Positive Money. A proposition for money reform

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ripped
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05 Dec 2014, 2:45 am

LoveNotHate wrote:
ripped wrote:
There is a difference between the currency issued by a federal reserve and the value of that currency.

In common parlance, money and currency mean the same thing, but in economics they are not.

But there is no sense in talking economics to someone who clearly knows nothing about it.


If you knew what you were talking about then you wouldn't be saying silly stuff like "banks don't create money".

The "Money Creation" wikipage:
http://en.wikipedia.org/wiki/Money_creation

The federal reserve is not issuing currency; in this context it is issuing money. Electronic credits. See first paragraph in image from wikipedia. And banks create money by cascading fractional reserve lending.


Well I stand corrected. Clearly you know this much about economics.

Now, in what currency are those electronic credits denominated? Why in US dollars of course.
Well that would make them currency wouldn't it?

Money however is comprised of more than just currency, and claims of 'free money' are easily believed to be stories to defraud the gullible and unsophisticated.



LoveNotHate
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07 Dec 2014, 5:54 pm

ripped wrote:

Now, in what currency are those electronic credits denominated? Why in US dollars of course.
Well that would make them currency wouldn't it?

Money however is comprised of more than just currency, and claims of 'free money' are easily believed to be stories to defraud the gullible and unsophisticated.


I waited to see if someone else would comment.

Yes, the credits are US dollar dominated. You might be right that electronic credits are currency, depends on how you want to define currency.

Money is created because banks can loan out more money than they have. Fractional reserve lending only requires like 20% reserves. And the banks can structure this (i.e, one bank loans money it doesn't have to another bank that loans additional 80% of that money to another bank .... )

It is a remarkable thing to think that banks can do this.



Mukherjee80
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08 Dec 2014, 5:25 pm

ripped wrote:
Mukherjee80 wrote:
ripped wrote:
I get a loan for a house. The house is worth the money I borrow.
The bank borrows the loan money from the money market and lends it to me.
Over the life of the loan, the loan is paid back, plus interest.
At what point did the bank "create" money?


The bank does not borrow money from the money market. That is just an assumption that you (and most other people) make, and one that monetary reform groups (like Positive Money) are trying to get people to understand is incorrect.

When you get a loan from a bank, the bank creates the money that it loans to you. The money comes into existence by virtue of the bank giving you a loan.


No it doesn't. This is a confusion between the debit and credit allocations in banks accounting systems.

Mukherjee80 wrote:
On the other hand, when governments borrow money, they do borrow from the money markets.

As do all banks, barring the Federal Reserve.


No. I repeat: when banks loan money to private businesses and individuals, they create the money that they loan.
The Federal Reserve affects the money supply by changing the discount rate, but it is still private banks that create about 97% of the money in circulation (the rest being notes and coins created by the government).

ripped wrote:
Mukherjee80 wrote:
But how did that money come into existence in the first place? By private individuals and businesses taking out loans, that's how.


That money came into existence by private individuals and businesses creating goods and providing services. That money is backed by quantifiable resources.


Even after witnessing your exchange with LoveNotHate, I'm still not sure you get it. I'm sorry to say it, but your paragraph above is ridiculous. When private individuals and businesses create goods it might be said that they are creating "wealth", but they are not creating money. If I as a private individual take a pile of wood and build a table out of it, I am increasing the wealth of the community, but I am not increasing the community's money supply.

A society could contain an abundance of goods, but if the money supply is too low (and since barter is inefficient for modern societies) the majority of people will suffer poverty admist plenty (which is what happened during the Great Depression).

ripped wrote:
LoveNotHate wrote:
ripped wrote:
There is a difference between the currency issued by a federal reserve and the value of that currency.

In common parlance, money and currency mean the same thing, but in economics they are not.

But there is no sense in talking economics to someone who clearly knows nothing about it.


If you knew what you were talking about then you wouldn't be saying silly stuff like "banks don't create money".

The "Money Creation" wikipage:
http://en.wikipedia.org/wiki/Money_creation

The federal reserve is not issuing currency; in this context it is issuing money. Electronic credits. See first paragraph in image from wikipedia. And banks create money by cascading fractional reserve lending.


Well I stand corrected. Clearly you know this much about economics.

Now, in what currency are those electronic credits denominated? Why in US dollars of course.
Well that would make them currency wouldn't it?

Money however is comprised of more than just currency, and claims of 'free money' are easily believed to be stories to defraud the gullible and unsophisticated.


What do you mean when you talk of "claims of free money" and "stories to defraud the gullible"? Nobody on this thread is making any promises of free money. I don't know if the name "positive money" has put you off, but the thread is about reforming the monetary system.



ripped
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09 Dec 2014, 1:25 am

Mukherjee80 wrote:
No. I repeat: when banks loan money to private businesses and individuals, they create the money that they loan.
The Federal Reserve affects the money supply by changing the discount rate, but it is still private banks that create about 97% of the money in circulation (the rest being notes and coins created by the government).

It isn't enough to repeat a false statement, you need to provide something by way of logic.

Mukherjee80 wrote:
When private individuals and businesses create goods it might be said that they are creating "wealth", but they are not creating money. If I as a private individual take a pile of wood and build a table out of it, I am increasing the wealth of the community, but I am not increasing the community's money supply.

Are you able to make a distinction between currency and money, or is this subject beyond you?

Mukherjee80 wrote:
Ripped wrote:
Money however is comprised of more than just currency, and claims of 'free money' are easily believed to be stories to defraud the gullible and unsophisticated.
What do you mean when you talk of "claims of free money" and "stories to defraud the gullible"? Nobody on this thread is making any promises of free money. I don't know if the name "positive money" has put you off, but the thread is about reforming the monetary system.

And the people in the video are asking for which, your vote or your money?



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10 Dec 2014, 1:59 pm

ripped wrote:
Mukherjee80 wrote:
No. I repeat: when banks loan money to private businesses and individuals, they create the money that they loan.
The Federal Reserve affects the money supply by changing the discount rate, but it is still private banks that create about 97% of the money in circulation (the rest being notes and coins created by the government).

It isn't enough to repeat a false statement, you need to provide something by way of logic.


Neither my proposition (that banks create the money that they loan) nor yours (that banks borrow the money they loan from the money market) is illogical in itself. If you are saying I need to provide real-world evidence, I already provided some when I quoted the Bank of England's own website, which is more evidence than you have provided. You should take your own advice about repeating claims with nothing to back them up.

ripped wrote:
Mukherjee80 wrote:
When private individuals and businesses create goods it might be said that they are creating "wealth", but they are not creating money. If I as a private individual take a pile of wood and build a table out of it, I am increasing the wealth of the community, but I am not increasing the community's money supply.

Are you able to make a distinction between currency and money, or is this subject beyond you?


That's an irrelevant question. You said "I get a loan for a house. The house is worth the money I borrow. The bank borrows the loan money from the money market and lends it to me." Even if this were correct (and it isn't) it leaves the question of how that money in the money market came into existence in the first place. The only answer you have offered to this question is "That money came into existence by private individuals and businesses creating goods and providing services."

Very well. Please explain to us how this works exactly. If an individual takes a plot of land and a pile of bricks and adds a million dollars of value by building a house, how does this increase the amount of money in the money market (ie- that pool of money that banks supposedly borrow from in order to make loans)? Does somebody's savings account get topped up with a million dollars as soon as the house is put up for sale?

ripped wrote:
Mukherjee80 wrote:
Ripped wrote:
Money however is comprised of more than just currency, and claims of 'free money' are easily believed to be stories to defraud the gullible and unsophisticated.
What do you mean when you talk of "claims of free money" and "stories to defraud the gullible"? Nobody on this thread is making any promises of free money. I don't know if the name "positive money" has put you off, but the thread is about reforming the monetary system.

And the people in the video are asking for which, your vote or your money?


Neither, which you would have realised if you'd been paying attention. Anyway, you haven't really answered the question. Who on this thread or on the Positive Money website is promising people free money? Nobody.



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10 Dec 2014, 2:01 pm

More evidence that banks create money when they make loans.

Quote:
"When banks extend loans to their customers, they create money by crediting their customers’ accounts."
Sir Mervyn King, Speech to the South Wales Chamber of Commerce at The Millenium Centre, Cardiff on 23rd October 2012

“The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending.”
Martin Wolf, Financial Times, 9th November 2010

"The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money."
Lord Adair Turner, former chairman of the Finacial Services Authority, Speech to the South African Reserve Bank, 2nd November 2012

"Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo – extending a loan to the borrower and simultaneously crediting the borrower’s money account."
Lord Adair Turner, former chairman of the Finacial Services Authority, Speech Credit, Money and Leverage, 12th September 2013

"By far the largest role in creating broad money is played by the banking sector… When banks make loans they create additional deposits for those that have borrowed the money."
Bank of England, Interpreting movements in broad money, p.377

"Even before the crisis banks enjoyed various kinds of state support, including the effective right to create money."
Independent Commission on Banking Report

Banks extend credit by simply increasing the borrowing customer’s current account … That is, banks extend credit [i.e. make loans] by creating money
Paul Tucker, Deputy Governor for Financial Stability

"Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit “creation” – credit is created literally out of thin air (or with the stroke of a keyboard).”
Paul Sheard, Chief Global Economic & Head of Global Economics and Research, Standard and Poors



Mukherjee80
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10 Dec 2014, 2:03 pm

More evidence, this time from the Guardian newspaper ...

Quote:

The truth is out: money is just an IOU, and the banks are rolling in it
David Graeber, theguardian.com, Tuesday 18 March 2014



Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called "Money Creation in the Modern Economy", co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong...

To get a sense of how radical the Bank's new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don't suffice, private banks can seek to borrow more from the central bank.

The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.

It's this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say "there's just not enough money" to fund social programmes, to speak of the immorality of government debt or of public spending "crowding out" the private sector. What the Bank of England admitted this week is that none of this is really true. To quote from its own initial summary: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits" … "In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money 'multiplied up' into more loans and deposits."

In other words, everything we know is not just wrong – it's backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with "quantitative easing" they've been effectively pumping as much money as they can into the banks, without producing any inflationary effects.
...
Why did the Bank of England suddenly admit all this? Well, one reason is because it's obviously true. ...
But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it ...



ripped
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11 Dec 2014, 9:48 am

The organisation behind the production of the video are advocating that all commercial banks only lend out money that has previously been deposited in their savings accounts . They want to prevent commercial banks from borrowing money.

Which is another way of saying they intend to crash British economy by reducing the currency tap to a trickle.

Wholesale reform of the monetary system is an extremely large undertaking and the onus is upon its advocates to make that case, which so far they have failed to do.



Yew
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12 Dec 2014, 2:40 pm

[quote="ripped"]The organisation behind the production of the video are advocating that all commercial banks only lend out money that has previously been deposited in their savings accounts . They want to prevent commercial banks from borrowing money.

Which is another way of saying they intend to crash British economy by reducing the currency tap to a trickle.

Wholesale reform of the monetary system is an extremely large undertaking and the onus is upon its advocates to make that case, which so far they have failed to do.[/



No, they want to PREVENT the economy from crashing again. They propose that the very lucrative function of creating loans with interest can be administered by a national bank also. So it wouldn't reduce the currency tap, just control it with another agenda than short term profit.

When the power to create money is in commercial hands the system is inherently unstable because banks tend to loan out too much in good times and too little in bad times. Also they prefer to lend out to wealth that is already created, like houses (and create bubbles), instead of wealth that could be created, like business start ups. Only 10% of bank loans goes to businesses. A national bank would be much better at getting us out of recession both by stimulating productive activities of businesses and making sure people could afford their goods and services.

After the financial crisis the banks were bailed out with society's money. So I would like to hear a good argument against why society shouldn't reap the benefits of how the monetary system works.
Are you comfortable with private businesses that are too big to fail ?

I think Positive Money has made a great case for a very mild and even conservative reform. The monetary system is 100% a social construct so it is only the lack of understanding and a huge lobby that is preventing change.



ripped
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13 Dec 2014, 2:40 am

Yew wrote:
ripped wrote:
The organisation behind the production of the video are advocating that all commercial banks only lend out money that has previously been deposited in their savings accounts . They want to prevent commercial banks from borrowing money.

Which is another way of saying they intend to crash British economy by reducing the currency tap to a trickle.

Wholesale reform of the monetary system is an extremely large undertaking and the onus is upon its advocates to make that case, which so far they have failed to do.

No, they want to PREVENT the economy from crashing again. They propose that the very lucrative function of creating loans with interest can be administered by a national bank also. So it wouldn't reduce the currency tap, just control it with another agenda than short term profit.

When the power to create money is in commercial hands the system is inherently unstable because banks tend to loan out too much in good times and too little in bad times. Also they prefer to lend out to wealth that is already created, like houses (and create bubbles), instead of wealth that could be created, like business start ups. Only 10% of bank loans goes to businesses. A national bank would be much better at getting us out of recession both by stimulating productive activities of businesses and making sure people could afford their goods and services.

After the financial crisis the banks were bailed out with society's money. So I would like to hear a good argument against why society shouldn't reap the benefits of how the monetary system works.
Are you comfortable with private businesses that are too big to fail ?

I think Positive Money has made a great case for a very mild and even conservative reform. The monetary system is 100% a social construct so it is only the lack of understanding and a huge lobby that is preventing change.


Look man, its a stinker.

They start out saying they don't know what money is.
Then that money isn't real.
And then they want the government that prints the money to lend it out as well.
And yet they cannot see of a conflict of interest there.

I don't mean to sound too harsh with this, but in order to effect a meaningful change there needs to be credible authority and sound economic theory.



Yew
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13 Dec 2014, 9:07 am

ripped wrote:
Yew wrote:
ripped wrote:
The organisation behind the production of the video are advocating that all commercial banks only lend out money that has previously been deposited in their savings accounts . They want to prevent commercial banks from borrowing money.

Which is another way of saying they intend to crash British economy by reducing the currency tap to a trickle.

Wholesale reform of the monetary system is an extremely large undertaking and the onus is upon its advocates to make that case, which so far they have failed to do.

No, they want to PREVENT the economy from crashing again. They propose that the very lucrative function of creating loans with interest can be administered by a national bank also. So it wouldn't reduce the currency tap, just control it with another agenda than short term profit.

When the power to create money is in commercial hands the system is inherently unstable because banks tend to loan out too much in good times and too little in bad times. Also they prefer to lend out to wealth that is already created, like houses (and create bubbles), instead of wealth that could be created, like business start ups. Only 10% of bank loans goes to businesses. A national bank would be much better at getting us out of recession both by stimulating productive activities of businesses and making sure people could afford their goods and services.

After the financial crisis the banks were bailed out with society's money. So I would like to hear a good argument against why society shouldn't reap the benefits of how the monetary system works.
Are you comfortable with private businesses that are too big to fail ?

I think Positive Money has made a great case for a very mild and even conservative reform. The monetary system is 100% a social construct so it is only the lack of understanding and a huge lobby that is preventing change.


Look man, its a stinker.

They start out saying they don't know what money is.
Then that money isn't real.
And then they want the government that prints the money to lend it out as well.
And yet they cannot see of a conflict of interest there.

I don't mean to sound too harsh with this, but in order to effect a meaningful change there needs to be credible authority and sound economic theory.


Unless you are a banker I don't really se the conflict of interest. If you are rich you should be interested in a stable system that keeps your savings safe. If you are poor you should be interested in a society that can afford to help you out with welfare.

Only if you trust your government less than you trust your bank I can understand why you dislike the idea. But then it's about time to get a new government.

The point is that there are things like roads and water supply that are too big and all pervasive to be handled by institutions with the narrow focus of profit. And that the money supply is one of those things. The financial crisis proofs that.

But it's a somewhat invisible subject even though it effect everyone. I've never thought about where money come from before. The message of Positive Money seems very fact based and grounded in sound economic theory.

Who do you think are credible authorities on these issues ?



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13 Dec 2014, 9:31 am

But central banks can control the money supply by raising or lowering the interest rates, which is what they haven been doing during the crisis. They are still in control, since the commercial banks will have to change their lending behavior based on the interest rate.



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13 Dec 2014, 10:16 am

trollcatman wrote:
But central banks can control the money supply by raising or lowering the interest rates, which is what they haven been doing during the crisis. They are still in control, since the commercial banks will have to change their lending behavior based on the interest rate.


Yes and the interest rate is indeed historically low. But I don't feel I live in a prosperous society with innovation and job creation and an optimistic outlook on the future. I feel I live in a deteriorating society.

I believe it would be more efficient to "cut out the middle man" and get the money directly to places where it could kick start the real economy. I mean the "ulterior motive" of a government owned bank would be to support productive activities that they could tax.