Tim Worstall is a man of the highest opinion, of himself.
As far as I can tell he thinks almost everyone I know who has ever written anything is wrong.
It's a position he might sustain if he was forever correct.
Unfortunately Tim fails in that objective. There are two good reasons for that. First he never appears to propose anything; he only criticises others. And when he does criticise he either deliberately misses the point, shooting down straw men of his own construction or he is just wrong.
His latest go at me concerns seigniorage: not a subject in common discussion I admit. It is the profit made by a person who creates currency (to put it in a nutshell). I argue that this profit largely arises to our banks. That's because 97% of all money in use is electronic, and the banks make that. It's that currency that they created that they have also lost: it's how there was sufficient money to generate the enormous losses they have suffered.
Then there's cash: that's 3% of all money in use. Worstall argues I'm wrong because the profit on the creation of cash always goes to the Bank of England - even when issued by private banks in Scotland and Northern Ireland.
I don't dispute this point, but when sneering what's more important - the 97% electronic money to which I referred or the 3% cash with which he tries to defeat my argument?
As ever Worstall has his priorities wrong, which is a pretty good synopsis of almost everything he says.
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I certainly thought that misleading response was unpleasantly sly.
The whirring sound in the background is coming from the grave of the thoughtful taxman, Adam Smith, at what is perpetrated in his name.
[…] I am honoured! […]
Richard,
The commercial banks don’t make seigniorage from the creation of credit. They simply don’t. So there’s no seigniorage profits to be nationalised.
I will admit I’d be fascinated to see an argument that they do, one which has escaped generations of economists (OK, to be fair, to my current knowledge, rather than that being a declarative statement).
Thanks, Richard. I was sure that Tim was wrong but didn’t know how. I have in the past commented on his blog, but there really is no point and I don’t want to give him the satisfaction of getting another hit.
Tim
Try reading a few major economists Tim
Start with Galbraith – try Keynes – keep going
Maybe you skipped them?
Richard
Well I would post, but my last posts like this one will be CENSORED….the actions of the scared.
Sean
Not if you contribute to debate they’re not
It’s entirely up to you….
But as editor I reserve the right to decide if you have, of course
Richard
Richard,
Keyens and Galbraith wrote a lot on money and monetary matters, this is true. It’s also true that I haven’t read their entire output. But I’m pretty certain (although it is always open to you to enlighten me) that neither of them ever said that banks earn seigniorage from the creation of credit.
I went looking for where you might have got this idea from and found this paper, from some of the people who founded the new economics foundation, a group I know that you are now associated with.
http://www.neweconomics.org/gen/uploads/CreatingNewMoney.pdf
If you look at note 3 to table 4 you will see that they’ve got terribly confused about what seigniorage is. Their calculation is that many bank accounts are non interest bearing (less true now than it was when they wrote but still) and yet banks are able to charge interest when lending that money out.
That’s what they are calling seigniorage. But that isn’t seigniorage. I would call that the profit from the float (although that’s not quite the right phrase either). It’s well known that this amount exists, that it is indeed profitable for banks to lend out at interest money that they do not pay interest upon. But it simply isn’t seigniorage.
[…] was getting his information on the way that the banks make billions out of seigniorage from. So I asked, and was told to go and read Galbraith and […]
If private banks could only create credit by borrowing from the central bank, then the state would benefit, as it should. A rose by any other name…. Once again Tim tries to introduce an argument on semantics to obscure the real issue.
The present system has created an oligopoly which has led to market failure, just like with the land monopoly. The two market failures together have created the current disaster.
I used to be, as I said yesterday, a great fan of the Robertson/Huber stuff about creating new money, but the current crisis has shown up its fatal flaw – that the “97%” is not actually money, but pseudo money, purchasing power, credit. This can be shown by the fact that now that it has gone bad, the creators of that type of purchasing power have had to go scrambling around for some real high powered money to meet their liabilities.
The biggest benefit of Robertson/Huber’s theory to my mind is that what it would give is a source of money that could be issued free to the government to spend into circulation. But, in contrast to your suggested “solution” in a previous post would have to be created by some body – somewhat akin to the Social Creditors’ National Credit Authority – utterly divorced from the government with their demand for money else their lack of independence would mean the state would eventually just tell it to issue money to fulfil their spending needs and be inflationary.
I just do not believe that such a body is viable – if it is given a monopoly of money creation by the state it is dependent on the state however many times the Chancellor of the Exchequer may claim it to be “independent” of government.
The real problem to my mind is not that this electronic pseudo-money has been created or by whom, but the fact that it is created as debt and that throughout the system users of nearly all the purchasing power in existence are continually paying for its mere existence.
Furthermore, I don’t believe you can prevent the creation of electronic “currency” without taking to oneself draconian powers. And nor would that be desirable. Money is merely a medium of exchange – to single out an electronic variety because it happens to be denominated in something we have some emotional attachment to as “our currency” would be difficult. I can trade in Linden dollars if I wish, or in Totnes pounds, or in any number of other mediums/media of exchange – or in none at all – we can store our creditworthiness in mutually trusted barter systems.
I suggest your solution is one for a bygone age – not long gone, it has to be said; such is the pace of change in the communication technologies that have made mutual exchange/sophisticated barter more feasible.
But finally, states have always had it in their power to stop or moderate the debt-money cycle by varying capital requirements and fractional reserve ratios and so on and yet we are still in the position we are in. Since the central bank system started our money has been devalued 98%. Why? Because it has suited governments to do so. Eddie George made clear that the start of this bubble at least in the UK was public policy – to allow more debt money to be created against land values (the house price bubble) so as to maintain consumer spending to spend our way to avoiding the early 2000’s min-recession. Why do you believe they would now be any more prudent, or that if they were, it would last beyond the next downturn?
Encyclopaedia Britannica vol12 p357 ed 1981
” In the course of issuing money the commercial banks actually create it by expanding their deposits,but they are not at liberty to create all they may wish ,whenever they wish,for the total is limited by the volume of bank reserves and by the prevailing ratio between these reserves and bank deposits-a ratio that is set by law,regulation or custom.”
Letter,5.viii .08:Kitty Ussher (Economic Sec to the Treasury) to Greg Clark Con MP for Tunbridge Wells, in reponse to an inquiry by a constituent Brian Leslie,”Your constituent asked some questions about the way credit is created.. When banks make loans they at the same time create a new deposit for those that have borrowed the money.As borrowers spend their new deposits,for example to pay a retailer for goods,this same money is returned back to the banking system as a new deposit in the bank account of the retailer.The bank is then able to to lend this new deposit to create further credit…..the banks’ ability to accept new deposits and to lend them again when they are returned to the banking system, leads to an ongoing process of credit creation..nothing new..goes back centuries”.
A lot of people seem to be in denial about this,almost in the way Victorian maidens refused to believe where babies come from. Both Worstall and Mark Wadsworth are very sound on Land Value Tax,especially the latter,but neither is prepared to see the similarity of land and money as Commons.Just as you could nationalise all land and the use rents for its occupation as sources of public revenue,so you could nationalise the banks and make people pay rent for the use of money via interest rates.( Of course LVT obviates the need to nationalise land, but we are already on track to nationalise the banks).
I would rather see Worstall address these quotes than go in for another homemade explanation of the way he thinks the banks work.
As you know Dave I have studied this area long and hard – and I have come to agree with Dan Sullivan and Mark Wadsworth that “credit” is not the same thing as “money”. The banks still need to get their hands on high powered money when their credit money goes bad. If what they had created were real money, why don’t they just create some more.
And I think the more important point is that the “state” through the central bank system that has been ngoing for 95 years now, has always had teh power to limit or even stop the creation of credit and has never done so – inflating the money supply, even if it is done by someone else, suits governments down to the ground because it devalues their own debts. But the 98% devaluation in money since the system got started in 1913 has impoverished billions at the same time by eroding their worth.
Does anyone seriously imagine that the “state” can be trusted with this function either? The problem with the commercial banks at present is that they are playingg with money denominated in someone else’s system – sterling or dollars and so on. They therefore know that when the crunch comes teh states responsible for those currencies will have to baile them out – that would not be the case if they were each responsible for their own currencies on the stability of which which their entire business rested.
Instead it is teh taxpayer who will pay, as always, when the state is involved.
Richard, how on earth do you expect anyone to have a reasoned debate with you about this nonsense? As a political end, a nationalising the banks policy might make sense to some, but the arguments you advance here are simply absurd. You have it wrong, and sniping at the messenger does not alter that.
Jock
Yes – I do imagine the state can be entrusted with this function
The evidence is it is quite capable of the task
The evidence is that the market is not up to the job
There really is no debate to be had on this point
Have you looked around you of late?
Richard
Alastair
I have never assume I will have a reasoned debate with you
A lot of people do not think I’m wrong
So why are you shooting the messenger?
Richard
I’m sorry Richard, you must be looking at a different world to me. The “evidence” as you put it is that over 95 years of central banking and fiat money the value of that money has been eroded by 98%.
There is no point at which the state was not within its power to stop or rein in excessing debt-money creation and yet it didn’t, wasn’t able to, even in the era of the so called monetarist Thatcher years they simply kept rejigging which money supply aggregate thay wanted to track to cover their inability to actually influence any of them.
So much for the Tory monetarists, preceded of course by the profligate inflationary Labour government who turned the presses on to meet political needs.
The asset price bubble off the past decade, was, as Eddie George said a year before the meltdown was on most people’s radar, a matter of public policy (albeit delivered through the “independent” Bank of England) to loosen credit to make people feel good about rising house prices and keep them borrowing consumer debt to spend our way out of a previous recession threat.
The creation of good money imposes a discipline that government are enither familiar with nor capable of as Hayek said.
I notice you make no comment on the ability of a state, without taking ever more draconian and authoritarian powers to itself, to prevent the creation of complementary currencies or the ability of people to trade one to one in modern siphisticated barter accounting systems.
We are on the cusp of an era, with or without the credit crunch in which the nature and p[urpose of money itself is changing beyond all recognition and may even be unnecessary. Your proposal, and the draconian measures the state would need to go to in order to ensure it had a monopoly it could defend would set that progress back a long way.
We need something way more imaginative and future proof than your suggestions, and now would be the best time to do it when so few trust the current system.
Jock
Now remind me – what is the issue with the fall in value of money?
Has it caused the current problems?
No, not at all
You’re barking up the wrong tree I think
Richard
Richard,
Now remind me – what is the issue with the fall in value of money?
That it is theft of the value of my labour. That it rewards profligacy and penalizes prudence. That it makes investment decisions more difficult. Need I go on. You’re an accountant – can’t you see the problem of inflation? Ultimately of course it results in war, death and famine. We’re talking about a system that has systematically devalued the money by 98% over its lifetime. And you still think the state, who has been in charge all along (and particularly responsible for the most inflationary periods), is capable of giving us stable money? You even believe there is evidence that they could? Where for God’s sake, man?
Has it caused the current problems?
Yet it is you who started this conversation wanting to stop the creation of near-money by the banks. Why? Unless it is to control the inflation of the money supply? Of course inflation caused this. But it was somehow restricted primarily to the land market for most of the period and showed through much less in day to day inflation on general goods and services. So yes, inflation, deliberate inflation as per Eddie George, of the money supply, the debt money supply, caused much of this crisis.
The other major factor is, yes, that the “masters of the universe” were playing their games with stuff created in our name and on our credit not on theirs and so had no real responsibility should it all go wrong. Yet we are now rewarding them for those games by fixing the problem they created at our cost.
You’re barking up the wrong tree I think
Still no comment though on how your solution is of a previous era, that the state cannot control money supply, because if there were a shortage we could just as easily create our own, call it something different and trade in our personal networks with it. Or maybe, like the Danish government in the thirties you would make such alternative currencies illegal? If so, how would you enforce it?
Jock
I have choices in life
One of them is not to bother to engage when I think it a waste of time
I think you’re wrong.
You’re sure you’re right
I respect your right to think that – even though I think anyone who calls inflation at the rates we’ve seen in the UK the theft of their labour is positively seeking to miss the point
I’d go further: some inflation has proved persistently beneficial for the economy
Rampant inflation is not
But then those in the middle ground know the meaning of the golden mean
On inflation it hangs on the side of a few per cent a year
Richard
You started this with a call for the government to control debt-money – the 97% of the system you and others say is created by the private banks (I used to agree, now I don’t, thanks to their obvious behaviour in this credit crunch).
Just have a look at M4 Lending over the past decade and tell me it’s been “a few per cent a year”. It’s been in double figures nearly all that time. If you believe that M4, the debt money, is real money, then it’s been inflated by a huge amount – as a matter of public policy as I keep saying (and you want to trust them again?)
We’ve been saved from rampant inflation in much of the market by the flood of cheap overseas goods – so there have been places for people to put their debt-money secured against our land values which have absorbed the inflation.
There is a whole generation of folk who have practically speaking missed the boat on home ownership because of this inflation – their labour is going to robbed from them for ever more by landlords if they cannot find a way onto the ownership ladder. For large chunks of the past decade house prices have on average risen faster than an entire annual salary.
If I recall correctly you are not a land taxer are you? So you don’t approve of that way of preventing this happening again. If you had land tax I would possibly agree that the state may be able to control the money supply, because the biggest inflatonary pressure on it would be removed in any case – indeed the propensity of people to have to borrow would be much reduced and the call for debt money likewise.
Jock
M4 growth was the banks creating money – as I said
The policy error was to let them do it
The public error was to not claim the benefit of it – which we could have done
But we didn’t have significant inflation per se – bar land
And I’m not opposed to land tax at all – I just don’t see it as a one club answer to the game of golf that tax is
It’s that middle ground again
As ever I seem to be in it. Now what’s your problem?
Richard
if I may use an analogy with physics (which I assume you would accept is a science?) the views you are propounding in this item equate to a belief in a flat earth. I’m not shooting at a messenger, but rather at a nonsense message. the only message of support you have here is from Carol, who states “I was sure that Tim was wrong but didn’t know how”. Not exactly a ringing endorsement!
Alastair
If world issues were resolved by the weight of comments on blogs it would indeed be a very strange place
Do you want me to call in those who agree? I’m sure they’d happily respond forever
But it won’t convince you, so why waste their time?
Richard
Richard, you say that you do not oppose land value tax, yet you choose to totally ignore it in your prescription for a good tax system. Why is that?
Carol
Because it’s regressive
And the system is already bad enough in that respect
Richard
Richard
Although I am 100% for nationalisation of banks and collecting all the interest rate income in order to replace other taxes, I do agree with Jock that it is dangerous in the present instance in the absence of LVT.The Gov is desperate to get mortgage lending going again , if possible to show the beginnings of a new house-price bubble aka “green shoots”by the time of the next election.Since the Tories got rid of Schedule A in 1963 and finished a decade long period of level house prices, it has not really been possible for anyone to get elected who does not deliver the inflationary goods with steadily rising house prices.
At the moment,the banks who had their fingers well and truly burnt with the last (collapsed) housing bubble are maybe,with their new found caution over housing lending,all that stands in the way of a resurgence of house price inflation .
Stick in a LVT and the whole thing gets simpler and State ownership of banks becomes more viable.
Richard,
The problem I have is that your solution is wrong.
The great benefit of the “state” – I don’t want to call it “government” because I am sure you would agree, as with Keynes and his Bancor idea, that the issuance must be kept at arm’s length from the spending requirements of “government” – controlling the issuance of the “97%” that is currently only near-money – debt money – would be not the profit from creating it, which would be relatively small – but if it was given to government at cost as a sort of a “dividend” which it could spend instead of issuing government debt. But it would never be something you could rely on – it would be a windfall. And no doubt spent on rent-(and vote-)seeking projects too.
The great problem with the debt-based near-money system is that we are continually paying for it throughout its existence in the form of interest – that doesn’t apply to high powered money issued at cost plus a small profit because you only get that seignorage once.
Your point about policy is evidence that the government cannot be trusted with the creation of stable money – it was a political aim artificially to insulate us from the early naughties recession through the feel good factor of having an asset bubble in something whose costs were conveniently not included in the inflation calculation. Likewise it has been governments that have reduced capital requirements and agreed to Basel accords and so on. And governments who have chosen to turn on the printing presses, even perhaps electronic ones.
Land tax, regressive? Not half as regressive as the Ricardian rent it would remove.
As regards LVT: only a few libertarians believe that LVT should be a single
tax(Those few libertarians ,that is,who believe in paying any tax at all).
Rather than providing one club to get round the course, LVT provides
a useful additional tool to interest rates in the management of the economy.Rather than try to make interest rate policy deal both with house
price inflation (rack them up) or unemployment ( lower them) often at the same time,LVT could deal with the credit spilling into land and property(house price inflation),leaving interest rates to find their own level consistent with full employment and settled exchange rates.People were pointing out in 1936( when Keynes Magnum Opus was published) that you could n’t increase the money supply to stimulate the economy without the new credit
disappearing into land,to stop which some kind of Henry George-ite
mechanism would have to be put in place.
But what are they agreeing with? That the government should nationalise the banks, or your erroneous understanding of seigniorage? The latter is demonstrable nonsense, and I think we probably agree that the former is a political argument.
David:
“As regards LVT: only a few libertarians believe that LVT should be a single
tax(Those few libertarians ,that is,who believe in paying any tax at all).”
A-ha! That’s because we don’t think of it as a tax. It is rent – a user fee for the privilege of occupying something we all have a common right to…:)
@ Jock Coats/ And A-ha to you. (Very Alan Partridge)
rent= “a user fee for the privilege of occupying something we all have a common right to”
So you agree that we should all pay user fees( interest rates) for the money
we also have given value by common effort.
If you say the commercial banks should be paid the user fees(interest) in full for creating credit,then you presumably feel that rents should go to the monopolists who have appropriated all the land.Land/Money.Both Commons
As you may be aware I have waged a totally unsuccessful campaign over many years to get” land value tax” re-branded as “land value repayment” so I don’t see it as a tax either.I see it as a repayment of land values that have come landowners’ way through no effort on their part and should be repaid in place of other taxes before they disrupt the economic system.
David:
rent= “a user fee for the privilege of occupying something we all have a common right to”
So you agree that we should all pay user fees( interest rates) for the money
we also have given value by common effort.
An interesting analogy, but I’m not sure I agree that it works. I can see what you are getting at regarding the “common effort” in money and if that were the case then perhaps, if there was an economic rent accruing to it (I’m not sure there is in reality – at least not in the same way as with land).
Even with a gold standard it is not a given that money is fixed in extent. It rightly expands to reflect higher levels of economic activity (or conversely prices fall to accommodate the new production in the system).
Money is “my” credit, and “your” credit (ie at the point of a transaction), not “our” credit as such I reckon. One may have a point that one should pay something to purchase some of it – in the same way that you might expect to pay for foreign currency upon transfer, but that would imply a transaction cost and not a holding cost or rent I would have thought.
I am currently doing some work studying the JAK system in Sweden and the WIR system in Switzerland and I think I am agreeing with the former that interest, that’s any interest, is immoral. If it is true, what they suggest that not only does the government take 40% or everything we earn but that compounded interest embedded in the goods and services we buy amounts to another 30% then we are truly impoverished by both public shafting and private shafting!
Currency is also much more flexible than land. It is only because government deems it so that we have to use their monopoly currency – a monopoly I maintain will be increasingly more difficult to defend (interestingly when JAK started life in Denmark in the depression they went for an alternative currency and the government made it illegal soon after) in this age of communications technology.
(I don’t know why we don’t just call LVT “rent” – perhaps “ground rent” – and be done with it as that’s what it is! – we can then start explaining why we think the common wealth is entitled to a part of your rent).
Jock. Interest? Immoral?
Are you really trying to say that there’s no time value to money?
“Ground rent” is not a bad suggestion,which has been mooted before ,notably by Jerry Jones of Labour Land Campaign and the Morning Star,but I still insist that “land value repayment” is a useful sleight of hand phrase which advances our argument a few steps by assuming there is some value created by the community that the landowner is obliged to pay back.If you start from this position , you are farther down the line than the alternative( ground rent) where you would start be asking the landowner to pay rent for his own land!
I have never heard of JAK or WIR which I will look up. I have heard of WARA and Stamp scrip and the analogy beween money and land is drawn from Silvio Gesell, in a roundabout way.He thought (and I paraphrase wildly)that labour, land and money could not take part in the merry dance of capitalism,because land and money could sit it out.Labour would depreciate in value because the workers would waste away.So he thought (i) land should depreciate in value also ( Keynes thought his ideas on this were Henry George-ite and “of secondary interest” to)(ii) his plans to make money run out of value ( with the stamped notes).
In the US stamp scrip was issued at the instigation of Irving Fisher by all kinds of local business organisations.
For the life of me I cannot see the difference beween the nationalisation of
land and the nationalisation of banks.Credit is not a personal matter; otherwise you would be given loans at different rates per person; the rich would get a much reduced savings rate. It is the national credit and the health of the currency depends on the prudent business habits of the entire
populus repaying loans,honouringagreements and not debauching the currency with inflation.
The populus has a right to the seigniorage which crops up not once but at every stage of the pyramid of loans: every time the bank creates a new sum of money to loan to Mr B while allowing Mr A still to draw on the full extent of his account (which “has been loaned out”: not).
As so little of our economy is concerned with manufacture (13%?), I wonder we never here much of Social Credit, which of course,fully develops the idea of credit as a common asset.Mark Wadsworth is a whizz with Social Dividend figures but he never includes an allowance to bring productivity up to full capacity in the Douglasite way.
Tim – I said I think I’m agreeing with the JAK position on interest, reading up on JAK has helped me understand, I think, the honourable and ancient condemnation of usury. It seems to me that a problem with interest on money is that it disconnects the investor from the thing invested in and the return on money is unrelated to the return on the wealth created by the loan. I’ve been working quite a lot recently on the idea of Open Capital as a better way of financing enterprise and of putting your spare money to a less potentially toxic use, with the possibility of better returns by sharing directly in the added value the investment creates. If that makes sense.
Dave, the WIR Economic Co-operative Circle was based very largely on Gesell’s ideas, and indeed in the early days did have a stamp requirement for holding the money. I think they found they didn’t actually need it as the trading system went so well the scrip barely stood still for long enough. JAK was a Danish foundation, later and still now moved to Sweden primarily – the do interest free savings and loans, based on a points system where you accumulate points for saving and are charged points for borrowing which you then make up with later saving. There’s quite a comprehensive Canadian study (PDF) that goes into more detail than the organization itself. WIR is much bigger but there is limited information out there – at least in English. Both were Depression era foundations to get round credit tightening, and contemporaneous also with the Worgl experiment.