A Dissenting Quaker on Money

By mikeralphking on November 26, 2015

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When I started the research for my book Quakernomics: An Ethical Capitalism four years ago I was helped and encouraged by the Quakernomics blogger and economist Tony Weekes. At the same time Tony introduced me to the work of Positive Money. I must be differently constituted to most Quakers because my immediate response was that this was all wrong. In the intervening years I have devoted a great deal of time to monetary theory, increasingly alarmed at the loyalty of Quakers to the idea that banks ‘create money out of nothing’, and, after many rounds of debate with Ben Dyson at Positive Money, I have now launched my counter-campaign called ‘Why Banks Don’t Create Money’.

Though I am conscious of being a lone voice, not just amongst Quakers but also amongst economists, I would like to initiate a serious debate here. If Positive Money is wrong, then many of our imagined ‘progressive’ ideas for economic and social justice relating to banking and government spending will need rethinking. You can download an 18,000-word paper from my campaign site which details my arguments: Why Positive Money is Wrong: An Obligations Analysis of Broad Money Growth.

The Bank of England is aware of my campaign and has responded by letting me know that it is concerned about the ‘misinformation’ put about by groups like Positive Money, and that it applauds my efforts. The response by Positive Money so far has been courteous but dismissive: rather than engage with the substantive criticisms I make Positive Money merely suggests that my ideas belong to another era where integrity was the rule amongst bankers (I don’t think that is supported by the historical record!).

Just as Sue Holden has toured Quaker Meetings putting the Positive Money point of view, I am happy to do the same for the opposing position. Let us have the debate!

Mike King, economics@jnani.org

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  1. frankem51
    Posted December 18, 2015 at 10:34 am | Permalink

    I’m afraid this is too deep for me. The Bank of England says it controls the money supply and in my ignorance I’ll have to go along with that. But I wonder whether Quakernomics should depend on what look like very technical arguments. I’d prefer us to stand in our tradition of ethical capitalism and promote existing examples of good practice which are in line with our values, rather than aspire to revolutionary change.

  2. mikeralphking
    Posted December 29, 2015 at 11:26 am | Permalink

    I think that frankem51 is quite right, that the subject of the money supply, central banking, QE etc are very complicated. Hence I think it wise for Quakers to avoid Positive Money, because if their technical arguments are wrong then backing their campaign is a waste of Quaker time and energy. As frankem51 says our ethical capitalism, or Quakernomics, should not depend on these technical arguments.

  3. JiminLeigh
    Posted May 15, 2016 at 6:44 pm | Permalink

    You have told a convincing tale of obligations starting with when a loan is made by a bank. You seem to me, however, to have left out some parts of the story. You say that the loan is made as a two part IOU. That much is understood. The loan is made and a contract signed by the recipient to repay the loan, usually with interest (but not always). The loan becomes a near-money deposit in the recipient’s account (or an extension of an overdraft) and may be spent. Sometimes this is tied to an asset such as a house or car and sometimes it is unsecured and may be spent in any way. You have followed a line of reasoning that says that either the money loaned is eventually deposited by an above-subsistence household or firm or is used by a below-subsistence household or firm to cancel all or part of a debt. That’s if I have understood you correctly. And on this basis you have argued that M4 will grow minimally and in line with added value in the economy.
    On this side of the argument (what happens to the loaned money) there seem to be other options. Examples are that the money is spent on fixed assets such as property, cars, planes, boats, gold, forex or shares, or that it may be deposited off-shore, or that it may be gambled in various ways in or out of the UK economy. It seems to me that at least some of these options will take the money out of the UK economy and may neither add a deposit nor cancel a debt. And in the process this type of activity often leads to asset inflation (rather than increasing CPI which does not include such things) and economic bubbles if indulged in by sufficient people. These bubbles will pop periodically as asset prices are corrected.
    On the other side of the story of the 2-part IOUs, there is what happens to the debt. The bank or other MFI or NBFI (if I’ve got you’re terminology right) can sell this debt as an asset, presumably with the appropriate paperwork and exchange it for money. Indeed, I believe there are things called CDOs (Collateralised Debt Obligations), which were used in the sub-prime mortgage industry in America to parcel up many such debts of varying quality, which received AAA ratings by the Ratings Agencies and were sold to UK banks such as Halifax, RBS, Northern Rock and Lloyds as well as to other banks around the world. And such dubious chains, whilst no doubt preserving the essential nature of the original IOUs have enabled the original party holding the debt to distance themselves from its final settlement or non-settlement.
    And so that brings us finally to the question of what happens if the debt is not settled for whatever reason at its full value with interest, such as happens in the case of a bankruptcy, whether of an individual or a firm. When loans or mortgages were undertaken in the run-up to the Great Financial Crash or Credit Crunch as some have called it, many were sold fraudulently with the knowledge that the recipient would never be able to pay off the loan. These loans were sold with sweetener low initial rates that were hiked within a few months to enable homebuyers to buy homes at 105% or more of market value on the assumption that property always appreciates in value, so why not have a little cashback. People were encouraged to lie about their income by unscrupulous mortgage brokers. In the 80s and 90s many were sold interest only mortgages together with an endowment life assurance policy that was intended to pay off the capital at the end of the term (usually 25 years). Many found that the endowment funds failed to perform and were mis-sold and were never going to pay the capital. I’m sure such things don’t happen any more.
    In our present situation in the UK, consider the Buy to Let market, which still has attractive deals requiring no deposit. Is that a bubble waiting to pop? What about Auto Loans that minimise monthly payments, but end with a balloon payment encouraging you to change cars at or before the end of the deal? Are some of these sub-prime? Do people understand them? They are designed to keep you buying cars. I believe the Governor of the Bank of England, Mark Carney mentioned Auto Loans and Leasing today (15th May) on the Andrew Marr show.
    So when a loan is not paid, or repayments cease, if there is an asset, then of course that can be sold to recover some of the value of the loan. If there are many such repossessions and fire sales then the value of the assets are driven down across the board making many other loans on such assets “underwater”, or “in negative equity” as I believe are the terms when a loan/debt is worth more than the securing asset. This is one way to “pop a bubble”. If the loan is unsecured then it must be written off if it can’t be collected. Such may be the case when individuals, firms or countries are bankrupted. Sometimes this is a deliberate act where, for instance, there is a limited liability company and the directors are not personally accountable for the company’s debts. The directors may have profited handsomely and may walk away with millions while the company’s creditors must take what they can get.
    So, in such circumstances, what exactly has become of your trail of obligations that nets out? The loan money has been spent and may be deposited or have settled a debt (or portion thereof), but the original debt itself has been destroyed (either fully or partially). So hasn’t the loan money just been added to M4? And isn’t that the case whenever a loan is defaulted?
    I am not really sure how M4 is affected by these additional factors, but they clearly have an effect. Maybe these effects balance out in normal times, or maybe they don’t. In 2008, they clearly did not. If the economy grows, debts get relatively smaller due to inflation and there is scope to repay them with interest. If the economy shrinks then debts get relatively bigger due to deflation and it becomes harder to pay them. When debts grow there must be a limit to how much more can be added. Debt helps to fuel growth of the economy as measured by GDP.
    It may be that Positive Money and the Bank of England are at least partly right. And you are as well. But there seems to be much more to it, I feel.
    Commercial lending, like profit, shareholder dividends and rent depend on a growing economy and in turn will fuel economic growth. But while it may be argued that profit and shareholder dividends may reflect added value (although in some cases they don’t – eg driving up the share price by buy-back using borrowed money), it is hard to see where the added value comes from commercial lending or property or other asset rents. They all depend on a growing economy, but any rate of growth must of necessity come to an end as the economy is a dissipative system and depends on energy inputs.
    We have reached a point where energy is increasingly expensive and is peaking. In 2007 the price of oil hit $147 a barrel. After the crash it fell to $30 a barrel then recovered (thanks to Amercan QE) to around $110 a barrel. This enabled many more unconventional (and expensive) oil and gas recovery operations such as deep water drilling, tar sands, and hydraulic fracturing (fracking) to add around 4 million barrels a day to supply causing a glut. Price has now crashed and recovered to around $45 a barrel. At such prices, many oil companies, particularly those involved in fracking to start filing for bankruptcy and others such as the oil majors to cut back severely on capital expenditure (capex) plans. It seems there is no longer a “goldilocks” price that will not bankrupt economies (recession) and provide sufficient profit for oil and gas companies to continue exploring and drilling expensive wells. Energy is at the root of an economy and enables human output to be “levered” with machinery to improve productivity. We find that productivity is now mysteriously disappearing because of the marginal diminishing returns on energy. The wage class have now been exploited all over the globe and finally, many are being replaced by robots and automatic machinery. The problem is that although robots make a lot, they don’t buy anything. What we see is demand destruction due to falling non-elite wages (as opposed to salaried jobs).
    The current supply rate of fossil liquids (crude oil, condensates, gas liquids, biofuels, etc) of approx 95m barrels a day of varying quality and energy content may have peaked in 2015 as suppliers are driven out of business by low prices. Stocks are at an all time high waiting for prices to grow but reduced capex investment in exploration is failing to replace consumption.
    I found it interesting that both yourself and Mark Frankel refer to “ethical capitalism”. Whilst such a thing may still be alive in the world and was no doubt in evidence in former times among Quaker business men and women and other philanthropists, there seems to be little evidence of it now. There may be one or two nouveau philanthropists, but do they really know what to do with their riches? And it seems to me that if we face a shrinking economy where debt deflation must run its course, there will be a tooth and nail fight to try to retain whatever wealth and privilege some have gained. In due course, water and food will become major issues and we will see where ethics is employed then.
    Looking at the Middle East and North Africa we have our friends in Saudi Arabia, Iran, Libya, Syria, Yemen, etc and in Europe we have the Eurozone countries including the PIIGS. Greece is a poster child for ethical capitalism don’t you think? If there are corrupt politicians or businessmen in other countries, where do they put their ill-gotten gains? They buy property in London, New York, Tokyo, Hong-Kong or Singapore via off-shore tax haven accounts shrouded in secrecy. Are we clamping down on that? What about the army of lawyers and accountants that facilitate that? Are they speaking out against it?
    It may be fine to talk about ethical capitalism, but I don’t see anyone practicing it.

  4. mikeralphking
    Posted May 16, 2016 at 10:23 am | Permalink

    Hi JiminiLeigh, thanks for your detailed response to my website where I show the errors in the Positive Money thesis. Just to recap: when a bank makes a loan, sure there is now a ‘fictitious’ deposit (as Werner calls it) matching the loan on the balance sheet. However, as I show, even in boom times 80% of these loans disappear when they are spent with vendors who repay debt. The remaining 20% create new money because the in-profit vendor’s outputs are valued greater than their inputs by the market, though market valuations can be wise or foolish as I suggest. Hence Positive Money is mistaken to say the 97% of money is created by the banks out of nothing. Instead my paper argues that every penny of new M4 arises from increased market valuations. I give one exception: where there are mutually-cancelling monies where a surplus in one account is negated by a deficit in another held by the same bank customer.

    You have raised some other possible exceptions, the first being transfer to foreign economies, and the second being defaults. I did not deal with these scenarios, as the paper was long enough, but the obligations analysis has no difficulty in either case.

    Firstly, on foreign transfers. I agree that this complicates the situation and, for example, makes it hard at times to get a true picture from the BoE as European banks can hold reserves with it, making the UK banking sector not a closed system. But as you say money can be ‘gambled in or out’ of the UK, which makes no difference to my thesis whether there is net inflow or outflow. Gambling takes place within a closed system just as much and simply means that market valuations are speculative and prone to reversal, resulting in money growth or shrinkage. Foreign economies are just the same, and any interaction between economies like this does not change the fundamentals.

    Secondly, on defaults. We have to distinguish here between normal default levels managed on a daily basis within the banking system and crisis-level defaults where government bailout is needed. In the first case banks have reserves set aside for defaults and the Fed keep separate statistics for this. Normal defaults result in a shortening of the asset side of the balance-sheet as loans are written off, and a matching shortening of the liabilities side as retained profits are reduced by the same amount. You are right that technically M4 is not reduced by such defaults, as retained profits are not recorded as part of M4. In the long term however defaults make no difference because M4 would have been larger without defaults as retained profits that disappeared would have been spent and turned up as deposits elsewhere in the system. Anyway the amounts are a tiny proportion of the balance sheet – I am guessing considerably less than 1%. Crisis-level defaults as in the Credit Crunch do result in M4 contraction, but indirectly as the economy tanks. If depositors had lost deposits then clearly M4 would contract directly, but, as the government provided cash bail-outs this did not happen. This cash was previously not part of M4 as it was held as a balance in the Government account at the central bank, and so you could claim that M4 had grown (or not shrunk) as a result. However all this cash had a direct economic basis as it came from taxing the economy. No money was created out of nothing here.

    Hence I don’t believe that your objections, while certainly interesting, provide any support for the Positive Money thesis.

    On ethical capitalism: let us work to make it a reality. Let us not be distracted however by the flawed thesis of Positive Money or imagine that its ‘solutions’ to a non-problem can help in any way.

  5. CharlesW
    Posted May 28, 2016 at 5:58 pm | Permalink

    I read your paper “Why Positive Money is Wrong…” with interest. I would like to offer a few comments.

    1. I agree broadly that Positive Money has got it wrong in a number of areas.

    2. The way I see it is that reasoning about the effect of interest rates, money supply etc on the economy is always going to be difficult, because people’s economic behaviour (how hard to work, how much to spend etc) depends on their preception of the situation, which depends on what they are told as much as the actions of the government, banks and other players.

    3. I do think that Positive Money undermine their case by implying that we will all be (much) better off under their proposals. Ultimately what counts is not how much money we all have but how much stuff we can get for the hours of work we put in. If all we ordinary people are going to have more stuff for the same working hours, then the rich people are going to have to have less, because the supply of stuff is determined by how much we produce during our working hours. Obviously it is only zero sum if we take the whole world into account, but the idea that some economic sleight of hand can automatically make us better off is an unwise thing to propose.

    4. As a corollary to 3 above, anything which makes the rich poorer is going to be resisted by them, bearing in mind the Golden Rule (whoever who has the gold makes the rules).

    5. I do however support Positive Money’s proposal as a way to reduce the boom and bust cycle. In a way, the current system of controlling interest rates is one level removed from controlling the money supply, and you could get much quicker feedback into the system by controlling the money supply directly. I expect though that it would lead to wide swings of interest rates, as banks try to match supply and demand for loans. I am old enough to remember the days when building societies had a quota of loans they could issue for each month. My wife and I got caught out by that when we bought our first house. It may come back.

    6. I think Positive Money are wrong when they say that with a different system people would not be in debt as much. People are still going to be able to borrow money and be in debt in any system. And they will have to pay interest on the loans (or some sort of fee, which is equivalent — in fact a lot of the interest that people pay now goes to pay the overheads of the bank, not the interest payable on the actual money). And Positive Money imply that people now in debt have somehow lost out, with all the interest they pay, ignoring the benefit they got from receiving the loan and spending it (or using it to repay a previous loan which they spent some time ago).

    All the best,


  6. mikeralphking
    Posted May 31, 2016 at 12:15 pm | Permalink

    Hi Charles, good to hear from you, and much to agree with you. However where you say, in agreement with Positive Money, that “you could get much quicker feedback into the system by controlling the money supply directly,” I have my doubts. What I have taken as quite correct from Endogenous Money theories is that no loan is made on the basis of waiting for a prior deposit. (Where I go with that is of course very different to where Positive Money goes.) Each loan is made only on the basis of credit-worthiness, and nothing a bank does can ensure that the loan will not be destroyed in repayment by vendors in net debt to the banking sector. As my statistics show, only 18% of loans result in money creation, and that is in boom time; in stasis or recession that figure drops to zero. How then could this be controlled directly? On my theory money creation is a direct measure of increased total market valuations in an economy, and is therefore nothing that you can control directly. All you can do is to reduce loan quantities in boom times, on some kind of quota system, but on what basis would you do that? Conversely, how could you increase the proportion of loans that result in net money creation during bust periods?

    We already have a simple tool for reducing financial instability in the banking sector, if that is what you want to do: increase capital ratios. Of course that is politically difficult in a world dominated by libertarian free-market extremism, where competition between nations, and hence financial centres, is more important than co-operation. But it is perhaps what we should be arguing for.

    In friendship, Mike

  7. CharlesW
    Posted June 4, 2016 at 6:47 pm | Permalink

    Thanks Mike, that is a useful clarification.

    I think I have been muddling:

    - financial instability in the banking sector
    - control of inflation
    - control of boom and bust cycles.

    Perhaps we should be pushing for increasing capital ratios, and using government spending to compensate for boom and bust cycles, which is a bit out of fashion at the moment. And, as you say, it needs to be done with global cooperation.

    I’m inclined to support the Positive Money movement even if it is wrong in its analysis, as I think it will do more good than harm. It provides an ideological hook. What do you think will happen if Positive Money’s main plan is implemented? ie in what way does its erroneous analysis affect the predictions for what will happen? What difference does it make if you can’t actually control the money supply?

  8. mikeralphking
    Posted June 6, 2016 at 12:27 pm | Permalink

    Okay, interesting. If I understand you correctly, what you mean by ‘ideological hook’ is a way of presenting progressive/socialist ideas (of the sort I also wish to see pursued) in the field of monetary reform. If so, I would agree that Positive Money have many ideals and goals that Quakers would naturally share. So does it matter that their analysis of banking and money is profoundly mistaken?

    I think it matters for two reasons. Firstly you cannot reform something for the better if you don’t understand how it works. Secondly by hitching progressive/socialist ideals to an erroneous analysis you discredit those ideals.

    What Positive Money is saying is that private banks print money through the mechanism of lending, and that this function should be taken over by the government for the benefit of the people. My analysis shows that banks do not print money through the mechanism of lending, and that if you attempted to transfer the existing system to public ownership all you would have different owners for the same process. State-owned banks could no more reduce money growth in booms or prevent money shrinkage in recessions than private-owned banks. But Positive Money doesn’t in fact want this anyway, what it wants is for the state to print money for fiscal purposes, or in Lord Turner’s phrase, to engage in ‘Overt Monetary Finance’ (OMF). The Weimar Republic and Mugabe tried that and it led to hyper-inflation (though Positive Money will gloss over the hyper-inflation in an outrageous piece of mis-information).

    Now, Turner thinks that OMF could be used sparingly and carefully to avoid inflation getting out of control. Perhaps. But this entirely misses the point, which is that if a government has to resort to OMF then it has lost the argument for its fiscal spending, i.e. not persuaded the population to give up the taxes necessary for that spending.

    Where Positive Money has completely muddies the waters over all this is that they are saying that private banks effectively engage in OMF to spend on themselves, and that the government should do it instead to spend on the people. Private banks, on my analysis, do not create a single penny of new money for themselves – or anyone else for that matter – and hence this becomes a lousy argument for Government OMF.

  9. Mark Frankel
    Posted June 7, 2016 at 12:09 pm | Permalink

    In a sense the present system is already owned by the state, because the Bank of England is in charge of the money supply, not the commercial banks. QPSW will be producing a paper in the New Economy series on banking and finance to add to the two already issued on ‘What is the economy for’ and ‘Good work in the new economy’. I hope the paper on banking and finance concentrates on how to turn the banks from being bad masters, which they are at present, to being good servants. This will entail the paper concentrating on financial stability, tax transparency, and the banks’ role in investment for sustainable development.

  10. mikeralphking
    Posted June 8, 2016 at 9:44 am | Permalink

    Hi, Mark Frankel. I don’t think it is correct to say that the Bank of England is in charge of the money supply, not at least if you mean the money supply as measured by an aggregate such as M4. If you read my paper at http://www.jnani.org/money/papers/King%20-%20Why%20Positive%20Money%20is%20Wrong.pdf you will see that broad money growth, M4 in the UK, arises from private bank lending which is re-deposited by vendors of goods and services that are in positive balance with the UK banking system. The Bank of England cannot control this process other than at the margins by setting interest rates, and by accommodating the private banking sector through normal-level asset purchase.

    I am in truth a little baffled why you assert that “In a sense the present system is already owned by the state.” Yes, the state defines the currency, creates coins and notes and has the normal central bank tools of interest rates and QE at its disposal – and even that is only true if you disregard the alleged independence of the BoE. So, I look forward to your paper which may clarify your position for me.

  11. Mark Frankel
    Posted June 10, 2016 at 7:04 am | Permalink

    This is not my area of expertise. I was only quoting what the Bank of England said. But the paper being prepared is not mine. Staff of QPSW are producing the series of papers, and I’m wondering why they don’t seem available through the Quakernomics website. Cait Cross is in charge: caitc@quaker.org.uk

  12. mikeralphking
    Posted June 10, 2016 at 11:27 am | Permalink

    Thanks for this, Mark!

  13. CharlesW
    Posted June 22, 2016 at 12:04 pm | Permalink

    Yes, I should explain about ‘ideological hook’. It’s a bit like joining a political party when you don’t agree with all their policies, just so that you can collectively be more prominent. Change happens more when an idea gets popular, than as a result of reasoned argument. This takes time, and the Positive Money idea has been growing for some time.

    I am reminded of the time when I was manning a street stall during the Alternative Vote referendum campaign, on the side of Yes. A group of women were running another stall nearby on some other progressive topic, so I went over for a chat, assuming that they would be sympathetic. But they were planning to vote No, because they wanted Proportional Representation. We know how that turned out. So if we vote No to Positive Money, we will probably get no change at all. This assumes that anything we do makes any difference of course!

    Having said that, thinking about it more, it would be a good idea to concentrate more on the topics Mark mentions, like financial stability, and not support the Positive Money plan.

    Thanks for the explanation about Overt Monetary Finance. I am still struggling to understand the fundamentals, so all this restating in simple terms is actually very useful.

  14. Posted September 26, 2016 at 9:45 pm | Permalink

    I share your concern that Positive Money have oversimplified things by saying banks create money out of nothing. If that were so, why was there a credit crunch in 2008? Surely, if banks could have created money out of nothing, they would have done so then? I asked Positive Money this question over a year ago via their website but they never replied. My question for you is whether my question is itself too simplistic? I’m not an economist, so I’m sure this must have been posed before and I’d be interested to know what you think.

  15. CharlesW
    Posted September 27, 2016 at 10:55 am | Permalink

    I find the following page useful — (http://positivemoney.org/how-money-works/banking-101-video-course/how-much-money-can-banks-create-banking-101-part-4/). I read the transcript rather than watching the video. It says that there is no definite limit on how much money can be created, but that the amount is limited when the economy is not growing much (see “refuse to engage in the inter-bank lending market… This is what happened during the financial crisis” and “when the economy is improving, the ability of banks to lend will also increase… [capital adequacy requirements] do limit the ability of banks to create money when the economy is doing badly”). So the fact that the banks needed to be given extra money during the crisis does not actually undermine Positive Money’s thesis. You can almost hear Mike King’s principle echoing through the Positive Money page — that the money created by the banks reflects the growth of the economy, not the other way round. There is no definite limit on money creation because there is no definite limit on the amount the economy can expand. The final paragraph (“mood swings”) goes much too far in extrapolating the argument.

  16. Posted December 29, 2016 at 7:22 pm | Permalink

    I think Positive Money are still bang on. Banks do create money out of nothing when the make loans. The Bank of England themselves acknowledge this so Mike is simply completely wrong. And there is nothing outrageous in any of the books, videos, thought pieces or rebuttals PM have produced over the last 5 years. It’s a superb body of credible research. I don’t think Mike has read it all. I have. PM definitely deserve Quaker support. Their position is far more Quakerly, credible and truthful than anything else I’ve seen..including Quakernomics. Our responsibility is to speak truth to power…not try to sequestrate words like ‘Quakernomics’ to propel our own agenda.

  17. Mark Frankel
    Posted December 29, 2016 at 7:58 pm | Permalink

    fatbrit007 is entitled to his opinion but it’s clear from these exchanges we are not in unity on this: see QF&P 1.01. Anyway, all the issues raised in these exchanges are secular ones into which a Religious Society has no special insights. By all means join Positive Money if you agree with them, which would be in line with A&Q 34. I’ve joined the Lib Dems and henceforth will look to them to promote my politico-economic opinions. I would like to see Quakers withdrawing from taking public positions on purely secular and party-political matters. As I say, we have no special insights and furthermore we have very little influence on our own.

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