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

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

#161

Post by catmanjan »

mcv wrote: post #134
baobabKoodaa wrote: post #32

Earlier quoted context omitted.

A hundred dollar bill has not represented an IOU since giving up the gold standard.

I was just thinking about this exact issue. Before abandoning the gold standard, money was basically an IOU for gold. Since abandoning the gold standard, it's clearly not an IOU anymore. It's just the value in itself. Why does it have that value? Only because we trust it. And honestly, that's really not so different than gold. Why would the gold standard work? What intrinsic value does gold have? Again it only has th…

Which is more likely, asteroid mining or governments printing money

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

#163

Post by captn3m0 »

baobabKoodaa wrote: post #119
roenxi wrote: post #114

Earlier quoted context omitted.

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 wou…

Would gift-card-economy work as another example?

When I give a Amazon gift-card to someone, it is an IOU against Amazon, and most people will gladly accept it as money.

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

#164

Post by anticristi »

baobabKoodaa wrote: post #56
thinkloop wrote: post #50

Earlier quoted context omitted.

Hi author, excellent article. But I'm just not seeing the central premise that Werner is wrong in saying that banks are unique in their ability to create money. What Full Tilt Poker did was illegal, simply because they were not licensed as a bank. We do have a special class of institution in our society that is blessed with the ability to create money through fractional reserve that we call "banks". Do you mean regar…

Yes, I suppose I mean regardless of law. Although I wasn't looking at it like that, I was just looking at it from a practical perspective: "he is claiming that only banks create money - well here is a counterexample where a non bank made money". The reason I attacked Werner's article is that he mystifies money creation and perpetuates the misconception that banks' ability to create money is similar to central banks'…

Hi author. Excellent write-up and nice food for my brain!

Although "technically" I agree with your article, banks have a legal definition, legal power and legal responsibility. That makes them special and gives them the legal power to create money -- not without limits, though. Banks can -- subject to some rules -- borrow money from the central bank, which will create said money for them. With repo rates hovering zero and all processing happening electronically, "out of thin air" is not really that far from reality. :)

I would argue that if I issue you an IOU, that is not real money: I do not hold a banking license, I do not keep track of all IOUs, I have no audit to pass once-a-year. In fact, I might drink away your deposited cash next day. :) The Full Tilt Poker example is relevant, but I would argue that that is illegal banking: It happens, but it really shouldn't. Wirecard is the other extreme: They were a bank (legally) and created money against the rules (I'm a bit oversimplifying).

I guess the common person needs to be educated about legal powers: For example, what makes this house special that I own it? A large enough hammer can open the door, as easily as my keys. In fact, if I sublet it, I might not even have the keys! Ownership, as money, are legal constructs that only hold value if they are properly enforced. Of course, enforcement is easier the more society accepts the construct.

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

#165

Post by baobabKoodaa »

scottmsul wrote: post #162

This article misrepresents just how much of the economy it's made up of these IOUs. If you deposit $100 and there's a 10% reserve requirement, that doesn't mean the bank can loan out $90. Rather, they can loan out $1000 since the $100 is 10% of that.

The article did not make any claims about how much the money supply can expand within a specific regulatory environment (such as the 10% reserve requirement you mentioned). I felt like that was outside the scope and would not be possible to present with a simple example.

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

#166

Post by mcv »

catmanjan wrote: post #161
mcv wrote: post #134

Earlier quoted context omitted.

I was just thinking about this exact issue. Before abandoning the gold standard, money was basically an IOU for gold. Since abandoning the gold standard, it's clearly not an IOU anymore. It's just the value in itself. Why does it have that value? Only because we trust it. And honestly, that's really not so different than gold. Why would the gold standard work? What intrinsic value does gold have? Again it only has th…

Which is more likely, asteroid mining or governments printing money

In the past, governments printing money. In the future, probably asteroid mining.

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

#167

Post by anticristi »

athrun wrote: post #80

I found this paper from the Bank of England very enlightening when it comes to the actual mechanisms of money creation and their limits. The paper is short and concise enough and the diagrams are very helpful to the uninitiated. Money Creation in the Modern Economy: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

Thanks for sharing!

Would be cool to make it even more accessible. Something that can be shared virally via WhatsApp by my aunt. :D

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

#168

Post by brandmeyer »

mehrdadn wrote: post #18

This is a fantastic page. I just have an issue with one of his points though: > That banks do not have any special powers in relation to money creation They most definitely do though: FDIC insured accounts have legal government backing—a random IOU from me can't achieve that, no matter how much anyone trusts me. Put another way, a bank deposit seems less like an "IOU" and more like a "WeOU"—"we (the bank or the gover…

Quite true. Its also why we should find it deeply concerning when a tech company starts taking on some of the powers of a bank without any of the responsibilities of a bank.

Facebook's digital currency system is one recent example. Paypal's behavior is a much longer-running example.

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

#169

Post by squiggleblaz »

aronpye wrote: post #144
golergka wrote: post #137

Earlier quoted context omitted.

> it only became worth something because the government says it is That's the only nitpick I have against your otherwise excellent comment: it's not that government says it is, it's the societal consensus that it's worth it. Of course, government is usually a pretty big entity it the country's economy, and since it uses the currency for all of it's transactions, currency acquires some value at least from these transa…

That’s where the term legal tender comes from. Society is legally mandated to accept whatever is determined by the government as legal tender for the settlement of debts. However, this does not include everyday transactions, only the settlement of debt. A trader can accept or deny any currency or form of barter as long as it is not for the settlement of debt. This is why the Scots are wrong to get in a fuss about sho…

>That’s where the term legal tender comes from. Society is legally mandated to accept whatever is determined by the government as legal tender for the settlement of debts.

This entirely depends on the legal framework in a given country. Some countries have legal tender but no necessary obligation, absent a contract, to accept coins or notes in general as payment of the contract.

Moreover, in the context that a person is likely to not accept the government mandated currency as payment, they're not likely to accept debt either. Such situations are common in times of hyperinflation for instance.

If governments could legal mandate that their fiat currencies have value, there would be no such thing as hyperinflation. There is such a thing as hyperinflation. Therefore, governments cannot legally mandate that their fiat currencies have value.

But they can make them highly valuable by demanding and collecting taxes. If you have to pay 20c in tax every time you buy a chicken for a litre of milk (because the government values a chicken at $1 and charges a 20% GST), then you're going to need some source of dollars - even though all your private transactions are denominated in litres of milk (or bitcoins or whatever).

As for Scots getting into a fuss, they are right to get into a fuss if they're treated less equally than other British people. You can say "oh, but the legal situation is thus" but that doesn't make the legal situation _or_ the social situation right. It merely means it exists (not, I suppose, that a person who attacks Scots could understand the is-ought distinction).

No English person would be hurt if every English person accepted Scottish notes at par; as you observe, the Scots are not hurt. Therefore, by putting up a barrier to free trade, they hurt their neighbors for no beneficial reason.

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

#170

Post by anticristi »

x87678r wrote: post #142

> If you have an argument why these IOUs should not be considered money, I would love to hear it. Otherwise, let’s conclude that non-bank corporations can sometimes create money out of thin air. It comes down to the definition of money. Yes non-financial intermediaries are very similar to banks and "create money" but money is defined as the amounts on bank's balance sheets so by definition non-financial intermediarie…

For my own clarification, are financial instruments "money"? I think common people, like me, have a hard time to distinguish money from cash and cash-equivalents.

A bond from an AAA corporate might not be money, but it's so liquid that it's as good as cash to me. :D

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