I liked this comment from John S Warren on the blog yesterday:
The most elegant, simple and useful short definition of money, and the purpose of banking I have read, was written by Alfred Mitchell-Innes, ‘What is money?' (The Banking Law Journal, May 1913).
Perhaps it should be sent to Faure and Gersbach; but better, read by the widest public:
“Money, then, is credit and nothing but credit. A's money is B's debt to him, and when B pays his debt, A's money disappears. This is the whole theory of money. Debts and credits are perpetually trying to get into touch with one another, so that they may be written off against each other, and it is the business of the banker to bring them together. This is done in two ways: either by discounting bills, or by making loans. The first is the more old-fashioned method and in Europe the bulk of the banking business consists in discounts while in the United States the more usual procedure is by way of loans.”
What particularly struck me was the emphasis by Mitchell-Innes on ‘debits and credits'; it reminded me of Ch.3, Randall Wray, ‘Modern Money Theory'. It begins with accountancy; which non-MMT economists simply do not seem to understand.
Note when this was written.
Note also that most economists are utterly dismissive of accounting.
And note that it is accounting that actually makes money: no printing press is required.
Well, accounting and the fact that the resulting money is accepted in settlement of tax.
And yet we still suffer from the myth that it is the toil of the wealthy (almost singlehandedly) that pays for all we need in society.
And that the government has no money of its own when by a stroke of a key it can however much it needs to deliver all the economic activity the economy is capable of sustaining.
We have known that for more than a century. And still we suffer from the myths. It's time they were laid to rest.
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I think money and currency have been conflated here. The currency we call the sterling can certainly be created at a whim and used to initiate both economic and uneconomic activity.
Money as a measure of value, of how much of his resources Peter owes to Paul, cannot be issued by government in units of resources or of value. We have variable exchange rates, inflation, and other means of exchange that don’t involve sterling to indicate all that. In fact the value added by issuing sterling currency could be positive or negative depending on what the government decides to do with it, hence the myriad examples of multipliers less than 1.
So the money we use as a measure of value is different from the one with the same description used to transact?
Would you like to explain how we tell them apart?
Tebay Services …?
With that accent ?
Pull the other one.
Closely related to Watford Gap
Both now closed accounts…
I’ve not come across this before – “in Europe the bulk of the banking business consists in discounts” – could you explain?
And is it still the case?
This was 1913…
As I understand it, bill discounting is like factoring – if you hold a receivable that is not yet due to be paid, you could sell that receivable, and the purchaser would pay a smaller sum than the face value and make money from that discount when (and if) the receivable is paid.
You are right
And once upon a time, when people said ‘once upon a time’ this was common
I’m so glad to see bank-created money being given the attention it deserves. Am I right in thinking that banks create money by lending and governments (those with sovereign money systems) create money by spending? Or is this too simplistic?
In summary you are right
There’s an excellent book [Published 2013 “Money”] by Felix Martin on the history and identity of money.
I see Larry Elliott of the Guardian is still giving airspace to IFS drivel because he doesn’t understand Sectoral Balances Accounting. This despite many commenters making reference to it over the years on his articles:-
https://www.theguardian.com/business/2018/jun/05/theresa-may-faces-dilemma-over-nhs-cash-boost-says-ifs
Larry really ought to put in for early retirement if he’s not willing to keep up!
Actually, I know Larry does get sectoral balances. We have discussed them, recently.
And as far as I can see that was a piece of reporting and not opinion – hence a very large number of quotation marks.
So in this occassion I am not sure the criticism is fair
But that does not mean he and I agree on everything – we don’t
I think though that’s a cop out then for Larry to simply report IFS views verbatim without some kind of counter-balance argument. It’s a bit subtle for most people to interpret that by using quotation marks around IFS arguments the Guardian is less than neutral on these arguments. Exactly how many arguments with a Sectoral Balances Accounting perspective does the Guardian actually print in comparison to the superstition the government is like a household and must balance its books. It isn’t as though this superstition wasn’t one of the two primary causes of the 2008 Global Recession:-
https://larspsyll.wordpress.com/2017/02/15/paul-samuelsons-balanced-budget-religion/
http://www.businessinsider.com/how-bill-clintons-balanced-budget-destroyed-the-economy-2012-9
The same superstition continues to be played out in Europe for goodness sake!
That’s modern journalism
I suspect he would agree with you
Bill Mitchell in Part 2 of his article on the Scottish Growth Commission paper brings in Sectoral Balances Accounting very pertinently into his discussion of this paper. It will be very interesting to see what the Guardian economic journalists write about Scotland’s monetary system options in the near future as the Brexit farrago draws to its conclusion.
http://bilbo.economicoutlook.net/blog/?p=39506
This article by Greg Palast should be accompanied reading to Bill Mitchell’s two articles on the Scottish Growth Commission Report. It reveals why even Reagonomics couldn’t inflict “Eurozonisation” or more correctly Neoliberal Supply-Side Economics on the United States:-
http://www.gregpalast.com/currency-rules-but-its-not-ok/
Thanks
Well I must commend Larry for his latest Guardian article bashing the Eurozone in generalised terms:-
https://www.theguardian.com/commentisfree/2018/jun/06/fix-eu-single-currency-does-not-work
I just don ‘t think they are going to ‘ lay them to rest ‘ Richard at least not until they are forced to by some earth shattering event that ends the era of the worldwide speculative bubble we are living through. God knows how much time those two put into writing that crap, as you and Steve put it, when you have the evidence in official reports of one sort or another, such that a layman like myself with very limited time can work it out then you have to ask yourself ‘ Why ? ‘
I think the answer may be this simple : to explain money creation in the clear and precise terms like those quoted in your blog would be academic suicide withinin mainstream economics as it is currently practised. Funny because I studied it for A Level in the sixties and , as was the case in those days it was an ‘ Arts ‘ subject, the mathematical element being minimal because as a social science a clear distinction could be made between the real world and the theoretical world of economic theory. To succeed in the academy nowadays you have to produce nonsense dressed up to look like science.
And you can only take the A level with a good maths GCSE pass….
Which is ridiculous as the economy is for everyone
I regard as being significant that the most celebrated mathematician, Albert Einstein, could tell you what happens around the speed of light , but judging by photographic evidence didn’t know what a hairbrush was for (or how to use one) 🙂
HJalmar Schacht was mentioned in another thread, I think yesterday. Given his association with the German Government of the late 1930s, and his appearance in the ‘dock’ at Nuremberg in 1945 (he was acquitted), makes him a difficult man to quote as illumination; but he understood finance, banking and currency – he stabilised the German currency, much against the odds, in the 1920s. In any case, in his 1949 autobiography ‘Account Settled’, he wrote this about mathematics and finance; with a prescience that was prophetic of the kind of economics Neoliberalism might actually do:
“For some reason or other the arithmetical nature of finance seems to inspire the mathematically minded, and their efforts always tend in one direction, toward the creation of an automatically functioning solution operating according to fixed mathematical rules. But the currency problem is not a problem which can be solved according to fixed rules. If it were, then perhaps a capable professor of mathematics would be the best financier after all. Monetary policy is not an exact science but an art. As such it will always be a sphere which will always remain mysterious to the man who is not capable of mastering that art, while appearing simplicity itself, to the man who is.”
NB., In 1949 it would always be a man ….!
I did A level economics in the 60s. By the time I took the degree in early 80s maths was all that counted. As a mature student I didn’t believe most of what I was taught – and it was soundly debunked by Steve Keen much later. I’ve learned so much more since then.
When a private banker create new money it incurs a debt to the whole society (seigniorage) which is currently represented by the Treasury of the host nation. The problem is that money creation is accounted mislabelled as a generic liability (a zombie liability never paid off) i.e. labelled as “debt to depositor” in the case of a commercial bank and “currency in circulation” in the central bank books. The counterpart of this liability – which should be better labelled as “seigniorage due to the sovereign” – must be accounted as an asset in the Treasury of the host nation and paid by the banker to the same Treasury – which is not. So the easy solution is renaming banks liabilities and opening a receiving account on the Treasury books (“seigniorage on money creation”) where the liability will be settled.
So the bank disappears from the transaction then and the customer owes the Treasury?
Might you explain all the double entry?
Richard, I’ve long believed that banks should pay seignorage. Does MMT make that unnecessary?
My answer to that is yes
I am not sure whether others agree
When you create money and spend it, you take a share from the community basket of goods and service offered equal to the money that you spent. So you owe to the community what you took from them exerting seigniorage (WHICH IS A SOVEREIGN POWER). If you are a central banker, you hide your enrichment by accounting like this: in the assets side you put the things you have bought and on the liability side you put a unresolved generic liability to hide the profits (“currency in circulation” or “Sight deposits”). You can buy the earth and still balance the books with ZERO profits ! The idea is now to make the bankers PAY for the liability by giving the corresponding sum to the Treasury. Else it is a FLOATING liability put in there just to con the public – like they do now. So the liability need just to be renamed and really paid by the bankers to the Treasury. In this way the Treasury find himself with all the money countervalue paid as seigniorage by the banker (the real seigniorage, not the depleted one indicated in the textbooks…).
I think you have got somethin* wrong here
The central bank is owned by the state….
And it seems to be a central bank that you are describing
I suggest you do some more reading
“I think you have got something wrong here”. So pleased you said that, Richard. I was thinking the same – you’re teaching me well;o)
🙂
What????!!!!!!!!!!!!
Peter Close What????!!!!!!!!!!!!
Quite.
I don’t get that.
I’ve always thought that banks should pay a seignorage tax so that people understand what exactly banks are doing. What’s not to like?
“… most economists are utterly dismissive of accounting”
Within a bank, economists exist to tell you how much money you could make; and accountants, to tell you how much you actually did.
I will gloss over the existence of a certain type of accountant, who will tell you how much you can *say* you actually made, to people outside the walls of the bank.
I think we both know why economists view accountants the way that they do: and, as explaining the existence of a magic beanstalk is more profitable than counting the beans, economists have higher status within the bank.
Indeed…
Richard, I apologise for putting the email below under this post, but the post you put up last week re the report by the IFS/HF on the NHS seems to be closed for comments . I put the text of an email I sent first to Anita Charlesworth at the HF and sent the same email to Sarah Sands the editor of the Today programme which had Paul Johnston on to talk about the report. I didn’t receive a reply from Anita Charlesworth ( surprise, surprise ) , nor one from Sarah Sands so I emailed Tony Hall the Director General in effect complain about the lack of response from Sarah Sands and then this afternoon received the email below evidently prompted by my complaint. Needless to say she doesn’t address any of the points I made about QE etc, and apart from the usual blah, blah, makes a connection to the story about the government selling off RBS shares intimating that will, as it were, put some money back in the government’s coffers. So in other words she , and presumably those around her believe , along with all those they ask to come on to the Today programme and other BBC news and current affairs programmes that a government IS just like a household and so now it has a few extra bob coming it it can pay for something else .
I’m thinking about a response !
Dear Mr Hope
Thank you for writing and your interest in Today. I apologise that it has taken a few days to respond, and I know you have also been in touch with the Director General’s office. Please let me assure you that we take feedback very seriously at Today and while it may take us a while to reply, we do consider each and every contact from listeners very carefully.
The future of the health service is very important and the interview with Mr Johnson is not the first time we have tried to examine the difficulties in funding the NHS given the constraints on public spending. You make very good points about the decisions Governments could make, and indeed, this morning we heard about the selling off of the Government’s RBS shares, bought to avert a banking collapse back in 2008. It is a good example of what you are saying, that Ministers do have scope to act when the political will is there. Please be assured that at Today we are committed to examine such important national issues from all angles, believing that robust challenge and intellectual rigour are what our listeners expect. Every point of view, including unorthodox ones, are welcome.
Best wishes
Sarah Sands
Sarah Sands
Editor
Today programme, BBC Radio 4
0203 614 3638
As replies go that’s complete nonsense
Thanks
Do banks create the sovereign currency or does it need to be switched into government issued sovereign currency at some point?
As I understand it only the government can create the sovereign currency.
Only governments can actually create a currency.
But banks do so for them under licence
Dear Richard,
commercial banks do create scriptural money under licence from the government ? Where is the text of the law pretending to give that licence ?
Commercial banks do create scriptural money without any licence here in Europe. Scriptural money a.k.a. ‘deposits’ are a monetary aggregate like coins and banknotes: all the three are considered CASH by international accounting rules (IAS-IFRS and GAAP). The central bank was created just to monopolize and privatize the profits of money creation and leaving the governments without the resource of seigniorage. Commercial banks have profited from the IGNORAMUS in the public creating scriptural money that is not registered in any book at the time of creation. See any cash flow statement of a bank and you cannot find the money they used to make the loans. More here:
Cash Flow Accounting in Banks– A study of practice, Ãsgeir B. Torfason, University of Gothenburg, 2014
https://gupea.ub.gu.se/handle/2077/35272
Werner, R.A., A lost century in economics: Three theories of banking and the conclusive evidence, International Review of Financial Analysis (2015)
http://www.sciencedirect.com/science/article/pii/S1057521915001477
I suggest you do some more reading.
I do not think this discussion is going anywhere useful
I do understand modern monetary theory
I do understand other theories of banking
And I do know what seignorage is
I also know banks have licences, as a matter of fact: you can’t be a bank without one in the EU
So let’s keep cool here
If you wish to those are the terms for doing so
And you have not explained the double entry of your claims as yet
“I also know banks have licences, as a matter of fact: you can’t be a bank without one in the EU” – yes, sure. The banks have a licence to do money intermediation while in fact they create new currency, which is a very different business. Clandestine money creation is not funds intermediation. Here: Werner, R.A., How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking, International Review of Financial Analysis, Volume 36, December 2014, Pages 71—77
http://www.sciencedirect.com/science/article/pii/S1057521914001434
With respect, you’re being very melodramatic
That does not help
And I will be deleting any more melodrama
“With respect, you’re being very melodramatic”
Is it not simply the exuberant enthusiasm of the convert who has seen the light ?
Sometimes it takes the eyes a while to adjust to the sudden glare.
Even if it is it is not helpful
Agreed. From my point of view anyway. (But I have the advantage of not having to read it before deciding to publish it or not !)
But it may help the writer, as you have said you do yourself, to get your ideas down on paper.
It’s the principle behind ‘Words for Wellbeing’. (Though that is more specifically aimed at improving mental health).
Fair point
Money creation is indeed an accounting trick. Not so sure that Mitchell-Innes definition of money is comprehensive though since where money takes the form of a commodity, like gold coins or cowrie shells, there is no associated debt or no “debit-credit” relationship.
In addition,when paying taxes the gov does not really accept this “debit-credit” type created money, it will only accept its own reserves. Banks can create as many as these credit-debit arrangements as they like but you cannot pay taxes with it,the gov only takes cold hard reserves(base money)Whence that money disappears. So bank created money cannot be used to pay taxes.
If governments can create money at the “stroke of a key”(as we all do know) this is, in fact, another kind of money that is also not of this “debit-credit” origin.
Gold was never money
It was a non-counterfeitable token of the debt due
Like a tally stick
Both record the debit – credit
As do the key strokes
I actually said gold coins, which was used as money for centuries.
The point was it is legal tender issued by the Sovereign,it matters not what format it takes,it could be shells, coins of various metals, paper, in fact, a host of items have served over time as money even huge stones with holes in them as in the Pacific island of Yap….and yes even tally sticks.
This is this Sovereign money issued without debt, it is useful for the Sovereign who gets first use of it to pay for whatever he desires. It is also useful as a convenient money in the economy and allowed one to repay taxes back to the Sovereign.
The same applies today, in the UK, HMRC will only take BoE reserves for tax payments, no one else’s money will do, certainly not debit-credit money.
You ignore ten fact that we now have fiat money – something fundamentally different