I support your mission wholeheartedly and believe you are doing a good job of making an arcane subject comprehensible. Money production always has both an ethical foundation and an economic one quite apart from the technical one. I think it is obvious to those who have been watching this for some time now know that as the money production machine goes asymptotic a) something is going to break and b) it won’t be pretty when it does. Preparing people for that inevitability is difficult and not always well rewarded (remember Laocöon’s fate for trying to warn the Trojans about that odd wooden horse that arrived at the City gates), but essential work nonetheless.
Thanks, you understand my intention exactly right. There is "good" money creation and "bad "money creation, both of which I intend to tackle in due course. I love your ancient classical reference (which you do so well!) but I don't care if I am the messenger who gets shot because, frankly, I have nothing to lose in that event, and I'd be truly gratified to make a modest dent in the shell of ignorance encasing this topic.
Enjoyed this and especially your linking accounting skills to economics. I have been in business of 30+ years and am constantly astonished at the lack of even basic understanding of balance sheet mechanics from people who are quite happy to expound on how the universe functions. Also found the link to the BoE paper valuable. Thank you.
I appreciate the comment. I'm on (what seems like) a one-man mission to help people to understand where money comes from. I believe we won't get to sound money until there is widespread understanding of the present system. Most of the more knowledgeable writers and economists seem to come from the UK. So perhaps the knowledge revolution has to start there, where the best ideas are. If you find any problems or errors in what I am saying, please call me out!
Jim: At 16:57 you say "but still think that the money creation process starts with an initial deposit that gets the money creation process started" -> but isn't this the case? If not then can you please explain?
Eric, I had a further thought. It is true that a bank, like any business, needs money to get started. So a startup bank might feed its balance sheet with a "deposit" in the form of capital, or shareholders' equity, on the liability side. One the asset side would be cash reserves. So in this sense, a bank starts up with a "deposit" which obviously precedes any lending. But this initial capital is not a demand deposit, not like what is created when a bank makes a loan. The point is, the process of creating new money starts with an asset purchase (making a loan or buying a bond) and does not require a deposit to get the ball rolling. Hope that was helpful.
Sorry to keep bothering you. It goes without saying that if you tire of discussing with me then feel free to stop. I was thinking about these questions and I was trying to work through a thought experiment. So, I was thinking about an auto loan. I don't know much about how it works. So I was thinking about when an auto loan happens that (maybe?) the bank sends the dealership a (what?) promissory note (?) indicating that the dealership will be paid (?) and then as the person pays, the dealership receives the payment...? So, eventually the money is paid. So, initially money is "created" but then over time the money is paid to the dealership...? Am I on the right track?
Please don't apologize! The exact plumbing of individual loans will vary with dealers and auto companies. The auto dealer is typically paid in full when he sells the car. If you finance a car at the dealer, you are obligating yourself to a lender. The lender holds the promissory note and with the car as collateral. Dealer is out of the picture. The lender could be a bank, in which case new money is created for the loan. More likely the auto lender is not a bank, but an intermediary finance company that has a line of credit at the bank. So the bank lends to this finance company, thus creating new money, and the finance company lends this money to the car buyer.
Thank you! So it seems to me that at some point the "created" money is replaced by "actual" money...? It seems to me that as the person with the loan pays off the loan the "created" money is replaced with the money being paid by the loanee...? In the case of the car loan, if the loan was through a commercial bank, then as the loanee pays the loan back with "real" money (whatever that is) then the loaned money is replaced by "real" money and so I'm thinking that nothing fishy is happening...?
So it seems to me that at some point the "created" money is replaced by "actual" money..[NO, THE NEW MONEY IS NOW A BANK DEPOSIT THAT CIRCULATES IN THE ECONOMY. THE NEW MONEY IS "ACTUAL" MONEY, ALONG WITH OTHER ACTUAL MONEY, PAPER CASH] It seems to me that as the person with the loan pays off the loan the "created" money is replaced with the money being paid by the loanee...? [DEPOSITS ARE DESTROYED WHEN LOANS ARE PAID OFF. THAT IS THE MAIN WAY THE MONEY SUPPLY DECREASES] In the case of the car loan, if the loan was through a commercial bank, then as the loanee pays the loan back with "real" money (whatever that is) then the loaned money is replaced by "real" money and so I'm thinking that nothing fishy is happening...?
Do you mean why Paul Samuelson was wrong? In fact, banks create money whenever they purchase an asset (make a loan, etc) A prior deposit has nothing to do with it. No prior deposit is required. Paul Samuelson claimed a cash deposit started the process. Is this the case you are talking about? If so, I can't reply this space.I recommend you read Werner's article, "A Lost Century In Economics."
I'm reading the article by Werner. Is he arguing against the "fractional reserve theory" of banking? Are you arguing against the "fractional reserve theory"?
It was the section about Samuelson that prompted my question. The think that bothers me is that it does seem like the process starts when the bank client deposits money. It does seem like there has to be a deposit before a loan can be made. I will look at "A Lost Century in Economics" again. Thank you.
Then again, now that I think about it, I can get an auto loan with a low balance in my savings account. That fits with the idea that the deposit isn't the driver. But then someone might say "but the money is there as a deposit in someone else's account"
It is not that "we" do not know how it works. Some of us do know. Most of the more knowledgeable monetary economists are in the UK. Have you read the Bank of England paper yet? (MRead that first. This is a case of knowledge lost by many people through a couple of generations of bad theory, bad teaching, and simple neglect. I can tell you are not convinced. That's good. If my explanation is not correct, how IS money created? Do you have an alternative explanation? All alternative explanations are easily refuted.
I'm not sure that I'm not convinced. :) More like I'm struggling and trying to understand. This seems like a big deal. It is strange that academics can completely lose their way. We do see that now so I should not be surprised. Look at all of the Postmodernism nonsense! So, with regard to this, since the bank balance sheets look like you have described, and I would think that accounting practice would clearly show that the banks are creating money, then how do the academics ignore the obvious accounting reality and why do people like Werner have to even push back and go through so much to verify that the banks are creating money. Seems like it would be trivial to demonstrate...?
The reason I posted my question about "car loans" and the "real money" replacing the "created money" was because I was wondering why, since banks create money, why the banks don't become unimaginably rich.
I support your mission wholeheartedly and believe you are doing a good job of making an arcane subject comprehensible. Money production always has both an ethical foundation and an economic one quite apart from the technical one. I think it is obvious to those who have been watching this for some time now know that as the money production machine goes asymptotic a) something is going to break and b) it won’t be pretty when it does. Preparing people for that inevitability is difficult and not always well rewarded (remember Laocöon’s fate for trying to warn the Trojans about that odd wooden horse that arrived at the City gates), but essential work nonetheless.
Thanks, you understand my intention exactly right. There is "good" money creation and "bad "money creation, both of which I intend to tackle in due course. I love your ancient classical reference (which you do so well!) but I don't care if I am the messenger who gets shot because, frankly, I have nothing to lose in that event, and I'd be truly gratified to make a modest dent in the shell of ignorance encasing this topic.
Enjoyed this and especially your linking accounting skills to economics. I have been in business of 30+ years and am constantly astonished at the lack of even basic understanding of balance sheet mechanics from people who are quite happy to expound on how the universe functions. Also found the link to the BoE paper valuable. Thank you.
I appreciate the comment. I'm on (what seems like) a one-man mission to help people to understand where money comes from. I believe we won't get to sound money until there is widespread understanding of the present system. Most of the more knowledgeable writers and economists seem to come from the UK. So perhaps the knowledge revolution has to start there, where the best ideas are. If you find any problems or errors in what I am saying, please call me out!
Jim: At 16:57 you say "but still think that the money creation process starts with an initial deposit that gets the money creation process started" -> but isn't this the case? If not then can you please explain?
https://www.youtube.com/live/DnmHXqcFKWY?feature=share&t=1015
Eric, I had a further thought. It is true that a bank, like any business, needs money to get started. So a startup bank might feed its balance sheet with a "deposit" in the form of capital, or shareholders' equity, on the liability side. One the asset side would be cash reserves. So in this sense, a bank starts up with a "deposit" which obviously precedes any lending. But this initial capital is not a demand deposit, not like what is created when a bank makes a loan. The point is, the process of creating new money starts with an asset purchase (making a loan or buying a bond) and does not require a deposit to get the ball rolling. Hope that was helpful.
Sorry to keep bothering you. It goes without saying that if you tire of discussing with me then feel free to stop. I was thinking about these questions and I was trying to work through a thought experiment. So, I was thinking about an auto loan. I don't know much about how it works. So I was thinking about when an auto loan happens that (maybe?) the bank sends the dealership a (what?) promissory note (?) indicating that the dealership will be paid (?) and then as the person pays, the dealership receives the payment...? So, eventually the money is paid. So, initially money is "created" but then over time the money is paid to the dealership...? Am I on the right track?
Please don't apologize! The exact plumbing of individual loans will vary with dealers and auto companies. The auto dealer is typically paid in full when he sells the car. If you finance a car at the dealer, you are obligating yourself to a lender. The lender holds the promissory note and with the car as collateral. Dealer is out of the picture. The lender could be a bank, in which case new money is created for the loan. More likely the auto lender is not a bank, but an intermediary finance company that has a line of credit at the bank. So the bank lends to this finance company, thus creating new money, and the finance company lends this money to the car buyer.
Thank you! So it seems to me that at some point the "created" money is replaced by "actual" money...? It seems to me that as the person with the loan pays off the loan the "created" money is replaced with the money being paid by the loanee...? In the case of the car loan, if the loan was through a commercial bank, then as the loanee pays the loan back with "real" money (whatever that is) then the loaned money is replaced by "real" money and so I'm thinking that nothing fishy is happening...?
Try this link and go to page 17 to the explanation of how money is destroyed.https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
So it seems to me that at some point the "created" money is replaced by "actual" money..[NO, THE NEW MONEY IS NOW A BANK DEPOSIT THAT CIRCULATES IN THE ECONOMY. THE NEW MONEY IS "ACTUAL" MONEY, ALONG WITH OTHER ACTUAL MONEY, PAPER CASH] It seems to me that as the person with the loan pays off the loan the "created" money is replaced with the money being paid by the loanee...? [DEPOSITS ARE DESTROYED WHEN LOANS ARE PAID OFF. THAT IS THE MAIN WAY THE MONEY SUPPLY DECREASES] In the case of the car loan, if the loan was through a commercial bank, then as the loanee pays the loan back with "real" money (whatever that is) then the loaned money is replaced by "real" money and so I'm thinking that nothing fishy is happening...?
Do you mean why Paul Samuelson was wrong? In fact, banks create money whenever they purchase an asset (make a loan, etc) A prior deposit has nothing to do with it. No prior deposit is required. Paul Samuelson claimed a cash deposit started the process. Is this the case you are talking about? If so, I can't reply this space.I recommend you read Werner's article, "A Lost Century In Economics."
https://www.sciencedirect.com/science/article/pii/S1057521915001477
Go to Section 2.2 titled The Fractional Reserve Theory of Banking.
I'm reading the article by Werner. Is he arguing against the "fractional reserve theory" of banking? Are you arguing against the "fractional reserve theory"?
It was the section about Samuelson that prompted my question. The think that bothers me is that it does seem like the process starts when the bank client deposits money. It does seem like there has to be a deposit before a loan can be made. I will look at "A Lost Century in Economics" again. Thank you.
Then again, now that I think about it, I can get an auto loan with a low balance in my savings account. That fits with the idea that the deposit isn't the driver. But then someone might say "but the money is there as a deposit in someone else's account"
How can it be that we would not know that banks create money? Is the issue not pivotal in accounting?
It is not that "we" do not know how it works. Some of us do know. Most of the more knowledgeable monetary economists are in the UK. Have you read the Bank of England paper yet? (MRead that first. This is a case of knowledge lost by many people through a couple of generations of bad theory, bad teaching, and simple neglect. I can tell you are not convinced. That's good. If my explanation is not correct, how IS money created? Do you have an alternative explanation? All alternative explanations are easily refuted.
I'm not sure that I'm not convinced. :) More like I'm struggling and trying to understand. This seems like a big deal. It is strange that academics can completely lose their way. We do see that now so I should not be surprised. Look at all of the Postmodernism nonsense! So, with regard to this, since the bank balance sheets look like you have described, and I would think that accounting practice would clearly show that the banks are creating money, then how do the academics ignore the obvious accounting reality and why do people like Werner have to even push back and go through so much to verify that the banks are creating money. Seems like it would be trivial to demonstrate...?
The reason I posted my question about "car loans" and the "real money" replacing the "created money" was because I was wondering why, since banks create money, why the banks don't become unimaginably rich.