Taking on the currency cranks

[Jazzz]

Once again, that is your interpretation but it is not Paul Tucker's. In that speech he says:

When a bank makes a loan, its assets increase by the value of the loan, and its liabilities also increase by the value of the loan. Are you really denying this? You can see that both must rise equally, as there is no profit realised before interest is taken. Again, this alone is 'levering up' the balance sheet, it is all that Tucker is referring to.

So, he's referring to something he had said earlier in his speech. What he was referring to were some views expressed by another economist:

No, he states how banks make loans as fact and not an 'argued' position.

 

[Jazzz]

more quotes

"[Banks] can lend simply by expanding the two sides of their balance sheet simultaneously, creating (broad) money." Paul Tucker again

"The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ " Martin Wolf, Financial Times

"Banks it is often said take deposits from savers (for instance households) and lend it to borrowers (for instance businesses) with the quality of this credit allocation process a key driver of allocative efficiency within the economy. But in fact they don’t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit." Adair Turner, Chairman of the FSA


"The process by which banks create money is so simple the mind is repelled." John Kenneth Galbraith, former Harvard professor of Economics

 

[Jean-Luc]

more quotes

Jazzz, the trouble is that you, like many currency cranks, are interpreting quotes from bankers and economists in a different way to what they mean. When they say banks "create money" you interpret this as meaning that banks create it "out of nothing". But this does not follow. Banks are said to "create money" when they issue an IOU which is then generally accepted for payments. The IOU is for lending money. You say that they don't have to have the money that they lend. Virtually all those authorities you quote take it for granted that banks lend out of funds they have, either from outside depositors or from what they have borrowed on the money market. So, just because someone says that "banks create money" does not mean that they think that banks do this out of nothing.

"[Banks] can lend simply by expanding the two sides of their balance sheet simultaneously, creating (broad) money." Paul Tucker again

Yes, that's what banks do when they grant a loan. It's called double-entry book-keeping and doesn't imply that they create "broad money" out of nothing

"The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ " Martin Wolf, Financial Times

It would have been helpful if you had given the full quote which actually ends "by private banks' often foolish lending". At least you didn't cut it short, as some other currency cranks do, after "out of nothing". I think it is unfortunate that Wolf used these words as he was bound to be misunderstood in the way he has been of saying that private banks create money out of nothing. So it's his own fault that he has been. From his other writings, it is clear that this is not want he meant. His actual position is that it is the whole "contemporary monetary system", which includes the central bank, that can do this. His view is that banks can sometimes make a loan without having the money, in the knowledge that at the end of day (literally, when banks clear their mutual payments) the central bank will lend it any money it lacks to cover the loan. A central bank can of course create money out of nothing. That central banks do behave in this automatic and passive way in response to "private banks' often foolish lending" is a controversial theory not shared by all economists (not by Paul Krugman, for instance), but it is not a theory that a bank can create money out of nothing on its own. If any institution is creating money out of nothing here it would be the central bank and not a private bank. But nobody denies that a central bank can do this.

"Banks it is often said take deposits from savers (for instance households) and lend it to borrowers (for instance businesses) with the quality of this credit allocation process a key driver of allocative efficiency within the economy. But in fact they don’t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit."

Adair Turner, Chairman of the FSA

The use of the word "collectively" suggests that he is describing the "deposit multiplier" you have already rejected, which assumes an original deposit which is the basis of the first loan, which when spent finds its way into one or other bank which can therefore make a another loan, and so on. In any event, he does not think that an individual bank can create money out of thin air, nor that it can lend more than has been deposited with it (or which it has itself borrowed). And he is saying that banks do allocate pre-existing savings. Full speech is here.

"The process by which banks create money is so simple the mind is repelled." John Kenneth Galbraith, former Harvard professor of Economics

This is a passage from Chapter 3 of his 1975 book Money. The use of the word "repelled" is not to be taken in its meaning of "disgusting" but rather in its meaning of "taken aback" as the next sentence makes clear ("Where something so important is involved, a deeper mystery seems only decent"). In any event, the passage tells us nothing about what he thinks the process is. For that, you have to read the next two paragraphs. In the first one he describes how the Bank of Amsterdam decided to lend money that had been deposited with not as coins but by opening an account for the borrower from which he could draw coins. In the second, he describes how early American banks granted loans in the form of bank notes which were redeemable against coins that had been deposited with it. In other words, he is not saying that banks simply create the borrower's deposit or the bank notes out of thin air, but on the basis of a pre-existing deposit.

Thanks for providing an opportunity to demolish some cherished currency crank quotes. Have you any more?

 

[love detective]

When a bank makes a loan, its assets increase by the value of the loan, and its liabilities also increase by the value of the loan.

Yes you're exactly right here - and what causes the liabilities to increase is the fact that they have had to fund the loan either from the circulation back to it of customer deposits, borrowing in the wholesale markets, or borrowing/repoing from central banks (all things you deny actually happen)

So that after the loan has been made & drawn on, the bank has a liability representing the amount owed by the bank to the party it funded it from and an assest representing the amount owned to the bank by the party borrowing

so you describe the outcome correctly, yet deny the process that causes that outcome

you claim that bank's don't have to fund their lending - if this was true the outcome of this on a bank's balance sheet would be that the asset side would rise representing the loan the bank has made to the customer, but there would be no corresponding rise in liabilities because the bank has magiced the money out of thin air - which is absurd as i) the whole point of a balance sheet is that it erm...balances, and ii) is contradicted by yourself above

 

[Jazzz]

Thanks for providing an opportunity to demolish some cherished currency crank quotes. Have you any more?

I am sorry jean-luc, but you are simply waffling and continuing to display the fact that you haven't got it. Your 'demolishing' is simply in your head. You do not understand the fundamental trick by which money is created by private banks. It's as both you and love detective think what is going on is full-reserve banking and I don't think you understand fractional reserve at all. How on earth do you think that 97% of our currency (which exists in form of bank liabilities) is created if you think that it can all paid with the 3% of central bank money? You describe a mathematicaI impossibility.

I find it exceptionally trying attempting discourse. It's really fine not to understand this - I have spent years getting my head around it. But to continually make out that you understand when you patently do not - that is exasperating.

The quotes are very clear - private banks create money.

 

[Jazzz]

Yes you're exactly right here - and what causes the liabilities to increase is the fact that they have had to fund the loan either from the circulation back to it of customer deposits, borrowing in the wholesale markets, or borrowing/repoing from central banks (all things you deny actually happen)

So that after the loan has been made & drawn on, the bank has a liability representing the amount owed by the bank to the party it funded it from and an assest representing the amount owned to the bank by the party borrowing

so you describe the outcome correctly, yet deny the process that causes that outcome

you claim that bank's don't have to fund their lending - if this was true the outcome of this on a bank's balance sheet would be that the asset side would rise representing the loan the bank has made to the customer, but there would be no corresponding rise in liabilities because the bank has magiced the money out of thin air - which is absurd as i) the whole point of a balance sheet is that it erm...balances, and ii) is contradicted by yourself above

No, incorrect, the 'liability' represents the loan. It is the thing that the customer can draw on. I have already explained in the other thread very carefully - your bank account is a liability account on the bank's books. The 'money in your bank account' is a simply a liability of the bank to you. That is all the money is: a liability from one party to another. In a sense, you could say that there is no actual money. It is all promises!

When a bank makes a loan, it need not get funds from anywhere else. It simply adjusts its books. Assets and liabilities increase by the value of the loan.

"So that after the loan has been made & drawn on"

This is precisely the point about fractional reserve banking. At any one time, considering depositors as a whole, only a fraction of people with 'money in the bank' come to draw it out. All the bank has to do - as was very carefully described by Paul Tucker - is have enough access to central bank funds to cover the tiny percentage that it expects depositors to withdraw at any one time. The rest - it can make up out of nothing.

 

[love detective]

No, incorrect, the 'liability' represents the loan.

nonsense - you clearly have never looked at, let alone understood, the report & accounts of a bank

It is the thing that the customer can draw on.

As i said in my post:-

So that after the loan has been made & drawn on, the bank has a liability representing the amount owed by the bank to the party it funded it from and an assest representing the amount owned to the bank by the party borrowing

i.e. - after the loan has been drawn on (i.e. used to buy something/pay someone), the bank has an asset representing the money due back from the customer and a liability representing whatever method that loan was funded by in the first place (customer deposit, wholesale lending, subordinated debt, share capital, borrowing from central bank etc..)

I have already explained in the other thread very carefully - your bank account is a liability account on the bank's books.

yet more nonsense - your bank account is only a liability to the bank if you have money in it, once the loan has been drawn and used to buy something/pay someone, the only thing left in terms of the bank/customer relationship, is the customers liability to the bank (i.e. the bank's asset). The corresponding rise in the bank's balance sheet liability at that point in time represents the liability to whoever or whatever party/method funded the loan (customer deposit, wholesale lending etc..)

The 'money in your bank account' is a simply a liability of the bank to you.

this is correct, but as noted above - once the loan has been used, the money 'isn't in the borrowers bank account' anymore - and this is where your lack of knowledge as to how things work is shown up for what it is

When a bank makes a loan, it need not get funds from anywhere else. It simply adjusts its books. Assets and liabilities increase by the value of the loan.

keep telling yourself that, meantime in the real world things go on somewhat differently to how you would like it to.

If things worked like how you think they do, you have to explain why eurozone banks had to borrow just over a trillion euros from the european central bank between december 2011 and february 2012 to help them fund their lending activities and repay maturing debt. If the world really was like how you think it is, why would these banks borrow a trillion euros (which involves paying interest on it and putting up collateral for it) to fund their activities/lending, when, according to you, they can just make a few accounting entries and magic that money into existence? If you make one reply to this post, make sure it's an attempt to answer to that question, and i say attempt as that is all that it will be, as you cannot reconcile your own theory with the facts as we know them

 

[Jazzz]

nonsense - you clearly have never looked at, let alone understood, the report & accounts of a bank

Not nonsense. The loan is a liability of the bank to the customer. This is what money is!

As i said in my post:-

i.e. - after the loan has been drawn on (i.e. used to buy something/pay someone), the bank has an asset representing the money due back from the customer and a liability representing whatever method that loan was funded by in the first place (customer deposit, wholesale lending, subordinated debt, share capital, borrowing from central bank etc..)

Well firstly, the loan might not be drawn on. It could be paying off an overdraft. It might simply stay in the customer's account. Or, it could be paid to someone else with a bank account at the same bank. In which case, there is absolutely no additional liability with the central bank.

But even more to the point, it is necessary to consider the banking system as a whole, because just as you might claim money created by private banks 'leaves' when it is drawn on to another bank, it arrives when the reverse happens. Suppose we have four major high st banks, each of them make a loan of £10,000 to one of their customers. Now suppose each of these customers draws their loan by paying someone at another bank, so each bank has given one loan and been paid by another. What is the overall position? None of the banks has any change in their position with the central bank. The banking system as a whole has created £40,000, out of thin air, by keystrokes on a computer.

yet more nonsense - your bank account is only a liability to the bank if you have money in it, once the loan has been drawn and used to buy something/pay someone, the only thing left in terms of the bank/customer relationship, is the customers liability to the bank (i.e. the bank's asset). The corresponding rise in the bank's balance sheet liability at that point in time represents the liability to whoever or whatever party/method funded the loan (customer deposit, wholesale lending etc..)

None of which changes the fact that your bank account is a liability account on the bank's books. As above you are again mistaken to think that there is any 1-1 relationship with 'funding' of the loan. The loan is created out of nothing.

this is correct, but as noted above - once the loan has been used, the money 'isn't in the borrowers bank account' anymore - and this is where your lack of knowledge as to how things work is shown up for what it is

Well of course not, if it couldn't circulate it wouldn't be money.

keep telling yourself that, meantime in the real world things go on somewhat differently to how you would like it to.

Absolutely true, do you really think I approve of the system I am describing?

If things worked like how you think they do, you have to explain why eurozone banks had to borrow just over a trillion euros from the european central bank between december 2011 and february 2012 to help them fund their lending activities and repay maturing debt. If the world really was like how you think it is, why would these banks borrow a trillion euros (which involves paying interest on it and putting up collateral for it) to fund their activities/lending, when, according to you, they can just make a few accounting entries and magic that money into existence? If you make one reply to this post, make sure it's an attempt to answer to that question, and i say attempt as that is all that it will be, as you cannot reconcile your own theory with the facts as we know them

Anyone can create currency. The 'trick' is confidence. In the case of the private banks, it is the confidence that they can exchange it for central bank money on demand. Indeed, when you create your money by way of a promissory note, the banks will only change it up for you if they are confident you are good for it. Likewise, we only accept that their numbers on a screen are worth anything if we are confident that we can change it up for central bank funds. So this is what happens with a run on the bank. Everyone demands that the bank changes it up.

So we come to fractional reserve lending. It started with the goldsmiths, who realised that they could more receipts for gold than they actually had gold, because the paper was serving better as money and the gold was best left in the vault. So they could loan paper money at interest by creating money out of thin air, backed on their promise that the paper could be redeemed for gold at any time. This is exactly what is happening with the private banks. And is why they are scared of 'the run', and it's why they need central bank credit.

The current fraction is around 3% central bank funds to the 97% money created by the high st banks. So, if the banks borrowed a trillion euros, one could expect that to be supporting the creation of thirty trillion euros, money which is created by keystrokes on a computer.

 

[Jean-Luc]

So we come to fractional reserve lending. It started with the goldsmiths, who realised that they could [issue?]more receipts for gold than they actually had gold, because the paper was serving better as money and the gold was best left in the vault. So they could loan paper money at interest by creating money out of thin air, backed on their promise that the paper could be redeemed for gold at any time.

What is your historical evidence that goldsmiths ever issued more receipts for gold than the amount of gold (actually at the time they existed, 17th century London, it was silver) than had been deposited with them? Or that they made loans in the form of "paper money" ?

Both deposits and loans were made in actual coins. Naturally, depositors were issued with a paper receipt confirming the amount deposited and entitling them to get their money back on demand (but these weren't loans). The goldsmith bankers learned that they did not need to keep all the coins deposited with them as coins but could safely lend out some of them.

Richard Cantillon, in chapter VI of Part III of his Essay on the Nature of Trade in General, written in the 1730s, explained how the goldsmiths bankers of 17th century London worked (and they only existed at that time and there):

If a hundred economical gentlemen or proprietors of land, who put by every year money from their savings to buy land on occasion, deposit each one 10,000 ounces of silver with a goldsmith or banker in London, to avoid the trouble of keeping this money in their houses and the thefts which might be made of it, they will take from them notes payable on demand. Often they will leave their money there a long time, and even when they have made some purchase they will give notice to the banker some time in advance to have their money ready when the formalities and legal documents are complete.
In these circumstances the banker will often be able to lend 90,000 ounces of the 100,000 he owes throughout the year and will only need to keep in hand 10,000 ounces to meet all the withdrawals. He has to do with wealthy and economical persons; as fast as one thousand ounces are demanded of him in one direction, a thousand are brought to him from another. It is enough as a rule for him to keep in hand the tenth part of his deposits.
There have been examples and experiences of this in London. Instead of the individuals in question keeping in hand all the year round the greatest part of 100,000 ounces the custom of depositing it with a banker causes 90,000 ounces of the 100,000 to be put into circulation. This is primarily the idea one can form of the utility of banks of this sort. The bankers or goldsmiths contribute to accelerate the circulation of money.

This can be said to be the origin of "fractional reserve banking", i.e. persons who accept deposits needing retain only a "fraction" of this amount as "cash" and lending out the rest (as cash). In the case of "gentlemen and proprietors of land", Cantillon says that this fraction (the cash reserve ratio) could be about 10%. For "merchants and undertakers" he recorded that this had to be much higher, from one-third up to 50%.

Note that, with a cash reserve of 10%, they could lend out 90% of what had deposited with. It does not mean that if total deposits amounted to 100,000 ounces of silver that the goldsmith-banker could then lend out 9 times this, or 900,000 ounces. That of course would be physically impossible. Nor did they issue "paper notes" to that amount (or, at this time, of any amount). That would have been madness.

They did not issue more receipts/notes than the amount of money deposited with them, but of course because some of the silver coins had been lent out the total number of receipts would be greater than the amount of silver kept in the bankers' vaults. But that's normal and what banking is all about (and would still apply under your "100% reserve banking" scheme). Cantillon explained that what the circulation of receipts meant was that the banker need not keep so much as a cash reserve:

They lend it out at interest at their own risk and peril, and yet they are or ought to be always ready to cash their notes when desired on demand. If an individual has 1000 ounces to pay to another he will give him in payment the banker's note for that amount. This other will perhaps not go and demand the money of the banker. He will keep the note and give it on occasion to a third person in payment, and this note may pass through several hands in large payments without any one going for a long time to demand the money from the banker. It will be only some one who has not complete confidence or has several small sums to pay who will demand the amount of it.

That "fractional reserve banking" means that banks can lend more than has been deposited with them is not only theoretically wrong. It has never happened, certainly not in the case of the 17th century London goldsmith bankers.

These early bankers in fact practised what you call "100% reserve banking". At least I think this is what you mean by this. You can't be saying, can you, that under your system banks will have to keep 100% of what is deposited with them as cash? In which case they wouldn't be banks, but safe-deposits because they wouldn't be able to lend. But, if they will only need to keep as cash what they judge their customers will ask to withdraw as cash, wouldn't that be "fractional reserve banking"?

 

[SpineyNorman]

Oh dear.

You are correct that learning to put fires out may well have come about through trial and error. However, it would be surprising if the process of trial and error involved any knowledge of oxygen or the physics of combustion.

So what? Observation comes first, then when enough observations have been made we try and integrate them into a theory that hopefully makes intuitive sense but most importantly helps us to make accurate predictions. It's called science.

It may have involved a mirad of theories about gods, stars, or perhaps no great over-arching theories at all. Solutions can be arrived at by trial and error without knowledge of the underlying physics, that is why I mentioned germ theories. The ancient Egyptians had learnt to build towns away from fetid swamps and had various explanations for why, none of which involved germ theories. Up until the late 19th century miasma theories based on ideas of fetid air were prevalent http://en.wikipedia.org/wiki/Miasma_theory_of_disease Even 19th century cholera outbreaks in London were acted upon and the causes prevented prior to a fully developed germ theory. http://en.wikipedia.org/wiki/1854_Broad_Street_cholera_outbreak (excuse the wiki) My point is not against the advancement of knowledge but rather that it is not a pre-requisite for effective action that full knowledge of the causes of something is available. In fact believing that the pursuit of knowledge is a pre-requisite can hinder effective action. If something appears to work it is entirely reasonable to do it before you even understand how it works. This approach is commonplace in practical sciences such as medicine. For a more recent case look at the BSE outbreaks of the 1990's which were acted upon prior to a knowledge of prions.

So what? Since we've come to understand germ theory and the physics behind fires have we become worse or better at fighting same?

Your point, "And these days people can put out fires because people who do understand the physics have shown them" kind of helps my position as it exposes the flaw in your position.

No it doesn't.

Is it really the case that people need people who understand the physics of fire to show them how to put it out? If this analogy applies to revolutionary struggle, are you really suggesting that the Marxist theorist is as necessary for an effective revolution as a physicist is for fire fighting? If so, then it would appear that the Marxist theorist isn't very necessary at all.

They also used to pray in order to prevent forest fires. Now we have people who do understand the physics of fires we can use dry powder, carbon monoxide and so on. Without an understanding of the physics, or at least instructions from those who do have an understanding, it would seem perfectly sensible to put out a chip pan fire with water. Once you've seen someone try that you won't try it again but then it's probably too late. And when you're dealing with whole societies, possibly even the whole world, we don't really have the luxury of trial and error. Especially when the errors can be so grave - let's not forget that the last time the kind of surface level analysis we're discussing on this thread was used as the basis for an "anti-capitalist" movement it didn't end very well.

What is necessary for effective change is an awareness of the problem, the fire, and knowledge of how to put it out. The problem is the capitalists who should be extinguished by being provided with the choice of defection or jail. The choice will be theirs, the people giving them the option will be us.

I agree with the first sentence. But your unwillingness to bother reading anything beyond the manifesto has led you to misidentify the problem (though I'd suggest you've also misread the manifesto but that's another question altogether). The problem isn't the capitalists. It's the social relations of capitalism. To pin it on individuals, rather than the system, leads precisely to the above kind of movement, or if you're lucky you might get the Luddites. Lessons from the interwar period apply all the more when the blame is placed on only one type of capitalist - the banker, a profession that has been associated with one particular religious/ethnic group and so is ripe for use in scapegoating. Just getting rid of the baddies won't help because the dynamics of the system will ensure that new baddies will quickly emerge to take their place. The problem isn't capitalists, it's capital.

Capitalism is the enemy. And the more you know about the enemy the better equipped you are to identify its weaknesses, to predict its behaviour and ultimately to defeat it. Just as fires have weak points (aiming extinguisher at the base and so on) so too does capitalism - and an understanding of the system offers an understanding of the weaknesses. The best example of this I can think of right now, specifically because it is very clear on how the theory was derived from Capital, is Harry Cleaver's Reading Capital Politically.

But there are really too many to mention. In my view, the error the left, and more specifically those who call themselves Marxists, have made (or rather one of them - abandoning class politics and embracing every liberal fad going is another) has been to not do this for themselves. Instead preferring to use the works of dead Russians, who were interpreting and using Marx for entirely different times, places and conditions, as a blueprint. And so not only are they using strategies formulated for completely different struggles, they also transfer any theoretical errors and misinterpretations, along with conclusions that may have been arrived at more as the result of personal political ambition than a hard nosed assessment of what's going on.

I'm not saying everyone has to read every word of Capital, or even that everyone should read Capital. What I'm saying is that it's a valuable tool and that a theoretical understanding of the problems we face is one of the necessary conditions for solving them, especially as the "error" part in trial and error isn't exactly attractive when you consider that it's human lives, maybe even the future of humanity itself, we're talking about.

 

[kenny g]

Thank you for the response. Slightly desperate to post up the entrance of Auschwitz though. Godwin's law and all that. Most of the rest of your response is a misrepresentation, including your apparent knowledge of my reading habits - Marx wrote more than Capital and the Manifesto you know.

I have not selected one type of Capitalist more than another so your straw man argument is irrelevant. Revolutionary change will occur when it becomes morally and socially reprehensible to be a Capitalist, with a legal framework constructed to reflect this. The result will be either mass defections of capitalists or their imprisonment. People don't accept that murders are merely a social relation, they go after murderers, and equally we should go after the Capitalists. If they don't want to be Capitalists then they are welcome to defect, if not they will be dealt with by a full legal process.

People who state Capitalism is the enemy generally seem to believe "getting to grips" with some economic text is half the battle. There is no necessity for people to have an understanding of Marxist economic theory in order for there to be an effective revolution. It may help to have an understanding of Capital but it probably would help to have an understanding of any number of areas, photoshop springs to mind.

Marx helped identify the enemy as Capitalists, the Bourgeoisie. Lock them up or let them defect rather than wasting time trying to understand the intricacies of their mechanisms of exploitation and control.

 

[SpineyNorman]

Jesus, on a thread where we're taking on precisely the kind of surface level pseudo-analysis the Nazis took advantage of I think those paralels can be made without evoking Godwin. And this thread does single out one type of capitalist - and it's criticisms of this surface level pseudoanalysis that provoked your comments so yes, it is perfectly apropriate.

It was you yourself as much as said the manifesto was all you needed so I don't think that's a misrepresentation, especially as in all Marx's works he was careful to point out that the problem was systemic rather than the result of individual agency.

The most important task is organising in communities and workplaces to resist whatever shit gets thrown at us and to learn the most effective modes of collective action whilst demonstrating in practice to others that these methods work. But you can do that and read a book or two.

Theory helps us understand where the weaknesses are in the system - in other words where to push and prod if we ever want to get to the stage where we can lock them up or force them to defect. Your suggestions are idealist, not mine - the materialist conception of history (and even that's contested ground - some place more emphasis on structure, others on collective and individual agency) posits that before capitalism can be overthrown - before we can lock them up or force them to defect - other processes must first be completed. Theory helps us at times to ensure these processes take place and at others to speed them up. To go back to the physics analogy, imagine capitalism as a heavy boulder. Even if we all push at it we can't get it rolling if it's not in the right position. But a single person with a knowledge of levers can get it moving that first difficult inch, after which everyone's pushing can get it rolling down the hill and out of the way. You'd have us all pushing at the boulder and getting hernias.

And the more people that try and get their heads around this stuff the better - reduces the chances of some self-elected vanguard putting itself at the head of the movement and ensures that there will be an informed debate over tactics, which is always a good thing.

It's not one or the other - we need action and understanding.

That's it for me now on this though, I've wasted far too much time that could have been better spent ensuring the inevitability of communism by reading Marx's original notes from the Grundrisse

 

[love detective]

Not nonsense. The loan is a liability of the bank to the customer. This is what money is!

absolute nonsense

a loan is a financial obligation created between lender & borrower following the passing on of money from the former to the later, obligating the later to pay back that money with interest at some point in the future. The loan is an asset in the book's of the lender/bank and a liability in the books of the borrower.

The cash that was passed on which resulted in the creation of the loan obligation is an asset in the books of the borrower until such time that this money is used to pay someone/buy something, at which point the money moves from their account and the only relationship left between the bank and the borrower is the loan obligation - which is an asset in the books of the bank/lender and a liability in the books of the borrower

Well firstly, the loan might not be drawn on. It could be paying off an overdraft. It might simply stay in the customer's account.

Ah i see, so your theory of how the credit & money system works only applies to situations where people borrow money from bank's but then don't actually use that money for anything! Not a particularly useful theory, given that the reason people borrow in the first place is because they need the money to do something with it.

And even if it's paying off an overdraft the end situations remains the same as i described - if you have a grand overdraft on your account, it means that previously you've paid a grand out to someone, if you then take out a loan to pay the overdraft off, you are left in the same situation i described, i.e. the bank having an asset in their books representing the money due back and the customer having a liability in their representing their future obligation to pay the money back

None of which changes the fact that your bank account is a liability account on the bank's books

again, absolute nonsense - a bank account can have a positive or negative balance - and it is this which determines whether the balance on that account represents an asset on the bank's books or a liability on the bank's books. It's determined by the quantitative magnitude, not the qualitative aspect. therefore a bank account with a minus balance is an asset in the books of the bank, and vice versa

As above you are again mistaken to think that there is any 1-1 relationship with 'funding' of the loan.

At the total level there is actually, the total of a bank's lending must be matched by an equivalent amount of funding (that funding can be made up a variety of sources, the customer deposits you referred to, wholesale lending if customer deposits are not enough to make it up, central bank borrowing or repoing etc..)

The loan is created out of nothing.

No (and as you pretty much admitted earlier) the loan is created out of the coming together of a variety of independent factors, namely the opportunity or need for the potential borrower to do something with the money, the ability of the bank to fund it's overall lending position if the loan is made, and the willingness of both parties to conduct the transaction on terms that they are both in agreement with. If all those independent factors come together then the loan is made - hardly what I would call 'out of nothing'.

To say this is all created out of nothing is as useful as saying something like 'education is created out of thin air by teachers' i.e. it is of no analytical use whatsoever in understanding the process of education

Absolutely true, do you really think I approve of the system I am describing?

You misunderstand - it's not about whether I think you approve of the system you are describing. It's about the fact that you have to bend the real world to fit in with your rigid and inappropriate theories of it. When I say you'd like the world to be like that i don't mean you support such a world, i mean you'd like it to be like that because it would give you theories some credence, but it isn't so they don't

The current fraction is around 3% central bank funds to the 97% money created by the high st banks. So, if the banks borrowed a trillion euros, one could expect that to be supporting the creation of thirty trillion euros, money which is created by keystrokes on a computer.

As i suspected, you were unable to answer the simple question.

So in the middle of the biggest credit crunch the world has ever seen, where credit is severely contracting year on year, where banks are unwilling or unable to lend, private individuals and business are paying down debts rather than taking more on because of the dismal prospects for the economy, you are suggesting that banks have recently made new loans to the tune of thirty trillion euros in the space of a few months! This is equivalent to 50% of Global GDP!

Who has borrowed thirty trillion euros in the last few months Jazz? what did they do with it? 30 trillion euros of new borrowing would represent an enormous monetary boost to the economy (as noted equivalent to 50% of Global GDP) that would temporarily set of a new short term boom and could literally wipe out unemployment overnight - that you think this is happening shows that you don't pay attention to what is actually going on in the real world around you, and of course you can't pay attention to the real world as if you did you wouldn't hold the fuckwited theories that you do

Absolute and patent nonsense from you Jazz - and yet again shows how you have to make up 'facts' about the real world to fit in with your inappropriate theories about how the world works (instead of adapting your theories when it's clear they are of no use to explain real world events)

The real explanation as to why the eurozone banks had to borrow a trillion euros from the ECB is that large chunks of the the borrowing they had made previously to support their lending (something you claim doesn't happen) is coming up for maturity in the coming year and due to the freezing up of the wholesale lending markets, they would be unable to refinance/roll it over in the normal wholesale markets, so the ECB had to step in to, to temporary avoid another crisis and provide funding that the markets had in previous years provided. Of course, you deny that this funding was even required in the first place (you just need to look at any report & accounts of a bank however to see it), so I can see why you can't admit the real world facts as they would once again pull the rug out from underneath your unfit for purpose theories on the money & credit system

 

[TruXta]

I'm continually amazed that you can be bothered, ld.

 

[love detective]

guess i free up time by not continually talking about what i've had for my tea and the like

 

[kenny g]

That's it for me now on this though, I've wasted far too much time that could have been better spent ensuring the inevitability of communism by reading Marx's original notes from the Grundrisse

Fair enough. Thank you for taking the time to respond to my points. Helped to clarify some of my ideas. To return to the OP - the meeting this Wednesday should be quite an event. I hope Jazz can attend.

 

[TruXta]

guess i free up time by not continually talking about what i've had for my tea and the like

Oh the burn.

 

[butchersapron]

Hello, weirdo.

 

[Jazzz]

What is your historical evidence that goldsmiths ever issued more receipts for gold than the amount of gold (actually at the time they existed, 17th century London, it was silver) than had been deposited with them? Or that they made loans in the form of "paper money" ?

Both deposits and loans were made in actual coins. Naturally, depositors were issued with a paper receipt confirming the amount deposited and entitling them to get their money back on demand (but these weren't loans). The goldsmith bankers learned that they did not need to keep all the coins deposited with them as coins but could safely lend out some of them.

Richard Cantillon, in chapter VI of Part III of his Essay on the Nature of Trade in General, written in the 1730s, explained how the goldsmiths bankers of 17th century London worked (and they only existed at that time and there):
This can be said to be the origin of "fractional reserve banking", i.e. persons who accept deposits needing retain only a "fraction" of this amount as "cash" and lending out the rest (as cash). In the case of "gentlemen and proprietors of land", Cantillon says that this fraction (the cash reserve ratio) could be about 10%. For "merchants and undertakers" he recorded that this had to be much higher, from one-third up to 50%.

Note that, with a cash reserve of 10%, they could lend out 90% of what had deposited with. It does not mean that if total deposits amounted to 100,000 ounces of silver that the goldsmith-banker could then lend out 9 times this, or 900,000 ounces. That of course would be physically impossible. Nor did they issue "paper notes" to that amount (or, at this time, of any amount). That would have been madness.

They did not issue more receipts/notes than the amount of money deposited with them, but of course because some of the silver coins had been lent out the total number of receipts would be greater than the amount of silver kept in the bankers' vaults. But that's normal and what banking is all about (and would still apply under your "100% reserve banking" scheme). Cantillon explained that what the circulation of receipts meant was that the banker need not keep so much as a cash reserve:
That "fractional reserve banking" means that banks can lend more than has been deposited with them is not only theoretically wrong. It has never happened, certainly not in the case of the 17th century London goldsmith bankers.

These early bankers in fact practised what you call "100% reserve banking". At least I think this is what you mean by this. You can't be saying, can you, that under your system banks will have to keep 100% of what is deposited with them as cash? In which case they wouldn't be banks, but safe-deposits because they wouldn't be able to lend. But, if they will only need to keep as cash what they judge their customers will ask to withdraw as cash, wouldn't that be "fractional reserve banking"?

Thanks for the thoughtful and researched post Jean-Luc. However, Cantillon is just describing the origins of fractional reserve banking. Maybe he didn't even fully grasp what was going on? Precisely the things you describe as 'impossible' and 'madness' did occur, and are the basis for fractional reserve banking today. I ask you - why are they 'impossible' and 'madness'?

From lending out someone else's coins - and giving the original depositor a non-transferable receipt - it was simply one further step to issuing the original depositor a transferable receipt "payable to bearer" which then functions as money - much easier to move around, as I think Cantillon noted - and it is one further step then to simply issuing these promissory notes as loans without ever having had a matching deposit.

I've given away my copy of "where does money come from", which I think had some good references on this, but I have these links:

Of these media the promissory note originated a receipt given by the goldsmith for money, which he took charge of for a customer but was not allowed to use. Such a note was really a warehouse voucher which could not be assigned. When, however, it became a receipt for a money deposit, which the goldsmith was allowed by the depositor to use for the purposes of making advances to his customers, it developed into an assignable instrument. Ultimately such notes were issued by the goldsmiths in the forms of loans and were not necessarily backed by gold or bullion. When this stage was reached the goldsmith had become a duly recognised purveyor of currency.

The Early History of Banking in England, Richard D. Richards - google books

also

The Bank of England
The Bank of England was founded in 1694, primarily to raise money for the war with France. Its founders were to provide the Government with a loan of £1,200,000 and the interest was to be £100,000 per year. In exchange the bank was to have a Royal Charter and the loan was not to be repaid before 1706.

The founders intended to do no more than the kind of business goldsmiths were doing already. Like the pioneer goldsmiths the Bank of England was a bank of issue, printing their own notes and lending money of their own creation. The power granted to the Bank of England in respect of note issue drove others out of circulation until they remained the only bank of note issue. However, other English bankers found that it was possible for deposit banking to be profitable with the right of note issue.

A History of English Clearing Banks, British Banking History Society http://www.banking-history.co.uk/history.html

Of course, for an example of a promissory note promising to repay silver which isn't there - you have only to open your wallet.

 

[mrs quoad]

Of course, for an example of a promissory note promising to repay silver which isn't there - you have only to open your wallet.

Do you have different bank notes to the ones in my wallet, then?

Admittedly I've only got a twenty and a fiver (think I've got a 1990s fiver somewhere, too) but neither of them make any reference to silver. Or gold. Or platinum. Or hen's teeth, tbh.

Were you under the impression that we're still working with the silver standard?

 

[free spirit]

actually, I think you're making Jazz's point there.

as in the notes still bear the legend 'promise to pay the bearer on demand the sum of 5 pounds', but we've gone so far down the cycle that we've now not even got any idea wtf this 5 pounds they speak of actually is.

Originally it meant something, and on demand the bank of england would need to have given you 5 pounds worth of something in exchange for that note, now it's gone so far down the line that they'd just hand you another fiver and look baffled if you wanted that £5 in gold, silver or anything else.

or maybe that's a different point entirely, I've given up trying to keep up with who's trying to make what point on this thread or the other one.

 

[Jazzz]

absolute nonsense a loan is a financial obligation created between lender & borrower following the passing on of money from the former to the later, obligating the later to pay back that money with interest at some point in the future. The loan is an asset in the book's of the lender/bank and a liability in the books of the borrower. The cash that was passed on which resulted in the creation of the loan obligation is an asset in the books of the borrower until such time that this money is used to pay someone/buy something, at which point the money moves from their account and the only relationship left between the bank and the borrower is the loan obligation - which is an asset in the books of the bank/lender and a liability in the books of the borrower

You assume 'cash was passed on'. Until the 'cash is passed on', the 'money in the account' is a credit entry in a liability account of the bank. If that is then converted to cash, the cash represents a liability of the central bank to the borrower. The liability is the money. You can't exchange it for precious metals anymore.

Ah i see, so your theory of how the credit & money system works only applies to situations where people borrow money from bank's but then don't actually use that money for anything! Not a particularly useful theory, given that the reason people borrow in the first place is because they need the money to do something with it. And even if it's paying off an overdraft the end situations remains the same as i described - if you have a grand overdraft on your account, it means that previously you've paid a grand out to someone, if you then take out a loan to pay the overdraft off, you are left in the same situation i described, i.e. the bank having an asset in their books representing the money due back and the customer having a liability in their representing their future obligation to pay the money back

You fail to address the point being made, which is that the loan created by the bank can stay and indeed circulate within the bank entirely with no change in the lending bank's position with the central bank or indeed any other bank. This does not mean that 'my theory' relies on this happening at all - I am simply giving a contrary example.

again, absolute nonsense - a bank account can have a positive or negative balance - and it is this which determines whether the balance on that account represents an asset on the bank's books or a liability on the bank's books. It's determined by the quantitative magnitude, not the qualitative aspect. therefore a bank account with a minus balance is an asset in the books of the bank, and vice versa

You are really agreeing with me - a 'bank account' with a credit balance is a liability of the bank. I have no problem with you describing 'negative' liabilities as assets.

At the total level there is actually, the total of a bank's lending must be matched by an equivalent amount of funding (that funding can be made up a variety of sources, the customer deposits you referred to, wholesale lending if customer deposits are not enough to make it up, central bank borrowing or repoing etc..)

Again let me quote Adair Turner of the FSA:
"Banks it is often said take deposits from savers (for instance households) and lend it to borrowers (for instance businesses) with the quality of this credit allocation process a key driver of allocative efficiency within the economy. But in fact they don’t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit." - the money which the banks create is funded by the money which the banks create.

No (and as you pretty much admitted earlier) the loan is created out of the coming together of a variety of independent factors, namely the opportunity or need for the potential borrower to do something with the money, the ability of the bank to fund it's overall lending position if the loan is made, and the willingness of both parties to conduct the transaction on terms that they are both in agreement with. If all those independent factors come together then the loan is made - hardly what I would call 'out of nothing'. To say this is all created out of nothing is as useful as saying something like 'education is created out of thin air by teachers' i.e. it is of no analytical use whatsoever in understanding the process of education

I think it is really important to say that banks create money whenever they make a new loan, and I think we disagree on quite how freely the banks can do it.

As i suspected, you were unable to answer the simple question. So in the middle of the biggest credit crunch the world has ever seen, where credit is severely contracting year on year, where banks are unwilling or unable to lend, private individuals and business are paying down debts rather than taking more on because of the dismal prospects for the economy, you are suggesting that banks have recently made new loans to the tune of thirty trillion euros in the space of a few months! This is equivalent to 50% of Global GDP! Who has borrowed thirty trillion euros in the last few months Jazz? what did they do with it? 30 trillion euros of new borrowing would represent an enormous monetary boost to the economy ...

Your main question was that why are central bank funds needed when banks can 'create money out of nothing'. You completely the main point of my reply, which was that it is not that simple, the banks can create as much money as they wish while maintaining confidence that it can be changed for central bank funds.

You are right that I posted hastily about the thirty trillion. Thank you. However it is because the money system is as I describe that the ECB has had to make such extraordinary moves while the possibility of Greek bankruptcy threatened to pull down the house of cards - the house being the fact that the bank loans are greatly in excess of central bank funds.

That it is possible that the ratio can be 30:1, that doesn't mean it necessarily is so, and central banks may not be able to increase the lending (and money creation) of private banks by increasing reserves (pushing on a string - as I have earlier said the money multiplier model is inadequate). Hence the extraordinary move in order to maintain confidence. I do not claim to be any expert on macroeconomics and the dynamics involved - however I do understand that the system is inherently unstable precisely because of our fractional reserve debt-based money system.

 

[love detective]

Sorry Jazz, but we've reached the stage where the validity of your theories have been exposed as useless

I'm going to give up on arguing the detached theory side with you as it's just going round in circles, i want to focus however on the usefulness of your theory in helping to understand the world around us

I gave you an opportunity to use your theory to explain why eurozone banks had to borrow a trillion euros in the space of a few months from the ECB in later 2011/early 2012. Your initial response to this shows that you have no real interest in actually understanding what goes on in the world. That you were forced to offer an absurd reason for the 1 trillion borrowing so that your theory would stay 'intact' shows that you have no real desire to understand how the real world works, you instead just want to try and distort what is happening in the real world to fit your rigid & inappropriate theory.

Even worse however, is when pulled up on your huge mistake, you don't take the opportunity to reflect on the fact that your theories are not fit for purpose and offer no understanding of how the money & credit system works. You instead then resort to a general 'the ECB is doing what it is because my theories are correct' - which is even more absurd that your original attempt to explain it. The ECB's action are in complete contradiction to your theories Jazz, you claim that bank's don't need to fund loans that they make, in which case they should have no need to borrow a trillion from the ECB to fund the loans that they have made. Even more worse however, as it becomes increasingly clear, even to you, that the world as it really is is diametrically opposed to what the world 'should' look like according to your theories, you then claim not to be an 'expert' on the dynamics of the system that you have spent pages and pages telling us we are all wrong about.

You can't have it both ways, you can't ponce around here authoritively telling us this is how the money & credit system works and that we are all wrong, and then when asked a simple question as to why your theories are totally contradicted by real life dynamics, you then say 'i can't explain that because i'm not an expert on it'

All theories and hypothesis about how the world works need to be validated against the real world to test their worth (there's a nice diagram somewhere that shows that continual process in action) - yours falls over at the first hurdle, what your theory suggests should happen is the complete opposite from what is actually happening, and when pressed on it, you dig yourself into a stuttering hole which leaves you with pure faith in your belief as the only thing that supports your theories

 

[Jean-Luc]

Precisely the things you describe as 'impossible' and 'madness' did occur, and are the basis for fractional reserve banking today. I ask you - why are they 'impossible' and 'madness'?

What I described as impossible was lending out 90,000 ounces of silver coins when only 10,000 had been deposited. Anybody who could do this would be entitled to a Nobel Prize for Alchemy. What I described as madness was issuing promissory notes convertible on demand into silver to a value of 90,000 ounces when only 10,000 had been deposited with you. Anybody who did this would soon go bankrupt. What actually happened historically was that 1.000 oz would have been retained and the remaining 9,000 loaned out either as silver coins or as promissory notes convertible into them.

Of course, for an example of a promissory note promising to repay silver which isn't there - you have only to open your wallet.

That's today, but up until WWI if you presented a £5 Bank of England note to the Bank of England you would have been legally entitled to the equivalent amount in gold such as 5 gold sovereigns.

 

[Jazzz]

You can't have it both ways, you can't ponce around here authoritively telling us this is how the money & credit system works and that we are all wrong, and then when asked a simple question as to why your theories are totally contradicted by real life dynamics, you then say 'i can't explain that because i'm not an expert on it'

LD I have discussed this extremely patiently with you. I have provided countless quotes, and very patiently dealt with all your queries. When you completely fail to respond to points I make, I haven't gone on about it. So now you are making a great deal of the fact that I am actually willing to take being corrected if I do post something amiss - when the entire rest of the time I have been correcting you. And you go for the old trick of claiming that everyone else is on your side of the debate, when that is certainly far from the case. Bad show old chap.

Of course, if the eurozone banks limited themselves to lending out money that they already 'funded', there could not possibly be the need for such massive interventions to prop the system up. You might wish to think about that.

 

[cesare]

Did you go to this meeting (y'know, the point of the thread) this evening, Jazzz?

 

[Jazzz]

What I described as impossible was lending out 90,000 ounces of silver coins when only 10,000 had been deposited. Anybody who could do this would be entitled to a Nobel Prize for Alchemy. What I described as madness was issuing promissory notes convertible on demand into silver to a value of 90,000 ounces when only 10,000 had been deposited with you. Anybody who did this would soon go bankrupt. What actually happened historically was that 1.000 oz would have been retained and the remaining 9,000 loaned out either as silver coins or as promissory notes convertible into them.
That's today, but up until WWI if you presented a £5 Bank of England note to the Bank of England you would have been legally entitled to the equivalent amount in gold such as 5 gold sovereigns.

No, it is precisely that they could lend out promissory notes equivalent to 90,000 ounces when only 10,000 had been deposited! Because as we have discussed only a fraction of people would come to withdraw the metal at any one time, while the notes circulated as money in their own right - with no need for the metal every to be withdrawn. The bigger the ratio, the bigger the gamble - and many early banks did indeed have runs and go bust.

As I quoted in the last post, from "Early History of Banking in England" - surely, it is clear?

Ultimately such notes were issued by the goldsmiths in the forms of loans and were not necessarily backed by gold or bullion. When this stage was reached the goldsmith had become a duly recognised purveyor of currency.​

​

If you wish to buy a gold certificate today, wikipedia warns you that you might lose your gold if you aren't careful - nothing has changed there:

"Unallocated gold certificates are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the issuing bank's gold on deposit.[1] "

 

[Delroy Booth]

To pin it on individuals, rather than the system, leads precisely to the above kind of movement, or if you're lucky you might get the Luddites.

You leave the Luddites alone. They were a million times better than anything we've got today, and certainly a lot more politically sophisticated than merely having a problem with the individuals who were making them unemployed. Read chapter 3 of EP Thompson's Making of the English Working Class, "An Army of Redressers" for the best historical view on the Luddites actual role in trade union history, rather than buying into this establishment discourse that simply dismisses "Luddite" as a synonym for "backward ignorant provincial machine-wreckers scared of progress" because the truth is very different to that.

Otherwise, excellent posts.

 

[love detective]

Of course, if the eurozone banks limited themselves to lending out money that they already 'funded', there could not possibly be the need for such massive interventions to prop the system up. You might wish to think about that.

It gets even more absurd - so after pages & pages of telling us how banks don't need to borrow to fund their lending, your explanation is now that the borrowing was made to fund their lending!

Eurozone banks, like all others, had limited themselves to lending out money that they already funded, as that is how the system works. The ECB borrowing was necessary, in the main, to replace shorter term market funding that had been previously sourced from the wholesale lending markets to fund previous lending activity (exactly the same situation as Northern Rock incidentally). Simply put, bank's have to fund any lending they make.

It's been a real eye opener watching you flap around trying to explain real world events not realising that every attempt you make to explain them either involves an absurd making up of what is actually happening in the real world (thirty trillion of new lending being made!) to bend it back to your theory, or an explanation that is diametrically opposed to what your theory says should happen. All that points towards someone who either doesn't understand or doesn't even concern themselves with what actually happens in the real world, which of course is a god send for you given how hopeless your theories are of explaining it

 

[gosub]

Did anyone actually go? Was it just a history of the Basel Accords?