Comments on: What is money?

By: pgts

pgts — Sat, 13 Aug 2011 02:12:45 +0000

The crux of your writing while sounding agreeable initially, did not really work perfectly with me personally after some time. Somewhere within the sentences you actually were able to make me a believer unfortunately only for a very short while. I nevertheless have got a problem with your jumps in assumptions and you might do well to help fill in all those gaps. In the event that you can accomplish that, I could surely be amazed.

By: Ellie Velinska

Ellie Velinska — Mon, 31 May 2010 03:12:13 +0000

Does it mean you consider this a serious plan?

All these politicians – whose names are showing on this blog – MPs, MEPs – are they endorsing it?

By: Current

Current — Sun, 30 May 2010 14:32:25 +0000

> Current, you may be implying I am a Rothbardian, I may jump to a
> wrong conclusion here, much as he was a great man, I am not an
> anarcho capitalist but a limited state liberal with small “c”
> conservative leanings.

I should have clarified that. What I means is that you tend towards Rothbard’s view on banking and money matters.

> I understand that if a 100% reserve bank “Door 2” style savings
> and loan style bank makes bad loans, shareholders will not get
> paid out in full on a liquidation.

The problem here though is that insolvency is generally the reason for bank failure. If there is a run then the reason is generally because the bank is judged insolvent by it’s customers.

100% reserves don’t protect against insolvency at all. If my 100% reserve Thorpe bank were to be insolvent then there would be a run on it just like a fractional reserve bank. That’s why to really provide protection a bailment contract would be needed.

(It’s likely that there would be a run on a bailment bank also because of lack of trust that it would act legally.)

> I am very careful to make the distinction between a balance sheet
> like mine which requires no legal privilege and a lender of last
> resort to stay solvently together. Mine has current liabilities
> and a bank does not distinguish between it s current liabilities
> and its long term liabilities. Here lies the problem. Anyone who
> supports fractional reserve free banking acknowledges that they
> require a grant of legal privilege for their system to stay afloat.
> So I am right in comparing current liabilities of my company and
> that of all other companies except banks and banks who do not make
> this distinction.

This issue was discussed at the Mises blog recently. It’s debatable whether a demand deposit is a current liability. A current liability is a debt that’s due in cash in the companies operating cycle. A demand deposit is only like this if the option to redeem it is applied.

The main reason this comes up in any case is the ban on option clauses. If option clauses were not banned then banks could put time limits on their liabilities.

In my view, if option clauses were legalised they would help prevent bank runs. If a bank got into trouble it could exercise the option and turn it’s demand liabilities into timed debts. It could then reorganise itself and pay off those debts. Such a system would mean that no bank would go bankrupt because of a random rush of demand for liquidity. Because, if that happened it could exercise the clauses and make good on them. The only threat a bank would face is insolvency, which is the same situation any business is in.

However, I don’t think it would make that much difference. As I said earlier, random surges in demand for redemptions don’t really occur in practice. A run generally occurs because the market fears the bank is insolvent. Option clauses would only help in the case where the market is wrong.

By: Current

Current — Sun, 30 May 2010 13:52:37 +0000

I got this example I gave above wrong, MRG is right.

By: Current

Current — Sun, 30 May 2010 13:50:36 +0000

> That is correct, only the exact amount of new positive net worth
> created needs to be moved to the Mutuals.

Yes. I got the example I gave wrong above.

By: Toby Baxendale

Toby Baxendale — Sat, 29 May 2010 21:12:59 +0000

To All Involved in this Debate – Thank you for your time.
The intention of the reform is to leave the existing owners of the banking system in exactly the same position as they were on the day of the reform., this means their net worth stays the same.
The government does not have to confiscate the excess assets created. What I have suggested is that it passes a law that compels the banks to forward assets into the mutuals that will need to be set up that mirror image the shareholding of the current banking system. These mutuals to be only mandated to pay off the national debt then wind themselves up. Job done.
Current, you may be implying I am a Rothbardian, I may jump to a wrong conclusion here, much as he was a great man, I am not an anarcho capitalist but a limited state liberal with small “c” conservative leanings. I understand that if a 100% reserve bank “Door 2” style savings and loan style bank makes bad loans, shareholders will not get paid out in full on a liquidation. This is just like any 100% reserved company, which all of us in business have to run. The point being, if I go bust as a fishmonger, there is no “fish run,” I just go bust. If Lehman, one bank goes bust, the whole world spins off into the “credit crunch.” As the governments around the world nationalised our banking problem, we now have a massive sovereign debt default problem.
Current, I am very careful to make the distinction between a balance sheet like mine which requires no legal privilege and a lender of last resort to stay solvently together. Mine has current liabilities and a bank does not distinguish between it s current liabilities and its long term liabilities. Here lies the problem. Anyone who supports fractional reserve free banking acknowledges that they require a grant of legal privilege for their system to stay afloat. So I am right in comparing current liabilities of my company and that of all other companies except banks and banks who do not make this distinction.
100% reserve banks like 100% reserve companies can go bust as they can do bad loans to shoddy entrepreneurs and lose money. A Bailment only bank can even go bust if it does not charge the right amount for storage and or have enough customers. The point being is there could never be a bank run and system wide catastrophe like we have today!
This reform does not stop banks going bust through bad business, just system wide bank runs.

By: Toby Baxendale

Toby Baxendale — Sat, 29 May 2010 21:00:57 +0000

MRG

That is correct, only the exact amount of new positive net worth created needs to be moved to the Mutuals.

By: Ellie Velinska

Ellie Velinska — Sat, 29 May 2010 02:23:52 +0000

Special thanks to Current, John Moor and mrg for teaching me terminology and for all the attention and advice!

I will be going to the ocean for the weekend! Beautiful Carolina Beach. Hope you have a great weekend.

By: Ellie Velinska

Ellie Velinska — Sat, 29 May 2010 01:50:58 +0000

You guys are too smart and know so much abstract terms that you fail to see the obvious:

1. the people lent L850b to the bank – the bank owes them L850b
2. the gov prints L850b and gives them to the people
3. the bank still owes L850b to the people
4. the government makes a law: the bank does not owe L850b to the people
5. the bank liabilities turn into bank assets. The bank now has L850b more assets.

I call this stealing people’s money, because the bank never paid back the money to the people (instead the government gifted money to the people).
The bank just kept the deposited money to itself and got L850 richer – by not paying back to the people.

It is important part to understand in Toby’s plan.

The people are not complaining that the bank stole their money and never returned it back, because the government reimbursed them for their loss.

Toby says – it is not stealing – it is turning liability into assets – it is a swap: L850b to the people – and the L850b demand deposit are gone.

However, the proper way to close the demand deposits is for the bank to pay back the money to the people. But the people already have the money from the gov. If the bank pays them back too – the people will have double the money.

6. the bank has the extra L850b that the bank did not return to depositors – the bank gives it to the government to repay debt.

At the end the government is paying the debt with the money that the bank stole from the people having demand deposits in the bank.

The money supply before the operation: cash (means the currency in circulation – the bank’s assets are part of this cash) + L850 demand deposit

The money supply after the operation: Cash (original cash + L850b(that is no longer demand deposit, but is turned into bank assets) + L850 cash that the government printed = original cash + 2xL850b

Please, don’t dismiss my brain like I am an amoeba, because I am not an economist.

Read this again and try to understand my point. It is important – if this is a real plan – it is crookery – robbery and it is inflationary.

I hope it is just a L1000 logic exercise.

The street smarts win and get the prize!

By: Ellie Velinska

Ellie Velinska — Fri, 28 May 2010 19:43:43 +0000

MRG, you say:
That’s interesting. I had assumed that only £3.5M worth of assets (corresponding to the new money) would be moved to the mutuals.

You are wrong and Current is right.

When the gov gives 4.5 to the people – the 4.5 demand deposits in the bank still exists.

Toby said that the gov will pass a law that says the bank no longer owes the people 4.5.

At this moment 4.5 of the bank’s liabilities turn into 4.5 of bank’s assets.

I call this the bank stealing people’s money facilitated by a law.

This is why the the bank has 4.5 new assets – the new 4.5 printed money went to the people – so they don’t scream that the bank stole their money.

The bank has 4.5 that were stolen from the people and is giving some of it into mutuals.

Imagine the gov passes a law: the banks no longer owe you money – riots begin.

Instead they say: The bank will no longer owe you money, but the gov will give you all the money the you lost because of the new law. People are happy – their money are stolen, the gov is repaying the debt with laundering 4.5 printed cash.