Banks create money, but it's less impressive than it sounds • Hacker News Board

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

#181

Post by x87678r » Mon, Aug 31, 2020, 2:53 PM UTC

anticristi wrote: post #170

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

No one can agree exactly what money is so that's why you see a bunch of arguments like this. A stock market billionaire who has a small mortgage on one of their properties has no money - he owes money.

You can see different countries have different definitions. https://en.wikipedia.org/wiki/Money_supply#Definitions_of_%2...

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

#182

Post by gridlockd » Mon, Aug 31, 2020, 2:54 PM UTC

baobabKoodaa wrote: post #100

gridlockd wrote: post #85

"There’s a lot to unpack here. First, Werner claims that banks are special due to their ability to create money out of thin air. Second, Werner claims that the first claim is proven conclusively with empirical evidence. Werner’s second claim is patently false, because the ”evidence” he presents in his paper only describes banks’ ability to create money out of thin air — he presents no evidence for non-bank entities’…

It sounds like you are referring to "claim one", not "claim two". I noted in the article that Werner is (only) technically correct on claim 1, essentially due to the reasons you described. Claim two is about presenting empirical evidence for claim one. You might think that empirical evidence is not needed. That's fine. It still was not presented, so claiming to have presented it was a false statement.

You ask for empirical evidence that "private entities have the inability to create money out of thin air", but this rests on a definition of "money". You brought up the example of a private IOU (the Poker Site).

If we remove the distinction between private IOUs and bank IOUs, indeed you would have an example of a private entity creating money out of thin air, for a more loose definition of money. However, as we established, removing this distinction is unwarranted, bank IOUs are treated quite differently both legally and materially.

If we maintain the distinction between private IOUs and bank IOUs, then your example becomes simply irrelevant. Any IOUs that may be issued by private entities that are materially and legally different from bank IOUs have no bearing on Werner's claims.

I believe the empirical evidence for private non-bank entities not being able to create bank IOUs is that they're not banks. Am I missing something?

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

#183

Post by zoul » Mon, Aug 31, 2020, 2:55 PM UTC

jonplackett wrote: post #131

I’d recommend ‘Money As Debt’ if you’re interested in this subject. It’s done as a cartoon but makes it really easy to understand why the world works like this and what the big problems are with it. Namely that if money is created only when you lend it to people, but they have to pay back what you created + interest, there is never enough money to pay all debts back. So bankruptcy is built into the system. It’s like…

Does it? Can’t we just expand the amount of money available forever?

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

#184

Post by phaemon » Mon, Aug 31, 2020, 3:01 PM UTC

pjc50 wrote: post #115

jacobush wrote: post #106

Earlier quoted context omitted.

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

Of course, in 2004 Northern Bank was acquired by Denmark-based Danske Group. So now, you have Northern Irish banknotes, which are UK pounds (GBP), with Dankse Bank written on them!

https://danskebank.co.uk/about-us/bank-notes/ten-pound-note

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

#185

Post by SpicyLemonZest » Mon, Aug 31, 2020, 3:03 PM UTC

anticristi wrote: post #170

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

They're not. There are actually multiple different definitions of "money" in use, because it's complicated to define exactly what distinguishes money from a financial instrument, but corporate bonds aren't included in any definition I'm aware of.

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

#186

Post by marcosdumay » Mon, Aug 31, 2020, 3:04 PM UTC

riffraff wrote: post #62

> Welcome to fractional reserve banking! I don't think that is fractional reserve banking. FRB is the system where a bank is required to have a reserve of X% before it can issue money, while in the current system the banks first emits money and then (in the US) it attempts to get a reserve[0] for that (and in the EU, it doesn't either, tho there are liquidity requirements). [0] https://en.wikipedia.org/wiki/Reserve_r…

It's called fractional because that X% is smaller than 1.

I do agree that, 0 being an integral, that name lost its meaning, but it's still the same thing, so people keep using the same name.

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

#187

Post by zimablue » Mon, Aug 31, 2020, 3:12 PM UTC

vmception wrote: post #4

I've done extremely well obtaining goods and services by operating under my unpopular perceptions of the world, including how banks make money and the purpose of money and currency. My unpopular perceptions have consensus with the people that matter (banks, lawyers, accountants, regulators, courts) but they just won't get very far on web forums if you try to tell people something that doesn't match their understandin…

https://xkcd.com/1570/

I think you haved to be careful about attributing your success or ability in one field to a generalized philosophy that you have.

Just looking around empirically, "successful" and "unsuccessful" people seem to vary wildly in ideology. Stallman, Thiel and Bill Gates have pretty wildly varying ideologies and are all successful, I'm sure you could find 3 unsuccessful people with similar ideologies.

I'm moderately OK because society currently values ability to solve quite formally defined logic puzzles and I was in a sociological place to get a couple of pieces of paper that statistically indicated some combination of privilege and ability to do the former when I was 18-21.

That might not even last, never mind demonstrating philosophical superiority. If I make a few million or achieve inner peace in the next decades it still won't prove too much, since there's so many other people of all philosophies going in all directions.

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

#188

Post by aronpye » Mon, Aug 31, 2020, 3:17 PM UTC

squiggleblaz wrote: post #169

aronpye wrote: post #144

Earlier quoted context omitted.

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…

> 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.

I think you may be getting confused between legal mandate and confidence. Governments certainly can, and do legally mandate the value of money in the form of fiat currency, that is the very definition of a fiat currency. However, society and the market can lose confidence in said currency thus triggering hyper inflation.

I’m not familiar with the legal situation in all countries, but certainly the UK, USA, and EU define legal tender as what one must always accept as settlement of a debt. That allows one to refuse payment if a prior debt does not exist, that’s why it’s legally acceptable to for shops to refuse high value bank notes for example.

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

#189

Post by zimablue » Mon, Aug 31, 2020, 3:19 PM UTC

riffraff wrote: post #62

> Welcome to fractional reserve banking! I don't think that is fractional reserve banking. FRB is the system where a bank is required to have a reserve of X% before it can issue money, while in the current system the banks first emits money and then (in the US) it attempts to get a reserve[0] for that (and in the EU, it doesn't either, tho there are liquidity requirements). [0] https://en.wikipedia.org/wiki/Reserve_r…

I think there's a mixup between what most people who have no idea what they're talking about (almost everyone including self) mean when they say fractional reserve banking and the technical meaning.

People mean: Bank has less "hard cash/assets" than deposit liabilities Technical meaning: The bank is legally/practically constrained to a fixed minimum reserve fraction of liabilities to harder assets

So banks DO have a "fractional reserve" even when not practising technical "fractional reserve banking"... I think

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

#190

Post by cryptica » Mon, Aug 31, 2020, 3:21 PM UTC

zimablue wrote: post #175

baobabKoodaa wrote: post #109

Earlier quoted context omitted.

Yes, banks do create money. This is said in the article multiple times, if you would like to read it.

The key question or claim is not whether banks create money but whether the way in which they are able to do it is unique. "creating money" is ambiguous to be nearly meaningless, "creating money in a way that noone else is able to" is a lot less ambiguous

People and other non-bank entities do not create money, they create and attempt to sell contracts to the bank which are supposedly backed by the value of future goods and/or services. The bank is the one which decides if a contract is worth what the seller is claiming. The seller could claim that they own a lot of user data and that this data is a valuable intangible asset and if the bank agrees with this valuation, then that person can get access to a lot of credit.

Nonetheless, this is all irrelevant, people cannot legally create money (that would be counterfeiting), they can only create assets; only banks can create money and they can cherry-pick who is allowed to get credit and who isn't using whatever rules or metrics they see fit. All the new money enters the economy through loans and government bonds. Companies and individuals who are close to the money printers get most value out of the new money since they get it first (Cantillon effect). By the time inflation kicks in, these people who are close to the money printer will be able to take another bigger loan in the future using their existing collateral which will undoubtedly be worth more due to inflation in the nominal monetary 'value' of that collateral.