Monday 7 September 2015

Yes, banking really is that simple.

Link spotted by Lola in the DT comments, from the BoE semi-official blog:

Specifically, whenever a bank makes a new loan to a non-bank customer X, it creates a new loan entry in the name of customer X on the asset side of its balance sheet, and it simultaneously creates a new and equal-sized deposit entry, also in the name of customer X, on the liability side of its balance sheet.

The bank therefore creates its own funding, deposits, through lending. It does so through a pure bookkeeping transaction that involves no real resources, and that acquires its economic significance through the fact that bank deposits are any modern economy’s generally accepted medium of exchange.

You see, there is no mention of 'capital' or 'reserves' or any other such woolly non-scientific concepts. People who talk about these things don't even realise that they can be used to describe both assets or liabilities, depending on the context. Those two words are more or less meaningless. Most people don't realise - or even refuse to accept when told - that a company's share capital is on the liabilities side, not the assets side.
Anyways, those paragraphs remind me a bit of what I posted four years ago:

A far simpler way of explaining banking... is to remind people what happens when you go to the bank to take out a personal loan for (say) £10,000.

Assuming you pass the credit checks etc, the bank creates two accounts for you - a deposit account and a loan account, and it simultaneously credits £10,000 to the deposit account and debits £10,000 from the loan account. No coins and notes change hands, nobody had to deposit money first, nothing, the banks just 'splits the zero'.

This is just how it works. People like Positive Money have their hearts in the right place, but they refuse to accept that this is inevitable, banks will easily be able to circumvent any fancy rule they can dream up.

End of.


Steven_L said...

So the people that run our central banks are still debating - and have clearly not reached any kind of conclusion or at the very least consensus - the fundamentals of how banking in the economy operates?

This explains a lot. I think I understand a lot better how the 'GFC' happened now.

Lola said...

Last para. Which is why, if you are really going to reform banking and credit creation, Positive Money/MMT etc etc are wasting their time. I hate to say it/point it out, but we've only had relatively sound money under a metallic standard - specifically the Gold Standard. And working under the God Standard does NOT mean that FRB won't be possible/won't happen. It will. But the GS combined with free enterprise and very little intervention will deliver us a more stable banking system.

Mark Wadsworth said...

SL, good.

L, we will always disagree on this. In real life, linking a currency to gold causes more trouble than it solves, and FRB, credit bubbles and land price bubbles always happened, even under the gold standard.

Anonymous said...

"specifically the Gold Standard. And working under the God Standard..."[Lola]

The problem I have with the gold standard is the way it tends to serve as some form of deity substitute in the minds of it's supporters.
Both metaphorically and even quite literally. See above post. :)

Lola said...

MW - Indeed, but less often and with less severity. In any event it won't be me or thee linking or not linking a currency to gold. In the free market for money the market will evolve, develop and accept what works least worst - and historically (in your own words) the tried and tested method has been linking to Gold.
I really am not a gold bug and although I accept without any reservation gold has issues it has one overwhelming advantage - everyone understands it. It is simple.

Lola said...

P156 Oh I agree. That is a huge barrier to acceptance. The Gold Bug problem.

Lola said...

SL. Good squared. God help us all if they actually make any sense of all the chaos they have created. It's only that chaos that they can't and will never master, that keeps us a bit safe.

Derek said...

Excellent, Mark. That's banking in a nutshell, Splitting the zero. Money is anti-debt. Or debt is anti-money. Just like particle physics.

And that's why even if we were on the Gold Standard it wouldn't (and didn't) help. Bankers would still split the zero.

Random said...

"I hate to say it/point it out, but we've only had relatively sound money under a metallic standard - specifically the Gold Standard."
Pegs to Gold tend to be unstable and can break down suddenly with lack of reserves. You would probably have to get an international agreement such as Bretton Woods
"Which is why, if you are really going to reform banking and credit creation, Positive Money/MMT etc etc are wasting their time. "
The MMT proposal is to limit what banks lend *for* and get rid of capital and reserve requirements and all such nonsense.

For a loan to be enforceable in the courts it has to be within the rules. If the loan can't be enforced then it is has to be written out as a bad debt. It becomes a Gift in law.

Too many of those and the bank goes bust. It then loses its lending license.

Lola said...

R. No. That's just the point. You would not need international agreement. Gold was and is the universal money. The Powers That Be keep banging on about creating an 'international currency'. But what they don't want is an internationally acceptable money.
And it is untrue that 'pegs to gold' tend to be unstable. Historically money was most stable when there was a gold standard. This is not 'pegging to gold'.
Yes, they can break down on lack of reserves. Or rather when governments over-reach themselves; by getting involved in war for example, the gold standard always fails since the state has to print money to pay for arms or issue lots of debt. It was the US involvement in Vietnam that killed Bretton Woods. Anyway that was a fake gold standard. So sticking to a gold standard would tend to increase peace/discourage war.
That is precisely what is wrong with MMT. It's just another set of complicated rules ripe for manipulation by the greedy and the corrupt.
It is perfectly possible for a loan made in gold to be legally enforceable. In any event what a Gold Standard would lead to / enable is good quality private money.
Why does a bank need an official lending licence at all?

Lola said...

D. Indeed they did exactly so. It happened in Scotland in about 1770 something. A bank overreached itself and went bust. But what happened? All the other Scots banks clubbed together and got rescued all the depositors and the owners of the failed bank went bust. Not a single penny of public money was involved and no-one really lost out.
It's central banks as government departments that are the problem.

I do concede thought that getting from here to there will be difficult.

Random said...

You can still buy Gold if you want in a fiat currency system. It is an exchange, not a conversion.

Random said...

Self-regulation has shown to be a foolish concept throughout the current crisis. Harking back to the 19th century for 'evidence' is desperation to fit to a belief.

This idea that depositors and shareholders will regulate the activity of a bank better than a central regulator defies logic. Fragmented shareholders are unable to overcome the agency problem in large firms, never mind banks. We've seen that over the years with the ongoing failure and consolidation of building societies.

Making banking more expensive doesn't fix the problem. You have to regulate what banks can create and lend money for.

Mark Wadsworth said...

As to "sorting out the banks", it's easy.

1. Land value tax. If the selling price of land is depressed as far as possible, then they won't be able to lend on it.

2. We can cap mortgages at multiples of income to be on the safe side or indeed set up a govt mortgage bank for land purchases - new bank mortgages will not longer be registered at HM Land Registry or enforced by the courts. It's like LVT.

3. Make inter-bank lending illegal (like in Canada), enforce higher Basel Ratios etc.

4. To bayonet the survivors, a bank asset tax.

Sorted. Gold standard has nothing to do with it.

Random said...

Add in levarage ratios to that and agreed.

Random said...

MMTers also suggest A National Bank Transaction System, similar to our nationalised road infrastructure, as a public good. Private banks don't print cash, so why should they use their own system:
"The retail bank transaction system is the circulation of our economy - interruptions can prove dangerous and perhaps fatal. As Cypriots recently found, most of us can only operate for a few days without access to a cash-point or online banking transaction service.

Transaction banking services are a national dependency, just as our body depends on the circulation system to pump blood around the system. This dependency is currently held entirely within the hands of privately-owned, dubiously managed, mixed-market banking organisations. Any threat to their monopolies or their bonuses, and the transaction banking system gets it. The Government, fearing a Cypriot-style crisis or queues at the Northern Rock, capitulates, and Osborne goes to Brussels to argue for bigger banker bonuses.

Even the wildest free-marketeers would hesitate to place our entire road network in private hands, so banking transactions should be protected in the same way.

There is no such thing as 'cash in the bank' if you're beyond the central bank's deposit insurance limit (note I didn't say "state's insurance limit" - only the central bank can provide reliable deposit insurance). At that point you're a risk investor in the bank as many in Cyprus have recently found out.

The transaction system is clearly being used as a hostage by the banks to get whatever they want out of the government and the central bank. Do as we say or we shoot the transaction system!

The transaction system has to continue to function in the event of a bank failure. Funds held in transactional accounts should be unaffected by that bank failure. The bank illusion of money in the vault has to be replaced with the reality of money in the vault. It can never be allowed to be shattered otherwise you get a sudden shift in expectations at best and cascade failure of businesses at worst.

But that can't be done by simply propping up banks no matter how ridiculous they behave. Capitalism without losses is like Catholicism without hell-fire. It no longer works as a concept. Bad lenders have to be allowed to fail.

Additionally the transaction system is a massive cost overhead to banks and they hate it. Every bank has a unique system, they are fundamental incompatible and that means the duplication between banks is colossal. I've done quite a bit of work on bank transaction systems over the years and the scale dis-economies are quite spectacular. And so they follow management fads - like outsourcing and offshoring - that do little more that shuffle the costs around the business. The recent failure of the RBS transaction system is a case in point.

The banks can do things together. APACS (now UKPA) and LINK show what can be done with mutual co-operation. That needs to be taken one step further, with the transaction system incorporated into a similar body."

Random said...

(cont long post)
"there are lots of ways of designing a mutual transaction system. But at its core is one concept - that transactions operate on the balance sheet of the central bank, not the individual banks. So you would have a Transaction Department at the Bank of England (alongside the Issue and Banking Departments) and current and savings account ultimately represent liabilities on that balance sheet.

The functional aspects are less important - existing bank accounts could be held in trust by the current banks, run as separate subsidiaries companies and a myriad of different other options. But the key point is that the operational entity is acting as agent and the legal ownership and responsibility is always at the central bank. That makes anything recorded in the transaction system exactly the same as holding cash. You have a receipt for liabilities at the central bank.

However that makes the individual banks short of deposits and balancing liabilites. The replacement on the individual bank's balance sheets is of course an overdraft from the central bank - as mentioned in the section on lending. Existing banks would then have to get the match funding to free themselves from the central bank lending restrictions, conform to requirements or just enter run-off.

The transaction system is like the road or rail infrastructure and is a common good required by all. Inevitably the state will have to fund its existence - because there is no money in running it. I see the state providing a 'white box' system that anybody authorised can put a marketing veneer on. Done correctly it would mean that you can literally operate your bank accounts through any of the competing front ends. Account numbers would stay the same whoever you are notionally with."

Bayard said...

"As to "sorting out the banks", it's easy."

Mark, what about peer-to-peer lending? That's on the increase. Are the P2P companies banks? What would happen if they start to supersede banks?

Mark Wadsworth said...

R, that's all a bit jumbled, but the analogy stands. Things like road network, national grid, the payment system are a national or government matter. People losing money on speculation is not a government matter. Building cars or actually generating electricity is not a government matter.

But being fair, cash machines, debit cards and credit cards are something the private banks developed and they knock the old post office system with postal orders and ordering currency three days in advance into a cocked hat.

B, but P2P lending conforms to the non-banking model (referred to as ILF in the linked article) i.e. they can only lend out money which somebody else has paid in. P2P lending does not create money (asset and liability) out of thin air.

benj said...

@ MW

regarding point 2 of your plan, perhaps we could call it the UK National Land Bank? Just to rub it in.

Under a fullon LVT location values should drop to zero, but as you say the relationship between rents and selling prices isn't necessarily straight forward.

This way we've got all the bases covered. Genius.

Random said...

MW, remember National Girobank created by Tony Benn helped with innovation ;)
Not your average capitalist. I think both the State and private businesses can deliver services well, it depends on the specifics whether you want something to be public or private. Be pragmatic.

Random said...

BJ agreed all bases covered. Remember the bank asset tax.

Lola said...

MW. We've got a bit sidetracked here.

Yes, 'of course' LVT and a bank asset tax are part of the bank 'solution'. And history shows us that in a free market bank capital ratios are higher. The 'market' knows. I would not ban interbank lending (I don't like 'bans'). In fact IBL is vital to market knowledge about the state of the banks. So overall 'we' know how to sort out the banks.

Then there's money. Once money is denationalised and it can be made by anyone the market will sort out what's best. And my guess is that that will be some form of gold or metallic backing. It's simple and it works.

Don't forget bank regulations will be massively reduced (not in the least because there is a revolving door between banks and regulators).

Lola said...

R old son. You're going to need a lie down after all that.

And why not put roads in private hands (as long as they are LVT's). They might be a Damn' site safer and better maintained.

Anyway roads are a very poor analogy for the payment clearance systems.

And I reiterate, none of the MMT ferrargo is necessary. It's just far far too complicated.

And it was not the lack of regulation that precipitated the current mess. It was excessive and mis-regulation on an epic scale. The market discipline of profit and loss always trumps arrogant and ignorant bureaucrats for success. If you really want to make bankers think make it illegal to run a joint stock bank. They all have to be partnerships with full personal liability for all managers. Getting skin in the game works wonders for common sense and caution. (Which is why bureaucrats fail - they have no risk; no skin in the game).

Random said...

MW and all,
Good blog this and post if you are interested.

James Higham said...

The bank therefore creates its own funding, deposits, through lending. It does so through a pure bookkeeping transaction that involves no real resources

And therein lies all we need to know.

Ralph Musgrave said...

Lola, Mark Wadsworth and others should understand that what Positive Money proposes, i.e. full reserve banking, was also proposed by a whole string of leading economists: e.g. Irving Fisher, Milton Friedman, the Nobel Laureate economist Merton Miller, John Cochrane (currently an economics prof in Chicago), Laurence Kotlikoff (economics prof in Boston). I.e. while Positive Money certainly doesn't get everything right, anyone wanting to criticise the above CENTRAL idea that they propose is up against far more brain power than they might at first think

And last and least, they're also up against brainy yours truly. If you want to see my reasons for backing full reserve, read my book:

Plus I've recently thought of an absolutely killer argument for full reserve which is not in that book, but which I'm putting in a paper to be published in the next month hopefully. Keep an eye on my blog if you're interested.

Lola said...

Ralph! "....up against brainy yours truly...."
Right that's it. You're Marvin from now on...

MikeW said...

And I reiterate, none of the MMT ferrargo is necessary. It's just far far too complicated.


Do you mean generally or the discussion above?

Ralph Musgrave said...

Mike W,

Actually MMT is dead simple once you get it. However (speaking as an MMTer) I admit that there is one well known, widely accepted, simple and easy to understand introduction. But if you Google MMT and "introduction" I'm pretty sure you'll find something.

DBC Reed said...

While I appreciate that my left-wing views on the creation of money by banks are not popular on this site (I would nationalise the banks on the lines of the State bank of N Dakota recommended by Ellen Brown in order to socialise the profits of seignorage and use interest rates as a tax on the creation of money to defray other taxes) I think I can understand the objection: that the creation of money should not be influenced by political considerations.
The problem is that it already is. The process of money creation through bank lending is at present brazenly manipulated by Homeownerist politicians mainly of the Right to raise house prices to get elected while righteous forms of personal wealth such as jobs and welfare state provision are starved of money.
As these are political aims it would be more honest to make the money supply an object of political debate the way taxation already is.
A political party to stand up for investment of new money in jobs and
communal property such as hospitals, schools, roads and, I would suggest, publicly owned housing is justified and necessary.

Lola said...
This comment has been removed by the author.
Lola said...

DBCR Eh? That's a bit weird. Because money is subject to political manipulation now, let's cure that by making it subject to political manipulation.

MikeW said...

Thanks Ralph,

That was going to be my point if Lola above had read it.
MMT is simple. It allows for the supporter of a gold standard/or peg to explain the role of money and taxation under that form of economy(history of the gold standard) and explains to everyone else the real (post 1972), fiat world we inhabit now.I think from previous comments that I have enjoyed reading, Lola cannot get over the idea that money/debt tokens are the product of the state/banks not of the free market.He is with the Max Kieser-ish wing on the gold issue it seems to me.
Some of my right wing chums cannot also get their heads around the MMT idea that taxation is about controlling inflation and is not for covering the government budget.
With regard Positive Money, I think their position is to make the banks fund their loans from deposits; just as most people think they still do. Can that be done? I am interested in the problem. Keep meaning to go to a meeting. LVT seems to me to mesh all these issues together though as MW suggets.

Lola said...

MW / RM Whoa. My point is not that I am anti MMT or positive money per se. All I am saying is that you have to look at the end user (as it were) and it suits them best if stuff is simple.

As regards the thing that taxation is about controlling inflation, there are an awful lot of people who have a different take on that and will challenge it constructively. It's not a 'right wing' challenge either. It's just a challenge. I happen not to agree with it as I like to know who is taxing me and what he is spending it on. If you parade taxation as a method of controlling inflation I can just smell the glee on the part of various bureaucrats and functionaries as they think that'll give them all sorts if licence.

My general position is that - from bitter experience - I trust the government and its functionaries as far as I can spit a rat. OTH I trust 'the market' as so far it hasn't lied to me or tried to stitch me up. And that includes you two.

Lola said...

Mike W. There are other studies/analysis that show that money was the product of the free market. That 'money' existed before states and across borders when there were states. One can certainly conceive of money without governments. But not without Law, perhaps.

Bayard said...

"P2P lending does not create money (asset and liability) out of thin air."

How do you get to do that (create money out of thin air)? If it something that you have to have permission from the state to do, is this not an argument for removing this activity from the private sector and having it done by the state itself?

Anyway, I don't really accept this "creating money out of thin air". Money is simply a handy denominator of debt. Every time a debt is created, money is created. If you owe me £10 for something I did for you or sold you, that's £10's worth of debt that didn't exist before, therefore that's £10 of new "money". Isn't it? and if not why not?

Mark Wadsworth said...

B, jesus christ, not you as well.

We are going round in circles here.

"Money" for these purposes is NOT A THING. It is a unit of measurement of indebtedness and whatever the opposite of indebtedness is.

So the bank splits the zero, you buy a house, you owe the bank £100, the bank owes the vendor/depositor £100.

If the mortgage borrower provides services to people with deposits, they withdraw their cash and give it to him. he repays the mortgage.

Hey presto, the zero had re-established itself. No party has any assets or liabilities. The "money" has disappeared again.

I have said this a hundred times. Nobody need to take my word for it, they just need to think about it for a few minutes.

Random said...

Basic MMT:
Detailed Primer (incl address commodity money such as what Lola has been talking about):
"I have said this a hundred times. Nobody need to take my word for it, they just need to think about it for a few minutes."
I get this feeling a lot too when explaining things :(

Lola said...

MW et al

Let's recap.

We all seem to agree that banks 'make money' by splitting the zero (that phrase always reminds me of Morris men - not he car men, the jingly dancers).

The last time I looked money had to have three qualities. A medium of exchange. A store of value. A unit of account.

The link I sent to MW that triggered all this was to a B of E blog post from the Bank that discussed 'financing' banks and 'intermediating' banks.

So far so good.

We then seem to have launched off into various directions about MMT/PM/Commodity Money/free market money/state money etc etc.

The thing is that there are as many supporters of all the various theories on here as there are theories themselves. This is a good thing. I like differences.

A lot of us are making absolute assertions as to what money is and where it came from. FWIW I am not trying to do that. I (and I think most of you) as stating what you 'believe' as opposed to what you 'know'. It's this debate between beliefs that tests the arguments from which answers are discovered.

Me? I do not dismiss the beliefs of MMT-ers, nor the Positive Money-ers. I am just always suspicious of 'assertions' and 'complexities'. And as someone who deals day to day with the Great British Public what I sense they want is simplicity.

Overall there probably is some blend of all these beliefs that will 'work'. I think that the debate on here is part of that process.

Random said...

L, agreed. It is good to have open discussion.

Random said...

BTW, England vs Switzerland is on ITV. Euro qualifiers.

Lola said...

R. How about this?

(I am watching WEC on Quest - not a big fan of footie.)

Random said...

Murphy is confused. He is talking about saving in real goods not financial assets.
Clearly you can save in Gold or any other real asset.
The MMT accounting identities are real (MMT 101):
"Imagine you and I are the only two people in an economy. For the sake of argument, say we use sea shells as a currency and we trade with no one else but each other. So when we do trade, we exchange goods and services with each other for the amount of sea shells these goods and services are worth. From an accounting perspective, it’s a wash; if you buy my goods, I get the sea shells and lose the goods of equivalent value and if I buy from you, you get the shells and I get the goods of equivalent value. So far, so good.

Now, let’s bring a third person into the mix, Harry. Harry is a foreigner with whom we agree to do business. Where he’s from, he uses silver as his currency. No matter; in trading with Harry, we agree to an exchange rate between our sea shells and his silver and we are ready to go. Now, we can trade with each other and with Harry. If Harry buys from either of us, we get silver and he gets an equivalent value of goods. If we buy from Harry, he gets sea shells and we get the goods, also equivalent in value to the shells…

Now, let’s introduce some deficits and debt into the scenario. For the sake of argument, let’s say that year in, year out we produce the same amount, the same value of stuff. However, in one particular year, you produce a lot of stuff – and I want to buy it. The problem is that I produce less stuff that you want to buy. What do we do? I could issue you an I.O.U. and tell you I will pay you back sometime later. You accept the deal and now I have received the goods and services and you have received an equivalent value from the two sources, currency and the I.O.U. Again, it is a wash from an accounting perspective. I have a deficit in this particular year and you have a surplus.

Now, even if we add Harry and his silver and foreign goods into the mix, it’s pretty much the same. For example, if you bought some of Harry’s services but didn’t have enough sea shells to pay for it, you could issue an I.O.U. to him for the shortfall. You would have a deficit with Harry for the year and Harry would have a surplus with you for the year. So, even when we introduce debt and deficits into an economy, the accounting is the same; there is no value leakage…

What holds in my little example for three people also holds for three groups of people too. You could have 100 million people in a group that you represent that does trade with my group and Harry’s group and the accounting would be identical. So, let’s give our groups names. I am the government, you are the non-government sector and Harry is the foreign sector. The sea shells are the domestic currency and the silver represents foreign currencies…

Notice I haven’t talked about government as the creator of currency and the private sector as the user of currency. I haven’t focused on any misallocation of resource or malinvestment issues. I haven’t raised the spectre of inflation or currency depreciation. I have simply presented the economics and accounting of budget deficits."
Murphy says the private sector is better than the public sector and the public sector misallocates resources. Well yes it can. This does not disprove MMT.

Lola said...

R. You 'believe' he's confused. He 'believes' you are confused. I fall into his camp...

Random said...

Well that's my take on it. Perhaps MW can keep this or put up some "open discussion board" specifically on this?

Random said...
Put the Mises link up onto the MMT criticisms board. Any more Lola?
You can post stuff on there, but you need a Wordpress account.

Lola said...

R. No more tonight. Got to work....

Derek said...

Mark: "I have said this a hundred times. Nobody need to take my word for it, they just need to think about it for a few minutes."
Random: "I get this feeling a lot too when explaining things :("

Tell me about it. I've been fighting the good fight for LVT/CD, MMT, and against austerity/debt-deflation over on Quora for quite a while now. But it's a never-ending task. I keep on getting variations on the same old questions. It's not difficult to explain but it does get tedious to repeat yourself after a while.

DBC Reed said...

There is really no argument any more since The Bank of England's 2014 bulletin "Money Creation in the Modern Economy" with accompanying videos consolidated the orthodox position that Banks create Money. There are irreconcilables who keep on fighting like Japanese soldiers in the hills but their war is legitimately over.
For those impressed by reputation, the line-up for "Banks create money" is daunting: Frances Coppola ("Banks do create money" in similar argument currently going on over on Tim Worstall's); Martin Wolf "Strip private banks of their power to create money"(FT headline 24.iv.14);"Why have we given our greatest social creation-money- over to private profit-seeking companies? "his opening remark at "Does Money grow on Trees?" event reported 18.xi.14.

Lola said...

BDCR (but not you particularly)...
"...);"Why have we given our greatest social creation-money- over to private profit-seeking companies? ..." Good question.

My answer would be, why not?

The problem is, in this instance, not necessarily with 'profit seeking companies'. In this instance it's that these profit seeking companies are rent seeking specially privileged proto nationalised (by regulationism) cartelised suppliers of a monopoly product [engaged in counterfeiting]. It's a nexus of government/central banks/state bureaucrats/'private' banks all conspiring with each other to screw the Poor Bloody Public into the ground.

Were this not the case then the market might stand a chance of sorting out the problems, (starting with LVT...?).


DBC Reed said...

You see no problem with: people paying interest on advances made by banks when they are not lending savers' money but making it up?
Also with: the State paying the banks to borrow made-up money when the State could as easily and more properly create it themselves?
You do realise that in Iceland the banks are being charged with counterfeiting money?
Why should " the market" which has done its best to inflate land values as an easier way of making money than providing goods and services suddenly swing round and demand LVT?

Lola said...

DBCR I think you have misread my post...:-)

Lola said...

DBCR. "...Why should " the market" which has done its best to inflate land values as an easier way of making money than providing goods and services suddenly swing round and demand LVT? Strictly speaking it's not the 'market' that has sought to inflate land values; it's rent seekers. Rent seekers include landlords, government and....banks.

(I speak as an entrepreneur trying very hard against the flow of landlordism/rent seeking to produce a 'service' for my customers).

DBC Reed said...

The market contains plenty of rent-seekers.
As to the personal point: as you know, I have always admired your bravery in arguing for LVT in a business milieu. Takes more bottle than I've got !

Lola said...

DBCR. Yes, I know 'the market' has lots and lots of 'rent seekers'. That is precisely my point. It seems to me that by not having LVT and having all sorts of other taxes (and regulations), those other regulations (and taxes) have been precisely designed to aid rent seekers.

Lola said...

DBCR Also, LVT would be a Very Good Thing for the vast majority of my clients - they might not know it - but it would be. Therefore as my job is to help my clients I consider lobbying for LVT is in their interests.

Bayard said...

""Money" for these purposes is NOT A THING. It is a unit of measurement of indebtedness and whatever the opposite of indebtedness is."


I think I was agreeing with you here. Debt is a thing, credit is a thing, but money is not a thing. The world worked fine on credit and debt for hundreds (thousands?) of years before money was invented.

So limiting the banks' ability to create "money" is really limiting their ability to create debt (because it is bank lending that causes the "splitting the zero" not depositor lending and the creation of a corresponding credit is a side-effect) and that's what we are talking about here, isn't it?

Just trying to put it simply so that I can get my head around it.

Random said...

L, read this to debunk Austrian arguments:
Money is a government IOU. A govt debt.
It can be used to pay debts the govt imposes on us (Taxes)
Anyone can issue IOUs though. This comment can become a promise to pay £5 - there done.
A deposit is a bank promise to pay govt IOUs on demand.
When a bank makes a loan it issues a Bank IOU and swaps it for a borrower's IOU. Bank IOUs are widely accepted, especially by people who owe debts to the bank. They can write cheques on their account similar to how you can pay taxes with govt IOUs.
Assets and Liabilities expand.
Banks keep some govt IOUs in reserve and can borrow more at a "penalty rate" via the central bank (part of govt.)
That's the best I can explain it.

Lola said...

R. "Money is a government IOU. A govt debt.". Not necessarily isn't, no.
From my point of view the Austrian's debunk MMT.

DBC Reed said...

You are obviously unaware of Murray Rothbard's paper on Fractional Reserve Banking. This amounts to a total demolition of FRB by the definitive modern Austrian.

DBC Reed said...

@L "From my point of view the Austrians debunk MMT"
Are you outa your mind?
Arch Austrian Murray Rothbard describes 'Fractional Reserve Banking" in a 1995 polemic on the Lew Rothwell site that makes all Banks Create Money proponents look wimpy and in two minds. Not only does he anticipate the Icelandic fashion of calling modern banking counterfeiting, he also bandies around "swindle" and "fraud" with invigorating abandon.
Rothbard is the foremost advocate of the banking is a fraud diagnosis: his prognosis that banking would right itself with the disappearance of government-backed cartel arrangements is not part of the consensus.Can you believe that in the US banks didn't form cartels of their own volition to protect their own interests? He seems to think the American State and Big Finance are not interlocked

Mark Wadsworth said...

B, 9 September, 19.31, we were agreeing with each other, don't worry.

R, L, DBC, you cannot compare and contrast or play off against each other "Austrians", "MMTers", "Georgists" or "Keynesians".

They are all looking at different things are all right in their own ways and are not mutually exclusive. It's like car mechanics know about cars, biologists know about bacteria, and so on. you wouldn't want a car mechanic treating your wounds or biologist trying to change your tyres.

Bayard said...

"Anyone can issue IOUs though."

As evidenced by Local Exchange Trading Schemes many and various (do they still exist?)

"It can be used to pay debts the govt imposes on us (Taxes)"

According to the Beeb (Promises, Promises on R4, a cracking programme, still on iPlayer) money was invented in order that the state could pay its armies in something other than land and in order not to run out of the stuff, they made it possible to pay taxes, which up until then had been paid in kind, in the new money. So I would agree that money is government IOUs that we use as an exchange medium and denoter of debt becuase of its universal acceptability (or almost - try buying something in rural Dorset with a Scottish pound note).

Lola said...

DBCR I am aware of Rothbard. I am pretty sure that I've read it.

Lola said...

MW. That's roughly the point I was trying to make. There are different world views. You can see where they are all coming from but you cannot use the logic of one to defeat the other.

Mark Wadsworth said...

B, yes of course, the whole government paper fiat money thing only came in once they realised that they didn't need gold to back their currency, the paper money works fine as long as it transfers wealth from taxpayers (who have to pay tax in paper money) to state employees (who are paid in paper money), Without wishing to cast either of those group as necessarily goodies or baddies.

L, correct and agreed. To my mind, all these four groups* are all quite right, up to a point, and as long as we are just looking at one particular topic, or one aspect of a particular topic.

* Whereby I tend to agree with what J M Keynes actually said, rather than what the Faux Libertarians claim that "Keynesians" say (a grouping which does not exist), which is just bogey man stuff.

DBC Reed said...

I am not trying to adduce Rothbard to play people off against each other or confuse matters by saying there's lots of different opinions, lets all agree to differ.Despite coming from what we would call the right wing, Rothbard provides exactly the same analysis of the banking system as Positive Money, Coppola, Martin Wolf, the Bank of England,and lefties like me, except he calls it a swindle and a fraud.And explains himself magnificently clearly.
This analysis is so consensus and orthodox (except for the accusations of swindle and counterfeiting) that it should be hoisted up at the bannerhead of this blog as a point of reference.The flaws in his exposition of the problem are made up for by his marvellously robust language, which strangely I had never appreciated before especially in his attack on Land value Tax.
Rothbard goes on, after explaining the problem very clearly, to suggest solutions in the way of less state control of banks which strike me as stupid but make Lola's case for him.
Everybody should be able to agree with his definition of the problem: the differences of opinion come at the next stage:what to do about it.

Lola said...


Yes, Rothbard is 'right'; including the 'less state control' thingy. The problem is that it is the 'state control/regulation' bit that has largely driven them into the mess they are in. This is probably because - IMHO - the banks and the gummint and the landowners are all doing quite nicely thank you all in league against 'the people'; which is broadly Rothbard's point. And I agree that if it were any other business it would be a fraud.

BTW there's a lot of him on youface.

Derek said...

Random said... "Money is a government IOU. A govt debt.
It can be used to pay debts the govt imposes on us (Taxes)"

This is almost always true. But not quite. The Somali shilling is an interesting exception. The Somali government has not levied taxes, nor issued new notes, for years. Yet the shilling continues to have value and to be used for trading purposes within Somalia.

However new notes have been ordered and issued by at least one of the big Somali landowners. Which indicates either that landowners are "the government", or that rent is a private form of tax. Either of which interpretation I am quite comfortable with.

Mark Wadsworth said...

D, interesting and agreed. Landownership and government are two sides of same coin and rent = tax.

Lola said...

D. MW. See George Selgin - Private Money in England 1750 to 1820. Essentially the Royal Mint failed to make enough small change so people like Boulton (Boulton and Watt fame) 'made' money. He set up the Soho mint. There was also an Anglesea based copper mine magnate whose name escapes me that also issued copper money. These were widely accepted and trusted and had the three key feature of money - a medium of exchange, a store of value and a unit of account. They issued pennies, halfpennies, farthings but not silver AFAIAA. I actually have an image of a coin made at about the same time by a hardware merchant in Ipswich.
It all worked very well.

DBC Reed said...

@L Yes and during the wild-cat banking era in the US, people would move West and find that the notes issued by Eastern banks were not accepted. I can remember having a Scottish banknote refused in an English pub.
I am surprised you don't advocate the truck system by which those wonderful millowners of the nineteenth century we are all supposed to look up to as builders of modern Britain, issued tokens only redeemable at the company store.They had to reform the Anti-truck legislation in the 1960's? to make it possible for people to be paid by direct credit into their bank accounts (which everybody then had to have).

Lola said...

DBCR. The truck system is clearly not on. It's actually not paying people. You don't actually need new laws to sort it out. And it has nothing to do with de-nationalised money.
As to the US experience, I seem to recall that silver dollars and gold coin were accepted universally. In any event it was quite reasonable for banks on the west coast not to accept notes from those on the east about which they knew nothing.

Bayard said...

"You see no problem with: people paying interest on advances made by banks when they are not lending savers' money but making it up?"

I don't really see this. When a bank "splits the zero", it creates a loan account and a deposit account, so the loan is backed by a deposit. If the account holder than does nothing, everything is OK in your book, the bank has lent out the deposit-holder's money to the debtor. The fact that they are one and the same person does not matter. The problem appears to arise when the depositor empties his deposit account, leaving just the loan account. However, exactly the same problem would arise if the depositor and the debtor were different people. The depositor deposits the money in the bank. The bank lends it to someone else. The depositor then crashes his car and withdraws his deposit to buy himself a new one. we are now in exactly the same position as were when the bank "split the zero" with a loan unbacked by a deposit.

"I am surprised you don't advocate the truck system by which those wonderful millowners of the nineteenth century we are all supposed to look up to as builders of modern Britain, issued tokens only redeemable at the company store"

There is nothing wrong with that system per se. What was wrong, was the company cheating its employees by charging higher prices in the company store for goods bought with tokens than they charged for good bought with cash. They could have achieved exactly the same effect with considerably less effort by simply paying their workers less. In effect, they were devaluing their own currency. I suspect that the token system arose because of the shortage of currency and then was debauched by greedy (and stupid) employers. The Truck Act is a good example of legislation attacking the symptom, not the cause (as a mental exercise, consider whether it would have been brought in if exactly the same token system was used, but the tokens were worth more than cash in the company store).

DBC Reed said...

"There was nothing wrong with the truck system per se" For some reason the operatives in the workers' paradise of 19th century British factories( which all BTW endeavoured to circulate insufficient money for the workers to buy all the products of their combined labour ) preferred to be paid in "coin of the realm" or a universally accepted State currency not tokens that local factory owners had stamped up themselves . And the general point applies: local businesses should not be interfering in the State or sovereign's prerogative to create money.
The climax came in the 1980's (not 60's as I guessed although I complained to my professional employer then about not being paid in cash!)when they had to amend the Truck Act to allow more general payment in Bank transfers. This sucked all workers into the ambit of banks with all the derivatives that they then invented to monetise the same deposits many times over.Result the phoney money system we have now.The British economy would have worked better with many more workers being paid in cash.

Lola said...

D, George Selgin's book and its research backs you up. The 'tokens' of good employers - Boulton for example - were universally acceptable as money. And it was precisely the failure of the Royal Mint to deliver sufficient 'change' (a contraction from exchange) the necessitated the making and issuing of these private tokens, aka 'money'.

The point I am trying to make is that I cannot for the life of me see why money has to nationalised, as such.

DBC Reed said...

This is all on the outer limits of laissez faire fairyland: there is every reason for having the same units of measure of temperature and time and having the same laws applying to everybody. So I don't want different units of money: I don't want to be paid by some rich bastard who controls my life with tokens that don't have universal spendability . Universality= national currency.
( I imagine if a manufacturer stamped up coins in gold and silver at exactly the same weights and purity as ensure parity with the State currency then this might produce acceptability.But in the business world of competitive selfishness how and why should that happen?)
NB The Corbyn vote might indicate that a huge number of people have rumbled that Blatcherite business-commercial bank friendly policies don't work, having given them a long time to prove themselves.

Bayard said...

"For some reason the operatives in the workers' paradise of 19th century British factories preferred to be paid in "coin of the realm" or a universally accepted State currency not tokens that local factory owners had stamped up themselves"

I suspect that is a majority view, reflecting the fact that good employers, who didn't exploit their workers in that way, were in the minority, but who can tell, when social history tends to concentrate on the ones that conformed to the stereotype of the evil capitalist? As L points out, where employers didn't take the piss, their coin was widely acceptable outside the company store. Also, at this time, each bank would issue its own paper money, so there was very little of a state monopoly in currency creation and none in the creation of money.

In the case of an employer paying an employee, money only serves as a medium of exchange so that the employer can pay his debt to the employee with something he has (money) and the employee can use that to buy something he needs, like food. It makes no difference to the employee if he is paid directly in food, so long as he is not cheated in the process, so it is the cheating that is the problem, not the process.

Derek said...

Cheers, Lola. I knew about Boulton and the private coining but I haven't seen Selgin's book. I'll have to see if I can get hold of a copy.