Tag Archives: money

Do Banks Create Money out of Nothing?

One of my correspondents recently referred me to an article and asked for my opinion about it. The article is Creating Money out of Nothing: The History of an Idea, by Mike King, dated April 2012 .

I read the abstract, the conclusions, and part of the body text, but could not bring myself to make a detailed read. “The history of an idea” is not relevant to my interests nor to the debt crisis that plagues civilization. Verbose and tedious, it seems to be an academic exercise that I doubt  will be of interest even to historians.

On the positive side, it did prompt me to write a few words of clarification on the question, words that I think are both pertinent and helpful to those who truly wish to understand the nature of money and the role of banks in today’s world.

The accusation that banks create money out of nothing has, according to King, been made by many famous economists, including Schumpeter, von Mises, and Keynes. I too must admit to having once or twice used that statement as a sort of shorthand criticism of the global money and banking system.

It is surely true that saying that banks make “money out of nothing” is an exaggeration that can be misleading to the uninitiated.

Bank actually create money out of something. The question is, what is that something, and what is wrong with it?

The short answer is that banks create money on the basis of the promises of their borrowers to repay.

Mr. King would have us believe that banks simply take in money from savers and lend it out to borrowers. That is clearly wrong. Even the Federal Reserve, in its own publications, says that,

The actual process of money creation takes place primarily in banks.(1) As noted earlier, checkable liabilities of banks are money. These liabilities are customers’ accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by the banks are credited to borrowers’ accounts.

In the absence of legal reserve requirements, banks can build up deposits by increasing loans and investments so long as they keep enough currency on hand to redeem whatever amounts the holders of deposits want to convert into currency. This unique attribute of the banking business was discovered many centuries ago.–Modern Money Mechanics

As I’ve pointed out in all of my books, banks serve two primary functions. They act as both depositories, reallocating funds from savers to borrowers, and banks of issue that monetize the promises of their borrowers. I’ve explained that in detail in Chapter 1 of my book, Money: Understanding and Creating Alternatives to Legal Tender, and in Chapter 9 of my latest book, The End of Money and the Future of Civilization.

But not all promises provide a proper basis for creating money. As Edward Popp, describes it, banks create both bona-fide and non-bona-fide money. (See Money, Bona Fide or Non-Bona Fide at http://www.reinventingmoney.com/documents/bonafidePopp.pdf).

The vast majority of the non-bona-fide money that banks create, is created on the basis of loans made to national governments (when banks buy government bonds). Further large amounts of non-bona-fide money are created when banks make loans to finance purchases of consumer goods and real estate (see my books for details). This is a violation of the principle that money should be created on the basis of goods and services on the market or soon to arrive there, which includes promises of established producers who are ready, willing and able to sell for money the things they ordinarily offer.

The bottom line remains: the present global, interest-based, debt-money system, is dysfunctional and destructive.

The creation of money on the basis of interest-bearing loans is the cause of the growth imperative, and the creation of non-bona-fide money is the cause of inflation.

If we are to achieve a sustainable society and assure the survival of civilization, we must transcend the present money and banking paradigm and reinvent the exchange process.  – t.h.g.

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Davos-What’s missing from the conversation?

Professor Jem Bendel is Director of the Institute for Leadership and Sustainability at Cumbria University in the UK, and a “young global leader” of the World Economic Forum. In this short video interview, he expresses his views on what is, and is not, happening at the Davos forum to address the global crisis.

E. C. Riegel’s Money Quiz and the True Money System

How many people in the world really understand money—its essence, its purpose, its proper management, its potential either to free us or enslave us? Sadly the number is close to nil as Riegel discovered decades ago, an opinion that was shared by renowned monetary economist Irving Fisher of Yale University. According to Riegel, Prof. Fisher, in a public speech “indicated that most persons who undertook to discuss money did not understand the subject and that those ‘who understood the real meaning of money’ were very few.” That was sometime in the mid-1930s, but it seems that the same situation still prevails today.

A little later, Riegel wrote a letter asking Fisher to specify whom those few might be, to which Fisher responded with a list of ten names, along with the caveat that the list was by no means exhaustive, and that there were probably several other of which he (Fisher) was unaware.

Next, Riegel, under the banner of the Consumer Guild of America, prepared a questionnaire which he sent out to the ten “experts” that Fisher had named. Riegel then published, in 1935, the results of his survey in a book titled, The Meaning of Money. I’m not aware of the existence of any digital file of that book, but there are a few bound volumes and photocopies still available.

My intention here is not to review or summarize that book, but simply to provide some background showing Riegel’s diligent research of the subject and to set the stage for presenting some of his eventual conclusions.

Riegel died in 1953, but part of the vast legacy he left behind is a one page document that bears the heading, Are These Propositions Correct? This document bears no date, but was probably written late in his life, and seems to be a concise summary of what he discovered and came to believe as result of his many decades of research and cogitation in the areas of money and the exchange process. I have transcribed that document, and present it below for your consideration.

Are These Propositions Correct?

  1. Money is a means of facilitating trade by splitting transactions in halves, giving the buyer value and the seller a claim for equivalent value upon any one or more traders in the community of traders.
  2. The issuance of money arises out of a purchase and sale transaction requiring tender and acceptance. Therefore, it is a bi-lateral function that can be exerted only by a buyer and a seller and there can be no money issue on behalf of another. Therefore governments cannot issue money on behalf of their constituency.
  3. Implicit in the act of issue is the agreement of the issuer (in common with all others in the trading community) to accept the issue in exchange for value when tendered. Therefore, only one who is prepared to accept money in exchange for value, when tendered, is qualified to be a money issuer and all persons so qualified to accept are ipso facto qualified to issue. Thus the power to issue is inherent in all traders.
  4. Money circulation is a cycle wherein the money passes from issuer to acceptor and from acceptor to acceptor until finally accepted by the issuer and thus retired. The money system is therefore a bookkeeping system whereunder money springs from a debit and is retired by an offsetting credit. The instrument evidencing the bookkeeping process need have no intrinsic value.
  5. Money is actually backed by the value surrendered by the seller and potentially backed by the value in possession of the next seller. Therefore, all “reserves” such as precious metals or other values are purely gratuitous and irrelevant.

Conclusion

If the above propositions are correct, we must conclude that a true money system, not only may, but must be established as an integral part of the private enterprise system and the issuing power must be denied to all except private enterprisers, the exclusion to include all governments and non-profit institutions. The true money system must be based upon voluntary cooperation of the participants. Therefore no legislative or political action is required. Therefore, without political sponsorship or boundaries, the true money system is potentially universal and uniting all traders with one monetary language.

Sometimes Riegel’s statements require clarification and elaboration, which I have done in some of my own writings, and there are a (very) few points on which I disagree. But Riegel has given us here a clear view into the simple essence of money and the true nature of the exchange process, providing the material we need for building a solid foundation upon which economic democracy can be erected. –t.h.g.

Let’s walk away and play a different game.

In this short video by Katie Teague, David Korten describes the fundamental strategy that I have been advocating for a long time. Forget about petitioning Congress or appealing to the power structure. The old system cannot be reformed; it must be transcended. We need to reduce our dependence upon their systems, structures and institutions, and learn to share and cooperate in building new ones that serve the common good. That must begin with the greatest of all our dependencies–money.

Katie Teague is the producer of the film, Money and Life.

The Emergence of Self-Organizing Systems of Exchange

Joseph Jaworski is the author of Synchronicity: The Inner Path of Leadership. In a message today from the publisher announcing the second edition of the book, I noted the reference to Jaworski’s “Four Principles to Access the Source of Innovation.” Although I’ve not yet read the book, I did take a look at the blog entry that describes the principles.

This is an excerpt of what it says:

At the heart of what Joseph Jaworski discovered during this fifteen-year journey as a way to understand and access the Source of wisdom and creativity – the place from which profound innovation flows – are these four principles:

 1. There is an open and emergent quality to the universe; a group of simple components can suddenly re-emerge at a higher level of self-organization as a new entity with new properties.

2. The universe is a domain of undivided wholeness; both the material world and consciousness are parts of the same undivided whole.

3. There is a creative Source of infinite potential enfolded in the manifest universe; connection to this Source leads to the emergence of new realities.

4. Humans can learn to draw from the infinite potential of the Source by choosing to follow a disciplined path toward self-realization and love, the most powerful energy in the universe. The words of philosopher Pierre Telihard de Chardin speak well to this principle. “Someday, after mastering the winds, the waves, the tides, and gravity, we shall harness the energies of love and then, for a second time in the history of the world, man will have discovered fire.”

Perhaps you own experience, like mine, will attest to the truth inherent in those principles.

I was particularly struck by the first principle and the statement that, a group of simple components can suddenly re-emerge at a higher level of self-organization as a new entity with new properties. This is highly relevant to the transition process that is currently underway in the world, especially the reinvention of money. In Chapter 17 of my book, The End of Money.., I describe the four basic elements required for A Complete Web-Based Trading Platform. These elements are:

1. A marketplace

2. A social network

3. A means of payment

4. A measure of value or pricing unit

These components are indeed “re-emerging” (based on our changing collective consciousness) “at a higher level of self-organization.” We are seeing more widespread recognition that:

  • money is nothing but a systems of accounting for credits and debits,
  • that it is the people’s collective credit that supports every national currency and payment medium,
  • that the creation of money based on interest-bearing debt requires continual expansion of debt, which drives economic growth that has become dysfunctional and destructive,
  • that we no longer need to depend upon banking wizardry to provide the monetary and financial means for exchanging goods and services and actualizing our productive capacity.

We now have many web-based marketplaces and social networks, numerous private currencies and payment systems that use direct credit clearing, and increasing recognition that there is an urgent need for a measure of value that is independent of any fiat currency or central bank.

As I pointed out in my chapter, there are a number of “disruptive technologies” that are emerging to completely change the nature of money and banking. These are:

  • Direct credit-clearing among buyers and sellers
  • The use of the Internet to create Web-based marketplaces
  • Transparency in Web-based accounting, information, and exchange systems
  • Strong identity verification
  • Secure encryption of information over the Internet
  • Social networking
  • Reputation ratings of vendors and buyers that are continually updated and available on-demand
  • The reemergence of mutual companies, co-responsibility, and localized Web-based markets

“It is not any of these individually but all of them in combination that will, I believe, result in structures that will provide superior performance in mediating the exchange process. Worsening economic and financial conditions, such as those experienced in 2007 and 2008, will create enhanced market opportunities for this sort of nonpolitical trading platform, and will assure their eventual implementation and wide acceptance.”

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Money and Politics in the New Decade

James Robertson and I have known each other for many years and I think there is a great deal mutual respect between us. James is quite insightful and his heart is in the right place, and that is reflected in his latest newsletter, part of which I’ve included below.

Our main point of disagreement is about what changes are necessary to deal with civilizations current crisis and what might be fruitful approaches to making them.

(1) He, like most Brits and Europeans I’ve encountered, still believes in statist solutions. They think they have a chance to influence, if not control, the political process using the existing structures.

(2) James also believes that central government should be the provider of exchange media (money).

On the first of those, I believe that the nation state has outlived its usefulness, that power has become over-centralized and therefore corrupting and corrupted, and that decentralization and human-scale must be the order of the day.

On the second point, I believe in the need for government to relinquish the money power and to repeal legal tender laws that give one brand of money a monopoly and force its acceptance even though it is inevitably abused by improper issuance and misallocation. I address this in the chapter titled “The Separation of Money and State” in my latest book, The End of Money and The Future of Civilization.

In 2002 I wrote an appraisal and critique of the proposal that he and Josef Huber published in 2001 under the title Creating New Money: A Monetary Reform for the Information Age. That critique can be found at http://reinventingmoney.com/documents/huber.html. James’ review of my book, can be found at http://www.jamesrobertson.com/news-jun09.htm#greco. Subscriptions to his newsletter are free; you can sign up here. — t.h.g.

James Robertson
Newsletter No. 28 – January 2010

1. EDITORIAL: THE TRANSITION TO A NEW DECADE

The ‘Noughties’ have shown that we in the “democratic West”, led by a global super-power in the USA, can no longer claim a specially democratic and influential position in world affairs.

The claim to be democratic has been disastrously damaged by our self-imposed dependence on profit-making commercial banks to provide our public money supply, by our elected representatives’ money-grubbing, and by the way the US and Britain invaded Iraq and destabilised the Middle East.

The claim to be influential has been shown up at the recent Copenhagen conference on climate change, when the newly powerful nations, led by China and supported by many “less developed” peoples, insisted that their future development prospects should not suffer from the need to repair the global ecological damage caused by Western development over the past 200 years, and that we should bear the main cost of repairing it.

In Britain we face a general election within the next six months. There is a widespread sense that none of our mainstream political parties is capable of responding effectively to the range of national and international challenges we now face. If their election campaigns confirm this, the result could be a temporary “hung Parliament”.

We electors and our politicians might then recognise the need for deeper-seated changes than mainstream agendas now offer. A two-year transition to the ‘Teenies’ decade could then see the start of a deliberate shift to a new worldwide path of co-operative development and democratic participation. It would give us a much better chance of securing the future of our and other endangered species, than trying to restore competitive Business-As-Usual.

2. MONEY SYSTEM REFORM

A major aspect of that new path of development has to be a money system fit for its purpose.

2.1. The Purpose of the Money System

The money system’s purpose must change from what it has been since its origins in the distant past. It must no longer be designed to provide a stealthy way to transfer wealth from weaker and poorer people to richer and more powerful ones. (If you don’t believe that this is a fair description, take a look at my short History Of Money -www.jamesrobertson.com/books.htm#history).

Its new public purpose now must be to enable everyone to benefit from fair and efficient exchanges of goods and services, reflecting what we each contribute to and take from the common wealth. It is a purpose for which governmental agencies at local, national and international level must become directly responsible.

To get the money system reconstructed for this new purpose, we have to understand it as a system of interacting money subsystems which influences our behaviour at every level – personal, household, local, national, and global. We have to understand how it generates a calculus of values, and how that operates as a scoring system motivating us by rewarding some things and penalising others. And we have to understand how its present modes of operation motivate us to behave in ways that hasten our species’ suicide.

The following four governmental decisions primarily determine how the money system works – in other words, what values it generates in terms of the prices and costs of everything compared with everything else, and so how it motivates us to behave:

  • how the public money supply is created, by whom and in what form (as debt or debt-free);
  • how governments collect public revenue (for example, what they tax and what they don’t tax);
  • what public spending is spent on and what it isn’t spent on; and
  • how governments regulate the financial dealings of individual people and other organisations.

Today, all of those urgently need systemic understanding and reform.

The full Newsletter can also be viewed here.

Thomas Greco’s Video Interview with Daniel Pinchbeck

Here are some segments of an interview I had with Daniel Pinchbeck during the Economics of Peace Conference in Sonoma, California in October of 2009. This interview was recorded by Haig Varjabedian

You can watch the entire interview in four parts on Vimeo.

Daniel Pinchbeck is an author and the  founder of  RealitySandwich.com, a website forum regarding experiences and initiatives surrounding the evolution of consciousness.

I also did an interview with Regina Meredith of Conscious Media Network.