Martin Wolf, Financial Times: Stop banks from creating money (Positive Money)

So thank you very much. It’s a pleasure to be here. I should say that, by my standards I have had an exceptionally busy day. I have finished a 17, 000 word response to Kenneth Brokovs review of my book The Prospect. Written this speech and written a column. I have never done so much before 4:30 so if I am completely incoherent verging on the catatonic then I attribute it entirely to this experience. I am very grateful to the institute of Charted Accountants. I was thinking as I was saying that how wisely you chose your name, nothing about the UK in it. Which you may have to change very soon. I am also grateful to Positive Money they have done some very interesting work which I have read and cited in my book. I think it is admirable and important that we have this debate on the future of the monetary and financial systems. Which are obviously closely interconnected. That is the theme of my book but I have to tell you just to be completely transparent that although these issues, the possibility of eliminating the fractional reserve banking system. which I will come to in a moment is discussed in my book. It is by far from the only theme in the book it is only a smaller part, a part of what I recommend. I have taken the view in my own writing that one has to make prosposals on the form of many level some that are relatively imaginable, soon will lead to big improvements in my view. And would stand whatever we do with the monetary system. And some which are more radical, clearly some of these are radical changes discussed for a long time. No country yet, to my knowledge, has adopted them. So I wasn’t prepared to tie myself to this mast. Now that’s the book. Let me say what I would like to touch upon. What I am going to do is really quite analytical. I am not going to try and produce a stum speech. I wouldn’t be very good at it anyway and I think there are some fascinating intellectual questions associated with the idea of reforming the monetary system. With that of course the financial system. What I am going to do in my remarks. I am famous for always producing numbered lists. In the case of a talk of this kind it could be helpful. I am going to focus on four questions. The first; what is the fundamental case for having permanent government creation of money turning the function of creating money in our society, from the private sector, which I’m sure you know creates virtually all the money in our economy. A point which was already noted in detail in his great book on interest in money at the end of the 19th century. This is not a new idea, transferring this back to the government. The second question I am going to ask does is matter precisely how we go about government creation of money? There are two variants on this idea out there. I am going to discuss those one of them in Positive Moneys and the other goes more under the heading of 100% reserve banking. I will argue that they are really not significant the third and much the most important section of what I have to say is to deal with the objections to having a system in which government creates most of the money in our economy and then I’m finally going to discuss possible ways forward given where we are now and given the inevitable extreme difficulty of shifting overnight to an entirely different system. So those are the things I’m going to touch upon in my remarks. So first, why should we do this? Well, there are, very broadly speaking two big classes of reasons for this. One is I suppose political philosophy there is no doubt at all that money is a social creation it is a creation of society it is one of our greatest inventions there is lots of debate about how precisely it was invented what the role of money was as opposed to credit It is now pretty clear to me that the credit came before money was correct but I’m not going to go into all that but it is a great social creation, without which the operation of our economic systems and lives centralise decision making would be really impossible to imagine. The argument would be, why should we let such a social creation be handed over in full to profit seeking private enterprises? The status is to pursue the public good at least in theory, why should it not have this role in the case of money And of course, does have this role fundamentally in any case because it ensure that the whole system in all modern economies through the central bank, that’s what the bank does one way to put this on my past writings is The central bank basically guarantees the promises of banks, which are money, your deposits are money Can actually be fulfilled, the central bank makes that possible, so the government is involved anyway. Therefore it is a public, private partnership The second reason for doing so reason for doing this is government creation of money would lead to a more stable financial system First because it would eliminate fractional reserve into mediation that is not to say it would eliminate in theory a system in which banks make a promise of a liability side of their balance sheet to make a promise to depositers which are liabilities in fact . To be able to give them money on demand but on the other side of there balance sheet they hold assets that are illiquid uncertain in value. Very obviously then clearly there are states of the world which they can’t meet those promises and that creates instability the second reason for this is that what I’ve just described isn’t quite right really and truly what’s going on in the system is that the banks create money they create money by making advances with each advance they create a deposit that is the way that money is created in our economy. This tends to create extreme instability in the credit system, credit expansion, during good times, when there are seen to be very good opportunities for lending which allows them to lend more creating more money which then tend to push up the prices of assets therefore justifying the decision that gives you the credit cycle. That is the second reason why moving to government creation money might stable the private financial system. The there is a completely different argument which is very attractive to many people which is if the government took back power to create money from the private sector it would have a cheaper way of funding itself. It wouldn’t have to pay interest or at least pay much less interest because it would appropriate to itself if you like the liquidity services of money get the value of that for itself and it would lower the cost of borrowing for the government essentially transferring this from the private sector, I’m not going to get into the very interesting theoretical question of where the benefit of creating money actually goes. It is largely completed away in the interests of borrowing, that’s not necessarily in the interests of the economy. That is a controversial issue. An important feature of what i have laid out, the reasons for doing this is that these ideas historically appeal very, very strongly, this is very rare almost unheard of, to the left and the right this is not a left wing or a right wing issue. The right like it and this is why the first articulate fully specified proposals actually came from the Chicago school of economics of all places. The teachers of Milton Freedman, including very famous American economists in response to the great depression and they liked it because they thought if we can get rid of fractional reserve banking we will have a more stable financial system and then we won’t have to regulate the financial system so much. The rest of the financial system can be allowed to do what it likes because the banking and monetary system is the same. They liked it for that reason. People on the left like it for that reason. They also like it because it gives government disposal of a great deal of funds which you can use for any purpose it sees fit. That is very attractive to the left. I am not going to place Positive Money on this spectrum, I’m going to leave that to them. But it is a very interesting fact about these debates. So my ideas on fractional reserve banking which appear in my book will certainly appeal to some real libertarian economists like John Cockeren and Robert Lucas who are very well known figures from the Chicago school and also people on the left. That is the first question. Why should we think about this at all? I’ve tried to set out what the issues are. The second question is, ‘How do we do it?’ It seems to me there are roughly speaking two proposals out there, since I believe they are not very different they I will specify them relatively simply. The first proposal usually goes under the name of 100% reserve banking. Which would mean that all deposits You would have to find exactly what a deposit is for this purpose. The current, non interest bearing deposits and one would probably want to go further. Are fully backed by the liabilities of the government, so matching liabilities of the government. Those could be liabilities of the central bank or of the state etc. It doesn’t matter as the central bank is an organ of the state. So I don’t think this matters at all whether, cash, central bank bills, treasury bills, but there would have to be maturity matches of course. So they would be relatively short term. That was of course what would allow the government to finance itself at the short term end of the yield curve and possibly in a low inflation environment, essentially at zero interest rates. Which will be clearly very attractive for the government. If the government then paid people for any purpose they would deposit their cheque, the bank of England cheque with the bank and the bank would then owe a deposit to you, the depositor, claim on the central bank, it would have to hold. It couldn’t create advances. In the process it couldn’t create deposits. The alternative proposal which is Positive Money proposal is that the banks are really just agents they don’t even have this degree of complexity of the balance sheet, they would just simply be employed by the state to manage the accounts which are really in government money so ultimately you might think of people actually holding accounts in the bank of England directly. I don’t think myself that the difference between these two is at all important. So those are two ways you might go about it. Most of the arguments have been about the former not about the latter. Now let me move to my third and most important questions, ‘why should anyone object to this transparent and intelligent new way of running our monetary system, given after all that the alternative system has shown itself consistently over many centuries to be radically unstable and the instability has not got smaller over time?’ It has got if anything, bigger, there is an argument to be made in the last financial crisis was the worst we have ever seen and the only we have avoided complete collapse was through an absolute incredible amount of government insurance of the system. So what in the objections? The first objection was exactly the objection that was made by Mr Itsa which is, ‘it’s going to lead to hyperinflation’. Nobody can trust a government with this amount of power if it is entitled to print money freely it creates all the money in the system politicians being politicians are bound to abuse the privilege and sooner or later we will be in 1923 republic or Mugabi’s Zimbabwe of today. That point was actually made in one of the people Phillip Booth from the IEA in response to my column on the subject. There are answers to this objection and they are discussed by Positive Money and other and I’m going to just repeat very quickly, the first is you could, and I would argue should, leave the decision on how much money to create to an autonomous institution, lets call it for the movement, lets call it Central Bank. So it wouldn’t be left to the finance ministry to decide how much money should be created that would be as now left to the central bank it just would be done in a different way The second argument against it is, well, its actually not that different from what we have now, true the government would get the benefit of money creation, in a direct way but the government is vitally interested monetary policy today because even if it doesn’t get the money directly its very interested in what its used for, it loves house price booms for example, so it would like the central bank to create house price booms, it welcomed them until it blew up, so in essence the temptation for the government to abuse the privilege under the assumption the central bank is to control the process would not be one could argue fundamentally different from the temptation to abuse the process that it has now and it is precisely because of that temptation to abuse the process that we have tended to move in most countries, to at least quasi independent central banks and if we have that then why should we worry about this potential for abuse. After all, finally, you can remember a time when it was taken for granted the chancellor would manipulate interest rates for purely political reasons and the system that we are now discussing, one in which the central bank made money which would be used to fund the government would clearly be better. By the way, using it to fund government is not the only way to do it I just don’t have the time for alternatives you could imagine a situation which we would agree it wouldn’t fund the government directly but the money created by the central bank would simply be sent in equal proportions to every individual in the country, I could imagine that, I could imagine many variables on this, you could imagine in theory that it wouldn’t go to the government at all. Of course these are all political decisions, goes without saying they are quayside political decisions. I’m not suggesting that, that would get you out of politics. The second set of objections, these are really important ones, I think the most important, I’ve spent a lot of time discussing the points I’m now going over. So the second set of questions, is that the borderline between banking and non banking, or between the monetary system and the financial system cannot be policed it is impossible to police it. Here, this is very, very important it does not effect those arguments which relate to the desire to fund the government more cheaply, they do relate fundamentally to the desire to make the financial system more stable. Clearly if it were not possible to police I believe the private sector would go ahead and find someway to create near monies, quayside monies and the private sector has consistently been able to create near monies and quayside monies through the centuries and you couldn’t police it then the central bank would have to get involved in all that, so in addition to this you would have a central bank managing that in some way and it would be more or less the same problem as we have now accept we would have this separate monetary system funding the government, and of course the rates of interest the central bank would try to create, in the rest of the monetary system and it would have to have some reserves to do that would be much higher than otherwise should we try to prevent it from growing as much. in the past I used to take the position personally that 100% reserve banking could not possibly work because banking would reappear the banking sector and this must be true at least to some extent and consider shadow banking today. That is exactly what happened when for example money market mutual funds were created because that was essentially a way of eliminating the need for capital, equity capital in banks that offer deposits it essentially turned out in the money market crisis funds with shorter term assets with some of the risks. There is a counter argument however, first if you cannot police the borderline between banking and non banking the entire new regulatory structure were in the process of creating after the crisis is going to fail. Because a lot of it is built around the assumption we can do just that we can police banks, impose high capital requirements, make them safer, all of which is certain to increase the backing into various forms and if you can’t police that prifery successfully our current reforms are going to fail. So it is essentially an argument against all systems that attempt to make the system relatively safe which is a perfectly valid libertarian, australian argument but it is not an argument that our officials could use because it is not the argument they are making. The second point I would make it while one can’t eliminate, if you have a credibly safe banking system which clearly provides the payment system and liquidity on a large scale when people really need it in an efficient way then it seems to me there are ways of controlling the growth of the banking system outside of the shadow banking system, basically two ways you can think about it, one, which is in Positive Money, you can make lots of other near money type arrangements illegal essentially you make certain sorts of promises to provide cash on demand as assets which have not comparable maturities you just make them illegal that’s a pause, massive murdering process. The other approach which is what the by the way, this one way, the 100% reserve banking people wanted to go Fisher actually said, more or less the proposal Cotnacough has come up with more recently is that apart from the banking system that we just discussed everything else would essentially be investment trust. So everything you hold, can be in a vehicle which doesn’t take risks internally, transmitted to the people that provide the funds. That would be transparent when you buy a unit trust, for example, the value of unit trust would go up and down in the same way if this trust buys bonds, they go up and down in price you would bear the risk and similarly if it bought small company loans the same thing would apply. So, that’s one way of going. The other way of going, which I think would be attractive to John Cochrane is to say, once we have provided something that is really safe and make it clear to people that it is safe, the rest of the financial system, you just say to it its far worse trying you’re in the wild west, if you fail you fail, we aren’t going to save you. After the first two or three crisis people will realise that actually it is the wild west then we would be back to the sort of capital systems that man used to have before current government intervention which is leverage ratios more than 3:1 were basically unheard of in UK banking in the 1960s, so you would say theres this absolutely safe system which is safe, it is made to be safe and creates most of the monetary system and the rest of the financial system is the wild west and you know its the wild west and you learnt that its the wild west So those are the two alternative ways to go to deal with this policing problem. There is an interim way which I might call the Marty Helvic way from there interesting new book the bankers new close which is you would go along with simply imposing capital requirements on any institution outside of the core banking system that may quayside monetary promises but was completely uninsured in any other way you simply say you need capital of at least 20% to be allowed to open your doors and if you don’t we will close you. That is an interim solution. The final, two more, then I will stop these are relatively simple. The third big objection is it will be impossible to do standard monetary policy and it is true that if you have 100% reserve banking monetary policy becomes a quantity rather than a price decision that is assuming the central bank is not also engaged in operating as a lender or resort of any kind outside the core banking system but in the banking system the central bank would no longer be a lender or last resort because you wouldn’t need a lender. But as I said you could imagine a hybrid system of some kind the central bank could still offer reserves in extreme times to non banking institutions. Of course the central banks emergency lending rate would influence rates in the rest of the system. There would be a policy question which is related to my last discussion on how far you would want the central bank to be involved in such a process at all and it depends on the structure of the remaining or residual financial system and how much risk you would want people to hold in it. I don’t think the monetary policy objection is all important and then finally and this is I think the most potent objection its the objection most people would make it is the objection Chiles Goodheart who is probably the leading banking economist in this country is that you lose in the process of getting rid of fractional reserve getting rid of this vulnerability in the system you would get rid of really valuable financial intermediation because its just a matter of fact that lots of people want to hold cash but we really don’t want everything to be invested in really short term securities we want long term investments to be made and we don’t want them all to be funded by the government. Or we don’t want the government to play a central role in their funding and this would be particularly problematic the argument is in lending to small business or small and medium enterprises because that is something with a bank and the bank knows about the transaction dealings of these companies really knowledge about these companies that nobody else does about these transactions is a uniquely favourable position to be a lender to so there is a natural reason why small and medium enterprises tend to be depending on bank credit particularly for working capital but actually also for longer term. I think there is something in this argument and I think it is something one has to think about very carefully but it is important to stress and I will stress this in my response to this that that sort of lending that is clearly valuable no doubt invaluable that we have a system that would allow it to happen is a terribly small part of balance sheet activities for temporary banks. If you take the UK retail bank so I am leaving aside the whole valuable stuff, if you leave aside property related lending or lending to one another lending to businesses other than all that It is only 9% of their balance sheet so it is a very poor argument for the banking systems we have but it is an argument for having something that handles that problem in an effective way and delinking it from the transaction system. I think it is a manageable problem but don’t have time to go through that. I hope I have gone through the arguments in such a way as to indicate actually I think all these objections could be handled but they are important objections, you have to think them through and there are options to be made, really big options to be made about how you go about a process of this kind. So finally, possible ways forward, you could imagine getting a government that is elected on the assumption it is going to change the financial system overnight but I don’t think that is going to happen tomorrow. So what should we do now? Apart from you know, Positive Money can keep campaigning you will probably succeed more in your life time then I will. But there are other things we can do, we can make for a start current reserve levels permanent we don’t need to treat them as temporary we could say that the reserve requirements of the banking sector are raised to the levels of current reserves which are quite high because of Qe and that make the banking system considerably safer and we used to have a system like that very similar actually with more reserve requirements back in the 50s and 60s even though the banking sector wasn’t great then, it worked well, it didn’t do anyone any terrible harm, it lent more to business because it wasn’t in the mortgage business but that is before we decided to destroy the entire mortgage lending system of this country through the conversion of building societies and other scandal which I’m not going to deal with today. We can let the government partially finance itself though money creation ‘helicopter money’ option, that seems to be clearly desirable now in the current circumstances and it was even more desirable a few years ago and we can adjust bank reserve requirements in response and that would as I suggested tax and curve private credit creation and we can use that constantly and the central bank can make that part of its monetary policy arrangement so we would have a hybrid system. Finally we could continue while we are doing that to prepare a worked out scheme and Positive Money has made a lot of progress in this and there are other people working on this which could be implemented and sold to the public to deal with the situation after, not if, after the next monstrous crisis, so after the next monstrous crisis which I don’t think will happen in my proffesional career but I am not sure but it will happen for sure given the arguments I made last week in my column and big page on my book spelled out why I think it is certain next time we have to have properly worked out schemes so we can say that really is it it will bankrupt the state completely anyway so we will have to shift to another system and next time we are going to have to be properly prepared. Thank you for listening to me! Subtitles by the community

13 thoughts on “Martin Wolf, Financial Times: Stop banks from creating money (Positive Money)

  1. Sorry, but Positive Money and Martin Wolf are in complete denial about what is REALLY happening in the world.  Central banks are not ultimately answerable to their governments but to the secretive and unaccountable Bank for International Settlements (BIS) in Basel, Switzerland along with the key banking dynasties (the House of Rothschild, the Warburgs, the Rockefellers etc.).  There is a secretive and unaccountable globalist 'Hidden Hand' made up of private bankers, corporate oligarchs, media moguls and Royal Houses which meet regularly with compliant (treasonous) politicians using a network of influential so-called 'think tanks' (Bilderberg Group, the Committee of 300, the Trilateral Commission, the Council on Foreign Relations, the Pilgrim Society, the Royal Institute for International Affairs, the Club of Rome and many others).

    This 'Hidden Hand' only exists because it completely controls the world's money supply (courtesy of creating money completely out of thin air and then charging interest on something that doesn't actually exist with the full connivance and support of the central banking system and the BIS) as well as profiting from most of the world's oil, armaments and illegal drugs trade.  It is a completely criminal set-up whose long term corporate aim is eventual global governance on their terms – terms which George Orwell would immediately recognise.

    As regards future and lawful money supply it is extremely simple and not complicated.  Please research Colonial Scrip and the Greenback Dollar.  But best of all please research the Treasury-issued debt-free and interest-free Bradbury Pound which came into existence one hundred years ago at the outbreak of the First World War.  From this you will see that there is one essential and undeniable fact – namely, that any, repeat any, sovereign nation can issue and control its own debt-free and interest-free money based on the credit and potential of that nation through its own treasury (and not the privately controlled central bank).  There would be no Weimar-type hyperinflation as the government would then use intelligent and appropriate taxation to remove enough money out of the economy to prevent any serious inflation.  It's all very simple and has been done before. 

    The sad fact is that Positive Money will not look at this Big Picture – everything you have read above is factual and if you want to see how our nation is being undermined by this global criminality may I suggest you feed into any search engine The UK Column and The British Constitution Group.  The simple Bradbury Pound is THE solution to all of our country's economic woes – the British Government, by simply restoring the Bradbury, would immediately have enough debt-free and interest-free money with which to protect all the vulnerable in our society; to guarantee all the needs of the NHS, to keep our armed forces at a level which guarantees our security and sovereignty; and to ensure that the nation's infrastructure is kept in best order. In addition, the Government would also oversee the setting up of human scale businesses and apprenticeships. We would have a sovereign nation once again free of outside criminal and corporate globalist interests and interference – a nation free of debt that was prosperous, industrious and happy.  

    And every nation on Earth can do the same.  The 'one per cent' would lose their grip on humanity and money would once again serve the people.  And the globalist corporate criminals (who started both World War One and World War Two and nearly all the wars since) would face Common Law justice.  The truth is coming out thick and fast (and I haven't even mentioned the appalling Establishment-led paedophilia and child abuse which goes right to the top!) which regretfully means that Positive Money is lagging a long way behind and thus needs to do a lot of catching up.  And the best way this can be done is by supporting the call for the immediate restoration of the Treasury-issued debt-free and interest-free Bradbury Pound.  This one simple action will completely expose and collapse the banksters' house of cards!

    Thank you for reading this.  Justin Walker

  2. One downside commonly missed by critics is the crony capitalist element. Where a government of the day could refuse to give (or may undeservedly give) a person government created money for political reasons.

  3. One small error by the Maestro is that there are more than two models out there, and he seems to be ignorant of the NEED Act proposal of Congr. Dennis Kucinich in the US, which is at least as good, and perhaps better, than those here discussed.

    At the AMI conference earlier this month, it was moved to make Wolf aware of this Bill, hopefully to make it part of his future dialogue.

  4. In a sense, we all can 'print' money as individuals. We may not be able to create the physical dollar bills, but any time we do some form of work there is the possibility for us to be compensated  for that work, we go from noting to something using our own will. Just a random thought.

  5. If the power of private banks to create money is ever really threatened a legion of John Wilkes Booths would be activated and there would most likely be widespread global war.

  6. Banks should be regarded as production facilities; money factories; they produce money and sell it (loan) for profit (interest).

    Banks create money out of nothing, and sell it for profit.
    This should be illegal.

  7. Many argue that if the power to create money for the public good was returned to government then politicians would abuse it. Perhaps there would be some abuses; after all politicians are human. No human system will ever be perfect.

    But one thing we know for absolute certain at this point is that if you leave the power to create money for private profit in private hands there will be disastrous criminal abuses which will devastate national and global economies on a regular basis which we will all have to pay for.

    What else is the current crisis other than a private banking created depression?
    Once the deregulation of the financial sector was basically completed by Clinton, it took them less than a decade to bankrupt the entire Western hemisphere.

  8. why do we need more money to be created again? i know of no reason, yet it is assumed necessary throughout this video

  9. Give the SNP Indy then close the border and charge Scots services and goods entering England even if they are on their way to Europe. The French charge 12% or 17% tax on Whisky imports to France right now.

  10. Wealth us really what makes lives better. But money is helps wealth be generated, exchanged and preserve it. The point here is the function of money is being shifted toward the rich interest not the majority of people. Banks make more money with shady manœuvers then supporting real wealth creation. Thx

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