Taking on the currency cranks

[butchersapron]

In this regard, there was one other thing I meant to mention with regard to the role of capitalism and labour in all this.

It is somewhat ironic that the crisis that so nearly brought capitalism to its knees was nothing to do with a straight conflict between capital and labour in the traditional sense as much of the post-war left thought it would.

IIRC, its analysis was that, yes, the banking system was bad, but that any crisis would be brought to a head by the actions of organised labour, in particular relating to mass industrial action.

That’s why the CP and, to a lesser extent, Militant and other groups expended a lot of time and effort trying to gain influence in the trade union movement so it could be used as the “battering ram” against the bosses.

It appears that they’ve wasted a lot of their time as the true struggle has turned out to be between financial capitalism and financial capitalism, with labour (at least in the organised, trade union, sense) a bit part player.

There is no true struggle in the sense that fighting that battle and that battle alone will bring victory. What there are are fights that won't bring any sort of victory - and internal battles between different factions of capital (the wars between bands of brothers) most certainly won't.

 

[revol68]

In this regard, there was one other thing I meant to mention with regard to the role of capitalism and labour in all this.

It is somewhat ironic that the crisis that so nearly brought capitalism to its knees was nothing to do with a straight conflict between capital and labour in the traditional sense as much of the post-war left thought it would.

IIRC, its analysis was that, yes, the banking system was bad, but that any crisis would be brought to a head by the actions of organised labour, in particular relating to mass industrial action.

That’s why the CP and, to a lesser extent, Militant and other groups expended a lot of time and effort trying to gain influence in the trade union movement so it could be used as the “battering ram” against the bosses.

It appears that they’ve wasted a lot of their time as the true struggle has turned out to be between financial capitalism and financial capitalism, with labour (at least in the organised, trade union, sense) a bit part player.

Yes but what's left out of that analysis is that it was the struggle of labour and other excluded/exploited groups that played a significant role in putting capital into crisis in the 60's and 70's and hence the development of neo liberalism and the suppression of working class wages and conditions, something that was to a large extent painted over by the availability of cheap personal credit. So even if the labour looks conspicuously absent from the current crisis it isn't, and certainly not when one considers that it is having the cost of it forced on it.

 

[love detective]

yeah this is important point - was going to bolt that on at the end of my last post about a parallel within contemporary society where on the surface there is a pretence/assertion that class and class issues does not exist anymore, with that about the pretence that class issues & matters were not relevant in and to the crisis

 

[happie chappie]

Yes but what's left out of that analysis is that it was the struggle of labour and other excluded/exploited groups that played a significant role in putting capital into crisis in the 60's and 70's and hence the development of neo liberalism and the suppression of working class wages and conditions, something that was to a large extent painted over by the availability of cheap personal credit. So even if the labour looks conspicuously absent from the current crisis it isn't, and certainly not when one considers that it is having the cost of it forced on it.

Not sure I entirely agree with this (and this has a feel of major thread derail, which is my fault!)

For example, the main driver of the world economic crisis of the early 1970s was one of energy, notably a massive spike in oil prices. Nothing really to with organised labour (or even primarily as a wider struggle between capital and labour) except their members suffered from the consequences of it, but they weren’t the cause.

 

[butchersapron]

Not sure I entirely agree with this (and this has a feel of major thread derail, which is my fault!)

For example, the main driver of the world economic crisis of the 1970s was one of energy, notably a massive spike in oil prices. Nothing really to with organised labour (or even primarily as a wider struggle between capital and labour) except their members suffered from the consequences of it, but they weren’t the cause.

No it wasn't - it was a component part of the crisis, but one that itself was driven by class struggle. How on earth can you just cut out class struggle and the massive rise in the costs of social reproduction shoveled onto state and capital as a result out of the history of capitalism?

 

[love detective]

Not sure I entirely agree with this (and this has a feel of major thread derail, which is my fault!)

For example, the main driver of the world economic crisis of the early 1970s was one of energy, notably a massive spike in oil prices. Nothing really to with organised labour (or even primarily as a wider struggle between capital and labour) except their members suffered from the consequences of it, but they weren’t the cause.

what revol means is that by the late 60's/early 70's - capital was becoming increasingly constrained by restrictions that had been put on it by the post war consensus and the various demands that had come up from below, by labour on capital. It was going through a crisis in that it was unable to roam free to seek enough profitable outlets for it to produce & appropriate value on a scale that allowed it to keep going, it also had a considerable social burden placed on it by labour. From the 70's onwards a direct response to this in practice was the liberation of finance and the end to this 'repression' of finance (something that had been preached for the last couple of decades by the usual suspects) - the collapse of breton woods, the relaxing of capital & exchange controls which allowed petro dollars 'earned' through the oil shock to be recycled back into the global economy through the increasingly liberalised financial system and allowed to roam around in a footloose way vulture like, added to this the increase in offshore & globalised banking plus the active gradual transfer of social costs from capital back to labour, all these things done under the banner of neoliberalism were a reaction to the problem capital found itself in the 60's/70's - and that problem was one which was put there very much by the active pressure of labour on capital. The resultant fall out 40 years later can be tied back to these very things. Labour is always there. Class Struggle is always there.

edit: posted that before seeing your post butchers

 

[revol68]

No it wasn't - it was a component part of the crisis, but one that itself was driven by class struggle. How on earth can you just cut out class struggle and the massive rise in the costs of social reproduction shoveled onto state and capital as a result out of the history of capitalism?

and even if one was to accept what happie chappie claims it still doesn't remove the struggle between labour and capital, as capital responded to the crisis by launched an assault on labour's wages and conditions not to mention it's social wage in terms of public services. Just because labour has been largely taking the kicking in this struggle doesn't mean to say that the capital/labour conflict isn't there, as Zizek says the absence of explicit class struggle (strikes etc) is all the more proof of it being waged.

 

[Blagsta]

I agree that to look at banks in isolation is silly. However, banks do in a very real sense create money, in the act of making loans. What they don't do is create the value that is attached to that money in the process of circulating.

No, they don't create money by making loans. They expand the money supply by circulating money.

 

[Jazzz]

No, they don't create money by making loans. They expand the money supply by circulating money.

Wrong way around.

Whenever a bank makes a loan, the money supply increases by the value of the loan. Whenever ordinary people make loans, the money supply does not increase. Whenever we simply circulate money - whether through bank accounts or otherwise - the money supply does not increase.

I don't see how anyone can persist with this nonsense about 'circulation'. It is in the act of making a loan that the new money is created - not the circulation of it.

Will address previous posts later.

 

[butchersapron]

Wrong way around.

Whenever a bank makes a loan, the money supply increases by the value of the loan. Whenever ordinary people make loans, the money supply does not increase. Whenever we simply circulate money - whether through bank accounts or otherwise - the money supply does not increase.

I don't see how anyone can persist with this nonsense about 'circulation'. It is in the act of making a loan that the new money is created - not the circulation of it.

Will address previous posts later.

How can time confuse one so?

 

[littlebabyjesus]

Wrong way around.

Whenever a bank makes a loan, the money supply increases by the value of the loan. Whenever ordinary people make loans, the money supply does not increase. Whenever we simply circulate money - whether through bank accounts or otherwise - the money supply does not increase.

I don't see how anyone can persist with this nonsense about 'circulation'. It is in the act of making a loan that the new money is created - not the circulation of it.

Will address previous posts later.

While I agree that the money supply is expanded through the creation of loans - through the creation of new promises, basically - you do need to look at circulation to see how that money affects the economy. ld is right that if it doesn't circulate, it does nothing. And also that expanding the money supply doesn't necessarily cause inflation.

So, Japan currently functions with 400 percent gdp total debt (money supply), while Brazil, say, functions with 50 percent, one eighth the amount (although it's growing as the economy grows). But through the nature of circulation, and through the nature of the promises (Japan has a great deal of long-term promises in there), inflation in Brazil is much higher than inflation in Japan, despite its money supply being far smaller.

 

[Jean-Luc]

Whenever a bank makes a loan, the money supply increases by the value of the loan. Whenever ordinary people make loans, the money supply does not increase. Whenever we simply circulate money - whether through bank accounts or otherwise - the money supply does not increase.
I don't see how anyone can persist with this nonsense about 'circulation'. It is in the act of making a loan that the new money is created - not the circulation of it.

This is begging the question because of the way the "money supply" is defined these days, i.e. not just as "base money" which only the state or its central bank can create but also including bank (and building society) loans or "bank money". No problem with this, as long as you don't mix the two kinds of "money" up and attribute to one something that is only a feature of the other.

So, as bank loans are included in the "money supply", yes, an increase in bank loans does (by definition) increase it. But "bank money" is not created in the same way that "base money" is, ie out of nothing by a stroke of the pen or whatever. When a bank makes a loan what it is doing is transferring the use of already existing "purchasing power" (or potential command over wealth) from someone or body that doesn't want to use it (spend it) for the time being to someone else or some other body to use which the bank judges very likely to repay with interest. This will have the effect of increasing spending, which will have economic consequences. and so it is legitimate to measure it But so do loans by pawnbrokers and moneylenders, only in their case it is their own money that they are lending to someone else to spend. No more than the money they lend are "bank loans" created out of nothing. The difference between a bank and a pawnbroker is that banks are lending other people's money while pawnbrokers are lending their own money. Question for Jazzz: do pawnbrokers "create money"? If not, why not and what are they doing?

Bank loans are a special case of the circulation of already-existing purchasing power. In fact, to make unused purchasing power available for spending is the basic economic function of banks.

 

[littlebabyjesus]

Each loan creates a new deposit, so that isn't the whole story by any means.

 

[Jean-Luc]

Each loan creates a new deposit, so that isn't the whole story by any means.

True, but saying "each loan creates a new deposit" is ambiguous. It can either mean (1) that when a bank makes a loan it opens a deposit account for the borrower in which it places the loan, or (2) that when a bank makes a loan and the borrowers spends it the money spent returns to one or other bank, not necessarily the one that granted the loan. The first is merely a tautology. The second is generally true, even if there will in practice be leakages. That's when the story continues. It began when somebody from outside deposited a sum of money in a bank. So you could also say that each (outside) deposit "creates" (is the basis for) a loan, but of a lesser amount.

 

[littlebabyjesus]

TThe second is generally true, even if there will in practice be leakages. That's when the story continues. It began when somebody from outside deposited a sum of money in a bank. So you could also say that each (outside) deposit "creates" (is the basis for) a loan, but of a lesser amount.

The second is what I meant. The 'loan first' theory of endogenous money creation contends that this is how it really works: loan is made, deposit is made, bank balances its books afterwards through interbank lending. By this view, fractional reserve lending is in fact a fiction. Steve Keen, among others, believes that this is the real story of bank lending.

 

[Jean-Luc]

The 'loan first' theory of endogenous money creation contends that this is how it really works: loan is made, deposit is made, bank balances its books afterwards through interbank lending. By this view, fractional reserve lending is in fact a fiction. Steve Keen, among others, believes that this is the real story of bank lending.

This may well be what happens in practice but it is still the case that the vast majority of bank loans have to be made out of the deposits that the bank already has. And of course in the small minority of cases where a bank makes a loan without first having the money it does have to find it literally by the end of the day and is relatively costly for the bank compared with getting the money first. So in fact all loans are covered by payments in to a bank.

The main purpose of the so-called "endogenous" theory of bank lending espoused by Steve Keen and others is to explain why a central bank can't control banking lending. Which in fact it can't (but also because of other factors such as both the supply and demand for funds for lending depending on the general state of the economy, whether or not it is expanding, at what rate, etc). "Full reserve banking" (actually, allowing banks to make loans only from time-deposits) is supported by the Nobel Prize winners Jazzz boasts about as a way of trying to assert government and central bank control over bank lending. Needless to say, none of them base their support for this reform on the fallacious arguments put forward by Jazzz.

 

[littlebabyjesus]

Keen goes further than that. He models a theoretical 'pure credit' system of money creation, which could work in theory, and compares the results with what actually happens. It is his contention that the central bank always expands the base money supply in response to bank lending expanding - forced to as the banks' reserve requirement would be broken otherwise.

A paper on it is found here:

the classic causal mechanism of the “money multiplier” model of money creation, in which base money
must be created before credit money, is the reverse of what is found in the actual data.

 

[love detective]

It is his contention that the central bank always expands the base money supply in response to bank lending expanding

Are you sure about that? specifically the bolded part

So what is happening at the moment, with the central bank expanding the base money supply not in response to bank lending expanding (as you say assert that Keen says 'always' happens), but it actually contracting - is not actually happening?

likewise central banks have actively in the past effected a contraction (not an expansion) in the base money supply when lending is expanding, to attempt to constrain the inflationary pressures of lending (through what is effectively a process that is the reverse of QE)

These two things are known empirical observations, they are observable facts

There is a huge false dichotomy going on at the moment between exogenous and endogenous theories

exogenous money theory contains large elements of endogenous theory and vice versa - at different times and different situations the system relies more on one way than the other to varying degrees of 'success' or otherwise

loans create deposits and deposits create loans - there is no real starting point as such it's a circuit not a line - all of this collapses into circulation as a process which can start at any point in that circuit

endogenous money theory and what is commonly referred to as fractional reserve lending are not mutually exclusive

 

[littlebabyjesus]

'always' is probably too strong. But it is certainly his contention that this is the usual state of affairs. He gives worked examples (from the US mostly, irrc). I agree that the two are not mutually exclusive, but Keen certainly contends that the system is primarily driven by endogenous money creation.

 

[love detective]

exogenous money theory contends that the system is primarily driven by endogenous money creation as well!

circulation, circulation, circulation

 

[Jean-Luc]

Keen goes further than that. He models a theoretical 'pure credit' system of money creation, which could work in theory, and compares the results with what actually happens. It is his contention that the central bank always expands the base money supply in response to bank lending expanding - forced to as the banks' reserve requirement would be broken otherwise.

I can accept that something like this probably does happen, ie the tail (the commercial banks) wagging the dog (the central bank) but that doesn't mean that the dog can't or doesn't wag the tail. In the end, both working in conjunction with each other expand "the money supply", i.e, the commercial banks can't really do it all on their own: they need the collaboration of the central bank (which can indeed create new money, but not of course wealth, out of nothing)

 

[Jean-Luc]

Yes, some excellent posts on this and the last thread about this, I've found it really interesting.

Anyway assuming the book isn't in the offing is there one you would recommend to read up on this stuff?

By coincidence the October issue of this journal is a special issue devoted to the subject:

Another modern criticism of today's Monetary Reformers can be found here:

http://www.metamute.org/editorial/articles/john-maynard-nothing

 

[littlebabyjesus]

I can accept that something like this probably does happen, ie the tail (the commercial banks) wagging the dog (the central bank) but that doesn't mean that the dog can't or doesn't wag the tail. In the end, both working in conjunction with each other expand "the money supply", i.e, the commercial banks can't really do it all on their own: they need the collaboration of the central bank (which can indeed create new money, but not of course wealth, out of nothing)

Well, commercial banks could do it on their own in theory, according to Keen. All that would be needed would be a removal of their reserve requirements. And in fact, as is it works now, they are constantly breaching those reserve requirements, compelling the central bank to step in and create more base money in response to the banks' lending. Fundamentally, it is demand for loans that drives money creation.

 

[Blagsta]

Well, commercial banks could do it on their own in theory, according to Keen. All that would be needed would be a removal of their reserve requirements. And in fact, as is it works now, they are constantly breaching those reserve requirements, compelling the central bank to step in and create more base money in response to the banks' lending. Fundamentally, it is demand for loans that drives money creation.

That demand has to come from somewhere.

 

[Jazzz]

This is begging the question because of the way the "money supply" is defined these days, i.e. not just as "base money" which only the state or its central bank can create but also including bank (and building society) loans or "bank money". No problem with this, as long as you don't mix the two kinds of "money" up and attribute to one something that is only a feature of the other.

So, as bank loans are included in the "money supply", yes, an increase in bank loans does (by definition) increase it. But "bank money" is not created in the same way that "base money" is, ie out of nothing by a stroke of the pen or whatever. When a bank makes a loan what it is doing is transferring the use of already existing "purchasing power" (or potential command over wealth) from someone or body that doesn't want to use it (spend it) for the time being to someone else or some other body to use which the bank judges very likely to repay with interest. This will have the effect of increasing spending, which will have economic consequences. and so it is legitimate to measure it But so do loans by pawnbrokers and moneylenders, only in their case it is their own money that they are lending to someone else to spend. No more than the money they lend are "bank loans" created out of nothing. The difference between a bank and a pawnbroker is that banks are lending other people's money while pawnbrokers are lending their own money. Question for Jazzz: do pawnbrokers "create money"? If not, why not and what are they doing?

Bank loans are a special case of the circulation of already-existing purchasing power. In fact, to make unused purchasing power available for spending is the basic economic function of banks.

I am highlighting the bit which is crucial and which you still have not grasped. Think about what you mean, "for the time being"? How long is "the time being"? A year, a month, a day?

Because you must realise that we are talking about 'demand deposits' which can and may very well be withdrawn in the very next minute.

What you are unwittingly alluding to is 'full-reserve banking'. You are implying that the money given out as loans somehow is the same money that was deposited. And of course that it doesn't make sense for that money to be in two places at once. With full-reserve banking this is the case - but not with fractional-reserve. With fractional-reserve banking the money ends up in thirty places at once, all of them circulating.

This is why I don't like the 'money multiplier' model - it is highly contrived and does nothing to disabuse people of the idea that banks are simply lending out the money they receive as deposits (as well as suggesting that the monetary base determines the money supply).

Other bits: the money supply is indeed increased by bank loans, it is defined that way because in a fractional-reserve system it does. The bank loans are made by typing numbers into a computer and that is how the new money is created. When you say that banks lend other people's money, this is legally not the case, crucially the ruling is that banks lend their own money, and when you deposit money in a bank, you are actually giving a loan to the bank (see Carr vs. Carr 1811, Davaynes vs. Noble 1816, and other cases http://www.cobdencentre.org/tag/carr-v-carr-1811/ which are all crucial to allowing the fractional reserve scam to exist)

Do pawnbrokers create money? No of course not. If pawnbrokers could act like fractional-reserve banks, they could lend out your wristwatch while at the same time allowing it to remain in the shop window.

 

[Jazzz]

Needless to say, none of them base their support for this reform on the fallacious arguments put forward by Jazzz.

Where do we disagree?

 

[frogwoman]

By coincidence the October issue of this journal is a special issue devoted to the subject:

Another modern criticism of today's Monetary Reformers can be found here:

http://www.metamute.org/editorial/articles/john-maynard-nothing

eta: stupid me! ta!

 

[Das Uberdog]

reallllly wouldn't take my economic theorisations from the SPGB

 

[Jean-Luc]

I am highlighting the bit which is crucial and which you still have not grasped. Think about what you mean, "for the time being"? How long is "the time being"? A year, a month, a day? Because you must realise that we are talking about 'demand deposits' which can and may very well be withdrawn in the very next minute.

Yes, of course that can happen in theory but in practice it doesn't and banking is based on the fact that it doesn't. Because only a proportion (fraction) of what is in "demand deposits" will be withdrawn at any time, the banks are free to lend the rest.

What you are unwittingly alluding to is 'full-reserve banking'. You are implying that the money given out as loans somehow is the same money that was deposited. And of course that it doesn't make sense for that money to be in two places at once. With full-reserve banking this is the case - but not with fractional-reserve.

Yes, I am saying that what happens today is a sort of "full-reserve banking" only not as rigid as what you mean by it: banks lend from the part of "demand deposits" they know from experience are not likely to be withdrawn as well as from "time deposits". In other words, from your point of view, your banking reform is not really needed.

With fractional-reserve banking the money ends up in thirty places at once, all of them circulating.

I don't know what you mean by this : that a bank can lend 30 times the amount of money deposited with it?

Jean-Luc said: ↑

Needless to say, none of them base their support for this reform on the fallacious arguments put forward by Jazzz.​

Where do we disagree?

On this last point, for one. I don't think any of the Nobel Prize winner you cite nor Mervyn King believe that when somebody deposits £100 in a bank that bank can then lend up to 30 times that amount, ie £3000. I don't think either that they think that a bank creates the money it lends by a mere keyboard stroke. Nor are they in favour of all money being so-called "debt-free money". What they are concerned about is trying to assert central bank control over the amount of bank loans.

I don't like the 'money multiplier' model - it is highly contrived and does nothing to disabuse people of the idea that banks are simply lending out the money they receive as deposits

I know that's why you don't like it, but it's probably accepted by your Nobel Prize winners. I think it's contrived too, but at least it accepts that a bank can't make a loan unless it has a corresponding deposit.

Do pawnbrokers create money? No of course not. If pawnbrokers could act like fractional-reserve banks, they could lend out your wristwatch while at the same time allowing it to remain in the shop window.

And you think banks can do the equivalent of this?

 

[Jazzz]

Yes, of course that can happen in theory but in practice it doesn't and banking is based on the fact that it doesn't. Because only a proportion (fraction) of what is in "demand deposits" will be withdrawn at any time, the banks are free to lend the rest.

Yes, I am saying that what happens today is a sort of "full-reserve banking" only not as rigid as what you mean by it: banks lend from the part of "demand deposits" they know from experience are not likely to be withdrawn as well as from "time deposits". In other words, from your point of view, your banking reform is not really needed.
I don't know what you mean by this : that a bank can lend 30 times the amount of money deposited with it?

On this last point, for one. I don't think any of the Nobel Prize winner you cite nor Mervyn King believe that when somebody deposits £100 in a bank that bank can then lend up to 30 times that amount, ie £3000. I don't think either that they think that a bank creates the money it lends by a mere keyboard stroke. Nor are they in favour of all money being so-called "debt-free money". What they are concerned about is trying to assert central bank control over the amount of bank loans.

I know that's why you don't like it, but it's probably accepted by your Nobel Prize winners. I think it's contrived too, but at least it accepts that a bank can't make a loan unless it has a corresponding deposit.

And you think banks can do the equivalent of this?

i) This is flat out wrong. This is precisely the thing that you have not grasped. The banks cannot be said to be lending the money they receive as deposits. They are creating new money which doesn't sit around - it circulates.

If what you said was true, then only the monetary base could be said to be circulating - but clearly we have far more than that going around. The reason has little to do with the fact that depositors like to save their money. It is the fact that unless they withdraw hard cash, then their money is always going to be somewhere in the banking system, existing simply as a liability entry in a bank's books, and as one bank loses these funds another gains. So when we consider the high street banks as a whole, they can create a great deal of money as loans just with keystrokes. When one customer circulates his money by transferring it to someone else's account at the same bank, it doesn't affect the bank at all. And when customers transfer money to other banks, it is going to be balanced by the transfers coming the other way ('clearing').

I suggest that you forget about the 'money multiplier' model, and just suppose instead that there is a central bank, and one big high street bank which has everyone's accounts (LLoydsNatwestHSBCBarclays). Now it should be straightforward to see that this big high street bank simply creates money when it issues a loan, out of nothing, and it can loan as much as it likes at interest, the only restriction being that it needs to maintain confidence that it can come up with cash (or other central bank money) for the tiny percentage that will require it at any time. Crucially, the bank is not affected at all by transfers between customers. Now it works the same way when you split up the big bank - interbank lending allows the four banks to operate as one.

There is a massive difference between fractional-reserve and full reserve banking and what we have is a million miles from full-reserve.

If you want to quote where my Nobel prize winners disagree with me, please go ahead, I will genuinely be interested.

It hardly restricts money creation that banks must have a corresponding deposit to every loan, because for every loan a corresponding deposit is created.

Last bit - yes, the banks are creating wristwatches whenever they lend a wristwatch.