142. Jim Says: May 6th, 2012 at 9:46 am
Hi Warren,In ‘Full Employment and Price Stability’ you write that “The current monetary system is a classic monopoly with the traditional analysis of monopoly sufficient to describe all aspects”.In other places you state that the government is the monopoly supplier of ‘its’ currency, or ‘its’ money, but that banks also create ‘money’ (credit/ deposit money) when they make loans. Banks presumably also determine the rate of interest that they charge on their loans.How is the first statement (that the monetary system is a classic monopoly) compatible with the fact that banks create money, and that the govt only has a monopoly on the supply of certain forms of money (currency, reserves etc)?Thanks.
Warren Mosler Reply: May 6th, 2012 at 2:43 pm
yes, the banks are designated agents of the govt that has decided their bank deposits are eligible for the payment of taxesUpdate to thread:
Jim Reply: May 6th, 2012 at 4:34 pm
But the banks create those deposits as and when they want to (by extending credit).A ‘monopoly’ is usually defined as:“The exclusive possession or control of the supply or trade in a commodity or service.”How can the monetary system be a monopoly if banks create their own form of money (which makes up most of the overall ‘money supply’)?The government may regulate the system to a greater or lesser degree, but does not have exclusive ‘control’ over it, does it?Thanks again.
Imtheknife: May 6th, 2012 at 8:00 pm@jim
Banks have permission from the federal government to create dollars, but only with certain terms. They cannot just create whatever money they want and spend it however they want and have that be the end of it- typically, liabilities are required such that money created by banks must ultimately also be destroyed by banks (that is, an equal and offsetting amount). Only the federal government can do that, and only the federal government can grant that power unto others (such as the central bank, in limited scope, and private banks, through the power of credit creation).
￼Warren Mosler Reply: May 7th, 2012 at 6:37 a
right, it’s called regulation and supervision￼
Warren Mosler Reply: May 7th, 2012 at 6:30 am
i say the govt and/or it’s designated agents is the single supplier of that which it demands in payment of taxes.fed member banks are currently govt’s ‘designated agents’
143. Jim Says: May 6th, 2012 at 5:16 pm
Also, by ‘their bank deposits’ do you mean their (the banks’) reserves at the central bank?
￼Warren Mosler Reply: May 7th, 2012 at 6:36 a
all the bank’s liabilities that can ultimately be used to pay taxes.
reserves are the fed’s bank deposits which count as well.
Jim Reply: May 7th, 2012 at 8:30 am
Can bank deposits pay taxes? It was my understanding that the actual payment happens in reserves. If I send in a cheque to pay my taxes, that cheque represents a promise by my bank to transfer reserves to the treasury on my behalf.Only a fraction of overall tax payments actually needs to be settled in reserves however, due to the fact that govt spending to banks usually offsets much of the transfer from banks.Have I got this wrong?
￼Jim Reply: May 7th, 2012 at 9:07 am
Regulation and supervision doesn’t equal ‘monopoly’. Many types of business require licences, and are regulated by govt agencies.
“They cannot just create whatever money they want and spend it however they want”
No, but neither does the govt control banks’ creation of credit. Most businesses face restrictions on what they can and can’t do – that doesn’t make them part of a government monopoly.
“the govt and/or it’s designated agents is the single supplier”
Shouldn’t that be “the govt and its designated agents are the only suppliers”?
Given the above, this would imply at least a duopoly (or oligopoly) of some sort.Ok, if government wanted to control everything that banks do they ultimately could, but at present they don’t, and they never have. Instead the govt issues charters and sets the rules of the game, as they do with other industries.Thanks.
￼Warren Mosler Reply: May 7th, 2012 at 11:14 am
govt controls bank credit extension to the extent it wants to.
and if it messes up a lot of out of control/inflationary consequences can follow.￼
Warren Mosler Reply: May 7th, 2012 at 11:11 am
you are conflating assets and liabilities a bit.
your bank deposit is fdic insured.your write a check to the govt. and the fed debits your bank’s reserve account and credit’s tsy’s fed account.
they don’t bounce your check because the bank might not have ‘sufficient’ reserve balance, they just let your banks balance go to where it goes, positive or negative.
if it goes negative, that’s functionally a loan to your bank from the fed.UPDATE 2:
144. Jim Says: May 7th, 2012 at 12:22 pm
Thanks for the replies.
On this point
“govt controls bank credit extension to the extent it wants to.”
We could say the govt controls everything to the extent that it wants to. Or in many cases, to the extent that the population allows it to.
Warren Mosler Reply: May 7th, 2012 at 12:28 pm
yes, making govt the monopoly supplier of business licenses, etc.
the govt allows its member banks to make bank loans which create bank liabilities called bank deposits which the govt has also decided to accept for payment of taxes.
It regulates/restricts this process and examines and supervises it to ensure compliance.
If that puts ‘supplying the thing demanded to pay taxes’ outside of your definition of a public monopoly fine. You’re entitled to any definition you select.
145. Jim Says: May 7th, 2012 at 12:24 pm
“they just let your banks balance go to where it goes, positive or negative”
Is there a limit on how far a bank’s balance can go negative, out of interest?
Warren Mosler Reply: May 7th, 2012 at 12:41 pm
yes, if your equity capital falls below the regulator’s comfort zone, or your liquidity, or your asset quality, or your management’s capabilities, or your earnings, or your liquidity, the regulators are supposed to shut you down .Source