To get a real insight into whether banks do indeed create money, we must first sharpen the focus of our enquiry:
If banks do create money, what kind of money do banks create?
For instance, do banks print foreign money?
It has been rumoured that in the past North Korea has printed North American dollars, but for the most part this practice is frowned upon and we can say that generally banks and governments refrain from printing each others currencies.(Although that might change in the Eurozone quite soon).
Do banks create their own private money? Is there such a thing as Lehman dollars?
Banks printing money in this form is not generally held to be the case, (at least not yet), but we can come back to that later.
Since it is clear that private banks don’t create money in general we have refined the question to:
Do banks create the national money used by you and I? Or to phrase it using democratised money theory language: Do private banks issue Government Issued Money?
And of course, when you put it in these terms, the answer has to be ‘no’.
Problem solved to my satisfaction at least.
But maybe not quite to yours.
In my last post I commented on a quarterly bulletin of the Bank of England that seems to suggest that banks do indeed create the majority money in circulation in the form of debt. This capitulation to the radical interpretation of economics piqued my interest. Putting aside the question as to whether banks do or don’t create money, why would the Central Bank retreat from earlier positions and just as importantly, why would it do so after all this time?
One plausible reason for a tactical concession to the insurgents is to better position the Monetarists for the next assault in their ongoing campaign to control the future of money.
It could be that central banks are positioning themselves so that it is not such a big shock when they come clean about derivatives being money. The message will be; Sure, private banks and financial institutions print money of one kind or another; they always have. So what’s the big deal? Perhaps the arrival of this political concession actually means that the time is approaching when the shadow economy will be coming out of the shadows.
This would be a reasonable assumption if there is a need for some kind of normalisation of interest rate policy. It will be impossible to significantly and permanently raise global interest rates without some corresponding amendment of national and international banking and exchange rules. These rules would need the justification of a new worldwide orthodoxy on money and banking. This might be the actual truth behind all those predictions of a world currency.
If orthodoxy were to concede that derivatives were to be regarded as a form of money it would confirm what I have been arguing for more than five years. But I don’t think I will be celebrating my intellectual success. Any successful attempt to conflate bank credit or anything else with Government Issued Money can only serve one purpose: to discredit and denigrate cash money. And that is nothing short of a disaster for you and for me.
There is a horrible synchronicity here between both orthodox and unorthodox wings of the monetary conflict; Monetarists and radical Bitcoiners. The message from Bitcoiners and Monetarists alike is leave government cash behind, the battle has moved on.
Bitcoiners argue that their cryptocurrencies are democratic and free from central bank oligarchy control and therefore better than cash. Monetarists argue for a technocratic ‘non politicised’ control of money issuance; effectively privatisation of money control in a credit card world. Both result in the end of cash money guaranteed by the state, under political control. Both result in the privatisation of the issuance of money.
In the light of these developments the strategic imperative for us is to ague for the sole primacy of Government Issued Money as the only form of currency. Let me explain why.
There has been a constant attack on the use of cash for at least two decades and this attack has been centred around the point of contact between cash and banking. The introduction of numerous legal requirements on bank reporting of activity as well as private petty restrictions on how much cash you can depots and withdraw have had a chilling effect on cash based banking.
At the same time cash has been increasingly frozen out of commercial activity- many utilities are virtually impossible to purchase with cash unless you use prepaid cards and are extorted by the utility provider for the privilege.
For the past six years or so this attack on cash has been masked by the attack on savings deposits expressed through negative interest rates. Not only do deposits not pay interest, but bank accounts and their supposed contents are rapidly losing their legal status.
The end game in all this is bail ins where banks simply convert deposits into shares, which you are not even allowed to freely trade! If bank credits really are money as the Bank of England paper argues, on what basis is this being done? Follow the actions not the words and you will at least begin to question any supposed conversion of monetary orthodoxy to radicalism.
It is possible to cut through the confusion between cash and credits illustrated by comparing the decision to hold goods, cash or credit.
Let us say that due to deflation you decided to put off purchases, that is to say to hold cash or bank credits. Are the risks and benefits the same in each case?
Holding and using cash offers the benefits of anonymity and privacy. Does bank credit offer this?
Cash money offers the benefit of dealing with no ratification, in other words no-one oversees and confirms any deal you might choose to make. Does bank credit offer this?
Cash money is legal tender, it has to be accepted in settlement of debt. Does bank credit offer this?
Cash money offers complete liquidity. Does bank credit offer this?
Bank credit is subject to seizure, forfeiture and conversion (as in bail ins). Does cash money suffer from this?
Cash money clearly offers a number of benefits and guarantees that bank credit cannot. Bank credit suffers in the comparison with cash money.
It should be clear from this that as bank credits become denigrated by the state it increasingly becomes necessary for central banks to delegitimise cash to at least a corresponding amount. Because if only a very small minority of the general population decided cash was the better option that would cause a lot of problems.
Only around 3-5% transactions are cash and this proportion will significantly diminish further if Monetarists have their way. But if usage of cash was to increase significantly, the plans of Monetarists would start to run into serious trouble in short order.
Firstly, cash is hard to take back in a way that credit is not. Paying off bank created debt ‘dissolves’ credit money but cash money has to physically be withdrawn from the economy which is much more difficult to do- this means hard inflation. The kind that central banks cannot control except by raising interest rates.
But even more important is the relationship between cash money and banking reserves. Cash money is directly created by central banks and obviously bank deposit credits are not (this is the essential complaint of unorthodox economics). The creation of cash money directly affects the amount of reserves required to be held by each private bank and by the central bank.
Bank credits can be created forever without necessarily altering the requirement for reserves. If people take their physical money out of the banking system for use they are effectively calling it into physical existence– forcing the banks to actually print and therefore again forcing them to raise interest rates.
These two reasons why bank credits are not Government Issued Money are still within the bounds of standard economics but there is a further more fundamental reason within Democratised Money theory.
I have argued previously that money makes a proclamation as part of a general contract between issuer and user.
This proclamation takes the form of the Base Interest Rate which determines the nature and scale of the economy. It is something that is universally applicable to the same extent. It affects everyone equally.
It is inextricably bound up with the specific contract of the money itself. Once this printed money proclamation goes out the door of the central bank it cannot be undone.
The cumulative effect of these non- undoable operations is the recorded element of the currency. You can’t undo a money issue interest rate or the effects it has on the economy but you can use the next money issuance to offset the effect. In other words vary the interest rate from issuance to issuance.
In contrast, bank credit is a specific, not a general contract. Credit is offered on an individual basis. The ‘proclamation’ from the lender is concerned with what the individual borrower must do, not the general economy. Because of this the issuance of bank credit requires a separate individual contract, unlike money where the contract is part of the money. This ‘money’ creation through debt is subject to ratification by the legal system; it can be undone if deemed onerous or illegal, unlike cash money.
The cumulative effect of credit creation by private banks does have a massive effect on the economy. But it is not a general effect like money, it is a cumulative private effect. When you borrow from a bank you have to deal with the economic power structure as a lone individual instead of as a citizen member of society dealing with a central bank. In other words it is the ultimate codified example of divide and rule.
If as I argue, Monetarists want to create a Permanent Credit Economy, (that is a decentralised planned economy, with banks deciding who gets credit to do what),
Then deceiving propaganda giving bank credit the status of money can only be to their advantage.
We should oppose it.