By Dan Kervick
Some people believe in endogenous money. They believe we live in a monetary system is which money is generated and extinguished as part of the ordinary flow of everyday economic activity. The economy tends to generate the money it needs in order to satisfy the exchange desires and saving preferences of participants in the economy, and to extinguish the money it doesn’t need.
The endogenous money picture is in some considerable tension with the idea that the monetary system is controlled by the government. The alternative exogenous money picture holds that the issuance and destruction of money is a task reserved for government alone, and that the total amount of money present in the economy is therefore a government policy choice.
We can achieve a happy medium between the endogenous money and exogenous money pictures by viewing things this way: Due to a combination of deliberate policy choices and historical contingencies, societies have chosen to institute complex monetary and credit systems in which the generation of the most commonly used means of exchange is primarily a market-driven phenomenon, but one that is heavily regulated and supplemented by government agencies that also issue their own forms of money. We can also note that those latter forms of narrow government money usually play a foundational role in constraining and underpinning the broader forms of money, since they are needed to settle the obligations that are incurred by issuing those broader forms of money.
So there is truth in each picture, and it is a mistake to adopt either extreme. One of those extremes is a view that I have sometimes called “hyper-endogeneity.” Hyper-endogenists systematically exaggerate the role of commercial bank money in our existing monetary system, treating the banks as possessing certain powers that are actually reserved to the federal government alone. Hyper-endogenists view banks as, in effect, operating their own fiat printing presses. They claim commercial banks manufacture money cost-free “from thin air” and therefore reap seigniorage profits from the exercise. I tried to point out the errors of hyper-endogeneity in my essay “Do Banks Create Money from Thin Air.” But since it was a long essay, let me recapitulate the main points as briefly as possible here.
Seigniorage is the profit earned by a money issuer from the spread between the real cost of creating the money and the real value of any assets that can be fetched for that money in markets. For example, suppose for whatever reason, you were privileged to own a perfectly legal and licensed government printing press (maybe it was awarded to you in a lottery.) The printing press makes $500 bills, and you are permitted to print 100 of these bills each year. Suppose the cost of each additional bill you print (the ink and paper you use) is 25 cents, and that this is a cost you have to bear yourself. Let’s say you print up a $500 bill, and use it to buy a fancy new tablet device that costs exactly $500. You have just reaped $499.75 in seigniorage profits.
But now let’s think of a different kind of printing. You don’t have a printing press for $500 bills, but only a printing press that creates IOU’s, which again cost you 25 cents apiece to print out. You print up a $500 IOU, sign it, and give it to a stranger in front of a witness in exchange for a $2 package of chewing gum. Have you made $1.75 in seigniorage profits? No of course not. You have lost $478.25, since in addition to the 25 cent cost of printing the IOU, you now have a debt of $500. Of the total cost of $500.25, only $2 was offset by the pack of gum. The stranger will at some point press the claim for the $500 you owe.
A typical bank loan transaction is like the second case, not the first. Commercial banks don’t earn seigniorage. Rather, they make money by charging interest on lending, in more or less the same way any of us could make money by charging interest in lending. Banks just do it on a much larger scale. Say you want to borrow $10,000 at 5% interest, with repayment due after one year. The bank creates a deposit account for you and credits it with $10,000. In exchange, you give the bank a promissory note for $10,000 plus the $500 in interest. Bank deposits are debts of the bank payable on demand, and the bank has thus incurred a $10,000 cost in the form of a debt. If things go well, they will have made $500, not $10,500.
Those bank debts represented by deposit balances are negotiable, and widely accepted at face value, and so drafts on those deposits function as a form of money in our economy. But the banks routinely have to make good on the debts they have incurred by issuing those deposits. They make good on the debts by making payments with a form of money that they, themselves do not issue and so must obtain through market transactions. The payment assets they use are issued by the government. They consist in both physical currency and deposit balances in the banks’ own deposit accounts at the central bank.
Hyper-endogenists sometimes go even further and suggest that governments have enslaved themselves to the banks, because the government somehow needs to obtain bank deposit money to carry out its operations. But this is erroneous. Governments choose to accept drafts on bank deposits in payment of taxes because the settlement of those payments is carried out with bank reserve balances or cash, which are a form of money that the government itself issues. In other words, payments to the government simply extinguish some of the money that the government itself has issued.
But government currency and central bank deposit balances are also usually classified as liabilities of the government that issues them. So are they debts in exactly the same sense as the liabilities issued by the commercial banks? No, they are special. Those government liabilities are not debts for anything that the government does not itself control and that it can’t manufacture at negligible cost. The possession of a $100 bill or a $100 balance in a Fed account doesn’t entitle you to anything more than another $100 bill (or a combination of bills and coins of smaller denominations). And the government has an infinite money well. It does have a printing press and it does reap seigniorage. It is limited in doing this only by its own policy choice not to destroy the market value of the currency it issues.
It is true that the government can also impose tax obligations on you, and that the government’s money discharges those obligations. So doesn’t that mean that a $100 bill is a bona fide liability of the government worth $100 in real terms, since issuing it deprives the government of $100 in tax revenue it would otherwise have received? Not quite. While the nominal asset value of a $100 tax obligation for the government is $100, its real marginal value to the government is zero, since the government has an infinite money well and doesn’t need additional cash. And while the nominal liability value of a $100 Fed deposit balance for the government is $100, its real marginal value to the government is zero, since again the government has an infinite money well and can always afford to part with any amount of cash. The government taxes dollars to remove them from private hands, and spends dollars to put them in private hands. And the ability to impose enforceable tax obligations is part of what fulfills the government’s policy purpose of creating a market demand for its currency.
So is bank lending constrained by the need for the government’s money, whether in the form of currency or deposit balances at the central bank? In one sense clearly, yes. Banks need that government money to fulfill the payment and withdrawal obligations that their lending and creation of deposit balances incurs. But for a given particular expansion of lending they might not need to acquire any additional reserves at all. And even if they do need more reserves, they don’t need to acquire the reserves first, before making the loan. They can make the loan and then acquire the reserves. Of course, the fact that they might not need to acquire additional reserves doesn’t mean that creating the deposit carries no cost. It does carry a cost because it is an additional claim against their exiting assets, and they will therefore lose assets as they settle those claims.
The truth in the endogenous money picture is that the processes by which the most widely accepted means of payment are introduced into the economy are driven by the demand for that money. Banks seek to satisfy that demand by making loans, and the government then satisfies the increased demand for government issued money that results. But the commercial banks don’t have their own printing presses.
Cross-posted from Rugged Egalitarianism
“The government taxes dollars to remove them from private hands, and spends dollars to put them in private hands.”
In the first case, according to MMT, “to remove them from private hands” is the very purpose of taxing.
In the second case, “to put them in private hands” is a side effect. Government spends dollars in order to remove real assets from private hands, i.e., to provision itself. If all it wanted was to put dollars into private hands, it would simply give them away, not spend them.
But similarly, if all it wanted was the real assets, it would tax the assets directly out of the economy. A government that has the power to enforce tax obligations doesn’t need to buy stuff to provision itself. It wants a submarine? It passes a bill and commands submarine companies to send it a submarine. It wants desk chairs? It calls Office Max and says, “send us desk chairs.” Or it could form a state submarine company and draft people into its employ.
But it doesn’t do this. Instead it swaps dollars for the stuff it wants and then taxes dollars. That’s to fulfill other purposes beyond the need to provision itself: purposes such as assuring that the tax burden falls fairly, instead of only on submarine companies and office supply companies, and that companies such as the latter are able to stay in business as a going private concern.
Clear refutation of the wilful obfuscations created by Cullen Roche in order to claim he has any original insights not ported straight from MMT. Banks do not control the monetary system and do not create dollars, only IOUs denominated in dollars, a fundamental difference. Any bank struck down from the Fed payment system and thus unable to make good on its IOUs is instantly dead.
That’s right. Here he calls himself the winner and MMT the loser creating vague definitions and reaching unsubstantiated conclusions:http://pragcap.com/nyse-margin-debt-just-shy-of-new-all-time-high-in-july#comments
I agree. I can’t believe how much that Cullen Roche guy has started trashing MMTers. To use a football analogy, it’d be like Mike Shanahan constantly trashing Bill Walsh and George Seifert or something when they taught him everything.
“Hyper-endogenists sometimes go even further and suggest that governments have enslaved themselves to the banks, because the government somehow needs to obtain bank deposit money to carry out its operations. But this is erroneous. Governments choose to accept drafts on bank deposits in payment of taxes because the settlement of those payments is carried out with bank reserve balances or cash, which are a form of money that the government itself issues.”
You don’t refute the claim. Government has chosen to not overdraw its accounts, so that it does indeed, by choice, obtain bank deposit money to carry out its operations. It could do without, but it does not.
That’s not the point I was making, golfer. The point I was making is that after the tax payment is made and settled, the government doesn’t end up with a commercial bank liability. It ends up with a Fed liability. If I pay my taxes by writing a check against by Bank of America bank deposit, then the government will indeed accept the check in payment. But that’s because Bank of America then settles with the government, and as a result, a balance moves from BOA’s reserve account at the Fed to the Treasury account at the Fed. The Treasury doesn’t spend from deposits in commercial bank accounts. It spends from deposits in Fed accounts.
“Governments choose to accept drafts on bank deposits in payment of taxes because the settlement of those payments is carried out with bank reserve balances or cash”
This bit could be clearer. The Treasury doesn’t accept bank deposits as payment. Payment to the Treaury’s account at the central bank can only be made with state money/central bank money.
Golferjohn: “it does indeed, by choice, obtain bank deposit money to carry out its operations.”
Bank deposits are deleted in the process of making payments to the Treasury. They cease to exist when final payment is made to the Treasury’s account at the central bank. So the Treasury doesn’t “obtain” them and then “spend” them. A bank deposit is a bank debt, i.e. a promise by the bank to pay state money on demand. The Treasury requires payment in state money. When that is done, the bank’s debt (promise to pay) is extinguished – payment has been made and the bank’s debt no longer exists. Deposits are thus destroyed in the process of making payments to the Treasury. This is obvious and logical.
I was thinking about spending (“carry out its operations”) not taxing. When you get a check from the US Treasury, is it drawn on the Federal Reserve, or on some ordinary bank in which Treasury maintains an account for the purpose of writing checks against it? I’ve been electronic for several years, so I don’t remember, but I think they have accounts around the country for this. TGA’s, perhaps? Places where the IRS can deposit paper checks that they receive as well.
It’s the Treasury Tax & Loan (TT&L) accounts I believe you are talking about. Here is the NYFRB’s page on how they work:
A key passage:
When the Treasury needs funds in order to make payments, the Federal Reserve Banks tell TT&L note option (those classified as retainers and investors) depositories, generally medium-to-large size banks, to transfer funds to the Treasury’s accounts at the Fed. The Treasury may request, or “call,” the full amount or a percentage of the amount in an account. Treasury calls, which normally are announced in advance and specify the date of the withdrawal and the percentage of the balance to be withdrawn, allow funds to move back into private hands as a consequence of government spending.
So the Treasury holds funds temporarily in the form of commercial bank deposit balances, but in order to spend, the funds need to be transferred, with the banks then making payments from their Fed reserve accounts to Treasury accounts at the Fed. The Treasury only spends from accounts that consist entirely of deposits at the Fed.
No, I was thinking of the TGA.
Treasury General Account (TGA)
general checking account for the U.S. Treasury Department maintained at the Federal Reserve Bank of New York. All official U.S. government disbursements are made from this account. The account also holds dollars credited to the Treasury in the form of monetized gold.
I had forgotten about TT&L, and was thinking they were the same accounts.
So, when they cut a check, it is drawn on the Federal Reserve (FRBNY) not some local bank.
OK good. Yes, right.
“When you get a check from the US Treasury, is it drawn on the Federal Reserve, or on some ordinary bank in which Treasury maintains an account”
Practically all spending by the Treasury is from its account at the Fed, i.e. the TGA – the Treasury General Account.
Treasury expenditures are not made from Tax and Loan accounts held at commercial banks. Tax and Loan accounts are used to hold deposits before payment is made TO the Treasury.
The government has no need of banks to create exogenous money. But as for the banks, they require extensive government privileges* to create much “endogenous” money. Why should this be? Can the private sector not come up with truly private monies? Indeed it can but then those with capital would have to share it with the general population, not legally steal their purchasing power.
Face it Dan, you’re supporting a fascist money system but you’re in too deep now? Cognitive dissonance and all that?
“but then those with capital would have to share it with the general population”
No that’s completely wrong.
* Such as government deposit insurance and a legal tender lender of last resort.
Here’s how I say it:
The Federal Government SPENDS dollars into existence.
The banks LENDS dollar denominated credit into existence.
You need a certain amount of SPENDING to back the large mount of LENDING.
Too much of either of them causes imbalance in the economy.
The key is to find the right balance.
What about the idea that private banks expand the money supply uncontrolably (too much or too little) or lend in an imbalanced manner according to herd mentality? They conduct monetary policy because they issue money, but a destructive form of MP.
You cant stop banks from creating IOU’s, but you can make them back up their deposits with reserves.
They can do that, but the emphasis on “issuing money” misrepresents the problem of debt-based financial instability. If you and I all began issuing IOUs to each other with abandon, and rolling the IOUs over with more IOUs, and leveraging ourselves up with debt worth many times our annual incomes and net worth, then we can also get a financial collapse. It’s the lending and debt; it doesn’t matter whether the lending instruments are “money”.
Bank IOUs just happens to function as money also, because everyone accepts those IOUs in exchange for goods and services. That’s going to happen whenever there is some generally reliable debt-issuer.
“It’s the lending and debt; it doesn’t matter whether the lending instruments are “money”.
But isn’t the lending and debt being exacerbated because the actual loans are treated as money. If we intervene in not allowing those loans to be money then the debt will be less wont it? The demand for those debts as a currency is also increasing the supply of debts.
“Bank IOU’s just happens to function as money also, because everyone accepts those IOUs in exchange for goods and services. That’s going to happen whenever there is some generally reliable debt-issuer.”
But the problem is that if the IOU’s an entity issues are treated as currency they get to further prop up their “reliability” in an unnatural way. They get to gain from seignorage and get to have an inordinate influence on the structure of the economy and determine how the economy performs because an economy needs a money supply.
If you and I all began issuing IOUs to each other with abandon, Danny K
Yes, but our IOU’s are not backed up with government deposit insurance like the bank’s are nor can we borrow from the Fed at less than 1% if we need to like the banks can.
Right, that’s an important difference. The banks have a special role.
The banks have a PRIVILEGED role and one they don’t deserve (read history) and one we don’t need that they should have since there are ethical ways to create endogenous money, including purely private banking.
They have a special role and an accompanying duty of care which they dont fulfil much of the time. Demand for central bank currency would also be less if it wasnt called “deposit” which is misleading the uneducated public. Maybe banks deposits could be called something like demand credit line or similar.
Well, most of the money I have in the bank got there because I deposited it – my paychecks for instance.
Your bank balance doesn’t say you have deposited an IOU it says you have deposited USD’s right?
“It’s the lending and debt; it doesn’t matter whether the lending instruments are “money”.”
A very important point and one that appears to be a very common source of confusion. It seems to me that the monetarist meme is hard to get shake off. I’ve written about this myself – http://monetaryreflections.blogspot.co.uk/2013/07/endogenous-monetarism.html
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“Hyper-endogenists … claim commercial banks manufacture money cost-free “from thin air” and therefore reap seigniorage profits from the exercise. … [and] the government somehow needs to obtain bank deposit money to carry out its operations.”
Does Cullen Roche make either of these claims?
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The key to money (credit) as a transfer agent is that it be universally accepted. This rules out private money creation. It was done in colonial times but required a reserve at each bank that would accept each variety of private money. In effect it became a big book-keeping problem. The further from the origin of issue, the more the money (credit) was discounted. This was especially true for Confederate money before the war ended. In this case, the value of money was related to the value of assets as well as the confidence in money as a store of value.
In 1827 a banking proposal was presented, first describing the historical faults with banking and then how to fix them. Fault number one was the presence of investors and the role of banking as a profit center which was at cross-purpose to the real role of banking, the management of community credit. For true universal credit, there needed to be only one issuer of money (credit) with several methods of money distribution. Unfortunately, banking was a franchise that never shed the association with investors, especially true of the alternate financing provided by investment banking. The closer the bond between deposit banking, commercial banking and investment banking, the more confused became their objectives.
Banking in it’s pure form was meant to be a distribution mechanism of universal credit produced by the government. Interest was charged to cover expenses. Interest was offered to encourage savings. Savings was meant to be a safety net, not a device for hoarding. Stamp money was a joint conviction held among a small group of economists that understood the importance of the circulation to credit. The pogrom was a local economic event using violence to return hoarded credit into circulation. It is important to understand that there can be a shortage of species (silver money, as during the Long Depression) or there may be a shortage of credit represented by the recall of greenbacks during the same period. There might be a surplus of credit (money substitutes created by leveraging (illiquid) assets as collateral, products of shadow banking and faulty underwriting). While shadow banking products may be innovative, you frequently end up with an Enron house of cards.
A great number of words are written about money (credit) creation but much less is discussed about it’s movement within society and it’s eventual retirement to satisfy it’s role as a transaction convenience when acquiring assets in exchange for labor. Money(credit) is not to be retained as property. For those that spend their paychecks, the fleeting dollars as greenbacks or credit and the relationship to the deficit, is not an issue. For those that hoard great sums of credit, like hoarding books from a library, the deficit becomes an issue. Eventually someone from the government may come knocking, wanting to put that money back into circulation instead of continuously adding more credit to the economy. The wealthy actively resist any form of government spending which may impact on their hoarded wealth. Wealth is simply the storage of credit in the form of assets. Some assets create jobs, other assets are economically inert. The conversion of shadow banking credit into liquid credit was meant to recapitalize banks and stimulate investment into economically active assets. While Rockefeller was excessively wealthy, his investments were economically active. Buffet invests in economically active assets with a goal of increasing equity. This is very Protestant-Ethic economics. While Buffet generates piles of liquid credit, he spends it on economically active assets. Cowboys saved to purchase or homestead a piece of land which they worked into an economically active asset. They were fought by the wealthy cattle ranchers that preferred large expanses of economically inert grazing land.
Note to Beard, we tried private credit production and it is not universal. Money (credit) must have a mechanism that returns it to the issuer. Money as debt is a requirement. There is no open-ended method of universal credit creation. The Coin is an attempt at open-ended universal credit creation, it quickly creates massive wealth inequality by substituting for taxes. The difference between ex and en types of money is literary. Banks are simply a distribution channel that “create” existing credit and distribute it. Our Fed system that manages the nation’s credit is made to be flexible after our several experiences with private money creation and private control of money. Control of Congress is a separate but important issue. The ability for shadow banks to create money substitutes should be curtailed, regardless of innovation. Unearned income should only be a small fraction compared to earned income, in most cases. Noah Smith touches on the concept of economic equilibrium which is worth exploring. The increase in production of ALT-A no docs was a clear warning of disequilibrium in the credit lending market. Faulty or non-existent underwriting was not innovative and not new. It was a precursor to the Great Depression.
I agree with most of your article. The only bit I disagree with is where the bank makes $500 out of the interest it charges. That explanation would do in an introductory text book. But what’s actually going on is more complicated, and as follows. (Beware: this is wonkish).
There is an important distinction between where a bank simply supplies the population with day to day transaction money, and in contrast, where a bank makes a long term loan. If a bank set up in a hitherto barter economy, and just credited everyone’s account with transaction money (in exchange for collateral), the bank would not be transferring REAL RESOURCES to customers, nor would any customer be indebted to any other customer on average (taking the year as a whole). So the bank would charge for ADMINISTRATION COSTS, but it would not charge interest.
It might easily call those charges in respect of administration costs “interest”, but that’s not genuine interest.
In contrast, a long term loan involves lending real resources for an extended period. But banks themselves do not supply those real resources. What they do do is act as intermediaries between (1) those willing to forego consumption of resources and deposit money in banks for an extended period, and (2) those wanting to borrow real resources for extended periods.
So when a bank charges interest (genuine interest, that is) it’s actually just passing on the interest it has to pay its creditors (those making term deposits, and bondholders).
I.e. when your bank charges $500, some of that will be to cover administration costs, and as to genuine interest, that will go straight into the pockets of the bank’s creditors. Plus a small proportion will be for a special type of creditor, i.e. shareholders.
Ralph, what in the real world corresponds to this process of creating transaction money? The only way I can get additional money into my account is by (i) depositing it, in which case already-existing money is moved from other bank accounts to my account (or conveyed in the form of government cash), (ii) taking a loan, in which case my account balance is augmented in exchange for my promissory note, or (iii) receiving an interest payment from the bank, which is the banks inducement to me to hold my deposits at their bank rather than some other bank. It seems to me that is the only way that commercial bank accounts grow.
“If a bank set up in a hitherto barter economy, and just credited everyone’s account with transaction money (in exchange for collateral),…”
Do you mean it gets the collateral under some kind of reverse repo? What’s the corresponding debit to offset the credit to customer accounts? Taking collateral doesn’t give you a debit – it’s off balance sheet.
Several senior banking officials involved with the Fed have recently reiterated the fact that the deposit banks do not lend out either their own assets nor depositors assets. If the only way loans could be made was through transfer of existing assets then credit card companies would be out of business immediately. The fact is that when you go into a bank and obtain a $100,000 mortgage at interest the money didn’t exist until it was put into an account for you as a credit and the bank gave you cheques with which you can spend the money that was created NOT by anyone’s bank deposits, nor by transfering any of the bank’s assets and depositing them into your account. The cheque money or bank deposit in the lender’s account was created simply by raising their bank account balance. Banks which want to make loans are required to accept bank deposits into customer’s accounts and pay them interest on these deposits. These deposits can be cheque money, cash or near cash instruments and banks offer this service for the priviledge of making loans secured by mortgages on assets either in the form of physical assets like a house or car or a “mortgage” on future earned income streams. Banks sometimes have to maintain a ratio of deposits to loans to ensure that citizens have a safe place to store their ‘money’ NOT because they need deposits or their own assets to lend out. In return for providing this service and paying interest on these deposits a bank is allowed to make loans up to a certain multiple of their deposits. Say this multiple is 10, so that in order to create 100 dollars to lend banks must have interest bearing deposits of ten dollars. So the cost to the bank of providing the loan of 100 dollars is the interest on 10 dollars of deposits plus the cost of initiating the loan which is generally a very small percent of the amount lent , in this case 100 dollars. So in fact in this case the bank does make the 100 dollar loan credit out of thin air. When the customer pays off the loan it gets paid off with existing money which is earned in exchange for economic value by the bank’s client and which is kept, not destroyed by the bank. So in effect the bank is exchanging a bank deposit created out of thin air for an earned income stream and the bank gets to keep the repaid loan amount plus interest payments less costs to initiate the loan and less the interest it must pay to its client on the money deposited in the client’s account. So the profit on a $100,000 loan for one year at 10% interest is $110,000 less the cost of initiating the loan plus the interest cost on a client’s deposit of 10% or recently frequently less, in this case interest on a $10,000 bank deposit. So if the loan was for one year the lending bank would receive from the lender’s earned money $110,000 at a dead cost to the bank of a few thousand dollars making their total profit around $108,000 of earned money – all of which it gets to keep.
The only way new money can get into the economy other than through debt is by the government, in the case of the USA through the Treasury and in the case of Canada through the Bank of Canada which is owned by the Canadian people through their national government and whose shares are held by the Finance Minister. This money is then spent into the economy purchasing goods and services which produce “public assets” and there is no corresponding debt associated with this money. If the national government through a national central bank believed that inflation was at the point of being a problem then it can take money out of the economy through taxation which can be directed away from those living on a small income and towards those with large disposeable incomes whose purchases create inflationary pressure, inflationary pressure is not created by low income individuals (unless there exists a scarcity of a commonly needed product or commodity in which case the fact of a smaller supply than the demand due to product or commodity scarcity will cause inflation) and therefore the economy can grow without inflationary troubles.
When money is created through debt unwanted inflation is one result which is exacerbated by artificial manufactured scarcity and destruction of competition leading to higher prices and greater wealth transfered to the wealthiest individuals from workers. The current consumer cost of oil products is an example of manipulated artificial shortages allowing corporations to receive excessively high prices for their products which leads to inflation for which the current ‘solution’ is for private for profit banks to charge more for loans. This mechanism effectively transfers more wealth from workers to wealthy individuals so it is in the interests of the wealthy to create consumer shortages to extract more wealth from working folks.
So the cost to the bank of providing the loan of 100 dollars is the interest on 10 dollars of deposits plus the cost of initiating the loan which is generally a very small percent of the amount lent, in this case 100 dollars.
I don’t believe this is the case. When the bank creates that new deposit balance of $100, it now has a $100 liability that it didn’t have before. That is a cost.
The fact that the money didn’t exist before the deposit balance was created doesn’t alter that fact. The inference from “banks don’t generally lend out their assets” to “bank lending has no cost other than the interest paid on deposits” is fallacious. One way of incurring a cost is by giving up an asset; another way is by acquiring a liability.
It’s just like if you issued me a $100 IOU, payable on demand. To issue the IOU, you didn’t have the $100 in hand already that you had acquired via some deposit from somebody else. But that doesn’t alter the fact that once you have issued the IOU to me, you had better be prepared to hand over $100 in some form whenever I demand it.
The only difference is that my IOUs are not generally accepted in exchange for other things. If they were, you might try to trade it at a restaurant for dinner for two, and then the restaurant would collect the $100 from me instead of you. That’s what we can do with bank deposits. Other people and their banks are willing to accept your payment orders on
Dan seems to believe that the Federal Reserve is a branch of the US government, but it’s not. It’s chairman is chosen by the president and confirmed by congress, but its important decisions are made by plurality vote of the chairmen together with those of its 12 branches, who are appointed by TBTF banks. In other words it is controlled by the banksters and is run for their benefit, not that of the people of the United States. The only money issued by the government’s Treasury dept. are coins, which make up only a trivial fraction of the money supply.
A less glaring but no less misleading implication of this article pertains to the claim that banks lend deposits. The problem here lies in the ambiguity of the term “banks” in this context. It is true that, when an individual bank makes a loan and that loan is withdrawn, that comes out of the banks reserves, which includes its deposits. But when spent it goes right back into the deposit base of one or more other banks. In other words, the BANKING SYSTEM as a WHOLE does NOT lend deposits, or its collective reserves at the Fed. So no single entity can directly control the money supply; that is done by the herd instinct of the banksters, who are demonstrated lemmings.
Then there is also the problem, not mentioned in this article, that in order to be able to pay off the interest on our debts, new debt and hence new money must first be created. This means our total debt, public and private, must grow exponentially until some physical or psychological limit is reached, at which point the boom goes bust. This is politely called a “business cycle”, but it is a physically and socially destructive process that will not stop until usury with demand deposits is made highly illegal.
Which is why I support the Public Banking Institute, the American Monetary Institute, the New Economy Foundation, and others attempting to achieve meaningful reform of our monetary system.
Not just the chairman, but all 7 members of the BOG are appointed by the Prez. 7 of the 12 members of the FOMC are the BOG members, and 4 of the remaining 5 are selected by board, 1/3rd of whom are government appointees.
“when an individual bank makes a loan and that loan is withdrawn, that comes out of the banks reserves, which includes its deposits.”
Reserves are assets of the bank, deposits are liabilities. Reserves do not include deposits.
While commercial banks do not have the power of the central bank other than influence over it, they are capable of temporarily creating money and this can continue for some time before the debt claims return to them. In this they are like any check kiter or ponzi scheme creating debt incapable of being liquidated but exists until the bezzle has been exposed. This is what the investment banks were doing by lowering credit standards. Some, like Bear Stearns, held onto it and collapsed, others sold it on the market to let others take the fall.
The questions around endogenous and exogenous money systems are not about what type of money system we have, but about what type of money system we should have.
We have been living under the endogenous money system of the ‘bankers-school’ of monetary thought for several hundred years – as banks create all money by issuing debts.
All the chat about ‘monetarism’ takes place within the reality of the endogenous-money, bankers-school money system. That is a given.
The debate that is coming is about what type of money system we SHOULD have.
MMT is minimally of two ideas here, claiming a sort of government monopoly-issuer reality with its keystroking-accounting identity- and at the same time embracing somewhat the view of a banker-centric monetary economy.
Sorry this is not a best-of-both-worlds new economic paradigm.
What we have is a plain old vanilla banker-centric modern monetary economy.
What we need to do is understand the alternatives that have been at play down through the ages, those of the currency-school (a public, national identity) and those of the bankers-school) (a private, corporate identity).
The debate is coming.
Let’s be honest about it.
If you were honest, you’d admit that money can also be issued as shares in Equity, not just as liabilities.
Money can be issued as jelly beans too. This post was about the existing monetary system and how it works, not about all of the other monetary systems we could have instead.
Except that common stock, unlike bank credit, requires no usury and no government privileges. As for jelly beans, they would more accurately be a form of barter, not money, whereas common stock is entirely symbolic as a good money form should be.
Common stock is an ownership share in some enterprise. Its value fluctuates as people’s perceptions of the value of the enterprise fluctuate. Not a very good vehicle for exchange or saving.
Its value fluctuates as people’s perceptions of the value of the enterprise fluctuate. Dan Kervick
Much of the apparent volatility in the value of common stock is a result of the underlying government-backed credit system whereby large amounts of purchasing power are created and destroyed as credit is extended and repaid. Otherwise, how do you explain the entire stock market moving up or down at the same time as it typically does?
The real value of a company is the desire for its good and services which is typically not that volatile.