Review of “The Production of Money: How to Break the Power of Bankers”

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Ann Pettifor’s new book, The Production of Money, is an excellent contribution to the growing body of thought exposing mainstream, neoclassical economics’ poor understanding of money, banking, and finance, and how its thinking has led to a financial system that we serve, rather than one that serves us.

Drawing extensively on Keynes’ thinking and how the financial system worked from 1945-71, her proposals are fourfold; first that bank lending should be regulated so that credit is guided into productive lending not speculative activity, second that regulators should set interest rates across a spectrum of lending, third that controls on international capital flows should be undertaken, and finally that a new Bretton Woods is adopted. Ann wants to wind the clock back.

Whilst these ideas are important for getting finance under control, when discussing why they aren’t being taken seriously, it is disappointing that Ann tends to take the easy option of blaming vested interests, rather than getting into the detail of how mainstream economists and policy makers misunderstand interest rates and capital flows, and how in practice these ideas could be implemented. 

Ann takes a whole chapter to criticise Positive Money’s proposals, however the criticisms are mostly based on a flawed understanding of what our proposals are trying to achieve. Furthermore, Ann’s proposals don’t solve some key problems of the banking system including ending ‘too big to fail’, removing implicit subsidies to banks, and protecting the payments system. These are the greatest immediate benefits of a Sovereign Money system. 

This confusion is probably as much our fault as Ann’s, but it does highlight the point, that if progressive critiques of the current money and banking system are going to come up with a blueprint of alternatives, we need to better understand each other, and how our proposals can fit together, not be chosen between.


Ann’s main proposals 

One of Ann’s key proposals is credit guidance where bank lending is regulated so that credit is guided into productive lending, not speculative activity. Positive Money has always considered whether we should advocate this as a policy proposal (and we are still considering it). There are clear issues with implementing it. Lending to the productive economy is now only a small part of banks’ business models, so implementing it would not be straightforward. It would have been good to see what Ann thinks are the main barriers to implementing this policy. 

Ann uses very similar rhetoric to that of Positive Money; for example, when discussing money creation, Ann states that:

It is a great power, a power that bankers can only exercise thanks to the backing of society’s taxpayers and of publicly financed institutions. As such it is a power that should be wielded in the interests of society as a whole and not just in the vested interests of the privately wealthy.’

However, Ann thinks that money should still be created through private banks, but regulated through public control over interest rates. In contrast, we think that money should be created by a public institution. 

Ann makes some important points about interest rates that few economists are even thinking about. She highlights a common misunderstanding about interest rates: economists and commentators imply that low central bank interest rates have been passed onto borrowers resulting in ‘easy, cheap credit’. But in fact, the cost of credit has never been higher. Low rates allow banks to lend more easily, but they don’t pass on the low rates to customers. Ann points out it was ‘easy, dear credit’ that led to the buildup of debt that resulted in the 2008 crash. 

Ann advocates capital controls as a solution to one of the challenges with the globalised financial system where large sums of money rush around the globe chasing returns. Jubilee Debt campaign, which is a development of Jubilee 2000 which Ann founded, highlights the devastating impact this can have on developing countries. Another proposal in the book is that a new Bretton Woods is needed, this time with one of Keynes’ proposals that wasn’t implemented in 1944 – an International Clearing Union. Such a proposal has been described for the Eurozone, the idea is to address trade imbalances and to ensure that those countries that build up a trade surplus are charged interest, as well as the debtor countries. The idea is a form of capital control to encourage countries to focus on lending into their own domestic economies. 

Finally, Ann argues that Keynes’ liquidity preference theory has been largely forgotten, and should be brought back. Unfortunately, there isn’t much detail on the mechanism but she discusses that governments must provide a range of government (safe) assets over different time periods in order to manage interest rates. 

Ann’s proposals are important and some form of all of them is likely to be necessary for building a new economy that we need. However, she does not describe how they could be implemented, and what are the main challenges in getting them adopted. Instead, Ann takes a whole chapter to criticise the idea that banks should be stripped of their power to create money – which I will elaborate on below. There is an implicit underlying narrative that it is either her proposals or Positive Money’s – why can’t we have both? Clearly, each different policy will address different issues, so why does there have to be a false dichotomy? 

Furthermore, rather than getting into the detail of how these ideas could be brought back to the mainstream, Ann tends to take the easier options of pointing to vested interests, stating that: 

“Monetary systems have been captured by wealthy elites who, with the collusion of regulators and elected politicians, have undermined society’s democratic institutions and now govern the financial system in their own narrow and perverse interests.” 

Clearly, whilst there are always vested interests at play, to imply collusion on such a scale is to overestimate people and to underestimate human nature of group thinking, herd mentality, and courage needed to try and lead huge bureaucratic institutions in different directions! 

The huge mess the monetary, banking, and the whole financial system is in, is not the result of some cleverly thought out plan by elites – indeed no humans are that smart. It is the result of almost 40 years of dominant economic thinking that money, finance, and markets are neutral, and know best. Thinking that states that banking and finance should be unconstrained, and that central banks and governments should therefore simply step out of the way. Doing a U-turn on that thinking is slow, it turns out – just look at the progress made since the crash. But it is happening, and we need to engage with those shifting their opinions at all levels, from those working in banks, to central bank governors, to the public willing to protest outside central banks. If we simply say the barrier to getting a progressive monetary system is vested interests then we lose and they win. 


Sovereign Money system 

Although it hasn’t been front and centre of our campaign (yet!), one of the main reasons for moving to a Sovereign Money system is that it would end “too big to fail”, by protecting the payment system and removing implicit subsidies to banks, such as deposit insurance. Our current accounts would be ‘transaction accounts’ held directly at the central bank, with risk-free liabilities of the central bank, rather than liabilities of a commercial bank. This would allow payment services to continue to operate even with the failure of a lending business. It would create a clear distinction between a risk-free payments system and the risk-bearing liabilities issued by banks. (We plan to do some writing on this subject over the next few months – stay tuned!) 

Ann highlights “too big to fail” and implicit subsidies as being problems in the book, pointing out that

private financial institutions enjoyed taxpayer-backed protection.‘

She also hints at the complexity of regulation:

As long as the banks remain vastly complex bundles of businesses, the executives running them remained above the law.’ 

Since the crash, banking regulation has if anything increased complexity in how banks function and how they are being regulated. This complexity is in part because the ring-fencing part of the Banking Reform act, which aims to divide their retail and investment banking arms, is being implemented in a different way by each bank. 

One of the great benefits of a Sovereign Money system is that because the system itself is simpler, having undergone a significant structural reform rather than being regulated, the new system has in-built resilience (for example through the safety of having current accounts directly held at the central bank), then it is far easier to regulate. The point is that whether we like it or not, the ‘vested interests’ that Ann refers to, will always have the upper hand in regulation simply because they have much bigger resources to water down and make regulation work for them. That is why John Vickers who led the post-crash commission that resulted in the regulation has recently suggested that regulation hasn’t gone far enough. 

As well as regulation, we need structural reform, and we think a Sovereign Money system is the best way to bring that about. 


Some false criticisms about Positive Money 

A fair few times in the book Ann interprets our limited commentary about some issues such as capital controls to mean we don’t care about them. I guess that is a fair enough assumption, but it isn’t correct. The reasons for not discussing them in great detail is that we haven’t done enough research into them to have a clear position. It’s good that Ann is pushing us to think more deeply about some of these issues. 

Ann states that ‘The movement shows little concern for high interest rates; indeed they are seen as beneficial because they act as constraints on lending’. 

This statement is false. We don’t see high interest rates as beneficial. Most of our commentary is about the Bank of England’s base rates, and pointing out that the Bank of England is in a bind, it can neither raise rates nor lower them, and that’s why monetary policy in its current form is broken. And that moving interest rates lower when they are already below 1% no longer works. We want a new tool to be added to the Bank’s toolkit: monetary financing (aka QE for People). 

Ann is right that we don’t talk enough about the real rates of interest which borrowers are offered by banks and how banks do a dreadful job of passing on low interest rates to borrowers (it simply isn’t in their business model, because banks do not first borrow the money that the lend; rather, they create ex nihilo the ‘money’ that they lend). That is an issue that we do not yet focus on in the campaign. We do need to think about how to directly regulate interest rates in the current system, and whether they should be regulated in a sovereign money system, and if so, how that should be done. 

However, Ann also does not realise that a key tenet of the Sovereign Money system is that it removes the built-in interest on the money we use. Almost all of the money we use is created by banks’ lending. Through this process, for each £1 that is created, £1 of debt is attached, plus the interest to repay that £1. Therefore society essentially rents our money from commercial banks. Under a Sovereign Money system, money would be created with no debt attached, so it would remove interest on money at source as an inbuilt mechanism of the system. 


Ann says that ‘Positive Money campaigners are relaxed about ‘offshore’ capital and capital mobility, though of course, they campaign against tax havens and tax evasion’. 

She also comments that ‘we have little interest in cross-border financial flows or the impact of these flows on domestic economic policies’.

However, we have said publicly both that tax evasion, and tax avoidance is wrong, and that capital controls are likely to be needed. We have done some significant thinking on what implementing a sovereign money system would mean in an international context for exchange rates, for example. Whilst capital flows are complex, the negative impacts of extreme capital inflows or outflows may be countered in a Sovereign Money system because the payment system would be protected, and if there was a massive outflow of capital, aggregate demand could be simulated easily (through sovereign money creation). This, of course, doesn’t mean that capital controls stronger than the ones that exist today aren’t needed – they very well could be, but Ann doesn’t lay out a clear blueprint for what new regulations she wants.


Furthermore, Ann states that what we are advocating ‘proved backward-looking in the 1930s, and disastrous in 1970s and 1980s. They are ideas that have long been discredited’ . I’m not sure who she is referring to here as she makes no reference. A Sovereign Money system has never been implemented in modern history so it is difficult to see how it could have been discredited beyond intellectual debate and the battle of ideas. There has indeed been a lot of misunderstanding around these proposals. There are some important differences between the Chicago plan on 100% reserves and a Sovereign Money proposal, where in the latter the key benefits are that the payments system would be protected, and “too big to fail” ended. These differences are described by Joseph Huber (who is on our Advisory panel) here, and our former chief economist, Andrew Jackson, here.


Where we need to do more work 

It is true that we have had some blind spots that Ann has highlighted. We are planning to let Modernising Money run out of print so that we can take our time to work on a new edition which will update our thinking in several areas. 

Ann points out that Keynes dismissed the ‘Quantity theory of money’ which essentially states that the amount of money is the key determinant in an economy, rather than being an outcome determined by borrowing and lending decisions. Indeed, although this theory is covered in Modernising Money, we no longer think that this theory is very useful in describing the economy. 

We are doing more work on interest rates. Although in our proposal (as Ann points out), we state that the central bank would no longer be responsible for setting the base rate (or policy rate) of interest, there are concerns that interest rates could become volatile in a Sovereign Money system. (Again, we plan to do some writing on this subject over the next few months – stay tuned!)


Ann’s criticisms of a Sovereign Money system / People’s QE

Ann believes that monetary financing or alternative forms of Quantitative Easing (QE) are technocratic, but her analysis is confusing. Ann strongly argues that it is technocratic for the quantity of monetary financing or QE to be decided by central bankers. However, she implies that she does not think it is technocratic for central bankers to be setting interest rates, or choosing the amount of cash they create through QE. Ann tends to confuse two key topics at the heart of the problems with the monetary system and central banking:

1) The relationship between the Bank of England and the Treasury:

  • How independent should the Bank of England be?
  • How in practice should the government hold the Bank to account?
  • How should the Treasury and Bank work together to deliver macroeconomic policy to deliver a more sustainable and balanced economy

2) What mandate and tools does the central bank need to do its job? 

Ann doesn’t acknowledge that central banks are answerable to democratically elected governments, and if our governments aren’t scrutinising them enough, questioning their mandate and tools, it is a failure of government. Central banks can act as independently as governments want. It is the Chancellor, working with the Treasury, who sets the mandate and tools of the Bank of England, and it is for the Chancellor to review it. This is the reason Positive Money has sent petitions to the Chancellor, and calling on MPs to better scrutinise the Bank of England. 

Currently, Positive Money and other advocates of alternative options to QE have tried to focus on promoting the idea of a new tool: monetary financing (MF) and people’s quantitative easing (PQE). MF and PQE are increasingly economically credible and legitimate alternatives to QE and would be a huge step towards reinventing monetary policy so that it serves the real, productive economy, and not financial markets. It would be up to the Chancellor to say: give the government £445bn to spend directly into the economy, or to say “buy green bonds from the Green Investment Bank” or say “give every citizen £X”, or whatever the version or combinations of MF or PQE the Chancellor decides. This reform of QE would help to get to the system Ann wants, where “elected representatives should be the masters of this process with the central bank as a servant – albeit an independent, open-minded and well-qualified servant.’ 

Ann seems to think that because advocates of MF and PQE don’t always mention the relationship between the Bank of England and the Treasury – issues of political economy – they are in favour of technocratic central bankers. In Positive Money’s case, this could not be further from the truth. We need to have conversations now about the QE’s failings, and how QE could be done differently. This would be a route into all of these questions about the role of central banks and how they work with governments. 

Helicopter money 

Ann thinks that a form of citizen’s dividend or helicopter money shouldn’t be used as a way of monetary financing because people would simply use it to buy foreign products. She also suggests it is undemocratic. 

Firstly, suggesting citizens shouldn’t be given a lump of cash from the government (Citizens dividend) because of what they might spend it on, is a pretty authoritarian statement as they come; it is akin to saying people shouldn’t be given a pay rise because of what they might spend it on! 

However, if Ann was to argue, as unions might, that helicopter money removes the pressure for companies to unionise and increase wages, then I would have more sympathy from where she was coming, because wage issues are so crucial. However, a cash transfer which resulted in slightly less pressure for the people most struggling, might actually give them the breathing space to unionise at their workplace, rather than be just managing to pay the interest on their debt and avoiding going further into debt, let alone making principal repayments. 

Helicopter money is not an alternative to much-needed pay rises; both are needed, for different reasons. I don’t understand the assertion that helicopter money is undemocratic. Giving a universal payment to all citizens, and allowing them to decide what to spend it on, is about as democratic a policy as you can get!


Bond financing vs Monetary financing 

Ann thinks that bond financing is preferable to monetary financing because it results in the creation of more government bonds, which provides the private sector with more safe assets, short-, medium-, and long-term assets, which will, in turn, enable the central bank to manage the spectrum of interest rates. 

Disappointingly, Ann does not go into detail about how managing the spectrum of interest rates on government bonds will affect interest rates on lending into the productive economy. For example, how would the number of long-term government bonds affect mortgage rates or business rates directly? Transmission mechanisms seem to be inherently uncertain, so more clarity from Ann on how this would work is needed. 

Aside from how it would work, there is the obvious question of why can’t we have both? Economists tend to get into false dichotomies. Clearly, both types of financing are useful for different reasons, and both can be used, even under a Sovereign Money system. 

What is more confusing is that Ann points out several times how we are in urgent need of investment, particularly for the green transition. It is confusing as to why she wouldn’t want to use all available instruments 

Ann discusses the need to make the Bank of England work for society, but she doesn’t lay out a clear blueprint for its reform. Our economy is totally skewed towards financial and property markets, and bond financing of fiscal spending won’t be able to rein in or take back control of those markets. To really rebalance our economy, we need the Bank of England involved; it must no longer see itself as a neutral technocratic observer. To get the Bank of England involved requires reforming monetary policy and starting from where the Bank is at. Shifting from QE to monetary financing would be a crucial step that could be done alongside bond financing.


Our intellectual journey 

I think it is worth saying here that Ann does raise some legitimate questions about Positive Money’s intellectual ancestors, and the theories on which our campaign is based. I think it’s worth briefly talking about Positive Money’s intellectual roots and where we are now, which I hope to expand on in another blog. There is a tendency for our critics, such as Ann, to attack our ideas as they were presented in 2011, rather than acknowledge that we too have been on an intellectual journey, as individuals, and as an organisation too. 

Essentially, Positive Money started – like many campaigns – from a moralistic stand-point. It is quite legitimate that when you find out that banks create money out of nothing, you are outraged. Banks decide where and when to lend – or not lend – based on their profit, and they caused the biggest financial meltdown in history. A sensible response to hearing that they create money out of nothing, is to think: “that is wrong”, or “that’s not fair”. That is how I and many other supporters became interested in Positive Money. We have an intuitive sense that banks wield enormous power over society, and we don’t understand them. Then Positive Money comes along and tells you that banks create money out of nothing and you are like “got it – that is the problem!” 

It is a bit like realising that using all our fossil fuels will result in climate change that will extinct humans, your immediate reaction is – quick let’s shift our energy supply overnight to renewables! But then you realise that fossil fuels underpin our whole economy, and so moving to a renewable energy economy isn’t going to be straightforward. Moving to an economy which functions with publicly created money, rather than private (bank created) currency won’t be straightforward either, but that doesn’t mean the intuition that banks creating our money is wrong, isn’t correct.

The other fundamental tenet on which Positive Money was founded, that causes a huge amount of confusion for people, is that presently, money is created as debt. That point is covered next. 

The main point I want to make is that Positive Money started from a moral, philosophical, and political standpoint, not an economic one. Banks have too much power and the financial system seems to underpin the economy, which seems to underpin the vast problems of inequality to the climate crises. From a systems change point of view (which I will also expand on in another blog); if we can shift how our monetary system functions, it will be a massive leverage point, and maybe even help to shift the paradigm on which our economy is constructed to one that puts society before finance. 

From the beginning, many economists believed that our arguments were flawed because we weren’t starting from a pre-existing school of economic thought. So, having received a lot of criticisms from economists, we built up an economic framework. But unlike the economic framework most economists use for understanding the economy, ours is not fixed; it is evolving as our knowledge expands.


Money as Debt 

Ann states that ‘Monetary reformers treat all debt as bad’. This is not true and represents not just Ann’s thinking, but also that of many of Positive Money’s critics. We have made numerous attempts through our communications to demonstrate that we definitely do not think that all debt is bad – but nevertheless, the misunderstanding persists. 

We understand that the invention of credit/debt, and, later, money are two of humankind’s greatest inventions. They have been hugely useful in developing modern society. Debt/credit are needed for so many things: starting a business, buying a house or a car, etc. Positive Money does not want to get rid of debt, we want to get rid of a process which creates money as debt. If I lend my friend a £10 note, I have created a creditor-debtor relationship, but I have not created money (i.e., increased M4). This description is akin to the banking system we want to see. Just as peer-to-peer lenders gather savers’ money and lend it to borrowers, without creating money, banks would have to do the same (they definitely do not do this now), and this structural reform would bring with it many other benefits. 

Another misconception is that Ann and others seem to think we are advocating for a centralised system of loan creation from the central banks – we are not. Rather, we are advocating for a centralised system of money creation, together with a decentralised system for making loans, in which the lender must first attract money to lend, and cannot (as banks do at present) create loan principals ex nihilo. 

The other confusing thing about this is that there are many general statements made around money being created as a debt. 

The way Positive Money looks at it is that most of the money we use now is digital IOUs from banks. Ever since the rise of banking, populations have been using IOUs from banks (first in paper form, but now mostly in electronic form). Since banks have become out of control, in terms of size, as well as in potential economic destruction, an easy way to rein them in is through limiting what they can do. So we can separate the person who creates the money from the person – or institutions – lending the money. This is possible because much of the time the IOUs that are circulating are merely facilitating payments – they are not creating creditor-debtor relationships.

Interestingly, Ann does connect high levels of debt with the unsustainable use of the earth’s resources, stating:

the earth’s limited resources have effectively to be cannibalized if the mathematical laws of debt repayments to the world’s creditors are to be honored.’ 

She points to Margrit Kennedy’s work showing that compound interest rates have exponential growth and Frederick Soddy’s work on ‘Wealth, Virtual Wealth, and Debt’. Both of these pieces of work are intellectual ancestors of Positive Money. Later this year we will be releasing a paper on the links between a debt-based monetary system and growth-focused economy. I hope Ann engages with the paper, and gives us some constructive criticism to work with.


In conclusion 

Understanding money is different from understanding how credit-default swaps work. The latter is complicated, but understandable by the human brain; the former is complex. With complexity, we will all construct different understandings of money, credit, and debt, depending on what information we have. Human brains can’t understand complexity that well; we are hardwired to try and construct certainty in the way we understand things. 

Ann has a different understanding of money from we at Positive Money. That doesn’t make one of us right and the other wrong. We both have different contributions to make to the bigger picture. As I said before, we would welcome working with Ann more closely to figure out how to come up with a shared blueprint for a money and banking system that serves society, not itself.




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