Augusto Graziani, an Italian Professor of Economics, … 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 | Professor and Head Of School Of Economics, History & Politics, Kingston University, London
15 comments:
zzzzzzzzzzz.....
To make it more intuitive, they should call money Maya. And then the illusion of infinite quantity could take root even though we know it is really limited and the only really infinite resource is human imagination.
It's wrong as well. Another creation myth.
We all generate credit with each other. I do something for you and you owe me. You do something for me and you owe me. It is those tabs that are the value.
Then we learnt to swap tabs with each other. So it simply isn't true that we need banks to clear transactions as anybody who has done a contra accounting transaction between two parties knows.
But that gets complicated because we have to maintain a contra account with everybody else in the economy. So you invent banks as a clearing house for contras and standardise on a unit of account to ensure that one contra can be compared to another.
Banks are a simplification structure to start with. And then banks start making loans in the unit of account - relieving the firms of the requirement to grant credit. Which is when the fun begins.
*I owe you.
Does it matter? The only thing we need to know is that is human made, not something that rains from the sky or we extract from the earth. Ie. is not something scarce unless we make it scarce.
If we acknowledge that a lot of policy options opens, and that's what matters.
"Does it matter?"
It does. If you get it wrong, then you start looking for policy options in the wrong place. Thinking banks are 'special' means that you believe you can't do without them, and that they are somehow different from 'shadow banks' or just normal companies.
Half the battle now is proving that the simple is equivalent to the complex - and that requires more of the sort of demonstration I've done before
trying to define a metonym is like doing a crossword puzzle or sudoku or reading a fiction book ... ie waste of time...
At least Keen doesn't make the same mistake as MMT with the government origin of money explanation. IMO Keen gets it right, functionally and historically. Government comes along much, much later in the discussion after banks have become an uncontrollable nuisance to the public and stability.
If you acknowledge that banks can create money ex-nihilo, pretty much, then any human institution can create it.
That's the main difference between not-knowing and knowing IMO, if we give banks more weight on creation of it is a political choice, but no one who is being honest can say that we require banks or than banks should have most of the share on the "business of creating money" (or doing "God's work" as Blankfein said) necessarily. The mix is a political choice.
So if you know "money" is an human institution/tool which is not provided by nature the following questions regarding it ('how to create it', 'put it into the economy', 'make it flow', 'put it in the right hands' etc.) is a matter of politics and ideology.
Ryan Harris,
What’s wrong with the MMT “the state creates money” idea? Who issues £10 notes and $100 bills? It’s the UK government machine and the US government machine, isn't it? By “government machine” I mean government and central bank considered as one unit.
And what’s the origin of reserves? The central bank!
As to whether government comes before banks or vice versa I’d guess that if you go back two or three thousand years, government came first. That is, there is plenty of evidence from history that money was originally invented by kings and rulers to help them collect tax. Though I’m not the world’s expert on the history of money.
As to whether private banks OUGHT TO create money, there’s a very simple and monster problem with private money creation, namely that money creation by private banks is done by borrowing short and lending long. And money is a VERY SHORT term liability for a bank, thus money creation by private banks renders them inherently vulnerable (as Messers Diamond and Rajan pointed out).
That’s why we have taxpayers standing behind private banks (i.e. subsidising them) and lending them TRILLIONS at sweetheart rates of interest during a crisis.
It’s widely accepted in economics that an activity that needs subsidising does not maximise GDP and should be scrubbed, unless there’s a very good social justification for the activity. I’ve expanded on that argument here:
https://mpra.ub.uni-muenchen.de/66612/1/MPRA_paper_66612.pdf
I take a Popeye approach to explain simplistic domestic-only money systems and banking systems. I think money creation all starts at the grass roots level with Whimpy saying he'll gladly pay us on tuesday for a cheeseburger today before a central bank or government issues anything. For most regular people and business, trade credit is primary, bank credit is secondary. The trade is going to happen Whimpy will eat, regardless, if government fiat is there and convenient and available, it will be used rather than less desirable alternatives. That basic level of credit 'money' creation filters up through the economy as various forms of credit money largely independent of government intervention except at the margins and emerges as excess demand for fiat, treasuries, bank liabilities. To wit, in places like Russia or Somalia or Ecuador where people don't trust each other and the government, they prefer to use foreign currencies, gold and other forms of fiat for nearly everything besides paying taxes.
Banks are only special because their credit is accepted at par with government fiat by law, there is no discount, no haircut due to implicit government backing through the central bank and accepting their reserves at equal value to hard currency for taxes.
So to me, we have to backstop the economy and the credit pyramid somewhere, it is well settled that the cost of the subsidy is far less than the Ayn Rand survival of the fittest, 'let them fail' model of calamity we had prior to our current era of central banking when recessions spiraled into depression as even good, sound assets were destroyed in every business cycle. And we provide excess money when Whimpy goes on a Cheeseburger diet.
If we are going to provide a Government back stop, it might as well be regulated banks to avoid perverse incentives elsewhere when regulatory authority is weak.
Where else in the credit pyramid would it make sense to backstop credit? The government ("we") bear the cost of backstopping the credit-money system but in exchange and we obtain the benefit of seigniorage, regulating banks (including bankers wages if we want!) and setting the risk-free cost of money, including labor prices and it gives us enormous "fiscal space" to provide services than if we had a convertible currency or other non-floating fiat system. During private credit contraction periods, fiscal space is nearly limitless, government is well compensated for their insurance.
In today's modern world, with free, instantaneous movement of capital, free communication, open borders, relatively free trade, this old fashioned MMT/Chartalist view of money though is less and less applicable than it was from maybe the 1900s to 1970s but still remains true enough as a starting point to explain things. It is a little outdated because there is a larger world organization forming and alternative markets for real goods, investment funding and credit larger than any single government that puts more limits on fiscal space than we pretend in MMT. Still a better model than others though.
At least Keen doesn't make the same mistake as MMT with the government origin of money explanation. IMO Keen gets it right, functionally and historically. Government comes along much, much later in the discussion after banks have become an uncontrollable nuisance to the public and stability.
If that were the MMT position, it would be wrong. But that is not the MMT position
MMT holds that credit money preceded state money. Chartal money is called "modern" money to contrast it with ancient money.
MMT is based on Innes, first, Knapp afterward. The record of credit goes back to antiquity. Chartal money is old but much later than credit.
Oh no, I made a strawman.
" we obtain the benefit of seigniorage"
Actually nobody does.
The benefits of seigniorage come from fines, banning things, taxation and saving - since that is what creates the real space for government activity.
It's people voluntarily stopping doing things and being stopped from doing things that creates seigniorage.
Great comments Ignacio
I have phrased your point this way in the past;
Money is an invention not a discovery.
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