Policy Research in Macroeconomics

Academics and civil society clash on money

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Since the financial crisis there is a far greater public awareness about the nature of money. Most importantly the idea is getting across that private banks are able effortlessly to create money from nothing.  This ability is a very big deal, not least a massive privilege – pretty much a licence to print money and to reap very rich rewards.

This awareness  is in large part thanks to ‘civil society’ (CS) campaigners who have worked tirelessly to de-mystify matters that are of the greatest importance to economics and political debate.

As far as I am aware, the vast majority of the economics profession has chosen to ignore this work.  

But a couple of weeks ago, academic economics from the ‘post-keynesian’ tradition responded (see end note for clarification). The title of Giuseppe Fontana and Malcolm Sawyer’s (FS) review essay says it all: “Full Reserve Banking: More ‘Cranks’ Than ‘Brave Heretics’” (it is published in the

Cambridge Journal of Economics
, the link has been updated to one with free public access).

Their targets are works by the NGOs ‘Positive Money’ (notably
Modernising Money by Andrew Jackson and Ben Dyson) and the new economics foundation (e.g.
Where Does Money Come From?  by Josh Ryan-Collins, Tony Greenham, Richard Werner and Jackson again).   Another target is a contribution from the IMF (
The Chicago Plan Revisited, by Benes, J. and Michael Kumhof – the latter now ‘senior research advisor’ at the Bank of England). 

As the title suggests, Fontana and Sawyer object specifically to the idea of ‘full reserve banking’ (FRB). FRB is common to many (though I am not sure whether it is all) of civil society’s initiatives. The logic runs (very crudely):

  • private banks create credit
  • private banks act recklessly and over-lend to disastrous effect – causing e.g. the financial crisis
  • so private banks should not be allowed to create credit. They should be allowed only to loan what has been deposited with them (that’s the full reserve bit) 
  • any expansion (or contraction) of the money supply should instead be the responsibility of the central bank.

Much of Fontana and Sawyer’s argument is technical, but there are some key points. They reject the idea that any such system would be more stable (given presumably that it is even possible to control money in this way). They claim that civil society organisations ignore non-banks, “deemed to have been the main cause of the Great Financial Crisis of 2007” (p. 6).  They also argue that the civil society proposals have an inherently deflationary bias, “quite likely to produce recessions and financial instability” (p. 7). They object strongly that the proposed systems are very close to monetarism in spirit, given that under their schemes the authorities are responsible for the supply of money and the apparent acceptance of the monetarist relation between money and inflation. They explain in some detail how government spending could be unnecessarily restrained under FRB proposals.
I will leave it to the targets of the Fontana and Sawyer critique to defend themselves against these charges.

For me the key point concerns the baby and the bathwater.

As the authors of this journal review write: “one of the main lessons from the work of Minsky and other Post Keynesian economists is that the demand for, and supply of bank loans via the financing of the production of goods and services (investment) are an integral aspect of the operation of real-world economies” (p. 8).

I agree with very much of this. For me, economic and social advance and an effective monetary system have gone hand in hand through 5000 years of history. To discard the system because it has malfunctioned – no matter how disastrously and inequitably – is to throw the baby out with the bathwater.  We do not ban fire because fire can get disastrously out of control. Money, with its awesome but sometimes terrible properties, is still one of humankind’s great inventions or social technologies.

But while Fontana and Sawyer celebrate the positives of money, they barely touch on the negatives – beyond remarking almost incidentally “the creation of money also opens the door to fraud and unsafe banking procedures and the use of loans to fuel asset price bubbles” (p. 8). 

Civil society organisations have been motivated by crises; by the realisation that the financial system has failed disastrously. And that is surely fair enough.  In Fontana and Sawyer’s review there is no sense of the scale of the failure of the system, and of whether there is need for fundamental reform (recognising this is only a review essay, not a statement of their perspective in full).  At one point they seem to be at the other extreme to civil society, with the credit system a vital protection against financial crisis: “Therefore, the creation of money through the lending activity of banks is essential in order to accommodate the financing needs of capitalist economies, and to generate the cash flows which will prevent the occurrence of real and financial instabilities” (p. 8).

It seems both Fontana and Sawyer and civil society organisations think these crises are inherent to capitalism: “Advocates of FRB seem to agree with Keynes that capitalist economies are monetary economies and as such prone to crises and instabilities” (p. 8).

For me there is a middle ground, which – contrary to the preceding statement – is where Keynes stood. This middle ground was defined by his liquidity preference theory of interest. Higher employment and financial and economic
stability depended on
managing money at a low rate of interest (the latter involving debt management policy, capital control and the rest). Interest rates seem scarcely to feature in either Fontana and Sawyer’s review, or indeed in the narratives of civil society.

There are very legitimate concerns about the prominence of FRB proposals in public debate around money, and of the associated dangers of discrediting all variants of monetary theory and proposals for monetary reform. I presume it is for this reason that Fontana and Sawyer have gone in so hard. They fear, in their language, the misleading doctrine of the ‘cranks’ overwhelming the rightness of the ‘heretics’.

But as noted at the start, civil society organisations are raising questions in the public mind that academia has not managed to raise. Indeed they have seemingly provoked the Bank of England to publicly concede that banks create money and point out that mainstream textbooks are generally wrong on this fundamental point. This is a very non-trivial admission (the first time in history?), serving somehow to vindicate the work of all of us.

I like to hope that the debate around monetary reform has barely begun. It is right that differences are in the open.  We will be best placed in the future if the various factions listen and learn from each other.


FS classify ‘modern’ Post Keynesian economists as embracing the ‘endogeneity of money’, and list the following variants:  

French and Italian circuitists –  Graziani, Parguez and Seccareccia

Horizontalists – Lavoie, Moore, Rochon

Structuralists – Wray, Palley, Dow

Fundamentalists – Davidson

Sraffians – Pivetti, Brancaccio and Fontana

Kaleckians – Sawyer

Neo-Chartalists –Wray

I wonder if this is not exhaustive and, though already complicated, over-simplifies the positions of all scholars of Keynes and post-Keynesian economics. Plainly these complexities are not an advantage in setting out a coherent challenge to the mainstream. “The only people we hate more than the Romans are the f*****g Judean People’s Front” and all that. 

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4 Responses

  1. The two primary dysfunctions that need to be addressed are the misallocation of capital-as-credit and the indefensible level of profit associated with the commercial banks privilege of creating money-as-credit and charging interest on it.

    Banks have abused this privilege by allocating credit to finance rather than the real economy, to big companies rather than SMEs and to asset purchases (including mortgages) rather than patient long term investments. They are just (as they see it) maximising profits by doing so, but some means of strategic guidance over priorities has to be applied. This is not a matter of picking winners it is a matter of investing in value creation rather than value extraction; in the real economy rather than the casino; and in the future of the planet rather than whatever makes a quick buck.

  2. "" I like to hope that the debate around monetary reform has barely begun. It is right that differences are in the open. We will be best placed in the future if the various factions listen and learn from each other. ""

    OTOH, it seems just the title of the F&S article shows their penchant for casting aspersions upon reformers rather than ‘engaging’ and seeking to promote the much-needed dialogue on the workings of these national monetary systems that guide, if not drive, our modern societies.

    As Ralph points out, the ‘objectors’ have ignored the major debates through the ages and the ‘reality’ that both progressive and conservative ‘Nobelists’ in this field have supported what is, tangentially, the "Full-Reserve Banking" school of money.
    This FRB system has actually been transcended today by the real-money advocates including the American Monetary Institute in the U.S. (monetary.org) and the legislative proposals of Congr. Dennis Kucinich in 2010 and 2011
    ( https://www.govtrack.us/congress/bills/112/hr2990/text )

    But what I find most appalling is that this sphere of self-righteous dialogue is fraught with unsubstantiated opinions about the potential economic outcomes that would result in the event we moved closer to, say, the OMF construct proposed by L. Adair Turner in his "Between Debt and the Devil" literature. (Not a particularly large fan, myself, due to Turner’s ‘limited’ application.)

    So, to me, these negative-outcome economic forecasts need some scholarship and substance, or else these P-K authors should learn from those who have most done the actual research on ‘public-money’s ‘ economic outcomes. Here I am disadvantaged by not affording a "Journal" subscription, and going only by what I have read based on Ben Dyson’s PM reply, and other comments.

    I offer two alternatives. The first is by BoE’s Kumhof, again and Jakab , ironically a research paper that addresses these outcomes through a fully-reserved bank lending platform based on the so-called ‘loanable funds’ theory.

    Under the "Why This Matters" section, Research Paper no 529 shows the exact opposite outcomes from those posited by this "learned" branch of the P-K community.

    The second is a far more comprehensive review that tests the macro-economic outcomes from instituting the public money option advanced again by Kucinich- AMI in the US. Dr. Kaoru Yamaguchi of Japan has recently updated this version of his Systems Dynamic macro-economic modeling work, but this paper has been around for five years now, and its outcomes have never been challenged.

    Rather than "advancing" the dialogue, the "You’re a Monetary Crank" crowd merely postulates about near-money and shadow banking, without any consideration given to the new risk-reward construct that opens up when banks cannot create new ‘moral hazard’ leverage by putting the transaction risk onto the real economy and the public. ‘Shadow bankers’ will be lending somebody’s real money, even from outside the CB system. But that money would be governmentally-originated into circulation. Near-money will be used to run the Monopoly game.

    For the Money system Common.

  3. Thanks Geoff, this is a good analysis. As the author of the proposals that Fontana and Sawyer focus on most, I have written a full response which will be published in the Cambridge Journal of Economics alongside their critique in the next couple of months. Just to say, we’ve addressed the key points that Fontana & Sawyer raise, although we can’t respond in full until our response in the journal has been released.

  4. Sawyer and Fontana (S&F) are a pair of incompetents for reasons which I spelled out in detail here:


    For example they don’t even seem to know who the most authoritative advocates of full reserve banking (FRB) have been over the last century. That is, at least four economics Nobel laureate economists who have backed FRB over the last century, but instead, S&F concentrate most of their attention, as Geoff Tily rightly points out, on two UK NGOs which were set up only about ten years ago!

    Next, S&F don’t appear to understand the basic book-keeping entries or movements of money that take place under FRB. That is, they say “The second inconsistency is that it is not clear where the prior savings alluded to by Daly and other advocates of FRB have come from. It is technically impossible for banks as a whole to collect deposits without at the same time granting loans for the same amount.”

    Well under FRB, government or “the state” simply creates new money and spends it (and/or cuts taxes) when stimulus is needed. It should be obvious to a ten year old that that new money inevitably ends up in some set of private sector bank accounts in the form of “savings”. That’s about as difficult as understanding the point that when tea exits a tea-pot it ends up in the cup which has been placed under the tea pot. But S&F, for all the technical jargon they exude, apparently don’t understand that.

    Next, Geoff Tily says “Interest rates seem scarcely to feature in either Fontana and Sawyer’s review, or indeed in the narratives of civil society.” On the contrary: the submission to Vickers by Positive Money, the New Economics Foundation and Prof Richard Werner gave detailed reasons as to interest rate adjustments are a defective method of implementing stimulus: the combination of low rates and sluggish escape from the recession over the last five years is surely evidence to back that point. See:


    Finally, Geoff Tily says “To discard the system because it has malfunctioned – no matter how disastrously and inequitably – is to throw the baby out with the bathwater. We do not ban fire because fire can get disastrously out of control. Money, with its awesome but sometimes terrible properties, is still one of humankind’s great inventions or social technologies.”

    Tily seems to suggest there that FRB involves getting rid of money, a bizarre suggestion. In fact FRB simply involves stopping private banks printing money: i.e. the economy is supplied with whatever amount of money it needs by the central bank / government.

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