By Geoffrey Gardiner

Jurists have demonstrated that every right must have a corresponding duty, or it is worthless.

The same is true of financial assets: for every creditor there has to be a debtor.

Money is assignable debt. The debt should be negotiable, that is it can be transferred to another owner without reference to the knowledge of the debtor.

There are primary debt and secondary debt. An example of primary debt is when a borrower draws down a bank loan by making a payment to someone. That someone pays the money received into a bank account, thus creating the credit which finances the loan. New money has been created.

The new money can then circulate in either of two ways. It can be spent, which means the payee becomes the new holder, and the payee too can spend it. Thus new money can be spent over and over again until it gets used to repay a debt, when it ceases to exist.

Or the new money can also be lent on, creating secondary debt.

Although banks are said to create money by granting loans, really the bank is only a midwife: money is created by the borrowers.

It is possible to make sure that the only money created by primary debt is state debt.

To achieve it every one has to be a customer of the central bank and all his or her payments and receipts will be recorded there. The accounts are to be called ‘transaction accounts’. The central bank will not make loans to the public but only to the state. The state’s payments will become deposits in the transaction accounts of the members of the public who receive payments from the state.

Customers will be allowed to make transfers from their transaction accounts to commercial banks which will use them to make loans to people or businesses up to the limit of its deposits and no further. The bank will make a loan by transferring money from its own transaction account to the transaction account of the borrower. In its own books it will credit ‘transaction account’ with the amount of the loan and debit the account of the borrower, following normal bookkeeping principles of ‘debit value in’ and  ‘credit value out’. In the books of the central bank these transactions will of course be reversed.

Note. A transaction account at the central bank may never be overdrawn as that would be allowing the customer to create money.

The system of transaction accounts at the central bank will be used to keep track of the population. Every person will be allocated an account at birth and vital details will be recorded and updated. The records will include a record of the person’s genome. The bank will issue identity documents. The transaction account number will be the person’s identity and passport number, and also the number of his or her tax account. Transaction account statements will be sent automatically to the tax office, which will have the duty to debit it with all assessed taxes. Every immigrant or visitor to the country will get an account and give similar identity details.

Use of coins and banknotes will be discouraged and eventually banned so that every transaction a citizen makes will be visible to the security services.

Credit cards will be forbidden.

To complete the total control of the credit supply, trade credit will be forbidden as will be bills of exchange and peer to peer lending.

Unfortunately secondary lending probably cannot be stopped entirely and no doubt, as in all recorded history, the public will devise methods of creating credit instruments and therefore money.

Note that it will not be possible to finance all government expenditure for ever from creation of state money as the quantity of money in circulation would be so great that the currency would become worthless as has happened so often in the past. Therefore some taxation will be inevitable.

Of course the banking system will be far less flexible and in particular the inability to overdraw will annoy many citizens.

18 responses to “Guest Post: POSITIVE MONEY IN ACTION

  1. “Thus new money can be spent over and over again…”

    Maybe it CAN be…hypothetically…except the ‘multiplier’ I’ve seen economists refer to is somewhere around 2 (If you calculated one based on 2014 spending data it’s 2.24 at the upper bound) , so on average a new dollar gets spent about twice and that’s the end of it (at least according to arithmetic). If we were to include the dollars that already exist (QOM) as potential spending (beyond Investment spending) the multiplier gets a lot smaller.

    For example if we assumed $5T of savings got dis-saved the multiplier I calculated would drop to 1.36. The trouble with this assumption from where I sit is that about 2/3rds of the population has no savings and for the 1/3rd that has savings it’s not possible to spend it unless they spend more than their income. How many of the top 1/3rd spends more than their income? Where does it go? This looks a lot like perpetual motion to me.

    There is no evidence that a ‘snowballing’ effect of an increased stock of money impacts the growth of GDP, which grows at about the rate of growth of federal spending.

    One could make a bunch of arguments explaining how a dollar can get spent ‘again and again’ but all of them would be up against the laws of arithmetic.

  2. «Money is assignable debt. The debt should be negotiable,»

    That is only a small part of the story: that only applies in “chartalist” systems, and only as to *currency* (“money” can also be used to mean a mere unit of account, that denominates the currency).

    More broadly speaking, “money” is whatever vendors routinely accept for payment. Usually it is discs of metal or negotiable debt instruments, but sometimes other things; whichever type of money, the essential property of money is *purchasing power*.

    «Although banks are said to create money by granting loans, really the bank is only a midwife: money is created by the borrowers.»

    In a chartalist system it is *creditors* who “create money” by accepting a debt instrument as payment. Until a vendor accepts it, it is not money, it is wishful thinking.

    When H Minsky observed that anybody can create money, the problem is getting it accepted, it was obviously to make the point that if it is not accepted it is not actually money.

    What banks do (and this was also described by H Minsky) is not to create money, but to *endorse* (underwrite) a buyer’s negotiable debt instruments because vendors are more likely to accept debt instruments underwritten (or from) a well known bank than from an unknown random buyer. But it is vendors (creditors) who ultimately decide what money is, but accepting (or not accepting) something as payment.

  3. I was glad to see this subject addressed. I thought that the initial explanation was clear, concise, and easily understandable.
    However, the accusations/criticisms made throughout were really over the deep end and few were inaccurate.
    In the end, the criticisms about trade credit, the rigidity of the banking system, and the higher potential for inflation seemed valid. I would like to see those expounded on some more.

  4. ” peer to peer lending” why would peer to peer lending be banned?that’s just transaction account holders lending to other transactions account holder inderpendently form the interim banking system.

    why would bill of exchange be banned-how could they be banned?

  5. Mustsign topost

    I fear this might not be an improvement over the current system. The trick about control is knowing when to let go.
    Where are the democratic Checks and Balances? As in, avoiding duress, promoting consensus but preserving dissent (speech and action).
    How does one prevent Corporations from being an instrument of looting? Do we relieve corporations from their ability to own bonds and stocks? How can we preserve ownership transfer while preventing concentration?
    How is international trade to be conducted?
    Tweaks in Anti-trust and company law, social security and labour law, and on what can be considered collateral for bank credit might be easier to implement and sustain. For example, requiring that government contractors be of a certain legal form like cooperatives…
    Or an UBI instead of limited liability

  6. Who let these people near NEP?

    Redefining the term ‘money’ doesn’t stop people creating it. When a bank accepts s deposit in any system it creates new money. That’s what the receipt for the deposit is – new money. You can’t make it go away and you can’t control it by the processes above.

    This myth I debunked months ago:

    And as you can see with lines like ‘The records will include a record of the person’s genome.’ what these people are after would make Orwell blush.

    Big brother isn’t just watching you. They know how you are made.

    It really is time to drop these fantasies and realise that the way you stop banks creating money is to limit what they can lend money *for*. The controls have to be on the asset side, not the liability side.

    That way you don’t need centralisation. Nor do you need DNA profiles.

  7. I really hope Geoff is taking the proverbial here.

  8. Is your post just an attempt to discredit the Positive Money* folks or more broadly to justify government privileges for the commercial banks and the most so-called creditworthy, the rich?

    Then please note that de-privileging the commercial banks would still allow them to operate – but honestly, for a change. Got a problem with that? Then let’s talk.

    *not one myself, btw.

  9. “It really is time to drop these fantasies and realise that the way you stop banks creating money is to limit what they can lend money *for*. The controls have to be on the asset side, not the liability side.” Neil Wilson

    With government-provided deposit insurance* the liabilities of the commercial bank cartel as a whole are largely virtual, ie. not real. So it’s no wonder they’ve been able to create unlimited deposits since those deposits are largely captive deposits within the commercial bank cartel – unless one chooses to deal with physical cash and the mattress or safety deposit box, a very poor substitute for an inherently risk-free account at the central bank.

    *instead of inherently risk-free accounts for all at their respective central banks.

  10. Some seem to have missed the point of the essay, which carries the proposal of Positive Money to its logical conclusions.

    Please see: A Modest Proposal For Preventing The Children of Poor People in Ireland From Being A burden to Their Parents or Country, and For Making Them Beneficial to The Publick
    By Jonathan Swift (1729)

  11. Again, I am glad that this topic is being addressed and scrutinized. I have been following both sides for a long time now and still have questions and uncertainties.
    With all due respect, the point (too much state control) is not lost, but it is more of a sattiracal conclusion than a logical conclusion.
    1) The entire point of the Positive Money Proposal is to make banks actual intermediaries (as we know they currently are not) and have all private sector transactions be entirely “peer to peer” and “crowdfunding” style lending transactions.
    2) Eliminating cash and coins is a dangerous direction to go, but that is already a very real threat in our current banking system. A major point of the PM proposal is to retain your checking/demand account as your personal property (not just a promise to pay back) so that you could cash it out in its entirety at any time.
    3) Credit cards would exist, but only as a securities debt…someone would have to invest in consumer credit first. This would greatly reduce available consumer credit.
    4) Loans for businesses could still be created as new credit via a bank through the Treasury. It is a cumbersome and inefficient process (most likely higher interest rates), but it is an option nonetheless.
    5) True, people/businesses could still create alternative forms of credit instruments, but they would be a distant second as money since they would not be “legal tender” or “payable in taxes”. This is not discouraged by PM at all. Alternative and complimentary currencies are actually encouraged by that camp.
    Lastly, the most valid criticisms are restrictions on trade credit, the rigidity of the banking system, and the increased potential for inflation. I would like to hear more about those concerns from an expert. Also, considering public banking as an option with both MMT or PM and its ramifications should be discussed.
    Thanks again

  12. «missed the point of the essay, which carries the proposal of Positive Money to its logical conclusions»

    The problem with making “The Onion” like parodies is that like those by “The Onion” since they only got a little bit further than actual events or actual proposals, they are quite believable.

  13. Here is how the Central Bank balance sheet will look alike:
    Assets Liabilities
    New money created: 100 USD Monetary Rent to the Treasury: 100 USD

    And here is how the US Treasury balance sheet will look alike:
    Assets Liabilities
    Monetary Rent from the bank: 100 USD Government expenses: 100 USD

  14. Can’t the ideas of a proposed alternative money system and its various defects or merits be examined and argued with resorting to incindory hyperbole and misrepresentation “banning complementary currencies/banning peer to peer/banning cash”.
    It is distracting and fails to actually address the actual proposals which are very much available for analysis and critique.
    It would simply be more effective and to the point(and to be honest..less tiresome) too point out the actual weaknesses and limitations of other systems (and how it would work on a practical level) than to discredit these ideas with hyperbolic inventions.

  15. Vince Richardson

    I endorse Jake’s view here too,this is not what I recognise as Positivemoney’s proposals at all,it is rather bizarre interpretation of what the author believes is their propoals.Alarmist comments about human genome and state surveillance is just ridiculous.This is compounded by other mistakes regarding PM’s proposals on credit cards, business credit and use of cash,none of which would be banned.

    If you want an account at the central bank why should we not have one?Personally I believe we all should have one and the banks can get on with lending,but if that fails they and their investors take the consequences,meanwhile those with state run current accounts can at least still have access to their funds.

    • If you want an account at the central bank why should we not have one?Personally I believe we all should have one and the banks can get on with lending,but if that fails they and their investors take the consequences,meanwhile those with state run current accounts can at least still have access to their funds. Vince Richardson

      Yes, with the allowance of central bank accounts for all and the end* of government-provided deposit insurance then all remaining deposits at the commercial banks, credit unions, etc. would be, by definition, at-risk, not necessarily liquid INVESTMENTS, not co-mingled with the funds for next week’s groceries.

      *Interestingly, the abolition of government-provided deposit should require huge amounts of new fiat to be created for the transfer of at least SOME of currently insured deposits to inherently risk-free accounts at the central bank. That new fiat should be distributed equally to individual accounts at the central bank and thereby allow much private debt to be paid down without disadvantaging non-debtors since they would receive an equal amount of the new fiat.

  16. “Money is assignable debt. ”

    Not necessarily since equity is debt-free by definition (Equity = Assets – Liabilities). Therefore shares in Equity, common stock, are debt-free too. Therefore money need not be debt.

    But why should those with Equity share it when government subsidies for private credit creation allow them to legally steal purchasing power instead?