by Mark Haynes.
I hope to address the issue of what money is in this article, how is it created and how should it be created, which in my opinion is for the benefit of the people.
In austerity Britain we are constantly being told by our rather hopeless politicians of the mainstream political parties, especially the doom-mongers of the Con-Dem coalition, many establishment orthodox economists and the corporate mainstream media that we have no money or not enough money for this, that or the other (except for Foreign Aid & Foreign Wars strangely), as if this thing we call money was some precious commodity that unfortunately doesn’t grow on trees, but is rather sparse and rare and maybe needs digging up from beneath the ground! We the people are constantly berated by these same establishment puppets and organs that ‘we have lived beyond our means’ and must, absolutely must cut-back on what we spend otherwise we all face doom and damnation and the vitriol of future generations who we will have burdened with huge debts which of course would be very unfair!
However, this doesn’t sound quite right does it? I mean it is very strange indeed when one considers that our monetary system and that of other nations is based and built on debt and without it there would be no money or virtually no money at all!
Money you see is or should be simply a means of exchange that we use to exchange our goods & services. It is a convenient way in an advanced economy to facilitate the buying & selling of goods and services to trade. If we had no money then buying and selling of goods and services would be impossible without some form of direct exchange or barter.
Notes & coins or for that matter digital money are worthless in there own right . Money only takes on value because we all accept it when we buy and sell. To enable trade and economic activity to keep going there has to be enough of this medium of exchange we know as money to allow this to happen. # (Richard Greaves, Prosperityuk.com) If money is plentiful there is a boom in the economy, but if money is not plentiful and in short-supply there is a bust!
Look around you now at this latest in a long line of economic depressions which is the same as earlier depressions in that people want to work, they want goods and services, all the raw materials for industry are available and yet national economies such as Britain’s are depressed or have collapsed as in much of Europe because of a lack of money!
There is but one difference between a booming economy or a bust economy, growth and recession, and that quite simply is money-supply.
Money is a measured title or claim, money is a measure of value and is valid when people recognise this claim and hand over goods and services to the value of this claim printed on the face of the ticket. # (Ezra Pound, What is Money For? counter-currents publishing)
The fact is though that these tickets or money is mainly created electronically on a computer screen. Bank deposits or electronic money make up over 97% of all the money in the economy, only a mere 3% of money is still old-fashioned notes and coin. # (positive money.org) If you don’t believe me then perhaps you would like to hear it straight from the horses’ mouth so to speak. “When banks extend loans to their customers, they create money by crediting their customers’ accounts.” # (Sir Mervyn King, Governor of the Bank of England 2003-2013, positive money)
Every nation has a central bank which acts as banker to the commercial banks and the government in the same way a commercial bank is banker to individuals and businesses.
Banks are of course businesses out to make a profit from interest on loans they make. Since banks decide who they lend to they effectively decide what is produced, where and by whom all based on how this will profit the bank rather than what will benefit the local or national community.
Indeed entire national economies such as here in Britain are run for the profit of financial institutions and the ’city’. This is the real money power, rarely acknowledged or even spoken about, but to which all of us and our government are subject.
Our nation’s money is an interest-bearing debt to private banks, when it should be supplied as a debt-free medium of exchange to facilitate our trade between each other and nations. Whilst these banking behemoths have huge power and control over our lives and reap huge profits, the rest of us struggle with an increasing burden of debt and sink deeper and deeper under the weight of the chains of debt-slavery!
The International Bankers can undermine national governments at will or support them by supplying credit to those they favour and by denying it to those of whom they disapprove.
Imagine if you will friend how much better our lives would become if businesses and governments did not have to pay huge sums in interest payments in tribute to the banks, which payments have of course to be added to the price of goods and services they supply. Wages could increase, prices could fall and our debts be reduced. Think by how much either taxes could be reduced or funding of public services could be increased.
If a future nationalist government were to take back the money power from the international banking clique overseeing the destruction of our nation, way of life, civilization, culture and standard of living, it could by creating the nation’s money-supply debt and interest-free usher in an era of unparalleled prosperity for the British people and start an economic boom the like of which hasn‘t been seen before!
This is the challenge for any genuine nationalist movement and party to offer a better future to our people where the financial/banking system works in the interests of and for the benefit of its people and not the vested interests of a private banking cartel, I hope you will take this challenge up!
# Richard Greaves, A short primer on money. http://prosperityuk.com/what-is-money/
# Ezra Pound, What is money for? http://www.counter-currents.
# http://www.positivemoney.org/
# http://www.positivemoney.org/2012/10/sir-mervyn-king-banks-create-money/
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It is impossible to assess a plan for the government to create money and hand it out unless the details are made clear.
Would money be lent or given out? Who would get it? Anyone who asked for it or would government select what it considered worthy recipients? On what basis? Governments already hand out money and often do it for shameless political advantage rather than for the benefit of the nation. Is government any good at picking winners when it comes to useful productive capacity?
It’s not in dispute that banks have ill-served the community in recent years – flooding money into the creation of a spurious boom. But that was done with the glowing approval of government. Voters felt rich and thanked those in power with a cross.
If government directly lent things could have been even worse.
Mike, I thought I made it perfectly clear that money would be created and issued debt and interest-free! It would not be lent but spent into the economy. Productive industry would get the money, and maybe a social credit payment could be issued to the people to increase purchasing power enabling people to purchase the bounty of goods that would be on offer. Surely this is much better than the current corrupt system where private banksters issue money as an interest-bearing debt and use their undeserved privilege to fund housing bubbles and other speculative ventures leading to disaster and bail-out by the people?
Governments can be corrupt and harmful to the nation and its people as exemplified by our present members of parliament, however this isn’t always the case. Do you mean to tell me Mike you don’t trust the good intentions of nationalist politicians of the British Democratic Party to serve the british people’s interests, if not why are you involved here I must wonder?
The thing is you miss the crux of the problem which is the banksters charging the people an interest fee for using our own money and usurping the power to create our money-supply which has given them control over our politicians and economy, choosing who they fund and who they don’t which is totally wrong and an affront to democracy. These rentiers and usurers need to go!
Nationalist parties are always vague about the money. Our new British Democratic Party needs a basic economic policy right from the start. People mainly vote regarding money , particularly at general elections. With the massive savings made for Britain, due to our policies on Europe and immigration, we are on a winner on this subject as well. Join the British Democratic Party.
It would require a book to answer all the questions posed by Mike. Fortunately such a book has recently been published, unfortunately not by nationalists but by a team from Positive Money. The book is called Modernising Money and I recommend it without reservation.
Then perhaps solutrean can answer my questions briefly from his reading of the book and save us the cost of buying it.
I’ve learnt the hard way how few people have a basic understanding of how banks work – and that includes a lot of financial journalists. Misperception is near universal but if you point that out you tend to be accused of saying the banking system is fine. It certainly is not but alternatives need to be based on reality.
I’m off down the pub to hear about how banks borrow a quid and lend ten….. It’s such an attractive idea for those angry about banks that they won’t give it up. As much a religion as multiculti and free trade.
Very well Mike. How can you conclude that the book “Modernising Money” is not based on reality if you have not read it? It takes far longer to adequately answer a question (especially in regard to a topic as complex as banking) than to ask it. To answer such questions briefly as you suggest is to leave gaps in the narrative that can be exploited by those steeped in the old orthodoxies. Read the book first Mike, then we can discuss its merits or demerits. After all, £14-99 is surely not going to break the bank. I can assure you that I have no financial interest in this.
Then write an article on it solutrean for this site and inform us.
I’ve read the extensive online summary about the book which you’ve been plugging for the last six months.
Saying ‘you know of a book’ and demanding everybody buys it because you can’t put over the arguments is a meretricious ploy. If you can’t put over the arguments then how can you know they are correct? Not a convincing witness. The most you can say is that it looks interesting to you and may be worth considering.
I’m surprised that you have not noticed Mike but there is already an excellent article on monetary reform by Mark Haynes above these posts. Perhaps another one so soon could be described as overkill.
The whole point of my mentioning “Modernising Money” is for the benefit of BDP members who would perhaps like to gain a deeper understanding of the subject that can only be gleaned from a book. Nor am I “demanding” that members buy the book. Where did you get that weird idea from? I could certainly not pen a book on economics to remotely come close to the expertise of the positive money team – nor could you.
Your oft repeated quip about banks borrowing a quid and lending ten suggests that you still believe that banks act as intermediaries and lend their depositors money. They don’t. Banks do not need deposits from savers in order to lend.
Well solutrean unhappily you are wrong. The banking system as a whole lends far more than the initial cash taken in via the circular redeposit system but an individual bank can only lend what it takes in.
A bank can certainly make a loan at the stroke of a pen by crediting a customer’s account but when the customer spends the money the bank has to have the cash. Why was QE introduced? One of the reasons was so that banks were not cash constrained in lending. Unfortunately they took the cash but did not lend.
The big insight in your favoured book is neither new and nor does it mean individual banks can lend without having the money. The insight is that in practice the central banks accommodate whatever amount of cash the bankers as a whole need.
Thus the volume of lending is not controlled by the government as traditional textbooks say but decided by bankers who often go mad lending into speculative bubbles. Money is as economists say ‘endogenous’. Hence the calls for 100% reserves as a brake and with government strictly controlling the volume of cash. Good points for debate.
There is an additional debate going on (known as the Chicago plan revisited) about whether government should confiscate the loans the banks (which means us depositors) own in return for bits of paper shown as ‘government credit’ or something like. The government then pays off its debt with the loans it’s snaffled. Your sight deposit is then fully backed by bits of government paper of various kinds rather than by payments from businesses and so on who have borrowed.
Endogenous money theory explains that, rather than the banks waiting for a depositor to come along with additional money, within certain constraints banks are able to lend as and when they want. It is by the process of lending that banks create deposits and increase the money supply. This leads to new purchasing power in the economy, as no one has seen a reduction in the value of their account.(Modernising Money P78).
The above quote would seem to knock your theory (that banks need deposits in order to make loans) on the head. The “certain constraints” seems to be merely the banks confidence that the loan will be repaid.
When you say “when the customer spends the money the bank has to have the cash” you are referring I assume to central bank reserves (base money) which is a closed loop and this money can only be created by the central bank and is not the kind of money that we use in our bank accounts. QE was introduced because the banks had lost confidence in this closed loop payments system. I could go on but why not read the book?
Here we go again solutrean you are book plugging.
Lending does indeed increase the volume of deposits and thus spending power but it does not increase the volume of hard cash in itself.
Banks need cash to lend. In normal circumstances, if short they borrow from banks which are flush. During the crisis banks did not want to lend because they feared their competitors were bust and also feared to lose cash they might suddenly need themselves. So the fluid system broke down which all rotates around having cash. If banks could lend with no cash on hand they would not need interbank finance or LIBOR. Indeed the process of monetary control by bank rate depends on making it expensive for banks to obtain reserves of cash.
What is true is that you sometimes find statements about banks running down their ‘required reserves’ when lending. That means they lower their cash on hand to less than they’d like. It does not mean they lend without cash but some people think that is what it means..
You simply don’t understand it. When you write a cheque it’s an order to pay in cash even if it does not look like it.
The volume of deposits and thus spendable money vastly exceeds the volume of cash on deposit. However, because payments are going all ways at once regular settling up between banks involves a net off with mostly little cash needed as a fraction of deposits. Also few withdraw cash that does not get spent and go straight back in the bank. That’s why FRB works. The volume of cash needed is small for a given volume of deposits being spent or withdrawn.
Everything with banks rotates around settling up in cash for every transaction even if it does not look like it from outside.
A recent article on this site suggested that nationalists need to gain a far better level of understanding of economics and banking than they currently have and I agree. This is why I recommend they read “Where Does Money Come From” by The New Economics Foundation and “Modernising Money” by a team from Positive Money. Both books are very modestly priced and explain the subject in plain English rather than the gobbledegook much beloved by some economists that serves to confuse rather than inform the reader. Both books are excellent but if a choice has to be made I believe Modernising Money would be the better option.
Banks don‘t need customer deposits in order to lend. I find that the best way to understand how the loan system operates is to regard the current account banking system (broad money) and the interbank lending market (narrow money) as two separate entities. When banks makes loans, there is no need in the immediate term for them to first “find” the money from anywhere else. The banks can simply expand their balance sheets on both sides and new broad money is created in the economy. Nobodies account has been reduced by this transaction. If the “loan” money is spent with a customer of the same bank, the two customer accounts are adjusted accordingly and that is it. All this happens using broad money.
If the money is spent with a customer of another bank, then the lending bank must transfer central bank reserves from its account at the Bank of England to the receiving banks account at the B of E. This transaction is by (narrow money) which is not the same kind of money that we use in our current accounts and only banks that have accounts with The bank of England can access this kind of money. The interbank market is a closed loop system.
At the end of each day all these various transactions are settled by a process of “netting out“. If all the banks lend in step then very few central bank reserves will need to be transferred.
This debate started when you criticised a nationalist who said that banks do NOT lend their depositors money. Your opinion at that time was that banks did indeed lend their depositors money. Now you are saying that banks need cash before they can lend. Not quite the same thing is it? I do not agree with either of these statements, but does this change of tack mean that you now accept that banks do not need depositors money in order to make loans?
A tiny amount of central bank money is comprised of physical cash (less than 3% of the money supply) and we ordinary punters can access this money via ATM machines. But interbank market transactions do not bother with cash. They trade using digital central bank reserves and gilts which is completely separate from the money that is in our bank accounts.
Thank you solutrean for yet another extensive book plug.
You actually admit what I said without realising it. If a customer borrows and spends into an account with another bank (on average mostly the case) a transfer is required of cash – which for convenience nowadays is done by transfer from cash balances held at the Bank of England. No cash there can’t make the loan! It could equally be done by sending a man round in a taxi with notes. It’s the same thing. Where does the cash comes from to place in the B of E deposits? From people putting money in the bank for goodness sake. No money no deposits can’t make a loan.
Of course all the payments in and out are netted for convenience as you say but add in more loans paid out by one bank and the net off increases adversely pound for pound so they need more cash to pay. They need the cash – even if it does not travel by taxi!
Look at it this way. If you started a bank but had no cash at all from anywhere could you make loans and pay out on them?
I’ve had enough now of arguing with a religion.
Mike. You still have not answered the question I asked regarding banks not needing deposits in order to make loans.
In answer to your question. First we must agree that banks do not require deposits before making loans. Let’s continue the example I gave previously of a bank loan given to a customer. Without going into all the double entry details. If this customer spends the loan money of say £500 with another customer of the same bank for DIY tools then all the bank needs to do is debit the buyers account of the £500 that the bank has just created out of nothing and credit the account of the DIY shop for the same amount. No central bank reserves are needed but the bank has created £500 of new money in the economy and the same amount of debt. The bank has made the loan, paid out on it and all with no cash.