Yves here. Positive Money boosters have failed to consider (or perhaps have failed to publicize) is that it would necessitate draconian controls to prevent the creation of private credit. This post gives a high-level look at what that implies. The suggestion of biometric-based tracking is not as much of a stretch as it sounds.
By Geoffrey Gardiner. Originally published at New Economic Perspectives
Jurists have demonstrated that every right must have a corresponding duty, or it is worthless.
The same is true of financial assets: for every creditor there has to be a debtor.
Money is assignable debt. The debt should be negotiable, that is it can be transferred to another owner without reference to the knowledge of the debtor.
There are primary debt and secondary debt. An example of primary debt is when a borrower draws down a bank loan by making a payment to someone. That someone pays the money received into a bank account, thus creating the credit which finances the loan. New money has been created.
The new money can then circulate in either of two ways. It can be spent, which means the payee becomes the new holder, and the payee too can spend it. Thus new money can be spent over and over again until it gets used to repay a debt, when it ceases to exist.
Or the new money can also be lent on, creating secondary debt.
Although banks are said to create money by granting loans, really the bank is only a midwife: money is created by the borrowers.
It is possible to make sure that the only money created by primary debt is state debt.
To achieve it every one has to be a customer of the central bank and all his or her payments and receipts will be recorded there. The accounts are to be called ‘transaction accounts’. The central bank will not make loans to the public but only to the state. The state’s payments will become deposits in the transaction accounts of the members of the public who receive payments from the state.
Customers will be allowed to make transfers from their transaction accounts to commercial banks which will use them to make loans to people or businesses up to the limit of its deposits and no further. The bank will make a loan by transferring money from its own transaction account to the transaction account of the borrower. In its own books it will credit ‘transaction account’ with the amount of the loan and debit the account of the borrower, following normal bookkeeping principles of ‘debit value in’ and ‘credit value out’. In the books of the central bank these transactions will of course be reversed.
Note. A transaction account at the central bank may never be overdrawn as that would be allowing the customer to create money.
The system of transaction accounts at the central bank will be used to keep track of the population. Every person will be allocated an account at birth and vital details will be recorded and updated. The records will include a record of the person’s genome. The bank will issue identity documents. The transaction account number will be the person’s identity and passport number, and also the number of his or her tax account. Transaction account statements will be sent automatically to the tax office, which will have the duty to debit it with all assessed taxes. Every immigrant or visitor to the country will get an account and give similar identity details.
Use of coins and banknotes will be discouraged and eventually banned so that every transaction a citizen makes will be visible to the security services.
Credit cards will be forbidden.
To complete the total control of the credit supply, trade credit will be forbidden as will be bills of exchange and peer to peer lending.
Unfortunately secondary lending probably cannot be stopped entirely and no doubt, as in all recorded history, the public will devise methods of creating credit instruments and therefore money.
Note that it will not be possible to finance all government expenditure for ever from creation of state money as the quantity of money in circulation would be so great that the currency would become worthless as has happened so often in the past. Therefore some taxation will be inevitable.
Of course the banking system will be far less flexible and in particular the inability to overdraw will annoy many citizens.
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There’s reason enough to be opposed to this scheme. Who, at this date, really thinks it a good idea to be giving the security services more information about ourselves? Puh-leez…..
First, there is no need under PM’s system for everyone to have an account at the central bank, as is explained in PM literature. (Though coincidentally, PM have started to advocate those sort of accounts just recently along with other advocates of full reserve banking, like William Hummel).
Second, the state already has HUGE AMOUNTS of information about everyone anyway. The amount of information required by ANY bank (central bank or commercial bank) about people before opening an account is minute by comparison: they want your name, address, information about any criminal record and that’s about it.
Use of coins and bankotes (and bearer bonds) was discouraged a long time ago in a variety of different ways, from removing copper from pennies and outlawing bearer bonds in the 1980s to removing silver from dimes, quarters, and half dollars and retiring high denomination paper notes in the 1960s to the standardization of machine-friendly formats for checks (MICR) in the 1950s to stopping the printing of high denomination notes in the 1940s…
The inability to overdraw? This will only be true of the “little people”. The present kleptocracy is based on the ability of some, to overdraw on the taxpayer’s account, of which the overdrawing of personal accounts (on houses, cars and educations) is a pale comparison. The “big people” don’t like the “little people” doing what they do, they think even fiat money is a zero sum game, and “want it all”.
The idea that full reserve banking involves an inability to “overdraw” is complete nonsense. The various advocates of full reserve (Milton Friedman, Lawrence Kotlikoff, Positive Money, etc etc) make it perfectly clear that BORROWING IS PERMITTED. However loans can only be obtained from entities which themselves are funded by equity or equity type liabilities, rather than from deposits.
What you wrote makes no sense. Absolutely no sense.
If the only assets permitted at a bank are cash and Treasury bills, it cannot make loans because loans are an asset of the bank. BY DEFINITION, under Positive Money, a private bank cannot lend.
Your discussion of equity funding is similarly completely incoherent. When a loan is made, it creates a deposit, which is a liability of a bank and source of funds. You cannot have an equity-only bank and have deposits and “no deposits” means “no bank loans”.
Yves, Ralph,
I cannot resist the temptation to chip in.
Ralph, your view how loans are made in narrow banking is very close to what we propose in “The End of Banking”. But clearly Narrow banking will not work like that. Yves is right on that. You need a better approach than narrow banking, like the solvency rule to prevent money creation out of credit.
Yves, not all loans result in money creation, only if you transform interest and credit risk (Gorton calls it information insensitive debt). For instance, corporate bonds are clearly not money. So a system without inside money does not mean the end to credit markets. You just need a more clever rule than narrow banking that will not require draconian follow up laws to deal with the loopholes
A corporate bond is not a loan. It is a securities offering. So I don’t see the inconsistency here.
In my view, a corporate bond is just a securitized version of a loan. But we can make the example with a loan too. if you lend money to a friend, it is a loan.
Let’s say you made a loan to your friend and told him he should repay in 6 months. Now, you go to the coffee shop to buy a cappuccino and tell the barrista:
“I don’t pay you with money. Instead, i instruct my friend whom I lend money to to repay you instead of me.”
Will the barrista accept your offer? Most likely not. First, the loan to your friend contains credit risk. The barrista cannot be sure whether your friend will make good on your loan. Second, the loan has interest rate risk; it is only due in 6 months. So the present value of the loan is volatile and changes with the interest rate enviornment.
As the barrista rejects this loan as a means for payment, it is clearly not money. Interest rate and credit risk has not been transformed.
Take money creation away from bankers they are globally incompetent.
The global monetary system was designed by bankers for bankers and they get a cut at every step in the process of money creation.
They are given the privilege of creating money out of thin air (fractional reserve banking), which they can then lend out and charge interest on.
There is only one task they have to carry out and that is to lend the money prudently to people that can pay them back plus the interest.
Could it be any easier, with no manufacturing, supply and distribution chains to worry about?
What are bankers like at prudent lending?
“What is wrong with lending more money into the Chinese stock market?” Chinese banker recently
“What is wrong with lending more money into real estate?” Chinese banker last year
“What is wrong with lending more money to Greece?” European banker pre-2010
“What is wrong with a NINA (no income no asset) mortgage?” US banker pre-2008
“What is wrong with lending more money into real estate?” US banker pre-2008
“What is wrong with lending more money into real estate?” Irish banker pre-2008
“What is wrong with lending more money into real estate?” Spanish banker pre-2008
“What is wrong with lending more money into real estate?” Japanese banker pre-1989
“What is wrong with lending more money into real estate?” UK banker pre-1989
“What is wrong with lending more money into the US stock market?” US banker pre-1929
Globally incompetent at the only job they have to do.
Rather than clean up after their reckless lending or try and hide their problems with loose monetary policy by Central Banks remove their ability to create money.
Give the world a chance.
Debt has been around for 5,000 years but bankers still don’t understand their product.
The human race has 5,000 years experience of debt but still can’t manage it sensibly.
A debt based monetary system is asking for trouble.
The article is just the usual scaremongering of vested interests.
Secondary lending can still be available to those who don’t mind getting their fingers burnt but the primary system is stable.
“Debt, the first 5,000 years” David Graeber
An ongoing tale of stupidity.
More accurately:
“Debt, the first 5,000 years” David Graeber
An ongoing tale of greed, stupidity and the enslavement of the many to the few.
Keith, methinks thou dost protest too much.
With a world drowning in debt someone has to point out that bankers don’t know what they are doing.
It should have been obvious after 2008 ……
We have developed complex financial instruments to spread risk and make the financial system safer.
James Rickards in Currency Wars gives some figures for the loss magnification of complex financial instruments/derivatives in 2008.
Losses from sub-prime – less than $300 billion
With derivative amplification – over $6 trillion
The derivatives loss multiplier was found to be 20x in 2008.
Doh!
If we must stick with debt-based money, at least understand its nature, you’ll be far ahead of Jack Lew, Lloyd Blankfein, Jamie Dimon, Janet Yellen, and Mario Draghi:
http://www.forbes.com/sites/stevekeen/2016/02/06/our-dysfunctional-monetary-system/#c8a64e36a357
But why not just separate money from credit? I’m still awaiting an answer to the question: I have a gold coin in my hand, who’s my counterparty? And where’s the debt?
Sure, sure, the gold standard would be bad because “there’s not enough of it” (lol, no mention of price), or because “deflation”:
https://mises.org/library/deflating-deflation-myth
“People will forego purchases” lol, you mean like, food, rent, utilities, gas, medical care? They don’t even put off the purchase of the latest iGadget fer chrissakes. C’mon people this stuff is not that difficult.
You have not done your homework.
Money is always debt based.
Any financial asset is someone else’s liability.
We’ve had MANY posts that have walked through this in detail. Please stop ignoring them.
How about an equal cash grant of freshly created money to all humans. Is that debt?
I do appreciate there’s a lot of material on this site to familiarise yourself with but it is really worth doing so first before firing off questions into the either.
Here in England the money actually tells you it is debt. It is literally printed on the cash. I explained this more fully here http://www.nakedcapitalism.com/2016/01/why-bitcoin-is-not-disruptive.html#comment-2538548 and the main article itself also answered your question long-form.
The cash you’re proposing to issue in your thought-experiment has to come from the central bank. Thus, it is debt.
Hope I didn’t disrupt your either with my intemperance, but I’ve been warned that familiarity can breed contempt.
If we go to positive money, it stands to reason that all banks will have to be utilities. Or is this satire? Isn’t the truth about money that private credit eventually destroys positive money which needs to control the deficit somehow? ATM message: Sorry to annoy you, but you cannot overdraw your account anymore!
In response to Geoffrey Gardiner and other MMT-ers, I invite NC readers to become acquainted with the late Margrit Kennedy at her still-maintained website: http://www.margritkennedy.com
For free, you can read a pdf of her book “Interest and Inflation Free Money”
http://www.margritkennedy.com/books.html
The banks hardly have a private monopoly on the issuance of credit. The “Money People” forget that many individuals and institutions extend credit at from zero to exorbitant rates of interest for various purposes. “The Banks Create Money Through Credit” problem and the “Cash-free Economy” conversations involve “money” in some but by no means all senses.
“Although banks are said to create money by granting loans, really the bank is only a midwife: money is created by the borrowers.”
“stop hitting yourself” comes to mind…
Is this what actually happens on a technical level? I thought that when a loan is made the loan amount is deposited into the debtor’s account (at that bank or some other bank). It’s at that point that new money is created — not when the debtor “draws down” the loan. Also I’m not clear what “thus creating the credit which finances the loan” is intended to mean. The loan has already been made, the bank has already arranged the necessary reserves to cover it. There is nothing needed to “finance” it at that point. Maybe I’m simply confused by the way the author described the process.
Is the author intentionally describing the status quo of fiat money emission and cumulative deficit spending? Or is he unaware of what is going on in American political economy? The East German Stasi would be jealous of the scale and capabilities of what we have today.
But aside from that, what is the point of this piece? The value of currency is a broad problem for any fiat regime, not something specific to positive money (whatever exactly the author thinks that is, since it isn’t explained). What distinction is the author drawing between a central account system and a job guarantee, for example? The ‘price stability’ in full employment and price stability hinges upon JG workers making less money than other public employees.
“Thus new money can be spent over and over again until it gets used to repay a debt, when it ceases to exist.” I have to think that shareholders in a bank that failed to report as income the money it receives in payment of loan would be upset. It would be more accurate to say that once created money is under usual circumstances eternal. It is even difficult for central banks to “drain reserves” as that operation typically provided the system with high quality collateral to support more lending.