In response to one of the commentators on yesterday's post on the political economy of money, I mentioned one of the most difficult ideas that there is when it comes to truly understanding the nature of money. That idea is simply stated. It is that money never moves. That needs explanation.
I offer it by suggesting what I think most people believe, and then by suggesting why that is wrong.
Most people seem to believe that when they deposit money in a bank that somehow, and in a way that defies imagination, something moves tangibly from them to that bank, meaning that they then have, as is commonly said, "money in the bank'.
In fact, no such thing happens. Instead, when a person deposits money in a bank, what they actually do is accept a promise from that bank that they will be repaid in due course. They promise, in exchange, to comply with whatever conditions the bank imposes on the management of that account. And that is it. Nothing moves. Instead, promises are exchanged.
There is nothing physical about this, or tangible, and the only manifestation of the existence of the deposit is the contract between the bank and the depositor, and the balance printed on the depositor's bank statement, which reflects the accounts of the bank itself.
That is the sum total of what happens when "money is paid into a bank". The bank's ledger changes, and if the depositor also kept a ledger, then theirs would too, in an equal and opposite way.
There are, therefore, some computer entries to represent what happened. But, very importantly, there is no "money in the bank".
Unfortunately, even if this can be comprehended, there remains another common and fundamental mistake that most people still make. This is the belief that because the bank is now in possession of some imagined asset that has a mysterious, tangible, and yet wholly unseen quality, that bank can then use the money deposited with them by a person and lend it to someone else. On the basis of this completely erroneous assumption, the whole model of banks as financial intermediaries is built, and it is total nonsense.
In practice, the bank has no legal right to assign the debt that they owe to the depositor to someone else. Their contract is to repay that sum to the depositor. To reflect that fact, the depositor's account balance with the bank must be left unchanged until repayment takes place. The bank cannot move that balance. They cannot assign it. They must simply maintain it. As a result, it is impossible for it to be used as the basis of a loan to another person who is completely unknown to the person who originally deposited the sum in the bank.
Instead, of course, what happens is that when the bank lends money it promises to make a payment to whosoever the borrower instructs and, in exchange, the borrower promises to repay the bank in accordance with the contract between them, including interest. It is that exchange of promises that makes new money. What is clear is that this new ending relationship is discrete and utterly distinct from any relationship between the bank and the depositor who thought that they put "money in the bank".
This is not to say that, in aggregate, the depositor with a bank is not at risk as a consequence of the lending decisions that the bank makes. If that bank is reckless and makes loans to people who are unable to repay them then the bank might become insolvent. If so, it will not be able to fulfil the promise to the depositor and repay the "money they have in the bank", not least because there never was any. That, however, is not a consequence of any direct relationship between the loan made and the deposit. It is because of the failure of the bank to manage its business properly.
It is precisely because we know the banks do not manage their businesses properly that the bank savings of most people in the UK are covered by guarantees of repayment issued not by the bank itself, but by the government.
The truth is that, deep down, we know that banks are not always good for their promises to pay. That is why we rely on bank guarantees instead when deciding to use a bank. But, despite that far too many people persist with the belief that they really did give the bank something that they can use to lend to someone else when they did not. They just exchanged promises, and that was it. And because those promises were not assignable not only do they not fund anything, but they also never move. Even when repaid, the record that they existed still remains. And in that case, the idea that money flows is simply not true: there is little that is more static in the world.
Money either exists, or it does not. What it does not do is flow. Instead, it is destroyed and recreated. But it's then something different from the money that existed beforehand, because new promises will be involved. Understanding that is fundamental.
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Absolutely correct.
For a concrete example… if I pay Richard £1, money still does not “flow”. I instruct the Co-op Bank to make the payment to Richard’s (say) RBS account. Co-op instructs the Bank of England to “send” £1 to RBS. In fact, all they do is deduct £1 from Co-op’s Central Bank Reserve Account (CBRA) and add £1 to RBS’s CBRA. Co-op records that it owes me £1 less than it previously did, RBS records that it owes Richard £1 more.
Co-op’s promise to pay me £1 is extinguished, {BoE’s promise to pay Co-op is extinguished, BoE creates a new promise to pay RBS), RBS promises to pay Richard. NB Co-op’s promise to me is NOT “passed on” it is ended and a new promise is created between RBS and Richard.
However, it is often helpful to think of money flowing around a plumbing system. Use of the word “liquidity” begs the analogy with water… and it can be very helpful when understanding the impact of open market operations by the BoE and gilt issuance/sales and redemptions/purchases (as well as taxation and government spending). How much water is needed in the piping system? How do you add water? how do you drain etc.. ?
Nevertheless, we should not forget the underlying truth of what you say…..money is a promise to pay; it either exists or it does not.
Finally, with regard to your observation about banks going bust and deposit guarantees.
Banks have very little money “of their own” – what little they do have is called “capital”; everything else is borrowing or lending. The money that they have in their CBRA is a loan to the BoE (against which they will have been loaned money by depositors).
As a depositor, I LEND to the bank and have credit risk. If the bank is reckless and lends to people that do not pay back then the capital (“their” money) has to be used to repay depositors and if that runs out then the bank goes bust and depositors will lose money.
In a truly free market world individuals and companies would have to make judgements about that risk. In the real world this would be ridiculous – even if I could analyse a bank’s financial statements how would I know if the underlying data is true? In practice we require (smaller) deposits to be guaranteed and banks regulated – otherwise the economy would grind to a halt.
Getting this regulation right is an impossible challenge (3,000 years of banking history supports this assertion) but we have to keep trying.
All agreed
Money is particulate
It just looks like it flows
But it does not
Thanks again for your output: I need to read these related posts and comments carefully.
I would comment that you are of course talking about modern fiat money: most people’s thinking is conceptually based on commodity money.
A cheeky questions to speed up my research: where can I find a system description of the government’s financial operations ? Eg. I am just trying to understand the Asset Purchase Facility which I encountered via your glossary.
I wish I could answer that question, but can’t
The Bank of England Red Book lays out the framework for BoE Operations in the Money Market.
Not sure it is called the Red Book anymore… indeed, a search does not throw up anything useful. But there must be a successor document somewhere. When I look for that I get too much noise.
Thanks to Clive and the uninvited guest.
Thanks for the pointer. This https://www.bankofengland.co.uk/markets/bank-of-england-market-operations-guide replaces the Red Book.
I quote: “This website replaces our previous guide (known as the ‘Red Book’) with a more modular online approach. It also consolidates the Bank’s historic toolkit with more recent innovations, including the asset purchase programme, our term funding schemes, funding facilities in non-sterling currencies, and the Alternative Liquidity Facility.”
I also found this https://www.rethinkeconomics.org/wp-content/uploads/2022/03/Understanding-the-Bank-of-England.pdf which provides an overview and many references, but I have to admit I did not find particularly enlightening. It did not add to my current knowledge which is something of a patchwork.
Still looking for a pdf of the Ryan-Collins book: I’m not allowing myself to buy any more economics books until I finish the ones I’ve got.
Try the UCL site for Josh’s book
Where does money come from?. 2nd Ed., by Josh Ryan-Collins
A PDF is online at https://neweconomics.org/uploads/files/b847162e8c996d5e26_fam6bqdx4.pdf
(Available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License)
Where does money come from? — Sorry, the PDF is only a preview 🙁
Ryan-Collins’ book “Where Does Money Come From? – A guide to the UK monetary and banking system” (2011) appears to be partly updated in a nice article here (free PDF):
Berkeley, A., Ryan-Collins, J., Tye, R., Voldsgaard, A. and Wilson, N. (2022). “The self-financing state: An institutional analysis of government expenditure, revenue collection and debt issuance operations in the United Kingdom“. UCL Institute for Innovation and Public Purpose, Working Paper Series (IIPP WP 2022-08).
https://www.ucl.ac.uk/bartlett/public-purpose/publications/2022/may/self-financing-state-institutional-analysis
Thanks
Arwel, I can recommend “Where Does Money Come From?” from the New Economics Foundation (Ryan-Collins, Greenham, Werner, and Jackson), specifically chapter 4.
Correctly – promises move resources – sadly in a monetary economy most think things move things!
I think most people think of money as being cash stored somewhere. When I was young it was unusual for anyone without a fairly high powered job not to be paid in cash. In my first “real” job I worked on the design of digital filters using an ICL mainframe computer, something which was viewed as “cutting edge” at the time, but I was paid in cash with a pay packet every week. I had a bank account but had to take the cash along to my local branch to deposit it there. It would be very easy to imagine that the bank would put the cash it in a vault somewhere and then lend some of it out to other people. This picture has become part of “common sense”, which, as Einstein once quipped, is the sum total of all the prejudices you have picked up by the age 16.
When you realise that cash is just a token that records a debt, which should be obvious when you consider that the state can and does withdraw notes or coins from circulation, the picture can be seen to be wrong. As an amusing aside, a relative of mine, when he discovered that his bank would allow him to pay £1 notes into his account for a while after they had been officially withdrawn thought that the bank was doing it at a loss.
I suspect young people who know almost nothing of cash will find what I say easier
I’ve forgotten the exact date – late -60’s I think – but I do remember my father, who worked for the SSEB (now Scottish Power), telling me they were given a “bonus” as an incentive to open a bank account so their wages could be paid in. That alleviated the need for somebody to go to the bank on a Friday morning to collect the exact amount of notes and coins (down to half-pennies) to then be counted into the pay packets.
I had pay packets in the 70s
Cash wages went on well into the eighties. In my early days as a consultant I worked around the periphery of major projects which moved retail employees from cash wage packets to bank accounts. It was quite a big undertaking to persuade all employees to make the move.
Given the vast majority of the population lived in an almost entirely physical cash economy for a couple of hundred years it’s not surprising that the “common sense” view of money retains vestiges of its history as a physical asset.
That does not mean it is right..
Sorry, but having spent years trying to teach my grandson about buying goods in shops and getting change, I am not going to now show or tell him this.
What is it doing if not moving from one hand to another?
Is this not money?
Notes and coins are a special, tiny firm of money
But actually, even they conform to this rule if you think of then as being a mobile ledger
Otherwise, I dismiss them as irrelevant
Incidentally, he will grow out of cash: my sins refuse to go near it. They just do not want to have it. Everything is electronic fir them.
Your sins?
My grandson has a card but has to be reminded to use it occasionally.
Having autism it would be a problem if he used it all the time as he either forgets the number or doesn’t read instructions properly and his card gets stopped.
It’s not an easy thing to teach him to use on his own. He says he prefers to see real money as then he knows how much he can spend.
Saying that, it might be a ruse on his part, as he always has far more money in his account than his 16 year old sister has!
🙂
And understood
Are you saying the velocity of money isn’t important or relevant?
No
But I am saying we really do need to properly understand money
And in that contyext money only has at best the appearance of velocity
What are you saying?
Am I correct in understanding that banks sometimes ‘sell’ collections of debt to other institutions? I’m thinking specifically of sub-prime where, if my understanding is correct, bundles of potentially bad debt (for instance where mortgages we offer to people with little prospect of paying back that debt) where traded between each other. Money isn’t being moved but the promise to pay is. We all know that this was ruinously dodgy but in the light of your post those participating must have been crazy.
They can be assigned in this way.
But the borrower rarely knows: they often still pay the same person, who passes the sum collected on for a small fee
As the rubric says, “I promise to pay the bearer…”
Or as a certain Professor once asked – and answered, “What is Money?”
https://youtu.be/VKa3R0a2hY4?si=2pP4Q1q_lXiSaik5
Notes and coins move; literally. That is where there is money plumbing and a sense of liquidity as a flow. It was interesting that Mr Parry’s valuable comment did not mention notes and coin in the context of ‘liquidity’; but for poorer people who may not have bank accounts, or have problems with credit; the liquidity of notes and coin is important.
But they are a tiny part of money now
It would be incredibly eocnomically dangerous to use such an unrepresnttaive, and rapidly fading tool, as the basis for understanding of how how the economy actually works.
I appreciate that, but there are several issues that arise from the problem created, almost unnoticed by this decline.
1) The liquidity supplied by notes and coins flowed (again the water/plumbing motif). operates through the whole system, and potentially brought virtually everybody in society into participation in the economic system, and the benefits that accrued.
2) The liquidity is sustained as long as the notes and coin remain in circulation, or are replaced.
3) The modern digital money system concentrates even more economic power in the hands of Big Tech, commercial banks, central banks and dealers: a financial elite who manage what is no longer the free movement of money, but solely a double entry; and therefore manageable, repetitious and directable; as you perceptively explain it, a series of discrete events, but discrete events that are effectively beginnings and endings; and therefore to a far, far greater extent (than notes and coin), able to be directed by an elite, where it wishes the money to reside, or finally reside (directable in ways the circulation of notes and coin cannot be directed).
4) Fiat money as a double-entry is ripe for the hegemony of both AI, and those who control the technology of digitised money. The real point of notes and coin is not that it represents a redundant technology; but that we have lost a far more important truth through the technological innovation of digitise double-entry; the capacity to involve everyone fully, or at least potentially in full participation in the economy. Neoliberalism could not achieve the levels of alienation of people from full economic participation (and enrichment of their living standards) in the modern economy, without the levels of digitisation of money over the last twenty years. Technology seems to empower, but for many, it simply excludes them.
Sorry John
I am simply not convinced
Of course you are right that expenditure in notes and coins is trivial these days and using it as the basis for understanding isn’t helpful. But unless you are able to engage with that thinking there is a risk you will only ever be talking to readers of this blog with an interest in the subject, and actually the ideas that come out of your thinking deserve much wider appreciation.
You don’t actually have to be that old (from my perspective not my daughter’s!) to have progressed from paying the window cleaner in cash that goes from one person to another, to paying by cheque, to paying by online bank transfer. It is hardly surprising people think of all these as the same physical transfer of monetary value.
The idea that all money is merely a promise to pay is actually a very hard concept (despite it being explicit on notes) and probably needs an explanation that resonates with a much wider public. Even my daughter for whom payment by cash is very much the last resort, sees that when she buys something money (= numbers) disappears out of her account and she interprets that as it having “moved” to the retailer. It doesn’t look like a paper promise.
But thank you for this post and the thinking it (and the discussion) provoked, I hadn’t realised how fundamental the concept is to so much else.
Jonathan
I accept all your points
I still do not think I have got this right
But I will keep on trying
Richard
Jonathon,
I think you still miss my point. Notes and coin provided free movement of money, and liquidity in a form that was open to all; it is universal. Digitisation removes the free movement of money; it is the controlled circulation of liquidity. The detailed circulation is monitored and sanctioned by commercial banks. They even decide how you present and approve your card or phone. They effectively sanction every single use. It is easy to make a case that this makes it better at preventing illicit uses of money, but that is a by-product of the fact it is now possible to control and monitor its use to serve the purposes of those who control it. In effect the commercial banks completely determine everyone’s access to money.
This is not about making it simple for everyone to understand a complex subject. It is about access to money, and the nature of liquidity. One of the great problems in late medieval England, that prevented economic growth, was a basic lack of coinage, especially small coins; and a system of central accounting that was separately based on tally-sticks. Sometimes foreign Scots coins, or mere tokens might be used by ordinary folk, simply to facilitate a little basic economic activity. Meanwhile, the most developed economy was Republican Venice, held elsewhere in Europe in a kind of baffled awe; a Republic that went on to provide the direct, detailed inspiration for Luca Pacioli’s great text on double-entry bookkeeping, all measured in a relatively widely, enriching, circulating coinage; and which, through Pacioli’s brilliant text facilitated the first great universal monetary revolution; the template for the modern world.
John
Cash did not allow free movement
It allowed movement of limited sums
I think that is differeent
Richard
The freedom of movement was determined first by the issuer of the notes and coin; and there were constraints on scale; but the access was universal, and largely free from interference or monitoring for someone in the ordinary discourses of life. The constraints of scale were largely either practical and matters of security, or to prevent illicit uses; but here the failure to stop the widespread illicit use of money need not be rehearsed, it is obvious. Nobody has given much thought to how far the existing constraints on free movement also have adverse consequences for the economy. In any case, the free movement of notes and coin is more flexible and free of interference than the digital alternative, whatever benefit of convenience it offers.
I am not disputing that an irreversible revolution has happened, I am pointing out two concerns. Something important has been lost, and yet again in the history of human inadequacy, we have failed to incorporate into a technological innovation, turned revolution any adequate preparedness for the serious adverse consequences it will bring. Climate change is not the last great human folly; we are blindly creating another one, we may live to regret through inadequate foresight or prudent reflection.
“But they are a tiny part of money now”.
That is my point. What you are describing is the result of a quiet, almost too obvious to record technological revolution. Such revolutions make fundamental changes to the world; and as with all such revolutions, there are pluses and minuses; but there has never been much rational analysis and reflection on the minuses – by anyone; which is extraordinary when we are discussing the free movement of money, specifically for ordinary people. It is a facile Whiggishness to assume all such changes are the fruits of ‘progress’ and therefore the downsides on balance are given trivial attention. Neoliberalism presented itself as ‘progress’ and swept too many along. This revolution has swept everyone along, because the marketing was both seductive and universal in its application.
The downsides in major technological revolutions are very rarely trivial; as we have found to our cost with fossil fuels (oil in the 20th century; or the downsides in health and squalor, as the by-product of coal in the 19th century). Adam Ferguson pointed to the inability of Adam Smith to articulate the downsides of the economic revolution he described: especially the social alienation of human beings in order to serve the new commercialised, intensive, labour systemising economy.
There are downsides in the loss of notes and coin, as a liquidity enhancing and enriching system for ordinary people, that its replacement fails adequately to replicate. Generally the current system has merely replaced liquidity (free movement) with a siren, seductive message of instant convenience and gratification for the consumer; a clever marketing technique.
The real advantage, for business and government, is the increase in control a purely digitised money system brings. Are there advantages for both? Of course.
I am merely pointing out the dangers for everyone else, and the fact that free movement, and liquidity have virtues that should not be dismissed because free movement of money may also allow the possibility of illicit uses. Government, as the sovereign issuer already has most of the advantages (which is why Neoliberal Conservatives and authoritarians of all hues are desperate to possess it, and never give it up).
We have already virtually lost something important that will never return, and I believe will live to regret; whether everyone recognises the reason for it, or not. I merely ask the reader to think about it.
John
You seem to b ignoring that ordinary people – me included, and I never thought I would say this – welcome this change. I cannot remember the last time I took cash out of a bank and am delighted to have to not need to carry it around.
I know a great many like that – and they are not all ‘kids’
Richard
Richard,
I do appreciate all that. That is the problem. It is a seduction. The seduction of convenience. The seduction of absolutely everyone. The revolution is not being carried out for the seduced, but for the seducer. The problem with QE was that it saved the banks by allowing them to spirit the money away through elite financial channels; insiders who could turn it quickly into an asset bubble, without doing anything for living standards, economic growth or protection of the public. The large majority of the ‘seduced’ were left out in the cold. There was no circulation of the liquidity through society, because the seducers had found a way to circumvent the need to issue notes and coin. They no longer needed to circulate prosperity. They could keep it for the chosen. It set the scene. Genuine liquidity has gone. We are now moving to closely managed liquidity.
Increasingly your credit score will be scrutinised; you will have to earn the right to participate in the convenience. It will be easy simply to take it away from you. Orwell could never even dream of this. He didn’t need Room 101 in this new, real world. First you provide convenience; instant gratification at a single click. Delivered to your door. Then you set the conditions. Then you withdraw the convenience, unless you meet the conditions. This is monetary serfdom; brought to you by the heirs of Hayek.
Which is why we need a state backed, guaranteed access, bank.
And it need not have anything to do with central bank digital currency.
“Which is why we need a state backed, guaranteed access, bank.
And it need not have anything to do with central bank digital currency.”
Richard, you have referred to that proposal before, but it isn’t there; it isn’t proposed by any political party, so far as I am aware; and it is a very sketchy idea, as it stands.
Could it answer my point? Possibly, worked through as a concrete, detailed proposal; backed by regulation that isn’t phoney window dressing. But it should be a condition of the money revolution; not an afterthought, and currently without anyone in power, or close to power even raising the issue.
What we often think of as the mere detail of technology often turns out to be the nub of the issue. For example only, ‘Data detritus’ held, but unused by Google in its early manifestation, turned out to be the commercial making of the most powerful business force in the world. It only cost its founders (Brin and Page) their often stated lofty commitments to ‘open access’, and required them to worship at the altar of profit. Nothing much. I may be wrong, but I don’t think they are around the business now.
That is my point.
It was called Girobank….
From a macro perspective notes and coins are largely irrelevant.
However, as you say, they ARE important. I would hate to see cash disappear for many of the reasons that you elaborate. Indeed, if they did not exist someone would invent them!
I think our current position is reasonable; the Mint produces and circulates as many notes/coins as demanded. We just need to make sure that these notes and coins are broadly available for use by those that want cash – and this IS an issue. ATMs are expensive to run and that burden needs to be shared fairly between all banks…. or even better recreate a Post Office Bank.
Thank you Richard, Clive and other commenters. It’s articles like this and the comments after, that really drive home what MMT is describing and enhances my understanding of key macro economic principles.
It is so important to keep knocking down these seemingly ingrained falsehoods and keeping money as real as we can.
But what happens when I pay my taxes, where does the money go? The government tells me it can make good use of taxpayer’s money.
The debt you owe is cancelled by the money paid. And that is the end of the transaction. Well, that and central bank reserve accounts are reduced.
Paying £1 of tax destroys £1
When the government spends £1 it creates £1 and there is no net change in the supply of money…. but let’s be clear – and this is perhaps the whole point, the government could spend that £1 whether you paid your tax or not.
Of course, the correct supply of money needs to be achieved through a balance of spending, taxation and bond issuance…. but the Government does not run its finances like the rest of us.
Correct
Am I right in thinking the sort of thinking about deposits and loans, which you describe as an entirely inappropriate understanding of banking, are basically how Building Societies originally operated. Or was that largely an illusion too ?
It was how they operated
And why they could not compete
Yorkshire Building Society still seem to manage and indeed are currently providing interest rates for savers which beat the Banks hands down.
Perhaps Banks have an advantage over Building Societies due to the interest payments they’re getting on the funds lodged with BofE for which you have called for removal or severe reduction?
Nationwide still calls itself a building society and competes very well with more branches than some banks.
But it is a bank
What’s the difference between a bank and a building society?
I am with the Nationwide. Every year I get to vote like any other shareholder.
It calls itself a building society on its headed notepaper. I looked before I wrote that.
But as far as I know it is regulated as a bank
I like the water analogy. However if as noted by JSW, the movement of physical money (notes and coins) is likened to plumbing, electronic money behaves more like waves in the sea which don’t physically move water (much) but instead transmit the energy present within the sea (the economy) from one physical location to another. The energy in this case being equivalent to the sum total of promises to pay.
Maxwell used the analogy of a fluid flow as the basic model to interpret Faraday’s electro-magnetic forces in the 1850s. This was probably the turning point toward the later wave formulations. It is a powerful analogical way of thinking, notably in moving from one conceptual scheme to a new one. I was thinking of that transformation, reflecting on Richard’s blog above, and Clive Parry’s comment; and a sense of the consequences of particulating something that clearly has worked very well as a flow; and then reflecting on the potential consequences of the change, and how this may develop. Physics works because it seems to work extraordinarily well when articulated as both wave and particle. That is not necessarily a convincing fit in the current case of money, if notes and coin become a mere conceptual afterthought.
I hate to say it John, but you think notes and coins are money and they aren’t: they are tokens representing money and I think that is your conceptual error.
I am disappointed Richard that you suggest that error. It isn’t true. There is no conceptual error, and I am frankly astonished you threw in something so obviously, trivially wrong. Nothing I have said suggests otherwise. The form money takes is completely irrelevant. It could be literally anything. But the technology shapes the access, and access is critical. I think you are becoming distracted by the technology here, rather than the underlying concept.
The point of notes and coin is that they circulate differently from digital money. Their liquidity promotes a freedom of use, by anyone transacting with anyone (as distinct from a freedom TO use, but at the discretion of banks) for ordinary people, that is not matched by digital money.
Are you now claiming that only digital money is money? It isn’t, and you find out that notes and coins rise sharply up of the hierarchy of money in a money crisis, and queues are forming at the doors of banks. And that is a fact.
Sorry John, but all money is debt
We can record it with ledgers, or tokens
But it always remains debt
I do not accept that I am wrong
Richard,
Where have I claimed that money is not debt? I have written it on this Blog in comments, time without number.
You are wrong to assert I a am labouring under a conceptual error. You have no grounds for that statement: it is totally wrong.
Who said this?
“The notes and coins in circulation are very definitely a liability of the Bank [of England] because they represent a debt owing”. (‘UK notes and coins are not debt free money’, Tax Research UK, June 11 2015: Blog, Richard Murphy).
Or are you actually going to hang your case on the proposition that I referred to notes and coin as money, without the necessary permanent qualifying term ‘represent’ or variants attached, and which may not be given, or understood, since they apply generally to the forms that money may appear in? In which case the title of the 2015 Blog should be ‘(‘UK notes and coins are not debt free representations of money’. but that would surely be sophistry.
I will be candid John, and say I am simply not sure what you ate getting heated about
So I relaxed what I think, not what you said
I reiterate, I am not sure what you are saying except that you want cash retained, but no one is threatening to be rid of it: it is simply ceasing to exist and will do so at rapidly increasing speed.
It’s like phone landlines and fax machines now: a tool past its use by date. But I know you are unhappy about that. I have simply offered an alternative and better solution.
I still have a landline. They are not past their useby date in the north east.
I phoned my son by mobile on Wednesday and we could not hear each other properly. Where he lives they still have problems with mobile signals, which is why we both have landlines.
It’s funny how both having cash and a landline are seen as things that only old people use. But we are going to die off soon, aren’t we, so we don’t matter.
Maybe Johnson should have had his way with covid!!!
I didn’t expect to have to say this on here.
Sorry – but I am simply noting what is actually happening
I deal with real world solutions
Land lines are rapidly disappearing
My son lives 30 miles away from me, in Morpeth just off the A1, and we can’t get a decent mobile signal between us.
I thought that you thought that levelling up was important. This just shows that levelling up doesn’t matter.
What were the signals like when you were on holiday this year, not far away from where we live, but with the odd range of hills around?
They can’t get rid of landlines until there is decent mobile coverage through out the whole country, just as they can’t get rid of cash.
By the way, there are lots of scams to do with switching to digital phonelines.
Mr Tresman has helped out here, by using his imagination; a though experiment to provide some potential examples of the drift of this tectonic plate. Your response is that he can use cash; which is becoming more difficult however, because the banks would love to eliminate cash, close branches, shut ATMs at the drop of a hat. They charge businesses enormous fees to collect or lodge cash with them. They hate cash.
Your response to the problem set Richard, seems to me to be fatalist. It is done, make the best you can of it, or struggle to use cash for whatever time it has left. Sorry, I find that complacent. And the answer you offer; Girobank II isn’t there, and isn’t on offer, and the banks will kill it if they can; and they will succeed, they always do. After, all we have all seen them rise from the dead; and declare a triumph.
There is so much passion here on issues that are often frankly, too late to do much about, or long gone; but here is something that is unfolding in front of us, a digital money revolution that is ill understood (not least by the practitioners – it smacks of the era before 2007/8; and I have zero confidence in their understanding of what they are doing, or the BoE, and I do not even want to think about the mind of the Treasury on this matter), and the debate here seems to me an ambiguous mixture of fatalism, and relaxed complacency.
What more can I say?
Not a lot
We disagree, and I rather susteoct people are bored by that fact
I will post ione more reply to another comment from you and then I suggest we move on
John, Richard … just to interject that I have found your exchange utterly fascinating and one of the most instructive and relatable posts for a long time. Many thanks to you both.
Back in the mid nineties began to see digitization as a ‘holographic representation’ of the material world that would itself, over time, impact and change the forms and processes of the latter in powerful ways that we could not at the time predict – but was likely to include the globalization of material destitution, and challenges to the presumption of innocence in law. So I do see where John is coming from on this and it’s a vital area of debate – please don’t stop!
I kind of get what you’re saying but why then do banks reward large-money-in-the-bank-account customers with all kind of freebies if they are not using said deposits?
Because they buy other services
…. they do need deposits of (almost) equal value to their loans and other assets.
Whilst the act of making a loan to a client automatically creates a deposit by that client with the bank there is no obligation for the client to keep the money there. If they use it to buy (say) a car from a dealer that banks with a different bank (Bank B) then the lending bank (A) will have to replace that deposit. At this point, Bank A needs to take a deposit and Bank B has money that it does not need… so they meet in the interbank lending market and Bank B deposits with Bank A.
Now, (and this is where it gets complicated) regulators are keen to have a stable banking system and if Bank A relies on interbank lending they are very vulnerable to a bank run because Bank B (and C, D and E) will stop lending to A at the first whiff of trouble and, in fact, magnify the trouble. (Think Northern Rock). If Bank A takes deposits from individual savers things are much more stable as they do not act so quickly (or at all) because they are often less informed and guaranteed by the government. Regulators require a Bank to be able to survive 30 days without access to the interbank money market in a crisis… and (crucially) assume that retail deposits do not flee. Hence their value to banks.
In addition, even if there are no loans worth making they get Base Rate on their CBRA and they are unlikely to be paying that to the clients they offer freebies to.
Interestingly, internet banking means this assumption might not be true anymore; SVBs depositors could (and did) move their money out at a click of a mouse; Northern Rock clients had to queue in the rain with only one teller working and counting notes VERY slowly!
Helpful comment Clive.
I find that the comments on here are almost as good as Richard’s posts. Certainly every day is a “school day” as they say, at least for me.
I know this may seem too simple for on here, but if you pay by card for every transaction, the business you are paying to has to pay charges to the company it uses for its card machine. The business gets charged by the bank for every transaction, so the prices go up to cover those overheads.
When you pay by card to your local coffee shop it costs the coffee shop more than if you paid cash.
If my local coffee shop runs out of milk the person in charge can go to the supermarket next door with cash and buy some more. They can’t if everybody pays by card.
If they have no cash and have to pay by card it costs more to both the supermarket and coffeeshop. The banks make profit on every transaction like this.
You can’t criticise banks for making too much profit when you encourage it when even spending a fiver.
Actually, banking cash is really expensive
Clive (if I may),
“I would hate to see cash disappear for many of the reasons that you elaborate. Indeed, if they did not exist someone would invent them!
I think our current position is reasonable; the Mint produces and circulates as many notes/coins as demanded. We just need to make sure that these notes and coins are broadly available for use by those that want cash – and this IS an issue. ATMs are expensive to run and that burden needs to be shared fairly between all banks…. or even better recreate a Post Office Bank.”
Here is the problem. Issuing coins “as demanded” means reducing the issue at the discretion of those who determine ‘demand’. I believe there is a powerful determination to digitise money to the greatest extent possible and squeeze out notes and coin to the edge of extinction. You do not do that by decree, or by upsetting people in a way easily observed. You achieve your aim by closing bank branches; then, slowly reducing the number of ATMs, and generally making it plain awkward to use cash. People therefore are constrained to use notes and coin less often; demand falls, and the issue responds by reducing the amount of notes and coin available. Simple. And of course commercial bank costs fall. This methodology is widely used in every sphere of commerce, and Government; where the interests are powerful enough to do so (typically near or actual monopolies, of whatever kind; and invariably inadequately regulated).
Call me cynical by all means; I have a great deal to be cynical about in the foul stew that Britain has become.
There is certainly strong encouragement to use electronic payment but in many cases this is what people want. I take your point that many people might not realise that the demise of cash has consequences that they may, in time, regret but one shouldn’t compel the use of cash.
What IS essential is that (free) ATMs need to made available everywhere…. and this IS a problem, now. Also, it is important that the Post Office continues its role as a taker/giver of physical cash.
Whilst I have become a rare user of cash I do feel quite uncomfortable when I enter the Oval Cricket ground where everything is cashless… I still have a deep attachment to physical cash.
Clive,
I am not promoting notes and coin as ‘compulsory’. I have just responded to Richard, who has suddenly suggested, erroneously, that I do not understand the concept of money, because of my argument about notes and coin.
I do not know where these notions are coming from. Not from the case I have put forward. My concern is threefold: universal access to money, personal privacy, and individual freedom.
I am pointing out something that seems to me fundamental about money. Its form is protean, but whatever technology is used as a matter of fact determines the way it is accessed. Make it out of a rare commodity and few can use it. Produce notes in only £100 denominations and only few can use it. Provide small value coins (farthings – 1/960th of a pound sterling) in 15th century England and the poor can now enter the world that facilitates everyday economic transactions.
Digital money allows a level of consumer convenience that is quite new; but it also means the commercial banks are directly engaged in every single transaction [even to tell you whether to present your card (merely for example) to the card reader, or insert it in the reader and use your pin]. There are all kinds of transactions people may wish to undertake where this intrusion by a middle man is neither practical nor possible, and is redundant; or to use the buzz word, is not convenient for the user. There is also an issue of privacy, and I hope the response to that isn’t – if they have nothing to hide, what is the problem? Ironically we have data privacy laws that can be very restrictive; yet the intrusion of the bank middleman in every transaction is now virtually universal, and acceptable.
My general point is that the determination of access has big implications, both economically and for the individual freedom to act, independent of oversight or supervision in everyday life.
I am not sure what this is all about
My argument I’d threefold. First, notes and coins are not money: they are tokens representing debt.
Second, they are going to disappear. I see no chance otherwise, and the world will go on, with less crime.
Third, we can guarantee access to money through a state bank. It’s a choice we have not done so.
That’s it. Each is totally logical. For example, I can’t sy all money is debt and deny that for notes. They are just debt instruments. So are coins.
” …notes and coins are not money: they are tokens representing debt”.
That is not rigorous enough. All money is debt; but not all debt is money. What you describe as tokens representing debt, is money; because the representations are of a special order of debt, issued by the sovereign as guaranteed debts, stamped by the crown, or promising to py the bearer; incurred on behalf of the sovereign issuer by the BoE, and offered to the public as circulating money.
But a token is not debt any more than an entry in a ledger is debt
Both are mere representations
‘Representations’ of debt that have no substantive existence, save as an acknowledgement of debt. But not all debt is equal and not all debt is money; so your definition does not go far enough. Money establishes a special case of debt (no BoE without it, just as an example); and within the special case of debt that is money; but there is a hierarchy of money.
So?
I would be concerned with the introduction of a digital currency. Do I want the state tracking my transactions? No problem if the state is run for the benefit of the public, where anonymity is assured.
Do I trust a state that knows I bought a book on socialism, Israel or Palestine, how to treat haemorrhoids, a book by Jeremy Corbyn, and many other topics that may be fringe today, considered extreme tomorrow?
Do I trust a state that controls my digital money? Will they sell my spending habits to multinationals? If they force another pandemic lockdown, can they deactivate where I spend? What if the WHO dictate 60 mandatory vaccines, or that I can no longer eat red meat, can I be refused a digital card? The list of possible abuses is mind-boggling.
Pretty much they can do this already…..
Unless you try to use cash extensively it’s ultimately nit hard to track a person’s transactions now
Mr Tresman,
You get it.
Good luck with finding that economy
But Richard, “Good luck with finding that economy”. Isn’t that what drives people to come here; because they can’t find that economy – an economy for all – under the current government, and the predicament we are in. They look for hope in the form of rational answers to complex economic questions, and seek to find them here as one of the few spaces that induces hope of new thinking, and the prospect of real, substantive change.
And yet, on ‘money’ itself, here we are; and the answer is fatalism: that ship has now sailed. Too late. the world isn’t interested. Make the best of it. Nothing to be done. Nothing to see here.
I have to admit to still being confused by this exchange.
This blog is about funding the future. If you had asked me in the 90s whether I thought cash would have had a role in that I would have said “I hope not”.
As an accountant I refused, pretty much, to ever account for businesses that handled cash. They were costly, uncontrolled, unreliable and frankly too commonly criminogenic in nature to take the risk of being associated with, not least because of the risk of Revenue investigation, which was real in those days.
I have worked very hard to eliminate cash from economies for this reason. So, I demanded the end of big denomination notes.
I demanded evidence of source for large deposits.
And, of course, the control of suitcases of cash in tax havens.
But I have also demanded increased transparency of banking in general to tax authorities, whilst seeking that platforms like eBay and Amazon be open to HMRC.
I believe in tax justice. Cash and opacity are its enemies. Nothing will change my position.
But I don’t need to change my position. People do not want cash. I would have thought the reasons why are obvious.
And there isn ‘t an honest business owner who is not delighted to put up the sign saying ‘card only’. Cash is a nightmare to manage, and costly too, because of the risks. Of course they also want to be rid of it.
This blog is about funding the future. And cash has no part in it.
Does that give me a civil rights concern? No. That concern does not come from the absence of cash. It comes from authoritarianism.
Does it give me an exclusion concern? Yes, but only because we need to guarantee digital and basic banking inclusion for everyone. Labour tried that in 2019. It is not doing so now. That is where your problem is.
But will I change my mind on cash? No, because it will be a memory soon and has no role in funding the future.
The DWP wants to bring in a new law allowing it to find out how every PIP claimant spends their money. A cashless society will enable this.
Do you think it’s right?
Do you think fraud is right?