At the session on nationalising the banks at the AWL’s Ideas for Freedom event (21-24 June), we had, alongside Patrick Murphy speaking for that policy, a speaker from the campaign group Positive Money.
The Positive Money speaker told us that their policy is for “nationalising money” rather than nationalising banks. He presented it as a left-wing policy, similar in drift to but different in detail from public ownership and control of banks. In fact the proposal for “nationalising money” has a right-wing pedigree and logic. It originates in the Chicago Plan of 1933, written by economists who were all strong (though sometimes quirky) supporters of ultra-free-market capitalism.
Milton Friedman, the most famous ultra-free-market economist of the late 20th century, was trained in and later led the Chicago University economics department. After supporting the Chicago Plan when young, he later modified it into the “monetarist” policy — keep the growth of the stock of money in the economy to a fixed percentage each year.
That monetarist policy became notorious when adopted by the Thatcher government in 1980-2. It led to huge unemployment and (though controlling inflation was advertised as its main virtue) increased inflation.
Monetarism, however, served its purpose as doctrinal stiffening for an assault on the working class. As Alan Budd, then a Tory economic adviser, later put it, monetarism was no good to control inflation, but it was “a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes... what was engineered there in Marxist terms was a crisis of capitalism which re-created a reserve army of labour and has allowed the capitalists to make high profits ever since”.
In 1982 Thatcher abandoned monetarism and switched to more free-form class-war policies.
The technical-seeming monetarist policy had the effects it did because the efforts to control the stock of money brought high rates of interest and thus a credit squeeze.
The rate at which the Bank of England lends to commercial banks, which had hovered around 4% since 1800 or so, was kept above 12% for years, and was 17% at one point. (It is now 0.5%).
Ironically, the credit squeeze also failed to control the stock of money well. The stock of money measured as the total in bank accounts is, as we’ll see, very different from the stock measured as notes and coins; there are yet other measures; and they can often move in different directions. Economists summed up the experience as “Goodhart’s Law”: any measure of money stock well controlled instantly becomes less important in substantive economics.
The crash of 2008, perceived as coming from loose credit, has revived proposals for more rigid public control of the stock of money, and on the left too. Switzerland had a referendum on 10 June on a proposal to limit money, effectively, to notes, coin, and balances at the central bank: it got 24% support. Martin Wolf, the liberal-leftish chief economics writer of the Financial Times, backed the proposal as a worthwhile experiment. In the USA, the leftish Democrat Dennis Kucinich and the Green Party have backed similar proposals.
At first hearing, “nationalising money” sounds like rounding circles. Isn’t money “nationalised” already? It’s pounds, dollars, euros, and those are issued and controlled by public bodies, no?
Today, however, only a small proportion of money, about 3% in Britain, is notes and coins created by public authorities. The other 97% of so is balances with banks, effectively tradable debt. That 97% is created by banks.
Imagine Iris has £1000 in cash. She will keep only £10 on her, and put the rest in the bank. The bank does not just sit on the £990. While Iris still has £990, Mya will also have £990 when the bank gives her a mortgage to buy a house from Helen, and that £990 then reappears as new bank-balance money held by Helen.
The bank then gives out £900-odd again as an overdraft to Aniqa. Aniqa banks or spends that money, and then a bank uses it to make a loan to Lara...
Already there is almost £4000 in circulation. The banks have to keep something in the vaults — it used to be a “reserve requirement”, today more usually a “capital requirement” — to be able to pay out when one person or another decides to cash out her whole bank balance. But that stash in the vaults need only be a small proportion of the total stock of money in circulation.
The system allows for an elastic response of money circulation to economic demands. That elasticity is also, however, a driver of speculation and crises. Thus the proposal to rigidify the system, by requiring banks to hold “100% reserves”, is attractive both to free-marketeers wanting market discipline to bite hard and quickly, and to left-minded people wanting to quell crises.
According to Marxist analyses, an elastic money and credit system is indispensable for a developed capitalist system. It will probably be indispensable even in the earlier eras of working-class rule. Rigid rules are likely to produce similar results to monetarism in 1980s Britain: the system slips round them, but meanwhile is disrupted by the attempt to rigidify.
Public ownership and control of the banks is a different proposition. It is about getting public control of the large chunks of money currently distributed by the banks as profits, and the even larger chunks currently allocated for productive investment through short-sighted, greed-focused, profit-first mechanisms.