The late Paul Samuelson's version of money creation, known to many as "fractional reserve banking," has been disproved by an ingenious empirical experiment.
A number of thoughts after listening to this podcast...
You asked if there was something that solidified a previous argument ...
Richard Werner floating the 200 000 Euro loan essentially solidifies the banking system creating of money out of thin air aspect for me. There is no longer is any linkage between the hard asset we produce, say a house or a book or a sack of potatoes. We are happy to see numbers on a computer screen as reward, a far cry from our ancestor who bit the coin to test for gold.
And I can see how easily it has happened. The convenience of not having to lug 500 ounces of gold over in order to buy someone's house ... The trust developed over years of full acceptance of first paper currency, then paper bank promises, cheques, to now digital printouts, e-transfer ... The size and scale of central banking system with loan officers never considering there might be a limit on the amount of money their bank could loam out, as that would be determined by someone far removed on the hierarchy chain.
Truly, I wonder if the entire thing happened by design or if it originally began by accident. I know the goldsmith turned banker would know when the gold supply was spoken for but I dare say, once reaching the scale of full banking and multiple branches, few employees would be aware of how much of the money on deposit was pledged as loans.
As a further though, with today's money being essentially vapour ware I wonder how it has distorted the business world. How many companies can accurately determine profit and loss?
Did Mr Samuelsson Know ... I don't know, I have not read him. I've heard that his text book rated the command economy of the USSR as superior to free enterprise and still did so when the slave state fragmented. But I also think about Bre-X, Nortel and Enron all companies receiving rave reviews from financial analysts till the bitter end. Experts guilty of compartmentalized thinking have ruined the lives of multitudes, and continue to do so today. The number of people that consider it important to strive for full context in their thinking are as rare as it has ever been. Contradictions only bother those who introspect and I've come to the conclusion that a good number of people change their minds without even knowing that they did. When a random thought is invalidated their subconscious mind just rewrites the code. From this day forward, they've always believed THIS to be true rathe THAT. Evasion simple tells them, they are never wrong. Think Caviid, global warming, collectivism and altruism.
As you mentioned human beings are dynamic and that leaves a static teaching profession continually in the dark. As early as Karl Marx intellectuals failed to see that seizing the means of productions carried with it the caveat that without freezing the economy it would do them like good as 2 weeks later some bright guy would make it all obsolete.
With respect to economics and economists ... beginning with Ludwig von Mises, ...
Having read 'Human Action', I place him near the peak of my admiration but in all i read i could not find a reference to the criminality of creating money absent of a link to production. I found that he seemed to consider that objectivity required that he remain removed from value judgement, pragmatic, more than idealistic. After reading him and a number of other people wasting time arguing for capitalism from an economic perspective I fully understood that morality moves man far more deeply. Yes, money is the greatest training tool ever invented but it doe not over come morality.
and a final point ...
I see redistributive government continually in need of funds and taxes as such can only be applied when things move and taking 5% of an economy that exchanges a trillion dollars worth of good adds up to real numbers. I saw why George Bush, in 2001, pleaded with American to get back in the mall. Even more so, truly defined, taxes are the price we pay for being productive and entrepreneurs pay taxes 'cause its so much fun to build things, they willingly pay the price. But with government employed economists I can see how they miss the real world. I believe most are 'trying to boil the frog', literally manipulate without killing the goose. As long as we continue to do productive, taxable actives they are in their glory. They've probably studied Atlas Shrugged even more than we have.
Wow, long post. I'll say a few things in response. Indeed, banks have always created money (fiduciary media) out of "thin air," but when gold (which is always in limited quantity) was the cash reserve in the bank, there was only so much "extra" money the bank could issue. As Mises and Reisman pointed out, bank-issued money tied to gold, unregulated and un-guaranteed by the government, would allow only a minimal issue of fiduciary media. But inflation reared its ugly head when paper certificates issued by fiat became the cash reserve. The problem is that the typical bank customer sees no clear difference when this happens. He still uses the bank for payments and borrowing, just as before. He notices that prices increase and he gets poorer, but this seems to have nothing to do with the banking system. As to the productivity of bank lending, I do believe money lending under free banking is highly productive. I tried to explain this in detail in Lesson Four, with the "Mr. Chow" restaurant example. As long as the money-creating loan is invested in a project that produces an income stream that pays the interest and principal, the loan is productive, self-liquidating, and, therefore, non-inflationary. So, I don't think it's accurate to say that all money creation by the banks is non-productive or immoral or "something for nothing," as some of today's libertarians like to claim. As you would probably agree, the entire problem in banking is the government's intrusion into the market. I don't think the evolution of goldsmith banking happened by "accident" any more than other human institutions (say marriage, for example) are an accident. Institutions adopted spontaneously by acting individuals, which last over many years, are good for the human race. These practices would never stand the test of time if they were not good for us. So, banks issuing money is clearly a virtuous idea, an essential aspect of free market capitalism. However, the government increasingly perverts banking, and this is what we must try to stop. My purpose in writing and teaching about banking is that the system can only be restored or reformed after it is better understood. Thanks for reading. I appreciate your thoughtful comments.
I would strongly recommend that you do not include Werner's "empirical test" in the planned book. Because what Werner is doing there is a hoax that does not prove what it is supposed to prove. Werner only proves what everyone already knows anyway, namely that a loan (or rather a promise of a loan) causes an extension of the balance sheet, where on the bank's assets side there is the claim against the borrower, while on the liabilities side there is the bank's debt to either make standard money (as you say) available to the borrower according to his instructions (withdrawal), or to ensure that the borrower succeeds in cancelling a debt (money transfer). The decisive factor here is that the loan agreement only contains obligations to transfer standard money. If the balance sheet extension has taken place, no transfer of standard money has yet taken place. This is the nature of a promise: it is a promise because what was promised has not yet been delivered or performed - the fulfilment of the promise is still pending.
What Werner has done is this: he has promised the bank to repay a loan that was never to be utilised. This means for the bank that it never had to fulfil its promise to carry out a transfer of standard money in favor of Werner. The reason for this is that a contract was made between Werner and the bank prior to the loan agreement that these promises that were to be made were never to be honoured:
"A written agreement was signed that confirmed that the planned transactions would be part of a scientific empirical test, and the researcher would not abscond with the funds when they would be transferred to his personal account, and undertakes to immediately repay the loan upon completion of the test."
The funny thing is that Werner uses the word "abscond", which would only apply if he already had the power of disposal over the money. However, he does not have this power because although the bank has promised to pay money, it is still the owner of this money (asset) - a deposit is merely a liability (a promise to be fulfilled). In order to activate this promise by the bank, Werner would have to a) make a transfer order and b) the bank would have to execute it (abscond is not possible without the assistance of the bank). However, the bank has made sure that it does not have to execute such an instruction from Werner, although with normal loans the bank has no right of objection if it receives an instruction for a money transfer. To put it bluntly: with such security, the bank could also have given him a loan of 100 billion € - since it can never be called upon to do so, this is not a loan agreement, but the cheapest kind of hogwash.
The contract concluded in German on the non-utilisation of the loan for own purposes is not included in the english papers, but can be viewed here (page 39 pdf counting):
The last sentence written by the head of the bank in the confirmation (last page of the pdf) is treacherous:
"This means that we have not undertaken any checks or actions to provide liquidity." This means that the bank, which cannot be utilised because of the loan promise, naturally has no reason to obtain the standard money (liquidity/reserves) it would need if the loan amount were actually utilised and it would be forced to transfer standard money with the help of the central bank, for example.
What can we learn from this? A transfer refers to central bank money, not book money. Book money is the right to instruct the bank to transfer standard money - but is not itself standard money. And that's the trick: you can only INSTRUCT payments WITH THE HELP OF book money, but not pay WITH book money, because it is not book money but central bank money that is being transferred.
Werner should know better, but he refuses to think logically. Maybe you do.
13:40 -- in the middle of watching. How do we make this great leap *backwards* to money as gold in order to come up with the "invention" of banking--and either we are talking Italy, as to, medieval, banking origins, or it's a nonsense theory, it would seem obvious.
A number of thoughts after listening to this podcast...
You asked if there was something that solidified a previous argument ...
Richard Werner floating the 200 000 Euro loan essentially solidifies the banking system creating of money out of thin air aspect for me. There is no longer is any linkage between the hard asset we produce, say a house or a book or a sack of potatoes. We are happy to see numbers on a computer screen as reward, a far cry from our ancestor who bit the coin to test for gold.
And I can see how easily it has happened. The convenience of not having to lug 500 ounces of gold over in order to buy someone's house ... The trust developed over years of full acceptance of first paper currency, then paper bank promises, cheques, to now digital printouts, e-transfer ... The size and scale of central banking system with loan officers never considering there might be a limit on the amount of money their bank could loam out, as that would be determined by someone far removed on the hierarchy chain.
Truly, I wonder if the entire thing happened by design or if it originally began by accident. I know the goldsmith turned banker would know when the gold supply was spoken for but I dare say, once reaching the scale of full banking and multiple branches, few employees would be aware of how much of the money on deposit was pledged as loans.
As a further though, with today's money being essentially vapour ware I wonder how it has distorted the business world. How many companies can accurately determine profit and loss?
Did Mr Samuelsson Know ... I don't know, I have not read him. I've heard that his text book rated the command economy of the USSR as superior to free enterprise and still did so when the slave state fragmented. But I also think about Bre-X, Nortel and Enron all companies receiving rave reviews from financial analysts till the bitter end. Experts guilty of compartmentalized thinking have ruined the lives of multitudes, and continue to do so today. The number of people that consider it important to strive for full context in their thinking are as rare as it has ever been. Contradictions only bother those who introspect and I've come to the conclusion that a good number of people change their minds without even knowing that they did. When a random thought is invalidated their subconscious mind just rewrites the code. From this day forward, they've always believed THIS to be true rathe THAT. Evasion simple tells them, they are never wrong. Think Caviid, global warming, collectivism and altruism.
As you mentioned human beings are dynamic and that leaves a static teaching profession continually in the dark. As early as Karl Marx intellectuals failed to see that seizing the means of productions carried with it the caveat that without freezing the economy it would do them like good as 2 weeks later some bright guy would make it all obsolete.
With respect to economics and economists ... beginning with Ludwig von Mises, ...
Having read 'Human Action', I place him near the peak of my admiration but in all i read i could not find a reference to the criminality of creating money absent of a link to production. I found that he seemed to consider that objectivity required that he remain removed from value judgement, pragmatic, more than idealistic. After reading him and a number of other people wasting time arguing for capitalism from an economic perspective I fully understood that morality moves man far more deeply. Yes, money is the greatest training tool ever invented but it doe not over come morality.
and a final point ...
I see redistributive government continually in need of funds and taxes as such can only be applied when things move and taking 5% of an economy that exchanges a trillion dollars worth of good adds up to real numbers. I saw why George Bush, in 2001, pleaded with American to get back in the mall. Even more so, truly defined, taxes are the price we pay for being productive and entrepreneurs pay taxes 'cause its so much fun to build things, they willingly pay the price. But with government employed economists I can see how they miss the real world. I believe most are 'trying to boil the frog', literally manipulate without killing the goose. As long as we continue to do productive, taxable actives they are in their glory. They've probably studied Atlas Shrugged even more than we have.
Cheers, gs
Wow, long post. I'll say a few things in response. Indeed, banks have always created money (fiduciary media) out of "thin air," but when gold (which is always in limited quantity) was the cash reserve in the bank, there was only so much "extra" money the bank could issue. As Mises and Reisman pointed out, bank-issued money tied to gold, unregulated and un-guaranteed by the government, would allow only a minimal issue of fiduciary media. But inflation reared its ugly head when paper certificates issued by fiat became the cash reserve. The problem is that the typical bank customer sees no clear difference when this happens. He still uses the bank for payments and borrowing, just as before. He notices that prices increase and he gets poorer, but this seems to have nothing to do with the banking system. As to the productivity of bank lending, I do believe money lending under free banking is highly productive. I tried to explain this in detail in Lesson Four, with the "Mr. Chow" restaurant example. As long as the money-creating loan is invested in a project that produces an income stream that pays the interest and principal, the loan is productive, self-liquidating, and, therefore, non-inflationary. So, I don't think it's accurate to say that all money creation by the banks is non-productive or immoral or "something for nothing," as some of today's libertarians like to claim. As you would probably agree, the entire problem in banking is the government's intrusion into the market. I don't think the evolution of goldsmith banking happened by "accident" any more than other human institutions (say marriage, for example) are an accident. Institutions adopted spontaneously by acting individuals, which last over many years, are good for the human race. These practices would never stand the test of time if they were not good for us. So, banks issuing money is clearly a virtuous idea, an essential aspect of free market capitalism. However, the government increasingly perverts banking, and this is what we must try to stop. My purpose in writing and teaching about banking is that the system can only be restored or reformed after it is better understood. Thanks for reading. I appreciate your thoughtful comments.
Hi Jim,
I would strongly recommend that you do not include Werner's "empirical test" in the planned book. Because what Werner is doing there is a hoax that does not prove what it is supposed to prove. Werner only proves what everyone already knows anyway, namely that a loan (or rather a promise of a loan) causes an extension of the balance sheet, where on the bank's assets side there is the claim against the borrower, while on the liabilities side there is the bank's debt to either make standard money (as you say) available to the borrower according to his instructions (withdrawal), or to ensure that the borrower succeeds in cancelling a debt (money transfer). The decisive factor here is that the loan agreement only contains obligations to transfer standard money. If the balance sheet extension has taken place, no transfer of standard money has yet taken place. This is the nature of a promise: it is a promise because what was promised has not yet been delivered or performed - the fulfilment of the promise is still pending.
What Werner has done is this: he has promised the bank to repay a loan that was never to be utilised. This means for the bank that it never had to fulfil its promise to carry out a transfer of standard money in favor of Werner. The reason for this is that a contract was made between Werner and the bank prior to the loan agreement that these promises that were to be made were never to be honoured:
"A written agreement was signed that confirmed that the planned transactions would be part of a scientific empirical test, and the researcher would not abscond with the funds when they would be transferred to his personal account, and undertakes to immediately repay the loan upon completion of the test."
https://www.sciencedirect.com/science/article/pii/S1057521914001070
The funny thing is that Werner uses the word "abscond", which would only apply if he already had the power of disposal over the money. However, he does not have this power because although the bank has promised to pay money, it is still the owner of this money (asset) - a deposit is merely a liability (a promise to be fulfilled). In order to activate this promise by the bank, Werner would have to a) make a transfer order and b) the bank would have to execute it (abscond is not possible without the assistance of the bank). However, the bank has made sure that it does not have to execute such an instruction from Werner, although with normal loans the bank has no right of objection if it receives an instruction for a money transfer. To put it bluntly: with such security, the bank could also have given him a loan of 100 billion € - since it can never be called upon to do so, this is not a loan agreement, but the cheapest kind of hogwash.
The contract concluded in German on the non-utilisation of the loan for own purposes is not included in the english papers, but can be viewed here (page 39 pdf counting):
https://www.vollgeld-initiative.ch/fa/img/Wie_entsteht_Geld/Koennen_einzelne_Banken_Geld_aus_dem_Nichts_schaffen__mit_allen_Beilagen_.pdf
The last sentence written by the head of the bank in the confirmation (last page of the pdf) is treacherous:
"This means that we have not undertaken any checks or actions to provide liquidity." This means that the bank, which cannot be utilised because of the loan promise, naturally has no reason to obtain the standard money (liquidity/reserves) it would need if the loan amount were actually utilised and it would be forced to transfer standard money with the help of the central bank, for example.
What can we learn from this? A transfer refers to central bank money, not book money. Book money is the right to instruct the bank to transfer standard money - but is not itself standard money. And that's the trick: you can only INSTRUCT payments WITH THE HELP OF book money, but not pay WITH book money, because it is not book money but central bank money that is being transferred.
Werner should know better, but he refuses to think logically. Maybe you do.
13:40 -- in the middle of watching. How do we make this great leap *backwards* to money as gold in order to come up with the "invention" of banking--and either we are talking Italy, as to, medieval, banking origins, or it's a nonsense theory, it would seem obvious.