Noticing The Obvious

Economists are geniuses at avoiding the obvious and saying what various factions among the powerful want to hear. A good example is their discussions of bank-money, which avoid noticing how destructive our modern system is to the human and natural world.

Money-creation has been assigned as a privileged activity to banks for the profit of capitalists and governments. As a result it consists of credit and debt, not as a straightforward commodity.

There are three main differences between bank-created money and money created as a commodity:

1. Newly-created bank-money is allocated to persons (human or corporate) by banks on the speculation that, one way or another, it will turn a profit. It is also allocated to governments on the promise of payment out of future taxes, burdening the citizenry with debt.

Newly-created commodity money, on the other hand, could be allocated in any way subject to democratic approval (e.g. spent by government in lieu of taxation, or distributed equitably, or given entirely to homes for retired cats).

2. Bank-money is created with an inbuilt demand for interest, which takes money out of circulation and into investment. This transfer inflates asset values, making everyone who is rich richer and the rest poorer.

Commodity money on the other hand can be lent, spent and even hoarded: it has no inbuilt widget taking from ‘have-nots’ and giving to the ‘haves’.

3. Once bank-money has done its work, it is destroyed, as loans are repaid. This creates a need for new money, which can only be created by making more loans.

Commodity money, on the other hand, can be managed actively with the objective of maintaining a steady value for money. If there is too much money in circulation, some can be removed via taxation and destroyed; if there is too little, more can be created and allocated as mentioned above.

Because of the above three points, it is foolish to be surprised when money accumulates in vast pools owned by governments and the very rich, leaving savers, independent producers and the poor worse off.

4 replies on “Noticing The Obvious”

  1. Marco Saba says:

    “Once bank-money has done its work, it is destroyed, as loans are repaid.” – I am not so convinced about this last assertion. Imagine that you repay your debt in cash: Do the bank destroy that cash after it is returned ? Not. So more precisely we can say that the money disappear from the accounting books but not from the real world. The same can occur with the electronic money if we understand that the monetary means differs from the mere accounting existence of their transactions. This is the way we can explain why in the world the financial statements of banks are so depressed and in deficit while at the same time their accounts on the interbank settlement systems are so replenished with ‘unaccounted-for’ electronic money ! The fact is that the bank have to register the money created at the time of creation in the cash-flow as a positive value AND ONLY THEN she can subtract this value when the deposit of the client is credited through loans or direct payment. Money is never destroyed, it simply changes hands in a more or less occult way.

    • Ivo Mosley says:

      BUT… when money is credit (i.e. a claim), it no longer exists when a debt is ‘retired’: or to be more precise, an exactly equal amount of credit no longer exists. The Bank of England now acknowledges this: in Quarterly Bulletin 2014 Q1: ‘the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their
      existing debt, for instance.’

      • Marco Saba says:

        The point is that credit IS money, even in the hands of a bank (deposits are M1 for the ECB). The accounting trick is that the bank – by not crediting herself of the money just created – seems to go in ‘overdraft’ when she lend (or spend) the newly created electronic money. And when she get back the money, the balance SEEMS even, but the bank still hold the electronic money just received back in her centralized account. She don’t need to destroy this electronic money parked in this account because now the existence of this money is unaccounted for. This explain why both banks and central banks hold money in positive accounts in the main clearing institutions far in excess of the sum that you can see by looking in their aggregate official financial statements… this shadow money is held in those shielded A/C and who knows what is the final destination ?

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