Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Banks create money, but it's less impressive than it sounds

attejuvonen.fi

Post reply on HN
Print view View original

111–120 of 235 posts

Re: Banks create money, but it's less impressive than it sounds

#111

Post by baobabKoodaa »

roenxi wrote: post #110
baobabKoodaa wrote: post #21

Earlier quoted context omitted.

Hey, author here. Your criticism is correct. Deposit insurance is a fundamental difference between bank IOUs and non-bank IOUs. So it's incorrect for me to say that banks have _no_ special powers (still not even close to central bank's power though).

How confident are you on that point? I don't have a reference on me right at this moment but I expect it is illegal for a non-bank entity to hand out IOUs at scale. People would be arrested. I'm thinking of things like https://en.wikipedia.org/wiki/Liberty_dollar_(private_curren... which ended in FBI raids.

It might be illegal, but it happens, and the article includes one very concrete example of that.

Re: Banks create money, but it's less impressive than it sounds

#112

Post by aronpye »

The article doesn’t adequately cover the role of central banks in fractional reserve banking.

Back in the days of the gold standard you used to be able to redeem a set weight of physical gold from the central bank for a dollar / pound of paper cash or minted coin. This conversion ratio was set by the central bank and acted as a final brake on inflation. When the gold standard was abolished and the dollar and pound became free floating fiat currency, it only became worth something because the government says it is. The “I promise to pay the bearer x pounds/ dollars” is just a hangover from the gold standard days when you could redeem money for gold directly from the central bank rather than through a private gold dealer. Now you can only redeem an equivalent amount of fiat currency at the central bank if day your dollar / pound note becomes damaged.

Banks can create deposits / reserves at the central bank out of nothing, they just have to promise to pay the central bank back at a later date, plus an equivalent amount of interest equal to the central bank set interest rate. This is how the central bank regulates the interest rate in the economy. If a bank charges another bank a higher level of interest for lending than the central bank, that bank can just go to the central bank instead and get charged the lower central bank interest rate. This acts as a brake on maximum inter-bank interest rates and ultimately what interest rates are charged by end consumers. The same is true for cash deposits, the central bank acts a floor / minimum interest rate for deposits as the central bank will pay interest at the central bank interest rate for deposits held at the central bank.

Re: Banks create money, but it's less impressive than it sounds

#113

Post by baobabKoodaa »

danybittel wrote: post #107

But the bank hasn't made any money?! It just wants back "more" than it "gave". Am I missing something? The one who is forced to "create" the money is the one who has to pay back the 1$ extra in interests (which previously did not exist). But he is not allowed to create any! So he has to create anything of value and sell that for money, so he can pay back the money and the interest. But that just moves it to the next…

> But the bank hasn't made any money?! It just wants back "more" than it "gave". Am I missing something?

Let's take the example where the bank loans out $10 and wants back $11. The money created in this example is not $1 (when the loan is eventually paid back and the bank makes $1 profit), it's $10 (when the loan is initially given out).

Let's imagine that the bank does not want to make a profit and only wants back $10. Even in this example the bank is creating $10. If you sum up how much money everybody has, people have $10 more money the moment the loan is given out.

Re: Banks create money, but it's less impressive than it sounds

#114

Post by roenxi »

baobabKoodaa wrote: post #111
roenxi wrote: post #110

Earlier quoted context omitted.

How confident are you on that point? I don't have a reference on me right at this moment but I expect it is illegal for a non-bank entity to hand out IOUs at scale. People would be arrested. I'm thinking of things like https://en.wikipedia.org/wiki/Liberty_dollar_(private_curren... which ended in FBI raids.

It might be illegal, but it happens, and the article includes one very concrete example of that.

So I suppose I put it to you that there is something special about the IOUs created by banks - they are legally allowed to used.

Even if everyone agreed to use your IOU from the article the tax office is going to have quite a bit to say on the subject and probably start launching audits. And if the IOU start getting traction they are likely to trigger police raids and maybe a legislative response (look at how Facebook dropped their Libra for example). That seems substantially different from the IOUs the banks can create.

I wouldn't use bank-issued IOUs if I thought I had a choice. I'm pretty sure I'm forced to by government policy.

Re: Banks create money, but it's less impressive than it sounds

#115

Post by pjc50 »

jacobush wrote: post #106
nly wrote: post #81

Fun fact: Bank of England bank notes, denominated in £ sterling, still have printed on them: "I promise to pay the bearer on demand the sum of pounds" Signed by the Chief Cashier of the BoE

The UK is like that, banks have their own notes, still.

The BoE ones are the "real" government-issued ones. The interesting ones are the genuinely private ones by the Scottish and Northern Irish banks. Including my favourite ever, the Northern Bank portrait-format space shuttle: http://www.polymernotes.com/northireland.html

The current legal basis is the Banknotes (Scotland) Act 1845: https://www.scotbanks.org.uk/history/banknote-history.html

Re: Banks create money, but it's less impressive than it sounds

#116

Post by x87678r »

danybittel wrote: post #107

But the bank hasn't made any money?! It just wants back "more" than it "gave". Am I missing something? The one who is forced to "create" the money is the one who has to pay back the 1$ extra in interests (which previously did not exist). But he is not allowed to create any! So he has to create anything of value and sell that for money, so he can pay back the money and the interest. But that just moves it to the next…

It wants the extra dollar, just like any other company in the economy, its working to earn it.

It also doesn't always get the dollar, or even the principle. Lots of people borrow the $10 and only repay $5.

Re: Banks create money, but it's less impressive than it sounds

#118

Post by pjc50 »

vmception wrote: post #83
sethjgore wrote: post #13

Earlier quoted context omitted.

Would love to know more about your unpopular opinions. Too many people think the same way about money.

Some of my currently unpopular opinions: The universe of investible assets available for the central banks are small, they need your help in providing a service to them in the primary market (credit markets, corporate bonds). Direct issuances were always going to happen, if it wasn't the pandemic it would have been something else. Anything that slowed down China's growth would have resulted in the same outcome. There…

This is good stuff. I see negative rates as the "stability tax", which is why the leader is Switzerland. As you say, the real work has to be done in fiscal policy.

Re: Banks create money, but it's less impressive than it sounds

#119

Post by baobabKoodaa »

roenxi wrote: post #114
baobabKoodaa wrote: post #111

Earlier quoted context omitted.

It might be illegal, but it happens, and the article includes one very concrete example of that.

So I suppose I put it to you that there is something special about the IOUs created by banks - they are legally allowed to used. Even if everyone agreed to use your IOU from the article the tax office is going to have quite a bit to say on the subject and probably start launching audits. And if the IOU start getting traction they are likely to trigger police raids and maybe a legislative response (look at how Faceboo…

> So I suppose I put it to you that there is something special about the IOUs created by banks - they are legally allowed to used.

IANAL, but the IOUs created by Full Tilt Poker were also legal to use. When the government eventually pressed charges in the debacle, no charges were pressed against regular players of the poker site, including those who used these IOUs for small economic activity. If using these IOUs would have been illegal, then surely the government would have pressed at least some charges after spending years investigating the case?

But anyway, even if _using_ the IOUs was not illegal, creating them like a fractional reserve bank surely was illegal. So you definitely have a point that the regulatory environment creates a special status for the legal tender of the country.

Re: Banks create money, but it's less impressive than it sounds

#120

Post by axilmar »

In my humble opinion, the article is too complex and the topic at hand could be explained in an easier way:

-banks can create money when they issue a loan, because, if all things go well, the created money will create wealth.

-banks cannot create money when they return money to depositors, if they don't have that money, because if they did the created money would not correspond to created wealth.

I.e. fractional reserve banking exists because what can be created with money, i.e. the actual wealth, can come after money is created, and not before: first money is created out of thin air, then that is used to pay people, which create wealth. The old system with the gold standard was limited because it depended on the amount of gold that existed.

Post reply on HN