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Edition 01: 10 May, 2013.




Summaries of monetary reform papers by L.F. Manning published at


The referenced papers :


00. Summary of papers published.

01. Financial system mechanics explained for the first time. “The Ripple Starts Here.” 

02. How to create stable financial systems in four complementary steps.

03. How to introduce an e-money financed virtual minimum wage system in New Zealand.

04. How to introduce a guaranteed minimum income in New Zealand.

05. The interest-bearing debt system and its economic impacts.

06. The Savings Myth.

07. The DNA of the debt-based economy.

08. Manifesto of the debt-based economy.

09. Unified text of the manifesto of the debt-based economy.

10. Using a foreign transactions surcharge (FTS) to manage the exchange rate.

11. The Manning plan for permanent debt reduction in the national economy.

12. Comments on the (Jaromir Benes and Michael Kumhof) Chicago Plan Revisited Paper.

13. Missing links between growth, saving, deposits and GDP.

14. Capital is debt.



Analysis of  The Positive Money Proposal – Plan for Monetary Reform,

Jackson, A., Dyson, B., and Hodgson, G., Positive Money, London, 02 April, 2013.


The proposal was posted at the website on 06 April, 2013.


By L.F. Manning and T.E.Manning

Stichting Bakens Verzet,



02 May, 2013.


Our comments follow the order of presentation in the document analysed (“the PM proposal”).


01. Positive Money (PM) tries to present its reform proposals in a more readable form than it has previously managed to do. The proposals are still far from easy for most people to understand. There are numerous intellectual leaps in the text that need to be broken up into smaller steps. We think the diagrams and figures in the PM proposal still need more work despite the effort that has already gone into them.


02. This new text does not alter our earlier critique of the proposal as a whole, namely that it will not work as it is currently presented. Our earlier critique was dated 18 January 2012, forwarded to Positive Money on 21 January, 2012, and subsequently further clarified in correspondence with the authors of the PM proposal. If we had a bank, we would be falling over ourselves to support the proposal because as it is presented it is a win-win for the banks and largely a lose-lose for the economy and the public.




03. Points 1-3 (p. 4) of the PM proposal : The repayments to Bank of England (BOE) are automatically re-circulated to maintain the money supply. We think this relates to both the Conversion Liability for transaction accounts AND existing bank debt placed in the investment pool but it is not clearly stated this is so. See our point 15 below for more detail on this. If the conversion liability extends to “pre-reform loans” shown on Figure 2 of their document PM need to make this very clear. Despite PM’s best efforts we still think the depiction of the proposal is far from clear.


04. Point 4 of the PM proposal : Demand deposits = transaction accounts PLUS deposits that deposit holders choose not to invest in investment accounts. The accounts transferred to the central bank, those are Transaction accounts, Operational accounts and investment pool, and the Central Government account shown in Figure 2, are operated through the commercial banks like trust accounts are operated by lawyers. The existing commercial bank reserve accounts at the central bank are absorbed at the changeover into the various elements for the BoE  balance sheet shown in Figure 2 but we do not think the text explains this well.


Commercial banks’ existing time (non-transaction account) deposits are already bank liabilities transferred to the investment pool. The difference is that existing “savings accounts” available on call would disappear because the customer must choose to leave that money in a transaction account or put it  in an investment account. At the changeover call accounts would presumably first be put into the transaction accounts and the customers notified so they can decide whether to hold their funds in their transaction accounts or authorise their investment through their bank’s investment pool. The PM proposals do not say this clearly.


For legal purposes anyway, deposit holders presently own the use of the funds in their current accounts. We say they have the use of the money, the right to which is being paid for by the original borrower under his debt contract with the bank. In the present system [e.g. Cyprus] those deposit holders are at risk as they can lose their deposits (or rights) if the bank fails unless the government already guarantees them. In Europe, little or no interest is paid on existing current account deposits.


05. Point 5 of the PM proposal : The whole issue of the transition stage for Investment Accounts is extremely vague. First, non-transaction account balances have to be identified as we have said in our point 04 above. Then bank depositors will have to be asked at the switchover how they want to distribute their investment deposits into different risk categories. Then the banks somehow need to categorise their existing sectoral risk. Then they need to find a way to bridge the inevitable imbalances that will arise. Our own proposals in The Manning plan for permanent debt reduction in the national economy (TMP) should probably also say something about that, but  the PITA structure in TMP is an independent government supported body whereas the PM Investment Pool is not. In PITA, secondary debt is carefully managed instead of being an unconstrained banking “free-for-all”.


PM point 5 refers to “demand deposit liabilities”, not to investment accounts. The term “conversion” is not defined there. Readers could infer that it refers to the conversion of just the debt supporting demand deposits and that that is what “would be repaid as the banks’ assets mature.” But that is not the case. As we understand it all existing bank debt has to be converted over the 20 year transition period.


There seems to be some confusion in the PM proposal between the status of the “migrant” deposit holder and that of the original debtor. The banks’ liabilities to the original borrower would be retired “as the [bank’s] assets mature.” That process reduces the deposit base. In the existing system the effect of that reduction in deposits is masked by the creation of new bank debt and new deposits. Banks´ assets at present represent rights created under the original loan agreements. They are not directly linked to the migrated deposits in current (or transaction) accounts.  


Under the PM proposal the existing deposit base will tend to shrink quickly as existing bank debt is retired, collapsing the investment sector. Therefore the PM proposal must fail unless either the speed of circulation of the remaining deposits accelerates or the retired deposits are somehow replaced by new debt-free money as PM suggests elsewhere in their document. Replacement done through government spending as indicated in PM Objective 6, which in any case is subject to the agreement of the Monetary Creation Committee (MCC), would effectively mean nationalising the economy since ALL existing bank debt would have to be converted. Furthermore, there is MORE debt around than deposits! How does PM propose to deal with a situation such as the one in New Zealand where bank debt is vastly higher than the deposit base? In fact that MUST be the case everywhere else too because while the banks’ net worth (Residual) is not part of the deposit base it IS part of the debt. There is also a major issue with HOW the conversion will work in practice given the asymmetry between debt and deposits. For more on this see our point 12 below.


06. Point 6 of the PM proposal: Again, there seems to be confusion between the “migrant” deposit holder and the original debtor.


Following on from our point 05 above, the system of “repayments” is poorly described in the PM proposal. There does not seem to be any mechanism whereby repayments under existing debt contracts could be “automatically re-circulated”. Under the PM proposals new deposits required to maintain the deposit base pass into transaction accounts through public spending and through BoE lending to commercial banks for productive investment. 


The question is how the need to re-circulate non-productive investment debt is to be matched with available resources in the productive sector.  Who would allocate the vast amounts of new debt-free money that will be needed to replenish the non-productive investment market ? To whom would it be allocated and how?


07. Point 9.2 on page 5 of the PM proposal : “Lending money…” should read “creating and then lending money.” This new lending goes only into the productive sector. We assume PM means the MCC will create the money, not the BoE as written.




08. PM objective 1: This objective seems to assume the government itself would not increase the amount of money in the economy in the absence of productivity increases. But it must do so during the transition period mustn’t it? The inference in the text is that the only way the government can fund a budget deficit outside of the MCC is by borrowing on the secondary debt market through the investment pool. 


What is to stop the government or corporations, or anyone else for that matter, from borrowing offshore? Then there would be new domestic non-bank debt and money deposits injected through the foreign exchange interface, wouldn’t there? Wouldn’t this affect the exchange rate and (eventually) interest rates? What kind of processes does PM have in mind to deal with this, since they do not seem to be mentioned anywhere in the PM proposal ?


In our own work, the underlying cause of the overall increase in the amount of the money supply is due to the exponential increase in the total of unearned interest paid on deposits. The amount of debt created, repaid and reissued is a symptom of the underlying mechanism, not its cause. The devil is not the increase of the amount of money in the economy per se. It is the siphoning off of purchasing power and wealth to the non-productive (investment) sector that skews the productive income and wealth distribution, forcing the productive economy to inflate.


09. PM objective 3.1: For “New lending would not create new money” read “New lending by private banks would not involve their creating new money”.


10. PM objective 5.1: Bank failure would not affect transaction deposits circulating for GDP (“the payments system”) but a bank’s clients who are “creditors” would presumably have to write off losses in investment accounts for the amount the bank is unable to cover. Those losses have to be physically distributed from within the bank’s investment pool. How is that to be physically managed? 


If a bank is shaky, investors will tend to transfer their deposits from the investment pool to the safety of the transactions accounts as soon as possible.  Wouldn’t that be inflationary if it were widespread? What would MCC do to ensure there is enough money in the investment pool to stop the investment sector crashing? Wouldn’t interest rates skyrocket in the investment sector?


11. PM objective 6.1: This states that because new money is spent into circulation by the government to replace bank debt repayments, the private sector can pay down its debt without sparking a recession. That’s OK, but needs to be expanded. If there is to be unlimited counter-cyclical government spending to replace the loss of deposits under the PM proposals how can MCC really be in charge of the money supply?


As discussed above in our point 05 above the investment pool will have to be replenished through public spending. Most of the new funds spent into circulation by the government go first through the productive sector and then migrate to the investment sector. The question then is whether those extra funds would further inflate the private investment sector when the value of public assets grows as a proportion of total assets. Wouldn’t they simply inflate the remaining private assets? Does the government have to have a continuous privatisation program? How would the wider public view such a program?


12. PM objective 6.2: This is poorly worded. Yes, the proposal eliminates most bank debt. However, in any form of capitalist economy, Savings and Loan style secondary debt must replace most bank debt.


The basic accounting equation still applies


M3  =  DC + NFCA + Residual                                                                                                                                             (1)


Where :


M3 is the aggregate deposit base,

DC is Domestic Credit,

NFCA is the Net Foreign Currency Assets of the M3 institutions and the Reserve Bank,

Residual is the net worth of the M3 institutions.


Equation (1) is simply a restatement of the basic accounting equation stated from the banks’ point of view:


Assets                                                                                             = Liabilities + Net worth.

(DC + NFCA)                                                                                 = M3 + Residual


All that happens is that some of the terms are expressed differently from a system point of view:


Assets                                                                                             = Liabilities + Net worth.

MCC funding + Residual debt + NFCA                                    = Deposits   + Residual                                                (2)




MCC funding is the debt-free BoE credit for most deposits and

Residual debt is the remaining bank debt + investment account lending + MCC lending for government and private productive capital.

NFCA is the Net Foreign Currency Assets of the M3 institutions and the Reserve Bank.


The residual (net worth) is always expressed as a negative quantity because it is not part of the money supply. 


The question then is “how is the NFCA to be funded”? How is it to be managed if  it is to be funded from debt-free money?




13. PM Introduction - Page 7:  (Taylor citation) “Private credit has always been the only useful and reliable predictive factor” [of financial crises].  We believe there is some truth in that, but, in our view, interest rates and foreign debt are also important factors.


14. PM introduction - Page 8  Top  The setting of interest rates by the central bank is generally ineffective at controlling inflation”. That is also true up to a point. However, in our work reducing interest rates reduces inflation provided new lending is properly managed.




15. PM heading “Transaction Accounts” Page 9 Bullet 4, on overdrafts. 


Reference is made to overdrafts but it is not clear where the overdraft “money” would come from. By definition an overdraft in the present system is a commitment by the bank to create new money on demand. Are commercial banks to have a corresponding “line of credit” from MCC?  If so, how is that line of credit to be allocated among banks? What determines the interest rate for it? Wouldn’t that mean the transaction accounts are not fully debt-free?


Both the loan “assets” and the deposit “liabilities” are the bank’s legal property because they represent the dual outcomes of the loan agreement whereby the bank agrees to create both the debt and the deposit.


Banks continue to “own” the money they have created. Borrowers and subsequent depositors just have the right to use it. The original borrower pays the price for the right to use the money as part of the original loan agreement. The money owned by the banks is tangible property, whereas the right to use it is temporary intangible property for which an on-going interest fee is paid.


The property of the banks relates to the parties´ obligations under the loan agreement. Deposit holders to whom the money created with the debt have migrated have nothing to do with the original loan agreement. The banks have no immediate right to or property in those migrated deposits at all because the deposit holder at any time has the intangible right to the use of the money. The banks’ rights relate instead to the original debtor and the original deposit under the loan agreement.


16. PM page 10. All financial activity except for government spending is to be controlled by banks, same as now, but with no effective limits on either debt or interest rates. The only differences are that government bank debt can be repaid (but we don’t need the PM proposal to do that) and that transaction account balances are debt-free. Everything else would be debt as usual ..... including funding current account balances.


17. PM page 11- Investment Accounts would not hold money: “An Investment Account would never actually hold any money.” This is because the money would immediately be transferred to the bank’s “Investment Pool”, at which point “the money would belong to the bank, rather than the Investment Account holder, and the bank would record the Investment Account as a liability to the customer, and the Investment Pool account as its asset.”


PM claims that when the money is transferred into a bank’s investment pool, it “would belong to the bank, rather than the account holder”. In our view that is true only up to a point. Legally the bank owns the money but the depositor, for the time being, owns the use of the money, much as expressed in our point 15 above. Under the PM proposals the investor hands the use of the money over to the bank under the investment prospectus, not the ownership of the money itself. Interestingly, in respect of the debt-free money issued under the PM proposal, we would say the “The People” own the money. It is public money made available for beneficial use in the economy at large. The MCC can add to that pool of money or reduce it at will according to the needs of the economy. Clearly the issuer, “the public”, owns it. We think the process described in the proposal defines the ownership of money once and for all.


If PM’s claim were true the bank would not acting purely as an “intermediary” as PM states at point 3, bottom of page 5 and point 2 on p 29 of the PM proposal would it? PM can’t have it both ways....... In our opinion, the investment account holder would remain the beneficial owner of the use of the funds. The amount invested should stay on his books as an asset. PM refers to this as a “record”. In effect, the investor sub-lets the use of the deposit in return for the interest the investor receives from the bank.


The bank does not (or should not) own the use of the money even though it has possession of it for a short time. The bank charges for its services with a fee or by negotiating extra interest for itself with the borrower. The bank invests the funds for its client on its client’s behalf. PM repeatedly state in the PM proposal at p. 12 “ the commercial banks would actually only be administering these accounts on their customers’ behalf”. This means the use of the money remains at the risk of the client. It must therefore remain the (intangible) property of the client. Sharing of eventual losses mitigates risks as stated the PM proposal on p. 12. From an accounting point of view the bank, if it includes these investor loans on its balance sheet, has the loan from the investor as a liability and the investor’s deposit in the investment pool as its asset. Interest and bank costs due or charged to the various parties would be accounted for separately as they are now.


We think the bank’s Investment Accounts should be a trust account, just like a lawyer’s trust account, and that the bank’s Investment Pool with the Bank of England should also be a trust account, just like a lawyer’s trust account.


Page 11 of the PM proposal : Investment accounts would be risk-bearing. Presumably losses are split according to risk category as in the Manning plan (TMP), but the PM document doesn’t say how the losses will be split. Loss split is crucially important because it has a large impact on bank lending behaviour, on investor decisions and on interest rates.




18. The PM proposal p.12 : Existing bank debt is repaid as it matures. That removes deposits from the banking system. Once all existing investment debts were repaid the only deposits in the system would be transaction account deposits. To roll investment debts over would require the speed of circulation of the remaining investment deposits to eventually approach infinity. The text only says that new money will be granted to the government to spend into circulation or supplied as loans to banks to pay for new productive assets , though that’s not clear either. Elsewhere in its text PM says the BoE money grants to the government are automatic so as to offset the loss of deposits. One of the most obvious ways to deal with this is to use a basic income to inject new deposits into the system. However, that is not as straightforward as may appear because once the deposit base has been rebuilt the basic income payments would need to be drastically reduced to match the planned growth in the investment sector, taking the speed of circulation of the deposits into account.


19. The PM proposal p.13 : “The money in this [investment pool] account would be owned by the bank and the account would be recorded as an asset of the bank”. We have discussed this under our point 17.


20. The PM proposal p.13 : The Customer Funds Account. Trust accounts would not normally appear on banks’ balance sheets. If they did, they would appear under the same title for the same amount on both sides of the banks’ books as we have discussed above. The same applies to trust funds held by the Bank of England for its client banks (Investment Pool) and for transaction accounts. Since the customer investment accounts and bank loans are on the balance sheet as shown in Figure 3 in the PM proposal they are not being treated like a Trust account. This would mean the commercial banks are, contrary to PM’s claims, more than intermediaries in the lending process.


21. The PM proposal p.14 : loans, bottom page: “By placing money into an Investment Account the customer will have transferred ownership of their money to the banks.”  This is like saying: on renting my house to a tenant I transfer ownership of it to the tenant!  We do not believe the PM claim is true whatever the accounting convention used. PM even confirms our view itself when it writes at the top of p.15 of its proposal : “ the act of making loans would merely transfer pre-existing money from one Transaction Account to another Transaction Account (via a bank’s Investment Pool)” The rights in the use of the money are transferred, not ownership of the money. Money arising from bank debt is owned by the bank and money issued debt free through MCC is owned by “the People”.


22. The PM proposal p.15 –top: PM writes “the quantity of money in circulation” would not increase. We say that the quantity of debt increases in excess of deposits if the first round of investment account funds were to be recycled to make more secondary debt loans. That would increase the speed of circulation of deposits. A higher speed of circulation would have exactly the same effect as increasing the quantity of money.


PM claims : “While the quantity of Investment Accounts would have increased, these would be illiquid and non-transferable and so could not be considered money”. This is contradictory because such deposits are part of M3 and therefore considered money now. They are obviously part of equation (2) above so they are money. Why wouldn’t investment funds continue to be considered part of the total money supply? The interest and principal repayments on secondary (investment) debt are money when they are paid into transaction accounts, so how and why would they suddenly become “non-money ” when they are transferred out of the transaction accounts?


The fact that investment funds are “illiquid” and/or tied up for a period of time does not remove them from the broader economy any more than is the case today. Since they are mostly tied up in the non-productive investment sector they do not contribute to GDP. But that is a separate issue altogether.


We think Figures 2 and 3 of the PM proposal are wrong and that both sides in the Bank of England balance sheet need to be extended by the amount in the investment pool if the investment pool is to be shown there at all.




23. The PM proposal p. 16- top: 


(a) Confirms MCC lends to banks only for injection into the “real” economy ;

(b) Confirms MCC has little control over how new money is to be used; and

(c) Interest rates are solely determined by the market. 


If that is so how does MCC know/decide how much to charge the banks for on-lending to private clients for productivity purposes? Money publicly spent into circulation would be interest-free. There is therefore no need for an “inflation target” of 2% if the financial system is stable. Conceptually, the inflation target can be zero as long as the interest rates paid on investment account deposits provide some “incentive to save”.


At present the PM proposal must fail. If deposits build up in the transactions accounts there will be runaway inflation in the productive economy and if most deposits migrate to investment accounts, as must happen for the productive economy to be stable, they must be on-lent come what may or the commercial banks will fail. The on-lending in the investment sector MUST cascade to keep the deposits out of the transaction accounts. This MUST lead to hyperinflation in the investment sector. The PM proposal will only work when there are systemic checks and balances in place as in as in the Manning plan (TMP).


24. The PM proposal p. 17 : How does MCC decide the amount of new lending needed in order


(a) to avoid a credit crunch in the real productive economy? and

(b) to stop money grants from MCC spent into the economy by  the government from increasing the levels of private debt?


Obviously most of the money grants must pass through the transactions accounts and then into customer investment accounts. Once they are in the investment accounts they MUST be on-loaned by the banks at interest, otherwise the banks would immediately go bust. Contrary to PM’s claims, most new money injection would promptly lead to unconstrained interest-bearing private secondary debt growth.


25. The PM proposal p.18 - Spending money into circulation.


PM’s Point A: If MCC controls the amount of money created, how does it decide how much the government gets and how much goes to private investment? How does the government physically manage the distribution process?


PM’s point B: This is confused and contradictory. MCC cannot both apolitically control the money supply and be directed in its decision by tax policy. Moreover changes in taxes change the distribution of purchasing power in the economy, not the money supply. PM’s point seems to be that budget deficits affect the money supply because new money would be needed to balance the budget. However MCC is supposed to be fully independent. If that is so the government has to adjust its policy within the framework of the new money MCC allocates to it, not the other way around. Allocation? How? Who decides?


PM’s point C: Citizens payments. Universal income is a way of equitably re-distributing funds. In principle, new money going into the system this way over and above the needs of the productive economy must be sterilised to avoid inflation there. One way to do that would be to tax out the excess for example, by using wealth and/or carbon taxes. This means there would have to be close links between MCC and the government that the structure of the PM proposal fails to provide.


PM’s point D: The paragraph on paying down national debt is incorrect. When a bond is repaid the government debt (the bank’s asset) and the government deposit (the bank’s corresponding liability) are both cancelled when the central bank transfers the new money it has created to the bank in repayment. The original government deposit remains however in circulation where is has been since the original loan money was spent . There is no new money changing hands! All that happens is that the bank loses the seigniorage (interest) previously paid to it by the government.


26. The PM proposal p. 19: Lending money into circulation.


PM writes: “the Money Creation Committee would also be tasked with ensuring that businesses in the real (non-financial) economy have an adequate access to credit.” and “the MCC may decide in its monthly meetings to lend some newly created money to banks”. This is confusing. MP has carefully stressed the MCC does not decide how new money is spent! There is supposed to be separation between deciding how much new money there is  (MCC), and how it is spent (Government, Banks). So the MCC would need to assess needs for the economy as a whole. Most money spent by government other than the taxation flows finishes up in private sector deposits anyway.


PM also notes that “new money comes into the economy not as new spending, but as new money available only for businesses to borrow.” PM should add to that : “for new production”. Otherwise the private sector could just collect new money (subsidies) to increase profits, which would inflate prices. Nor does PM say that money grants to the government can only be used for new productive investment. We are not saying that the grants to government should necessarily be limited to new productive investment but if that is not the case there would need to be some predetermined rules around how it can be used for other purposes.


27. The PM proposal page 19 - 3rd Paragraph: We do not see any reason why the government should not seek to “pick winners”. Unrestrained private enterprise for profit is not designed to and never works in the national or public interest, and we are disturbed that the PM proposal would continue the status quo in respect of the economy as a whole.


The government answers to its electors for the choices it makes. In effect PM seem to agree with this where it writes: “the Bank of England may make up the shortfall by lending a pre-determined amount to commercial banks expressly for this purpose.” This is both dangerous and inconsistent with the structure of the PM proposal under which the government spends new money into circulation and the MCC, not the Bank of England,  provides funds to commercial banks for on-lending to the private sector for productive purposes. We think PM needs to state the roles of the parties more clearly.




28. The PM proposal page 20 -The traditional method.


We think the wording at the top is very clumsy. The existing bank deposits are transferred from the commercial banks to the central bank. The central bank then has an asset (the deposits it has received) and a liability (the corresponding “loan” from the banks). The balance on both sides of the accounting equation falls as the bank loans giving rise to the deposits are repaid. As previously agreed, the government  must spend an amount of new money into circulation equal to the repayments being made. If it did not do so there would be no transaction deposits left when the final existing loan is repaid. Whether the government could physically spend so much remains to be determined. This is so even though the Conversion Liability is repayable over a period of 20 years. The text on page 20 seems to refer to the transitional period in respect of the commercial banks’ Investment Pools, but does not say so. Which makes it confusing.


29. The PM proposal page 20 – paragraphs 2 and 3: The Central Bank transactions account is or  should be a trust account. There is no loan either from the individual banks or from deposit holders. Funds are simply recorded when they go in and when they go out, like a lawyer’s trust account. Individual banks maintain the schedules on behalf of the Central Bank on the one hand and their clients on the other, so the use of the funds remains individually owned and “controlled” by the deposit holders.


We think the whole matter of bonds and government debt is redundant as MCC has the sole power to create money. The potential need for the bonds seems to arise because the roles of the key agencies (MCC, government, central bank) are still confused despite PM having made considerable effort to avoid that. The tables and figures give an idea of outcomes but we do not think they properly define the relationships.


30. The PM proposal page 23 – bottom:  How does MCC decide what “the productive capacity of the economy” is? How can it make such a decision when the banks allocate the new money for private production? There seems to be a fundamental contradiction between MCC playing a management role here when, according to the text, the banks have full control of resource allocation in the private sector.


31. The PM proposal page 24 – Table. Would the productive capacity of the economy be the outstanding principal on productive investments + the productive sector transactions accounts as in Lowell Manning’s work at ? 




32. The PM proposal page 25. The text claims “The consequences of conversion of demand deposits into state issued currency would allow a significant reduction in household debt and a gradual reduction in the aggregate balance sheet of the banking sector”. We think this is misleading.


PM shows a reduction in the balance sheet of the banking sector only because the very large secondary debt base is not scaled properly on the balance sheet (Figure 3). PM shows the post reform loans have indicatively the same size as the investment accounts but that would be untrue in presence of a cascading effect resulting from multiple on-lending of the deposit base. 


According to PM’s earlier text customers just have the “records” of the banks’ (potentially multiple) on-lending of the investor account deposits. However PM shows both the investment account and the bank loans on the household/firms balance sheet in its Figure 3. The full amount of debt will still be there, and it could be much larger than it is at present. So we think Figure 3 is more or less OK (though lopsided) and PM’s text elsewhere is unclear.


At the same time the banks will still be drawing a bank spread, which would potentially be at least as large as before but for a much reduced risk, on the whole sum invested through investment accounts. That sum may and probably will be larger than the total deposits in the investment pool because there is nothing at all to prevent multiple secondary on-lending of the same deposits. So there may be little, if any, reduction in household debt unless basic income or equivalent measures are carefully introduced. In short, we suggest the PM proposal fails in its major objectives.


33. The PM proposal page 26 – Overnight switch: First paragraph. See points already made above about the conversion liability and the difficulty of juggling risk levels and deciding transition interest rates.


PM states: “the Bank of England would have ‘extinguished’ the banks’ demand liabilities to their customers by creating new state-issued electronic currency and transferring owner-ship of that currency to the relevant customers.” This presumably refers only to transaction accounts, though PM does not say so. The Bank of England creates money on the instructions of MCC and gives it to the banks to extinguish the liability the banks have to their customers under their loan agreements. In return the banks then have an equal liability to the Bank of England for the money the Bank of England has lent to them.


The household and firms’ transaction accounts shown in Figure 3 of the PM proposal would remain as they were. They were already a credit of the account-holder with respect to the commercial bank and now they are a credit of the account holder with the Bank of England. There is no physical transfer of new currency to the deposit holder. Instead there is a physical transfer of new currency from the Bank of England to the commercial bank so that its deposit liabilities can be extinguished.


The commercial bank still enjoys the interest benefit from the original debt corresponding to the original deposit, which still has to be repaid by the original borrower. However, the principal repayments form part of the conversion process, passing from the commercial banks to the Bank of England to reduce the banks’ debt, its “commercial bank liability to bank of England”, shown in Figure 2.


34. The PM proposal page 26 – 3rd paragraph:  If removing the demand liabilities from bank balance sheets were the end of the process, then the UK banking sector in aggregate would have lost around £1,041 bn. of liabilities.” 


That’s not the end of the process so there’s little point in the text. You can’t “lose” liabilities. That’s why there is a corresponding conversion process as the banks’ original borrowers repay their loans, including those giving rise to the transaction account balances, while the banks use those repayments to retire their liability to the Bank of England. It would be helpful if Figures 1-3 in the PM proposal were better scaled to allow the reader to better follow the actual processes. Perhaps a numerical example would also help.


As the Bank of England receives the Conversion Liability repayments from the commercial banks over a period of some 20 years, it reduces the banks’ Conversion liability to it. Meanwhile the Bank of England “writes” a corresponding amount of new money into its assets column (Figure 3  Bank of England, left hand column) that shows the position once all the existing bank debt has been repaid.


35. The PM proposal page 26 – 4th par: “Under normal circumstances the Bank of England would be required to automatically grant the money paid to it as a result of the repayment of the Conversion Liability to the Treasury to be spent back into the economy.”


The extra money that is put into the economy by MCC to expand production (both government and private) has to be enough to maintain the existing deposit base plus new money for new economic development unless the speed of circulation through the investment accounts increases.


Once the conversion is complete, as in Figure 3, repayment of loans advanced through the banks’ investment pools eventually accrue to the original depositor (the lender) through the banks’ operating accounts and there is therefore no loss of deposits from the financial system. Where deposits are on-loaned the investment sector more than once, the speed of circulation of the money supply increases.


Spending money `back into the economy` through the transition period in part mimics the existing debt system where deposits are cancelled as debt is cancelled and new debt and new deposits are created to replace them.


In the reformed system deposits are not cancelled as investment account debt is repaid. Instead, new secondary debts are likely to be created using the same deposits. That will not be inflationary unless the total quantity of investment account lending exceeds the size of the investment pool.  However, there is nothing in the PM proposal to prevent that happening.


36. The PM proposal p. 28 – Deleveraging :


¨After the reform, loan repayments would not reduce the money supply, because the act of repaying a loan would simply involve transferring state-issued electronic currency from the borrower’s Transaction Account to the bank’s Investment Pool


This wording is clumsy. Repayments of loans made via investment pools under the proposed PM system pass from a borrower’s transaction account to the bank’s operational account and from there to  the original lender’s transaction account. If the original lender chooses to re-invest the money, it will pass via the original lender’s transaction account to the bank’s investment pool for re-investment. This does not apply to the existing debt-base which is described at the top of page 28.


37. The PM proposal p 28 – Deleveraging – bottom:


¨The money supply would be maintained, although because the money would be spent and not lent into circulation, debt would be lower


This is fundamentally incorrect, as described elsewhere in these notes. The deposit base will increase as new money is spent into circulation through government spending and MCC loans for productive investment.  Most deposits will pass through investment accounts into the investment pool. Since there is no restriction on the cascading effect of deposit recycling, interest-bearing secondary debt will almost certainly be higher than the total debt is now, not lower.


The authors can be contacted at :


Stichting Bakens Verzet (NGO Another Way)

Schoener 50,

1771 ED Wieringerwerf, Netherlands

Tel. 0031-227-604128

E-mail :


The referenced papers :


00. Summary of papers published.

01. Financial system mechanics explained for the first time. “The Ripple Starts Here.” 

02. How to create stable financial systems in four complementary steps.

03. How to introduce an e-money financed virtual minimum wage system in New Zealand.

04. How to introduce a guaranteed minimum income in New Zealand.

05. The interest-bearing debt system and its economic impacts.

06. The Savings Myth.

07. The DNA of the debt-based economy.

08. Manifesto of the debt-based economy.

09. Unified text of the manifesto of the debt-based economy.

10. Using a foreign transactions surcharge (FTS) to manage the exchange rate.

11. The Manning plan for permanent debt reduction in the national economy.

12. Comments on the (Jaromir Benes and Michael Kumhof) Chicago Plan Revisited Paper.

13. Missing links between growth, saving, deposits and GDP.

14. Capital is debt.


Return to : Bakens Verzet Homepage

"Money is not the key that opens the gates of the market but the bolt that bars them."

Gesell, Silvio, The Natural Economic Order, revised English edition, Peter Owen, London 1958, page 228.


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