Fallacies about the banks

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Sep 19 2016 10:34
Noa Rodman wrote:
Perhaps the ex-nihilo camp is saying that even the central bank rate does not have the power to force commercial banks one way or another (borrow more or less)? This is probably the crux of the matter.

I agree or phrased otherwise how it works in practice regardless of regulatory or theoretical ideas.

It's also almost a philosophical issue to determine if it's the central bank or the private bank who "created" the money in the above scenario.

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Sep 19 2016 20:05

It's the central bank who creates the money; it can refuse to lend ("create money") to commercial banks in distress:

Fed's Discount Window: Closed for Banks on Brink (12 April 2011)
(http://www.wsj.com/articles/SB10001424052748703518704576258993132298396 google the title for full view)

Quote:
The U.S. Federal Reserve may be the lender of last resort, but not, it turns out, for banks on the brink of insolvency.

Data recently provided by the Federal Reserve and analyzed by Dow Jones show that of 201 banks that failed between February 2008 and March 2010, only 11 had loans outstanding from the central bank's discount window when they failed.

The discount window makes secured short-term loans, usually overnight, to help banks when market funding is expensive or hard to obtain. One of the Fed's historic roles is to help banks that are healthy but are temporarily out of cash; it is one of the core tasks of any central bank.

The revelation that the Fed sometimes will reject a bank's discount-window request therefore came as a surprise to some observers. Several lawyers and bankers familiar with how and why banks fail said they simply assumed the Fed required more collateral from weak banks—not that it wouldn't lend to them at all.

Reserves at the central bank really seem necessary only for inter-bank payments, otherwise reserves are useless. Now with QE there are excess reserves deposited at the central bank.

In a recent interview Keen said that banks cannot lend these reserves out. Curiously he also seems to fall into the logic about a necessity for 100% reserves in this case, arguing that if the bank would lend out someone else's deposit to you, and then that someone else wants to withdraw his money, Keen ask how can the bank give that money to them, since it is lend out.

His point seems though that the excess reserves of the banks stored at the central bank even just physically cannot be lend out. Well they could disappear probably if banks asked for actual paper cash. Commercial bank indeed cannot themselves destroy these excess reserves (Keen laments excess reserves, since banks lose money on them under the negative interest rate now). The way the excess reserves can be destroyed is only by the central bank itself. So if the commercial banks cannot destroy the central bank money, how can it be said that they have created it?

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Oct 1 2016 11:16

There is a lot of talk about negative interest rates by central banks (Sweden, Denmark, Switzerland, Japan, ECB https://www.theguardian.com/business/2016/feb/18/negative-interest-rates...).

What is meant is mostly the deposit rate, not the lending rate.

And it is usually only on (some level of) excess deposits (of commercial banks held at the central bank). So in the ECB it seems excess deposists are now 541,622 million: https://www.ecb.europa.eu/mopo/implement/mr/html/index.en.html
-0.4%
would be (assuming it applies to any excess amount) about 2 billion euros that banks have to pay to the ECB, which would be handsome profit for the ECB, though I doubt it is that much (and over what period?).

It is actually a bit difficult to verify in the cases of Sweden and Switzerland whether it might be the lending rate that is negative. The Guardian piece says;

Quote:
Sweden’s central bank became the first country to lend at a negative rate when in February 2015 it announced a negative repo rate – its main lending rate to commercial banks. Economists point out that this is largely a technicality because of the way its banking system operates.

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Oct 6 2016 09:31

My estimate of 2 billion euro interest payment on excess deposits over 1 year to the ECB seems accurate.

It's not clear if this money simply vanishes, or if it somehow goes to the ECB as a profit (on to its own account? - at least we don't seem to have balance sheet statistics to track this).

Steve Keen is right that the banks cannot lend out their deposit reserves (held at the central bank), in the sense that any inter-bank payment just shifts around the money from one bank's account at the central bank to another's. Except for cash withdrawal. However they also could shift the money to deposits overseas that do not charge negative deposit rate (this is called euroeuro, like eurodollar).

I see no reason why eg German banks with excess reserves at the ECB wouldn't simple move their money offshore to avoid negative rates. It's probably just difficult to track this. (same with estimating the total dollars held in overseas deposits)

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Oct 6 2016 12:53

Well the figures do seem available, for instance euros in the UK, even divided by bank's nationality, so we see:

Monthly amounts outstanding of European-owned (excl. UK-owned) banks' euro deposit liabilities total (in sterling millions) not seasonally adjusted:
31 Aug 16 300368

_
So if I got it correctly, there are 300 billion euros (tho this is actually valued in sterling) deposited in the UK only by European banks.

I don't think they are subject to negative deposit rate. So why don't euro area banks simply transfer their excess reserves presently at the ECB to their UK branch/subsidiary, if the ECB deposit interest payment is so damaging to their profit as they claim it is?

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Oct 9 2016 07:57

You can find economists who say that banks lend out reserves and rely on our deposits to make loans. And you can find those who insist that they don't and that banks create new money out of thin air. Both are true depending on how you look at it.

This article explains it very well: https://spontaneousfinance.com/2014/01/28/banks-dont-lend-out-reserves-o...

Quote:
Frances Coppola keeps reiterating again, and again, and again, and sometimes again, that banks don’t lend out reserves. She wrote her latest piece on the topic last week on the Forbes website. The title couldn’t be clearer: “Banks Don’t Lend Out Reserves”

A simple question that could come to anyone’s mind is: what do banks lend out then?
To be honest, I think that a large part of the misunderstanding comes from semantics. I actually agree with Frances on a number of points she makes. I have some objections to her ‘extreme’ view, or at least ‘extreme semantics’. Things aren’t that clear-cut.

...

Quote:
To be clear, banks do need reserves. If a (single) bank makes a loan to a customer, the bank is going to increase both its assets and its deposits (liabilities) by the amount of the loan. So far it does seem that the bank has created money out of thin air. But what happens if the customer withdraws the money from the bank? Deposits will get back to their previous amount, creating a discrepancy with the total loan figure. At the same time, there will be a drain on the bank’s reserves equal to the amount of the loan, as reserves will have been converted into physical cash (while total high-powered money remained the same). Seen this way, we could probably say that banks do lend out reserves.

What happens if the customer doesn’t withdraw the money but pays with it for a good by bank transfer? The drain on reserves still occurs as the beneficiary bank knocks on the door of the borrower’s bank to get hold of the money. In this case again, we could probably say that banks do lend out reserves.

...

Quote:
Let’s now consider the banking system as a whole in a closed economy. If lending leads to cash withdrawals, we could say again that banks lend out their reserves. However, let’s consider the following case: nobody ever withdraws cash. In this situation, all payments are made by electronic bank transfer. While individual banks experience fluctuations in their reserves, the total amount of reserves in the system never changes. Here, we could say that, indeed, banks don’t lend out reserves.

Here is what I meant by fallacy of division: what is true of the system as a whole isn’t for individual banks.

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Oct 9 2016 11:35

I did check that blog.

The standpoint of the ex-nihilo camp can only be accepted under the ridiculous conditions that the loan which a bank gives to a borrower actually isn't used, but remains on deposit with it. So yeah, the deposit is created out of nothing, but since the borrower doesn't actually make use of the money, this is obviously not what most people understand when we talk about a bank loaning out money (ie it involves either withdrawal of cash by the borrower, or using the borrowed money to pay someone who is not a customer of the same bank, thus an inter-bank payment).

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Oct 22 2016 18:14

Even basic Trots now claim that banks create money ex nihilo;
http://www.marxist.com/what-is-money-part-three.htm

Adam Booth (from IMT) wrote:
With the invention of fractional reserve banking, however, banks were no longer mere lenders of credit – they became the creators of credit, and thus the creators of money also. Only a fraction of deposits are backed up by liquid assets, the rest are simply loans created by the bank (at interest) in order to provide greater profits for the bank, thus increasing the money supply in the process. The credit lent appears in the form of a deposit in the bank account of the borrower, who can then spend this just as he/she would spend any other money.

Today, according to the UK-based campaigning group Positive Money, whose aim is to “democratise money and banking”, upto 97% of the money supply in the British economy is the creation of banks, with only 3% existing in the form of cash.

Shake my head.

Regarding the origin of fractional reserve banking though, textbook history says it was the London goldsmiths. I tried to find more info about this, but it turns out there is next to nothing. I think I read a fire destroyed any records. So I'm sceptical, as this goldsmith story seems to rest pretty much on mere speculation.

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Oct 23 2016 03:26

One of the earliest sources the SPGB has found is this.

Richard Cantillon's "Essai sur la nature du Commerce en General" (it's in English) written in 1730. Here's what he wrote:

Quote:
"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. 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. In this first example the cash of a banker is only the tenth part of his trade."

Nothing here about the goldsmith/banker being able (or even trying) to lend more than the 100,000 ounces of silver deposited with them, as in the fairy tales of the currency cranks.

Cantillon's full account of how the banks of his time operated can be found in Chapter VI at
http://evans-experientialism.freewebspace.com/cantillon03.htm

There were some goldsmith/bankers in London in the 17th century but not in every town. But the goldsmith/bankers seem to rather have been more like pawnbrokers for the idle rich.

http://en.wikipedia.org/wiki/History_of_money#Goldsmith_bankers
http://heritagearchives.rbs.com/wiki/Edward_Backwell,_London,_1653-82#Ba...\
he_banker

Adam Smith makes no mention of "goldsmith/bankers". His description of how the Bank of Amsterdam operated confirms that the currency cranks have not been able to produce any example of a bank that issued more certificates of receipts than the gold it had (and survived).

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Nov 28 2016 15:08

On so called "shadow banking".

This is just a stupid name for investment/merchant banking (include asset-managers like Blackrock into the category).

The Glass-Steagall act is most often invoked, arguing for the need to (again) separate deposit- from investment banking (because that supposedly gives greater stability against crises).

Hilferding wrote:
In any case, the modern trend is increasingly to combine these functions, either in a single enterprise, or else in several different institutions whose activities complement each other, and which are controlled by a single capitalist or group of capitalists.

I question how real (in practice) the separation of deposit and investment banks was even under Glass-Steagall. Today, as the wiki entry on shadow banking points out: "Many shadow banking entities are sponsored by banks or are affiliated with banks through their subsidiaries or parent bank holding companies."

Politicians do recognise the need for this "shadow banking", eg in EU: http://www.reuters.com/article/us-eu-regulations-idUSBREA2N08U20140324

Although Deutsche Bank seems actually (being forced by the US) to withdraw from that field.

The soviet economist Zachary Atlas wrote some stuff about this in Vestnik in 1929-30.

--

On so called dark pools (a private forum for trading securities). Let me quote again Hilferding:

Hilferding wrote:
The development of the banking system has been accompanied by a change in the organization of trading in securities. At first the banker is simply a broker who handles a business affair for his client. But the more the capital resources of the bank and its interest in the share market increase, the more actively does it go into business on its own account. A great many of the transactions no longer take place on the stock exchange, but instead the bank simply cancels out the orders of its clients against one another, and only the outstanding balance is settled on the stock exchange or covered by the bank's own funds. ...

Considering the way in which affairs have developed on the stock exchange, one should speak today of the trend in banking rather than the trend of the stock exchange, because the big banks are increasingly turning the latter into a subservient instrument and directing its movements as they see fit.

Almost every major bank has its own dark pool:
https://en.wikipedia.org/wiki/Dark_liquidity#Broker-dealer-owned_dark_po...

Perhaps I should differentiate dark pools from internalization. It might be the latter to which Hilferding is referring, but they are related.

An article from 4 years ago:

Goodbye Exchanges: Hello Internalization and Dark Pools

Executing orders on exchanges is quickly becoming a thing of the past.

About thirty three percent of U.S. trades are now being executed outside exchanges with internalization methodologies overriding dark pools, says a recent study released by New York-based consultancy Tabb Group.

Of the thirty three percent, thirteen percent was executed in dark pools and the rest was via internalization -- a practice whereby broker-dealers match orders internally on their own trading desks before sending them to either dark pools or exchanges. The thirty three percent represents more than double the fifteen percent of orders executed outside exchanges in 2008. The term "dark pool" refers to a place where trading liquidity -- a supply of shares -- is not displayed for all to see. The anonymity afforded to investors and trades through either independent or broker-operated dark pools protects not only the identities of the trading firms, but can also help mitigate market impact. That is the sensitivity of price shares to movement when any sizeable demand surfaces.

"While some traders are upset that their orders are being surreptitiously spammed around the market and others complain about fleeting quotes and inexecutable liquidity, there is a core group of traders who view higher ark execution ratges and lower commission levels as outweighing the information leakages messaging barrage," write Larry Tabb, founder of Tabb Group and research analyst Cheyenne Morgan who co-authored the report entitled "Tales from the Dark Side, Out of Sight, but Very Much in Mind."

Tabb and Morgan cite several reasons why exchanges are ending up with orders nobody wants. The obvious one -- reducing market impact. Yet others: as trading volumes decline, buy-side traders are turning to internalizers and dark pools much earlier in the trading process than in the past to find the necessary liquidity. Second, an increasing amount of order flow is being managed electronically as humans don't have the ability to track liquidity across 50 venues operating under such low latencies. As a result, managing cost is becoming critical. Matching orders internally is a lot cheaper than executing orders on exchanges.

Last but not least, technological advances are also helping dark pools and internalization engines gain popularity. Trading desks can now send out messages to solicit the other side of the trade and if an order can't be done directly it will immediately go to one of more dark pools in a fraction of a second.

Written by Chris Kentouris, Editor-in-chief at www.iss-mag.com

__

So this seems to confirm Hilferding's point of banks taking over the function of stock exchange (it would be interesting to discuss and study these questions in more detail). Questions; what percentage of stocks is traded like this, how does it work concretely, etc?

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Dec 9 2016 15:23
Quote:
Commercial banks withdrew from the depressed securities markets of the early 1930s even before the Glass–Steagall prohibitions on securities underwriting and dealing became effective.

https://en.wikipedia.org/wiki/Decline_of_the_Glass%E2%80%93Steagall_Act

I found that already as early as 1957 banks were permitted to receive profit from brokerage transactions performed for the convenience of their customers, ie brokerage commissions (this is not mentioned on the wiki page).

--

Apparently no longer permitted by the IRS, but from the early 1960s to the 2000s, there existed exchange funds (or swap funds). This was only for the very rich, with the goal of diversifying stocks, while postponing tax associated with sale of stocks. They put their stocks (of one company) in the fund and in the end they got stocks of the same value but of a whole bunch of different companies. So it looks like actually the stocks were "bartered" here (though not at the own choice by the owners themselves, but by the fund operater apparently). It has only some resembles to dark pools. Exchange funds were not very well-known. Perhaps they even still exist.

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Dec 11 2016 08:57

Factoring. https://en.wikipedia.org/wiki/Factoring_(finance)

I'm sure Hilferding also had this in mind when speaking about the dominance of banking industry over industry, though the exact term is not found in his book.

Quote:
One of the oldest forms of business financing, factoring is the cash-management tool of choice for many companies. Factoring is very common in certain industries, such as the clothing industry, where long receivables are part of the business cycle.

In a typical factoring arrangement, the client (you) makes a sale, delivers the product or service and generates an invoice. The factor (the funding source) buys the right to collect on that invoice by agreeing to pay you the invoice's face value less a discount--typically 2 to 6 percent. The factor pays 75 percent to 80 percent of the face value immediately and forwards the remainder (less the discount) when your customer pays.

https://www.entrepreneur.com/encyclopedia/factoring

Quote:
Factoring, as a form of commercial finance, has a long established history. It is, essentially, the business of buying accounts receivable at a discount—a discount provided because the factor (the party who buys the receivables) assumes the risk of delay in collection and loss on the accounts receivable.
...
Factors often do not plainly identify themselves as such. Depending on other aspects of their respective businesses, they may refer to themselves as a bank, financial institution, lender, capital resource, asset solution, or some other financially related term.

http://www.mcsmag.com/tricks-traps-avoid-factoring-companies/

--

To return to a question I asked earlier in the thread:

Noa Rodman wrote:
why don't euro area banks simply transfer their excess reserves presently at the ECB to their UK branch/subsidiary, if the ECB deposit interest payment is so damaging to their profit as they claim it is?

I'm probably mistaken that currency deposits can exist outside its central bank.

As regards the figure of euros listed as parked in the UK, I think they must in reality still always be held (in this case by a euro-branch of a UK bank) at an account within the ECB.

First I naively believed a currency deposit held outside the borders of its issuer somehow was electronically transferred abroad and resides on a foreign computer system.

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Dec 21 2016 17:55

^ my above interpretation seems still wrong of this:

Quote:
Monthly amounts outstanding of European-owned (excl. UK-owned) banks' euro deposit liabilities total (in sterling millions) not seasonally adjusted

I now think those "deposit" liabilities are not actually euros, but euro-denominated debts.

--

The cause of my confusion is probably reading stuff about so called Eurodollars. They are always explained as if they are dollars held on deposit outside the US (ie mainly Europe, hence their name). At least, that was the impression I got.

So what is a dollar deposit held outside the US?

Quote:
The average eurodollar deposit is very large (in the millions) and has a maturity of less than six months.

Quote:
Eurodollars have two basic characteristics: they are short-term obligations to pay dollars and they are obligations of banking offices located outside the U.S. In principle, there is no hard and fast line between Eurodollars and other dollar-denominated claims.

http://www.investopedia.com/exam-guide/cfa-level-1/derivatives/eurodolla...

So they are not actually dollars. They are a dollar-denominated debt.

Governments and corporations outside the US can issue debt denominated in dollars, so it seems quite logical that banks outside the US can do this too.

But, to stress the main point of this thread, this is not "money creation".

[edited to add:]

The debate with the ex-nihilo camp is pretty much just semantics about what is money. They know of course there is a difference between a dollar and a dollar-debt, but they colloquially call them both money.

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Dec 30 2016 21:38

The Eurodollar-phenomenon also misled Robert Kurz into talking about money creation outside the central bank:

https://www.youtube.com/watch?v=-Jz08K3bx3g (brief comment at 2h 6min)

Krise: Business as usual oder mit Volldampf in den Kollaps? Karl Held & Robert Kurz

-

In English there's a lecture series by economist Perry Mehrling, in which he correctly talks about the Eurodollar:
https://www.youtube.com/watch?v=dNf4V0WMbiM

Actual money deposits are always held at the central bank, they don't leave the country. Foreign commercial banks outside the country that hold deposits in its currency, actually have an account at a subsidiary or account at a correspondent bank inside the currency's home county.

But just like the total size of commercial bank deposits is greater than the size of their deposits held at the central bank, so too can foreign commercial banks "multiply" their deposit (held inside the central bank).

To speak about "multiplying" can be misleading. What happens is the same sum of money is lend out numerous times. For instance 4 times. But that doesn't mean there's 4 times as much money now. The first lender lend out the money to someone else, and so on. When payment on the first lender's loan comes due, the money must flow back through the chain (from the fourth borrower, back up through to the first lender).

The extent of this chain (or the "multiplier") is not determined by the central bank, rather it's endogenous, ie by the needs of the borrowers. If that's all the money-ex-nihilo camp wants to say (and who actually disagrees with this point), it would be fine. But perhaps in order to appear controversial/radical, their presentation gives the impression that commercial banks create (base) money out of nothing. But again, I don't think they actually claim that.

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Jan 3 2017 12:04

Don't wish to detract from the interesting more detailed discussions which Noa Rodman has kept going on this thread but for anyone looking up this thread for the first time and struggling with the basic arguments Adam has given this short (and sometimes entertaining) talk at a recent spgb summer school and also answered some common questions in the discussion section here:
www.worldsocialism.org/spgb/audio/idiots-guide-banking-how-avoid-being-c...

PS:Thanks for the tip on Kurz.

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Jan 3 2017 13:32

I disagree with one objection made in that SPGB talk against alleged currency cranks, namely that if all loans were repaid, then there would be no more money. I think this is actually correct. The currency (and deposits at the central bank) are liabilities, matched by assets in the form of government bonds, etc. on its balance sheet. If all those assets were repaid, ie the money would flow back to the original issuer, the central bank, there would be no currency left. One of the first assets that the Bank of England got at its foundation was a debt by the king in compensation for his confiscation of gold. I think something similar happened in the US in 1933 when the government seized the Fed's gold reserves and gave gold certificates for them. These gold certificates are an asset of the Fed, for which it can issue its banknotes.

Spikymike
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Jan 4 2017 16:18

Noa, I think you may have misunderstood an 'off-hand' remark about this by Adam but that's up to him to correct if so.

alb
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Jan 4 2017 16:54

Spiky is right. It wasn't really even an off-hand remark but a criticism of the stated conclusion of a currency crank leaflet I picked up at Occupy St Pauls in December 2011. The unsigned leaflet actually claimed:

Quote:
The bizarre truth is ... MONEY is now just A PROMISE to PAY IT BACK (with INTEREST) and ... IF WE ALL PAID OFF OUR PROMISES to BANKS THERE WOULD BE NO "MONEY" ! [their bizarre emphases]

It was about that not about the currency issued by the government via its central bank. This is accounted for as part of the National Debt, but if the National Debt was abolished (or all repaid) that would not mean that money would disappear, just that it would have be recorded in the government's accounts in a different way. Double-entry bookkeeping may have been something that helped capitalism develop but is also a rich source of confusion.

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Jan 4 2017 19:21

Hi alb,

"recorded in the government's accounts in a different way"

What do you mean by "in a different way"? Without the existence of a central bank?

There would be a possibility for the government to directly print money, and so it would not have to issue debt (this is actually something advocated by some 'modern money' types).

But that would be a different system to what exists today, in which the central bank's loaned out currency is matched by assets (debt).

btw, a Marx quote against the notion of debt-slavery:

Quote:
The anticipation of future fruits of labour is therefore in no way a consequence of the state debt etc., in short, not an invention of the credit system. It has its roots in the specific mode of realization, mode of turnover, mode of reproduction of fixed capital.

https://www.marxists.org/archive/marx/works/1857/grundrisse/ch14.htm

alb
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Jan 6 2017 07:30

I just meant that, if there wasn't any National Debt, the government-issued currency would have to be recorded under some other heading. Anyway, classifying it as part of the National Debt is an accounting convention arising from the fact that the currency is issued via a bank and that when banks issued their own notes (made a loan in notes) the notes were accounted for as a liability (the corresponding asset being the debt to the bank of the person given the loan in notes). The government could just as easily directly issue currency notes, as happens in some countries and as happened in Britain in WW1 with Treasury notes. But I don't think it's a difference worth getting worked up about even if this is what most currency cranks end up advocating.

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Jan 6 2017 12:20

If by "recorded under some other heading" you mean that a currency would be backed by assets other than national debt (eg bills of exchange, as you refer to), than the point still stands that if those assets were repaid, there would be no more banknotes.

If you mean that the government could directly issue currency notes, than you're not talking about the system as it exists today. The difference is important.

During the suspension of the convertibility of Bank of England notes (1797-1821) James Mill explained (in a review of Thomas Smith’s Essay on the Theory of Money and Exchange, in the Edingburgh Review 1808):

"
There are two kinds of paper money, which are so remarkably different, that it is surprising any occasion should remain to point out the distinction between them; yet such confusion has prevailed on this subject, that some great errors owe their origin to the misapprehension of one for the other. Of these, one species is the paper money issued by government, and which it is rendered obligatory upon the people to receive. Of this nature were the assignats, and the mandats, issued by the revolutionary government of France; of this nature, too, was a paper money issued by the government of the United States in the crisis of revolution, and by the Dutch in their celebrated war for the independence of the republic. The second species of paper money consists in the notes of bankers, payable to bearer on demand, and which pass current for the sums there specified. Bills of exchange and other obligations, payable only at a stated time, and bearing interest, are sometimes denominated paper currency; but it will contribute to distinctness, if we exclude them from the appellation of paper money.

We are disposed to give Mr Smith very considerable praise, whether he discovered the distinction, or learned it elsewhere, for having very clearly perceived the difference between the paper money which a government may force upon the people, and the paper money circulated from banks, which nobody receives but at his pleasure.
"

Another economist writing at that time, William Huskisson in 1810 (The question concerning the depreciation of our currency stated and examined, p. 107):


Paper money issued in the name of the state, in aid of its own Exchequer, and in compulsory payment of its expenses, such as has been resorted to in various parts of the world, is happily unknown to this country [that is England]. Such paper is in the nature of a forced loan, which, in itself, implies a want of credit. From this circumstance alone, it falls below par ; and its first depreciation is soon accelerated by the necessity of augmenting the issues in proportion to their diminished value. Thus an excess of paper co-operates with publick mistrust, to augment its depreciation. Such was the fate of the paper issued by the American Congress in the war for their independence ; more recently of the assignats in France : and such is now the state of the paper of the Banks of Vienna and Petersburgh. Whereas, the state of our currency, in regard to its diminished value, is no other than it would be if our present circulation, being retained to the same amount, were, by some sudden spell, all changed to gold, and, by another spell, not less surprising, such part of that gold, as, by its excess, created a proportionate diminution in its value here, with reference to its value in other countries, could not by exportation, or otherwise, find its way out of our separate circulation. It is excess not relievable by exportation.

Marx stressed the difference:


Most English writers of that period confuse the circulation of bank-notes, which is determined by entirely different laws, with the circulation of value-tokens or of government bonds which are legal tender [..]

The point these writers are making is not that state paper money is inconvertible, whereas banknotes are convertible, because I think that’s too obvious. The point is that state paper money is expended by force, the banknotes are voluntarily borrowed (eg by selling a security to the central bank).

National debt (Treasuries) is not legal tender, it is not forced upon anyone, rather the market voluntarily buys it (with bank currency). Even plain figures make this clear, for example in the US, the national debt is many times larger than total currency. What happens is that the same note can be loaned out to the Treasury multiple times.

The Treasury does not “print currency”, its debt is not legal tender, nobody is forced to accept Treasury bonds in payment (like eg government employees, soldiers). It is also wrong to say that the currency is created “from nothing”; if anyone wants currency, they have to provide collateral (like securities).

-

Anyway, perhaps some older comrades might help me with this question:

When were the Treasury notes in Britain dematerialised (ie lose their paper-form). It's difficult to find pictures of them, since, as they are not state paper money (legal tender, forced currency) and have to be repaid, they always are withdrawn from 'circulation'.

Colloquially people do refer to national debt as money, when they speak about a central bank's foreign currency reserves. But actually these reserves are composed of foreign national debt, not actual foreign currency.

alb
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Jan 6 2017 13:44

I wasn't talking about Treasury Bills but about the Treasury Notes that were issued in Britain at the beginning of the First World Slaughter:

Quote:
Banknotes in the UK are normally issued by the Bank of England and a number of commercial banks (see Banknotes of the pound sterling). At the start of the First World War, the Currency and Bank Notes Act 1914 was passed, giving the Treasury temporary powers to issue banknotes in two denominations, one at £1 and another at 10 shillings, in the UK. Treasury notes had full legal tender status and were not convertible for gold through the Bank of England. They replaced the gold coin in circulation to prevent a run on sterling and to enable purchases of raw materials for armaments production. These notes featured an image of King George V (Bank of England notes did not begin to display an image of the monarch until 1960). The wording on each note was UNITED KINGDOM OF GREAT BRITAIN AND IRELAND — Currency notes are Legal Tender for the payment of any amount — Issued by the Lords Commissioners of His Majesty's Treasury under the Authority of Act of Parliament (4 & 5 Geo. V c.14). Notes issued after the partition of Ireland from 1922 had the wording changed to read "United Kingdom of Great Britain and Northern Ireland".

The promise (never adhered to) was that they would be removed from circulation after the war had ended. In fact, the notes were issued until 1928, when the Currency and Bank Notes Act 1928 returned note-issuing powers to the banks.

https://en.wikipedia.org/wiki/HM_Treasury

Nor was I saying anything about what they were backed with or whether or not they were, merely about how they were recorded in the government's accounts.

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Noa Rodman
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Jan 6 2017 22:00

My point about Treasury Bills is that in today's system, the government does not expend them in payment for goods, it doesn't forcefully introduce them into circulation, rather people freely buy them (they credit the government).

re: the Treasury Notes from the world war, in what sense are they an example of state paper money? It is true that some view them to be such:

Bring back the Bradbury wrote:
We require that the Treasury immediately restarts issuing such interest-free money, based upon the wealth, integrity and potential of our country. Such an initiative would completely remove the hold the banks have over the nation, and would kickstart a productive economy.

However, the mere fact that the state carries out the printing-work of the notes is irrelevant.

Your wiki-quote states that:

Quote:
They replaced the gold coin in circulation

So people exchanged their gold coins (sovereigns) for these treasury notes. They were smaller denominations than the existing Bank of England notes. This is a clue that they were not intended for the government's own large-scale expenditures (eg buying armaments). The assets backing the treasury notes, collected in the Currency Note Redemption Account, included government debt, gold, etc.

The question is whether that government debt had been freely raised from the public, or was issued solely/directly for the Currency Note Redemption Account. I doubt the latter.

It's the way that the notes enter circulation that matters.

alb
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Jan 7 2017 10:05
Noa Rodman wrote:
So people exchanged their gold coins (sovereigns) for these treasury notes.

I doubt it. Only a fool would do that. If I been around then and had some gold sovereigns I wouldn't have exchanged them for a paper note. I'd have kept them, as most people did. What happened was that the government suspended the convertibility of Bank of England notes into gold, thereby not depleting the stock they had. They wanted the gold to pay for raw materials from abroad to make armaments and shells.

More on Treasury notes and how they got into circulation (via banks) here:

http://www.rbsremembers.com/banking-in-wartime/supporting-the-nation/the...

There's a picture of one too. When we get socialism today's £5, £10, £20 and £50 notes can join the Treasury Bills in the museum of antiquities and antiquarians can study what money was and how the system worked.

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Jan 7 2017 14:09
Quote:
can join the Treasury Bills

You meant to say Treasury Notes (also called currency notes).

Obviously, not every gold coin was exchanged for a currency note. The link you posted states:

Quote:
At the outbreak of war in August 1914, one of the government’s first priorities was to withdraw gold from the circulating economy so that it could be put towards the national war effort. Moreover, hoarding of gold and silver coin was widespread, impeding normal small payments.

The introduction of small denomination notes had the purpose to concentrate the gold into official reserves. Germany and France did this in 1909, swelling the official gold reserves, in prospect of the impeding war.
In Britain, still in August 1915, the percentage of gold (in the Currency Note Redemption Account) backing currency notes was a predominating 61%. It's safe to assume that the origin of that gold was the domestic gold freely exchanged by the public into the currency notes, whether directly, or by natural replacement via paying stuff in gold coin and receiving income (wages) in the form of currency notes.
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To get back to the point: How would the proposal in the OWS-pamphlet practically work? (I mean without the launching of their alternative state paper money)

The central bank should not be allowed to issue further currency. This is already enough to crash the system, but let's proceed with the scenario.

The government has to use its tax revenue for repayment of that debt held by the central bank. That the complete repayment of debt (on the central bank's asset side) would mean the disappearance of currency, can be seen today from the fact that the government's tax collection has to be offset by a monetary expansion of the central bank, in order not to disturb the inter-bank rate.

However, the government has to find a way to discriminate in repaying its debt, so that it doesn't bring money in circulation again. The priority should be to repay the central bank. In order to do that the government's account/fund (of collected taxes) has to be kept in cash (ie central bank deposits), and not, as is the case now, be temporarily invested in assets (during the time prior to government's expenditure of it). Money shortage intensifies.

In order to repay all its debts to the central bank, the government would still have to find a way to collect also the remaining physical notes. If it could overcome that detail, there would be a money-less society. There are some practical difficulties to be worked out still.

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Feb 16 2017 22:44

Audio of a panel on Lapavitsas' book "Marxist Monetary Theory" at SOAS on 18 January 2017 (part 1, 3 in total online): https://soundcloud.com/soaseconomics/thinking-about-money-part-i

Quite awful, but Lapavitsas does correctly reject (in the q&a part) the view (eg articulated in an article in HM journal by a couple of authors) that new financial institutions like hedge funds etc. supposedly create money or have created a new kind of money. Often that view is also put in alarmist fashion, like, "there are $700 trillion derivatives!l!?!".

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Noa Rodman
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Mar 3 2017 20:10

Anyone know how to respond to the following conundrum:

some forum poster wrote:
Eventually, all debt, public/private exceed the economy's ability to pay it back.

All money in circulation other than coins1 is generated by a loan [let's suppose here is meant a loan from the Fed]. As loans are paid back, the money is withdrawn from circulation [...] The only way it gets back into circulation is through another loan.

Problem: the principle of the loan is injected into the money supply. The interest isn't. There is always a shortfall in the money supply to pay back the debt. Debt has to continually increase to pay back the interest. It's a dog chasing it's tail.

The only beneficiaries of our wacked out monetary system are banksters and financiers. Everyone else is saddled with perpetual, increasing private/government debt or the whole thing unravels.

When debt exceeds the economy's ability to pay it back, the party is over.

So how does the Fed (or any central bank) make a profit (ie annual residual earnings), ie from the accrued interest on its loans etc., given that total money (backed by assets on the Fed's balance sheet) is smaller than the total income generated by these assets? In a hypothetical scenario of total repayment of the Fed's assets (as discussed above on the thread), there would not be enough money to give the Fed the accrued interest.

  • 1. (Coins, as opposed to notes, held by the Fed are accounted on its balance sheet as an asset.) - Noa
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Noa Rodman
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Mar 4 2017 10:54

Annual interest-payments on the Fed's assets are quite possible without encountering an insufficient money supply; the accrued interest is profit, which the Fed hands over to the Treasury, who brings it back into circulation. The assets continue to exist, the notes too.

However, since the initial purchase by the Fed of the assets was at a discount, then at maturity, more money has to be paid to the Fed, than was put in circulation. I think in a hypothetical scenario where all the Fed's assets mature at once, there would indeed be the problem of insufficient money supply. But in reality the Fed's assets mature at different dates, so the Fed's profit on some matured assets is paid with money that is based on other assets that haven't matured yet. In this sense, there always has to exist some other debt (ie non-matured assets on the Fed's balance sheet). The matured assets are deleted from the balance sheet, and most of the money (the returned principal) is deleted. But the Fed's profit on matured assets is not deleted. It is again put in circulation (by the Treasury), and this happens without increasing the debt. So there is no "dog chasing its tail".

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Apr 6 2017 13:00

The CLS (continuous linked settlement) Bank is a global settlement bank. It daily settles around $1.5 trillion (in 18 major currencies).

Daily FX trade more like $3 trillion than 5 -CLS
Leaves out double-counted and internal bank trades

Reuters wrote:
As of February, CLS puts its estimate of executed trades it settles at $1.5 trillion a day.

It estimates that adds up to a bit more than a 50 percent market share, putting the whole daily market's broader value at less than $3 trillion a day when allowing for currencies and trades for which it does not cover the settlement risk.

CLS Bank tries to eliminate settlement risk in the foreign currency market.

In addition to CLS’s primary purpose of mitigating settlement risk, the service has delivered liquidity and operational efficiencies for its Members, eg: Liquidity Efficiencies Through Multilateral Netting

Quote:
Each day prior to settlement in each currency, CLS calculates the funding required of each Settlement Member on a multilateral netted basis for each currency, after taking into consideration all payment instructions of the Settlement Member that are due to settle that day in that currency. In addition, we also offer a liquidity management tool - in/out swaps. This service, combined with multilateral netting, results in an average funding requirement of less than 1% of the total value of all trades.

(so from the $1.5 trillion, it comes down to perhaps "only" $15 billion to fund payment transactions daily).

Moreover it is projected to launch (in 2018) CLSNet, a standardized, automated bilateral payment netting service for FX trades that are settling outside the CLS settlement service. "In response to market demand, CLS will expand its proposed bilateral payment netting service – CLSNet – to support more than 140 currencies".

To be clear, the real final payments must still take place within the national central bank systems. Thus the CLS Bank has a direct account in those systems (eg Fedwire).

Anarcho
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Apr 8 2017 11:37

most economists -- and most economic schools -- have no notion how banks (or even a real economy) actually works. In terms of the "history" of banking, much of that are "just-so" stories.

If you take the "Austrian" school, its position on banks is driven not by an analysis of how capitalism works but rather how it should work. They need a scapegoat for the business cycle -- which their ideology assumes cannot exist under "real" capitalism -- so they look at the banks. Their basic complaint is that bankers act like capitalists (i.e., they seek to make profits by meeting consumer demand!) and this makes the interest rate no longer coincidence with its "natural" rate (an equilibrium concept which they reject in every other market!). Their conclusion is to regulate the banks to force them to have a 100% reserve (in gold!) -- which would destroy the banking system and capitalism as we (and they) know it.

But that is ideology for you...

So the notion that banks hold gold/money and loan that is a "just-so" story by classical economists who viewed interest rates as the price which equated the demand for money and savings. This is not the case.

The post-Keynesian economists are worth reading on this -- starting with Steve Keen.