Another discussion about banks and printing money

@davidjohnston I think the issue could become illustrated by using gold in our exchange. If I give you a gold bar and ask you to put it into your vault for me, you will give me a receipt. That receipt is a very real representation of the very real debt you owe me. If that gold gets stolen, my little receipt will allow me to collect the value of that gold back from you, one way or another. Now let's say one day, I bring some more gold to you to store in your vault, and you say that you are no longer preferring to give physical receipts, but have now installed a new accounting system that works through the web. You show me how you have entered the value of my gold into the system, and I now have a total balance in there.

Now, it should be noted that the gold in the vault is not considered to be money, because A) you can't use it as a medium of exchange, since it's locked in your vault, and B) nobody at any store would allow me to buy stuff with it. I would have to convert that gold to SOME form of money, either physical receipts (accepted at stores), or electronic receipts (also accepted at stores).

Now you inform me that you have arranged for the grocery store to also use your vault and your computer money system. So, I can go to the store and there will be direct transactions made in both my account and the store's account when I want to buy something there. So, in this illustration, the gold is NOT money, but the computer system transactions ARE money. This is because the computer can now be used as a form of exchange, it stores value, and it keeps a record of accounts...the 3 requirements for any form of money. At any time, I can then convert my electronic money (however much I have in the account) back into a) a physical receipt, or b) the physical gold in the vaults.

I should point out that New Zealand is one of a handful of countries that have NO RESERVE requirement on private commercial banks. Banks DO maintain a reserve, but this is only at their own discretion, based on their own good business decisions.

@kennethkopelson Also - there is legislation regulating the amount of capital banks have to keep on hand, etc.

http://www.rbnz.govt.nz/regulation_and_supervision/banks/prudential_requirements/

@kennethkopelson We're in agreement about how it works regarding gold in the vault/electronic money, and the supermarket. What we're doing is exchange promises of being able to withdraw that gold, if want.

Because both the supermarket and the myself use the same bank, the bank can easily just create money and lend it to me, and I spend it at the supermarket. In this transaction, the only thing that changes is then numbers on bank's accounts.

However, if the supermarket then spends its money (these electronic numbers) at its wholesaler, who banks with a different bank, that bank is going to say to our bank 'Hang on, this here is a promise of $10,000 of gold, hand it over please'.

@davidjohnston That is an excellent list of prudential requirements. It should be noted that "capital" means any money (physical or non-physical), assets, or other items that the bank as valuable, that could be liquidated and used to pay off obligations. So, this does not necessarily mean "cash", though it does include it.

Also, liquidity requirements refer to the the banks money stocks, which would also include physical currency, as well as deposits (electronic) the bank has in their account at the RBNZ.

Also, regarding your comment about the supermarket, all the banks in New Zealand are members of the RBNZ, and as such, use their Exchange Settlement Accounts to transfer funds between them...with using any physical currency.

I note there are a couple of other discussions with people in this discussion trying to come to consensus on this issue. Can you all do the rest of us a favour and try to keep this in the one place thanks.

Rangi, which one should we use please? A hyperlink is helpful..

In the meantime:
"Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn't know how banking really works, because if they did, "there'd be a revolution before tomorrow morning".

Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called "Money Creation in the Modern Economy", co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.

To get a sense of how radical the Bank's new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don't suffice, private banks can seek to borrow more from the central bank.

The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.

It's this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say "there's just not enough money" to fund social programmes, to speak of the immorality of government debt or of public spending "crowding out" the private sector. What the Bank of England admitted this week is that none of this is really true. To quote from its own initial summary: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits" … "In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money 'multiplied up' into more loans and deposits."

In other words, everything we know is not just wrong – it's backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with "quantitative easing" they've been effectively pumping as much money as they can into the banks, without producing any inflationary effects.

What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there's no question of public spending "crowding out" private investment. It's exactly the opposite."

Source: http://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity

https://internet-party.loomio.org/d/h1rHQaEv/should-interest-rates-be-capped-at-10-across-the-board

https://internet-party.loomio.org/d/UCmQ56g0/can-we-agree-that-any-system-that-allows-borrowing-will-multiply-the-money-supply

The same scope of debate is raging in those two discussions.

@dennisdorney "Read the Bank of Englands Spring 2014 Bulletin, where they explain simply and clearly that banks do create our money supply."

I think that's where I get into the problem. People quote the banks as authorities when describing their own "atrocities". I they are so horrible and evil, how can you trust them to condemn themselves correctly?

My issue is that "money supply" isn't "money". That is, I think, the point on which so many are confused. The "velocity of money" is real. Someone mentioned it in another place, and was bashed for it. currency * movement = money. If currency doesn't move, there is no money. If there is no currency, there is no money.

Though, these days, I must include digital currency (not "money"), as the RBNZ and other central banks "create" non-currency money with the legal effect of actual currency. This "currency" is not unlike a one-time printed $1,000,000,000,000 coin (like the one Obama threatened to mint, should the US Congress not end the sequester). Only the currency is "printed" electronically. But is legally indistinguishable from the paper (plastic) in your wallet.

Money supply is not money. It's the availability of money. I assert that's different,

I see it as the difference between distance and velocity. Distance can't change without velocity. Money can't move without a "money supply". I think the terms were picked by the bankers for the purpose of confusing people. The more people are confused, the more they argue over the terms and don't spend time actually fixing the problem.

The problem is that the debt is created and held by banks. I vote we re-form the RBNZ to be a P2P lending clearing house, so that debt can be created and held by the people, eliminating $10,000,000,000 or so in fees "lost" every year to the banks. Give the people back more than $10,000 per household by re-forming the RBNZ into a P2P lending clearing house.

Why will the government lend cheap money to the banks, but not you and me? That's the real problem with the system. It's designed for ANZ/Westpac profits to be sent to Australia, and not for the benefit of citizens or NZ.

Yes we all agree that major banking reform is required in NZ. I am suggesting that we investigate the policies of 'The New Economic Party' who seem to have thoroughly researched the financial System of NZ and have some of the right answers to most of the discussion within this forum and others. talks and possibly alignment with this party could benefit all New Zealanders. Power is people coming together wanting the same outcomes and benefits.Enrich our people,keep profits within our borders and strengthen and protect our Sovereignty. Please review; http://neweconomics.net.nz/index.php/manifesto/banking-and-investment/decentralisation-of-banks-a-return-to-high-street/

The discussion merely asks whether the Reserve Bank Act should be overhauled. The general consensus seems to be "Yes". I have seen about five different monetary systems suggested. A discussion that closed some time ago indicated a preference for the Positive Money option but it seems to me that we need a separate and different process to resolve that issue.

This discussion seems to have drifted away slightly from the discussion topic, so I have updated it to be more specific. Hope this helps.

@kennethkopelson I noticed an "error" in the wording of the Bank of England videos. They use "money" as a short-hand term for "money supply".

If I have $1000 in a bank (presuming checking or transaction account), you've indicated you count that as "money". So, if I have that in a term deposit (CD), so it'd cost me $100 to get my $1000, or wait some time period, do I have $1000, $900, or $0?

If I put $1000 in a term deposit for 6 months, and the bank lends that to Bob for 6 months, then do I have money? It counts towards the money supply at least twice (but may have to count as M3, rather than M2 or M1), but Bob is the only person that can spend it.

Banks create/print money supply. They take some M0 and make some (or lots of) M1-M3 out of it, but don't make/create/print M0.

Go ask the next 100 people you see if they have any "money" in their pocket. I would bet that everyone (95%+) will count cash, and not point to an EFTPOS card and say "plus another $10,000 of "money" on the card."

So using an economic definition of "money" that's slanted to confuse "money" with "money supply" wouldn't work when talking to regular people, and I try to read with that eye, as that's the final audience for all this. The average voter.

Banks "make/create/print" "money supply" by multiplying "money" through fractional reserve.

The banks try to make it confusing, because they are inserting themselves as a rent-seeking leach on the system, lending Bob's money to Alice, and charging both of them to do it. The "useful" functions of a bank are down to cash handling (not needed if we move to a digital currency), and vetting borrowers to assess risk.

If we move to a digital currency, and have the RBNZ or IRD assess all households for "credit risk" as a national service, then there's no need for banks at all, and a P2P lending system, managed by the RBNZ would be the next logical step.

In a digital world, the "money supply" is infinite. If you spend $10 at a store with EFTPOS, it's instant. So they can spend it the same day. It could be spent thousands of times. Even more if we get a P2P banking system that allowed real-time zero-fee money trading. You need enough "money" for all simultaneous transactions, but when they are instantaneous, the entire country could be run off enough money for the largest single transaction. The rest is just money supply generated by that money being shuffled or promised to be in more than one place at a time.

I like my P2P banking idea less and less as time goes on. The banks were too big to fail. The governments gave them lots of support to keep them going. So what happens when the banks are small enough to fail? The guy borrowing $200,000 to buy a house can't make payments? The people he owes are then partial owners of the house? His debtors now owe his creditors? How would that be assigned? Oldest debt goes to oldest creditor?

I stopped posting because there's no indication from the executive team that they'll even have an economic policy. Thinking about how to make the world a better place is a waste when I don't have time to put this on paper, and the party doesn't want to pick up economics. But I ran across something else that confused "money" with "money supply" so it made me think of this one, so I came back for a few minutes.

We have some of the most disruptive ideas about money out there. We could change the way money works. We just need some "help" to get them in laws. @kennethkopelson has his ideas he's been working on for a while. He's close to publishing them, with or without the IMP.

I haven't been working on "my" P2P banking idea before. I literally thought of it while writing a reply on the forums. It's not a mature idea that I've invested a lot of time in. I was just looking up the bank's ticket-clipping ($10k per household "profit" per year sent out of the country, and $20k per household "lost" per year), and thought that'd be a good thing to trim. And we are finally at the tech level where we could make a system with 1,000,000 (or more) banks and have it work.

Unless the party announces any economic policy or at least hints they are looking into one, there's no reason to waste time thinking about it. Nobody else would even consider it. Change is hated because predictability is more important than improvement.

It's a shame the the Internet Party is orphaning good ideas because they don't have the resources to take them on.

@marcwhinery I can go with your description. Not exactly how I would say it, but close enough :) My idea doesn't have banks in each house, but instead each governmental zone has its own e-mint which can only create money for that zone's projects/services. It's all the same type of money (amongst all the e-mints), it's just that each zone has the most local view of what needs to be done in that locality. If goods/services are sold to people outside the zone, that will increase the money supply in that zone, causing zonal price increases. If goods/services are bought from parties outside the zone, that will decrease the money supply in the zone, causing zonal price decreases. So, in this model, each zone desires to buy from other zones, thereby lowering local prices. This economic pressure fosters trade, which fosters competition and improvement.

@marcwhinery So, lending institutions can still be useful, allowing people to get funding for things that don't have a great societal appeal or benefit. Because boutique projects require private funding, lending institutions will be useful. Now, nothing prevents these from "creating money" for people by simply lending them broad money (numbers in other computer systems they may have). The difference being that these institutions will have to compete against the government funding services, which are either free grants, or interest-free loans that have to be paid back over time. So, this will tend to keep those lending institutions under control...hopefully :)

I have moved this discussion "Reserve Bank of New Zealand and NZ Treasury Dept " to here: https://www.loomio.org/d/5DS3PkJL/

@kennethkopelson "Because boutique projects require private funding, lending institutions will be useful. Now, nothing prevents these from “creating money” for people by simply lending them broad money (numbers in other computer systems they may have). "

If we had a liquid private lending market, we could have people with need request money, and people with money offer it. NZ has the greatest number of business licenses per capita, why can't we have the greatest number of banks per capita as well? There's no reason that most housholds couldn't incorporate as a bank, and then petition the government or others for lending, for a home, for a business.

I know that if money were cheaper, I'd be starting a business tomorrow. Anyone want to lend me $5,000,000 to start yet another family entertainment venue. The "odd" thing is the government (council, not central) would be one of the most direct competitors, but because they have no profit motive, they don't try to fill the needs, but assert a need they are filling that is unrelated to the market. That has left some gaps in certain areas (both market and geographical) that should be profitable to fill.

But $5,000,000 is hard to borrow to start something. And even if I could get full funding, the interest at "market rates" (the ones that send about $5,000,000,000 a year to Australia as profit) would make the venture unprofitable. At 0% interest, it would be very profitable, and at a "reasonable" rate should be sufficiently profitable that I would undertake it, should I be able to secure $5,000,000 in "low interest" loans.

And there are other ideas that I've had that I've not bothered to fill out because the funding and start-up would be too hard.

What would the nation look like if borrowed money was cheap? Would there be piles of startups? Even if 80% fail, that's thousands of new startups, and millions/billions of new revenues.

@marcwhinery Yes, I think you are just touching on the thing that I'm advocating in general. Here's how I see it in a nutshell:

Each human being is born on this planet in pretty much a similar way. We then get a certain number of years to do stuff here, and as we do stuff, we either feel excited, motivated, and happy...or we feel bored, trapped, and unhappy...or somewhere in between. My contention is, we should structure the world so that the most number of people feel the former most of the time. That should be the great goal of humanity. As I've tried to imagine such a world, I've seen how it could be done. Yes, it would require virtually every societal structure to be redesigned, but the payoff for doing this would be monumental. This payoff is the VALUE I keep talking about.

So, if your $5 million venture would only somewhat work towards that GREAT GOAL I just mentioned, getting private funding (at least partially) would probably be in order. If, on the other hand, you could show that your venture has great overall society benefit (at making people happier, let's say), then that business could be seen by the government as "one of the conduits" for pumping more money into the economy. Because the size and number of government-sponsored services would be self-regulated by the size of the population (larger population needs more services), as population grew, more services could be sustained by the people who would use them. Basically, what the government would try and predict is how many people would use the service on some regular basis. If the number if sufficiently high, this would indicate a positive societal benefit.

One of the main ways I see governments deciding on which new services to launch (and which ones to shut down) would be a website like the one you showed me, where people get to "invest" in movies with voting points. You called it "predictive" something, but I can't remember what it is exactly. Can you refresh my memory on that please? Another way of doing it would be to show them 100 services and ask them to rank them with 1. Must have, 2. Nice to have, 3. Don't need it, 4. Certainly not. Or you could ask them how often they would use each one, as in 1. Daily, 2. Weekly, 3. Monthly, 4. Occasionally, 5. Never

@marcwhinery Governments do not now have the goal of making their people happy. They want to make them safe, falsely believing that THAT is all it takes to be happy. People are happy when:

1. They are free to pursue their life dreams and goals
2. They have the time to pursue those dreams and goals
3. They are debt free, owing nobody
4. They know they will never go hungry or be on the streets

There are probably some other factors I didn't include. Safety is only one sub-factor that contributes towards #1 above. Governments seem to work contrary to #2, desiring simply to "provide jobs" where they should be fostering a society that provides fulfilling work...which means work that allows each person to fulfil their aspirations. Governments also fail greatly at providing #3, which is one of the main shifts required, and what VBE is really all about. Factor #4 is just something we can do as a society, by pulling together and providing this minimal human standard for everyone. Here in New Zealand we do sort of have this one going, but it can be better for sure.

Some fantastic discussion here, most of which I agree with. The main thing that I want to do is stress how important it is for the future of the country, people and planet to urgently get some changes on the table, with regard to the monetary system we have in use.

Almost every topic where we see problems, has those problems as a direct result of the monetary and economic system we use.

For instance, the environmental catastrophe we are enduring exists because of the concept of growth. The concept of growth exists because 97% of our money is created by banks as interest bearing loans. Hence, because the interest isn't also created, there isn't enough money to pay the interest without growth (and inflation).

When we examine the topic of poverty and inequality, we see that the money creation system, which directs the vast majority of the money it creates into property and financial markets, reduces jobs in the real economy and creates jobs in the highly paid, but parasitical sectors, which "clip the tickets" of the poor at every opportunity.

Democracy is also difficult under this system, as the beneficiaries of the system will always look after themselves. Currently in Aotearoa 17 billion p.a is lost Seigniorage (the profit from money creation) which could be in the public purse, goes to private corporations. Not surprisingly, they like this system!

So instead of worrying which system would be best, why not start with broad strokes like "outlaw fractional reserve banking" or "make it unlawful for the government to delegate the money creation process".

Broad strokes like this will soon educate the public about the problem, which is currently, deliberately obscured. Let's not forget that this is a man-made system, not some law of physics, man-made systems that do not work for the common good must be changed.