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Positive Money say things like this:

It's common knowledge that printing your own 10 notes at home is frowned upon by Her Majesty's

police. Yet there's a small collection of companies that are authorised to create and spend more

new money than the counterfeiters have ever been able to print. In industry jargon, these companies

are called "monetary and financial institutions", but you probably know them by their street name:"banks".

This is highly misleading. If banks could create and spend new money at will, how could they have

got into the financial trouble they did in 2008? They could have just printed themselves some more

money! But banks dont create money, they create promises to provide money at some point in the

future. And there is a crucial difference.

Any of us can create new money by promising to provide money at some point in the future, as long

as people believe our promise. I can write on a piece of paper IOU 100, signed Josieand give it to

you. If everyone trusts me to deliver on my promise to pay 100 to the bearer of the paper, you can

now say that you have an additional 100 in your pocket, and you can spend my IOU like money andother people will accept it. An extra 100 has been created out of nowhere, at the stroke of a pen.

I cant reallydo this like banks can, because people dont trust me like they trust banks, so nobody

would accept the IOU as money. The reason that the banks are traditionally so trusted is twofolda)

they generally domake sure that they have enough money to pay people when it is demanded. If

there were runs on the bank every week, nobody would believe in bank balances anymore And b) in

the last resort, the government backs them as they are deemed to be too big to fail, as we just saw

a few years ago.

Positive Money is right that there are no technicallimits on how much banks can loan, they don't

legally have to actually have that money in reserve, or even a fraction of it. However, there is a reallimit, as they have to have sufficient reserves that they can pay out whatever will be asked of them

at any one point. It's like juggling - you can keep 10 balls in the air when you can't actually hold 10

balls in your hands at once, as long as they're moving in sufficiently big arcs that you're able to catch

the ones that are coming towards you. I can promise to pay you 100 next week even when I dont

have it now, as long as I am confident that I will have it next week.

How much is likely to be demanded at any one time (as in - how high the balls are flying, in the

juggling analogy) depends on the state of the economy, so how eager bankers are to loan money

depends on their beliefs about that. How eager people are to borrow it tends to be similarly

determined. The total money supply therefore expands and contracts according to the state of the

economy and peoples beliefs about it. The technical term for it is that the money supply is"endogenous" - it is determined by the internal workings of the system, rather than from outside.

(Mainstream economists deny this, but as I understand it, they are wrong about this, as they are

about most things).

Positive Money suggests removing banks right to loan out anything more than they have in reserve,

and to have all other loans being made by the government. I can see two possible reasons to want to

do that: a) to control who loans are made to or b) to control the total quantity of loans.

As far as the first goes, Im not really convinced that there is much reason to do this. For a loan to be

a loan, not a grant, it has to be tied in some way to peoples ability to pay it back. I'm in favour of the

state giving people many more grants and subsidised loans than they currently do, but it just seems

like a confusion to get grants and loans muddled up. I cant see how the bulk of loans can be made

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without reference to the likelihood of their being paid back, and if that is going to be the criteria that

the government are going to lend on, then it is no different from private banks doing it.

As far as regulating the total amount lentseverely restricting credit doesnt seem like a sensible

thing to jump too recklessly intoCapitalism works on having credit around so that people can

invest. Without it you get a recession. Clearly the banks got out of hand recently, lent far too muchand needed to be bailed out by the government, which was a perversion of the systemthat is not

supposed to happen. But it is hardly a radical thing to say that they shouldnt be allowed to do that,

that the government should make an effort to ensure that banks do not lend recklessly. Its been

regulated in the past anyway - as Ann Pettifor says in her article why I disagree with Positive

Money: The creation of credit should be carefully regulated, managed and directed at productive,

sustainable activity... just as was done until very recently. It was only thirty years ago that

restrictions on the creation of credit were lifted under a measure wrongly defined as Competition

and Credit Control and bankers were freed up to aim credit at speculation.

So all in all, Im not very convinced by Positive Money. I'm also wary of what some socialists used to

call "credit crankery": there is a tendency to focus on the mysteries of the money system and investthem with a magical ability to cure society's ills. But I think that Capitalisms ills are much more

systemic than that. They run through everything, they are not locked in some secret vault. Some of

the Positive Money crowd suggest that their bank reforms are going to decrease inequality, save the

environment, bring power to the people etc. It seems like magical thinking to me. I dont see any

reason why they should do any of that. At their best they might smooth the boom-recession cycle,

but thatsbasically it.

Also, do not assume that Positive Moneys ideas are left wing. The biggest promoter of full reserve

banking (banks only being allowed to lend what they have in reserve) was arch-neoliberal Milton

Friedman. It is one of those things that attracts people on all parts of the political spectrum like the

conspiracy theory world, with which it has quite a lot in common, including the involvement of a lotof the same people.