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How money is created

March 13, 2018

from Lars Syll

Everything we know is not just wrong – it’s backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes.

There’s really no limit on how much banks could create, provided they can find someone willing to borrow it … For the banking system as a whole, every loan just becomes another deposit. What’s more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity …

The real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow.

David Graeber 

Sounds odd, doesn’t it?

This guy must sure be one of those strange and dangerous heterodox cranks?

Well, maybe you should reconsider … 

The reality of how money is created today differs from the description found in some economics textbooks:
• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits …
Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base or broad money.

Bank of England’s Monetary Analysis Directorate

  1. March 13, 2018 at 12:29 pm

    Why is the crank theory still in textbooks and on Wikipedia?

    • Luca Ravioli
      March 13, 2018 at 9:10 pm

      Great question. And any one willing to learn how to edit them can fix wikipedia articles.

      • March 14, 2018 at 12:02 pm

        Question Of The Day:

        In our current private banking environment, would it be possible to create a bank without any initial capital investment whatsoever?

        If, say, you were to create a modern, online bank, where all payouts to any depositor, employee, etc. are made by crediting an account you’ve created for them, would you even need vault cash? Let other banks, ATM companies, which have already taken on that expense turn account totals into hard cash.

        Why could you not just give yourself a few million dollars/pounds/euros with a keystroke on opening day. Would anyone even check to see if the money that appeared in various accounts was actually transferred from a ‘legitimate’ source?

      • March 14, 2018 at 4:58 pm

        100% true. You don’t even need the phoney keystroke balances either. There is a membership fee to start a bank, it was 1 million, but after you open the doors people come and give you money! You, as the bank,legally own those deposits. You do, of course, owe the money to the depositor but it is your money when it is deposited!

  2. culturalanalysis.net
    March 13, 2018 at 12:57 pm

    So everyone knows this by now, and still nothing is done to reclaim some of this value (amounting to perpetual interest paid to the private banks on 97% of money in circulation). We cut spending on schools and roads but nobody touches the Banks’ golden goose, even though they have no better title to this money than anyone of us, but a worse title than the State.

    • March 13, 2018 at 1:57 pm

      We cut spending on schools and roads but nobody touches the Banks’ golden goose, even though they have no better title to this money than anyone of us, but a worse title than the State.

      Well, yes this is true, but let me point out that one “answer to the inequity” that is popular among the Austrian crowd these days —that of giving “everyone” the freedom to create money like the banks—is beyond ridiculous.

      We already tried that experiment in the 19th Century in America, where banks were free to create their own money and the result was wave after wave of bank failures over time. Lots of victims.

      In order for fiat currency to ‘work’, its supply must be kept relatively scarce. If you don’t keep the supply ‘relatively scarce’, inflation will quickly worsen to a point where everyone agrees that it must be stopped, or attenuated.

      The answer is not to give individuals, or municipalities for that matter, the freedom to create their own money, but rather it is to end the immoral behavior of banks lending money that they create out of nothing. END THE PRACTICE of banks lending ‘reserves’ that they do not possess before the execution of a loan.

      The Central Bank would still be able to expand overall lending by buying the financial assets of banks (or any other asset for that matter) with money it creates with a keystroke, but if it wants to maintain firm control over the money supply when the economy is flirting with Full Employment, it must prohibit banks from lending money they do not ‘possess’ prior to executing a new loan.

      I really don’t understand why those who complain about the unfairness (of banks creating the money they lend) don’t demand that this Lending Sin be banned in the name of Justice instead of looping on the argument, “why can’t we do what they’re doing?”

      What am I missing?

      • culturalanalysis.net
        March 13, 2018 at 9:00 pm

        I agree that giving everyone the power to create private money in the same sense that Banks do I still not a viable solution. I was not suggesting that.

        There is effectively 3 main, more or less viable ways of dealing with the problem:

        1. 100% full reserve money as in the Chicago Plan, Vollgeld, etc.

        The main problem with this is lack of elasticity in the money supply to respond to the needs of the economy.

        2. Banking system privatisation by the Government (at least one bank, to create pressure on others to keep rates near zero)

        3. Super-tax imposed on monetary expansion by the banks.

        4. Parallel money creation by the State and direct spending into bottom end of economy according to some supply rules (I have proposed ‘Value-Added Negative Tax’ in issue 70 of RWER).

        The problem is how much power banks have, globally, and can really hurt people and states who would try anything creative in that regard.

      • rddulin
        March 13, 2018 at 10:21 pm

        There is no place for lending of money in an honest money system. You can sell something on time payments if you want to, but money can not be lent without screwing someone.
        It is like stretching a rubber ruler so it fits what is measured. The ruler is always wrong and so is the measured value. Rubber rulers and rubber “Buying Power” do not work.

      • March 14, 2018 at 1:03 pm

        There is effectively 3 main, more or less viable ways of dealing with the problem…

        I am firmly on the side of using credit controls to put an absolute limit on the quantity of dollars/pounds/euros that banks are allowed to lend into certain industries, period.

        For example, if a Central Bank wanted to control inflation in certain markets where speculators (mostly banks and other financial firms) are trying to take advantage of inflation by leveraging large purchases of commodities at today’s prices in the hopes of selling at a higher price several months later (i.e., all asset bubbles), it could simply set a certain total quantity limit on the amount of ‘loanable funds’ that would be available for any and all banks to lend to such customers.

        If you want to lend to these customers, you need to acquire the funds you want to lend from the Central Bank, and that pile of money will be limited in size. If demand is high and the target is exceeded, the the price charged will be raised until ‘equilibrium’ is achieved at the desired quantity of supply.

        If this was done AND privately-owned banks were required to actually possess any monies they might want to lend out before executing a loan, then it shouldn’t be at all difficult to keep inflation ‘under control’, even in economies where the government has decided to create and indefinitely maintain a Labour Shortage. Hyperinflation would be an absolute impossibility.

      • March 14, 2018 at 3:31 pm

        Yes, IF, “… you need to acquire the funds you want to lend from the Central Bank.”
        The Private for profit banks MUST borrow from the Central Bank; no longer be allowed to
        “create money out of thin air.”

      • March 15, 2018 at 1:58 pm

        Michael Kowalik (page 80):

        In a system where individual agents have inherent ownership rights with respect to the goods and services they generate but no inherent ownership rights with respect to the money supply that constitutes a universal claim on the former, the productive agents face incidental expropriation of wealth on account of the dependence that exists between the supply of goods and services and the purchasing power of money. (my emphasis)

        I’m not sure that “expropriation of wealth” is an accurate/useful way to describe what is happening to the purchasing power of sellers who bring more product to market (against a constant money supply).

        I’m assuming that what you mean by “expropriated wealth” is the purchasing power one might imagine one would have if the larger quantity of things for sale could have been sold at the old (higher) price that the things used to sell for when supplies were less abundant.

        The way you’ve worded this statement, Michael, suggests that IF the producer had ‘ownership rights’ over the money supply, he would perhaps be able to maintain, or recapture, the older, higher price his product once commanded in the marketplace when it was more scarce.

        If so, then I think perhaps you are failing to distinguish between the two completely different market-determined reasons why prices go up.

        In the scenario provided, the original/higher price that your product used to command in the marketplace (before you decided to produce twice the quantity) was determined by the market’s auctioning function. The product’s price was determined by the number of buyers out there who were willing/able to pay that higher price, compared to all their other options.

        If the quantity of product that you and others have brought to market is double what it used to be, then the only way you are going to be able to sell them all is by charging a lower price. That way, people who were ‘priced out’ of the market previously are now able to afford the product.

        But you have suggested, Michael, that if the producer also had ownership rights over the money supply—i.e., having the power to determine the “price level”—he would be able to restore the higher price he used to get. There’s a problem with this.

        Yes, he would theoretically be able to re-establish the higher price by manipulating the money supply, but not in a way that affects the auctioning process. He could raise the price by inflating the money supply, which means he would necessarily be raising the prices of everything sold and he would also be inflating the disposable incomes of those who are participating in the affected markets.

        But the drop in prices the producer wants to compensate for through his control over the money supply is not due to deflation, but is due to an actual change in the supply of product being offered for sale, and that price is determined by the auction process.

        Hopefully, you can see why inflating the money supply would not “restore lost purchasing power” (the old sales price, relative to all other prices) that the seller might have thought he was entitled to, due to the results of an earlier auction (when supplies were much smaller).

        When prices drop as a consequence of increased supplies, the seller does not actually experience any loss of purchasing power with respect to his income, which I elaborate on in the second part of my reply…

      • March 15, 2018 at 1:58 pm

        The second part of my reply…

        Also, Michael, it is important to note that, when discussing the topics of purchasing power + inflation, the purchasing power of an income is a very different thing from the purchasing power of a unit of currency.

        In economies experiencing a robust level of sustained price inflation, none of those affected by the constant price increases actually loses any purchasing power with respect to their disposable incomes.

        This, because their incomes must necessarily have been inflated enough to cover the higher prices that are holding in the marketplace. So even when the purchasing power of an individual unit of currency drops in a market that is being influenced by price inflation, none of those participating in the market has experienced any loss of purchasing power with respect to what their disposable incomes will buy in the marketplace.

        Unfortunately, few economists realize that when a unit of currency is ‘debased’ by inflation, the drop in its purchasing power does not ‘stick’ the the currency itself, ensuring that it (the loss of purchasing power) will show up in any and all markets it is spent in.

        The drop in the currency’s purchasing power is not due to anything that happens to the currency, itself, but is caused by what has happened to the disposable incomes of those participating in the market.

        In other markets, dominated by people who did not experience inflated incomes, the same unit of currency will not face inflated prices, because most of the buyers in that market did not get any extra money with which to bid up prices.

        This illustrates one of the major mistakes Irving Fisher made when he popularized his conception of The Price Level. Currency units do not actually lose purchasing power due to monetary inflation; only buyers who have experienced inflated incomes experience a loss of [their currency’s] purchasing power, and only in those markets that are affected by their inflated incomes.

        The idea that an entire currency is somehow ‘debased’ by inflation is a myth.

        From this POV, the producer in your scenario doesn’t experience any kind of real loss of purchasing power in terms of his income when the price he can get for his extra product drops. He’s charging a lower price per unit, but is selling a lot more, so the purchasing power of his income increases in spite of the fact that the price he receives is lower, and that’s what he cares about.

        For more on this analytical perspective, see “How The Marketplace Determines Prices”.

  3. March 13, 2018 at 1:27 pm

    Hopefully economists will catch up at some point.

    • Luca Ravioli
      March 13, 2018 at 10:21 pm

      People who understand accounting have very little problems understanding this.

      Example accounting Journal entries for a loan to Luca Pacioli with the Bank of Italy from the point of view of their account books.

      Luca Pacioli’s journal entry in his account books
      Description: Luca gives a $100 note to the Bank of Italy.

      Debit.: Bank Account, at Bank of Italy $100
      Credit: Loan Liability, at Bank of Italy $100
      Bank of Italy $100 <—- Note from, Me, Luca Pacioli to Bank of Italy for $100

      Bank of Italy journal entry in their account book (mirror image of Luca Paciolis’s entry.)
      Description: We the house of Bank of Italy received a $100 note from Luca Pacioli.

      Credit: Bank account of Luca Pacioli $100
      Debit: Loan Asset Note from Luca Pacioli $100
      Note Recievable from Luca Pacioli for $100 <—– Luca Pacioli, record in his bank account

      In accounting, every one keeps their own set of books from their point of view. In accounting for a set of books and for every each entry the sum of debits = sum of credits. And, the entries from both points of view mirror each others books because the Bank of Italy received a note from Luca Pacioli. One received and the other gave. Luca Pacioli gave a note to pay in the future. The bank received it.

      If you learn or have learned some double entry bookkeeping it can be simple. If not, it looks hard. But, accounting is so valuable to learn. Why not learn accounting? Check out the arrow comment at the bottom of the journal entries showing the transaction from each entities point of view..

      Now draw T accounts and it is more clear (if you have had some accounting.). Check out the meaning of personal accounts, and bills of exchange which include drafts. Try also T accounts as with one running account by merging the loan and bank account together.

      In this case, the debit and credit for each are for the same person or personification (in italics). If left in the same account the account would be known as a “running account.” They would balance out if they were not put in different accounts of Loan and bank accounts. Whah! lah! The loan was financed by Luca Pacioli but the bank and its depositors are the guarantors.

      The value created was the promissory note signed by Luca to pay in the future and the banks obligation, liability, to pay from the bank account of Luca to by Luca’s direction by draft or currency in the future. And, as long as some people take drafts, checks and bank cards, as payment it works! If no one will, it does not work. But, people and stores with employees like those forms of payment.

      Please look at your deposit slip. Currency and checks are recorded as two different totals which both are credited to you account by the bank but the debits are one for “cash” and the other for “checks in transit” to clear.

      * Bank of Italy started in San Francisco, their success was partly due to taking on good immigrant customers with less funds when other banks would not. And helping their customers succeed. Maybe being Italian helped with familiarity with accounting which is required for banking.

      • Luca Ravioli
        March 14, 2018 at 12:02 am

        Most of the terms above that might be unfamiliar can be looked up in an accounting text, accounting dictionary, or online in accounting or finance related web pages.

      • March 14, 2018 at 2:54 am

        Double entry bookkeepers are very useful and understand the accounting needs of USERS of money but they have not the foggiest idea of how to keep books for an entity that CREATES money such as a sovereign nation. The bookkeeping for users of money is very different from bookkeeping for a creator of money. The creator of money must look at available resources and inflation factors. The fiscal equity of a sovereign nation is essentially infinite and bookkeepers can’t deal with that. They are, therefore, essentially useless in governing the spending of a sovereign nation.

  4. March 13, 2018 at 1:49 pm

    Graeber makes a slight mistake when he says commercial bank created money is legal tender. In most countries, only central bank issued money is legal tender. The fact that the tax authorities accept a cheque drawn on a commercial bank does not alter that because final settlement between banks and the tax authorities is in central bank issued money. Otherwise Graeber’s points are correct.

    Next, I agree with Culturalanal that commercial banks gain a form of illicit income or subsidy from their right to create money. Indeed, therein lies the basic flaw in private money creation: it is widely accepted in economics that subsidies do not make sense or maximise GDP, unless there is a very good social case for a subsidy. However when it comes to setting out the exact nature of that subsidy, I think Joseph Huber nails it in his work “Creating New Money” (1st link below). See his para starting “Allowing banks to create new money…”. As Huber says, if you can lend out and get interest on home made money which costs nothing to produce, that’s clearly a better bet than lending out money you’ve had to acquire by earning it or borrowing it. That enables banks to lend at a lower rate than they otherwise would, which in turn means debts are artificially high and the bank industry is artificially large.

    I expanded on that subsidy point of Huber’s at the second link below.

    Also there will be a referendum on this subject in Switzerland this summer. The chairman of the Swiss central bank (needless to say) opposes a move to ban private money creation. See 3rd link. I answered his point – see fourth link.

    Click to access creatingnewmoney.pdf


    Click to access ref_20180116_tjn.en.pdf


  5. Helge Nome
    March 13, 2018 at 1:58 pm

    The deception involved here is very clever:

    When a bank issues a loan to an individual, two entries in its books are made. One entry as a loan to the borrower is listed as an asset to the bank because it is repayable. The other entry, for the same amount, goes into the liabilities column branded as a deposit because it is available to the borrower to spend at will.

    Now, when you look at the aggregate number of assets and liabilities on the bank’s balance sheet, it appears as if all the loans made are backed by deposits, when in fact, each loan made automatically generates an equivalent deposit on the bank’s books.

    Even bank employees believe that loans are backed by money coming into the bank from depositors.
    Just like, in the past, people who deposited gold with goldsmiths and received certificates in return, believed that there was enough gold in the vault to cover all the goldsmith’s IOUs.

    Oh, the Wonderful Wizard of OZ!

    • March 13, 2018 at 4:01 pm

      Bank professionals are quite aware how money creation works as a balance-sheet operation. It’s not unknown or a deception within the profession. Yet folk-tale theories about the nature money are still being promoted to the public. I’d like to know which it is:

      * Paternalism. “It’s complicated, they wouldn’t understand”
      * Bone-fide attempt to strengthen the illusion of money / avoid bank runs.
      * Hidden agenda to move money creation away from a policy tool toward a privately administered gold-like model that suits the rich.

      I suspect it’s the latter. The Euro debt crisis in particular could have been entirely avoided if the ECB aligned with the “money is policy” philosophy, but largely bowing to German pressure it fell into a “money is gold” orthodoxy. I suspect this is a still ongoing plan to take money out of the reach of government or policy and turn it into a private system of keeping score.

      • Rob Reno
        March 13, 2018 at 4:52 pm

        I always find your comments enlightening and worthwhile. Thank you. Are you writing a book?

      • Luca Ravioli
        March 13, 2018 at 11:57 pm

        I think one needs to use different vocabulary for different things. Some of this vocabulary already exists.

        I found “bank money” and “credit money” in a banking or accounting dictionary. They refer to money created by private banks and or used as drafts such as checks and bank cards. Notice when you pay by check you are not using currency!

        Now since J. Pierpont Morgan, said. “Gold Is Money, Everything Else Is Credit” I call gold money and currency currency because currency is a form of credit. Currency is recorded by the government as a debt. So I try not to call currency money.

        “Fiduciary Currency: It is the credit money. Money which has no portion of it supported by redemption in the metallic reserve. Paper money issued by the bank or government on the credit is called fiduciary currency. ”
        —-Blackie’s Dictionary of Banking and Finance

        A book on banking that talks about several forms of money near p.109 with a google preveiew is, “The Pillars of Banking”

        “Strickly speaking a debt is not money, primarily because debt can not act as a unit of account. All debts are denominated in units of something external to the debt. Hence credit money is not strictly realy money at all. However credit money is certainly acts as a money substitute when it comes to the other functions of money (medium of exchange and store of value). As such the existence of credit money may dampen demand for the real money and in so doing alter the dynamics of moneys market value.”

        -The author used a better word than equilibrium!

  6. March 13, 2018 at 2:03 pm

    Economists also refuse to see how state borrowing destroys democracy and has nothing at all to do with economics except that destroying democracy also destroys an important part of the information flow supporting an efficient market.

  7. rddulin
    March 13, 2018 at 3:07 pm

    Lending does not create money.
    It creates velocity, which is indistinguishable in practice from money.
    It satisfies one side of the M x V = P x Q equation.
    Anyone that can lend can create velocity.
    So everyone can create “money”.

    • Craig
      March 13, 2018 at 4:33 pm

      The velocity of money creates liquidity for enterprise with which they must pay their vendors and crediters, but does not increase the purchasing power or incomes of individuals by a single cent as its classical illustration erroneously depicts. This is because any money re-circulating is business revenue NOT anyone’s individual income that can be distributed willy nilly without regard for cost accounting and the necessity for businesses to pay their bills. Macro-economists miss this because they’re off in some three times removed abstract and/or eye glazing over mathematical fugue and hence have lost track of temporal commercial realities.

      • rddulin
        March 13, 2018 at 8:43 pm

        Really great to see so many people thinking about this subject but sad to see how many wrong beliefs there are about money.
        If you don’t have money to pay for something, as long as you have collateral and some possibility of income you can create money immediately by getting a loan from someone, bank or individual at the price of interest. All buying power (M x V) creation cost money. When you spend that borrowed money the person you paid now has non interest bearing money the he can pay his bills with.( because you are paying the interest) Depending on how many times it is spent before it gets paid back to you (possibly 5-10 times) for something that you sell ,(labor or product) You have just created interest free money for 5-10 other people). In the present system someone has to borrow money for it to exist. Most borrowed money exist as velocity. The lower the velocity, the more money has to be borrowed (to create velocity) to provide the required purchases in an economy.

    • March 13, 2018 at 8:49 pm

      The fact of creating velocity does not create money. The Bank of England is right: it’s lending by a bank that creates money. Indeed other central banks have said the same, e.g. see this Bundesbank article.


      Money is defined in text books as something like “anything widely accepted in payment for goods and services”. The liabilities of a bank normally ARE ACCEPTED as money. Most other liabilities are not. Ergo lending by a non-bank does not create money.

    • Luca Ravioli
      March 14, 2018 at 12:04 am

      Lending creates credit.

  8. March 13, 2018 at 3:08 pm

    Garrett, I don’t think the sovereign state has to “borrow” money; it just spends money into the economy where companies and individuals gain access to it to either save money or to spend money.

    What is egregious about banks creating money by making loans, is that the banks then have a perverse incentive to make as many loans as they possibly can because that is where their profit comes from; therefore, in the last financial crisis, banks made subprime loans to mortgagors (through service or mortgage companies), and then created derivatives from these subprime loans to sell to pension funds and insurance companies. By that means, the banks received their profits through selling derivatives and, when the loans went bad, the buyers (pension funds, and others mortgage holders,) suffered. That is why the government bailed out the banks that created these fraudulent loans so that the whole financial system would not collapse. Many homeowners were foreclosed on as a result of banks making bad mortgage loans that could not be repaid.

    • March 13, 2018 at 8:54 pm

      I’d put that differently and as follows: it is precisely the fact of creating money that renders commercial banks fragile and causes them to collapse. Douglas Diamond said as much in the abstract of a paper of his: http://www.nber.org/papers/w7430

      Money is a short term liability of a bank. Borrow short and lend long is always dangerous, and there absolutely no need for that risk because central banks can create and distribute whatever amount of money the economy needs to bring full employment.

    • rddulin
      March 13, 2018 at 9:15 pm

      Everyone has to share the interest payments to keep enough “Buying Power” in circulation,
      even governments .
      Money has to be lent everyday to make yesterdays loan payments.

  9. March 13, 2018 at 3:14 pm

    rddulin, please read the following to see how making loans creates money: https://lop.parl.ca/Content/LOP/ResearchPublications/2015-51-e.html?cat=economics

    “Private commercial banks also create money – when they purchase newly issued government securities as primary dealers at auctions – by making digital accounting entries on their own balance sheets. The asset side is augmented to reflect the purchase of new securities, and the liability side is augmented to reflect a new deposit in the federal government’s account with the bank.

    “However, it is important to note that money is also created within the private banking system every time the banks extend a new loan, such as a home mortgage or a business loan. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money (see Appendix B). Most of the money in the economy is, in fact, created within the private banking system.

    “A key similarity between money creation in the private banking system and money creation by the Bank of Canada is that both are realized through loans to the Government of Canada and, in the case of private banks, loans to the general public.” (from the above link)

    • rddulin
      March 13, 2018 at 8:59 pm

      It is important not to get confused with the fancy footwork that Central banks perform for the purpose of confusing people.
      Central banks under dubious authority from their government can create money out of nothing.
      It is the primary duty of any government to provide a currency for it’s citizens.
      Ideally when that money is created it as necessary for the economy it would be divided equally and distributed on a per capita basis to all citizens of legal age at no charge.
      Instead the people at the central bank lend it and collect interest or buy income producing properties such as government securities.
      Private banking can not create money out of thin air but usually as soon as they lend money some of it is redeposited and can immediately be lent again.
      Central banks create money All other lenders create velocity.

      • culturalanalysis.net
        March 13, 2018 at 9:05 pm

        If M1 and above counts IS money then Banks do create money. Indeed, this is a different kind of money than the central bank money and can’t be Spent the same way, but it still allows for charging of interests, and that is how banks convert this bank-money into hard currency.

      • Luca Ravioli
        March 14, 2018 at 12:59 am

        I think many of us are confused because many of us have not learned double entry bookkeeping. AKA the language of business.

        Those that have not learned it have no idea what they are missing in understanding things financial, business, government, and economic.

        It is a great way to measure all kinds of things and a very
        valuable frame work for understanding. It is endemic in the world.

  10. March 13, 2018 at 3:32 pm

    That is correct. Now we have a 100% credit-money system, where banks create money out of lending, but they also have the posibility to finance speculation, and not the productive economy, with no limits, except those of minimum capital requirements, which is a limit to all lending, not to speculative lending. Shumpeter analysed deeply and advocated for the concept of credit-money, like the one we have, but his frame of mind was the productive economy, not a financiarised bubble economy like the one we have today. The two main trends are these two: Some want to go back to gold standard (or bitcoin-standard) to stop speculation, which is again a limit to all lending and not to speculative lending, and go back to pre-Keynesian times, stop banks from creating money and accept that the volume of savings is the limit for financing the real economy. The other main trend is to let banks create money out of lending, but also let them finance speculation as much as they want, except that only big banks can do it (which is what minimum capital requirements boil down to). Out of these two main trends, there is a third way: Credit-money for the productive economy alone. Along this line, there are thinkers that advocate for regulating banks (i.e.: let them finance the productive economy and not speculation), like Ann Pettifor (See her book “Just Money”) . Others, like me, advocate for new ways of creating money out of lending (interest-free credit-money for the productive economy alone), and for complementary and alternative currencies to test this new ways of money creation. Just to give you some more references, I carried out a report fo the Competition Authority in Catalonia (ACCO) about the structure in the monetary and financial system (as money creator, dominan digital payment system, and credit system), and the innovations that fintech can bring about (from page nbr. 23 you can find the money creation description and recomendations: http://acco.gencat.cat/web/.content/80_acco/documents/arxius/actuacions/20171120_informe_ineval_03_eng_P2P.pdf. The Competition authority published a report only about competition in payment systems that you can read here: http://acco.gencat.cat/web/.content/80_acco/documents/arxius/actuacions/20171120_es_16_2017_03_eng.pdf .

    • Luca Ravioli
      March 14, 2018 at 1:01 am

      “That is correct. Now we have a 100% credit-money system”

      That would be free banking! And J.P. Morgan would have gone on being prudent and take over their banks or assets later at a discount.

  11. Craig
    March 13, 2018 at 3:56 pm

    Everyone here is missing the real problem which is the idea/currently enforced paradigm of Debt Only and which has no balancing counterpart despite the rigged, cost inflationary and hence unworkable inherent nature of modern technologically advanced economies. Everyone is mentally paralyzed by the fear of monetary inflation which is a misnomer because money actually isn’t the operative factor in such, and is largely or completely unconscious of the fact that the point of retail sale is the terminal summing of all costs and so all price for any item or service and simultaneously is the terminal and only legitimate ending point for the entire economic/productive process, that is where production becomes consumption. Hence it IS the perfect place to implement the new paradigm of Monetary Gifting with a monetary policy of a discount/rebate that mirrors the digital nature of both the pricing and money systems and so benefits all agents and not only prevents any possibility of inflation (retail sale is also the terminal expression point of price inflation including large asset purchases like autos and mortgages), but integrates price deflation painlessly and beneficially into profit making systems.

    Behold! All things are made new!

    • Luca Ravioli
      March 14, 2018 at 1:03 am

      Where is the price deflation?

  12. March 13, 2018 at 4:08 pm

    A message from Frederick Soddy (“The Role Of Money” 1934),
    To RWER’s 26,498 subscribers and 340 million Americans.

    “There never was an idea stated
    that woke men out of their stupid indifference
    but its originator was spoken of as a crank.”
    — Oliver Wendell Holmes, Sr.
    (1809-1894) American Poet

    “The Role Of Money”

    ******Excerpt from http://en.wikipedia.org/wiki/Frederick_Soddy

    “In four books written from 1921 to 1934, Soddy carried on a “quixotic campaign for a radical restructuring of global monetary relationships”[this quote needs a citation], offering a perspective on economics rooted in physics—the laws of thermodynamics, in particular—and was “roundly dismissed as a crank”[this quote needs a citation]. While most of his proposals – “to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort” – are now conventional practice, his critique of fractional-reserve banking still “remains outside the bounds of conventional wisdom”[this quote needs a citation]. Soddy wrote that financial debts grew exponentially at compound interest…”

    *******Excerpt from “The Role Of Money”

    As Soddy stated,
    (…”I feel for you and others in that you are not aware of being victimized.”)
    “For a loan, if it is a genuine loan, does not make a deposit, because
    what the borrower gets the lender gives up, and
    there is no increase in the quantity of money, but
    only an alteration in the identity of the individual
    owners of it. But if the lender gives up nothing
    at all what the borrower receives is a new issue
    of money and the quantity is proportionately
    increased. So elaborately has the real nature of
    this ridiculous proceeding been surrounded with
    confusion by some of the cleverest and most
    skilful advocates the world has ever known, that
    it still is something of a mystery to ordinary
    people, who hold their heads and confess they
    are ” unable to understand finance “. It is not
    intended that they should.”(The Role Of Money)

    This book attempts to clear up the mystery of money in its social aspect. With the monetary
    system of the whole world in chaos, this mystery has never been so carefully fostered as it is to-day.
    And this is all the more curious inasmuch as there is not the slightest reason for this mystery.
    This book will show what money now is, what it does, and what it should do. From this will
    emerge the recognition of what has always been the true role of money. The standpoint from
    which most books on modern money are written has been reversed. In this book the subject is not
    treated from the point of view of the bankers as those are called who create by far the greater
    proportion of money but from that of the PUBLIC, who at present have to give up valuable
    goods and services to the bankers in return for the money that they have so cleverly created
    and create. This, surely, is what the public really wants to know about money.

    It was recognized in Athens and Sparta ten centuries before the birth of Christ that one
    of the most vital prerogatives of the State was the sole right to issue money. How curious that
    the unique quality of this prerogative is only now being re-discovered. The” money-power ” which
    has been able to overshadow ostensibly responsible government, is not the power of the merely
    ultrarich, but is nothing more nor less than a new technique designed to create and destroy money
    by adding and withdrawing figures in bank ledgers, without the slightest concern for the interests of
    the community or the real role that money ought to perform therein.
    The more profound students of money and, more recently, a very few historians have realized
    the enormous significance of this money power or technique, and its key position in shaping the
    course of world events through the ages. In this book the mode of approach and the philosophy
    of money is expounded in the light of a group of new doctrines, to which the name ergosophy is
    collectively given, which regard economics, sociology, and history with the eye of the engineer
    rather than with that of the humanist. It is concerned less with the details of particular schemes
    of monetary reform that have been advocated than with the general principles to which, in the
    author’s opinion, every monetary system must at long last conform, if it is to fulfil its proper role
    as the distributive mechanism of society. To allow it to become a source of revenue to
    private issuers is to create, first, a secret and illicit arm of the government and, last,
    a rival power strong enough ultimately to overthrow all other forms of government.

  13. Vince
    March 13, 2018 at 5:00 pm

    This article is very true,but there is also an equally worrying corollary,in a recession banks stop lending and so money creation falls as everyone stops taking out loans and paying down debt. So private banks first create too much money, which leads to a boom(usually in property or share markets ),then eventually recession hits and then they can’t lend at all. Banks are creating financial crises and then keeping us stuck in them.The central banks then have to come to he rescue as well as the government.

    As Adair Turner once said,most of what banks do is “socially useless.”

    Also see Positive Money for potential solutions to this conundrum.


    • rddulin
      March 13, 2018 at 9:10 pm

      The financial crises are created as soon as the central bank keeps the money for itself and dose not distribute it to the citizens who’s money it rightfully is.
      You cannot pay loans with loans forever.
      An ever growing portion of society cannot make their income from lending money and collecting interest, no matter how desperately the economy needs “the Buying Power” of money in hand.
      The system has to periodically crash and reset to start again.
      Lending stops and slows because fewer people have the means to repay.
      They are already paying most of their income on debt.
      Nothing that a good crash will not cure by wiping out debt.

      • Vince
        March 14, 2018 at 7:57 am

        I would agree about the wiping out of debt,but the crash is not so good,it causes harm and much suffering.

      • rddulin
        March 14, 2018 at 11:57 am

        I absolutely agree and consider this feature the damnation of the credit monetary system.

  14. Benjamin Morgentau
    March 13, 2018 at 7:36 pm

    Since i live here in Switzerland and followed and even participated for a while in the initiative “Vollgeld-Initiative-Schweiz” since the beginning a couple years back it may be interesting for you. The idea is a simple one.

    It wants to achieve by popular vote on the 10 June 2018 a slight change of the constitution in that the National Bank of Switzerland SNB is also responsible for the giral money. That is precisely the money which is created by todays banks out of thin air simply by entering digits into a computer and transfer the amount to a private account for whatever.

    When it was agreed some 150 years ago that Switzerland should have a central bank responsible for the creation and management of coins and notes there simply was no giral money. But there where private banks of course. The full force of giral money and its endless possibilities came decades later first with credit cards, later with computers and the constitution was never amended to this new situation.

    The creation of all electronic money was left in the hands of private entities.

    Now the swiss can on the 10 of June vote to change the constitution and give the SNB alone the right to create coins, notes and new giral money as well. It will be most interesting to see if on this day the swiss decide to take away the creation of giral money from private banks. From then all accounts with private banks would in reality have the deposits directly with the SNB.

    If a private bank overspeculates and goes bankrupt there is no access to the savings of its account holders since they are held directly with the SNB. So the new bail in rules in Europe would have have no effect.

    The URL is here with some english pages besides german, italian, french


  15. March 13, 2018 at 9:32 pm

    That banks create money is a myth. Banks rent credit and every rental, if successful, results in real money being removed from the economy; the portion of the rental fee (interest) that banks transfer to their reserve account. Therefore, rather than creating money, banks systematically remove money from the economy which requires a continuous stream of new money from either sovereign spending by the govt or from the central bank buying national debt. If that stream on new money into the economy falters we have foreclosures, defaults. etc…a bust.

    • Luca Ravioli
      March 14, 2018 at 1:10 am


      Interesting view. The myth. Rental of credit is a great description!

      • March 14, 2018 at 2:44 am

        Historical facts and records support my view.

      • Luca Ravioli
        March 14, 2018 at 9:49 am

        Yes. I’m sorry I was not as clear as you were.

        By interesting, I meant that you illustrated a point of view from an other direction that clarifies it better. And, then I abbreviated your points above.

        Thank you for the clarification.

        Maybe, the banks, also, supply that other money if they are willing and able to increase their net loans?

        I would be interested in checking out some historical stuff you have looked at. Would you like to mention any historical records that you thought were really good or interesting?
        Online stuff might be great because I am not near good libraries.

        Some historical records I thought helpful and fascinating for better understanding of rental of bank credit and banking are as follows:

        * Old accounting literature, including descriptions of historic Indian accounting and Banking. (India once produced 25% of world GDP)
        * Descriptions of the Hundi system and Bills of exchange. (The west might have gotten banking that came from India.) And, history of overseas trade in goods using those instruments using very little money. An example, is colonial North America’s trade with India and other countries using bills of exchange, and agents on both sides. That allowed goods to travel in both directions simultaneously without sending money. Thus, making profits squared in time compared to sending money one way.
        * Descriptions of check clearing at a clearing house when the US was on the gold standard.
        * Descriptions of the the “bill book” used in bookkeeping.
        * “Bahi-Khata: The Pre-Pacioli Indian Double-entry System of Bookkeeping”, B. M. LALL NIGAM, http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6281.1986.tb00132.x/abstract
        * “Ancient double-entry bookkeeping : Lucas Pacioli’s treatise (A.D. 1494 – the earliest known writer on bookkeeping)”, (Contains an English Translation of Luca Pacioli’s treast on bookkeeping), by Geijsbeek et. al., 1914. p. 14 interesting explanation of accounting, and from p. 33 is Pacioli’s Accounting text in about 20-30 pages. https://archive.org/details/ancientdoubleent00geijuoft, (Several other scanned versions are available on line if one wants to avoid using archive.org., including google books.)
        * “Double Entry: How the merchants of Venice created modern finance”, by Jane Gleeson-White

      • March 14, 2018 at 5:10 pm

        Luca, I created a computer program with the historical data taken from the Fed site, census site and some from the White House site. The program displays the data in both graphical and text form plus in a format to allow print outs. It is all described in my book, “What You Need to Know About Taxes” which is available on Amazon. You can get the programs for free if you buy the book.

      • rddulin
        March 14, 2018 at 10:11 am

        Rental of ones position to create credit is more accurate.

    • March 14, 2018 at 11:34 am

      Banks rent credit and every rental, if successful, results in real money being removed from the economy; the portion of the rental fee (interest) that banks transfer to their reserve account. Therefore, rather than creating money, banks systematically remove money from the economy…

      Not sure I understand why you are saying that interest payments are money “removed from the economy.” The banks are still in the economy, are they not? Isn’t that money still circulating within the economy, generated as payment for a service, which is then used to make purchases, etc.?

      I do acknowledge that saved money is money removed from the economy. So if the thing that banks are renting out is money that was removed from the economy by savers, how does your argument hold up?

      • March 14, 2018 at 4:40 pm

        I am speaking from recorded facts. True, banks operate in the economy and return much of the interest collected back into the economy in wages, supplies, utilities, dividends etc. However their reserve account is not in the economy and a portion of the interest goes into their reserve account. Look at the data. Bank reserves have risen exponentially since 1934, the advent of fiat money. Additionally, bank reserves track the national debt but just a few percentage points greater which reflects, in my judgement, the quantity of sovereign spending done by the govt. If you think about a govt spending money into an economy then taking back a portion to prevent inflation then spending more you will see that money in the economy is equal to the national debt by bookkeeping rules. However with the central bank and commercial banks the national debt becomes the wealth of banks, not money freely moving in the economy. It is all explained in detail in my book, “What You Need to Know About Taxes” which is available on Amazon.

    • March 15, 2018 at 12:51 pm

      Charles, the mechanism whereby banks create money as debt is crystal clear. Your assertions are not.

      • March 15, 2018 at 2:03 pm

        There is just one problem with your statement, real money is NOT debt! I do understand the economic /bookkeeping community wanting to maintain the “money is debt” myth but the reality is that there exists real money in the economy and the debt money system could not exist without it.

      • March 15, 2018 at 2:24 pm

        Do you have an a-priori notion of what “is money” or “is not money”? It seems that’s where you’re coming from. If you do, please make it clear.

        What Graber and the BoE are saying is this: When someone takes a mortgage the bank writes on the asset side of its balance sheet “person owes the bank X pounds”. That’s called a loan. The bank simultaneously writes another thing on the liability side of their balance sheet “bank credits person Y pounds” where Y>X and the difference is interest. That amount Y is technically called a deposit even though the bank made it (the person didn’t come in with a bag of cash and “deposit” it). Person sees Y pounds appear in their bank account and for all intents and purposes they “have Y pounds”. The crucial point is the money Y did not come from anywhere. It got created by the bank writing these two entries in their book. There’s no essential gold or other thing the bank has to have or “multiply” or “lend out” or anything like that. Banks work simply by creating loans and deposits in symmetry (lopsided symmetry, where the bank pockets the interest). That much is a fact.

        We call bank credit, the numbers in peoples accounts that you can get out of ATMs or swipe with payment cards, we call it money. Do you have a philosophical disagreement about calling it money or are you disputing the mechanism?

      • March 15, 2018 at 2:25 pm

        X > Y

      • March 15, 2018 at 3:09 pm

        What happens when the person pays back the loan is more complicated. Recall that the bank created X and a loan and Y and a deposit, so person found Y in their bank account. Then person does some transactions with others, trades, works for a living, etc. and eventually these people pay the person (X-Y) so now the person has X in their account. Let’s say they pay from another bank. The bank has a liability “Bank owes person X” but also a new asset “Other bank owes first bank X-Y”.

        The person then goes back to pay the loan. The bank erases the entry “Person owes the bank X” from the assets side (the loan) and they erase “Bank owes the person X” from the liabilities side, replacing it with whatever is left in the person’s account. At this instance an amount of money X is destroyed, so you’re correct in that sense. The bank keeps the asset “other bank owes first bank X-Y” for itself as profit.

        Now it may seem that this process destroys money because X > Y and for that one transaction it’s true. But in aggregate, this creation and destruction of money is happening continuously. If this specific loan lasts 10 years, an amount Y was created for 10 years and then a larger amount X was destroyed. But continuously other people, businesses, the government or whoever create and destroy money through loans in this fashion and the total stock of money and loans currently outstanding is ever increasing. That’s how the amount X-Y appeared in this example. It’s other people taking more loans.

        Yes, in theory you’re correct that if everyone paid off all their loans the money would be destroyed and in fact money would go negative. It would be a colossal financial disaster! The system is predicated on the total stock of loans ever increasing, and banks pocketing ever more as interest. Also you an’t hurt them, because then the money would vanish. It’s rubbish. But that’s how the system is.

      • March 15, 2018 at 4:31 pm

        Exactly! I agree. The process proves no money was created by the bank. Instead of a loan for a mortgage assume a personal loan to a small business person, say 1000. He gets the loan exactly as you describe, he takes it in cash, the teller gives him the 1k from the cash drawer, he walks out and suddenly realizes he does not need it. He goes back, returns the cash, the teller puts it back in the drawer and everything is exactly as it was before the loan was made except the bank may have hit him up for an early repayment penalty. Where is the money the bank created? They didn’t create any! Obvious fact!

  16. March 13, 2018 at 11:18 pm

    “That banks create money is a myth.”, Charles3000.
    Please explain how they honor their check ( for a loan of $10 million)they give to their borrower when the bank has on deposit a total of $10 billion, all of which is 100% owned by their depositors. When the borrower deposits the check in another or even a foreign bank which customers are notified that $10 million of their money is no longer available for withdrawal by them? But they do not need to steal their current depositors money to honor that check because we have legislated the privilege of “creating money out of thin air” to the banks. We have legislated (The Federal Reserve Act) that our trust is no longer in GOD, but now, rather in the hands of our Private For Profit Banks. Period. AND HOW HAS THAT WORKED FOR US? (1% of the people OWN 40% of the worlds wealth.) Only a systemic change can stop a 100% ownership .
    N.B. Soddy said,”… every monetary system must at long last conform, if it is to fulfil its proper role as the distributive mechanism of society. To allow it to become a source of revenue to
    private issuers is to create, first, a secret and illicit arm of the government and, last,
    a rival power strong enough ultimately to overthrow all other forms of government.

    • March 14, 2018 at 4:47 pm

      Carmen, the simplistic answer to your question is that when the loan is repaid it disappears from the economy along with that portion of the interest that the bank moves to their reserve account. No money was ever created by the bank but they removed a small amount from the economy. The bank only rented credit for a limited amount of time, the term of the loan.

  17. March 14, 2018 at 3:28 pm

    David Graeber at least attempts to define money before arguing about it: “money is really just an IOU”. Unfortunately it isn’t JUST an IOU: it is also (even in barter form like gold) a MEASURE of the value of the real things on Spaceship Earth which are traded, used and have to be renewed. What I still find shocking about all the urban and ivory tower comments here is their complete disregard of physical reality and the referential function of language.

    Put another way, then, what money IS is not a thing but a MESSAGE, and David is dead right about that: the message given out by the appearance of money is that the banks are giving you something of value, whereas they are actually putting a limit on what you will be able to credit vendors with for the goods they have supplied to you. “The real limit … is how much [we] are willing to borrow”, indeed, but that depends on whether we consider money as wealth we can spend or a “credit card” debt we will rightly be expected to repay by earning credit for what we do.

    James Kroeger, seeing “everyone” as “every bank”, so missing the point that we write our own IOUs, eventually asks a pertinent question. Why don’t we “demand that this Lending Sin be banned in the name of Justice instead of looping on the argument, ‘why can’t we do what they’re doing?’ ” Because we are not yet agreed on what to do instead? And that because of not understanding the language of justice (equilibrium being but a special case of sufficient improvement) and the imperatives of reality?

    Culturalanalyst, throwing the baby out with James’s bath-water, accepts it is not viable to give us all “the power to create private money IN THE SAME SENSE THAT BANKS DO”. All his four “viable” ways hinge on money being a THING private or state banks give to or take from us. Credit card systems are however LOGICALLY viable, and PRACTICALLY viable insofar as the cultural norm is for expenditure to be reasonable in relation to work being done to maintain human wealth and ecological sustainability. All banks do is authorise credit card limits, which gives them no right to charge interest. What we spend is up to us, but what we obtain indebts us to the chain of production and distribution which supplied it, including banks only as bankers earning their keep maintaining our accounts, and regional/corporate governments only as organisers earning their keep by advising us what needs doing.

    Rddulin I would say is spot on: “Rubber rulers and rubber buying power do not work”. Nicely put. And again: “Really great to see so many people thinking about this but sad to see how many wrong beliefs there are about money”.

    Luca Ravioli’s point about banks acting as guarantors sounds good, but will bankers do the work necessary to make good the shortfall in work not being done by defaulters? A good local bank can indeed earn its keep giving good financial advice, but the English disease has been eloquently described as “hypertropic accountantitis”. Saving money sells nothing. Information can be fake. Lies are lies. Despite what accountants have been taught about double entry book-keeping by economists, there are nothing but accounts in my accounts, so nothing either in the banks’ accounts for them to lend. Is there not a story about the Emperor having no clothes on? Helge Nome and Pavlos Papageorgio anyway seem to see the point. As Carmen B. keeps reminding us, Frederick Soddy saw it long ago. Ralph Musgrave brought us up to date with Huber and Robertson, but money being such a pain, don’t we really need to abolish it except for small advances on credit card accounts for local purchases?

    Lots of other interesting points I would like to take up, but with so much interest, even the longest comment is in danger of being drowned out. Enough’s enough!

    • Luca Ravioli
      March 15, 2018 at 3:23 am

      Davetaylor1: “Luca Ravioli’s point about banks acting as guarantors sounds good, but will bankers do the work necessary to make good the shortfall in work not being done by defaulters? ”

      Good point and that is part of the problem. I said, the bank and the depositors were guarantors for [Pacioli’s note]. But, the bank is the direct guarantor. I should have also mentioned other bank creditors such as bondholders.

      Some one said it is like swamping notes. The bank accepts some ones note and others accepts drafts on the bank, as more people find bank drafts and bank credit acceptable.

      In olden days some one with a good business and reputation could do banking because their bills of exchange were acceptable and could be passed from person to person until it came due. Bills of exchange have a due date and are marked “for value received of xxxxx” yyyyyy will pay xxxxx amount. And, they are legally and sociably enforceable. Then the business would redeem the bills at their due date by paying out money or goods if the creditor preferred.

      So, you can see how all these bills of exchange floating around could increase the credit money supply. That businesses might accept notes or bills of exchange from others and distribute their own. There has been trade in bills called discounting bills which banks and wealthy entities are in a good position to do. It is still done today. Today, the money market is smiler.

    • rddulin
      March 15, 2018 at 12:16 pm

      DaveTalor1 has really hit upon the problem. We can’t agree on a definition of money. Just like someone has said about porn,”We know it when we see it.”
      Here is a comprehensive definition I have been working on. Apologies for the length, but definitions need to be complete.
      The fundamental basis of humans living and working together peacefully and productively is respect and acknowledgement of each individual’s “things of value”. All living organisms possess “things of value”. These things of value” can be as basic as air, water, warmth, food or light. Humans, being more complex creatures have many things that can be as complex as social acceptance, freedom of speech or privacy, or consensus of belief that ensures protection for “things of value”. The term “thing of value” is used in place of the words property or ownership because property and ownership are limiting constructs defined by the prevailing social contract, not by nature.

      “Things of value” may be acquired by trade, production, or by threat of creating and imposing “negative things of value” that the individual wants to avoid, experience or possess.
      They can be traded on a one to one basis or in a two-step process using “money” as an intermediary tool, a “thing of value” that assists the trade.
      Money is therefore a universal “thing of value”, a tool, a measurement standard, just like standards for length, mass and time that everyone can agree on, whose value, like all “things of value”, is established by the characteristics it possesses.
      Luckily one thing that humans have the ability to design and implement are tools of ever greater precision.
      A standard money tool with superior characteristics should be no problem once a list of design requirements is established.
      Accuracy of prices produced, universal access with no discrimination, and stability of prices with time, would be on the top of the list.
      Credit, debt and lending are all create velocity for a price called interest. There demand is made necessary by a perpetual shortage of an honest money created and issued by the “state”.
      They create immediate “buying power” at long term, and if the lender chooses not to spend his earnings but “reinvests” them for collecting more interest, at un-payable and perpetual costs.
      The key to perpetual debt is the lender not spending ALL of his earnings.
      If I have a ruler to measure length and you do not, I can lend you my ruler at a price for a time. Twice the “length measuring power” is created by velocity of use of the single ruler. Another ruler is not created.

  18. Paul Davidson
    March 14, 2018 at 7:28 pm

    Bank IOUs are equivalent to dollars of legal trender and the central bank [IOUs of central bank] will convert bank IOUs to dollars of legal tender whenever asked to do so! — and, as Keynes pointed out, The State decides what is the thing that settles all legal contractual comitments. So it is the law of contracts empowered by the State that decides what things are money!

  19. March 15, 2018 at 7:09 am

    Lars, IOUs are not money. IOUs are just writing on paper, or solemn promises to pay or return. Per Naill Ferguson in his book, “The Ascent of Money: A Financial History of the World,” “… money is a matter of belief, even faith: belief in the person paying us; belief in the person issuing the money he uses or the institution that honours his cheques or transfers. Money is not metal. It is trust inscribed. And it does not seem to matter much where it is inscribed: on silver, on clay, on paper, on a liquid crystal display. Anything can serve as money…” In other words, money is a social institution; a sharing, at least in part of a cultural understanding. Money as trust in repayment was the center of the first large trading routes in history (Sumerians, Egyptians, Persians, and eventually the Islamic and Christian nations.) And these were the foundations of international relationships and global empires. All based on faith and trust. Thus, money is not a commodity, a thing. In today’s terms, money is credit. An example might help. When the Ottoman Turks besieged the city of Valletta in 1565, gold and silver supplies ran low, forcing the defending Knights of Malta to mint coins made of copper. The motto they stamped on the coins to remind the population of the source of their value was: “Non Aes, sed Fides” (Not the metal, but trust). As we still find today, trust remains the core of money and the core of most of our problems associated with money. Many of us today find we trust the wrong people where money is concerned. Yet most of us remain unable or unwilling to commit ourselves to solving this problem.

  20. March 15, 2018 at 9:50 am

    Paul, as a matter of fact you are of course right. But what is “the State”? Is it something which can decide anything? Surely it is people in government who make decisions which by self-referential decision are legally binding? But the people in government can be changed, or have their minds changed, and so make different decisions in future, including changing what is the legal status of money: especially if that made life easier for them by dispensing with the need to finance the services it organises via unpopular taxation. In short, even if the Law of Contracts decides what things are money, it is possible to change the Law of Contracts.

    However, I suspect genuine contracts already require one to provide the services one has been given credit for, which is inconsistent with crediting usurious bankers for the passage of time as well as returning credit to the banking system via suppliers. Given honest credit and a universal basic income in the form of a generous credit allowance, the inconsistency would disappear, because bankers, like everyone else, would have been “paid” in advance.

  21. March 15, 2018 at 12:52 pm

    Very interesting post and not least – given that Graeber’s view is well-known – thread. I wonder if the bank of Canada, England and Germany ever explained how Mosler/MMT economics helped them reconsider their working theory of banking?

    Please forgive me for pr myh page on the subject: http://homosociologicus.com/neoliberalism-3

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