Augusto Graziani, an Italian Professor of Economics, who died early last year ... understood what money is because he posed and correctly answered a simple question: how does a monetary economy differ from one in which trade occurs by barter?Forbes
What Is Money And How Is It Created?
Steve Keen
21 comments:
why would anyone accept a bank promise? Keen doesn't really explain the theory properly, if it can be explained at all. As presented, it doesn't make sense.
He misses the hierarchy of money. The bank's promise is good because it is a promise to convert a deposit account to central bank money on demand as either cash at the window or settling in the interbank market is bank reserves. Both bank reserves and cash are government liabilities, which MMT calls tax credits. Those tax credits are assets on non-government balance sheets and liabilities on government balance sheets.
Circuit theory, which Keen stops at, is only half the story, and as such incomplete wrt modern money.
He should know better. Frankly, I am surprised. I thought he had caught himself up on MMT.
"why would anyone accept a bank promise?"
Because it has better standing than your promise.
People prefer to hold a bank's promise to repay over your promise to repay. So you buy your promise back by swapping it with one that is an 'upgrade'.
That's how the private circuit works. It's why banks evolve in a monetary economy. They are a repository of trust that clear exchanges more easily.
Because some people are indebted to the bank, they will seek the bank's money to clear the debt to avoid the consequences of not doing so.
There is a reason why bankruptcy has a massive stigma that is in many cases more debilitating than not paying your taxes.
To be fair Tom, it was only an article explaining how money differs from commodities.
You can't do the whole lot in 500 words.
That's true, Neil but it the answer is incomplete, since it hangs on trusting banks.
If one hangs one's hat on trust, then that trust has to have a basis. The history of banking shows that banks are not reliable repositories of trust. That's what deposit insurance is about, for instance.
Government money and guarantees back bank money, and the reason it works wrt trust is that government creates continuous artificial demand for its currency by imposing a tax liability.
Some would say that the history of governments debasing currency and the fact that central banks have inflation targets undermines that trust, so the only backing that one can actually put one's trust in reliably one is ownership of real assets, including precious metals.
PM's sit at the top of the hierarchy of money in a fixed rate convertible system, but even in fiat systems many people choose to save in their portfolios in real assets rather than financial assets.
are there any historical examples of banks that just issued their own currency and didn't use an outside currency to settle payments to customers and to other banks?
See Wikipedia — Free Banking
issuing bank notes is not the same thing as issuing a base money which is the final means of payment. Bank notes are promises to pay something else, such as coin in the past.
Don't think that it is fair to say circuitism is only half the story. Properly understood, it is identical to MMT. A hierarchy of money that happens to have a government at the top is a merely empirical fact, not really part of the theory. We could call the guy at the top of any hierarchy "the government" - and make it true by definition. During the middle ages, sometimes bank currencies traded above par of the (nominal) government's currency of the same name. So holding their money would have been a wiser penultimate settlement device, to answer Philippe - or you could just call such a bank "the government". Recreating them good old days is the aim of our modern corporate feudal overlords (CFOs).
"sometimes bank currencies traded above par of the (nominal) government's currency of the same name"
do you have more info on this?
Right. That's how bankers came to own the central bank privately at the outset of central banking. In effect, they became the government financially, since governments at the time not only didn't act responsibly but didn't have a clue about finance either so they became dependent on those who did.
But I would still say that the contemporary context in which Keen is presenting is only half the story, and understanding this correctly is important for a very important reason: Recreating them good old days is the aim of our modern corporate feudal overlords (CFOs).
Mitchell-Innes mentions it, see also other articles in the M-I volume. Ingham's Nature of Money & Wray's 1998 book does too IIRC. Boyer-Xambeu, Deleplace, Gillard's Monnaie privee et pouvoir des princes: L'economie des relations monetaires a la Renaissance, also translated into English is the main modern treatment, I think - haven't seen it. (Deleplace has an article touching on this in the volume dedicated to Graziani edited by Arena & Salvadori)
John Law gave an adequate explanation, 400 years ago.
So did the Greeks with "Nomisma" - over 2000 years ago.
Currency ain't rocket science, and never was.
Ignorance of coin, currency & social-credit seems to come mostly from efforts of bank lobbies to baffle citizenries with bullshit.
right Roger....
Its 2015: "What is money?"
what a bunch of f-ing morons...
We should explain this in 1st grade, to 6 year olds, and have done with it.
"That's true, Neil but it the answer is incomplete, since it hangs on trusting banks. "
Not quite.
It hangs on being in debt to banks.
That's what give the banks the control associated with government - a liability imposed ahead of issuance - and the reason why they really want to get rid of the competition from a state currency and government.
(As we know that was imposed after government realised that its bank had taken charge. And then the neo-classicals turned up with their cock and bull 'inflation targeting' storey and we gave it back).
What's amusing of course is that the way that we bring banks under control is to tie them into a fixed exchange rate and force them to exchange their own liabilities at par with the currency at the top of the hierarchy.
Correctly used that removes the power of bank debt as a power instrument.
So think of Greece as a bank...
In Geoffrey Ingham's book "The Nature of Money" he tells us that ontologically amongst human beings the "moral community" arrived a long time before the "market." Today our predicament is the widespread failure to understand the need to balance individual morality with community (mutual) morality when it comes to the creation and deployment of money.
Neil,
"It hangs on being in debt to banks."
That must have its origins in being in debt to landlords or merchants, etc, no? Otherwise why would you want to go into debt to a bank?
"landlords or merchants" who owned the bank.
In response to Scofield,
Yes, there are many examples of the fallacy of scale. Until we teach that to 6yr olds, in 1st grade, nothing much will change.
Example: If a Luddite hoards currency, he feels richer. Therefore, if we ALL hoard currency ... we'll all feel richer too, right?
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