Tuesday, 15 December 2015

‘Cranks’ and ‘brave heretics’: Rethinking money and banking after the Great Financial Crisis (GFC)

Ken Coutts, Geoffrey Ingham and Sue Konzelmann (February 2015)/Cambridge Journal of Economics/ Blogger Ref http://www.p2pfoundation.net/Transfinancial_Economics

Serious financial crises inevitably invigorate the debate about monetary theory and policy, stimulating proposals that go beyond the prescription of exceptional temporary measures aimed at restoring health to the existing financial system, such as bank rescues and the application of ‘quantitative easing’. In the broadest of terms, these debates are related to the contrasting positions between orthodox/mainstream and heterodox economics. Policy recommendations from many in the former camp derive – albeit unwittingly and loosely – from the venerable commodity view of money as a ‘natural’ element in the economic process.1 In various ways, heterodox economic theories and policy proposals focus – again, often unwittingly and/or implicitly – on the institutional production of money. On this side, a lively debate has arisen between some Post-Keynesian proponents of the theory of endogenous money and the advocates of neo-chartalism in the ‘modern monetary theory’ (MMT) of the Kansas City, Missouri, group.2 To some extent, this debate has become a rather arcane and doctrinal dispute within heterodoxy; however, the varying positions have different implications for monetary policy that are not always made explicit.
The severity of the GFC has also led to a recrudescence of views that were last expressed by the so-called ‘monetary cranks’ of the 1930s, such as Gesell, Soddy, Foster and Douglas.3 For example, Positive Money in the UK, the American Monetary Institute and the German-based New Currency Movement follow in this tradition by calling for a radical restructuring of the way in which money is produced and used. Among other things, it is argued that the profitable franchise to produce credit-money should be removed from banks and replaced by a government agency with exclusive monetary sovereignty. Others wish to dilute monetary sovereignty with complementary and/or alternative currencies. The fact that much – but by no means all – of this debate is to be found outside the narrow academic arena tends to reinforce its association with the monetary ‘cranks’. However, many of the questions raised are closely related to those that in Keynes’s view had been banished during the early nineteenth century to an ‘underworld’ of economic analysis where, perhaps, some of his ‘brave heretics’ might also be found.4
These and other reassessments focus on fundamental questions concerning the nature of modern capitalist money and how it is created, distributed and used in relation to the goals and conduct of monetary policy. In doing so, they draw attention, at least implicitly, to the fact that policy is always framed and constrained by existing institutional arrangements. By contrast, mainstream monetary analysis, including some of the mildly heterodox, almost always implies an ‘institutional vacuum’ or ‘neutrality’ of institutions. Indeed, as Charles Goodhart (2009) has remarked, “the suggestion that Prof. X took an institutional approach to monetary analysis was sufficient to cast his/her reputation into outer darkness” (p. 828).
Nevertheless, by their very nature, crises make the question of institutional change more compelling. There are clear signs that the institutional mechanisms involved in the ‘endogenous’ creation of money are now better understood by the monetary establishment.5 However, despite any shift in the demarcation line separating Keynes’s ‘cranks’ and ‘brave heretics’, the contention that significant institutional change is required to effectively remedy the manifest inadequacies of capitalist monetary systems, is not widely accepted. Indeed, even some in the radical and heterodox camp see the question of monetary reform as an intellectual matter of setting free “the slaves of some defunct economist” (Keynes (1997 [1936]), p. 383).
In short, it is to be expected – and, moreover, welcomed – that the GFC has thrown up a range of theoretical analyses and prescriptions which express not only the traditional antinomy between mainstream economics and its heterodox critics, but also divisions within the latter. The fact that almost all of the positions have been advanced in the wake of previous monetary crises is testimony to the persistence of unresolved debates – including, as ever, demands for the restoration of a precious metal standard. Today, much of this debate is to be found in the ‘blogosphere’ which encourages the brief and rapid, but not always carefully considered, exchange of views. But it does provide a medium for arguments that might otherwise not find a platform to be expressed.
It is our intention to bring together some of these positions in the more traditional and integrated format of a special issue of the Cambridge Journal of Economics. We wish to expand the debate on monetary policy and institutions beyond the usual heterodox critiques of existing orthodox practice which focus on techniques of monetary management as, for example, in evaluation of the New Macroeconomic Consensus. Instead, we wish to focus on the way in which economic and political institutional arrangements, in conjunction with theories of money, constrain and frame policy objectives, the means by which they are pursued and the outcomes realised. Our aim is to go beyond a critique of the dominant perspectives in theory and policy – mainstream and heterodox – and to develop coherent alternatives.

We would not wish to restrict the range of contributions, but instead to guide (rather than prescribe) areas for further debate. Papers engaging with theme areas including (but not limited to) the following are welcome:
A. The development of ‘modern monetary theory’ (MMT) predates the current crisis and continues to provoke disagreements within heterodox monetary theory. The Editors do not wish to reiterate in the Cambridge Journal of Economics the arguments between MMT theorists and their post-Keynesian critics that have already been aired elsewhere. Instead, we would like to encourage contributions that expand on these debates to explain the consequences for monetary policy that derive from the theoretical framework adopted. For example, what are the implications for monetary policy associated with the question of how precisely modern money is created? The importance of this question is most obviously shown by consequences of the institutional infrastructure of the euro.
B. The ineffectiveness of orthodox monetary policy to forestall crises has led to calls for changes in the power of the private banking system to create money.

On the one hand, the most radical proposals call for the removal the banks’ franchise to create credit-money denominated in the sovereign money of account – for example, the resurrected ‘Chicago Plan’, ‘Positive Money’ and the American Monetary Institute’s advocacy of the removal of the banks’ franchise to create money have all received some support in the academic establishment. What are the implications and likely viability and effects of such proposals?

On the other hand, lending for business investment has declined as banks seek to repair their balance sheets in the wake of the GFC. This has led to revival of interest in sources of finance outside the dominant universal banking sector – for example, building societies, credit unions, local community banks, mutual savings and loans, and cooperatives. This situation and information technology has also stimulated for novel complementary or alternative forms of banking and finance, such as crowd funding and peer-to-peer finance. How do the powers and privileges in the existing institutional framework of banking and finance affect these developments?
C. It has been argued, among other things, that the stability of production and consumption would be enhanced if money’s store of value function were detached from its use as a medium of exchange and payment – that is, “when money flows from one hand to another, is received and dispensed, and disappears when its work is done from the sum of a nation’s wealth … money as it ought to be” (Keynes, 1923: 1; 124). Such a distinction underpins the rationale for the myriad of alternative/ complementary currencies that have further expanded to facilitate local economies – such as New Zealand’s Green Dollar and Sardinia’s Sardex. In some cases, such as Argentina or Russia during the early 1990s, complementary/alternative media are a symptom of the disintegration of the formal monetary system. However, could they play an important role in stimulating local/domestic economic activity in more stable systems?

1. See, for example, Goodhart’s (2009) critical analysis.
2. See, for example, Lavoie (2013).
3. See David Clark (2008).
4. Early in The General Theory Keynes (1997 [1035]) contends that Ricardo’s victory had been as successful in removing monetary analysis and the notion of effective demand from economics as the Holy Inquisition had been in conquering Spain. Henceforth, this “could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas” (p. 32). Towards the end of The General Theory, Keynes refers to the “brave army of heretics ... who, following their intuitions have preferred to see the truth obscurely and imperfectly rather than to maintain error, reached indeed with clearness and consistence and by easy logic but on hypotheses inappropriate to the facts” (Keynes (1997 [1936]), 371).
5. See for example, McLeay et al (Bank of England) 2014a and 2014b.


Clark, D. (2008) ‘Monetary Cranks’ in S. Durlauf and L. Blume (eds) The New Palgrave Dictionary of Economics, Second Edition, London: Palgrave Macmillan.

Goodhart, C. (2009) ‘The Continuing Muddles of Monetary Theory: A Steadfast Refusal to Face Facts’, Economica 76(4): 821-30.

Keynes, J. M. (1973 [1936]) The General Theory of Employment, Interest and Money, The Collected Writings of John Maynard Keynes (1971-1989), Vol VII, Cambridge: Cambridge University Press.

Keynes, J. M. (1973 [1923]) A Tract on Monetary Reform, The Collected Writings of John Maynard Keynes (1971-1989), Vol IV, Cambridge: Cambridge University Press

Lavoie, M (2013) ‘The Monetary and Fiscal Nexus of Neo-Chartalism: A Friendly Critique’. Journal of Economic Issues 47(1): 1-32.

McLeay, M, A Radia and R Thomas (Bank of England) (2014a) ‘Money in the Modern Economy: An Introduction’, Quarterly Bulletin, Q1: 4-13. ( [accessed 15 Feb 2015])

McLeay, M, A Radia and R Thomas (Bank of England) (2014b) ‘Money Creation in the Modern Economy’, Quarterly Bulletin, Q1: 14-27.
Submission of Papers

The deadline for the submission of papers is 17th June 2015.

Submissions should be made using the journal’s online submission system at http://mc.manuscriptcentral.com/cje
There is the opportunity, during the submission process, to indicate that your manuscript is a candidate for the Special Issue on ‘Process and Order in the History of Ontological Thinking in Economics’. Authors are also advised to include a note to this affect in a covering letter that can be uploaded during the submission process.

All papers submitted will be considered using the CJE’s normal peer review process. Please also see the Journal’s information for authors:

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