Friday 14 November 2014

Glad to have cleared that up.

Ralph Musgrave in the comments to an earlier post:

"If money is a “measure of indebtedness”, who is indebted to who when gold coins are used as money?"

If you swap gold coins for goods and services, those coins aren't money in the modern sense. They are just valuable assets, just like the goods you can exchange them for. So post-transaction, nobody is indebted to anybody.

"The answer is “no one”. And the same goes for all commodity monies."

Even back in the day when we used gold coins, the split second that any of the following occur, you have a debt-based money system:

a) You obtain (or supply) goods and services on credit, i.e. payment at a later date. The fact that the indebtedness is measured in terms of of how many gold coins will change hands in future is by the by. You can measure it in gold coins, pounds, dollars, payment in kind or bags of salt.

b) Somebody borrows gold coins from a money lender. The gold coins still very much exist, but the money lender no longer owns those gold coins, what he owns is a promise by the borrower that the borrower will repay x gold coins at a future date (an asset). The borrower now has whatever he spent the coins on and a liability. The money lender's new asset and the borrower's liability are equal and opposite and have been created out of thin air.

c) The money lender himself accepts "deposits" which is a polite way of saying "borrows gold coins from people". The gold coins he accepts from depositors are of course the gold coins from transaction (b). Each time they are lent out to borrowers and taken back in from lenders, the money lender's balance sheet grows. He splits the zero into assets and liabilties.

"Debt of course CAN BE USED as money, but it’s not the only form of money. Also the extent to which base money is form of debt is very debatable. E.g. £10 notes claim that the Bank of England will pay you on demand £10 (of gold presumably). But that’s an empty promise."

When I was a lad, the Bank of England very sensibly showed the face value of coins and notes in circulation as a liability from the point of view of the Bank. Which they are. The fact that they don't do this any more (h/t Bob Edmiston, deceased) is by the by, it's only tiny amounts.

And it's not an empty promise. If you owe the government £100 (for fines, fees, taxes) and have £100 in coins and notes, you can repay that liability by handing over the coins and notes. The government now has some worthless bits of paper and metal which it manufactured itself in the first place.

“If some "people's ability to buy... is thwarted" that's a PC way of saying that "they are poor". Nope. One can have a situation where everyone is well off (e.g. house and car owners) but if there was no money, their ability to trade with each other would be thwarted."

Money would come into existence all of its own accord, see a), b) and c) above. It always has done and always will.

The government *might* need to kick start this, like when they introduced the Deutschmark in the late 1940s. All Reichsmarks were declared null and void, every adult got bits of metal and paper with a nominal value of DM 40, and hey presto, things got moving again. Even people who were little children at the time remember this, suddenly, there was stuff in the shops, businesses were taking on employees and from that day on, everything hummed along nicely.

“No need for fancy "money creation"”. No? Then (as per above paragraph) if there was no money, we’d manage OK? A “no money” economy is a barter economy. That’s OK on desert islands, but not in Europe in 2014.

See previous response.

And, ahem, who started off by talking about gold coins?? Not me. I always assume that our starting point is Europe in 2014. And we are where we are, with a debt-based money system.

“As to "banning private money creation" if you understand double entry book keeping you would know this is impossible.” As regards whether I understand double entry book-keeping, I’ve got accountancy qualifications, so I think I pass that test. As to the idea that banning private money creation is not possible, several economics Nobel laureates think it’s possible.

All right, you try banning transactions a), b) and c) above, see how far you get.

For the umpteenth time, a bit of private money/debt/credit creation to oil the wheels and smooth the system is vitally important.

Where it gets dangerous is when banks capitalise land rents (that's eighty per cent of private money creation), which can only be sorted out by decapitalising land values i.e. with Domestic Rates, rent controls, mortgage restrictions caps etc. This is not hypothetical, it's what the UK did until the 1980s and it worked a treat - housing was affordable, owner-occupation rates shot up and the ocasional banking crises we had were as nought compared to what happened since 2008.

10 comments:

DBC Reed said...

A most peculiar explanation of the gold coin system if I may say so.If the money lender hands over the gold coins as a loan, he will be left with a paper i.o.u and no real assets at all.What is he supposed to live on? Is he going to loan out the paper i.o.u as that's all he's got left?
Usually the standard explanation is that lenders of gold coins gave promissory notes to traders to pick up gold coins off their brothers or family in distant towns and these notes went into circulation.But these notes were n't originally forms of debt : they were receipts for money held in the vaults.There was "no out of thin air" involved.The funny business of FRB only started when they started issuing more receipts than they had gold coins laid up.You may call it debt: Murray Rothbards calls it fraud.

I dunno why you are picking over the archaeology of banking.You should be writing a critique of Martin Wolf's "Strip private banks of the power to create money" (FT 24.April)

Mark Wadsworth said...

"If the money lender hands over the gold coins as a loan, he will be left with a paper i.o.u and no real assets at all."

The lender is left with the IOU which (together with interest thereon) must be worth as much as the gold coins OR ELSE HE WOULD NOT HAVE LENT OUT THE GOLD COINS IN THE FIRST PLACE!!!!!!!!

"What is he supposed to live on? Is he going to loan out the paper i.o.u as that's all he's got left?"

FFS, grow up. What do you think bankers live off?????

DBC Reed said...

What do I think Bankers live off?Creating money every time they make a new "loan" and charging interest on it. That's the orthodox explanation.
In the primitive world you are so keen to inhabit, the lenders were not able to create new gold with a stroke of the quill.They could n't go in for any funny business until paper notes started being circulated with only a fractional reserve of gold for troublemakers who preferred the real thing.It may have escaped your attention that in the modern world stress testing and other pressures are on banks to get their reserve levels up after years when they were accepting all kinds of CDO's and other commercial paper which being based on American no recourse mortgages dematerialised.
I have challenged you to critique
Martin Wolf's "Strip private banks" analysis. You are sticking to the Medieval Mediterranean where a lender would have been reckless to lend out hard gold money to impecunious geezers who would hop on a boat leaving the lender with a paper iou ,which people would take off his hands only at a hefty discount. Better to buy land and rent it out at the same rate of interest:at least its not going to disappear!
Less of the bad language and insults please and more engagement with contemporary reality .You must be aware that Wolf has said repeatedly that full-on Georgist LVT would rob the banks of collateral and collapse the banking system ,permanently this time. It would be a help if some kind of government reinforcement by talking over the money creation process was there to take the immense financial strain I would have thought.

Mark Wadsworth said...

DBC, seriously. You are doing Double Think.



You say "What do I think Bankers live off? Creating money every time they make a new "loan" and charging interest on it."

Exactly! You've answered your own potty earlier question about what earlier money lenders lived off! That's what money lenders have always lived off, whether they are lending out gold coins or numbers on computer screens!

"You are sticking to the Medieval Mediterranean where a lender would have been reckless to lend out hard gold money to impecunious geezers who would hop on a boat leaving the lender with a paper iou."

No! YOU ARE!! YOU KEEP MAKING UP FACTS ABOUT THESE PEOPLE!!

CLEARLY THEY EXISTED AND CLEARLY THEY MADE MONEY THE SAME AS TODAY'S BANKERS!!

IT IS EXACTLY THE SAME IN BOTH CASES!!

SOMETIMES BANKS GET DUPED INTO LENDING TO PEOPLE WHO CANNOT REPAY, FFS!!!!!

Mark Wadsworth said...

I have read Martin Wolf's article it is the usual bollocks spouted by Positive Money and IT WILL HAVE LITTLE OR NO IMPACT ON THE BANKS.

I explained why two years ago and I can't be bothered to explain it again

http://markwadsworth.blogspot.co.uk/2012/08/positive-money.html

Bayard said...

"You are sticking to the Medieval Mediterranean where a lender would have been reckless to lend out hard gold money to impecunious geezers who would hop on a boat leaving the lender with a paper iou ,which people would take off his hands only at a hefty discount."

Throughout most of the mediaeval period, lending money at interest was banned by the Church, so the only people who were able to do this were the Jews. Even they were banned by their religion from charging interest when lending to other Jews. The only reason they were allowed to charge interest to gentiles was precisely to cover the risk that the borrowers might "hop on a boat leaving the lender with a paper iou ,which people would take off his hands only at a hefty discount."
(Which they frequently did, or got the king to cancel the loan by royal decree, or simply set up a pogrom and killed the person who'd lent them the money in the first place.)

DBC Reed said...

@B Yes and the Jews were not allowed to own land so were disbarred from the traditional form of rent-seeking.
@MW
The problem is you insist on equating two-bit money lenders with early well-capitalised banks.You do not have to worry yourself by reading Positive Money blogs to know that "Banks do not lend money"(Prof Victoria Chick et al).By definition money lenders do lend money and dish out their own capital in return for personal IOU'S.For some inexplicable reason you think that these IOU's "must be worth as much as the gold coins" see above.If they were issued by the money lender they might conceivably be so, but these were issued by his customers so could not be circulated.Where the similar bank notes became accepted as "currency" ,nobody would then or now accept in change say a £20 I0U signed by somebody you'd never heard of with no guaranteee as to its creditworthiness or convertibility.
It is a pity you have lost it with Positive Money.Their present campaign which includes an attack on banks for over-investing in mortgage business would easily meld with Land Tax propaganda. They are organising their members to write to MP's ( a matter of putting your name to a pro forma) to attend a Commons debate on the Money Creation system on 20th November.But the land taxers prefer to do things their way i.e argue amongst themselves over the purest form of LVT.Forward into oblivion!

Mark Wadsworth said...

DBC, you have a novel take on the history of banking. The whole point is that money lenders or goldsmiths DID accept the gold coins back as deposits, and then lent them out again etc, and the IOUs issued against deposits became a form of currency.

Remember: loans create deposits, or do you conveniently forget this when it suits?

Positive Money's campaign is a worthy campaign which 'raises awareness' of important issues.

I'm just saying, technically, their proposed solution won't work.

You said so yourself:

Loans create deposits.

Therefore if you allow banks to lend money (which Positive Money's suggestion allows) then they will create money.

Bayard said...

"nobody would then or now accept in change say a £20 I0U signed by somebody you'd never heard of with no guaranteee as to its creditworthiness or convertibility."

I am afraid the English language is against you on this one. The etymology of the word "bill" show that this is precisely what happened:

"written statement," mid-14c., from Anglo-French bille, Anglo-Latin billa "list," from Medieval Latin bulla "decree, seal, sealed document". Sense of "account, invoice" first recorded c.1400; that of "order to pay" (technically bill of exchange) is from 1570s; that of "paper money" is from 1660s.

OK an invoice is more of a "you owe me" then an IOU, but the it shares the IOU's convertibility and creditworthiness.

Lola said...

Read all the posts. My brain hurts. I thought banking was simple. Someone sets up a bank with his own capital. Employs some clerks. Runs bank accounts. Takes term deposits for interest. Makes loans. Earns a profit. Now, that's taken care of Monday and Tuesday. Rest of the week on the golf course.