John Fullerton

Let me start with a disclaimer. While I did indeed spend nearly twenty years inside JPMorgan (when it was a mere glimmer of its current self, thankfully), I am the first to say that anytime I am asked about money, I respond by saying, “I don’t understand it well enough to make a useful, much less comprehensive, statement.” Now with the advent of blockchain technology, which my gut tells me could be a profoundly transformational technology as it relates to systems of exchange, I feel even more ignorant.

Having said all that, I would like to make a few points.

(1) I largely agree with Mellor’s description of money and the history of money; however, I believe there is some misunderstanding about the value of seignorage to private banks, which is one of the arguments for shifting to public money. To put it concisely, I maintain that it is misleading to say that banks get a windfall from seignorage which should logically be a public good. Banks do indeed earn profits from lending (or they have gone out of business or been rescued to try again), and banks fund themselves at a lower cost than they would without the explicit and implicit government guarantee to their depositors, and even to their uninsured creditors and counterparties (especially too-big-to-fail banks). But they also compete to lend, with each other and with the capital markets. And they need to hold capital against their lending book as a buffer for losses, more now than before. The result is a relatively low “return on equity” business, not a windfall on the backs of the public.

That’s why banks have switched to an “originate and sell” model. It is much more profitable for them to take origination fees and not tie up capital holding the loans on their balance sheets (all else equal). But, of course, this creates all sorts of problems as well, as we saw with the mortgage crisis.

My point here is that if banks didn’t create money, but just intermediated money created by the government, they would not lose a seignorage windfall, although it’s hard to imagine that the impact wouldn’t include less lending, which of course is both good and bad. If the public sector took on the credit risk as with public banks, then that activity should need economic capital buffers as well (lending is risky and will always generate credit losses). If the goal is to restrain private banks lending for speculation (in real estate and securities), a goal I strongly endorse, that can be done within the current private money system with regulations and or capital charges if we had the desire and political will. The truth is, we don’t even distinguish between speculation and real investment!

Having said all this, I too endorse the use of public money to address critical gaps that the market economy is failing to address. At the top of this list is the trillions of renewable energy infrastructure that don’t fit the private banks' business model and demands low cost of capital (The US government has the lowest in the world, an asset we need to deploy in this global emergency) to make projects “economic.” I, along with others, call this “qualitative easing.” How to govern this alone is a major challenge. But it’s the place I would like to see us start on a regional scale around the world.

(2) I am also intrigued by Mellor’s distinction between profit and provisioning. However, I believe this is to some degree a simplified or even false choice, and the world of economics is far more complex and subtle. Is the upcoming iPhone 8 merely a market seeking profit, or the natural extension of a revolutionary innovation that enables billions of people access to banking and other services they previously had no possibility of imagining (without a smart phone)? The answer, of course, is that it is both. But I doubt we will ever be able to separate them or predict them in advance. Once the smart phone was invented, something the free enterprise system is good at doing, then the “unnecessary” iPhone 8 and all the related apps become the inevitable logical extension. We take the “provisioning” with the “profits” more often than not, I think. Of course, there are vast amounts of essential provisioning that markets don’t address, and are not designed to address. Wrong tool. For this, Mellor’s distinction is totally valid. But again, I would suggest a both/and approach rather than either/or with respect to money will lead us in the right direction.

(3) I am not optimistic about a functioning democracy, which Mellor builds her proposal upon, less so today than a year ago! But I am also nervous about grand and somewhat binary proposals built on speculative foundations such as “assume functioning democracy.” If we first prove we can do democracy, then perhaps we try our hand at democratic money. But even then, I’d prefer starting with some experiments. Mellor rightly points us to the central bank printing experiment of trillions of dollars to support the financial system in the wake of the 2008 collapse. That was an experiment…an ongoing one at that. But hey, it worked! (Even if we disagree with the goals of the experiment.) The world did not end, and we’re not rushing around with wheelbarrows full of cash in a hyperinflation as the “experts” would have predicted. We must build on that learning, and we must begin by acknowledging this reality.

(4) Simply establishing the case that the government can indeed print money (if it has its own currency—which means Europe has a whole different challenge as a result of the euro) if it chooses to without inflation exploding should be a focused priority. We still live under the naive “too much money chasing the same amount of goods” understanding of inflation, and a “balance the check book” mentality which fails to distinguish the difference between a household and the State that issues its own currency, so we generally have a gut response that printing money must be unacceptable and even morally corrosive. This view is reinforced by politicians and their many “bridges to nowhere” and other forms of corruption and waste. So this is a big task, just to establish an understanding for the theory and see that it’s correct. See Randall Wray and the Modern Monetary Theory (MMT) crowd; it’s all there, except I’m not sure even they have fully figured out the limits of government money printing, which I believe must exist. And I think it is more complex than “up until there is full employment.” There are feedback loops at play, and it can be extremely complex to get one’s head around.

(5) I am no apologist for private banks as those who know my work will attest. But not all banks are bad banks. Case in point is the Global Alliance for Banking on Values (GABV) banks, who are committed to do what we would all agree is good productive banking. This is not PR or greenwashing for the most part. I say we need many more of them! And they are private banks, and I for one would not want to take away their ability to lend money into existence in service of the real economy we all want. It must also be acknowledged that even the big Wall Street banks do good productive lending as well as way too much speculative lending. So again, it is complicated. Private enterprise, including in banking, has many positive attributes I would not want to throw out with the bathwater. I worry that Mary’s approach lacks an appreciation for the many good babies out there which we want to nurture while letting a thousand flowers bloom.

(6) I would like to end with a final point on the “growth imperative” of money, which generated a lot of discussion. I can offer many simple examples of a shrinking business (degrowth) that can generate a positive return on investment. It is worth less, of course, than if it were growing, but it is not worth zero. The issue with growth rates and debt is more about debt capacity than debt per se. All else equal, debt capacity goes up when growth rates are higher, and when interest rates are lower. The real issue, in my view, is that we have too much (interest-bearing) debt for the economic system and the planet to handle, and more than individuals and societies can handle. But today’s ultra-low real interest rates mitigate the gap. Mellor’s prescription for public money no doubt will be part of the solution when we finally come to grips with the mother of all debt write-downs we will one day no longer be able to avoid. When this day of reckoning will arrive (has been predicted for a long time) and how that will work continues to baffle my mind. For now, whether in Greece or the State of Illinois pension system, or with American student loans, we kick the can down the road, with unquantifiable human and ecological costs.