Martin Wolf’s recent article in the Financial Times has sparked a major debate in the mainstream media. The article discusses the nature of money and credit in the modern monetary system in which he suggests: “strip private banks of their power to create money”. There has been a significant backlash from critiques and many misunderstandings. But it is fantastic that this issue is finally getting attention and is being debated.
We’ll respond individually to the criticisms and misunderstandings. Now, here’s an overview of the latest articles – by the economists Paul Krugman, Ann Pettiffor, Warren Mosler and FT Alphaville reporter Izabella Kaminska:
Paul Krugman, American economist, the Nobel Laureate in Economic Sciences, Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times.
Because of the finance sector’s despotic power, about which I have been very vocal, many readers would expect me to support a proposal that prevents private banks from creating money, and to enthusiastically back the nationalization of money issuance. I do not however, and want to explain why.
Warren Mosler, American economist and theorist, president and founder of Mosler Automotive, and co-founder of the Center for Full Employment And Price Stability at the University of Missouri-Kansas City.
Yes, a 100% capital requirement, for example, would effectively limit lending. But, given the rest of today’s institutional structure, that would also dramatically reduce aggregate demand -spending/sales/output/employment, etc.- which is already far too low to sustain anywhere near full employment levels of output.
Izabella Kaminska, financial reporter at FT Alphaville discusses the issues in two articles:
Anyone who has speculated about the significance and effects of quantitative easing in the last five years should probably have a read.
In the piece, Wolf comes out in favour of the endogenous theory of money supply and explains why it is that banks, through their power to issue private money directly, influence the economy in a very different way than is traditionally accepted.
But the case for expanding the central bank balance-sheet to the population — something which can easily be done via the issuance of sovereign e-money — does not in our opinion necessarily demand the elimination of private money issuance along with it. More than likely both forms of money can co-exist quite healthily.
We’ll respond individually to the criticisms and misunderstandings. In the meantime, most of them are covered briefly in our Frequently Asked Questions, e.g.: