Sunday, 27 April 2014

Credit, banks and democracy ... or Pettifor, Wolf and Positive Money

Andrew Fisher on a vital debate for left economics and politics

Following the economic crash and the credit crunch, you would be hard-pressed to find two better exponents that have helped people understand the role and creation of credit and money within the economy than Ann Pettifor, Director of Prime Economics, and the Positive Money campaign.

So successful have they been that even the Bank of England, a paragon of economic orthodoxy, has effectively admitted their analysis is right - and orthodox economic thinking baloney - with the publication of Money in the modern economy, which shares the shared Pettifor/Positive Money analysis that money is essentially an IOU, and that commercial banks create most of the money in our economy through credit.

As Karl Marx famously said, "the philosophers have only interpreted the world, the point however is to change it". It's at this latter point that the shared analysis evolves into divergence on the thorny issue of what to do about it.

As a massive admirer of the work of both Ann Pettifor and Positive Money, I hesitate to enter into this debate - especially to say that both are in part wrong in their proposals about what to do.

The debate sprung into life when long-time FT columnist Martin Wolf - who has travelled some distance to the left in the last fifteen years ("when the facts change...") - wrote a very readable piece entitled 'Strip private banks of their power to create money', which basically endorses the Positive Money analysis and remedy: "to give the state a monopoly on money creation" and "for 100 per cent reserves against deposits", i.e. "[banks] could only loan money actually invested by customers".

On initial reading, I was very sympathetic to this - why indeed do private banks essentially have a licence to print money? Why should they harvest profit from usury? If there is to be credit creation shouldn't the state have a monopoly on it - and the direction of investment being subject to popular control, in some form(s)?

Public ownership of the banks is something I argue for in the final chapter of my forthcoming book The Failed Experiment, because I believe it's the logical conclusion of the preceding chapters - which looks at how the crash happened in the UK, what caused it, and the state of our economy.

Ann Pettifor, quite possibly the stand-out campaigning economist of our time, responded with Why I disagree with Martin Wolf and Positive Money. Pettifor argues against Wolf's nationalisation of money issuance proposal because:
"The idea that society can set up a single “independent” committee of men to make far-reaching decisions about the quantity of money needed by a nation of sixty four million people, all engaged in varied and complex activities – is bordering on authoritarian. First there is no possibility of such a committee being independent. One has only to think of the “independent” UKFI committee – set up to oversee the banks, including RBS, in which the state has a stake – to question the possibility of such a body being independent"
I would argue there is nothing inherent in Wolf's or Positive Money's view that means there cannot be plurality within a nationalised banking sector - indeed few would argue against a diversity of regional public banks or indeed the continuation of mutuals and credit unions. Despite the articulation in Wolf's article, I'd be surprised if either Wolf or Positive Money would argue for such a centralised system - would you?

But I think Pettifor is chucking out the baby (public ownership) with the bathwater (the centralised Morrisonian model of state ownership and control). I hope I'm right in thinking she wouldn't do that either - or would at least be more favourable to the pluralistic model of public and mutual banking?

Of course, both may have good reasons for articulating their case that I have either misunderstood or that I just might disagree with. But I'm always optimistic that consensus is possible - even on the notoriously diverse left.

So here I am acting as a Relate counsellor trying to extend the marriage of analysis between Pettifor and Positive Money into a marriage of vision for the future.

But there is one area where there clearly won't be consensus - and on that issue I am undeniably Pettiforian: credit creation. I do not think credit creation is inherently damaging and must be banned (Wolf's point that banks "could only loan money actually invested by customers").

Firstly, I disagree because this weakens one of the key argumments made by Wolf for public ownership: the capture of seignorage revenues. And secondly, because with regulation (which Pettifor also advocates) and public ownership the likelihood of destabilising credit creation becomes much less likely. And of course if a democratically accountable body - the government or otherwise - did engage in risky behaviour we would vote them out: something we can't do to the corporate gangsters running the banks now.

So I'm 75% Pettifor and 50% Positive Money ... perhaps Richard Murphy (that other great explainer of banks and credit) could do me a Venn diagram?

This is a massive debate for the left - and one that should run and run. So credit (pun intended) to People's Parliament for putting on a public debate 'Making Money Work for People and Planet' on 25 June, which includes Ann Pettifor and Positive Money's Ben Dyson. Get along if you can!

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