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November 16, 2011


Mark Braund

Chris, I agree that each of these are real phenomena, but if a way could be found of ensuring money supply stability without choking off credit for investment in real production, would not Greece and overburdened households have been less likely to rack up such unsustainable debts; might banks not have made such huge misjudgements; might genuine pessimism not not have been inevitable because earlier excessive optimism had been avoided; and might not the slowdown have been less sharp following a more moderate preceding boom?

Ralph Musgrave

Chris claims the fact that an idea is old disproves the idea, or is at least a weakness in the idea. The idea that two plus two makes four is an old idea.

He then claims that “monetary disturbances might have real effects in the short run, but these can be corrected by orthodox monetary policy”. Isn’t that begging the question? In other words the basic point made by Dyson and his organisation “Positive Money” is that there are fundamental flaws in “orthodox monetary policy”.

He then claims (final paragraph) that there is “little that money can do” about “our problems”. The truth is that much of the money to ramp up share prices in the late 1920s and ramp up house prices prior to the credit crunch was created out of thin air by private banks – money which was then withdrawn or destroyed come the recession, which exacerbated the recession.

If private banks’ not had the right to create money, the credit crunch and the subsequent recession would have been significantly less severe, I think.

This Credit Suisse paper tries to quantify the collapse in privately created money during the current recession. See the charts on the first few pages:


I agree with Chris when he says that Dyson overstates his case and oversimplifies the issues. But Dyson does basically have a point.

 Luis Enrique

What would the financial system look like without fractional reserve banking? I guess the question is, would it be any more stable and would we pay a price in forgone growth / efficiency?

what would a sketch of the system look like

1. people generally won't receive any interest on their savings (and would be charged for payment services, ATMs, online banking etc. ) unless they put their money at risk and via, I guess, something like mutual funds. When a loan is made the lender gives up their (already existing) money, and can only get it back by being repaid or selling the loan (via selling units in mutual fund). Savers will lose money from time to time, when recessions hit.

2. how is new money released into the system? Bank of England makes loans of freshly printed money (?), presumably it would delegate the decisions of who to lend to to agents, but how would it decide on quantity of new money it makes available? How much more "stable" would relationship between money supply and money demand be?

Would Kotlikoff's limited purpose banking kill fractional reserve? I asked a BoE wonk once whether they'd ever consider that and was told no, concern is that supply of credit in economy would contract too sharply.

It's true that having frac. reserve means the money supply expands and contract in a way that is out of direct control of CB, but you can see that as a feature not a bug.

 Luis Enrique

I already want to edit the above substantially - still my intention was to try to prompt fractional reserve critics to discuss what they'd replace it with and why it would be better.

josh ryan-collins

You're a little selective in quoting schools of economic thought this topic Chris. I would say Marxist and neo-classical perspectives are possibly the two least useful.

You will find that Schumpeter, Keynes, Minsky and Hayek amongst others argued that the most important distinguishing feature of capitalism was a credit-creating banking system. And all of them rail against economics' astonishing failure to incorporate banks in to macro-models.

Sadly this is still the case. Even the Bank of England's main macro-model still doesn't include banks I have been told!

I can recommend Richard Werner's 'New Paradigm in Economics' and Steve Keen's 'Debunking Economics' for attempts to build macro-models that include banks. What these guys show is that credit created for productive investment by banks is the most important determinant of all other macroeconomic variables - growth, employment, inflation, interest rates etc.

I can also suggest buying and reading 'Where does money come from?' written by the new economics foundation www.neweconomics.org/publications/where-does-money-come-from

The book is co-written with Richard Werner and has a forward by Charles Goodhart.

The only way out of our current balance sheet recession is to create credit as cheaply as possible (if its interest-free as Dyson suggests all the better) to stimulate growth. I don't see much evidence of the banks doing this - hence we need to think of alternatives, at least in the short-term, including direct credit creation or guidance by governments or central banks.

You throwaway comment about 'printing money' leading to inflation is particularly painful to read from someone who clearly knows his economics. Credit created for productive activity, in general, should not be inflationary as it creates jobs, growth and an increase in output. Credit created (as the banks have done on a massive scale) for speculative purposes (mortgages, financial transactions) will create asset price inflation.

The only monetary-cranks in the room are the economists who pretend that money and banks aren't important to the 'real' economy. They are the reason we're in the mess in the first since it logically follows from such a belief that deregulating credit markets makes sense.


Josh Ryan-Collins
Senior Researcher
new economics foundation


'Cranks' like Ben Dyson have their heart in the right place. They want to end socially useless financial speculation, while encouraging proper investment. They also want to make it easier for the government to manage the money supply and the macroeconomy.

But the cranks make 3 mistakes:

1. They think debt is inherently evil, when it actually enables investment and social progress.

2. They think that because all money must be created with matching debt (credit=debt in our banking system), that there is consequently 'too much debt'. But in fact it forces lenders to create money, so that the stock of debt does not exceed the stock of money - preventing debt slavery.

3. They think that a government-issued, debt-free money stock could be lent out in large amounts by banks without fractional reserve re-evolving. If fractional reserve does not re-evolve, then the stock of debt may well end up exceeding the stock of money and we all risk becoming debt slaves.

Now a point for Chris - money does matter and it is a failing of neoclassical economics not to consider it. The only economists to predict the crisis of 2008 were those that based their models on a proper understanding of accounting in the banking system. See Steve Keen or the Modern Monetary Theory school.


@ Josh

Nice comment. One think to point out to Ben Dyson and others like him is this:

The government can create effectively debt-free money under the existing system. All it takes is for government borrowing to occur at interest rates that are close to the rate of inflation. Central banks can ensure this by purchasing bonds until the interest rate is below the rate of inflation.

In the current climate of very low UK and US interest rates, it makes a lot of sense for further fiscal stimulus to restore the stock of credit and hence aggregate demand.

Nick Rowe

Hmmm. I believe that recessions are always and everywhere a monetary (medium of exchange) phenomenon.

I'm a (Market) Monetarist. I always thought I was orthodox.

I just realised: I'm a monetary crank.

Yay, monetary cranks!


@ BT

I disagree. you state:

"But the cranks make 3 mistakes:
1. They think debt is inherently evil, when it actually enables investment and social progress."

Well only 8% of current lending in the UK gos towards productive lending. The rest is in property, speculation, or non productive.

and then
"But in fact it forces lenders to create money, so that the stock of debt does not exceed the stock of money - preventing debt slavery."

You should really check your facts. Debt exceeded money in the mid 80's. If we all tried paid back our debt we would end up running out of money (money is destroyed when debt is repaid) and still have £600 billion in debt left to pay

And one more thing, you call Ben a crank. Yet Positive Money's proposal is based on 'a program for monetary reform' by Irving Fisher. Was he a crank too? What about those other cranks that advocated full reserve banking: Friedman, Simons, Knight, Tobin.


Not long now and money will be phased out - we need to come at this, not from an economic point of view [hardly going to be popular on an economics blog] but from a political.

It's clear what the political goal is:

"As the World Bank's chief economist Joseph Stiglitz has put it, when so many cars run off the road, you start wondering whether the road itself might be the problem. And indeed, many questions are now being raised about the global financial architecture."

Also, as Vox points out:

As Greece, Italy and the European Central Bank appointed new leaders in the midst of the worsening Euro crisis, observers rushed to find something that might link the cost-cutting crusaders. And it seems the scrutinisers have found a connection in the form of Goldman Sachs. The new president of the European Central Bank, Mario Draghi, Italy’s new prime minister, Mario Monti, and the new Greek prime minister Lucas Papademos all reportedly have the US investment bank as a common denominator.

You can also throw in that the new boys in Greece and Italy are both Trilateral. What's occurring, from the faux debt to the austerity on entirely the wrong section of society is that this is primarily a sovereignty issue and secondly that of who controls the purse strings.

Economic suggestions such as should we throw more money at it or should we create cheap credit are largely irrelevant because that's not what this game is about. This crisis could be over tomorrow.


@ Andrew

Not all lending has to be 'productive'. People need loans to buy houses. Mortgage debt will always be a big part of bank balance sheets. That's not a problem. Speculation on house prices or other asset prices is a problem - but it can be attenuated without destroying the banking system.

If you want to take down a fractional reserve system, focus on the shadow banking system - which is a fractional reserve operation on top of the main banking system.

Finally, in a double-entry accounting system, credit and debt must be equal by definition.


@ Josh - I'm not sure we disagree. I agree (of course) that conventional macroeconomics ignored the importance of banks:
But the problem here wasn't that banks are free to create money. It's that they were fundamentally - really - dysfunctional.
It's not at all obvious that taking away their right to print money would solve the problem, rather tyhan merely relocate it.
I was NOT saying that printing money is inherently inflation - merely that if you want to create inflation to erode the real value of debt, then a massive (far more than the QE we've seen) printing of money is the way to go.

Leigh Caldwell

One counter-argument is that the real economy has multiple equilibria, and that monetary policy can easily nudge the economy from one equilibrium to another.

However I can only pose that as a hypothesis - I don't think we can convincingly demonstrate the size of the effect.

Curt Doolittle

I was with you until you cited your examples. Printing money IS A PROBLEM if it sends signals that distort human behavior away from productivity gains that will express themselves in ways that eliminate debt.

So, while I agree with you that the world is full of cranks, I don't agree that 'printing money' (even if that statement is technically false) is not a source of the problem.

The moral hazard for bankers and mortgage brokers was real, material, and caused by policy. If you think a banker has any idea what he or she is doing, you haven't looked at where bankers come from in the graduating class, nor have you met enough of them.

josh ryan-collins

@ everyone - what concerns me is the narrowness of the current options being debated (in both the UK and Europe). Hardly anyone is talking about governments directing credit for socially useful activity (Adair Turner and Andrew Haldane at the Bank of England are two exceptions). No-one is doing research (except me as far as I know) on historical examples of direct government credit creation that proved to be rather useful.

Two examples: Bradbury notes that helped us win WWI (direct government credit creation) and Keynes Treasury Deposit Receipts, which involved the government obliging the banks to lend to it, without the use of bonds, at 1.125% interest, which helped us WWII.

One wonders if it will take another European War before we actually wake up to the fact that a country with a sovereign currency can be a little more adventurous than handing over 97% of the money supply to a corporate oligarchy focused on short-term returns.

Luis Enrique

Nick Rowe,

But you don't advocate returning to the gold standard or blame our problems on fractional reserve banking.

And whilst I've seen you convincingly argue that recessions can only happen as they do in monetary economies and they manifeet themselves in everybody trying to acquire more money than they spend, i didn't think you necessarily thought recession had monetary causes or cures.


Why does advocating some more ambitious printing press usage have anything to do with objecting to private money creation?


Creating money transfers wealth from society to the banks, especially with compound interest.

Asset inflation is a ponzi scheme where the asset inflation, provides an incentive to incur more debt to purchase more assets, (bubble or ponzi ?) as it will be inflated away.

(Not to mention all the other Financial Engineering schemes (frauds)).

When the ponzi scheme collapse so does demand in the face of austerity imposed by the burden of obligations, compound interest and the collapse of asset prices.

There is no shortage of investment opportunities, but fraud was far more profitable, until the scheme collapses.

The obligation was not required in the case of the sovereign, and the product of participating in fraud on the part of individuals.

Clearly I don't understand economics...

But this is fun, and I could go on, and on and ...

As BT commented you could look at Modern Monetary Theory backed by Professors of Economics.

But where's the fun in that ?


"The only economists to predict the crisis of 2008 were those that based their models on a proper understanding of accounting in the banking system. See Steve Keen or the Modern Monetary Theory school."

Wrong. The Austrian School predicted it too. Most of them are anti FRB but a minority are in favour as long as there's no Central Bank.


RE: Marx on money as a veil - not quite, actually. In his critique of Say's Law ("products are paid for with products") Marx quite clearly says that he thinks that money has a role to play, because money is relevant to exchange value.


From the Economic Manuscripts ch17:

"In order to prove that capitalist production cannot lead to general crises, all its conditions and distinct forms, all its principles and specific features—in short capitalist production itself—are denied. In fact it is demonstrated that if the capitalist mode of production had not developed in a specific way and become a unique form of social production, but were a mode of production dating back to the most rudimentary stages, then its peculiar contradictions and conflicts and hence also their eruption in crises would not exist.

Following Say, Ricardo writes: “Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected” (l.c., p. 341).

Here, therefore, firstly commodity, in which the contradiction between exchange-value and use-value exists, becomes mere product (use-value) and therefore the exchange of commodities is transformed into mere barter of products, of simple use-values. This is a return not only to the time before capitalist production, but even to the time before there was simple commodity production; and the most complicated phenomenon of capitalist production—the world market crisis—is flatly denied, by denying the first condition of capitalist production, namely, that the product must be a commodity and therefore express itself as money and undergo the process of metamorphosis. Instead of speaking of wage-labour, the term “services” is used. This word again omits the specific characteristic of wage-labour and of its use—namely, that it increases the value of the commodities against which it is exchanged, that it creates surplus-value—and in doing so, it disregards the specific relationship through which money and commodities are transformed into capital. “Service” is labour seen only as use-value (which is a side issue in capitalist production) just as the term “productions” fails to express the essence of commodity and its inherent contradiction. It is quite consistent that money is then regarded merely as an intermediary in the exchange of products, and not as an essential and necessary form of existence of the commodity which must manifest itself as exchange-value, as general social labour. Since the transformation of the commodity into mere use-value (product) obliterates the essence of ||710| exchange-value, it is just as easy to deny, or rather it is necessary to deny, that money is an essential aspect of the commodity and that in the process of metamorphosis it is independent of the original form of the commodity.

Crises are thus reasoned out of existence here by forgetting or denying the first elements of capitalist production: the existence of the product as a commodity, the duplication of the commodity in commodity and money, the consequent separation which takes place in the exchange of commodities and finally the relation of money or commodities to wage-labour."


So really, Marx seems to say that if Say's law were to hold then crisis of overproduction would be impossible, and that although Say's law holds in a barter system, it doesn't in contemporary capitalism because we have a money system. So actually for Marx, money is central to understanding capitalism's propensity to crisis.


(from the same)

"It is admitted that there can be over-production in each particular industry. The only circumstance which could prevent over production in all industries simultaneously is, according to the assertions made, the fact that commodity exchanges against commodity—i.e., recourse is taken to the supposed conditions of barter. But this loop-hole is blocked by the very fact that trade [under capitalist conditions] is not barter, and that therefore the seller of a commodity is not necessarily at the same time the buyer of another. This whole subterfuge then rests on abstracting from money and from the fact that we are not concerned with the exchange of products, but with the circulation of commodities, an essential part of which is the separation of purchase and sale."


Gosh, Chris, I've generally agreed with you before. Not this time. I find the Positive Money people slightly naive about how change will come about, and I'm not sure I agree their solution will be the silver bullet they claim - but money and the monetary system is exactly the right thing to be talking about at the moment.

I was fine with Marx until 2007 and the Northern Rock crash made me realise that after 30 years of study and activism part-inspired by Marx's theories of value I'd never sat and wondered, 'what is money'? And despite spending five years militating to get housework and other unwaged work counted in the GDP, I'd never even given much thought to the content and use of that statistic.

Marx wasn't wrong to call money an 'illusion'. There's no denying it's entirely a man-made concept and has little reality save the fact that we all agree that is has reality. And in that particular agreed reality resides the power to control people and things. Michael Hudson is good on Marx and money, in particular this article about the bad call on industrial capital triumphing over financial capital: http://michael-hudson.com/2010/07/from-marx-to-goldman-sachs-the-fictions-of-fictitious-capital1/

Histories of humankind which track money and debt's invention have a revealing POV, even if I would argue that it isn't the entire story. The best so far has been David Graeber's 'Debt: the first 5,000 years'. Based on the way he and others look at the question, debt is the very opposite of 'real' in the sense of having any absolute physical reality like mass, heat or light.

I was surprised at your insistence that the debt at the moment is 'real'. What makes a debt real? The handshake? The signature on a contract? The nod in an auction room? Getting four when you bet on seven? Would the world and civilisation as we know it really collapse if all the derivatives and speculation built on those 'real' agreements were simply abolished? Those agreements themselves are merely agreements between people - they can and should be renegotiated. Yet people treat debt and money (and now financial markets) as some kind of natural phenomenon, unpredictable and beyond our control.

Land is 'real'. Water is 'real'. Fuel is 'real'. Flaura and Fauna are 'real'. Air is 'real'. This is what our human system is really running out of. These things treated as externalities are what the present monetary system endangers, with its demand for constant, infinite growth and the choices forced in a finite world. More and more people realise this, even if, like me, they don't back any one rational solution over something equally rational.

After so much disformation and ignorance on the subject of money from the left, right and in-between, I'm not surprised that many who talk about the centrality of money and banking often have an evangelical air. Usually they have a pet solution, sometimes they're annoying in their advocacy of it. The very plethora of these solutions is worthy of attention. Any one of them (except in my opinion the gold standard) could be nothing but an improvement on the current situation, whether top-down or bottom-up.

I say try'em all - public banking, ending of private interest-bearing debt-money creation, barter currencies, gift currencies - even the Tobin tax - I'd rather have multiple ways for people to control how services and goods are distributed fairly than the multiplicity of arcane financial 'products' which now distribute goods, services, even self-worth, so very inequitably via rigged markets.

Marxists like yourself are missing a trick to write all these ideas off - going back to Aristotle and Solon - as 'crank'. I'm disappointed that you brought out the usual leftist anti-semitic/neo-nazi smears. Any anti-semitism - which does exist - is too much, and seriously distorts history. The vast majority of monetary/banking reformists I've read or been in contact with have been keen to distance themselves from the 'Blame the Rothschilds' gold-bug wing of the Teaparty.

Most 'monetary cranks' are knowledgeable people who are concerned to find a better model for money/banking. The fact that you find them coming from both 'capitalist' and more communitarian ideologies should be a source of some hope, I think, and not merely scoffed at. Maybe there is no one right answer. What we do know however is that the big banks and ruling politicians currently have all the wrong ones.

One April I went to a monetary reform group which is on an eco-spiritual tip. After a heated argument about the role of interest vs fractional reserve we all sat incredulously as one person announced that he was about to go to New Mexico to meet up with a friend of his visiting Earth from the 13th dimension. He was there to say, that his cosmic sources wanted us to know that really we shouldn't worry, all would become clear in September. 2008.

In many ways it did, and while the banks have learned nothing the rest of population have been studying up. You may well consider them amateur efforts but I wouldn't scorn all out-of-hand.

Just because the prediction came true, I wouldn't put the erst-while ET in the same bag as Dyson, who is at least making a serious contribution to the current debate about banks and money. Disagree with him, fine, pull apart his plan, his ideas about money, whatever. I'd be interested to see a well-thought through critique of his or any of the many other 'crank' plans from your POV. I was sorry to see you think them beneath your attention.

This was a lazy dismissal of not just Dyson but all those who are waking up to how the money system is central to the operation of our economy. Are you really saying that what we use to measure and store value in an economy, and who controls its creation, is 'incidental'?

Now where can I get my t-shirt 'Danger: Monetary Crank Overhead'?

Ralph Musgrave

Josh can’t work out why no one apart from himself is looking into the possibility of using government credit creation to fund “socially useful activity”. Reason is, if I might suggest, that Josh confuses two issues, whereas no one else does.

I agree with the point made in the submission that the NEF made to the Independent Commission on Banking (along with Positive Money and Prof Werner) that governments / central banks should simply create new money and spend it in a recession (and/or cut taxes). Modern Monetary Theory also advocates this.

But there is no logic in using this new money specifically for “socially useful activities” any more than there is logic in funding education exclusively from VAT or funding the army exclusively from income tax.


@ Ralph

Granted, management of the stock of credit in circulation and aggregate demand in the economy doesn't need targetting of the newly created credit in any special way - as long as the new money is spent and circulates.

But creation of a government-sponsored bank to promote 'socially useful' investments is a good idea on its own merits.

josh ryan-collins

@Ralph - this is one of the biggest problems I have with MMT. Its advocates do not seem to distinguish by credit created for productive activity (i.e. that contributes to nominal GDP growth) and speculative (ponzi) or consumptive credit creation. As Aragon points out: 'When the ponzi scheme collapse so does demand in the face of austerity imposed by the burden of obligations, compound interest and the collapse of asset prices.'

Credit created for speculative purposes does not circulate in the real economy - a mortgage does not add to GDP growth. Some of it might leak in to the real economy but a small fraction.

So government should take it upon itself to ensure credit is direct in to productive activity - or do itself in cases where we have systemic failure of banks to do it, as we have now.


Calling monetary reformers cranks is offensive and unhelpful but may be was intended to increase the number of comments? So it worked!

My view is that this debate is confused by the use of "real" and "nominal", words derived from the history of philosophy; may be a Philosopher could clarify the problem? I think that it is important to grasp that money or credit are "real" as we live in a market monetary, not a barter economy. So money and credit who ever creates them affects output and prices. I always understood the classical economists such as JS Mill as thinking about the "real" factors of land and Labour etc to clarify their ideas about productivity growth i.e. only more productivity produces a higher living standard in the long run. But that is not the same as asserting that changes in the quantity of money and credit have no effect on output. The actual economy consists of "real" and "nominal" components so they are both real if you see what I mean. To confuse the original meaning and annoy philosophers there is only a conceptual difference between a man and a bank note or credit, they are both economic entities who can affect output. To think you can separate out real and nominal is the crank position. It may be quite possible to improve the economy in part by changing who and how money or credit are created and where the money is spent. That has no effect on the aspects of the economy which are not directly affected by such changes and tells you nothing about the correctness of other parts of economic theory.

To say the crisis is a real problem as the Bankers misjudged the future income of the borrowers is true but is also the same as saying they made a nominal mistake about money flows so it is both a monetary and real crisis! There is no logically correct distinction. It is the same thing in a monetary rather than a barter economy.

In the same way confusion arises from the fact economic stability depends on future states of the world which can be quite different to our expectations. So ex ante may be different to ex post. This is a real and monetary problem too and changing the source of money or credit will not solve such a inter temporal problem. But having a big public sector able to clean up the mess by creating more demand might not be a bad idea!


I also agree with you . That main reason of crisis could any one of these. Any explanation of the appeal of these ideas over generations would have to invoke sociology and psychology.

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