The FT has reported that:
Brussels is considering a €56bn raid on European Central Bank profits to plug a hole in the EU's long-term budget after Brexit. The European Commission will discuss the plan at its weekly meeting on Wednesday, where it is due to consider a range of new revenue sources as it tries to maintain its financial firepower once the EU's second-biggest net budget contributor leaves the bloc in 2019.
The ECB proposal would divert profits made by the eurozone's 19 national central banks from printing banknotes straight into EU coffers. The commission estimates the revenue stream could generate €56bn during the seven-year span of the next EU budget.
More than 90 per cent of the so-called seigniorage profits are distributed by the ECB to the eurozone's 19 central banks that often pass a portion on to their national treasuries.
First, it's smart thinking: this is EU generated money, after all.
Second, this shows just how much creating money out of nothing is worth to banks.
Third, now recall that private banks also create money out of nothing. Admittedly they don't do it very well as they then seem to lend it to people who do not want to pay it back. But in essence, their core product costs nothing to make precisely because it comes free as a result of a government licence and that fact should be differentiated from the fact that they are as a result rather reckless in the way that they manage it.
Fourth, shouldn't banks be paying rather more in the way of additional taxes as a result, simply to reflect this fact?
And fifth, shouldn't this charge most especially apply since the state even underpins the supply of depositors funds that mean their promise to pay is acceptable as a result of depositor guarantee schemes that, in effect, supply most of bank capital?
I do of course know that banks do have additional tax regimes now. But my question is, has anyone really worked out if they are enough to reflect the benefit provided? I would be curious to see the figures.
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Maybe it is my economic ignorance speaking, but I notice the most obvious question is not being asked. It is true that seigniorage arising from governments’ monopoly on money is a source of large profits. It is also true that money creation by private banks is entirely underpinned by government guarantees, being in essence a result of sharing the aforementioned monopoly and rent associated with it; or to put it differently, a massive state subsidy to financial sector (hard to justify that with an appeal to economic freedom). I think many could also agree that banks do not use this privilege in socially beneficial way: if the system is ‘working’, it produces asset price inflation (such as in housing markets) and massive consumer debt, if it doesn’t it causes financial crises. Shouldn’t taking away this exorbitant privilege, by which I mean limiting money creation to the state, be at least considered as a policy option?
I am not asking it be taken away
I am suggesting it be paid for
I am asking, however, why is it better to tax it than to have it managed and utilized directly by the State.
If the state does manage it then it is a tax
Compulsory levies paid to the state are taxes
Ted Kotov says:
“I am asking, however, why is it better to tax it than to have it managed and utilized directly by the State.”
Ted, Are you asking ‘why not simply nationalise the entire banking system ?’
There would be a logic to that if you consider that money issuance is a natural monopoly. I think, however it would be a step towards total state socialism beyond where most British people would want to go.
Perhaps more people would be supportive of such a move if they realised how abusive the current system is. The risk is already nationalised and we’re still carrying the carcass of RBS, I believe, along with the toxic assets of the GFC.
It isn’t a proposition that would get a hearing however and would bury a political party that suggested it even as a discussion topic.
Andy,
I don’t know that much about British politics, however I believe it could be advanced in many countries, certainly in mine. Speaking from observation, I think most people have a very vague idea of how banks actually operate and turn a profit, merely spreading the actual information while offering an alternative could be enough. In fact that’s what libertarians do, only their proposed solution (usually gold standard) and their general public image makes the message utterly ineffective. But if you got a charismatic populist who would dress it up as national interest and cleaning up the financial system (instead of some scary spectre of socialism) to do it…
Richard,
but if I’m correct profit earned by state-owned enterprise isn’t a tax. That is what I think should be done: nationalizing money creation instead of levying taxes on it.
Ted Kotov says:
“…but if I’m correct profit earned by state-owned enterprise isn’t a tax. That is what I think should be done: nationalising money creation instead of levying taxes on it. ”
I’m not sure what Richard’s answer to that is, but I’m thinking that profit earned by state-owned enterprise is exactly that – a tax.
Now that sounds like a criticism – something we would regard as a bad thing because we have such a negative attitude to taxes. but it actually makes a lot of sense. The profit taken by a state-run enterprise is tax and as such disappears out of circulation. Currently we still pay the ‘tax’ in the form of the profit made by private enterprise, but it piles up in somebody’s personal or corporate account.
When both Gas and Electricity were nationalised industries in Britain the government was able to (and did) manipulate the relative prices to favour one or other energy preference according to available (or estimated future) supply. Effectively taxing one to subsidise the other.
We pay tax. Either to the state for collective benefit or in the form of profit to individuals and corporations and banks.
Profit is a form of privatised tax collection. ? I think it is.
I think I follow your logic
You are right – the profit of a nationalised industry is in eff3ct all tax
“You are right — the profit of a nationalised industry is in effect all tax”
You’re not sure about the profit of the private sector being a form of tax aswell though are you? There are some uncanny parallels.
Banks as private currency issuers demand their return in the same currency and when they get ‘their’ money back it effectively disappears. When they don’t spend/lend into the economy the economy shrinks. Irresponsible bank lending is just as much an inflationary risk as state spending – they are both money printing exercises.
But the difference lies in where the money ends up. State taxes wipe out the money, leaving a legacy of infrastructure and services whereas whereas private tax collects in huge heaps and allows individuals and corporations to usurp and control democratic government.
Am I arguing myself into becoming a communist ?
Ted,
The state could create all money itself directly but would such a system be any good?
I think the underlying idea behind our existing system is probably workable: the state creates money centrally and distributes it nationally to pay for projects that further the public good.
The state delegates local private money creation to private/public partnership banks where thousands of individuals can get to know private citizens and assess the creditworthiness of their ideas. These commercial banks are (or should be) incentivised to create money in a sensible fashion via a profit motive set up by the mechanisms of the central banking system and banking regulations.
The idea is the state can leave the people and the commercial banks to get on with looking after the supply of private money creation for private endeavours and instead focus on the public good as specified by their democratic mandate.
Just because the system is obviously not currently functioning optimally doesn’t mean the whole system needs to be abandoned. Having the state step in and try to manage all money creation centrally would be hugely unwieldy and likely leave many citizens waiting a long time to have their ideas considered or have lots of poor credit decisions taken by hard pressed and out of touch central bankers.
If alternatively the state attempts to run all the local banks directly then it simply replaces the profit motive as a means of incentivising good money creation decisions with a bureaucratic management hierarchy. Who’s to say this will be better than just re-regulating private banks and breaking the bigger ones up sufficiently to achieve competitive but sensible local lending?
Whichever route you choose you’re just left with people making decisions within some form of legal framework. There is no magic answer to the question: “what are we all going to do with our time and resources over the next week/month/year/decade?”
A lot to agree with there
Thanks
I believe I didn’t explain the meaning I wished to convey. I didn’t wish to imply that replacing the entire financial sector with a ‘People’s Democratic Bank’ would be a good or even workable solution. Private enterprise motivated by profit certainly has an important role to play in productive allocation of credit, I merely object to the way in which contemporary commercial banks do it.
Perhaps I could illustrate my issue with it on an example: consider the difference between a savings account and a corporate bond. Both are debt instruments that allow investors to earn interest while their funds are put to (at least in theory) a productive use. However, corporate bonds cannot be used to pay tax (disqualifying them as money), they aren’t commonly utilized as means of private transactions (bearer ones perhaps could, but that’s rather uncommon) and for that reason they aren’t guaranteed by the State, thus fostering actual market activity instead of rent-seeking. My ideal system would be one in which money (as medium of exchange and store of value) is directly managed by the State (as it already is, just in an indirect way that happens to privatize risk while socializing inherent risks) while private financial institutions compete for investable funds by offering an optimal balance of risk and yield, as the private sector already does today when it offers instruments such as corporate bonds.
For reference, I believe civil society organizations associated with Positive Money idea advance reform proposals quite similar to what I suggested, although I haven’t researched them in enough depth to state my agreement with them.
PM do propose ideas similar to that you suggest
The trouble is that they don’t understand what money is. They believe it a tangible, and scarce, asset rather than debt. It’s a pretty fundamental mistake
Adam Sawyer says:
“If alternatively the state attempts to run all the local banks directly then it simply replaces the profit motive as a means of incentivising good money creation decisions …..”
Interesting….
You’ve got me wondering here. At a very basic level is that what we think we’re doing ? Money creation?
If we accept that money is created by the government spending (the central tenet of the fiat currency system as explained by MMT) then we don’t have to concern ourselves with ‘incentivising good money creation decisions’.
We need instead to concern ourselves with good solutions to the problems which life throws at us – like what we’re going to eat and where we are going to live and what we are going to do with ourselves that might be more constructive than watching other people pretending to have a life on television.
Take for example electricity generation and distribution. A good example because without electricity the world as we know it would grind to halt almost instantly. The object of the exercise is to supply electricity to everybody who can use it in as efficient as a way as possible (efficiently because we don’t want to waste our time, that’s one thing money can’t buy).
There is absolutely no benefit in doing this profitably except as a measure of the efficiency of the process.
Well that’s one way of looking at it. I’m not sure how far it takes us.
Andy Crow,
“You’ve got me wondering here. At a very basic level is that what we think we’re doing ? Money creation?”
You then suggested, correctly, that we ought to actually be focussed on how we achieve real world outcomes like food to eat and electricity to do work for us and question the profit motive.
I agree that where natural monopolies are concerned democratic control us preferable to the profit motive.
Howevrr, my point was not that ALL of us should constantly be concerned with money creation but that some of us HAVE to be and we must select the most effective method of money creation to meet real world challenges.
Money is an IOU, nothing more nothing less. Effectively any of us can create it. We do so by saying “I have a cunning plan; if I do activity-X then I’ll create value-Y and that’ll be sufficient to pay you back for my use of resource-Z”.
If we know the people we’re trying to persuade of the worthwhile nature of our plan then there’s a good chance they’ll accept it and help us execute it. If it’s logical and we’re trustworthy, why wouldn’t they accept it? Everyone wins so it’s a good idea to follow through on good ideas.
That works great in small communities where everyone knows everyone and have done their entire lives. Trust is total and no banks are required to get things done – the community itself can manage all credit relations by itself.
Probably a community of up to 150 people can operate this way. 150 is the Dunbar number – the maximum number of meaningful relationships the average human can maintain at any one time.
The UK in 2018 comprises 65+ million strangers spread over nearly 94,000 square miles. There is zero possibility of organising ourselves in the same way as a group of 150 individuals living in a close-knit community over an area a few square miles.
This is why humans didn’t immediately set up the societies we have now the moment our species evolved. It took hundreds of thousands of years to evolve the ideas, technology and social structures to allow the mind boggling levels of coordination we take for granted today.
The state and the public/private commercial banks HAVE to be aware that they are creating money and HAVE to be aware of what that means. They are literally creating the means by which 65 million of us agree what we’re going to do with our real resources. If they create money suboptimally then someone somewhere will have a good idea that they’ll be unable to persuade others to help them achieve and we’ll all miss out on the potential benefits.
Such an idea could be as fundamentally important as: “I’ve noticed we’re killing the ecosystem we need for our own survival and I believe we must seek an alternative mode of production and style of living that we can achieve with the resources we have left within the ever narrowing window of opportunity allowed to us by said ongoing ecological degradation.”
Get money creation wrong and we quite literally sign our own species’ death warrant. Get it right and we can reach for the stars.
Whatever organisational set up and social/legal constructs allow for the greatest level and flexibility of real world activity within environmentally and socially imposed hard limits is the system we should adopt. Personally I believe the system we have has a lot going for it but has been twisted out of shape by selfish and shortsighted cliques within the financial and political system.
Maybe even if we were able to make our existing system work optimally there would still be an even better system waiting to be evolved/invented. Certainly technology and ideas are always evolving and history shows it’s unwise to say “this right here right now is as good as it ever gets”. But let’s all get up to speed with the current system and make it work optimally within its own paradigm before leaping to try something totally different.
If nothing else fully understanding the best version of the current system will inform us as to the most likely possibilities for future improvements or even the possibility of instituting a wholly new paradigm.
Thanks for taking the time to write at such length, Adam.
Your parting thought makes a lot of sense:
“….If nothing else fully understanding the best version of the current system will inform us as to the most likely possibilities for future improvements….”
Way to go….. especially since the current top dogs rather like things as they are and would prefer as few people as possible to understand….anything.
I think I recall Hutton of the New Economics foundation writing about this back in the days before I read your blog.
Unrelated, but this just popped up and I was wondering if it changes your view on many of these new powers being ones that the government doesn’t intend to use?
https://www.telegraph.co.uk/politics/2018/03/28/oligarchs-22m-property-frozen-crackdown-unexplained-wealth-security/?utm_campaign=Echobox&utm_medium=Social&utm_source=Facebook
You think freezing £22m indicates action?
I don’t, but I would assume they are doing more unless you have reason to believe that is all that is being done?
The evidence remains scant
Angus Groom says:
“Unrelated, but this just popped up and I was wondering if it changes your view on many of these new powers being ones that the government doesn’t intend to use?”
I’d be inclined to say one swallow does not make a summer.
I find it little short of amusing that the nationality of this particular ‘oligarch’ has not been disclosed. In common parlance all ‘oligarchs’ are Russian.
I’d be surprised if this isn’t just another bit of ‘Russiagate’ business. Maybe Salisbury gate’s underlying motive was to make just such action against Russians palatable without frightening Conservative Party billionaire donors of favoured nations. (Too cynical ? Maybe?)
I´m not sure what to think about it.
As the FT quote also mentions most of the profits are passed on to the Eurozone´s central banks which often pass on a portion of that to the national treasury. So it is money from the national budgets too, just less visible because the actual sums aren´t known and budgeted before.
I don´t know but it really plays into the secrecy complaints about the EU.
Don´t ask openly for the money because citizens might complain, just find a somewhat hidden way to get it. At least that´s how the proposal reads.
Then there is the fact that not all EU member states are members of the Eurozone.
That´s unequal treatment of member states. States like Portugal, Greece or the Baltic states should renounce Eurozone profits while countries like Denmark, Sweden or Poland (not Eurozone member) are spared?
And if more than € 56 billion is needed the rest is then calculated using the “normal” EU formula? Which would mean that non-Eurozone members in total would pay less than Eurozone members? As I said, unequal treatment.
Besides there is that talk about a new Eurozone “crisis” / “bad weather” fund”. Shouldn´t the profits from the Eurozone ECB first go there? Instead of immediately asking for additional direct funding from the Eurozone member states?
I´m not against “plugging the hole”. That should be doable.
But I want it done openly. Which amount of money is needed? For what? Can we save money anywhere?
EU parliament travel Brussels – Strassbourg comes to mind as an example. Probably not much money saved but it´s a symbol (of waste)…
I don´t want it done using hidden or obscure ways. Especially if it comes down to unequal treatment of member states. That would only help eurosceptic parties.
“Then there is the fact that not all EU member states are members of the Eurozone.
That´s unequal treatment of member states.”
No, because the states that aren’t EZ members (like Britain) have their own independent central banks (like the BoE) creating their own separate seigniorage profits. In which case yours is a moot point.
I should have also noted that for all we know Brussels proposal may only relate to EU spending in EZ countries. Lord knows how that would work.
The more interesting point that you have raised is that over 90% of these seigniorage profits are currently being “distributed by the ECB to the eurozone’s 19 central banks that often pass a portion on to their national treasuries”.
Given that is so this proposal simply diverts money from the national treasuries to the EU. In which case non EZ countries would probably be expected to match that contribution.
So, hijacking the ECB profit gives the EU a first-mover level of control over the issue. That way compliance is less voluntary and consensual than it would have been otherwise. I think that’s the idea behind it,
Money creation by the state and private commercial banks is an historic compromise designed to avoid nepotism or cronyism. Just as there is an agency problem of corrupt politicians denying the supply of state loans to those who oppose them so is there an agency problem of the very rich forming cartels to keep loan interest rates high. Clearly which agency state or private sector should be involved in loan creation must depend upon the situation. After hyper-inflation of house prices off and on for nearly five decades in the UK there is a strong argument for the central state and/or local state to take over the issue of mortgages to provide for the basic need of roofs over citizens heads. But wait was it not Blue and Red Tory governments that slashed the budgets for social housing construction supported by a significant number of Buy-To-Let MP landlords? The chains we bind ourselves with seem to depend upon our ignorance which facilitates the treachery of our leaders!
https://www.theguardian.com/money/2016/mar/14/tony-cherie-blair-property-empire-worth-estimated-27m-pounds
To be honest I have always found it hard to get my head around the way that seigniorage works. Not the concept of it but the the nitty gritty of how it is actually realised. For central banks it ultimately appears to be an accounting (balance sheet) exercise.
Reading BIS articles on the subject (not fun) one comes to realise that some of that which is referred to as seigniorage in central bank parlance is not related to notes and coin but to cashless money creation
https://www.bis.org/publ/bppdf/bispap20d.pdf
I don’t quite see how private banks’ credit money creation involves seigniorage. For one thing they don’t actually create notes and coin. I’m not saying that private banking doesn’t involve seigniorage per se but that, strictly, definitively speaking, I can’t entirely see how. The argument to suggest that it does so relates to the interest component on loans.
For my own benefit I will look into it later as I have questions (doubts) and answering them is not going to be quick or easy. Overall the detail on this can be vexed and if we here, in forums such is this want to pontificate on such things it may be better if we had some idea of what the hell it is that we are talking about (good luck). Here are some mixed views on the question:
“Private seigniorage, defined and estimated (includes a free Eurozone example!)”
https://www.worldeconomicsassociation.org/newsletterarticles/private-seigniorage/
“Seigniorage profits made by private banks.”
http://ralphanomics.blogspot.com.au/2016/07/seigniorage-profits-made-by-private.html
“How much seigniorage do private banks steal from central banks?”
http://ralphanomics.blogspot.com.au/2013/11/how-much-seigniorage-do-private-banks.html
“Memo To George Mombiot; There Is No Seigniorage In Credit Creation – Tim Worstall (every village has its idiot)
https://www.forbes.com/sites/timworstall/2015/02/18/memo-to-george-mombiot-there-is-no-seigniorage-in-credit-creation/#2bce6454773b
Now for something a little easier.
There is some argument in this forum about the virtues of nationalising banks given that the increasingly despised private banking sector has sunk most of its balance sheet business into the housing bubble.
Some are unrestrained in their calls for nationalising while others are wary and want to retain some role for private banks.
The answer I believe is simple. You can do both. All the government needs to do is establish its own commercial, retail bank ( at least 51% government owned by charter) which should be large and widespread. Given that retail banking has effectively become an oligopoly, the state’s bank can act as market leader and set the standards for banking practices. Private banks that fail to follow suit would lose business to the leader.
In the post-war era Australia’s Commonwealth Bank more or less performed this role, was well regulated, provided a decent service, profited and distributed revenue to ‘the Commonwealth’ (federal government) before it was ‘de-regulated’ and privatised by neo-libs in the 1980’s and 90’s. A good national bank would need a charter to ensure that is a good market leader.
Establishing such a bank should be quite easy given that at least one of the major retail banks will fail in the next crisis. With the “bail-out” comes the takeover.
Any issues that fall outside the scope of leadership can be left to “macroprudential” regulation as industry-wide banking regulation is now known.
Girebank
The old TSB
What RBS could have been….