Why I disagree with Positive Money and Martin Wolf
By ANN PETTIFOR 1 May 2014

I have today, !st September, added a note about the policy proposals of Jeremy Corbyn, who is bidding for leadership of the Labour Party. It is good to see some momentum building up but I have added some words of caution at the end of this page.

Apologies to Ann for the mis-spelling of your name. I understand that you will be given a link to this page this evening at your meeting with Frances. Frances and I had a hugely interesting discussion about all of this 11.00 a.m. - 1 p.m. today, 27th August 2015. Ann pointed to the same kind of objections that Frances also pointed to. There are solutions which I attempt to point to herein.

In summary, what is needed to get the economies of nations straightened out is:

1.     A way to create both kinds of money - credit and printed money - independently and in the right balance with a slight overall surplus at all times.
2.     A way to isolate an economy from interest rate and capital confusions in the currency markets so that the money supply and the rates of interest are only those that are needed by the domestic economy of each and every nation. And so that the balance of trade is what sets the currency price. This will end currency wars and save central banks vast amounts of money intervening in currency markets. It will give to the Positive Money campaign what they need to ensure that monetary policy is well able to move forward.
3.     A way to match the monthly repayments cost of housing finance with changes in the rate of growth of an appropriate index of average earnings so as to stabilise the sector. And to regulate the amount that can be lent so that house values are stable and dependable. Currently these monthly payments and loan sizes are highly geared compared to the rate of change that they should be making.
4.     A way to allow savings invested in bonds to adjust to the changing value of money however small that may be.
5.     Taxation of capital gains and interest rates to be changed so as to allow capital savings and debt accounts and capital investments to be tax free on the adjustments needed to allow for the changing value of money. That is not the rate of prices inflation. It is close to the rate of National Average Earnings Growth, NAE.
6.     A balanced way of distributing money created by the proposed new central money creation agency, which I have called the Money Supply Authority, MSA. New money, when printed, should stimulate all sectors equally to keep the economy in balance. Balance is very important. Governments should not be allowed to spend the money because that is a significant moral hazard. We need to keep government's hands off monetary policy. 

One important point that should not be over-looked is that as the rate of inflation has dropped some parts of the economy have become more unsafe and more financially unstable, so we need to address that. I refer to housing finance and bond finance in particular both of which are obstructing monetary policy at present. My Blogs go to a lot of trouble to explain this and how to correct the problem. If Jeremy Corbyn succeeds in getting the economy moving by printing more money and if interest rates start to rise as a result, we will still have this problem. We have to reform debt finance in order to overcome that problem. Read my Blogs on this. If that is put right and the currency pricing is corrected as explained here Positive Money will not need to worry about monetary policy and getting the amount of money created exactly right. All prices will adjust including the amount that people earn. 

As J M Keynes wrote in 'A Tract on Monetary Policy', 1923, "If the value of money halves in such a way that a person both earns twice as much and spends twice as much on the purchase of the same things then he is basically unaffected." He was right and if that was what happened when money halved in value, we would have very little to worry about. Because that does not happen and all kinds of prices vary at different (wrong) rates, monetary policy cannot get it right no matter what. So people need to address these things first, before interest rates start rising, led by rising incomes.

I have tried to cover all of these points in the following:

Here are extracts from that web page of Ann Pettifor's which are written in italics with replies by Edward  C D Ingram in straight font.

Ann Pettifor writes about the Positive Money plan, their plan which, like my own group's plan, aims to allow the central banks to manage the money supply and allow interest rates to do their job. Interest rates are a price. Prices adjust to create a balance between supply and demand. Get the monetary policy right by creating the right amount of money or get it nearly right and prices should be able to adjust to re-balance everything else.

"As such his proposal, like the Chicago Plan, would contract and restrict economic activity – to the level of existing savings. That is why the Chicago Plan was so enthusiastically endorsed by monetarists like Milton Friedman."

This is not correct, at least not if you do this my way. We set up the Money Supply Authority (MSA) at the Central Bank with the authority to create all forms of money. This breaks down into three parts: credit, printed money (both electronic), and cash. Printed money is created as either cash or as an entry into a ledger which can then be retrieved electronically and exchanged for cash at a bank.

Printed money can be used in transactions allowing Peter to pay Paul as long as there is enough of it around so that Peter does not have to wait to be paid before he can pay Paul. But Peter can also save this money in which case it goes out of circulation. Savings take printed money out of circulation until it gets spent as transaction money and ceases to be savings. Alternatively, the saved money can be still in the savings account but it may be released by an IOU, like a bond, so that the deposit money can be lent. Of course, everyone likes to have some money in their pocket or in their bank account which is just waiting to be spent, so there is always that amount of transaction money which is temporarily out of circulation.

Very few transactions take place without transaction money, so forget near money. No one takes near money into a shop and buys goods with it. First it has be be exchanged for transaction money. Only then can it enter circulation. If there is not enough transaction money then people have to wait to be paid. When banks create credit money, they make an entry into a ledger that previously did not exist and call it a loan. They create that money and then they lend it. Credit money immediately becomes transaction money as soon as it enters circulation but if it is not created by a bank but by the Money Supply Authority, the MSA, it can wait on the sidelines until a borrower is available to borrow it. It does not have to have a prior owner. It can just be put on the money market as available credit until a borrower offers the market rate of interest for that kind of activity, and then it can become a loan and lent. Credit has to be borrowed in order to enter circulation as transaction money and it vanishes when it is repaid. The advantage of having the MSA is that it can print new money as well as new credit in limited quantities, enough to keep the economy going but not so much that there is far too much credit and too much spending, as can too easily happen at present. 

Money in circulation does not have to be lent. It can just circulate. It can be placed on the money market as savings on offer to be lent or if the interest rate on offer is not attractive it can remain as unlent savings / deposits. Many arrangements can be used to bring lenders and depositors / savers together at the money market. For example, Money Brokers as well as individuals with bank accounts at the money market can decide when to let go of the money for lending. It can be done via the banks using bank accounts for deposits and for savings. The borrowers bidding for it can be lenders or anyone including government and commerce. They can offer bonds in exchange for it for example. The money markets should be accessible to everyone. That is where the bidding should occur and interest rates for every kind of borrowing can be set. One market, many players.


The transition to the new system can be easily managed because as soon as a debt is repaid using the present system of bank created credit, the MSA can create replacement credit money and the MSA can immediately put it onto the money market along with individual's deposits and savings or institutional deposits and savings that can be bid for there and borrowed at the market rate. Savings that are not lent will not generally earn interest. The important thing about this proposed new system, apart from there never being a liquidity crisis as a result of too little borrowing and too little money in circulation as a result of that, is that there is a managed and limited quantity of credit available for borrowing and the bidding process will set the rate of interest so as to bring the supply of credit into balance with the demand for it. Unlent money will still be in circulation until it is lent, but it can stay on the sidelines in bank accounts and as cash. If we look at current conditions people would rightly say that not enough people or businesses want to borrow money and you can lower interest rates as much as you like, but there will still be a shortage of money in circulation for Peter to pay Paul. If we do not print money, it only enters circulation when it is borrowed. If we use only credit to create money and people do not want to borrow enough money, we will not have enough money on deposit to keep everything moving. A balance is needed. We probably need a huge amount more of printed money and much less credit money. Savings of printed money can still be borrowed.

Failing that, or not failing that, the MSA must have a primary target to aim for. The target would be to ensure that on average, National Average Earnings, NAE, rises at or around a selected target percentage rate p.a. Prices inflation should not be a primary target, but they can be a secondary target. The reason is that prices adjust and it is demand (spending) from earnings which has to be managed. Prices inflation will occur if NAE increases at a fast enough rate. The difference between earnings inflation and prices inflation is variable and basically reflects the variable rate of real economic growth. In other words, if the real economy is growing the prices inflation rate should normally lag behind the NAE rate of inflation, called Average Earnings Growth, AEG% p.a. by something like the rate of real economic growth.

The MSA must not target that real rate of economic growth. It will find its own level. The role of price adjustment will set the level of prices inflation after the rate of real economic growth finds its own level. The MSA simply has to keep on creating more credit and printed money to keep all sectors in balance and NAE growing. The rest is up to the business sector. Earnings are also a cost and will adjust to balance the supply of people wanting to work with the demand for them at a negotiated wage, so that the level of demand is a match to the level of supply. End of unemployment if all else is stable and adjusts properly as it should. Basically, this means that as money stock of all kinds increases at a steady rate allowing NAE and prices generally to inflate at a steady rate there will not be any economic slowdowns on account of a lack of printed money or credit.

So that, is our vision.

Ann Pettifor writes about the tighter management of printed money and credit:

"..the idea that society can set up a single “independent” committee of men to make far-reaching decisions about the quantity of money needed by a nation of sixty four million people, all engaged in varied and complex activities, is bordering on authoritarian. First there is no possibility of such a committee being independent. One has only to think of the “independent” UKFI committee – set up to oversee the banks, including RBS, in which the state has a stake – to question the possibility of such a body being independent."


I do not agree about this either. Just as central bankers are asked to be independent and to an extent they are, so the MSA can be asked to adhere to these targets. If they swell spending before elections that is not too much of a problem. With the ILS systems in place, everything will adjust. It will not be a question of boom followed by bust which is what  happens when central banks get leaned on to cut interest rates before an election. What would be a problem is if they give the money that they create to the wrong people - for example to the government to spend. 

Not only would that be a moral hazard (first class) as governments will spend it on their cronies, those that help them pay to get re-elected, but there is a fundamental rule of macro-economic design for financial stability. Namely, that spending patterns should not be changed by a stimulus, nor by the dynamics of a wrong financial framework for that matter (as in yo-yo costs for housing finance for example). Apart from avoiding that mistake when creating new money, we get the same problem with the current lending and repayment management systems.  They do break that rule with enormously damaging consequences. When a stimulus causes growth to increase causing interest rates to increase the cost of loan repayments jumps up ten times faster than anything else. That breaks the rule for correct and proportional pricing adjustments. When a government spends on roads and other things to stimulate the economy that breaks a rule. The rule says that there must be an equal stimulus to all forms of spending. Spending delivers employment and all forms of employment must have their share of the additional spending, or renewed spending, so as to avoid the loss of jobs in some sectors. If jobs are lost then people wanting to buy those products and services will be denied those things by the fact that the new spending has been unbalanced. Everyone, consumers and enterprise, needs continuity and balance. 


So in order to do that sales taxes, (e.g. VAT), should be cut for say three months, by say, 5%. Anything not subject to tax should get a 5% discount, for example regular savings of all kinds and regular charity payments. At the end of the month people will have 5% more money or will have spent 5% more and someone else will have that extra money. The revenue authority will be 5% short so the MSA will replace that lost revenue by creating new money and giving it to them so as to balance their books. If the new money is created first then it goes to everyone as a subsidy. If it is created later it comes to the same thing. We know this system works. The UK cut VAT and got a great stimulus. [I have been informed that too many other changes were made to draw this conclusion but I said it was obvious. I was told not to say that because there are too many economists saying things are obvious and they can lack credibility] They spoiled it by balancing the books by raising VAT again. They got a great slowdown. It works fast and is very effective. [But my informant then said that when Japan raised VAT in the early 1990's they got an instant recession. So there lies at least half of the evidence. So why is it that Europe wants Greece to raise VAT after all the austerity and all the damage that has already done ...? 

Ann Pettifor continues:

"I would argue, we should once again regulate the banks and bankers. We may have to begin by acknowledging that, without the guarantees provided by central banks, most banks are effectively insolvent, and will have to be re-structured. Because of their weakness, caused by their own greed and recklessness, they are unable to provide affordable credit in quantities needed by the economy. This is a major cause of ongoing economic weakness, falling incomes and high unemployment across western economies."

Under this new system the banks will become agents that service savers and lenders. The money market will be where savings go to and it will be where credit can be found. If the banks mess up they go out of business. They will have shareholder's capital to act as a buffer, and they can re-invest profits or they can insure their risks with an insurer. If they fail in business by lending badly, clients will not lose any money. The MSA can print replacement funds for any lost deposits and savings. The economy needs new money all the time anyway. There will be no bank too big to fail and there will be no runs on the bank. Competition between banks will be freed of the high capital requirements that we have currently. Goodbye high capital reserves and too big to fail. Hello competition. Will that not cause inflation? No. New money creation is constantly needed. This can be accommodated under that heading and replacing lost savings can keep the balance in the economy.

Ann Pettifor Writes:

"banks’ retail arms should be separated from their speculative, “investment” arms. "

Completely correct. Banks have no right to place depositors' money at risk. And they should be clear whose money they are placing at risk. Many banks have so many activities that they are unable to understand their own accounts. It is a golden rule that simplicity reduces risk. And it concentrates the minds of the management. So any very different activity such as speculating with derivatives, insuring risk, giving financial advice, etc, should be done by a separate entity. Having the advantage of being subsidised by a profitable arm when things are going badly is something for any single business to consider: a holding company can be formed with that in mind if so desired.


"Restoring banking regulation to its proper place, and managing cross-border lending would once again restore balance to our financial system, just as it did in the period 1945-71. It would bring to an end the despotic power now exercised by bankers and the finance sector."

You cannot fix the value of a currency. Prices are there to allow supply and demand to come into balance. You cannot limit money creation to zero or keep the value of any currency constant.

Current arrangements in place for currency pricing are the source of huge financial instability. The system needs to be changed.  It is a fundamental tenet of systems management and of economics that the price of the currency should respond to one thing only - the balance of trade. One variable one function, one market for one price. By confusing this pricing role, by having one market for trade and the same market for international capital about half of the world's economic output is having to use an unsafe currency price, and this will also impact on  the Positive Money plan. You cannot get one price to perform in two separate fields. Things will not balance in either field of activity. Having gone to all the above trouble to manage the supply of credit and transaction money in a nation there is no reason to import or export any capital or interest rate problems to or from other nations. This does not mean that changes to the ownership of capital between nations should not be allowed. They can be allowed but using a different capital swops market. This is explained here. But there may be a need to consider how best to reduce instability in the swops market and to remove any arbitrage in the pricing of swops compared to the pricing of the currency. Work-in-progress.


If Ann Pettifor wants a return to the Breton
 Woods' gold standard she is not thinking clearly. The price of anything is what it can be exchanged for. If there is one person in the room who insists on exchanging gold for a given amount of money when everyone else is deciding for themselves how much gold they are willing to buy or sell for a given amount of money, the one person that does not agree and fixes the price will end up either owning no money, or no gold. The Fed virtually ended up owning no gold.

The three most important parts of financial stability, (like finding the best property means location. location. location), is adjustment, adjustment, adjustment. 

Ann Pettifor concludes:
" outlandish proposals for nationalizing money and granting huge powers to a committee of men to decide how much money we should all have, and whether to shrink or expand the money supply and economic activity will only add to the economic confusion that shrouds the banking system."

Ann are you crazy? (Nothing personal mind you - just emphasis). What you are saying is that central banks should have no management function. Yet they do have - they are required to manage interest rates right now. You are saying that anything as powerful as that should be in the hands of politicians. Politics is by nature corrupt when it comes to election time, despite the best intentions of most politicians.  This is why honest politicians asked the central banks to make the decisions on monetary policy. The most important rule governing the MSA in that regard will be that when new money is created it must NOT be given to the government to spend as they wish. It has to go to everyone proportionately to their spending so that all jobs that exist as a result of spending are equally protected and boosted.

As stated earlier, my concern about stimulating the UK economy right now is that property and bond prices are not free to adjust and we can easily see a stimulus creating a rise in interest rates too far. We may see a recession and a lot of social damage. First study my remedies for that.

My second concern is the precedent being set of government deciding how the new money should be created. The economy may be out of balance and this might help that temporarily, but temporarily is not good enough.

My third concern is that no one appears to have thought through in detail exactly how the transition towards a mixed printed money and credit supply should be managed and what kind of a balance between the wo we are heading for.

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