Would Positive Money reform lead to a reduction in credit available to businesses?

One of the really common concerns that comes up regarding the Positive Money system is that it would lead to a reduction in credit available to business and therefore stagnation/deflation, a lack of dynamism, low growth, etc. The argument is basically that monetary reform is a choice between growth and dynamism on one hand and stagnation and stability on the other.

The argument goes as follows: reform of the monetary system is a choice between a dynamic, risk taking system, where banks are able to create money and in so doing fund the capital development of the nation (and bubbles too!), and a reformed system in which the creation of money is restricted, banks are unable to create money, and so are unable to respond to the needs of businesses, resulting in lack of investment and growth (and potentially deflation and stagnation).

This line of argument is however a bit of a straw man, and a false dichotomy when applied to the Positive Money system, as it ignores the fact the the Positive Money plan is not about restricting the amount of money in circulation, or the amount of lending by banks:

Not about restricting money creation/growth: The Positive Money proposal ensures that there will always be enough new money and credit in circulation. In fact money creation will become counter-cyclical rather than pro-cyclical. Money will be created in line with an inflation/employment target – low aggregate demand will result in an increase in money creation by the Bank of England, and therefore an increase in Government spending/tax cuts.

Not about restricting bank lending to business: If there is a lack of credit for businesses banks will be able to borrow from the Bank of England to lend into the economy. This could be through standing facilities at the Bank of England (i.e. overdrafts). So there need not ever be a lack of credit. Money creation in the Positive Money system could, if desired, be completely endogenous. In my version business lending can become endogenous if required, speculative and non productive lending can not. Alternatively, regional investment banks could be set up to lend to businesses with the amount created decided by the Bank of England.

(Its also important to note that the current system is dynamic only in the boom (by creating large amounts of credit), and then stagnant in the bust (due to a lack of lending and money destruction). This business/financial crisis cycle dynamic is likely to lead to less investment and risk taking as entrepreneurs are discouraged, as success or failure is to an even greater extent due to factors outside there control – recessions/financial crises caused by bank failure and financial crisis.)

Of course, there are also other benefits to the Positive Money system which help distinguish Positive Money’s proposal  from other proposals such as credit guidance, like: allowing banks to fail, removing bank subsidies, aligning risk and reward, and allowing government to reduce distortionary taxes/increase spending, to name but a few.