There seems to be almost endless discussion on the nature of money - and how it is even created within modern monetary theory. And generally the way in which money is created - via lending - is very little understood. This video addresses the issue. And tomorrow I'll look at how only is destroyed.
And just a postscript: the video channel reached 1,000 subscribers yesterday: thank you.
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The word “Money” should be reserved for Gold.
The excellent explanation you have proferred is for “Fiat Currency” and as you have described is a system that can be used to create an unlimited quantity of Currency, a fraudulent Ponzi scheme.
https://m.youtube.com/watch?v=diEVmQZ1QfM
I think your time here is up
I think the James Bond movie told us if you body is entirely painted with gold it can’t “breathe” and you expire! Same with gold fetishists they’re slowly dying of economic theory irrelevance! Maybe in a few more centuries they might actually understand why Keynes said it was a “barbarous relic!”
🙂
Goldfinger’s asphyxiation contention was roundly rejected by Jacob Brunowski’s wife, the sculptor Rita Coblentz, who wore a thong and was painted gold all over for a Chelsea Arts Club Ball in the 1930s at the Albert Hall: “I was naked except for a g-string and painted from head to toe in gold paint, and did not suffer any adverse consequences at all.” https://www.bbc.co.uk/news/magazine-34665882
That was before the ball was banned from the venue in the 1950s, for, as Wikipedia puts it, “rowdiness, nudity and public homosexuality”. They must have been inspired by the Parisian “Bal des Quat’z’Arts”… all well before Philip Larkin’s Annus Mirabilis in 1963 “Between the end of the Chatterley ban, and the Beatles’ first LP”.
Many years ago now in the late 60s/early 70s, I helped to make money
I worked as a compositor in one of Edinburgh’s two printers who printed banknotes, George Waterston & Sons, who printed the Royal Bank of Scotland notes. Waddies printed for the Bank of Scotland. I remember setting up the array of numbering boxes that printed the numbered sequence on the notes.
Needless to say, security was ‘tight’ with the printing machines behind steel barred, double-locked doors with only designated machine operators allowed in and out. They had their own facilities in the department to minimise access. Each sheet of paper was counted both in and out and any wastage rigorously accounted for. The special paper was almost as valuable as the actual notes, at least, to a counterfeiter.
The only sight of the process was through a small barred window grill in the door and even that was considered suspicious.
Sadly, neither are still with us, Waterston’s going into receivership in October 2004.
With the growing possibility of an independent Scotland, with our own central bank and currency, poses the question who would be able to print our notes as there are few with the capability still around. It would be paradoxical, if on Independence Day, we had to rely on De La Rue in England to deliver our money!
The sad reality us that there are few currency printers now
But there’s also little physical money now – electronic money is what will really make the change
Out of interest, what is the percentage split between government created money through spending and private bank created money through loans?
I admit, on an evening off that’s not one I am tackling
According to Bank of England data, “total sterling notes and coin in circulation” (is this what used to be known as “M0”?) is about £86 billion, and M3 (“monetary financial institutions’ sterling and all foreign currency … liabilities to private and public sectors”) is about £3,200 billion.
Thanks Andrew.
I’m not sure of the terminology of M3. (“monetary financial institutions’ sterling and all foreign currency … liabilities to private and public sectors”)?
Is that just the broad money created by private banks, or does it include government created/spent money (minus cash) as well?
The two cannot be firmly differentiated in existing stats
That would be an interesting stat to know.
Does the private banks or government get to create most of the money in the economy?
If the former, maybe this needs redressing? Big time!
For me too this is also a really critical point. My experience when trying to discuss MMT is the general reaction of ‘inflation’ but if people knew that the private banks (and shadow banking system) were actually responsible for creating the vast majority of newly created money rather than the government it might change the framing of MMT entirely!
Phil.
I agree. On reflection, it’s a really important stat that seems to be missing.
If tax and government bonds are ways of removing money from the economy to create the “space” for more spending. Who gets to fill the “space” is critical.
If it is private banks then we get a housing bubble and lots of private debt.
If the government gets to fill the “space” we get well funded public services.
No wonder right wing think tanks are anti government spending. It allows the private sector banking industry to cash in by filling the “space” with its loan created money!!!!!
So what happens when Banks ‘crash’? John
Other banks won’t accept their money
“Other banks won’t accept their money”
Banks crash or become insolvent when they have asset liability mismatch. This normally means depositors want their money back and the money markets won’t provide them with funding for fear of default..
As I said…..
Their promise to pay ceases to have value
[…] a fiat money system knowing how money is created. I addressed this issue yesterday. It is equally important to know how money is destroyed, because that’s an essential […]
Have things changed significantly since the 1960’s when most people and many bills were paid on cash rather than ‘bank created’ money?
Congratulations on 1,000 subscribers! Having over 100 subscribers means that you can change the URL of your channel to something more memorable. Eg, rather than:
https://www.youtube.com/channel/UCGlMOIZ1A3zluwLXTGpzZfw
You could have:
https://www.youtube.com/c/RichardJMurphy/
Hope that helps , Jake
That has already been done….
Re: Your important point from a few days ago about the difficulties in explaining MMT when it involves ‘inverting language’. When it comes to reaching ordinary people who do not have the time or inclination to read about economics, the following are some of the difficulties. (Please don’t shoot the messenger. We accept MMT.):
– Laypeople are likely — quite rightly — to see debt as a relation between a borrower and a lender – and they are likely to be baffled when references are made simply to ‘debt’ without the creditor and debtor being identified, as if it were just a thing. Who owes whom? (e.g. ‘Private sector debt’ is too abstract a term to connect.)
– Expressions used in financial and accountancy circles such as ‘owning debt’, ‘holding debt’, ‘selling or buying debt’, and ‘issuing debt’ are confusing to the non-specialist. Again, who owes whom? is likely to be the question. Even expressions like ‘rolling over debt’ and are not widely understood.
– The world of bonds and bond markets is a mystery to most people. Even if they own some premium bonds or have a pension that’s invested in bonds, they may not make the connection or understand the idea that such debt can be bought and sold in second markets.
– When the national debt grows, one of the reasons people see it as alarming is that they think that individual lenders may not able to get their money back, even though they may want repayment. They don’t realise that bonds are continually being issued, maturing and being paid off, even where the overall size of the debt grows. Nor do they realise that many bond holders will want to renew them.
– Re: The description of money as debt. How is this point likely to be received by lay people? Again, who owes whom is likely to be the question? Even when you point out that the note has the words ‘I promise to pay the bearer £10’, it’s meaning is still mysterious. If we took it to the Bank of England and asked it to honour the promise, what would we get? To say that the government fulfils its promise by taking our money back in taxes is likely to baffle. The layperson is likely to think the government would not be honouring its promise if, instead of getting something from the government in its place they have to pay taxes to the government. Maybe describing money as an IOU, a promise made in return for some service or product, would be easier to understand that than it as ‘debt’ (even though it amounts to the same).
MMT involves a Copernican shift not only in understanding of the technicalities of economies but in how we understand moral economic issues to do with justice and fairness and the well-being of society. A common pre-MMT moral economic view concerns ‘tax-payers money’, and associated ideas that we have a duty to contribute to the maintenance of our economy and society particularly in helping pay for things like roads and schooling that are provided free to the user. With this are ideas (on the left) that those who dodge tax are parasites, free-riding on the benefits supposedly funded — and, more importantly, actually produced – by the majority. There’s much support for the idea that all should contribute what they can, and that those who for good reason are unable to contribute (e.g. youth, old age, infirmity, disability, job scarcity) should be supported by the rest. If we abandon the idea of taxpayers’ money, and replace it with something more complex (government created money returned by citizens to the government via taxes that allows it to suppress inflation, or as a means by which the currency is validated) then what happens to those hugely important moral economic arguments? They are lost in what looks like scholasticism. Yes, you do acknowledge that tax has other functions too, including those of redistribution, but the latter point needs working in to public-facing accounts of MMT. If the message ignores redistribution and the idea that people should pay tax according to their means, then it won’t win them over.
To end on a more positive note: For non-specialists, the most compelling points in MMT are simply:
– That the government, unlike households, creates money and levies taxes. It can never run out of money, so it can always repay debts.
– As long as there are unused resources, especially labour, as there are now, government spending can set them to work to benefit society without causing inflation. If and when inflation becomes a problem the government can always reduce it by increasing taxes.
– That much of the national ‘debt’ is like a savings account at a bank. (Renaming the national debt ‘national savings’ is a really good idea.)
– That pension funds and life assurance funds need somewhere to put pensioners’ money that’s safe and will add a bit of interest.
For pragmatic purposes of changing world views, these are surely the key points. Much of the rest is of interest to specialists of course, but maybe simpler messages/videos are needed for the public (and politicians).
Yours in appreciation.
Andrew Sayer with contributions from Kevin Morgan
Now going up on the site as a post in its own right
Thank you
A few basics, sorry most possibly already known to most of you:
1. Much money was saved in the building societies back befor the 1980s – from the 1970s to 90s, relatively high interest rates – those deposits being relent – “other peoples” real money providing for most of the 90% homeloans – after the 10% deposit required (if you had a job, say at £3000 p.a). I could just manage to pay off my loan of £6200 for a 3-bed terrace from 3 room’s rent in late 1970s. Paying 11.75% -£69.00 per month if i remember right. It was touch and go for me once unemployed, whether i’d have foreclosure. Luckily I got through my exams for a decent engineer design job because of the Hand-skill I had – a Carpenter will rarely be out of work.. Every time i needed work – that skill was my unique point above the competition. The IMF have indicated a need for 1960s economics and Pilger has noted that 1960s was reasonably equitable.
2. Bank of England Officials told me in 2002 that half the actual cash (sum) created was then being returned to the UK-Treasury Exchequer coffer, Since the GFC the CB profits from bondbuying and digital money-making (QE) are so great they can afford to put all the cash money value to the Treasury as a public-purse contribution (and employ loads more staff). Correct me if i am wrong about the bond-buying profits.. Look at the growth in staff numbers. Why(?) unless I am right.
3. As i have said before, i am told that around the 1940s (probably to at least the 1970s) around 2/3 of money created was commercial-bank money [credit money, via loans – literally created on a ledger and other “commercial paper”] and a third [up to a half, Anne Belsey said once] was the physical printing of paper currency for the public good (half held by CB for stability purposes as 2 above). so why can’t we get back to half by CHARGING for credit money?
4. Those stability activities were shown glaringly to be inadequate by the example of growth in the finance sector used with Mr Soros and all the banks colluding on Black Wednesday with CB activity trying to suport the UK£stg. We in UK paid a lot for that. Was that inevitable as an experiment? What is to be done against the power of international financial ‘sloshing’ today and no Financial Speculation Tax (FST)? I say 4 things ET, CMCC as a way into MMT, FST and before that a minor Eco-Fit ramp-up of Sunak’s £3bn to £5bn to get, within 2 years to the 40-year £40bn p.a. TARGET i have suggested making BUILDINGS ECO-FIT. All existing buildings. From that £200m extra to UK-Treasury the first year we hit £40 bn (not the £3bn he’s aiming for). And it all has to be made clear before UK-Gov can really understand it – otherwise ‘divide and rule’ – “Smoke and Mirrors” wins every time: I am just leaving those Acronyms for explanations if Richard can request clarification of any one of Them.. otherwise he’d be within his rights to say i’d gone on too long. (?).. Which would be the first explanation? ET on trade in Imports (much more doable now after Trump – individual tariffs now doable – scotching the endless polical nonsense that importers should pay nothing extra for externalities such as noise, pollution, etc. [what say you Richard? OR Credit MoneyCreation Charge CMCC, modest at first? If the housing market “recovers” to £200 bn of commercially-created ‘free money’ they gather immediate interest on why can’t we get rapidly back to 0.5% base rate from that and by next year 1% and get it into the public purse, get away from so much “borrowing” as you say anmd get Mechanisms for money-issuing, for instance charging for any money commercially created? Or high-street banks have to get it from CB.. isn’t that like what you are saying and a practical mechanism., and who is going to help Treasury get the instruction ready for Bank of England? As the Bank have said to me “it is the job of government. i respectfully suggest it will have to be done incrementally and without delay.]
Thank you Richard for providing what could be an effective ’round table’. What relations do you have with Prof Werner and Ben Dyson who i know has contributed to at least one bank of England Paper?
warm regards to you and all your readers
ian greenwood (structures)
Ian
I have posted this but stress I really do nit agree with much if it
Most has no relationship with MMT or the fiat currency world
And I have little to do with Richard Werner, whose thinking I largely disagree with and Ben Dyson got almost everything about money wrong – which is no doubt why the BoE liked him
Richard
I forgot to say 3 background things
dad in the Comonwealth Bank in the 1960s was getting 6% on his savings account. i’d like to get back to 5% – an easier number
Also, from the look of the deeds on my house commonly agreements were made privately at 4%.
So for example the owner-occupier of the house i am in who let out next door borrowed from someone to help him build something of similar prportions on land “demised” to him. they knew he had the means to pay it back.
Companies were formed to get out of the clutches of the banks in 1800s.
Now we are not actually defrauded by them as the law protects them, so much as ‘in hock’ due to us not standing up together – getting it clear and making the statutes. Gov needs to be more sure of itself, and will be due to the sterling efforts of such as Mr R Murphy..
Why do you have an entitlement to 5% for nothing?
THANKS for allowing the post
the 5% is my proposed “floor” on Savings rates for depositors to incentivise work and economical behaviour. Having savings, in my wide experience of different sectors is of huge social benefit (saving up for a house deposit etc) and in terms of having funds for a rainy day. One never knows when misfortune may strike and as you and you correspondents say unemployment is on the rise even tho the true figures are concealed by part-timers not registering, not even having to pay tax at £13500 p.a. self-employed, etc.
The 4% rate was common in the 1800s.
I’d appreciate someone telling me why mortgage rates cannot also be fixed or at least have am upper limit of some kind, with Liquidity money (the savings held by banks and building societies) if they are not going to be actually re-lent properly paid for – according to my research building societies can issue beyond their deposited holdings (as the free money banks are used to) but except for (presumably) Nationwide those societies not doing actual money-creation.
I can see that money-creation is a tool in a low-employment, sit-around-and-be-digital-world of DIVIDES, (maybe a happier, potentially less consumptive world) and that QE has been that tool, but it seems – i agree with you that MMT could be a way better solution than allowing socia credit which is all Positive Money.org.uk seemed to be advocating.
this post – from above – seems to sum up an important MISSING figure
“Vinnie says:
August 4 2020 at 9:26 am
Thanks Andrew.
I’m not sure of the terminology of M3. (“monetary financial institutions’ sterling and all foreign currency … liabilities to private and public sectors”)?
Is that just the broad money created by private banks, or does it include government created/spent money (minus cash) as well?
Richard Murphy says:
August 4 2020 at 5:14 pm
The two cannot be firmly differentiated in existing stats”
YOUR STATEMENT THERE SEEMS TO ME TO BE THE BIGGEST RECENT MOVE FORWARD as it and the Question before it, is extremely clear! What is needed is clear ID of where money is made and by whom?
Thanks to you and your contributors
I am nit arguing against savings
But what entities anyone to 5% on them
Your comments are always hard to follow Ian
Please engage on that issue aline since it seems key to your demand
And who do you think pays?
[…] provocative (in the sense of thought provoking) comment was posted on the blog yesterday and I can only apologise to Andrew Sayer and Kevin Morgan of Lancaster University, who offered it, […]