Positive money: The wrong answer to the relevant question of the control of money supply

Since the 2007 crisis, a certain number of papers have discussed banking system reforms in order to improve stability. In the UK, a group of scholars has created the Positive Money Movement in favor of narrow banking. All those discussions send us back to the Chicago Plan, drafted in the aftermath of the Great Depression. The purpose of this paper is to show the limits of the different plans suggesting the separation of deposit-taking institutions from intermediaries. In a narrow banking system, banks managing deposits are fully backed by reserves intended as government-issued securities. The underlying assumption is that government, working in full cooperation with the central bank, is capable of managing money supply and more efficiently delivering bank stability. The tenets of these plans overestimate both the ability of the government to deliver an adequate money supply, and the benevolent character of the state. In other words, a State-run monetary system would be more efficient at delivering stability, and a 100% reserves banking system would eradicate both inflation and banking crises. The present paper aims at showing the limits of this view relying on two approaches: the Austrian monetary and Public Choice theories. First, we will present the two main designs of narrow banking system: the Chicago plan and the Sovereign Monetary System. We will also show that these plans are, in reality, deeply rooted in the post-Keynesian view of money, in particular the concept of state money or chartalism, first elaborated by Georg Friedrich Knapp in 1905 (Knapp, 1924) and A. Mitchell Innes in 1914 (Mitchell Innes, 2004), and subsequently developed by Abba P. Lerner (1947, 1943). Second, we will demonstrate that a 100% government-issued reserve bank does not solve in itself the problem of stability of the banking system, in particular the question of inflation. Moreover, the fact that the money supply is directly issued by the government, or indirectly through the central bank working in full cooperation with the government, does not solve the problem of potential inflation. Government would not necessarily be more efficient than central banks in issuing the quantity of money associated with a low level of inflation. Furthermore, the public choice approach suggests that letting the government have control over the money supply raises the question of the political cycle of business.