I’d somehow forgotten that the Green Party Conference was due to debate full-reserve banking – although I knew that many people within the Party were enthusiasts for the Postive Money approach. It had never occurred to me that, before the conference was out, the Party that had prided itself on being the only voice in British politics opposing austerity would adopt a policy that is not only pro-austerity but actually is close to Friedmanite monetarism. But that is what they have done today.
The attraction of full-reserve banking – under which banks would not be allowed to lend more than the deposits they have at their disposal (not current accounts), or what they can raise on the stockmarket, or in loans from the bank of England – is that it is seen as an answer to the fundamental instability of fractional-reserve lending; the problem of speculative lending leading to credit bubbles like the one that burst so disastrously in 2007-8. In that they obviously have a point – speculation around property has been the cause of every economic crisis since 1973 and such crises, in an increasingly deregulated international financial system, have been getting deeper and more frequent. It’s a problem that needs to be addressed, and addressed globally, if we are to achieve a stable and sustainable economic system.
Where the Positive Money enthusiasts go badly wrong is in their analysis of what is to be done. As Chris Dillow points out here, the likely effect would be to reduce bank lending in times of recession – in other words, precisely the opposite of what is needed to stimulate recovery. He further indicates that such a policy, enforced by a National Monetary Authority, could have precisely the opposite of the intended effect; the conventional wisdom remains that mortgage lending, even at inflationary levels, is seen as “safe”. And as Tim Worstall points out here, there is a crucial intellectual error at the heart of the Positive Money agenda – that banks create money at all; as he rightly points out, if that’s what bank lending did Northern Rock would not have gone under. And as Worstall additionally points out, full reserve banking is in essence, the purest monetarism; Milton Friedman would be proud. Frances Coppola, herself a former banker, describes in some detail that Positive Money is based on a straightforward ignorance of what banks actually do.
So, next time Caroline Lucas is on Question Time calling for a Green New Deal, the informed viewer will be entitled to respond: but your party, at its recent conference, voted for the creation of a National Monetary Authority whose job would be to restrict the sort of lending to the private sector that would be needed to stimulate recovery (I’m trying not to use the word “growth” in a Green Party context, but if they don’t think the Green New Deal is about growth than they’re …. the sort of party that accidentally votes for deflationary monetary policy at a time of recession).
There is no doubt that it is essential to curb speculative lending, especially in the property market. Chris Dillow, in the piece I’ve referenced above, points out that there are other, more proven ways of achieving this. Proper, international regulation of the banking system – a return to the system that gave us thirty years of post-war prosperity – is obviously top of this list.
For me, as an ex-Green Party member who believes that the most urgent task in Britain’s politics is to develop an alternative to austerity, I don’t know which is sadder; that the Green Party has voted for monetarism, or that they appear not to have noticed that they have done it. I suppose they mean well. But their days of claiming that they are the only party in Britain opposed to austerity are clearly over.