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Finance: need to understand banking, money and credit

from John Balder and the current issue of RWER

To explore the origins of the global financial crisis, the first step is to specify the relationship between banking, money and credit. According to the mainstream view, a bank serves as an intermediary between a borrower and a lender. As a pure intermediary, a bank has no impact on real economic activity. This view – taught in most Economics 101 textbooks – implicitly assumes that money is available in finite quantities that are regulated by the central bank.

Several years ago, Paul Krugman and Steve Keen engaged in an enlightening back-and-forth about banking, money and credit. The discussion examined whether banks lend existing money (implying money is neutral) or newly create the money they lend (money is not neutral).

 Economist Category Result
Krugman (2012) Money is neutral Banks lend already existing money
Keen (2011, 2017) Money is not neutral Banks newly create the money they lend

In support of neutral money (mainstream view), Krugman (2012) casually asserts:

“Think of it this way: when debt is rising, it’s not the economy, as a whole borrowing more money. It is rather, a case of less patient people – people who, for whatever reason want to spend sooner rather than later – borrowing from more patient people.”

Krugman notes that banks lend existing money as intermediaries between borrowers and savers. In other words, a bank must have $100 in deposits before it can make a loan for $100. Deposits create credit (or a bank liability is needed for a bank to create an asset). This view asserts that money is neutral and can be ignored, as it has no relevance for real economic activity. This view seems to be intuitive, in fact almost obvious; after all, if I do not have $10, I cannot lend it to you.

Conversely, Keen (2011) argued that banks newly create the money they lend. If true, this suggests that money creation impacts real economic activity and is not neutral. But how does a bank “create” money? When a bank makes a loan, it simultaneously creates a deposit (which is money) for the borrower in an identical amount.[1] For example, if I borrow $10,000 from my bank, the bank creates a deposit account in my name with $10,000 in it. In creating credit, a bank necessarily creates a deposit and thus, money. This is how double-entry bookkeeping works. Loans create deposits.

According to Richard Werner (2012), more than 95% of all money created in the US and UK is a direct result of credit creation by banks.  When a bank creates credit, it also creates money.  Post-Keynesians have been making this argument for more than three decades, though few have listened (e.g., Basil Moore was an early proponent) and this view was recently affirmed by the Bank of England (McLeay 2014a and 2014b): “Whenever a bank makes a loan it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” Yet, despite the factual basis of this claim, it has been ignored by neoclassical economists, given their attachment to equilibrium analysis.

Banks are authorized to create credit, ex nihilo (“out of nothing”) so credit (money) cannot be neutral. In creating credit, a bank creates money that a borrower uses to purchase goods and services that add to aggregate demand and economic growth. Banks are not limited to acting only as intermediaries that move money from savers to borrowers.[2] Importantly, banks also determine how credit and money are allocated. In the real-world, money creation distinguishes banks from other financial intermediaries (e.g., shadow banks) that can extend credit but do not possess the authority to create money. Within the financial sector, only banks are granted this authority. Money is a form of credit, an obligation to pay. In Werner’s (2012) words, “banks are the creators of the money supply” and “this is the missing link that causes credit rationing to have macroeconomic consequences.” In short, finance (banking, money and credit) matter!  read more

[1] Keen (2011 and 2017) and Werner (1995, 1997 and 2012).

[2] Mainstream economics continues to assert that credit and money are neutral and do not impact real economic activity. Neoclassical economists have good reason to be defensive. Given the structure of their models, dropping the neutral money assumption will result in an indeterminate outcome.

  1. November 19, 2018 at 3:00 am

    It is rather obvious to me that what banks do is rent credit. They do not create any money. Every successful rental of credit/loan results in the removal of money from the economy, not an addition of money to the economy. This fact, and it is a fact, results in banks having to increase loans in an exponential fashion to insure a fixed amount of money/credit in the economy. The math is rather simple. The other factors influencing the process is senioriage spending by the government and open market operations by the Fed.

  2. culturalanalysis.net
    November 19, 2018 at 10:04 am

    “Renting credit” is like saying ‘lending a loan’, therefore nonsense. Where does M3 come from if M0 is all the money that has been ‘created’?

    Yes, when loans are paid off M3 shrinks, but in the process of being paid off the economy creates new debt of roughly equivalent value plus interest. The aggregate M3 cannot shrink without loan default or M0 expansion matching that of M3. ALL M3 is debt.

    • November 19, 2018 at 3:36 pm

      Can you please elaborate on this process, describing the process? “…but in the process of being paid off the economy creates new debt of roughly equivalent value plus interest.”

      • culturalanalysis.net
        November 22, 2018 at 6:15 am

        Interest in M3 (of which 98% is debt to banks) cannot be repaid unless the economy is growing. The economy can grow only through growth of M3, so unless M0 were printed instead of M3, which would in effect have to be something like the Chicago Plan, all debt which is repaid must be replaced by the same amount of debt plus interest. Or else, widespread private default to the banks.

      • November 22, 2018 at 5:20 pm

        Yes! ….but sometimes the economy does not grow because of actions by the monetary authorities and then we have a crash!

      • culturalanalysis.net
        November 23, 2018 at 2:50 am


  3. November 19, 2018 at 4:06 pm

    Very good, thank you.
    For me, the core problem is banking performs two critical functions both of which are poorly understood.
    First, banks (including shadow banks) operate our payments system. We pay by check, pay by cash, pay by credit card, pay by debit card, and so on. All this is provided through an ever growing data network we call banking. Eric Lonergan, at Philosophy of money blog points out that we are only now starting to understand the power of the networks we create be they social networks like Facebook, and Twitter, or payment data networks. Networks gain there power from “Network Externalities”. Networks, like our payments system grow in power as the square of the number of users. For money, in all its forms, this is now many billions of people world wide. Ask Iran how powerful these payment networks are as they are excluded from our SWIFT payment system.
    The same banking system, writ large, creates new credit money. Schumpeter first noted that economies operating without credit creation cannot grow because in such an economy money circulates in closed loops. One man’s expenditure is another man’s income in the absolute. There is no remaining risk capital for investment in anything bigger than a family owned barn on a family owned farm. No great sailing ships get built in that economy.
    The problem is we cannot live without each of these functions even while few of our intellectuals understand them. Moreover, even among our heterodox economics community of a few hundred people at most, the subset studying this network externalities, power law aspect of money is down to a few.
    I’m reminded of a Gary Larson cartoon where a dinasaur at a lecturn says:
    Small furry mammals are eating our eggs and we have brains the size of walnuts. It doesn’t look good.

    • November 19, 2018 at 5:53 pm

      Yes, but we cannot ignore the fact that sovereign nation backing actually creates all legal money by building a national debt which is, in simple terms, the money spent by the government but not redeemed by taxes. The banks could not exist without that national debt because their reserves/wealth is equal to the national debt plus senioriage spending by the national government. Banks do not like senioriage spending because it places money into the economy that is not owed to anyone. The anti-senioriage effort has resulted in doing away with silver certificates, US Notes and half dollar coins. The minting of quarter dollar coins still carries significant senioriage, about 400 million in 2016.

      • November 19, 2018 at 7:13 pm

        This is not supported by the history of banking. Before we had a Federal Reserve central bank we had private banks each of which printed its own bank notes. People deposited real hard assets at those banks like gold and silver in return for printed bank notes; paper money. Why? Because they needed access to the paper money payment system which was a type of early payment data network along with checking administered by the bank. Governments enforce laws against bank fraud more than they create money. 95% of new money is credit created by banks.

      • November 19, 2018 at 8:26 pm

        I am speaking of the fiat money era, post 1933. From 1934 to 2016 (the period I analyzed) the assets of all commercial banks has, on average, exceeded the national debt by 4 to 6%. That is historical fact. I cannot equate credit with money. If I buy something and pay with money the deal is finished. If I use a credit card the deal is not finished; I have to pay the bill at the end of the month. To me credit is to money as a hole is to a post.

      • November 19, 2018 at 10:33 pm

        Credit card issuers are shadow banks not chartered banks. Only chartered banks are legally empowered to create new credit money. Credit card issuers borrow at a low rate from chartered banks and lend at a higher rate to card holders. The spread is their profit net of defaults and expenses.
        Mortgages are typically issued by chartered banks who do create money by lending. Example:
        You decide to buy a house. A chartered bank credits your demand savings account with newly created credit money to buy the house with. Simultaneously at closing you sign a mortgage document promising to surrender the house if you don’t pay the loan back. The bank posts the mortgage doc with your signature on it to it’s balance sheet as an asset and posts the money placed in your demand account as a liability. The chartered bank didn’t loan you money they had on deposit from someone else nor did they lend you reserves they got by borrowing from the Fed. They created new credit money by legally simply crediting your demand account at the bank. If the country you live in has a reserve ratio requirement the bank will use its own reserves or borrow reserves from another chartered bank to meet the requirements.

  4. Craig
    November 19, 2018 at 6:02 pm

    Banks distribute money only as debt/credit. A new paradigm of monetary Gifting must be integrated into the system in a way that is beneficial to all agents and changes the current realities of systemic austerity, individual monetary scarcity and unstable and halting flow into abundance and free flowingness. A universal dividend and a 50% discount/rebate at the point of retail sale are the two basic policies that will accomplish this.

  5. Helen Sakho
    November 21, 2018 at 2:59 am

    There is no crisis. It is a repetition of many crises over a very long period of time. It just repeats itself at a higher rate of profit, and that is the basic definition of all modern capitalism. And it is global, with the exception of those parts of the global which never counted as anything, partly because their Economists did not speak English or were already nonexistent.

  6. December 1, 2018 at 7:40 am

    Historian Richard Hofstadter describes America as made up almost from the beginning of tendencies that continue today, often contradicting and interfering with one another. A Restless Society. All observers agree that Americans work harder, eat faster, move around more and relax less than Europeans. Nothing seems finished in this raw republic.
    “Improvement,” both personal and collective, is a national preoccupation. Americans are confirmed tinkerers, whether dealing with machines or institutions. They are on the move, in transit, going from somewhere to somewhere. They are obsessed with speed and impatient of delay. A Commercial Society. American society is primarily a business society, materialistic and practical. By the 1820’s the businessman already occupies a key position in American society, and the trading spirit permeates American life. Every American, declared the editor of a well-known commercial periodical, is in one sense a trader. The physician trades “benevolent care,” the lawyer “clever tongue,” the clergyman “prayers.” One principle motivates the commercial classes, another periodical explained, that enabled them to enrich the country as well as themselves: Whether it be called avarice or the love of money, or the desire of gain, or the lust of wealth, or whether it be softened to the ear under the more guarded terms, prudence, natural affection, diligence in business or the conscientious improvement of time and talents-it is still money-making which constitutes the great business of our people-it is the use of money which controls and regulates everything. An Idealistic Society. Despite their insistence on the practical and the useful and their almost universal contempt for the theoretical and the visionary, Americans are susceptible to every kind of evangelical appeal. They respond emotionally to causes. Democracy and Equality. In our government [declared an orator in 1840], we recognize only individuals, at least among whites; and in social life, the constant effort to do away with the castes produced by difference of fortune, education, and taste. The motto upon the flag of America should be ‘Every man for himself.’ Such is the spirit of our land, as seen in our institutions, in our literature, in our religious condition, in our political contests. Individualism and Cooperation. When Tocqueville visited America, he was immensely impressed by the fact that “the most democratic country on the face of the earth … carried to the highest perfection the art of pursuing in common the object of their common desires.” For the American to pool resources, both material and intellectual, and to throw in their lot with the community in which they work and live, simply seems the most sensible thing to do at the time. A society of “lone wolves” would not have survived. Sectarian Rivalry. America is filled with sectarian rivalries, even conflicts. But despite America’s looseness and variety, an inner unity-based upon a general acceptance of democracy, property, and religion-held the country together. Most of the time! The conflict over slavery required a war to settle. This is unusual in American history. Perhaps such a war is once again needed today?

    It’s always been difficult for banks to fit into, or sometimes even survive in this chaotic America. One of the more frightening developments over the last 40 years is the efforts by banks and other financial institutions to remake American culture. To the point of destroying the historical customs of mind and action that make America America. The signs of the damage this has caused and the pain it has inflicted is all around us today.

    • Craig
      December 1, 2018 at 6:04 pm

      If you don’t have to worry about inflation because you’ve taken rational control of the terminal expression point for all forms of inflation with a high percentage discount/rebate monetary policy at the point of retail sale that beneficially and “miraculously” integrates price deflation into profit making systems, then you can pour as much money into the economy as is needed for everyone to have an upper middle class income and to finance whatever projects are needed for a better, more productive and ecologically sane world.

      The paradigm of Debt Only has been in effect for virtually everyone and at every moment for such a long time that it has held the cultural and psychological evolution of mankind back almost from the beginning of civilization. Once this great and vast neurosis is removed and we intelligently and graciously acculturate ourselves to the freedom the new paradigm will effect mankind will have the opportunity to fulfill his actual species designation of homo sapiens, wise and discerning man.

      • December 2, 2018 at 6:22 am

        Craig, this is a fine plan, if the bankers will allow you to implement it. But the founders of the USA were skeptical that would happen. Besides the curse of debt money, bankers have also stolen our money using another, equally sinister tool: By controlling our nation’s money supply – up and down. “The fluctuations of our circulating medium have committed greater depredations upon the property of honest men than all the French piracies.” – President John Adams, 1799. And, more famously: “If the American people ever allow private banks to control the issue of their currency first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered.” – Thomas Jefferson. With each passing year and “financial” legislation the people of the USA have turned over more and more control of their economy to bankers and their ilk.

      • Craig
        December 2, 2018 at 6:01 pm

        We need to understand that the bankers and their enablers are few and we the benefactors of the new paradigm are many. Economists need to make up for their ignorance/intellectual complicity in letting the paradigm of Debt Only continue to reign. They could best do this by recognizing that endlessly theorizing, preaching only to ego involved academics and “authorities” in the faint hope that they will change their minds and making everyone’s eyes glaze over with calculus….are fruitless political endeavors.

        They must instead get behind a mass movement that communicates the simple but elegant and powerful essence of the benefits of the new paradigm and its policies for both the individual and commercial enterprise.

      • December 3, 2018 at 3:32 am

        Craig, bankers are not only few but in current American society mostly invulnerable to attack or prosecution. Not one banker was prosecuted regarding the 2007-2008 financial crisis. And, of course none went to prison. I simply find it difficult to believe that the movement you suggest could take on bankers successfully. Particularly, when US Presidents, US Congress members, religious leaders, and entrepreneurs have failed to control banks. Right now banks are in charge. Before any such movement as you suggest even has a chance of success, banks must be taken down, hard. That needs something more like an MMA match.

      • Craig
        December 3, 2018 at 5:40 am

        Do not underestimate the power of desire for change and self interest combined. Trump allegedly won the presidency by demagoging the former alone. Showing the extremely large constituencies of the 99% and the small to medium sized business community who dwarf the employment and personnel numbers of the major corporations how they can IMMEDIATELY almost triple their incomes and potential business revenues with simple, easily understood and observable policies like the discount/rebate policy and a universal dividend….is an extremely powerful message. Put that together with an honest and urgent modicum of indignation about how the financial and corporate elite have dominated the general populace and…..

        Regurgitating the correct and erudite critiques of neo-liberal DSGE for ANOTHER decade has no such chance of succeeding.

  7. Craig
    December 3, 2018 at 5:57 am

    The sooner well intentioned economists swallow their intellectual vanities and realize that the point of retail sale is the simple but elegant and effective fulcrum point in the entire economic process where a single monetary policy can invert stubborn longstanding realities into the very goals they already say they want to see occur….the better.

    • December 3, 2018 at 7:39 am

      As they say, proof is in the pudding. How do you suggest we find out if your suggestions have any chance of working when put to the test? Historical studies might be helpful. For example, the Quaker colony setup as Pennsylvania. Or, the Dudley Street Neighborhood Initiative in Boston. An interesting and informative read, and one I like because it’s about the reddest of red states today, Texas is “Where Credit Is Due: A History Of The Credit Union Movement In Texas, 1913-1984.” After all, the basic problems are about how property is owned and controlled. And, how political decisions are made. These examples deal with limited efforts at change. Your goals seem much broader.

      • Craig
        December 4, 2018 at 1:36 am

        Just play out the discount/rebate policy in your mind. The policies I advocate are so basic and are implemented at such a powerful economic point in time (the ending point of the entire economic process for every consumer item, the summing point of all costs and prices for every consumer item and the terminal expression point for all forms of inflation) namely retail sale. No one is saying you wouldn’t need additional regulations in a world not entirely rational or ethical, but along with the dividend policy and the national and central banking system the effects are so beneficial for both individuals and commercial that lesser reforms pale to insignificance.

      • December 6, 2018 at 2:26 pm

        Craig, mark me down as thick (but not as a brick). I still don’t see how your proposals fix the problem that the bottom 90% of the income and wealth scale have little influence on how property is owned and controlled.

      • December 6, 2018 at 5:41 pm

        Can we at least advance to agreeing the problem is really in two parts. One: get total private debt to GDP down to about 0.7 from its current value near 2. If and only if we accomplish that (and quick is better than slow), then:
        Two: we debate the best way to keep it there long term ie to break the destructive long term build up of private debt that periodically threatens to destroy our civilization. I view Craig’s proposal as a candidate for number two. Steve Keen seems to suggest a saw tooth periodic ramp punctuated by Jubilees is another idea.
        If we can’t get past step one gracefully, the second step won’t matter.

      • December 8, 2018 at 11:06 am

        Peter, yes private debt is a problem. But why is it a problem? In my view it’s the result of insufficient income (pay too low) for most Americans below the 10th percentile of income. The Median income for the 3-person middle-class family is around $71,000 to $73,000, with Median income near $80,000 in a few states. Doubling that Median income would help greatly to reduce the level of debt in the middle-class. Thus, reduce the ratio of private debt to GDP. Debt-restructuring is also needed. Here I refer to quick forgiveness (no longer than 3 years) of a large part (at least 50%) of current debt. I also believe that additional indebtedness entered by Americans should be limited to no more than 15% of the borrower’s annual income. I do not support one off debit jubilees. They often make the situation worse, as borrowers sometimes over extend themselves in the joyous moment of the jubilee.

      • December 8, 2018 at 5:40 pm

        When you look at the history of dealing with massive debt overhangs it’s not encouraging. In a balance sheet world like this one we’ve created, the holders of the debt; retirement funds, insurers, and the rich, are politically powerful. Getting these actors to understand the message Mariner Eccles delivered in his testimony to Congress in the last Great Depression is the key challenge. Eccles noted that in a failing economy creditors can come to own all sorts of collateral by repossession upon default or repudiation of debt, but that that collateral; empty factories, abandoned homes, idle farm land and the like aren’t much fun to own. He also warned the no fun part was largely due to social stability which we all take for granted disappearing overnight.
        The political resistance is a childish resistance to admitting this simple truth, that debt restructuring is really an acknowledgement that we have collectively deluded ourselves by believing that the capitalist wealth creation machine we’ve enjoyed is unaffected by private debt. Like any grim chore, cleaning up our debt delusion mess is going to suck, but first we must agree that the job must get done.

      • December 9, 2018 at 7:50 am

        Peter, the USA Declaration of Independence gets a lot wrong and is filled with some of the more disturbing prejudices of its times, but it gets one thing right. Here is that one thing with my updates. “We hold these truths to be self-evident, that all peoples are created equal, that they are entitled at birth to certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness and Usefulness.” If we solve the problem of creating communities that believe in and defend this basic way of life, then solving private debt problems become more likely.

      • December 9, 2018 at 4:48 pm

        When the Founders wrote that congress would decide how to arrange for debt destruction through bankruptcy I doubt they expected that would mean congress would declare some classes of debt not dischargable in bankruptcy. We are in bad shape. What’s next? Congress declares some objects will not be affected by gravity? Repeal the second law of thermodynamics? As Michael Hudson says: Debts that cannot be repaid, won’t be.

      • December 10, 2018 at 7:50 am

        Peter, a lot of this wasn’t worked out by Congress at all. The post-war economic boom ended about the same time as the Second US bank failed. The economic collapse in the US was part of a world-wide crash. The consequences of the bank failure and the economic crash prompted several states to abolish the useless and degrading punishment of imprisonment for debt and to pass liberal bankruptcy laws and laws easing the settlement of contracts. Congress also came to the aid of the West with a new land act in 1820 making it possible for a settler to buy an 80-acre homestead for $100 in cash. The next year it added a Relief Act to assist those people whom earlier credit provisions had got into trouble. The Supreme Court under Madison also in a series of subsequent decisions, often the subject of much controversy greatly expanded the authority of the Court and the powers of the federal government, limited the scope of action by the states, and defended the sanctity of private contracts against legislative interference. In 1819, while controversies between debtors and creditors were raging in the states, Marshall handed down two decisions bearing on the rights of contract. Of sweeping importance was Dartmouth College v. Woodward, which raised the question of whether the charter granted to the college by the legislature could subsequently be changed by the legislature. Marshall decided that the charter was a contract and that it had been unconstitutionally impaired by the legislation in question. Of great importance to colleges, this decision was of still greater importance to business enterprises operating under legislative charters; for it now appeared that these charters, defined as contracts, were secure and substantially unchangeable. The second decision in 1819, Sturges v. Crowninshield, dealt with a New York State bankruptcy law. Marshall found that even though Congress was empowered to pass bankruptcy laws, the states could also enact them if Congress failed to exercise its powers. But insofar as the New York law sought to relieve a debtor of the obligation to pay his debt, Marshall found it in violation of the contract clause of the Constitution. Eight years later, however, in the case of Ogden v. Saunders (1827), Marshall failed for the first and only time to persuade the other justices to follow him in rigidly enforcing the contract laws. Earlier bankruptcy decisions had ruled out state laws impairing debts made before these laws were passed. In Ogden v. Saunders, Marshall wanted to throw out a law impairing debts contracted after its passage; but in this case the Court forsook him and upheld a state law of this kind. Clearly, Madison disagrees with Michael Hudson. Overall, in establishing the supremacy of the federal government and the Supreme Court over acts of states, Marshall’s regime was a spectacular success.

      • Craig
        December 6, 2018 at 6:09 pm

        Well, if a two adult household was getting $1000/mo/$48,000/yr worth of potential purchasing power in dividend payments ($1000 x 2 adults x 2 with the 50% discount x 12) and they both had part time jobs making $25,000/yr that would give them $148,000/yr in potential purchasing power to invest, consume and undoubtedly be able to purchase a home that with a national bank that charged 0% interest on notes for a $200k home that has been discounted to $100k at retail sale and $50k at note signing because finance has now been enabled to become the new end of the economic process instead of an incredibly expensive exterior parasite to it….I’d say that was a lot better deal for the 90% than they’ve ever been given before.

      • December 8, 2018 at 11:09 am

        Craig, everything you describe is good, if it happens. But how do you suggest we convince the current Congress (now mostly the Senate) that hates (literally) anyone not carrying at least $1,000,000 after their name to vote for legislation needed to implement such changes? I don’t think it is news to anyone, Republican, Democrat, conservative, liberal, etc. that finance is a vampire sucking the nation dry. Now it is a question of which politicians will desert the nation for a share of the blood and which will not.

      • December 8, 2018 at 7:17 pm

        I need to chime in with some points and facts. First, our monetary system has changed.numerous times over the history of the nation so changes can happen. The first and second US banks were chartered and then not renewed. The third central bank, the Fed, was chartered in 1913 and then drastically modified by FDR in 1933. Since that time we have had dual monetary systems, real money/sovereign money created by the government and spent directly into the economy and bank money/debt money. After FDR’s action real money included Silver Certificates, US NOtes and coins. Silver Certificates were discontinued in the ’60s and US Notes in Jan of 1970. The attack on real money spending (and it is correct to call it an “attack”) continued with the demise of the half dollar coin and the blocking of circulation of the one dollar coin which, by the way, is circulated widely in some Central American countries. The object of the attack on government spending of real money was obviously to increase dependance on bank money and it has worked. I submit that to cure the debt money problem will require increasing real money spending by the government and that highlights the very significant issue; the congress will then be responsible for managing the money supply, they will have to learn that taxes are the tool to forestall inflation of the money supply and are not revenue. That plus the other repercussions across the monetary system is the real roadblock to fixing the debt money problem.

      • December 9, 2018 at 2:03 pm

        Charles, a few comments. First, what’s your view on why the 1st and 2nd US banks failed? Second, would you explain your dual monetary system. I’m looking at the history and don’t see it. Third, you say real money has been under attack for around 80 years. I don’t understand what that attack is, who/what carried it out, or why it’s important. Fourth, how is real money different from sovereign money, from bank money? Finally, can you provide a few examples of the changes Congress will have to make in managing US money?

      • December 9, 2018 at 8:12 pm

        Yes, Ken. The 1st and 2nd banks were different, private banks but chartered by and used by the government. I think Jefferson put down the 1st bank and the second was a victim of Jackson’s “bank war”, his apparent distaste for the arrogant Biddle and his determination to put down Henry Clay too. I call it a dual monetary system because real money comes directly from government creation and spending while bank money is controlled by commercial banks and the central bank. Real money, sovereign money and Friedman/Bernanke “helicopter money” are all one and the same. Some refer to it as senioriage spending, a slightly different view of real money. The attack on real money spending has come through the congress and bank lobbying. Why was the RFC closed by Eisenhauer? The RFC was a clear government agent that competed with commercial banking with its ability to spend real money into the economy.My reply to Craig, above, outlines congressional action that would pave the way. The two basic ingredients are establishing a national bank like the RFC and those used now by China and ending the sale of treasury bonds to retire the national debt.

      • December 10, 2018 at 11:29 am

        Charles, good summary. For a lot of reasons, the US first opposed and then went forward 125% with the financialization of its economics. That’s one reason appeals like those made by Trump resonate strongly with a portion of the US population. The Great Depression should have destroyed capitalism in the US. Leading to in my view some sort of democratic socialism. But FDR saved capitalism. The capitalists repaid his favors by seeking repeatedly to destroy the country and/or hand it over to fascists. The role of government in the US economy has been debated, sometimes strongly since the beginning of that nation. Most ordinary Americans support involvement so long as it was not overly oppressive. Most of the American rich did not. Even in 1800 their preference was privatization. FDR had the opportunity to settle this fight. But he chose to label the New Deal programs experimental, necessary due to the emergency. As you point out with the RFC, most of these programs were dismantled after WWII, since in the view of supporters of dismantling the emergency was over. The survival of Social Security is more the result of the widespread anger over elderly crushing poverty than of policy research. That elderly poverty has improved since 1950, is mostly due to union negotiated pensions and state-federal workers. The US has the 3rd largest percentage of elderly living in or near poverty of all developed nations, even today. The adage that capitalism makes most of us poorer is certainly borne out with the elderly and overall US poverty rates.

      • Craig
        December 6, 2018 at 7:27 pm

        I’ll second that. Keen’s “modern debt jubilee” could be a fast way to reduce private debt, but doing that only and without concurrently ridding ourselves of the paradigm of Debt Only would only enable Krugmanites to claim the problem was solved….when it was merely palliated. We need to be smarter than the ancients who utilized debt jubilees. Turn a page on financial and economic history. The one we’re on has been gathering dust and disintegrating civilizations for 5000 years.

        Keen is smart and economically insightful. He deciphered the problematic fact that we’re caught between the “necessary” rock of debt build up and the hard place of economic recession. C. H. Douglas came to the same conclusion from a business cost accounting perspective by doing the calculus on total individual incomes created in ratio to total costs and so prices simultaneously produced. I told Keen 4-5 years ago that Douglas was the first disequillibrium/financial instability theorist not Minsky.

        All it took to extend and innovate Keen’s, Hudson’s and Douglas’s policies and insights from my study of both of them was an open mind and my paradigm/pattern perception skills honed from interests in science (specifically quantum physics), history, philosophy and the world’s wisdom traditions.

      • Craig
        December 8, 2018 at 8:43 pm


        Most of your facts are well taken (except for the fallacious idea that re-distributive taxation is effective or necessary to fight inflation). However, just “increasing real money spending by the government” leaves the the REAL AND DEEPEST part of the problem unresolved, namely the virtually monopolistic financial paradigm of Debt Only that the private banking system dominates and manipulates everyone and every other business model with.

        The truth is that power corrupts and absolute power corrupts absolutely and so either a private financial system or a publicly administered one will be imminently corruptible….unless they implement the individual, commercial and systemically freeing policies and regulations of the new paradigm of Direct and Reciprocal Monetary Gifting….which gifting in turn is powerfully aligned with the universally resolving natural philosophical concept and unimpeachable ethic of grace as in love in individual action/policy in systems.

        If we don’t communicate the benefits to everyone, every enterprise and the system, and demand a change to the paradigm….do we think our politicians are going to be able to rise above the power of finance’s current dominating paradigm? Of course not.

        We need to get real, solve the whole problem with Wisdomics-Gracenomics, let freedom ring, acculturate the multifaceted aspects of grace….and let the nation and humanity grow out of a troubled adolescence and into a mature civilization.

      • December 9, 2018 at 7:26 pm

        Craig, monetary inflation is very real be it the use of it as a foreign policy tool in Germany in the early 30s or the ongoing crisis in Venezuela. In my vocabulary “redistributive taxation” is an oxymoronic expression. In this era of acknowledged fiat money, taxation destroys money and is not a “redistribution of money.” You are correct, however, in questioning whether or not the action would cure the debt money problem. My response is it could but many other things would have to happen to make it a fact. The reduction in real money flow from the government into the economy has happened to provide the central bank with greater power to manage the money supply, the debt money supply. We could look at how the money supply was managed in the war years of the 40s to see how the central bank’s role can be reduced without “throwing out the Fed.” Some have described what happened was the Fed was told to go sit in the corner and they did. The RFC had been in operation since the early 30s but was put to extensive use in the 40s. It was a real national bank and it supported the war effort with real money. If you look at the ratio of commercial bank assets to the national debt from 1934 to 2016 you will find that commercial bank assets exceed the national debt by just a few percent on average but in the 4os, near 1946, the debt is nearly two times bank assets, indicating the government’s spending of large quantities of real money. The economy of the 40s indicates the effects of this real money spending which resulted from large quantities of money, real money, circulating in the economy debt free. Hence, to make it happen, we need a national bank similar to the RFC and, noteworthy, like the four national banks that China employs! The other action that would support the demise of the debt money problem is for the Treasury to be stopped from selling treasury bonds, allowing the national debt to be retired in thirty years. This action would essentially remove the FOMC’s strongest tool for management of the money supply, open market operations. The “goodness” of the national debt could be incorporated into the national bank by allowing individuals/entities to set up interest paying savings accounts in the national bank. If all of this were to happen then the congress would have to shoulder the responsibility of controlling the economy and the money supply.

      • Craig
        December 9, 2018 at 8:59 pm


        While your post has much of the current money mechanics correct, and it’s true that places like Venezuela are under attack by finance capitalism it misses the point I’ve been making here for years and that is:

        a sufficiently high percentage discount/rebate monetary policy at the point of retail sale….effects a monetary, financial and economic paradigm change. How and why? Because a 50% discount to prices IMMEDIATELY doubles everyone’s purchasing power thus inverting the current systemic reality from scarcity to abundance. The rebate back to the enterprise giving the discount makes them whole on their overheads and profit margins and IMMEDIATELY doubles their potential business revenues. Being implemented at the end of the entire economic process for every consumer item or service at retail sale it is also the terminal expression point for any and all forms/concepts true or fallacious of inflation….it ends any possibility of inflation and in fact integrates price deflation painlessly and beneficially into profit making systems.

        Until one crashes through the “sound barrier” of the present orthodoxies they have inherited from their economic educations and ACTUALLY looks at the IMMEDIATE effects of this one policy, all of the supposed complexities you enumerate seem to be true and necessary.

        This policy provides the better alternative to commercial decision makers inflating prices in an austere and scarcity system when they see more money coming into the it, and combined with a universal dividend would enable us to eliminate transfer taxes for welfare, unemployment insurance and even social security because if everyone has at least $2000/mo worth of purchasing power from the time they turn 18 until they get planted…..these taxes become completely redundant.

        When Monetary Gifting becomes the new guiding paradigm why would we want private banking to remain? A national bank can do everything needed that private banks do…and a helluva lot less destructive like MBS, CDS, synthetic versions of these not to mention dominate everyone, every other actually legitimate business model, nation states, regions and the globe. Even if one can’t see these obvious benefits of a publicly administered banking system at least they might be able to understand that the problem of regulating a single entity as opposed to a bunch of self interested enterprises with a monopoly on the most vital and essential factor in all of a monetary economy violates the concept of Occam’s Razor.

        Private and public finance have had 5000 years to create a stable and beneficial system for all. It’s now time to take the most efficient and wise route to doing that with the guidance of the new paradigm and the concept behind even that.

      • December 9, 2018 at 9:42 pm

        Hi Craig. In this statement, ” The rebate back to the enterprise giving the discount makes them whole on their overheads and profit margins…”, who gives the rebate? And, yes, a real national bank is a key ingredient. The US proved that in the 40s. Commercial banks should be allowed to continue operations and they should be treated like any other privately owned business but their umbilical cord to the US Treasure via the central bank which enables them to earn money on the senioriage of FRNs should be ended.

      • Craig
        December 9, 2018 at 10:50 pm

        The new publicly/government administered central bank will distribute all new monies distributed for the dividend and rebate policies as well as for government programs at at least the federal level. Personal and private enterprise loans will also be created by the central bank and distributed by the national banking system subject to credit-ability and alignment with the variously applicable aspects of the natural philosophical concept of grace. Everything/every governmental/public policy or program will be funded based on its philosophical alignment with same.

        Private money creation is NOT a stable or legitimate economic business model. The history of human civilization tells us this. Banks can be depository institutions, intermediaries of already created and saved money and perform certain needed financial services, but that is it. Nothing more. We never went back to Ptolemaic cosmology and we will never go back to the idiocy of the domination by private finance via its monopolistic paradigm of Debt Only.

      • December 10, 2018 at 1:32 am

        We are in the same church, maybe different pews. What you describe would be a real money only monetary system. What I described would allow banks to make loans as they presently do, even with time worn fractional reserve banking but they would do it at their own risk, no bail outs by a central bank nor protections via FDIC.

  8. Craig
    December 8, 2018 at 6:25 pm


    By communicating to the populace how the new monetary and economic paradigm of Direct (the universal dividend) and Reciprocal (the 50% discount/rebate policy at retail sale) Monetary Gifting….integrates their obvious best interests and the best aspects of the liberal and conservative economic and political agendas….into a complete and beneficial whole.

    That way conservatives have to acknowledge that the anti-austerity policies of the dividend and discount/rebate at retail sale at least double potential business revenue and yet simultaneously not only defeat inflation but implement the price deflation that libertarians mistakenly think austerity on steroids will effect.

    That way liberals have to acknowledge that the two policies immediately end poverty, individual monetary scarcity, systemic austerity and inflation without having to further hamstring enterprise with the mistaken need for re-distributive taxation.

    That way gross moralists can stop generalizing and being tight assed about money being the root of all evil (instead of it being THE LOVE of money) and embrace an ethic of grace as in love in action to be acculturated not only into the economic, financial and monetary systems, but the entire society.

    That way Keen can recognize that Wisdomics-Gracenomics is the higher disequilibrium and financial stability theory that he and Douglas were seeking, Hudson can realize its the answer to his financial parasitism and MMT can realize that it’s the more freeing way to truly enable governmental deficits for urgently needed things like infrastructure and yet dispels their old paradigm obsessions with employment as the only way to resolve austerity and their mistaken critiques of UBI/universal dividend. That is, they can unite behind Wisdomics-Gracenomics being the completion of their separate insights and theories.

    In other words everyone has to come off their lingering orthodox stances and instead embrace an wholistic, integratively wise, ACTUAL solution to a 5000 year old monetary, financial and economic problem with these paradigm changing policies and regulations.

    • December 9, 2018 at 8:11 am

      Craig, like it all. But it’s difficult to see how we’ll convince a world that no longer even pretends to respect or follow democracy to make changes as you suggest more radical than any shift to democratic life.

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