Our response to critics in the Cambridge Journal of Economics

The Cambridge Journal of Economics (probably the leading journal of Post-Keynesian economics) has published an entire special issue on “Cranks and brave heretics: Rethinking money and banking after the Great Financial Crisis”, inviting a range of academics to comment on proposals to stop banks creating money (amongst other ideas for monetary reform).

It is great to see this debate growing in academic circles. The Cambridge Journal of Economics deserves much credit for trying to stimulate the discussion on monetary and banking reform.

Our response to a couple of the most critical papers has now been published in the journal. Normally you would need an academic journal subscription to access it, but readers of this blog can access it for free in PDF format.

From our introduction:

“We wish to address four main concerns raised by F&S [Guiseppe Fontana & Malcolm Sawyer] and N&W [Yeva Nersisyan & Randall L. Wray] in this issue. First, F&S focus on a sovereign money system’s impact on government finances, arguing that it would place constraints on fiscal policy that do not exist today. We argue that there is in fact no difference as far as the Treasury’s policy space is concerned. Second, both papers claim that prohibiting money creation by banks would be economically destructive: in N&W’s words, it would ‘run our economy into the ground’ (N&W, 2016, p. 25). We argue that the reality of bank lending and firm investment is a challenge to this assumption and ignores the fact that the central bank can always create money to finance lending to the real economy. Third, we address the argument that if money creation by banks is prohibited, then money creation in the form of ‘near monies’ will simply shift to the shadow banking sector. Finally, we address the claim that financial instability has its real source in the shadow banking sector, so that our focus on commercial banks is misplaced. Space does not allow us to address many of the other points made by F&S, but their omission from this response does not imply our acceptance of those arguments.”

Read the rest of the response in PDF format.

There’s also some interesting analysis of the debate by Geoff Tily over at the Prime Economics blog.

The fact that more and more academics are beginning to engage in these topics shows that the work Positive Money is doing is starting to have an impact on the wider academic and policy debate.