Great Leap Forward

Something is Rotten in the State of Denmark: The Rise of Monetary Cranks and Fixing What Ain’t Broke

Horatio:  He waxes desperate with imagination.

Marcellus:  Let’s follow. ‘Tis not fit thus to obey him.

Horatio:  Have after. To what issue will this come?

Marcellus:  Something is rotten in the state of Denmark.

Horatio:  Heaven will direct it.

Marcellus:  Nay, let’s follow him.

 Hamlet Act 1, scene 4


Marcellus is right, the Fish of Finance is rotting from the head down. It stinks. As Hamlet remarked earlier in the play, Denmark is “an unweeded garden” of “things rank and gross in nature” (Act 1, scene 2).   The ghost of the dead king appears to Hamlet, beckoning him to follow. In scene 5, the ghost tells Hamlet just how rotten things really are.

Denmark, is of course Wall Street or London. Far more rotten than anyone can imagine.

In the aftermath of the Great Recession, we all wax “desperate with imagination”, looking for explanation. For solution. For retribution!

The financial system is rotten. Our banking regulators and supervisors failed us in the run-up to the crisis, they failed us in the response to the crisis, and they are failing us in the reform that we expected in the aftermath of the crisis.

Heaven will not save us, either. The Invisible Hand is impotent. Just wait for Scene 5!

In times like these, we thrash about, desperate for ideas, for imagination, for leadership. There’s nothing unusual about that. Read the entry, monetary cranks, by David Clark in The New Palgrave: A Dictionary of Economics, First Edition, 1987, Edited by John Eatwell, Murray Milgate and Peter Newman.

You’ll find many of the same proffered reforms bandied about now. Many of them make sense, or at least partial sense. I’ve always used that entry in my money and banking courses as an example of sensible ideas being rejected by the mainstream, labeled “crank” to discredit them.

When I use the term monetary cranks, I use it as a term of endearment. We need some cranky ideas because all the respectable ones failed us. There is nothing, and I mean literally nothing, that will come out of the mainstream that will be of use.

Chicago Plan

The “Great Crash” (as JK Galbraith called it, AKA the “Great Depression”) generated a similar outpouring of “cranky” proposals. Even quite mainstream and respectable economists got involved. A group of them published “the Chicago Plan”—supported by Irving Fisher, Milton Friedman, and Henry Simons.

The idea was to prevent another run-up in speculative fever by restricting banks. They could issue deposits but could not make loans. To ensure safety of the deposits, they’d hold only the safest assets—such as US Treasuries. (For more on the history of the Chicago Plan, see the great book by my good friend and Levy colleague, Ronnie Phillips, (1995) The Chicago Plan & New Deal Banking Reform, Armonk, NY: M.E. Sharpe.)

Hyman Minsky wrote an endorsement for the book, but he also wrote that the Narrow Banking plan was aiming to “fix what is not broke”. Yes, the plan would carve out a section of the financial system that would remain safe—the payments system. However, with a central bank that acts as a lender of last resort and with the treasury providing deposit insurance, our payments system is perfectly safe.

You want proof? We just went through the worst (global) financial crisis since the 1930s with not even a hiccup in our insured deposit system.

True, our uninsured money market mutual fund system faced disaster, and required expansion of the government safety net to save it. And virtually every other part of our financial system also had to be rescued. As my Ford project team has documented, it took $29 TRILLION of subsidized loan originations by the Fed to prop up Wall Street, London, and Brussels.

But the protected deposit-based payments system went through unscathed.

(The UK did have a hiccup, precisely because it did not offer 100% insurance; it had to expand insurance to 100% to stop bank runs that never occurred in the USA.)

So what do our monetary cranks want to do? Well, a lot of them want to go back to the Chicago Plan. They want to solve a problem that does not exist.

Like Minsky, I don’t object. Maybe there is a better way to do the payments system. Personally, I’ve always liked the idea of a nationwide, universally accessible, government-funded, postal savings system. Let’s go for it.

It’s a crazy idea only in the USA. It is easy to find PSSs around the world. Last time I looked, the Japanese PSS was the biggest “bank” in the world (but maybe one of the bankster banks has surpassed it now—propped up, fed, clothed and diaper-changed by Uncle Sam).

We do not have to reinvent the wheel. We don’t need a Chicago Plan. Let’s just restore the US Postal Saving System (which, as I recall, lasted into the 1960s).

Centralized Committee of Experts

However, the crank can be taken too far. Some—even the FT’s Martin Wolf??—are not talking about carving out a tiny part of the financial system, but rather are talking about lock-stock-and-barrel replacing it with narrow banks. (See the great critique by Ann Pettifor, Out of thin air – Why banks must be allowed to create money,

Now that is cranky.

The idea seems to be that we don’t need no stinking banks—at least the kind we’ve got now.

As I’ve been arguing, our banks “create money” (in the form of demand deposits) “out of thin air” when they make loans. It seems that everyone except Paul Krugman now gets this. And lots of people don’t like it, including Martin Wolf.

So we’ll eliminate that kind of banking, and just let narrow banks take in deposits and then buy safe treasuries. No more money creation out of thin air.

Who will do the lending? There are two options. We could allow specialized intermediaries that would take in savings and lend them out. Or we could have special government banks. I’m only discussing the first of these today.

While the cranks who support private intermediaries have not explicitly stated it, what they seem to be proposing is a riff on Islamic banking. The idea is that savers can lend their saving to investors. Sure it is risky! The savers effectively share in the rewards or the losses incurred by the investors.

In many religions, interest is (or at least was—damn usury!) prohibited, but there is nothing wrong with sharing profit (or loss). Since matching savers and investors is time-consuming, special intermediaries rise up to perform that function (taking some of the profit off the top).

As an enterprise model, this is as old as the hills—going back to Mesopotamia. As Michael Hudson argues, the interest rate charged was 20% or 33% depending on the type of economic activity (lower for commercial, higher for consumer).

In its modern dress, the proposal is to set up a centralized nongovernmental committee of experts to decide who gets the loans.

According to Pettifor, this is pushed by the “UK NGO, Positive Money. They agree that all ‘decisions on money creation would … be taken by a committee independent of government’. Furthermore, Wolf argues, private commercial banks would only be allowed to: ‘…loan money actually invested by customers. They would be stopped from creating such accounts out of thin air and so would become the intermediaries that many wrongly believe they now are.’”

For me, that’s a crank too far.

First, I do not like centralization and I worry about a committee of experts deciding who is going to get credit. I like the idea of having thousands of decentralized financial institutions making such decisions.

I like a variety of types of financial institutions as well: credit unions, local community banks, mutual savings and loans (those were the old thrifts that offered mutual shares and made mortgage loans; they never failed and they served their communities), and even some mid-sized banks with a few branches.

(I also support government development banks, which lend for public purposes. And there is a need for direct lending by Treasury for student loans and other public purposes. However I would not want to eliminate private lenders or cooperatives and mutuals. I do not believe government will generally do a good job of underwriting—so I would favor government direct lending where the public interest trumps good underwriting, and leave the rest to “private” lenders, including coops etc.)

Second—and maybe more importantly—the proposal is based on a fundamentally flawed view of the saving-investment and deposit-loan relationship.

For those who’ve got Econ 101 under their belt, it is based on the loanable funds notion that “saving finances investment”. As we’ve known since Keynes, that is precisely wrong. I won’t go into it here, but it is best to think of this the other way round: investment creates the income that can be saved.

But if the Keynes view is right (and of course it is right), then what finances investment (and any spending in excess of income)? Credit. Where does it come from? Out of thin air.

I can just hear our cranks: “There you go again, that is what we want to eliminate!”

Yes, I understand. But crankiness can only take you so far. You’ve got to have the correct theoretical framework. As Pettifor rightly says in her piece, if we really did limit our finance to saving, then we’d run our economy right into the ground.

Saving is a two-step decision: a decision to NOT spend, and then a decision to hold your saving in some form. Only a portion of saving will ever make it into our intermediary to finance loans. (Some portion will go into the narrow bank, some portion will go under the mattress in the form of currency.) Each period, the amount saved, lent, and then spent would probably decline (leakages into those mattresses).

Yes, you could instead grow government (“thin air money creation”) to fill the demand gap. Government deficits create saving. I’m all for sufficient government spending to fulfill the public purpose. But I think there’s also important private purposes. As I’ve argued before, the sizes of government is mostly a political decision (with economic effects). The US (along with Japan) desires a government sized at the small end of the scale; France is on the big end. I’ve got nothing against French-sized government. The majority of Americans are not with me on that.

We need that thin air money creation to keep the lending, spending, and growing moving forward. At least some of it needs to come from the private sector fulfilling the private purpose–maybe less than in years past, but sufficiently large that government budget deficits are not likely to fill the hole if we eliminate private thin air money.

Now, before I’m accused of advocating the full-speed-ahead excesses of late 1920s banking or early-to-mid 2000s banking, let me say that (with rare exceptions, as discussed above) lending requires underwriting (credit assessment). I do want “experts” to do that. I want every community bank, credit union, or mutual thrift to have committees of loan officers to do the underwriting.

What failed us is that the biggest global banks decided underwriting is not needed. They got rid of their loan officers. They off-loaded all their loans to securitization. There is absolutely no hope that a Citi or a BofA will ever do good underwriting again.

I agree with our cranks (I’m as cranky as they are) about shutting down all of the biggest financial institutions. They serve no public purpose, and their business model ensures they cannot serve any private purpose, either, except enriching the top tenth of one percent.

However, we need “thin air” money creation, albeit with decentralized and incentivized underwriting determining which activities ought to get financed. (Good underwriting is incentivized if loans are held to maturity.)

The Limits of Legislation

But here’s a more fundamental question. Is it really possible to legislate away “thin air money creation”?

As Minsky said, “Anyone can create money” (How? Thin air.), “the problem is to get it accepted.”

How can government prevent me from writing “IOU five bucks”? Our economy is based on “I-O-U’s” and “U-O-ME’s”. Since the time of Mesopotamia, we’ve run up bar tabs—cleared at harvest time on the threshing floor. Retailers routinely receive wares on trade credit, payable thirty days hence.

If you think about it, it’s all trade credit of some sort or other. You work for a month and accumulate wage claims on your employer. At the end of the month he gives you a credit redeemable at a bank, which gives you a credit redeemable at another bank.

And we’ve carried this to the “nth” degree–$700 trillion of contingent commitments, promises to pay if exchange rates move, if someone’s credit gets downgraded, if a peasant dies, if the Fed moves rates.

Now, how the heck do you eliminate all of that? And why would you want to?

Yes, some of it stinks, like that rotten fish head in Denmark. But do you really want a centralized committee somewhere trying to tell you whether you can write an IOU for five buckaroos? Or whether you can place a bet that sterling will rise against the dollar?

Or that your peasant will die? (Wait a minute, that one certainly ought to be illegal—a go to jail or to the gallows sort of crime.)

Here’s my proposal: let a thousand flowers bloom, but don’t protect all of them from wilting.

Carve out various sectors of the financial system that are designated “public-private partnerships” that do have safety net protection, but are closely regulated with respect to what they can do. Further carve them up so that they perform designated public purpose activities. Some help to run the payments system (keep them very safe); others make mortgage loans (closely watched to guard against lender fraud); some make commercial loans (with good underwriting); others provide investment services (with more risk but transparently revealed).

Horses for courses. We’ve got a huge and complex economy with varied financial services needs.

Right now, we have far more finance than we need. Exactly how much of it we could eliminate as unnecessary is up for debate. I wouldn’t be surprised if our economy would actually run better if finance was downsized by 90%–that would put it somewhere near where it was in the early postwar period—the so-called golden era of US capitalism.

But we’re not going to eliminate all excesses through legislation. We can, however, refuse to support excess and refuse to rescue the perps of excess. The warning should be explicit and it must be believable. That is hard, no question about it.

Some will say that with Wall Street running our government, you’ll never remove the safety net of the biggest, crookedest, riskiest banks. They might be right. But if they are, I cannot see how they will do the impossible: legislate away Wall Street’s excesses.

Simon Johnson, who wants to break up the biggest banks, made an interesting point when we shared a panel in Washington last year. He really believes it is not only possible to break them up, but that it will happen. Why? Because there is growing support among all the banks that are not “too big to fail”.

For the most part, those smaller banks played no role in the shenanigans that led to the crisis. They increasingly recognize the huge public subsidies given to the “banksters” (I use that term accurately to designate those institutions that are run as control frauds—as Bill Black calls them) in the form of low interest rates plus a government backstop in the event that their bad bets go wrong.

He might be right. It might be easier to break them up and shut them down than to legislate away their excesses. Heck, much of what they did is already illegal!

The Role of Monetary Cranks

Yes, the rotting fish on Wall Street and in London stinks. We need downsizing. We need reform—not only of the financial system that exists, but also of the crisis response that we will need when the system fails next time. You can be sure there will be a next time.

This is the time for monetary cranks.

No good ideas will come out of the mainstream. They never saw the crisis coming, indeed, their advice in the speculative run-up made the crash not only inevitable but much worse than it would have been. They were behind the bail-outs of Wall Street and London. Their rescue of the banksters will hasten and deepen the next crisis. Do not listen to them.

We need to remember two things, however, as we assess the proposals of our cranks.

First, there is no final solution. There is no magic reform that will prevent another crisis. As Minsky said, “stability is destabilizing”. Any successful reform will lead to the recreation of instability that will lead to another crisis.

Second, it is essential that the reform proposal is based on a coherent and valid theoretical framework.

One way to judge the monetary cranks that are proposing reforms is to ask: “Where were you a decade ago?” Did you see “it” (the crisis) coming? Did you have a coherent theory which explained why a financial crisis would occur? Is your proposal consistent with that theoretical framework? What the heck is your monetary framework?



30 Responses to “Something is Rotten in the State of Denmark: The Rise of Monetary Cranks and Fixing What Ain’t Broke”

Ralph666June 30th, 2014 at 6:47 am

“However, with a central bank that acts as a lender of last resort and with the treasury providing deposit insurance, our payments system is perfectly safe.” Well of course! But lender of last resort and deposit insurance provided by taxpayers is a SUBSIDY of banking. And subsidies misallocate resources, as it explains in the introductory economics text books.

Incidentally, Walter Bagehot, writing 150 years ago did not approve of lender of last resort. See the last chapter of his book, “Lombard Street”.

You put the total subsidy at $29 trillion of subsidised loans. That is ONE HELL OF A SUBSIDY. You honestly think there is no misallocation of resources there? And since you choose to use pejorative words (crank and crazy), I’d personally describe $29 trillion subsidised loans as “crazy”.

Even crazier is the trillions of lost GDP and thousands of suicides that resulted from our clapped out banking system’s collapse five years ago.

As for the idea that the Postal Saving System “does the payments system” that amounts (far as I can see) to something very near to what advocates of full reserve / Chicago plan propose. That is, the latter propose that money transfers are only done using accounts that are 100% reserve, i.e. 100% backed by base money.

Under your Postal Saving System, everyone and every firm would need to open an account at the postal system. In contrast, under full reserve / Chicago system advocated by Positive Money, everyone would use their EXISTING BANK: much more convenient.

“So we’ll eliminate that kind of banking, and just let narrow banks take in deposits and then buy safe treasuries. No more money creation out of thin air.” Wrong. As the many advocates of full reserve / Chicago explain perfectly clearly, money is still created out of thin air: it’s just that that function is performed only by the central bank.

“The savers effectively share in the rewards or the losses incurred by the investors.” Correct. And what’s wrong with that? Savers have tens of trillions invested in stock exchanges where they “share in the rewards or the losses…”. Where’s the problem?

“As an enterprise model, this is as old as the hills…” And what exactly is wrong with “old” ideas? The idea that two plus two makes four is an old idea.

“In its modern dress, the proposal is to set up a centralized nongovernmental committee of experts to decide who gets the loans.” Total and complete bunk!!! 180 degrees out. Pure bullshit.

Where does it say anything of that sort in literature produced by full reserve / Chicago folk?

Can’t be bothered reading any further, I’m afraid. Please STUDY THIS SUBJECT BEFORE COMMENTING ON IT.

NeilWJune 30th, 2014 at 6:53 am

The main issue with committees is that they are fundamentally anti-democratic. They are talking about an institution that would have the power to limit the money available to the government.

Now if that has any constitutional teeth then you have a bunch of unelected individuals drawn from the elite able to reject the budget of the elected house. Imagine the debt ceiling debate, but outside Congress and decided by a set of Very Clever People in a closed room.

And if it is just an exercise in appearances then you have a bunch of people sitting down stroking their chins and making pronouncements that really don't matter, while drawing a very large salary at the public expense.

Both of these are unacceptable in a democracy. If the legislature passes a budget or appropriation, then it must be implemented as passed with nothing getting in the way.

worldmeetworldJune 30th, 2014 at 7:01 am

"I am but mad north-north-west. When the wind is southerly, I know a hawk from a handsaw" Hamlet Act 2 Scene 2
Professor Wray has left a wide opening for the establishing of common ground between MMT and Positive Money. Both take as assumption the creation of money "out of thin air" as both reject commodity money.. Both agree that "out of thin air money" should be created but there is a disagreement over who should makes the decision on how much "thin air" money to create and who should receive it. The other difference is whether that money should be lent into existence or spent into existence.
I think Professor Wray makes clear that both of these approaches are in response to a system that is completely broken and that bitter wrangling over details, no matter how important, should not hide the fact that both are good faith attempts to address what his colleague at UMKC, Bill Black, has rightly identified as the criminogenic environment that is modern finance. I have little enthusiasm for a central committee making monetary policy but I feel equally ill at ease with the idea of the government as "Employer of Last Resort" but I would support either if it had a political chance because of their shared status as good faith efforts.
I think we have a big enough world to try both.

KIngKongKingJune 30th, 2014 at 10:01 am

Prof. Wray is seriously mistaken in his main objection to Full Reserve/narrow banking, namely his "worry about a committee of experts deciding who is going to get credit".

There is absolutely no grounds for such worry because micro-management of finance is NOT part of any the proposals for Full Reserve/narrow banking (Chicago Plan, Friedman, Cochrane, Kotlikoff, Wolff, etc).

As with the current banking system,Full Reserve/narrow banking would require fiscal and monetary policy to stimulate or restrain aggregate demand. This task would be modified to the extent that Full Reserve/narrow banking would reduce bubbles and financial crises such as those which have periodically occurred in the past due to excessive lending/money creation by banks.
But private sector investment and financing would remain decentralised and within the private sector as at present.

Some Full Reserve/narrow banking proponents have suggested a new committee of experts within the government/Central Bank to determine the scale of overall fiscal/monetary expansion/contraction. Personally I don't see the need for this. But no-one has proposed a committee to plan the finance of individual investments.
Hopefully Prof. Wray will reconsider his position regarding Full Reserve/narrow banking when he is better informed. As a start I would suggest:

CezaryWJune 30th, 2014 at 10:19 am

Prof. Wray,
I'm willing to participate in commenting your blog with intention to add some value out of a layman perspective, as economy is just my hobby. Its not easy 🙂 as I like your perspective outlined in the article. Including variety of financial institutions, robust underwriting, money creation by both -private and government sector, etc.
Some ideas have come to my mind out of the article. Could you address the most preferable of them ?

1. Public sector vs Private sector 'investment waste' creation. Which waste is less wasteful ?

2. May Minsky's statement 'stabilization is destabilizing' bring about more stability ? Are there any solutions to attenuate destability period ? How to decrease the impact of destability on real economy ?

3. Centralized money creation. Prof. L.Randall Wray as a Chairman of the Committee of Experts on Money Creation (the only entity to create money of thin air). What would be your main policies ?

4. What's your proposal on a robust national financial system ? Stated in a succinct, positive form,i.e. how a robust national financial system looks like ?

5. As human propensity to earn income on financial investments seems detrimental to real output creation, what are the limits to these two phenomena being decoupled ?

6. What are positive aspects of financial system proposal ? As outlined in

7. You wrote: "Here’s my proposal: let a thousand flowers bloom, but don’t protect all of them from wilting." What do you think about – let a thousand flowers bloom and protect most of them from wilting at the same time ?

8. It seems that any system except 'self-organized complex system'(here regulation is done the way magic works) needs an explicit regulation function. Don't you think all humans can do is just improve on regulator's dysfunctional algorithm ?

Ralph666June 30th, 2014 at 12:50 pm

I have disastrous news for you, Neil. Those sort of “undemocratic” committees already exist and have HUGE POWERS. As to monetary policy, that’s determined in the UK by Bank of England, especially their Monetary Policy Committee. Same goes in most other countries. And as to fiscal policy, various “fiscal responsibility committees” have recently sprung up round the world.

But best of luck with your fight against these committees. Almost the entire world disagrees with you.

NeilWJune 30th, 2014 at 1:53 pm

There is no need for a committee of any kind for any reason. Let the auto-stabilisers do their work, and do the rest via the legislature as normal. The central bank then just enables the Treasury to fulfil the will of the legislature via 'Ways and Means Advances' in the traditional way.

Let the Very Clever People get proper jobs doing something useful instead.

L. Randall Wray L. Randall WrayJune 30th, 2014 at 2:04 pm

Ralph: read your own darned literature. Here is Positive Money on the need for centralized decision making by committee:

. . . it is important that politicians are not directly
given control over money creation, because of the risk
that political pressures could lead the government to
abuse this power to create money. Therefore, the deci
-sion over how much new money to create should be
taken, as it is now, by the Monetary Policy Committee
(MPC) at the central bank in line with their democrat
-ically mandated targets. Likewise, the process should
be designed so that the central bank is not able to gain
influence over government policy. In practice this
means that the MPC and the Bank of England should
not have any say over what the new money should be
used for (this is a decision to be taken solely by the
government) whilst the government should have no
say over how much money is created (which is a deci
-sion for the MPC).

L. Randall Wray L. Randall WrayJune 30th, 2014 at 2:07 pm

King, as above, read the literature. With respect to Friedman’s money proposals, it is obvious he always opposed democracy.

Positive money says:

. . . it is important that politicians are not directly
given control over money creation, because of the risk
that political pressures could lead the government to
abuse this power to create money. Therefore, the deci
-sion over how much new money to create should be
taken, as it is now, by the Monetary Policy Committee
(MPC) at the central bank in line with their democrat
-ically mandated targets. Likewise, the process should
be designed so that the central bank is not able to gain
influence over government policy. In practice this
means that the MPC and the Bank of England should
not have any say over what the new money should be
used for (this is a decision to be taken solely by the
government) whilst the government should have no
say over how much money is created (which is a deci
-sion for the MPC).

NeilWJune 30th, 2014 at 2:08 pm

I'm really not surprised that a supremecist is in favour of rule by autocratic elite.

You and your very small group of like minded individuals no doubt find that acceptable.

But mostly it is a conjuring trick designed to fool those of a weak mind and even less vision. When the chips are down, nobody actually says 'no' when they are supposed to.

Because if they did, they'd be out of a job.

bendyson2013June 30th, 2014 at 2:59 pm

Randall: At no point in the proposals do we suggest that the Monetary Policy Committee or central bank would decide "who gets credit". That decision would be left to banks, investors and any other lending institution. So the article above is highly misleading, in particular:

WRAY: "In its modern dress, the proposal is to set up a centralized nongovernmental committee of experts to decide who gets the loans."

Well this statement is factually untrue. The committee (such as the Monetary Policy Commitee) would decide how much money to create. This money would be added to government budgets and spent into the economy. The only people deciding 'who gets the loans' would be loan officers in banks, and customers of peer to peer lenders – entirely consistent with what you advocate in the article.

Just to restate: we are NOT proposing that a central committee decides who gets loans.

So many of the points you make above are invalid, because they attack something that we've never proposed.

For the other points, I'll respond in full with a blog post, but one quick point on this:

WRAY: "As Michael Hudson argues, the interest rate charged was 20% or 33% depending on the type of economic activity (lower for commercial, higher for consumer)."

Like Ann Pettifor, you're implying that lending without money creation would lead to the high interest rates of ancient history. But there are much less misleading examples that exist right now, such as peer-to-peer lender, which allows people to lend pre-existing savings to borrowers at rates which are equal to or even below the rates offered by big banks. Funding Circle, which is a peer-to-business lender, charges rates between 6% and 15% depending on risk. (HSBC business loans start from 7.9%). So there's no evidence to support the claim that lending without money creation leads to high rates.

There are more problems above, so I'll write a full blog post in the next couple of days and post the link here.

Kristofer DittmerJune 30th, 2014 at 4:14 pm

Hi Randall,
I agree that the Chicago Plan would wreck the economy. But I don’t think the Positive Money crowd is more crankish than the Chicago Plan; they have actually watered down their proposal to accept that money would be endogenous for productive investment purposes. But I sympathize with the motive of green full-reservists like Herman Daly: finding some way to make a no-growth economy possible. You argue that we need thin air money creation to “keep the lending, spending, and growing moving forward”. I think we agree that growth is the logic of capitalism, you’ve cited Heilbroner on that yourself. What I don’t know is if you would agree that there is no way we will decouple exponential economic growth from natural resource use and pollution at anything like a sufficient rate to avoid environmental disaster in the coming centuries. Probably not even with massive green tax reform. But could we at least stop presenting economic growth as self-evidently desirable? We need more economic equality and an economy that keeps people happy and employed without exponential growth, somehow.

L. Randall Wray L. Randall WrayJune 30th, 2014 at 5:19 pm

Ben: You have a centralized committee deciding how much can be lent. It is a centralized, nongovernmental entity deciding how much. Do you dispute that? It seems to be what you’ve argued in the quote. If not, please explain.

Can you explain why it is that you’d prefer to allow an unelected, centralized committee to determine overall quantity? What theoretical framework drives this policy recommendation? Friedmanian Monetarism? Why a quantity control in the first place? Why not a quality control?

Setting the limit will have a huge impact on who gets the money created? I suppose there will be a ranking and as rankings go, it isn’t too hard to figure out who gets the short end of that stick. That is why I like community banks that are constrained by equity, not be central committees. I do not see how a quantity control is not also effectively determining rationing. But you can explain why it is not. Can you also explain how it is that these quantity constraints will then impact quantities that individual institutions can lend out to their communities?

You’ve made several jumps in your comment. Yes I cited Hudson’s work on Mesopotamia but I did not predict what the rates will be under your scheme. You can explain how you will ensure non-price rationing rather than price rationing, and how you will ensure a fair share of the central committee-restricted funding will go to the less fortunate at low enough rates that we don’t see perpetual indebtedness.

L. Randall Wray L. Randall WrayJune 30th, 2014 at 5:21 pm

Kris: I support your green thinking. As I’ve said many times before, we require sustainable growth. We need to think about growth in a much different way. We need to move away from growth based on increased thruput (of resources etc). Capitalism requires rising nominal incomes; it does not require rising natural resource use and accompanying environmental disaster. That said, I’m open to your ideas on alternative economic systems.

Ro_June 30th, 2014 at 5:31 pm


Isn't this part of the PM proposal (p. 21) pretty close to Randy's description, given that he clearly acknowledges in other places saving-financed loans can be directed anywhere (i.e. he is talking here about new money-financed loans):

"After the reform, the Monetary Creation Committee would also be tasked with ensuring that businesses in the real (non-financial) economy have an adequate access to credit. The Bank of England would monitor the UK economy both through quantitative and qualitative methods (such as the Credit Conditions Survey). If, based on this analysis, the Bank of England concluded that banks were unable to meet demand for loans from creditworthy borrowers and businesses and this is negatively affecting the economy (perhaps because difficulties in securing funding is placing large numbers of otherwise healthy companies in financial distress), then the Bank of England may make up the short-fall by lending a pre-determined amount to commercial banks expressly for this purpose.
This is especially important in the UK, where less than 10% of all bank lending goes towards businesses that contribute to GDP (Ryan-Collins et al. 2011). For example, the MCC may decide in its monthly meetings to lend some newly created money to banks, with the restriction that the banks could only lend this money to businesses that contribute to GDP (i.e. it could not be lent for financial speculation, consumer finance or mortgages). Banks would still be responsible for deciding which businesses they should lend to – the Bank of England would not be making loans direct to businesses., nor choosing the businesses that were to receive loans.

The government could, if it so desired, make this lending facility permanent, by turning it into an
overdraft facility that banks could use to access funds (perhaps on the condition that these loans were only for businesses that contribute to GDP). Alternatively, the government could set up a series of regional investment banks for this purpose, which would lend and create money under the central bank’s stewardship."

L. Randall Wray L. Randall WrayJune 30th, 2014 at 5:48 pm

Wow, here’s a former Positive Money supporter who’s throwing in the towel. Thank Ralph, apparently!….
So I’m thinking of withdrawing my Positive Money membership, because I now think their proposal doesn’t really make sense. Most of what I’ve said about it on this blog is probably, if not completely wrong, then at least poorly judged. Sorry about that.

So what happened was that Martin Wolf from the FT wrote a piece basically in support of the PM proposal. This gave it far more publicity, at least among economists, than activist groups ever gave it. As a result, some pretty competent criticisms came out. They convinced me.

I’m not going to explain the criticisms, because this has been done very well by Ann Pettifor and now by L. Randall Wray. Warren Mosler also has a pretty good set of replies to Wolf, although his prose isn’t exactly luxurious.

But I will say what didn’t help for me. Ralph Musgrave, who writes a lot for Positive Money, wrote this piece replying to Pettifor’s article, and this piece about her recent book, Just Money. Both replies to Pettifor are bad-mannered, needlessly sarcastic, and sexist. He questions Pettifor’s level of understanding in a demeaning and patronizing tone. Yet Pettifor is actually right about some things that Musgrave is wrong about (as Scott Fullwiler points out here).

stf18June 30th, 2014 at 6:00 pm

Your point about interest rates is irrelevant. You are comparing your proposed system to one in which central banks provide an anchor interest rate through endogenous provision of reserves. Other interest rates are then a markup–and a bank knows that it can fund a loan at the central bank's target rate. Your system would not do that; not even close. The two are apples and oranges.

stf18June 30th, 2014 at 6:06 pm

Agree with Randy on all points. I'm an MMT economist and teach financial markets in a sustainable MBA program. Daly is excellent on many things, but not money.

I find it very strange how the progressive, sustainability community understands that traditional microeconomics, financial theory, and measurements like GDP are inherently flawed, but still uses traditional neoclassical macro to understand banks, monetary policy, and fiscal policy. I think MMT is the appropriate macro counterpart to ecological econ.

Randy made an excellent point that the sustainability community misses usually and bears repeating–"We need to move away from growth based on increased thruput (of resources etc). Capitalism requires rising nominal incomes; it does not require rising natural resource use and accompanying environmental disaster"

(Not implying Kristofer in any of this, just to be clear.)

CezaryWJune 30th, 2014 at 8:14 pm

Hello Kristopher,

I understand your, as well as many, many others, growing concern re unsustainable economic growth. Its not the space to address it comprehensively.Here ( you'll find the full debate addressing issues like: overpopulation, pollution, limited resources, exponential growth limits etc.

All in all, permanent economic growth is not only possible and can be sustainable but is necessary if we want full employment and price stability policy operational. Those, I'm sure well-intentioned, 'no-growth' proponents unintentionally promote a policy to permanent increase in unemployment level.

CezaryWJune 30th, 2014 at 10:41 pm

Hi stf18,

Could you clarify if MMT can be considered a school of economics, macroeconomic perspective or description of modern money systems ? Has it already evolved into fully-fledged economic theory ? I'd love to read sth about MMT view on microeconomic issues. Will you recommend me some material ?

TomUsherJuly 1st, 2014 at 3:45 am

I suggest you read the text of the National Emergency Employment Defense Act of 2011:… which is based upon the Chicago Plan.

Commercial banks may still lend.

The Monetary Authority (MA) is somewhat as the Fed is now, which I don't like.

However, the infrastructure financing method is great compared to what we have now.

The MA in my view should be an open source computer program system that would peg the supply of money to real productivity. If done correctly, it should result in no inflation or deflation and never a shortage of funds.

Please note that the currency would be debt-free (no bonds), nobody earning passive income off the issuance of US currency. In case anyone is concerned, there would be all the money needed to assure nobody would live in poverty, far from it.

axdouglasJuly 1st, 2014 at 9:44 am

Can't blame Ralph, really. It was learning a bit about MMT that made me think the Positive Money reforms may not be the best option. RM's replies to you seem to fall a bit short, as I mentioned on my reply to his reply on my blog.

PZ_July 1st, 2014 at 4:12 pm

"Page Not Found". That link does not seem to work.

Anyway, what these PM people do not seem to understand is that goverment issued money or bonds are wealth of the private sector, so if you try to deficit spend too much people will quite readily increase consumption as their wealth increases so you cannot ever get them to save enough to finance massive amounts of loans modern economy needs.

PZ_July 1st, 2014 at 4:33 pm

I mean, if the nominal spending keeps rising while all available resources are already engaged in production, you dont get more savings, all you get is more inflation.

L. Randall Wray L. Randall WrayJuly 1st, 2014 at 7:20 pm

Pz: If govt deficit spends you do get net financial assets accumulated in the nongovt sector. That is indeed “savings”. You are confusing saving up real stuff and saving in the financial sense. The real resource constraint has nothing to do with that.

L. Randall Wray L. Randall WrayJuly 1st, 2014 at 7:23 pm

Tom, uhhm, no, I’ve got much better things to do with my time. Rather get some root canals. No such thing as debt-free money. Read next post.

PZ_July 2nd, 2014 at 10:02 pm

Well, I was referring to the issue that inflation does devalue of savings so you do not get savings in "real" value, ie inflation adjusted.

L. Randall Wray L. Randall WrayJuly 3rd, 2014 at 12:41 am

Pz, yes. the notion of “real savings” is highly confused. You can save in real terms–bury canned goods in your backyard and hope they don’t rust too fast. The way you use the term (many others do the same) has no easy definition nor real world counterpart. You must deflate by something and anything you might use to deflate it is suspect.

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