Ann Pettifor’s incompetent criticisms of Positive Money and Martin Wolf.


Most of the money in circulation is created by private banks, not government or central banks. Positive Money and others oppose that form of “private money printing”. An article by Ann Pettifor which attempts to criticize Positive Money’s ideas is riddled with mistakes which briefly are as follows.

1. She appears to be unaware that several Nobel laureate economists have advocated a ban on private money printing.

2. She assumes that implementing the above ban involves regulating demand by regulating the stock of money, which in turn allegedly makes Positive Money’s ideas similar to monetarism. In fact regulating the size of the stock of money is simply Positive Money’s preferred way of regulating demand. It is not an essential characteristic of banning private money creation. I.e. other advocates of banning private money creation prefer other methods of regulating demand like adjusting interest rates.

3. As for monetarism, while the word is certainly a popular “hate word”, the question as to what is right and wrong with monetarism is nowhere near as simple as Pettifor seems to think. For example the word as defined in economics dictionaries is simply the idea that money incomes vary with the size of the stock of money, which is pretty obviously a truism. Clearly that doesn’t mean that all aspects of monetarism, particularly as advocated by Milton Friedman, are valid. But simply throwing a popular “hate word” at something does not constitute an argument.

4. Pettifor claims that monetarism and neo-classical economics is based on the idea that the forms of money we have today are commodity monies, or at least that that’s how monetarists and neo-classicists see money.

The reality of course is that about 99% of economists, including monetarists have actually tumbled to the distinctions between fiat and commodity money, plus they have tumbled to the fact that commodity monies disappeared from most of World about a century ago.

5. Pettifor claims that in the Middle Ages there was just commodity money and that there was a one to one link between the stock of that money and economic activity. The reality is that a shortage of money does somewhat constrain economic activity. But given that shortage, people have, since the world began, simply reverted to barter and similar. Thus the latter alleged “one to one” relationship is nonsense.

6. Pettifor claims the Positive Money / Martin Wolf bank system (i.e. banning private money creation) involves what she calls a “committee of men” who control the size of the stock of money, and that such a committee cannot possibly deal with the millions of micro-economic decisions made every day in a modern economy, plus the committee cannot possibly be independent.

Well there’s a teensy problem with that claim, namely that most countries already have a committee which among other things determines the size of the stock of money and is at least moderately independent: in the case of the UK, that’s the Bank of England Monetary Policy Committee. Plus it is not the job of the latter committee to influence every detail of every minor economic decision, nor would be the job of the equivalent committee under the Positive Money / Martin Wolf system to do that.

7. Pettifor claims that the Positive Money / Martin Wolf system equals or has close similarities to the gold standard. The two are actually chalk and cheeze. For example inflation over the long term is impossible under the gold standard, whereas under the Positive Money system government can choose its inflation target, for example the widely accepted 2% target.

Finally, please note that I am not an official spokesperson for Positive Money.


If you Google “Positive Money”, you’ll probably see on the first page an article by Ann Pettifor entitled “Why I disagree with Positive Money and Martin Wolf”. Martin Wolf, by the way, is the chief economics commentator at the Financial Times. As I’ll show below, her article is nonsense.

Basically she supports the right that private banks currently have to create or “print” money, in contrast to Positive Money and many others who claim private money printing should be outlawed. And if you don’t believe that private banks print / create / issue money, see the first few sentences of this Bank of England article which confirm that that’s exactly what private banks do.

A system where money creation by private banks is outlawed actually goes by several names: e.g. “full reserve banking”, “Sovereign Money”, “100% reserves” and “narrow banking”. I’ll use the first, that is “full reserve”.

Apart from Positive Money and Martin Wolf, full reserve is actually backed by several economics Nobel laureates and numerous other economists around the world, apparently unbeknown to Ann Pettifor. So she is up against more than just Positive Money and Martin Wolf. Indeed, the Nobel laureate economist Maurice Allais very much called a spade a spade in this connection when he said that money creation by private/commercial banks amounts to counterfeiting. (See opening sentences here.)

David Hume, writing almost three hundred years ago, made the same “counterfeit” point.

Anyway, Ann Pettifor’s first series of blunders comes in her third paragraph where she claims full reserve “…is not very different from the monetarist or neoclassical understanding of money, as based on a commodity.”

There are actually at least three quite separate mistakes in that one short phrase.

First, she assumes that full reserve involves using adjustments to the money supply to adjust demand. Second, she suggests that assuming full reserve does have similarities to monetarism, that’s a flaw in full reserve because monetarism is nonsense. The truth is that some aspects of monetarism are very questionable, while others are not. Third, her suggestion that monetarism or neoclassical economics assume we have some sort of commodity money is bizarre.

I’ll deal with those three mistakes in turn.

Full reserve means adjusting the stock of money?

Pettifor isn’t entirely clear why she thinks full reserve equals monetarism, but the reason is fairly obvious: it’s that Positive Money and others, as well as advocating full reserve, also advocate a system where aggregate demand and inflation are controlled by adjusting the amount of state created money that is created and spent into the economy.

Clearly if the state (i.e. government and central bank) create and spend £Xbn of new money in a particular year, then the money supply will rise by £Xbn in that year, assuming there is no money creation by commercial banks. Plus it is pretty obvious that that increased stock of money will have an effect: when anyone finds more money in their account, they tend to spend some of it, which raises demand (and possibly inflation). So when the money supply for the economy as a whole rises, the effect will probably be extra demand and perhaps extra inflation.

And that idea, i.e. that expanding the money supply expands demand is basis of monetarism. My Oxford Dictionary of Economics starts its definition of “monetarism” with: “An economic theory based on the view that the quantity of money is the main determinant of money incomes”.

Thus Ann Pettifor has clearly jumped to the conclusion that because Positive Money and others advocate full reserve and also advocate using changes to the money supply as the main tool to be used to adjust demand, that there for adjustments to the stock of money (i.e. monetarism) is an essential constituent of full reserve banking.

Well that’s a bit like saying that because you have a blue car, ergo all cars must be blue.

The truth is that under full reserve banking, it would be perfectly feasible to use interest rate adjustments to adjust demand, much as is done at the moment. Not that I’m keen on interest rate adjustments: like Positive Money, I prefer changes to the stock of money.

Indeed in the joint submission to the Vickers commission made by Positive Money, the New Economics Foundation and Prof Richard Werner, which advocates full reserve, the authors devote several pages to casting doubt on the effectiveness of interest rate adjustments. But they do not suggest interest rate adjustments would be impossible under full reserve.

So that’s the first of Ann Pettifor’s mistakes in the above sentence of hers. Now for the second.


The above sentence of hers also suggests that because Positive Money policy has similarities to monetarism, Positive Money policy must be flawed. So in effect she is saying there is something basically wrong with monetarism. So what exactly is wrong with the idea that “money incomes” are determined by the “quantity of money” (to use Oxford Dictionary phraseology)? I mean it’s pretty obvious that when someone’s stock of money rises, e.g. when they win a lottery, or get a tax rebate, their weekly spending is likely to rise. Indeed, the empirical evidence is that that is exactly what happens (surprise surprise). And extending that to the economy as a whole, if government were to print billions of pounds worth of £20 notes and hand them out to everyone (sometimes known as a “helicopter drop” ), spending and thus the income of the entire population would rise.

Of course inflation might get excessive, but that doesn’t destroy the basic monetarist claim, namely that money incomes vary with the size of the total stock of money, state issued money in particular.

Having said that, I am not, repeat not endorsing all aspects of monetarism, particularly as advocated by Milton Friedman. I am simply saying there is not an awful lot wrong with the basic monetarist claim. Thus Ann Pettifor’s argument, namely that full reserve comes to almost the same thing as monetarism, ergo there is something wrong with full reserve is weak, to put it politely.

Commodity monies.

Pettifor’s third mistake in her above sentence is her claim that monetarism and/or the “neoclassical understanding of money” involves the assumption that money “is based on a commodity.”

Well now that’s a bit of a strange claim given that the main forms of money for at least a century have consisted of so called “fiat money”: that’s a form of money which is quite specifically not based on a commodity. To illustrate, gold coins were still used in the UK towards the end of the 1800s, but they disappeared soon after that, never to reappear.

In short, and contrary to Ann Pettifor’s claim, monetarism is not based on the assumption that money takes the form of a “commodity”.

Anyway, that’s that sentence of Pettifor’s dealt with, or should I say “demolished”.

Full reserve cuts demand?

Next, in the same paragraph, Pettifor claims full reserve “would contract and restrict economic activity — to the level of existing savings.”

Well now, assuming the only form of money is Bank of England issued money what exactly is to stop the BoE and government creating and spending whatever amount of money they like into the economy? Absolutely nothing!!! I.e. under full reserve, “economic activity” is not restricted “to the level of existing savings”!

Put another way, under full reserve, there is nothing to stop the state creating and issuing whatever amount of money is needed to induce the private sector to spend at a rate that brings full employment. Plus of course, money can be given to government spending departments to spend on health, education and so on. Thus full reserve does not “restrict” economic activity, as claimed by Pettifor.

The Middle Ages and the gold standard.

In two or three passages in her article Pettifor tries to claim full reserve would equal a return to the Middle Ages. For example she says, “If the issuance of credit or money is to be restricted to equal the money set aside in peoples’ piggy banks — the “savings” that Martin Wolf refers to — then society would revert back to the Middle Ages, or to the age of the Gold Standard.”

As for the “Gold Standard”, there is no more similarity between full reserve and the Gold Standard than there is between chalk and cheeze. For example under the Gold Standard, inflation (in the long term rather than short term) is impossible because the size of the monetary base (i.e. the stock of gold) is pretty much fixed (except that more gold can always be dug out of the ground, but that is a slow process). To illustrate the “no inflation” point, Britain was on the Gold Standard in the 1800s and the price of bread in Britain in 1900 was the same as was a century earlier in 1800.

In contrast, under full reserve, since the size of the monetary base is flexible, government can choose whatever inflation target it likes, for example the widely accepted 2% target.

Second, the fact of banning privately created money does not “restrict” the total amount of money, as claimed by Pettifor, because under full reserve the state creates and spends into the economy whatever amount of money is needed to induce the private sector to spend at a rate that brings full employment. (And some of that spending, to repeat, can take the form of more money for public spending items like health or education.)

Put another way, under full reserve, the size of the monetary base is flexible as explained just above.

Commodity money.

Still on the subject of the Middle Ages, Pettifor says, “The one-to-one link that existed between commodity money and economic activity in the Middle Ages does not exist in today’s banking system.”

So economic activity in the Middle Ages was limited by the amount of “commodity money”? Well the first flaw in that idea is that given a shortage of money, people since the world began have simply reverted to barter or similar. And indeed barter was widespread in the Middle Ages and indeed in Roman Britain: for example taxes were often paid using agricultural produce in Roman Britain. Thus, and taking the extreme case, if money disappeared altogether, that would not (contrary to Pettifor’s suggestions) bring all economic activity to a halt.

Second, an important form of money in the Middle Ages were tally sticks. The actual inherent value of a stick (just like the value of the paper in a £10 note) is next to nothing. Thus transactions in the Middle Ages may have been somewhat hindered by a lack of money, but there certainly was no “one-to-one link” between the supply of commodity money and economic activity in the Middle Ages, as claimed by Pettifor. Plus tally sticks are clearly not a form of commodity money.


Next, Pettifor says “Unlike commodity money, which is of necessity scarce, credit is able to facilitate society’s myriad transactions, and to satisfy our varied needs. The issuance of credit enables society to do what we can do. And that is why it is a very good thing.”

Well certainly banks loans are a “good thing”, assuming the lending concerned is done responsibly. That much is obvious. But then under full reserve, as explained by Positive Money and others, banks have a big incentive to grant loans to any particularly viable potential borrower who walks thru their doors. Thus Pettifor’s suggestion that there are no bank loans under full reserve is nonsense.

It is true that under full reserve, obtaining bank loans would be a bit more difficult: i.e. interest rates would rise a bit. But it’s far from clear why that would be undesirable as long as any resulting fall in demand is made good by extra state money being created and spent into the economy. For example low interest rates have encouraged asset price bubbles, in particular the explosion in house prices in the UK over the last twenty years or so. Plus the rate of interest paid by those with mortgages in the 1980s was almost three times the rate that prevails nowadays. I don’t remember the sky falling in the 1980s. Nor do I remember the streets being lined with homeless individuals unable to afford mortgages. Indeed, homelessness has increased since the 1980s. Plus economic growth was better in the 1980s than nowadays.

In short, full reserve reduces the amount of debt based economic activity and increases the amount of non-debt based activity. Why that might be a disaster is not clear.

Astute readers (that’s about 0.00001% of the population) will have realized that there are all shades of grey between an economy heavily dependent on debt and an economy where everyone obeys Shakespeare’s dictum “Neither lender nor borrower be”. And that raises the question as to what is the optimum compromise between those two extremes.

Well one good reason for thinking we are currently too dependent on debt based economic activity is that banks’ freedom to print money is pretty obviously a subsidy of banks (or should I say “one of the many subsidies that banks enjoy”). Joseph Huber explains that subsidy on p.31 of his work “Creating New Money”.

And another form of preferential treatment that banks get, as I explain in an article entitled “A new justification for full reserve banking?” is that those who deposit money at banks with a view to banks lending on their money and earning interest are protected by taxpayer backed deposit insurance, whereas other investment intermediaries which perform almost the same function (e.g. unit trusts and mutual funds) enjoy no such privileges.

In short, in that full reserve disposes of artificial assistance for banks’ debt creation activities, there would seem to be much to be said for full reserve.

Committees of men.

Towards the end of her article, Pettifor criticises the allegedly wicked “committee of men” that would control the money supply under full reserve.

As she puts it, “Wolf’s proposal is problematic for other reasons. First, 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….”. (Incidentally I assume the repetition of the word “first” is a typo.)

Well there’s a teensy problem with that passage which is that we already have “committees of men” which control the money supply and much else besides, e.g. they control or at least try to control aggregate demand, inflation and so on. In the UK, the first of those committees is the Bank of England Monetary Policy Committee (MPC) and the other is the Office for Budget Responsibility. (Incidentally, those two committees have actually included a sprinkling of women for the last few years, but I won’t delve into what the male to female ratio of such committees ought to be.)

Worse still from Pettifor’s perspective, other countries have similar “committees” of men. This is a disaster (I don’t think).

On the subject of the MPC’s control of the money supply, it was the MPC that took the decision (after consultation with the UK’s finance minister) to implement QE which has hugely increased the money supply.

Of course in that the MPC consulted the finance minister before implementing QE, the MPC was not acting in an entirely “independent” manner. However, the MPC has much more independence when it comes to interest rate adjustments: it was specifically given that independence by Gordon Brown, the UK’s finance minister at the time.

And interest rate adjustments have a crucial effect on the money supply: raising interest rates for example, reduces the amount of money that private banks create and lend out.

So to summarise, it’s a bit hard to see why Pettifor objects to a “committee of men” determining the money supply when we already have a “committee of men” doing just that!!

The independence of committees.

Next, and as regards Pettifor’s claim that “there is no possibility of such a committee being independent” she does’nt explain why not. Certainly there is no obvious reason why the committee proposed by Positive Money and Martin Wolf could not have about the same independence as the MPC.

That of course does not equal total independence: reason is that ultimate power always rests with politicians. But there is no reason, to repeat, why the proposed committee should not have about the same independence as the existing MPC.


Ann Pettifor’s claim that full reserve represents the end of civilization as we know it and that we would “revert back to the Middle Ages” is pure nonsense.

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