In a recent blog post, Richard Murphy makes a number of points about our Sovereign Money proposals. In the post there was a common misconception about Sovereign Money that requires clarification – Positive Money does not, and never has advocated any centralised decision-making with regards to making loans.
“However, it also requires recognition that decision-making on loan creation has to be devolved if it is to be effective to meet the needs of a modern economy. This means that I do not think the total money supply can be rationed by a central committee, which is a proposal at the core of Positive Money’s suggestions. The right to lend does, instead, have to be given to banks…”
Firstly, under a Sovereign Money system the primary function of the central bank will be to decide on how much new money to create. The decision on how the new money would be spent, would be taken by Parliament.
Secondly, banks still have an important role to play in a Sovereign Money system. They would lend money out but they would do so by borrowing pre-existing sovereign money (originally created by the central bank) from savers to borrowers. This would be different from the current system, where banks simply credit the borrower’s account and create new money in the process. In other words, credit intermediation between borrowers and savers would be the very function of the lending side of a bank in the sovereign money system.
Thirdly, most importantly, it is still banks – and not the central bank – that make decisions about who they will lend to and on what basis. The only decision taken by the central bank is concerning the creation of new money; whereas, all lending decisions will be taken by banks and other forms of finance companies.
Finally, in the comments section Richard states:
“And they (banks) could not make a loan without seeking a deposit from the central bank… So the BoE would have to in effect approve all loans”
To clarify, banks would have to look to the private sector for investors willing to deposit their savings into an Investment account. Moreover, when a potential borrower submits an application for a loan, the Bank of England would have no decision making power as to whether it would be approved or not.
To conclude, all decisions about the approval and rejection of loan applications would lay solely with private (or public) banks and any other type of lending facility.