of the matter and in what form denoted.

    I have trouble understanding the dramas with bank issued credit when squared with say equities, why all the focus on one and not to be inclusive of a wide assortment of other mediums of exchange and how they are created and why.

    1. skippy

      Sorry comment was directed at djrichard above.

      So tell me why J – bonds are called the death trade e.g. shorters nightmare – albeit they will tell you their shorts are being thwarted by ev’bal forces.

      1. djrichard

        Hey Skippy,

        I’m with you. I am a believer that the debt is not an issue – and in that sense I’m a believer in MMT. That said, what I’m trying to bring up is that MMT as practiced by Japan doesn’t seem to be working as well as needed to reboot their economy. In which case, why not?

        One would have thought that after all that fed debt that’s been ladled on in Japan, that that would have been enough. Or at least that in combination with all that QE that’s been taken up by the central bank of Japan as well. But they’re still having trouble rebooting.

        One take away could be that MMT and/or QE as practiced by Japan has been malpractice. I honestly don’t know.

        But another possible take away from this is to jettison the monetary system that created this problem in the first place.

        1. Yves Smith Post author

          You do not “practice” MMT. MMT describes how fiat currency issuers work.

          MMT does point out that fiat currency issuer will never go bankrupt in their own currencies, and that what constrains their spending is inflation, not budget accounting (which is confused anyhow, since it does not separate out “spending” from transfers from investment).

          QE to the moon has nada to do with net fiscal spending, which is what MMT is concerned about. QE is an asset swap. It is not “printing” or net fiscal spending.

          Japan has been running reasonably large budget deficits but given its super high savings rate and non-existant inflation, it can and should run bigger deficits. The rise of “freeters” or people hired as not full time employees, says that there is labor slack.

          1. djrichard

            Yves, you answered my question. Your answer is that Japan should run even bigger deficits, to at least employ everyone. Fair enough.

            And at first blush, it seems full employment should be sufficient. But is employment levels in Japan what is truly holding Japan back from rebooting? Something tells me that even if that gap is filled that Japan would still be stuck in the doldrums. They would still be a zombie economy.

          1. djrichard

            So the US shouldn’t run into this problem, right? If the US achieves full employment, e.g. through a job guarantee program, then we’re rebooted?

            1. skippy

              No because its not dependent on equity valuations in lieu of share of productivity, hence less credit risk.

              1. djrichard

                Hey Skippy, I appreciate the response. But I’m not sure I’m following. Because it seems to me that the US and Japan have achieved equilibriums in zombification, and I don’t see productivity changing that equilibrium.

                First just to note that labor’s share of productivity gains from the 1980s onwards has been nil. But even if labor does better on that metric, it doesn’t give labor anything with respect to the boom cycle of profits that are generated from debt fueled binges. Surplus profits like that never go to labor; labor is not an equity “playah” at the table. And because labor is not getting a share, the asset prices that are fueled by these debt-binges put these assets (e.g. housing) out of the reach of labor.

                And then to add insult to injury, the Fed Reserve works its damnedest to preserve those price levels when the debt binge collapses. To preserve the “wealth effect” don’t you know. Because the Fed Reserve believes that as long as it pacifies the 401Kers that it can achieve a political equilibrium – the center will hold as long as the center is comprised of the 401Kers. But the center isn’t, and therefore the center isn’t holding.

                Anyways, these debt binge booms and busts get the US, Japan and other countries into the equilibriums that they’re currently experiencing. I don’t see why a job guarantee should change that.

                1. skippy

                  The fed is largly staffed by quasi monetarists so what ever drama some might have it should be there and not some over generalization about the fed through out its existence.

                  As has been pointed out on this blog more than a few times the whole thing [GFC] would have been an S&L level event save for the mercenary shorts blowing the payment system up. So its not just a case of the fed, more so congress took a powder on any fiscal side.

                  As far as jobs and wages go the market got its way.

                  At the end of the day banks did not make this happen all by themselves nor did they drive the ideology which enabled it.

                  Heck what did banks do before Plaza.

  36. The Rev Kev

    Couldn’t resist this. That title has me intrigued so, with apologies to Winston Churchill-

    ” What (neoliberals have) called the Battle of (Credit) is over … the Battle of (Money) is about to begin. Upon this battle depends the survival of (world) civilisation. Upon it depends our own (western) life, and the long continuity of our institutions and our (civilization). The whole fury and might of the enemy must very soon be turned on us. (Neoliberals) knows that (they) will have to break us in this (idea) or lose the war. If we can stand up to (them), all (the world) may be freed and the life of the world may move forward into broad, sunlit uplands.
    But if we fail, then the whole world, including the United States, including all that we have known and cared for, will sink into the abyss of a new dark age made more sinister, and perhaps more protracted, by the lights of perverted science. Let us therefore brace ourselves to our duties, and so bear ourselves, that if the (United Nations) and its (Countries) last for a thousand years, men will still say, “This was their finest hour.” “

    1. skippy

      Yet then some say AET and Neoclassical economics just needs to implement PM and all will be well.

      I’ve yet to see any PM advocate or proponent criticize an executive or corporatism, only banksters and some politicians. On the other hand I’ve seen many PM sorts back crypto based on the argument of decentralization. So which is it, counterfeiting of national money with a side of corruption or a case of counterfeiting ex nihilo via some arbitrary computational source with a predominate side of corruption.

      I am completely at a loss to understand how the debate about money proceeds things like Marginalism, supply and demand as a monolith, rational agent models, theoclassical opinions elevated to truisms [economic laws] and a reduction of human experience as a binary condition set in stone.

      I also have issues with PM advocates and their UBI agenda, due to its original proponents views on the need to water down democracy more to keep the unwashed from just voting themselves more money. It is in my opinion logically incoherent, that is just what has occurred during the neoliberal period and corporatists via the democracy of money through lobbyists – every dollar is a vote – et al.

      In light of that I can only surmise that PM is actually pro elitist, not that I have issues with some being elite, that is another story altogether, but money itself is not the bar.

  37. political economist

    All but one of the arguments offered by Richard Murphy against Positive Money (PM) boil down to this: PM is an attempt to impose austerity and control inflation at the expense of fiscal stimulation and full employment. (I will return to the other argument at the end.) I have read similar criticisms of MMT that are somewhat similar (not the same but similar). Something along the lines that MMT claims it is a non-partisan approach to understanding the financial system that even right-winger can use it. Obviously, Wray, Kelton and others in the MMT camp have a political agenda that is progressive. But, I think many, if not most or even the vast majority of people in the PM camp, are progressive in intent, but they have not made a case for PM in a logical way. Let me know if I’m wrong.
    I have read Wray’s books and know he does not like PM but I have never seen his reasoning but that seems to be because its backers don’t make a case using T-accounts and logic. If someone knows of someone who has made the logical case for PM or read the MMT case against it, I would like to know the reference. But since I am not aware of it, I suggest we try to make the best case we can for PM using the tools of MMT.
    But first, let us consider a thought experiment: suppose all T-bonds were callable and were called in today. What would happen? For the Treasury, the answer is easy, the amount of debt would be exactly the same, except now the T-bond debt would be in the form of currency (= cash + reserves). For banking, assuming away for purposes of brevity and focus the effects from foreign-held T-bonds, there would now be about $17T in new reserves in the US banking system as the Treasury paid for all the T-bonds. This is about the same as the current value of loans by US banks. It is impossible to know what the major ramifications of this would be but it is unlikely that it would lead to an increase in loans of any significant size as banks have not responded that way to the QEs, a finding consistent with MMT. If so, one result would be that the reserve ratio would be much, much higher. Not 100% of course but around 50%. The public (non-banking public) would have more money instead of bonds as assets.
    Now let’s think through PM using the MMT approach and assume the job guarantee (JG) that Wray and other MMTers have advocated. Using the two-sector approach in which MMT ignores the ROW (rest of the world), there is no difference between PM and MMT except that PM explicitly assumes no T-bonds are ever issued while MMT leaves this open as an option.
    But, PM also assumes 100% reserve ratio. At least that is my understanding as I have never, as noted above, read a clear exposition of PM. This makes for a very different banking system than we have now. And, banking systems are quite complicated especially if we are talking about ALL contracts that are made where money is given today for money in the future. But, even if we restrict ourselves to typical loan contracts, there is a lot to consider. For example, it is difficult to imagine lending not involving the government, certainly with laws and courts and almost certainly regulations and courts. And, a lot more than con be consider here.
    Let’s start with the Federal government (Fed). Here we will use the simplification often made in MMT of analytically merging the fiscal and banking arms of the Federal government. The Fed has basically the same liabilities as it has in its current arrangement except that it has no bond debt and presumably a lot more currency debt as it has no bond debt and lenders cannot lend more than they have in reserves. It is possible that the government would take on lending to some degree or in some circumstances, as in loans to students or loans for some homes. If so, then this would give it assets in the form of these loans. Of course, when the Fed would make a loan this would increase its liabilities in the form of currency in the amount of the loan. Part of banking for the Fed is of course is spending and just as a reminder we are assuming that the Fed will spend on a JG program. Also, it will need to collect taxes (negative spending — destruction of currency).
    Who or what else would lend to someone? Perhaps there would be more interpersonal lending. Much of this happens already between family members. Also, there are online forums where people lend to one another.
    However her I want to focus on how lending institutions (LIs) might function and see how a PM regime would work for them. As the amount of currency which is now (I presume) mainly in the checking accounts of people and businesses (including LIs) would be very great and earning no interest at the Fed, there might be businesses that would want to earn something by lending to other businesses and to people. An LI could lend out its own currency — i.e., the currency of its shareholders — by essentially giving it to the borrower –i.e., writing a check from its account at the Fed to the borrower’s account — who would repaid it to the LI in the future with interest as specified in the loan agreement. An LI could also pay interest to “depositors” who would write out “deposit” checks in return for an agreement that specified some interest rate to be paid. I am ignoring a lot of details here as anyone who has read such an agreement knows.
    This is a barebones analysis with a huge amount of practical details that could have untoward consequences but I don’t necessarily see that it could not work better than what we have now. Is more government necessarily bad?
    Aside from the argument that PM gives the government too much control, Murphy’s other argument is this: “I have already discussed the dangerously oppressive nature of these reforms which would remove the right of commercial banks to create credit, and pass the whole responsibility for creating the country’s money supply to its central bank.” So, the argument is that the banks are good and that the government (which Murphy seems to confuse with the “Central Bank”) is bad? As I have outlined, the idea of PM (as I understand it) is that while LIs could not create debt ex nihilo, they could if the democratically-elected government allowed it create loans. Murphy draws a major distinction between bankers (good guys) and the Central Bank (bad guys); I’m not convinced.

    1. Terence callachan

      What a foolish article.
      Businesses lending to people or to other businesses is possible but would be unreliable across the board.
      Dream on.
      Back to your drawing board I say or perhaps back to study.

      1. political economist

        >Businesses lending to people or to other businesses is possible but would be unreliable across the board.>
        Most lending is by businesses to other businesses. Do you think banks are not businesses? Do you think American Express is not a business?

    2. Wilson Logan

      Well, were I to jump into my time machine & go back to 1965 in Britain I would find that there were no credit cards, no personal lending and if I wanted a mortgage I would go to a 100% reserve bank (called a Building Society) to borrow that money.

      Strangely, people were well paid and could buy a house and run a family on one wage.

      1. political economist

        I am coming to the realization that most people who comment here have not read MMT in depth. It is not that hard and definitely worthwhile. It is a serious contribution to post-Keynesian theory. However, I have not seen a serious in-depth critique of PM by the anyone in the MMT school. I know Wray says in the second edition of Modern Monetary Theory that he would not want the government to take over the determination of whom gets loans from the private banks. But, why not?
        And, as you have pointed out in fact a 100% reserve requirement on private lenders has been done and is done privately very frequently (complementing as I showed analytically using MMT why this is feasible). The question should be how can MMT be used to structure lending in a pro-social way.
        Murphy did not do this.

  38. djrichard

    Arguments that apply against an inelastic currency (vollgeld) apply to labor too. Shouldn’t we be seeking labor arrangements where labor is elastic as possible?

    From a tweet threadthat diptherio linked to

    under Vollgeld, lending for productive enterprise would depend not on the potential of the enterprise, but on the availability of money for lending. No money, no lending – regardless of how good the enterprise is. This is not how lending should work.

    Don’t “productive enterprises” similarly suffer when it comes to the labor pool? An inelastic labor pool (e.g. slack in a labor pool taken up by a job guarantee program) would be detrimental to these “productive enterprises”. All the workers would be “loaned” out, until somebody “increases” the labor supply.

    They may even have to pay more to rent labor. And wouldn’t that be pro-cyclical (not counter cyclical), and therefore another proof point that it suffers the same shortfalls as an elastic labor supply (an argument in that seem tweet thread)?

  39. djrichard

    Arguments that apply against an inelastic currency (vollgeld) apply to labor too. Shouldn’t we be seeking labor arrangements where labor is elastic as possible?

    From a tweet thread that diptherio linked to

    under Vollgeld, lending for productive enterprise would depend not on the potential of the enterprise, but on the availability of money for lending. No money, no lending – regardless of how good the enterprise is. This is not how lending should work.

    Don’t “productive enterprises” similarly suffer when it comes to the labor pool? An inelastic labor pool (e.g. slack in a labor pool taken up by a job guarantee program) would be detrimental to these “productive enterprises”. All the workers would be “loaned” out, until somebody “increases” the labor supply.

    They may even have to pay more to rent labor. And wouldn’t that be pro-cyclical (not counter cyclical), and therefore another proof point that it suffers the same shortfalls as an elastic labor supply (an argument in that seem tweet thread)?

    1. Wilson Logan

      Oh dear… the “productive” vs “non-productive” work fallacy.

      The economy is amoral. It does not care what you do so long as someone pays you to do it.

      Banker, prostitute, surgeon, drug dealer, the economy does not care.

      The US health system has 1/2 million people involved as parasitic middle men. Are they productive?

      They get paid and that’s all the economy cares about.

      What you & I think is productive doesn’t matter.

      1. djrichard

        Yea, and I’m not trying even to make that argument. I’m just trying to understand how people square their thinking:
        – of the ideal of a completely elastic currency
        – with the ideal of a completely inelastic labor force.

        If we musn’t migrate off an elastic currency, because of risk to small medium businesses, corporations, what have you, isn’t that the same risk in moving off of an elastic labor force?

  40. todde

    What constitutes a productive enterprise?

    If the enterprise is more productive for Labor, then Labor will become a component of that enterprise.

    its a power shift more than a threat to economic activity.

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