Wednesday, December 26, 2012

Andrew Jackson on Positive Money v. the Chicago Plan Revisited and Full Reserve Banking


More on monetary systems. This post compares and contrasts the Chicago Plan Revised full reserve proposal with Positive Money's credit plan, which is based, I believe, on Richard Werner's credit theory.

Clint Balinger
Can Full Reserve Banking actually even stop credit-money creation? The Chicago Plan v. Positive Money
Andrew Jackson | Positive Money

12 comments:

Dan Kervick said...

Why do these PM guys have such a difficult time speaking and writing clearly?

Jose Guilherme said...

I've just finished reading their primer (coordinated by Prof. Werner) on "Where does money come from".

Pretty interesting, but on page 123 they have this to say: "...government spending merely reallocates pre-existing money around the system. It does not create new money. The only way new money could be created is if a commercial bank directly purchases a government bond - via the creation of new credit - and the recipient of government spending is not a bank".

I just wonder what Professor Wray - and JKH - would have to say on this. :)

Tom Hickey said...

What he is saying, in effect, is that only deficit spending increases NFA. Spending balanced with taxation is a wash.

Jose Guilherme said...

No, apparently he's claiming that only direct loans from a bank to a government create "new money". He states that "whether funded by borrowing or by taxes" govt spending only reallocates so-called "pre-existing money".

So, when a pension fund buys a govt bond in the primary market there is no new money created, in his view. Only when banks debit a bond and credit a government deposit at the same time is there money creation - at least that's how I interpret his words.

He does not present the T accounts to demonstrate this, however.

So here we have a heterodox school saying confusing things about money. No wonder the populace has a hard time trying to understand the subject.

Tom Hickey said...

Ii would assume that the T account would be loan as bank asset, and govt liability. Asset created on the side of non-govt with corresponding liability on side of govt results in a non-govt net financial asset. So the non-govt net financial assets would be created by banks' extending loans to govt in this monetary arrangement.

Govt would have to repay the loan by taxation as a non-govt liability and a govt assets, which when then used to pay the loan would cancel the non-govt NFA created by the loan.

In addition, govt has to tax to obtain the interest on the loan.

Tom Hickey said...

Richard Werner is a co-author of New Economics Foundation's book, Where Does Money Come From? A guide to the UK monetary and banking system. Second Edition.

Jose Guilherme said...

The point is: what happens in most cases, when the first buyer of the govt bond is not a bank? Somehow Werner refuses to consider those cases as "creation of new money". Even though there is a deficit, all the same.

This is the kind of stuff that must be cleared up and made into a homogeneous discourse if we're to have a real chance of influencing the debate on the nature of money.

Tom Hickey said...

I assume he must be positing that only a bank can make a loan in the unit of account that create additional units, so that anyone else purchasing a govt bond has to do it from the circulating money stock.

David said...

Werner is sort of an interesting case. I read his book on Japan (Princes of the Yen), in which he supports the state theory of money. He claims to have been the one who coined the term "quantitative easing," but he says that he meant something different from what the Japanese did. He says he used that term because you couldn't just say "print money."

Somewhat curiously, he doesn't like traditional "bond financing" of deficits because he believes it causes "crowding out." On the other hand, he recommends that governments "finance their deficits" by direct borrowing from commercial banks. The justification is something like "the gov. can basically name its price (interest rate), it bypasses the absurd politics of deficits, it keeps the financial lobby happy, and (somehow) avoids the problem of "crowding out."

Maybe this is the latest iteration, but it seems to be founded on the same type of thinking as his previous work.

Clint Ballinger said...

Dan writes "Why do these PM guys have such a difficult time speaking and writing clearly?"

Please note, this was simply a comment on an earlier post by Andrew that I upgraded to a post, not an invited guest post. Any lack of clarity is chiefly because he is responding to a number of comments that do not appear in the later post, addressing details they mention.
And I think this- "This is achieved by removing the sight deposits from banks balance sheets and placing them onto the central bank’s balance sheet."
is one of the clearer explanations of how a plan like this might work you will find. I have to ask, have you read the details of the PM plan, or the details of Benes and Kumhof? (Maybe you have, I don't know)

Clint Ballinger said...

Jose Guilherme - "when the first buyer of the govt bond is not a bank? Somehow Werner refuses to consider those cases as "creation of new money". "
There is some discussion in Benes & Kumhof 2012, The Chicago Plan Revisited and possibly this by Fullwiler (not on FullRB but...) has some bearing What If the Government Just Prints Money?

Jose Guilherme-"This is the kind of stuff that must be cleared up and made into a homogeneous discourse if we're to have a real chance of influencing the debate on the nature of money."
Quite right.

Tom Hickey said...

In an auction the Treasury exchanges a new tsys for rb, so that non-govt no longer hold the rb as an asset but a tsys. This is a "reserve drain" according to MMT, not creation of new money. It's switching composition of existing $NFA* but not the amount in total.

New money is created when the Treasury credits a non-govt acct through deficit spending and debits it reserve acct. This increases amount of $NFA in total.

*consolidated non-govt net financial assets in aggregate.

This happens through the Fed as the Treasury's fiscal agent.