2.6  Do we have a currency or a banking regime?

Today's two-tier banking system is a mixed system with separate but complementary roles for the central bank and banks, and a mixed money supply consisting of central-bank money (including issue of government coin) and bank money (demand deposits). In terms of the currency vs banking paradigm, one would consider this to be a mixed currency and banking system, including a certain 'division' of initiative and control between central banks and banks.

/33/ Against this background, most economists still believe in a central bank's control of the banks. To put it differently, they believe in the primacy of a central bank's sovereign currency over bank money. MMT stays within this consensus. Bank money (broad deposit money) is seen as a kind of leveraging of central-bank money. This, however, contradicts MMT's observation that central banks do not restrict their supply of reserves to banks and thus do not exert control over banks' ability to create credit and deposits. MMT in turn declares monetary quantity policy not only to have been abandoned in the present system of fractional reserve banking, but to be irrelevant anyway.[1] Instead, MMT insinuates base-rate policy as a mysteriously effective instrument of a central bank's control over money and banking.

Wray sets forth a thesis of 'integration of creditary and chartalist (state money) approaches', an amalgamation already present in Mitchell-Innes.[2] In reality, such 'integration' does not exist. It can of course be conceived of: if there were a full sovereign currency system with all primary credit originating from the treasury or the central bank, and banks acting as upstream-downstream intermediaries of secondary credit only, i.e. no longer creating primary credit themselves, than this actually would represent a system of chartal credit money. Whether it would be desirable in such a variant is another question (3.6).

Under fractional reserve banking, however, any such idea is unreal. An attempt to 'integrate creditary and chartalist approaches' then means nothing but attempting a synthesis of currency and banking doctrine – which does not work and comes out as banking doctrine. As will be discussed below, according to MMT, the important things for having a 'sovereign currency' are to determine the national unit of account and to levy taxes denominated in that standard (3.1, 3.5). The actual issue of the money is not deemed to be of importance; and should there be any doubt, MMT has it that treasury and central bank together would in fact create the money in circulation, using the banking sector as a helpful intermediary between the government and the central bank, as well as between the government and the taxpayer (3.8).

Bank credit creation as a result of accumulation of government debt and foreign-account deficit is certainly an important contributive factor to determining the money supply today. But MMT's reinterpretation of this obvious connection as representing the government's sovereign control over the money system is rather audacious. This may be the weakest, and certainly the most affirmative part in MMT, obscuring the overwhelmingly dominant position of the banking industry in the present money system.

/34/ For NCT, by contrast, the actual situation represents a near-complete reversal of control in the two-tier banking system to the benefit of the banking industry, i.e. a near-complete reversal of what the Reserve Position Doctrine had postulated, a situation that might even be described in terms of capture.[3] One might call it monetary capture. The big players in banking, now also known as systemically relevant banks, have usurped most elements of the monetary prerogative and have turned government and central bank alike – voluntarily or not – into banking agencies. Pro forma, we have a currency regime which de facto has mutated into a banking regime. As explained in 2.3, the initiative lies with the proactive banking industry and the central bank reacts by fractionally refinancing whatever banks demand. The central bank may 'accommodate' at somewhat higher or lower interest, coming either as a nuisance or a delight to the banks, but in no way impairing their ability to create credit and their total control of the public money supply, including cash. If systemically relevant banks threaten to fail, the central bank stands ready to lend a helping hand, acting as the 'bank of banks'. As a consequence, there is no control in a proper sense, since, as explained in chapter 1 on the currency versus banking paradigm, money and capital markets will not reach a state of equilibrium as long as credit and deposits keep bubbling at source depending on banks' discretion. As opposed to the beliefs of 'neoaustri­ans' and free banking advocates, the present situation is actually farther from government or central bank control and much closer to Hayek's ‘private ducats’ dream than they are prepared to concede.

What 'neoaustrians' and Mitchell-Innes have in common, in turn, is their conferring blame upon state interference whenever fractional reserve banking does not work. In one passage, neglected by his followers, Mitchell-Innes defended the notion of 'sound money' against dysfunctionally overshooting credit and debt creation. /35/ He did not hold the banks but the government responsible for this, though, surprisingly, not for incurring too much debt but for setting fractional reserve requirements. 'The effect of this law', Mitchell-Innes wrote, 'has been to spread the idea that the banks can properly go on lending to any amount'.[4] That is what all believers in 'free banking' pretend—as if banks behaved differently at a reserve requirement of 0 per cent instead of 1 or 10 per cent.


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Wray (ed) 2004 257.
Wray (ed) 2004 11, pp255, pp259.
Häring 2013 pp.13.
Mitchell-Innes 1914 167|74.